We are maintaining our long-term Neutral recommendation on the South Korean telecom giant SK Telecom Corp Ltd (SKM - Analyst Report) following its strong second quarter results. For the short term (1–3 months), the stock retains the Zacks #3 Rank (Hold).
Operating income and net income improved on the back of lower marketing expenses and increased smartphone activations. Revenue also remained healthy due to growing mobile services as well as new business and other revenues. We believe strong smartphone offerings, 3G network expansions, the launch of 4G networks and the cloud computing business will fuel the company’s future growth.
SK Telecom has joined hands with telecom carriers and rolled out its first commercial 4G Long Term Evolution (LTE) service, also known as 4G networks, in Seoul in early July. Additionally, SK Telecom plans to invest approximately KRW 2 trillion ($1.87 billion) by 2014 for development and enhancement of 4G LTE networks.
Further, SK Telecom is also investing heavily in high-speed Wi-Fi and data femtocell to boost network capacity in small areas. These efforts made by the company will likely boost future wireless revenue.
Moreover, SK Telecom’s Apple Inc. (AAPL - Analyst Report) iPhone 4 and iPad offerings, which ended the exclusive hold that its major rival KT Corp. (KT - Snapshot Report) enjoyed since late 2009, are gaining traction in the Korean market and is driving its revenue upward.
However, SK Telecom continues to spend heavily as the carrier is increasing its promotional efforts to contain customer churn amid stiff competition from its rivals. Competition has increased in the South Korean mobile market and has reached a saturation point. Despite the surging demand for smartphones, iPhones are struggling with stagnating sales in the saturated domestic market.
We remain cautious on tariff reductions and heavy regulation by the Korean ministry. As part of its plan to counter rising inflation, the Korean government had ordered SK Telecom to cut its monthly mobile service rates. The reduction in monthly rates will pressure future revenue growth.