[Click eStock] SK Telecom, Optimism Despite Expected 5G ARPU Decline

[Asia Economy Reporter Hwang Junho] Yuanta Securities maintained the target price for SK Telecom at 74,000 KRW, stating that the company will enter a cost reduction phase in the first quarter of this year.

Yuanta Securities expects a structural decrease in costs starting from the first quarter of this year, with performance improvements anticipated from the second quarter onward. The projected sales for the first quarter are 4.23 trillion KRW, representing a 2.9% increase year-on-year, and operating profit is expected to reach 403.4 billion KRW, a 7.8% increase compared to the previous year. This figure exceeds Yuanta Securities' performance expectation of 385.1 billion KRW by 4.8%.

This performance improvement is analyzed to be due to reduced marketing expenses and decreased amortization of intangible assets following the 4G frequency reassignment. Marketing expenses are expected to decline due to a decrease in phone sales volume and a reduction in marketing expense contract assets. Sales volume dropped from 2.11 million units in the fourth quarter of last year to an expected 1.73 million units in the first quarter of this year. Regarding marketing expense contract assets, they decreased from 3.19 trillion KRW in the fourth quarter of 2020 to 3.05 trillion KRW in the fourth quarter of last year. SK Telecom's amortization period for marketing expense assets is 28 months, which is longer compared to other companies. Therefore, a significant reduction effect in related asset amortization expenses is expected to appear starting from the first quarter of this year. This trend is expected to continue until the second quarter of this year, and unless there are special variables, Yuanta Securities analyzes that performance improvement will strengthen in the second quarter of this year.

Choi Namgon, a researcher at Yuanta Securities, stated, "If this trend continues, the confidence of SK Telecom investors in the 'entry into a structural cost reduction phase' will be strengthened," and added, "Expectations for performance improvement in the second quarter of this year, when the one-time labor cost impact is removed, will expand."

However, due to the slowdown in 5G subscriber growth, the average revenue per user (ARPU) for the operator's service subscribers is expected to slightly decline compared to the previous quarter.