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On Jan 2, 2014, we downgraded our recommendation on SK Telecom Co Ltd (SKM - Analyst Report) to Neutral from Outperform as market saturation continues to affect the company’s wireless business.

Why the Downgrade?

Despite the surging demand for smartphones, the South Korean mobile market is saturated and SK Telecom is feeling the heat of it. The Seoul-based company currently carries a Zacks Rank #3 (Hold).

Detailed Analysis

The demand for smartphones and high-speed data services is growing rapidly, leading to growing requirement for wireless data services. We believe 3G network, 4G LTE network expansion and the cloud computing business will fuel SK Telecom’s future growth.

SK Telecom unveiled the world’s first LTE-Advanced (LTE-A) network that renders speed of up to 150 Mbps that is twice as fast as LTE and 10 times swifter than the 3G network. To tap new customers, the company has kept the price range of LTE-A connection the same as LTE. We feel that availability of advanced network at competitive pricing will enhance the popularity of high quality broadcasting and video content as well as boost the customer service level.

The South Korean carrier is also aiming to tap the growing demand for software, platform and service data storage. The company entered into a new strategic partnership with Birst Inc. that will allow it to provide market leading business intelligence (BI) and analysis to various firms across Korea.

The introduction of mobile number portability has resulted in increased churn rates and stiff competition among wireless service providers. Competition has led to stagnating sales of the popular iPhone and Galaxy S smartphones.

Further, SK Telecom’s aggressive smartphone rollout plan includes higher promotional expenses (including the cost of advertising and handset subsidies), which may impose downside pressure on the bottom line in the near term. Based on these negatives we prefer to remain cautious on the stock.

Other Stocks

Better-ranked stocks within the same sector are Hawaiian Telcom Holdco Inc. (HCOM - Snapshot Report) Ceragon Network Limited and KT Corp. (KT - Snapshot Report). HCOM currently has a Zacks Rank #1 (Strong Buy) while CRNT and KT carry a Zacks Rank #2 (Buy).

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