KT Corporation ADRKTC

Morningstar Rating

Stock Research and Analysis

by Jacqueline Zhang

We like KT's dominant position in Korea's telecom market, but we expect long-term growth potential will be limited as the South Korean telecom market matures.

As the incumbent telecom provider in South Korea, KT dominates the fixed-line industry and continues to control more than 90% of the local phone market, despite the government's effort to promote competition. Read more

Bulls Say

The MIC is permitting big operators to offer bundled packages of fixed-line and wireless services at discounted prices. As the only fully integrated operator, KT should be able to leverage its various offerings to attract new subscribers.

The firm's disclosure and corporate governance is among the best in Korea.

KT dominates the fixed-line telecom market in Korea, which generates considerable free cash flow. Read more

Bears Say

Growth opportunities are scarce, as Korea's telecom market is nearing saturation. An inability to find new growth opportunities will hurt the firm's long-term prospects.

Hanaro Telecom's acquisition of Korea Thrunet, the country's first Internet access provider, in 2006 allowed the firm to enjoy greater scale advantages and to be more aggressive on pricing. Ongoing consolidations in this market will create other sizable players that could threaten KT's leading position.

In order to gain market share, KT was very aggressive in offering deep handset subsidies, which caused marketing expenses to skyrocket and profits to decline in 2007. The company's inability to win customers through other less costly methods will continue to dig into earnings.

As the market leader in the Internet access business, KT is compelled to charge customers higher rates than those of its competitors, putting the firm at a clear disadvantage.

KT and KT Freetel both lost their CEOs in the last couple of months because of allegations of bribery, which we think will likely delay the much-anticipated merger between the two companies. Read more

Strategy

As the telecom operator with the broadest service portfolio, KT is positioned to take advantage of fixed-mobile phone convergence in Korea. It is also offering new services such as Internet protocol TV and WiBro to derive additional revenue. Read more

Management

Seok-Chae Lee assumed his role as KT's new CEO in January 2009 following the resignation of former executive Joong-Soo Nam in November 2008. Nam is charged with accepting bribes from suppliers during his term as the firm's CEO. Lee previously served as Korea's minister of information and communication and was previously an outside director for SK C&C, a subsidiary of SK Telecom, as well. Read more

Profile

KT is the incumbent and largest fixed-line operator in South Korea, with about 20 million customers (92% market share), and about 50% of the nation's Internet access market. Read more

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