LG Uplus facing cash flow problem
By Kim Yoo-chul
LG Uplus is expected to face a cash shortage in the wake of its aggressive investment over the past few years, according to market analysts Monday.
They say the nation’s smallest mobile carrier has been lavish in its investment in a next-generation long-term evolution (LTE) network to try and catch up with rivals SK Telecom and KT, but has yet to generate enough profit. Experts believe it has gained a bigger market share at the expense of cash flow.
``The key point is that LG Uplus will report its steepest drop in operating profit in the second quarter as it spent too much to climb to the No. 2 position,’’ said Choi Nam-gon, an analyst at TongYang Securities.
According to a consensus among market analysts, industry leader SK Telecom posted an operating profit of 356 billion won between April and June, down 25 percent from the previous quarter. Runner-up KT recorded 354 billion won, while LG saw its profit plunge by 85 percent.
The poor performance was widely expected. Last year, the total borrowing by Uplus reached 3.9 trillion won. As of the end of May this year, the total cash-equivalent assets the firm owned were less than 500 billion, according to fund managers.
Officials expect LG’s debt ratio to increase 200 percent this year after heavy investment in LTE but handsome returns are not expected in the coming quarters.
The average revenue per user ― the key barometer to gauge telecom companies’ profitability ― fell to 31,000 won at the end of last year from 38,000 won as of the end of 2004, stock analysts said.
``It is unlikely that Uplus will make money unless it prevents its cash flow from deteriorating further. It is still far behind SK Telecom and KT in the number of smartphone users, while it can’t sell Apple’s existing and upcoming iPhones. LG has little room to create new cash revenue,’’ said one fund manager based in Seoul, adding he is considering selling Uplus stocks as part of a portfolio realignment.
``LG Electronics is also struggling to release competitive smartphones that use LTE compared to Samsung and Apple. The deepening business woes at LG is also affecting Uplus,’’ said the manager.
Last year, Uplus invested 1.7 trillion won in its LTE network and has allocated 1.4 trillion won for that purpose this year. LG is now the nation’s No. 2 LTE provider and its CEO Lee Sang-chul expects the number of LG LTE customers to rise to 5 million by the end of this year.
Lee is desperate to boost the LTE business. He said Uplus will fully open its network to mobile voice over Internet protocol services, though the company will see a decrease in revenue from voice calls.
The Korea Communications Commission, the nation’s top telecom regulator, has planned to auction an additional 1.8-gigahertz bandwidth to meet rising consumer demand for LTE networks. ``But Uplus is in no position to join the bidding as it doesn’t have the cash,’’ said one official, asking not to be named.