Company Reports

The LG Uplus' second-quarter result was broadly in line with our expectations for revenue, but operating profit was below our expectations, mainly driven by large increases in depreciation and amortization expenses. We reduce our operating profit forecasts around 20% in 2024, with the impact reducing in the outer-year forecasts, mainly due to increased depreciation and interest expenses. Our fair value estimate for LG Uplus reduces to KRW 9,700 from KRW11,400, leaving the stock on a 3-star rating. At our fair value estimate, the stock would trade on a 2024 price/earnings of only 7.4 times, with a 6.7% dividend yield. We see this as reasonable given our forecast for the company to grow its revenue by an average of 2.6% per year and its operating income by an average of 1.3% per year over the next five years. Our no-moat rating is retained given that LG Uplus has generated returns averaging below cost of capital over the past 10 years and we expect this to continue over our five-year explicit forecast period. LG Uplus has gradually taken market share in mobile, broadband, and pay-TV markets but remains in third position in terms of market share, with 20%-25% in each market. Given the high fixed cost nature of telecommunications, this puts LG Uplus at a slight disadvantage compared with its peers, KT Corp and SK Telecom, who've benefited from first-mover advantage but who also have no-moat ratings.

We expect LG Uplus to continue to grow its core business through the expansion of its wireless/wireline network, specifically its 5G broadband network, and expansion into targeted noncore businesses such as its smart home and enterprise infrastructure business segments. As LG Uplus expands its wireless network, it attracts premium 5G subscribers directly but also mobile virtual network operator subscribers. In addition, LG Uplus is investing in physical storefronts to drive its MVNO business. Revenue from roaming data usage is now back to prepandemic levels, due to the easing of covid-19 restrictions in Korea.

LG Uplus' first-quarter result was slightly positive at the top line, with services revenue growing 2.7% compared with our 2% full-year forecast, which is in line with company guidance. However, the operating profit decline of 15% was below our expectations and was mainly driven by large increases in depreciation and amortization expenses. We retain our operating profit forecasts and our KRW 11,400 fair value estimate. Management retains its guidance of 2% service revenue growth for 2024 with improved profitability and will retain its dividend payout ratio of 40% of net profit on a separate rather than consolidated basis. At our fair value estimate, the stock would trade at 2024 price/earnings of only 6.9 times with a 5.6% dividend yield. We see this as reasonable, given that we forecast the company to grow revenue by an average of 2.7% per year and operating income by an average of 2.6% per year over the next five years.

We expect LG Uplus to continue to grow its core business through the expansion of its wireless/wireline network, specifically its 5G broadband network, and expansion into targeted noncore businesses such as its smart home and enterprise infrastructure business segments. As LG Uplus expands its wireless network, it attracts premium 5G subscribers directly but also mobile virtual network operator subscribers. In addition, LG Uplus is investing in physical storefronts to drive its MVNO business. Revenue from roaming data usage is now back to prepandemic levels, due to the easing of covid-19 restrictions in Korea.

The LG Uplus fourth-quarter result was slightly disappointing with services revenue growing at 2.2% and operating profit declining by 32%, year on year. Increased amortization due to spectrum charges, as well as increased wages, were the main drivers of the operating profit decline. We lowered our operating profit forecasts by 2%-5% over the next three years, and our fair value estimate for LG Uplus decreased to KRW 11,400 from KRW 11,600, leaving the stock with a 3-star rating.

We expect LG Uplus to continue to expand its core business through the expansion of its wireless/wireline network, specifically its 5G broadband network, and expansion into targeted noncore businesses such as its smart home and enterprise infrastructure business segments. As LG Uplus expands its wireless network, not only does it attract premium 5G subscribers directly, but also mobile virtual network operator subscribers. In addition, LG Uplus is investing in physical storefronts to drive its MVNO business. Revenue from roaming data usage is now back to prepandemic levels, due to the easing of COVID-19 restrictions in Korea.

We expect LG Uplus to continue to expand its core business through the expansion of its wireless/wireline network, specifically its 5G broadband network, and expansion into targeted noncore businesses such as its smart home and enterprise infrastructure business segments. As LG Uplus expands its wireless network, not only does it attract premium 5G subscribers directly, but also mobile virtual network operator subscribers. In addition, LG Uplus is investing in physical storefronts to drive its MVNO business. Revenue from roaming data usage is now back to prepandemic levels, due to the easing of COVID-19 restrictions in Korea.

We initiate coverage on LG Uplus with a no-moat rating and a KRW 11,900 fair value estimate. As the third entrant into the Korean telecom market, LG Uplus has gradually taken market share in the mobile, broadband, and pay-TV markets, but remains in third position in market share terms in each market, with 20%-25% market share. Given the high-fixed-cost nature of telecommunications, this puts LG Uplus at a slight disadvantage compared with its peers, KT Corp and SK Telecom, who have benefited from first-mover advantage. Despite only having three operators, the Korean telecom market has proven to be very competitive, with each of the telecom companies generating average returns on invested capital below their cost of capital over the past 10 years. For this reason, we give LG Uplus a no-moat rating.

We expect LG Uplus to continue to expand its core business through the expansion of its wireless/wireline network, specifically its 5G broadband network, and expansion into targeted noncore businesses such as its smart home and enterprise infrastructure business segments. As LG Uplus expands its wireless network, not only does it attract premium 5G subscribers directly, but also mobile virtual network operator subscribers. In addition, LG Uplus is investing in physical storefronts to drive its MVNO business. Revenue from roaming data usage is now back to prepandemic levels, due to the easing of COVID-19 restrictions in Korea.