SK Telecom - Risks

Part 2 - Risk Detail
Part 3 - Possible Upside
Part 4 - Competitor Review
Part 5 - Valuation and Assessment
Part 6 - Management & Performance Targets

This industry is heavily capital-intensive, most notably in the following 2 areas: 1) Infrastructure - companies must spend massive amounts of capital to build out networks, run cable, etc. & 2) Market share - customer acquisition costs are high as wireless and broadband services are mainly price-based.
The telecom industry is highly regulated in South Korea. Market leaders are required to adhere to more stringent guidelines than their competitors, allegedly to foster competition and consumer benefit.
South Korea is a fairly mature wireless market, with nearly 90% market saturation. Growth in the domestic market will have to come from increasing revenue in value-added services as well as getting customers to trade up the technology chain (ie from CDMA to WCDMA, WiBro, etc.)
In 2006, the government lifted restrictions on handset subsidies, leading to fierce competition for market share among the three major wireless operators and compressed margins for all.
Corporate governance standards are arguably not as robust as in some Western countries. The S. Korean chaebols have gained some notoriety for not maximizing shareholder value, to put it diplomatically. SK Telecom is part of the SK Group, who has had some issues with corporate malfeasance in the SK Networks subsidiary, leading to fines and jail time for the culprits. SK Telecom leases 66% of their leased lines from SK Networks.
With an incoming, hardliner conservative President, diplomatic tensions with North Korea could ratchet up, leading to cross-border conflict.
Said incoming President has also vowed to lower mobile tariffs by 20%+ which has spooked investors away from the stock.
Like most of the chaebol, SK Telecom does engage in non-core activity and non-strategic investment. For example, they own a sizable stake in Posco, the steel company. Unfortunately, the rest of their record doesn't invite favorable comparison with Warren Buffett. Shareholders have to acknowledge that South Korean corporations may not be the most effective stewards of resources.

SK Telecom, as the market leader in wireless (50.5% share), is designated a market-dominating entity and must operate under tighter restrictions than competitors KT Freecell (KTF) and LG. For example, SK's peak usage rate is 11% higher than their competitors. SK's self-posed market share limit of 52.3% ran through the end of 2007 but management has not enumerated their stance going forward.
SK's non-domestic operations are rather opaque. The company does not provide breakouts of operating results from their US Helio venture nor their Vietnamese S-Fone business. The company has stated that foreign ventures will be considered successful once they generate free-cash flow. As no mention of such has been noted, it can be assumed that neither venture is FCF positive (92.5B KRW loss from Helio as of YE 2006).
Prospects for the company's Helio joint venture with Earthlink in the US seems dim from this vantage point. The American wireless market is highly competitive and well-covered by incumbent operators. Management shows no indication of backing away from future investment in Helio.
The company's "digital convergence" strategy is a bit dubious. Management states that digital convergence is a new paradigm but it seems vague and short on tangible details, targets, schedules, etc. In fact, outside of financial guidance for their core business, management provides few specifics on future plans, even when directly asked.
SK Telecom's rejected bid for a stake in Sprint Nextel signals a determination to establish a bigger presence in the US market. It is unclear what advantages SK Telecom will bring that will allow the company to generate sufficient returns in this market to justify the move.

Go to Part 3 - Possible Upside of this report.

DISCLOSURE: Please see our portfolio page for all disclosures.

This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.

The author received no compensation and is not affiliated with the company reviewed in this report with the possible exception of being a shareholder. The author reserves the right to buy or sell the stock as deemed personally prudent without further notification

The Enlightened American

SK Telecom - Risks