KT Corp

KT's service revenue grew 1.8% in the second quarter, but operating profit fell 36% due to a real estate project gain booked in the previous year. Core telecom service revenue declined 1.3%, the first decline since 2023.

Why it matters: The results show KT is still recovering from the data breach discovered in September 2025, in a sluggish mobile market, while nonmobile businesses are also showing a mild decline. KT's second-quarter mobile revenue declined 1.8%, a bit ahead of SKT's 1.9% decline but below LG Uplus' 0.9% increase. Overall Korean mobile market revenue declined in the quarter as the bulk of the market has already moved to 5G. Both of KT's nonmobile telecom business lines also declined, with consumer fixed-line revenue down 1.5% and business revenue down 2.3%. Growth of 22% from its artificial intelligence platform business was not enough to offset declines from its Design & Build business.

The bottom line: We reduced our operating profit forecasts by 7%-8%, partially offset by strength in the won, and our fair value estimate declines to $20 per share from $22. We believe shares are fairly valued, trading at only around 11 times earnings. The company will return 50% of adjusted nonconsolidated net income through cash dividends and share buybacks. For fiscal 2026, the dividend will be a minimum of KRW 2,400 per share.

Long view: KT's corporate value-up plan sets a key target to lift return on equity from 6.1% in 2023 to 9%-10% by 2028. This is predicated on the transformation of KT into an AI company, with AI/IT revenue tripling from 2023 to 2028 to KRW 3 trillion. KT is also relying on selling unused real estate. But the AI targets appear quite aggressive to us, given that the monetization of AI outside of AI call centers looks uncertain. We see some potential AI efficiency gains but don't fully include them, as competitors are likely to do the same.

Correction (Aug. 12, 2026): A reference to the first quarter was amended to the second quarter.

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Our fair value estimate is $20 per ADR using a weighted average cost of capital estimate of 9.6%. Our WACC assumes a 12% cost of equity and a 4.2% pretax cost of debt. Our fair value estimate would put KT at a 2026 price/earnings of 11 times.

KT's operating profit averaged KRW 1.7 trillion over 2021 to 2023. 2024 saw operating profit fall on one-off job cuts, but it rebounded to KRW 2.5 trillion in 2025, helped by property sales, and we assume it will get back to that level again by 2030 without property sales. We assume continued efforts by the government to keep a lid on telecom pricing and spending by KT on artificial intelligence, with limited AI-related revenue in the specific forecast time frame. Further cost-reduction initiatives and earnings from real estate development could provide upside to our forecasts for KT. KT's corporate value-up plan sets a key target to lift return on equity from 6.1% in 2023 to 9%-10% by 2028. This is predicated on a transformation of KT into an AI company with AI/IT revenue to increase 3 times over 2023-28 to KRW 3 trillion. KT is also planning to sell unused real estate. KT had cyberattack issues in September 2025 and will likely incur expenses to compensate customers and upgrade its own networks, and maybe even some regulatory fines.

We give KT a no-moat rating based on the company’s low returns as compared with its cost of capital. We would normally expect a three-operator telecom market with mature operators to allow all operators to earn returns above the cost of capital due to the efficient scale moat source, where new entrants are precluded from market entry due to the very high cost of entering the market and uncertainty around the new entrants building enough scale to be viable. However, we have seen the Korean telecom operators earning average consolidated returns below their costs of capital over the past 10 years, despite enjoying a stable three-player market structure for the whole of this period. We see this as largely a result of the operators being very competitive with each other and the two largest operators, SK Telecom and KT, investing aggressively in no-moat nontraditional telecom businesses.

Given the market share advantages that KT and SKT have in the key mobile, fixed-line broadband, and pay TV markets, we would have expected them to earn at or above cost of capital returns from their telecom assets, but consolidated returns on invested capital have been below the weighted average cost of capital. We believe this is largely a function of the companies’ investment in nontelecom businesses such as artificial intelligence, e-commerce, and metaverse social media. We’ve seen KT and SKT consistently invest in these types of businesses over the past 10 years, with SKT investing in semiconductor manufacturer SK Hynix in 2012 and making a string of acquisitions in security businesses. LG Uplus has far fewer investments outside its core telecom business, which we believe explains why its ROIC does not appear to be significantly lagging the other operators, despite its scale disadvantages. LG Uplus has been gradually taking market share for most of the past decade.

Another reason often cited for low returns for operators in Korea’s telecom market is the highly competitive culture in Korea, with the most famous example being extremely competitive schooling and education. It is difficult for us to verify this, but it could help explain why the telecom companies have always competed very hard against each other.

Despite the Korean government attempting to attract a new, fourth mobile operator at least three times from 2010 to 2020, no new licenses were awarded. Some small companies did make bids for licenses but were rejected by the regulators. Larger international telecom companies were reportedly concerned about the difficulties of entering the market due to cultural and language differences and did not bid for licenses. The Korean market was also already very well served by existing operators and was very competitive. Korean regulators are expected to announce policy changes to allocate a 28-gigahertz mobile network to a new entrant, and the government has indicated that it will provide incentives to the newcomer in the form of tax cuts and loans. Given the struggles that new mobile entrants have had to date in Singapore and Japan, and the history of little interest in new licenses in Korea, we do not expect much interest in this license from serious mobile operators.

KT generates around 60% of its revenue from traditional telecom services and the remainder from nontraditional telecom services such as ICT, data centers, cloud services, robots, blockchain, energy, and real estate. We see these businesses as generally operating in competitive markets where KT has few competitive advantages, except perhaps real estate, where it is monetizing telecom real estate that it no longer needs as network equipment gets smaller and it consolidates buildings required for its network.

China is another three-player telecom market where we have only one player with a moat: China Mobile. All three operators are controlled by the Chinese government, which has shown a tendency to push telecom prices down to benefit the broader society to the detriment of the telecom operators. China Mobile has been able to maintain returns above its cost of capital due to its dominant market share and resulting economies of scale, while the smaller China Unicom and China Telecom have consistently earned returns below their costs of capital.

Following cost-cutting measures and asset sales in 2014 and 2015, KT's free cash flow remained strong through 2024 despite spending on 5G network rollout.

The Korean telecom market has managed to avoid excessive competition and handset subsidies while introducing 5G mobile.

The Korean telecom operators should benefit from growth in the IDC and cloud services industry.

KT's fixed-line telephony revenue has been in long-term decline. Fixed-line revenue is high-margin, and revenue from new services is unlikely to be as high.

By expanding into nontelecom businesses, KT is moving away from its core competence and economic moat into more competitive businesses.

From time to time, most governments look to lower telecom prices, which could lead to government-forced price reductions.