FITCH negative regulatory environment to continue for South Korean telecoms

Tue Mar 29, 2011 11:28pm EDT

(The following was released by the rating agency)

March 29 (Fitch) Fitch Ratings says the Korea Communications Commission's (KCC) policy for additional tariff discounts will place negative rating pressure on South Korean telecom operators. See-Joong Choi has been reappointed as chairman of the KCC and has indicated his intention of achieving further reductions in mobile subscriber activation and monthly basic fees during his second term. During Mr. Choi's first term in office, the KCC adopted a consumer-oriented stance and consistently pursued policies for tariff discounts in various forms which resulted in slower revenue growth and margin erosion of the South Korean telecom operators.

Fitch notes the KCC's role in contributing to the slower revenue growth and margin erosion of the operators, and the agency considers that regulatory risks are likely to continue as a constraining factor on the South Korean operators' ratings compared with their global peers. Fitch currently rates KT Corporation ('A'/Stable), LG Uplus ('BBB-'/Stable), SK Broadband Co., Ltd. ('BBB+', Stable) and SK Telecom Co., Ltd ('A'/Stable).

The KCC's approach is in line with the South Korean government's policy of curbing the recent spike in inflation, as telecom expenses account for the third largest portion (7%) of the average household's monthly spending according to Statistics Korea. As the operators' data revenue has grown in recent quarters due to the rapid uptake of smartphones yielding a proliferation in wireless internet usage, Fitch expects the commission to focus on reducing mobile data tariffs in addition to activation and monthly basic fees.

Although Fitch acknowledges that the impact of such a regulatory policy on the telecom operators will be negative over the mid to long term, the agency expects only limited impact in the short term. Fitch believes that the KCC has a sound understanding of the operators' need to upgrade their networks in order to cope with the rapid increase in mobile data usage, and in this regard the commission is aware of the sizable capex amounts which the operators are likely to undertake in FY11 and FY12. In view of this, Fitch expects that the KCC will not pursue an aggressive policy that can significantly shrink the cash generation of the operators in the short term for the benefit of consumers.

In addition, the KCC is fully aware that the telecom operators have introduced various tariff reduction measures over the past several years with per second billing and unlimited data usage as part of one of the most recent plans for smartphones. Although the operators have carefully designed the discount plans to have minimal adverse effect on their profitability, Fitch anticipates that it will be difficult for the regulatory body to disregard these gestures and push for additional discounts at this juncture. However, the regulator's overall policy aimed at ongoing tariff reductions is likely to weigh on the telecom operators' ratings in the long term.