LG Uplus: Initiating Coverage With No Moat and KRW 11,900 Fair Value Estimate

We initiate coverage on LG Uplus 032640 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.

While the Korean government has attempted to attract new entrants into the telecom market at least three times during the period 2010-20, no new licenses were awarded. Some small companies did make 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 the 28 gigahertz 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.