Fitch Ratings said the aggregate telecom sector net leverage in 2018 in Korea will remain largely the same as in 2017 at around 1.2x-1.3x, due to strong non-telecom operating performance despite the negative impact from the government-driven tariff cuts.
Balance sheets are likely to remain cautiously geared ahead of a likely increase in 5G investment, with controlled Capex, prudent marketing cost-control and working-capital management.
Marketing costs of Korean telecoms will rise to 24 percent- 25 percent of total wireless revenue, which is high relative to many other APAC markets.
The aggregate CFFO for the sector will continue to remain solid at around KRW8 trillion in 2018, which is slightly less than the previous levels in 2015-2016 due to the negative impact from government-driven tariff cuts.
Korean telecom operators generate stable operating cash flows and have secure subscriber bases, although upside is limited in a saturated market. The government-initiated tariff cut and the expected increase in investment in 5G infrastructure is likely to pressure FCF generation in the medium term.
Broadband revenue continues to rise as greater numbers of subscribers convert to more expensive high-speed internet services. Drawing on their broadband and wireless customer base, KT Corporation and SK Telecom will continue to win IPTV subscribers against cable-TV operators by offering cheaper, bundled products.
Revenue from pay-per view, home shopping and advertising should rise in tandem with a growing IPTV market share.
The expected increase in Capex due mainly to 5G investment is likely to be manageable within the current rating levels for both SKT and KT as long as operating cash flows remain solid, although there is still much uncertainty over the amount of Capex after 2018. The technology standards for 5G may be finalised during 1H18, after which companies will begin to firm-up their investment plans.
