Aging Korean Demographics And OTT Will Squeeze Telecom Margins

Key Takeaways

• Demographic shifts and changing consumer habits challenge core telecom revenue, putting long-term growth and ARPU under significant pressure.
  
• High investment in innovation and diversification faces risks from rising compliance costs and industry price pressures, threatening margins and sustainable earnings.
  
• Solid subscriber growth, strategic tech partnerships, and infrastructure investments are driving profitability, higher-margin opportunities, and enhanced shareholder value through proactive capital return policies.

Catalysts

Provides various telecommunication services primarily in South Korea.

• Slower population growth and aging demographics in South Korea are likely to result in a shrinking base of new, younger subscribers for LG Uplus, which will put significant long-term pressure on overall revenue growth.
  
• Increasing adoption of OTT messaging services like KakaoTalk and WhatsApp is expected to continue reducing reliance on traditional telecom offerings, eroding LG Uplus's core service revenue and weakening its ability to sustain or grow ARPU in the coming years.
  
• Despite heavy investment in innovation such as AI-driven services and new data center projects, heightened cybersecurity and evolving data privacy requirements will drive up ongoing compliance and technology costs, compressing net margins and making it harder to deliver sustainable earnings growth.
  
• Expansion efforts into new businesses such as AI, media/content, and smart home solutions run the risk of persistent underperformance, limiting the diversification strategy and resulting in capital expenditures that fail to provide adequate returns, which could ultimately stagnate long-term earnings and cash flow.
  
• The telecom industry's accelerating price competition-compounded by increasing regulatory pressure in Korea to lower consumer telecom bills-threatens to further compress ARPU and operating margins, diminishing LG Uplus's profitability and returns for shareholders over the next several years.

LG Uplus Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on LG Uplus compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming LG Uplus's revenue will decrease by 1.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.8% today to 4.5% in 3 years time.
• The bearish analysts expect earnings to reach ₩685.8 billion (and earnings per share of ₩1596.91) by about July 2028, up from ₩409.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.1x on those 2028 earnings, down from 15.7x today. This future PE is lower than the current PE for the KR Telecom industry at 23.7x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.79%, as per the Simply Wall St company report.

LG Uplus Future Earnings Per Share Growth

Risks

• LG Uplus is demonstrating steady growth in both revenue and profit, highlighted by a Q1 service revenue increase of 1.6% year-over-year, operating profit up 15.6%, and net profit up 24.6%, suggesting that cost optimization and profitability initiatives are meaningfully improving earnings and operational cash flow.
  
• The company is seeing robust subscriber base expansion, with mobile subscriptions up 10.7% and strong growth from high-value segments such as IoT and MVNO, along with 5G penetration reaching 74.8%, indicating strong long-term demand and the potential for higher average revenue per user, which could support top-line growth.
  
• Strategic partnerships with leading global technology companies like Google and AWS position LG Uplus to capitalize on growth in AI-driven consumer and enterprise services, potentially leading to enhanced revenue streams and improved net margins over the long term.
  
• Ongoing investment in advanced infrastructure, such as the new high-efficiency data center, aligns with secular trends in cloud adoption and AI, and may open up recurring, higher-margin enterprise revenue that could support sustainable earnings growth.
  
• Continued focus on shareholder return initiatives, including planned share buybacks, treasury share cancellation, and a progressive dividend policy, signals commitment to enhancing shareholder value, which could put upward pressure on the share price through both improved earnings and increased investor demand.

Valuation

• The assumed bearish price target for LG Uplus is ₩10000.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of LG Uplus's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩20000.0, and the most bearish reporting a price target of just ₩10000.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩15234.8 billion, earnings will come to ₩685.8 billion, and it would be trading on a PE ratio of 6.1x, assuming you use a discount rate of 6.8%.
• Given the current share price of ₩14920.0, the bearish analyst price target of ₩10000.0 is 49.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.