Telco Services
Ignore the static
We believe 2009 will be another year of smoke and mirrors for the telcos, judging
from the little guidance provided. We suggest investors ignore the noise
surrounding mergers in the wireline space, and stick to wireless names as
defensives with earnings growth. Our top pick is SKT.
Key recommendations & forecasts
Reuters Year end Recom Price Target EPS PE
price 2009F 2009F
KTF¹ 032390.KQ Dec-08 Sell W28700 W25000 1,862 15.40
LGT¹ 032640.KQ Dec-08 Buy W9330 W14000 1,319 7.07
SKT¹ 017670.KS Dec-08 Buy W204000 W280000 22,105 9.23
KT Corp¹ 030200.KS Dec-08 Hold W38950 W36000 3,140 12.4
LG Dacom¹ 015940.KS Dec-09 Hold W18400 W20000 1,727 10.7
1. Normalised EPS - Post-goodwill amortisation and pre-exceptional items
Source: Company data, ABN AMRO forecasts
Prices as of 2 February 2009
Worst guidance ever, due to pending KT-KTF merger
We believe the 2009 guidance conference calls shared a level of unprecedented ambiguity,
thanks to the pending merger between KT and KTF. With the exception of the vague,
consolidated guidance that KT provided, the other telcos refused to provide basic earnings
and capex guidance, most likely to protest against the KT-KTF merger. We took just two
clear messages from guidance across the sector. First, mobile competition is likely to remain
weak given the sustained weakness of the economy and this is likely to result in earnings
growth for the wireless players. Second, SKT intends to maintain its dividend per share at
W9,400, giving an FY09G yield of 4.6%.
KT and KTF appear to be using the pending merger to shrink shareholder returns
In contrast to SKT, both KT and KTF have reduced shareholder returns in 2008 and have
provided very little guidance for 2009, given the cash uncertainties regarding the merger.
KTF says it has no intention of paying dividends or performing share buybacks. The merger
itself will result in 26% book dilution according to our calculations, regardless of whether KT
uses treasury or issues new shares. Given that KT bought treasury shares at a steep
premium to the current share price, we believe it will be destroying value by utilising them,
contrary to the consensus view.
We prefer wireless over wireline for better earnings visibility and valuations
Despite the lack of clear guidance, we believe the telecom sector will outperform the Kospi
given the lack of alternative defensives. We prefer wireless to wireline given our view that
they: 1) have better earnings growth prospects, 2) carry less regulatory risk, 3) offer better
shareholder returns, and 4) offer better relative value. We recommend investors switch into
SKT, our top pick, from KT. We see similar earnings growth prospects for LGT as SKT. We
think LGT carries less capital management risk and expect the valuation gap to narrow. The
main risk to our Overweight stance on Korea telcos is if market uncertainties dissipate and
investors switch to high-beta stocks.

Contents
More moo than milk 3
The Year of the Ox started with a lot of noise but not much substance. However, we
expect Korean telcos to outperform as defensives with relative earnings growth. We
prefer wireless names SKT and LGT for their earnings growth.
3
Company profiles 16
KTF 17
SK Telecom 21
LG Telecom 23
LG Dacom Corp 27
KT Corp 31