Rising Expectations for 5G-Related and Telecom Stocks... Benefits from Earnings and the US Presidential Election

Sales Decline Hit All Year Due to COVID
Trump and Biden Both Agree
on Ultra-High-Speed Network Construction

[Asia Economy Reporters Juyoun Oh and Boryeong Geum] Ahead of the U.S. presidential election this November, investors are showing sensitivity to the polling gap between the two presidential candidates, Donald Trump and Joe Biden. Their contrasting political orientations and campaign promises mean that beneficiary stocks could diverge depending on who wins. However, both candidates have expressed a unified stance on the 'ultra-fast wired and wireless network infrastructure build-out,' drawing attention. Regardless of who wins, 5G adoption rates are expected to increase, leading to an analysis that domestic 5G-related stocks, which have been subdued due to decreased third-quarter earnings, could gain attention next year.

According to financial information firm FnGuide on the 21st, the third-quarter earnings of telecommunications equipment and component companies related to 5G have been sluggish this year, but are expected to improve compared to the same period last year starting in the fourth quarter. For KMw, third-quarter operating profit is forecasted to decline by more than 30% year-on-year, but a return to profitability is expected in the fourth quarter. RFHIC is estimated to have turned a profit in the third quarter and to increase operating profit to 8.2 billion KRW in the fourth quarter, a 714% rise compared to 1 billion KRW in the fourth quarter of last year. Oisolution is also expected to see operating profit increase from around 5.6 billion KRW in the third quarter to about 8.6 billion KRW in the fourth quarter, reducing the year-on-year decline.

The 5G-related sector was considered a promising stock this year but suffered sales declines due to the impact of the novel coronavirus (COVID-19). Delays in 5G-related investments planned by various countries this year also dampened early-year expectations. With no positive catalysts, 5G-related stocks have shown weakness since the beginning of this month. Seojin System's stock price fell 12.1% from 45,750 KRW on the 5th to 40,200 KRW as of 9:20 a.m. on the day, and RFHIC dropped 8.7% from 40,450 KRW to 36,950 KRW during the same period. Oisolution and YFarm also saw their stock prices fall by 13.4% and 11.4%, respectively.

After the U.S. presidential election, 5G adoption rates are expected to increase significantly, especially in North America, Northeast Asia, and Western Europe, with attention needed on essential components and equipment in this process. Seungdoo Na, a researcher at SK Securities, said, "North America centered on the U.S., Northeast Asia centered on South Korea, and Western European regions including the UK, France, and Germany will drive 5G growth," adding, "Next year is expected to be a year when telecommunications equipment and components will both be highlighted."

There is also an assessment that telecommunications stocks will undoubtedly attract attention once the full-fledged 5G era opens. Although telecommunications stocks have been sidelined in the market and shown sluggish performance over the past two months, expectations for a rise are growing due to third-quarter earnings and the launch of the iPhone 12.

SK Telecom's stock closed at 233,000 KRW yesterday. Considering the closing price of 235,000 KRW on August 21 two months ago, this represents a 0.85% decline. During the same period, KT fell 3.56% from 23,900 KRW to 23,050 KRW, and LG Uplus dropped 0.84% from 11,850 KRW to 11,750 KRW. This contrasts with the KOSPI index, which rose 2.34% from 2,304.59 to 2,358.41.

As the third-quarter earnings season approaches, expectations for telecommunications stocks are gradually increasing. The three major telecommunications companies are expected to have solid earnings excluding one-time issues. In particular, the wireless business is maintaining growth in both subscriber numbers and revenue. Since the fourth quarter of last year, a trend has emerged among telecom companies to avoid wasteful competition, leading to a stable trend in marketing expenses.

The number of 5G subscribers is expected to continue growing for the time being. Notably, on the 30th, the iPhone 12 and iPhone 12 Mini, which support 5G, will be officially released in South Korea. As Apple's first 5G phones, a large pent-up demand is anticipated. Overseas, where pre-orders have started, sales reportedly exceeded those of the previous iPhone 11 model from the first day. According to Samsung Securities, the number of 5G subscribers in South Korea is expected to reach 11.39 million by the end of this year. By company, SK Telecom has 5.3 million, KT 3.44 million, and LG Uplus 2.65 million subscribers.

The remaining issue is the cost of frequency reallocation. Telecom companies borrow frequencies from the government to provide wireless services, and over 70% of the currently used frequency bands' usage periods expire by June next year. Minha Choi, a researcher at Samsung Securities, explained, "Telecom companies and the government are currently in a tug-of-war over the calculation of frequency reallocation fees," adding, "If decided at a reasonable level as the telecom companies suggest, it will have a positive effect on stock prices."