KT Corp Moat Rating Downgraded to None; Fair Value Estimate Decreased

We downgrade KT Corp’s KT moat rating from narrow to none and reduce our fair value estimate for KT Corp to USD 17.20 per ADR from USD 18.00 per ADR due to the moat rating downgrade and a slightly weaker KRW. The moat downgrade is based on KT’s inability to earn above cost of capital returns consistently over the past 10 years, and therefore our uncertainty around its ability to do so over the next 10years. This is largely due to the competitive nature of the Korean telecom market and the penchant of KT for investing in noncore telecom activities, such as content and payment services, that we see as having no moat. Despite the moat and fair value downgrades, we continue to see KT Corp as decent value, trading on a 2024 price/earnings ratio of only 8 times with a 6% dividend yield.

While the Korean government has attempted to attract new entrants into the Korean telecom market at least three times during the period from 2010 to 2020, no new licenses were awarded. Some small companies made bids for licenses but were rejected by the regulators. Larger international telecom companies were reportedly concerned about the difficulties of entering the market due to cultural and language differences and did not bid for licenses. Korean regulators are expected to announce policy changes to allocate 28 GHz mobile network to a new entrant, and the government has indicated that it will provide incentives to the newcomer in the form of tax cuts and loans. Given the struggles that new mobile entrants have had to date in Singapore and Japan, and the history of little interest in new licenses in Korea, we do not expect much interest in this license from serious mobile operators. If the three telecom operators can curb their competitive instincts enough to allow the generation of returns above cost of capital, this would look like a classic narrow-moat market based on efficient scale, but until we can get some confidence that this can happen it will remain no-moat.