From Fixed Lines to Wireless: Another Group of Foreign Telecoms to Watch

As discussed earlier on a previous article on foreign telecoms, fixed-line telecommunications are becoming less attractive. And, unfortunately, wireless is slowing down as well due to the fact that developed markets are reaching maturity levels. Nonetheless, some markets still present opportunities, especially considering their infrastructure levels and disposable incomes.

So, here are three Asian telecommunications ADRs to consider; two based in Japan, and one based in Korea.

Pretty exposed
First, it will be important to review Nippon Telegraph & Telephone (NYSE: NTT  ) , which controls the largest wireline telecom network in Japan. In fact, it holds 50% of market share.

Unfortunately, the company's fiscal first-half results did not impress. Although net income increased 10%, operating revenues and operating income remained mostly unchanged compared to the previous fiscal year.

It is important to point out that NTT is different than most telecoms in the sense that its fixed-line segment has a weak return on invested capital, or ROIC. Normally, fixed-line operators are cash cows, but not NTT. But, if we consider wireless, NTT possesses the majority of its subsidiary NTT DoCoMo (NYSE: DCM  ) , that dominates the Japanese mobile market with a 44% of market share. So, when this company shows good results, it benefits NTT as well.

As it is mainly a fixed-line business, the company's exposure to Japan is very significant, since only 10% of consolidated net sales are generated overseas. Moreover, this stock is extremely tethered with the Japanese economy among investors that will short this stock in the event of a loss of confidence in Japan. So, considering that there is a chance that Japan's stock market could make a correction soon, NTT might be one stock to avoid.

It's all about data
Just like NTT, NTT DoCoMo reported mixed results for its first-half in fiscal 2013. Operating revenue decreased ¥8.3 billion to $21 billion compared to the same period last year, while operating expenses decreased about $100 million.

With significant increases in its customer base, NTT DoCoMo is the leader in 4G LTE. This growth is slowing the company's loss of market share and increasing data usage. In fact, NTT DoCoMo derives 68% of its service revenue from data. If LTE continues to grow, we should see better revenue generated from data, and better average revenue per user, or ARPU, figures.

However, it will not be easy to increase and maintain good margins as intense competition is making subscribers change providers thanks to the mobile number portability. The fact is that NTT DoCoMo continues to add subscribers, but at a lower rate compared to its peers.

4G making the difference
Finally, we have the largest wireless operator in Korea, SK Telecom (NYSE: SKM  ) , which has 27.2 million subscribers.

Just like the other two companies, third-quarter results were mixed, and showed a 4% year-over-year improvement in revenue, along with a 5.8% drop in operating expenses year over year.

SK Telecom managed to increase its wireless base 1.6% this quarter, and made an outstanding 116.6% customer growth in its 4G LTE business. But what's really good about this rise is that it improved the company's ARPU to $40.23. Not bad at all, and if we consider that conversion to LTE will continue, revenue growth should as well.

Strategy-wise, SK Telecom decided to focus more on retaining its own subscribers rather than adding new ones, which has drastically reduced a 20.1% its marketing expenses year over year. Nonetheless, marketing expenses still account for more than a quarter of revenue. If the company manages to reduce these expenses further while maintaining its customer base, we should see an amazing profitability coming in.

Conclusion
NTT is struggling to generate decent ROICs. Plus, if the Japanese market makes a correction, this company could take a hit. Pay attention to the evolution of the country's economics.

Regarding NTT DoCoMo, the key variable to watch is its new 4G LTE subscriber generation, as it will drive margins and revenue in the following quarters.

In the case of SK Telecom, its improvements in subscriber base and profitability are good growth drivers. If expenses continue dropping, we should see higher profits coming ahead.


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