South Korean telecom operators step up data-center investment, with KT the top pick due to unpriced AI infrastructure

Overview

The report examines whether the data-center and AI-infrastructure expansion of South Korea's three major telecommunications operators can drive a valuation reset. Morgan Stanley recognizes the industry's long-term optionality but sees clear differences among the stocks in valuation, catalysts, and transparency regarding project returns. It therefore names KT as its top pick and takes an Equal-weight stance on both LG Uplus and SK Telecom.

Core views

All three major South Korean operators are expanding their data-center footprints. SK Telecom announced that it will build 5GW of capacity beginning in 2029, with a long-term target of 15GW; KT's new management plans to increase investment in AI infrastructure, including data centers and submarine cables, targeting 1GW of capacity over the next five years; LG Uplus plans to increase its owned data-center capacity to 270MW by 2030, nearly double its current scale. The report expects data-center revenue growth to outpace that of traditional telecommunications services, thereby increasing the share of revenue from AI infrastructure. Because current share prices do not yet reflect a meaningful AI-infrastructure valuation premium, successful project execution could become a rerating catalyst. However, commissioning timelines for new capacity and the returns from models such as full-stack services, colocation, GPU leasing, and DBO remain moving variables. Industry valuations also face interest-rate pressure. The Bank of Korea raised its policy rate by 25 basis points in July, and Morgan Stanley's macro team expects the terminal rate next year to exceed 3%. Historically, rising interest rates have generally been unfavorable for telecommunications stocks, for which yield is an important pricing consideration. The report therefore raises the risk-free rate used in its DCF and DDM valuations from 4.0% to 4.5%. All three operators underperformed the KOSPI in 2025 and year-to-date 2026, despite stronger share-price performance in 2026; based on shareholder returns, South Korean telecommunications operators also no longer trade at a discount to Asian peers. This means that subsequent rerating will require clearer AI growth, returns, or company-specific catalysts rather than relying solely on their traditional high-dividend characteristics. KT is the report's top pick. While continuing its “value up” initiatives, the new management is increasing investment in AI infrastructure and enterprise AI services. The report expects the drag from customer compensation expenses related to the data breach to fade in the second half of 2026, allowing earnings momentum to recover. KT's share price has declined 24% from its February 2026 peak, and the stock trades at approximately 10 times P/E while offering a 6.5% TSR. Morgan Stanley believes this valuation incorporates essentially no upside from AI infrastructure and therefore upgrades the rating from Equal-weight to Overweight. Due to a higher cost of capital, the target price is cut 3% from W64,000 to W62,000, but the report still expects 18% upside. The target price corresponds to approximately 10 times revised 2026 P/E, a 4.5% dividend yield, and a 6.5% market-cap-based TSR. KT is valued using a sum-of-the-parts approach: the parent company's telecommunications business is valued using DCF, with WACC raised from 6.8% to 7.2%, including an increase in the risk-free rate from 4.0% to 4.5% and in the cost of equity from 7.6% to 8.1%, while the terminal growth rate remains at 0%; KT Skylife, Genie Music, KT Alpha, and Nasmedia are included at market value in proportion to KT's ownership stakes and then subjected to a 30% holding-company discount; KT Estate is valued at 1.0 times P/B and assigned a 30% discount; BC Card is valued at 0.5 times P/B, including the value of its 34% stake in K-Bank based on a W4tn valuation in the base case, followed by a 30% discount. The bull-, base-, and bear-case values are W75,000, W62,000, and W48,000, respectively, corresponding to 2026 expected EPS multiples of 14 times, 12 times, and 9 times in the risk-reward framework. The bull case assumes that the parent company's operating margin rises above 10% and that AI businesses drive KT Cloud's market capitalization to W7tn; the base case assumes that the parent company's operating margin reaches approximately 9% beginning in 2027 and that ROIC approaches 10% before the deployment of 6G around 2030; the bear case assumes slower wireless revenue growth and higher capital expenditure, limiting margin improvement to approximately 9%, with medium-term ROIC peaking at approximately 9%. Additional disposals of non-core real estate or subsidiaries are also identified as potential sources of upside. Although LG Uplus is undergoing an earnings recovery, its rating is downgraded from Overweight to Equal-weight. The company has placed greater emphasis on profitability following its 2025 restructuring, and the report expects earnings to recover in 2026, with the enterprise business also likely to benefit from the Paju data-center cluster; dividends and share repurchases are gradually increasing alongside the earnings improvement. However, its AI-infrastructure narrative is relatively weak, shareholder returns are broadly in line with expectations, the stock lacks a clear catalyst to attract investors, and rising interest rates further reduce the appeal of yield assets. Morgan Stanley states that it may adopt a more positive stance only after the Paju data center begins contributing revenue in coming quarters. The target price is cut 6% from W18,000 to W17,000 due to the higher WACC. LG Uplus's W17,000 target price is based on a sum-of-the-parts valuation: the parent company's telecommunications business is valued using DCF, with WACC raised from 7.4% to 7.9%, the risk-free rate increased from 4.0% to 4.5%, and a terminal growth rate of 1%; LG Hellovision is included at market value based on the company's 50% ownership stake. The target price corresponds to 9 times expected 2026 P/E, a 4.7% dividend yield, and a 6.1% TSR. The bull-, base-, and bear-case values are W19,000, W17,000, and W13,000, respectively, corresponding to expected 2026 EPS multiples of 12 times, 9 times, and 8 times. The bull case assumes that the parent company's medium-term operating margin reaches 12% and long-term ROIC rises to approximately 10%; the base case assumes that healthy consumer wireless and enterprise businesses drive the margin to approximately 11%, capital expenditure remains stable before the deployment of 6G in 2030, and medium-term ROIC exceeds 8%; the bear case assumes constrained wireless ARPU growth and higher capital expenditure, with the margin peaking at approximately 11% and higher post-6G capital expenditure keeping long-term ROIC below 8%. SK Telecom remains Equal-weight, but its target price is raised from W80,000 to W90,000. The report recognizes the company's proactive development of a large AIDC portfolio through SK Hyper but remains cautious pending further details on planned capacity, capital investment, business models, and expected returns; it also believes that the current share price already reflects most of the fundamentals. Its sum-of-the-parts valuation uses a DDM to value the core wireless business, with the cost of equity increased from 8.0% to 8.5%, the risk-free rate raised from 4.0% to 4.5%, and a terminal growth rate of 2%. AI investments are valued using the latest post-money valuations for unlisted companies or market capitalizations for listed companies, with a 30% holding-company discount in the base case. The report assigns a value of W4.6tn to investments related to LLM and data-center solutions, raising NAV per share from W80,000 to W87,000 and rounding it to a target price of W90,000. The new target price corresponds to 15 times expected 2026 P/E and a 3.4% dividend yield. SK Telecom's bull-, base-, and bear-case values are W130,000, W90,000, and W70,000, respectively, corresponding to expected 2026 EPS multiples of 21 times, 15 times, and 11 times. The bull-case value is raised from W100,000 to W130,000, assuming no holding-company discount for AI investments, higher wireless revenue, consolidated operating profit reaching W2.5tn by 2030, and W750bn of incremental value from SK Hyper. The base case assumes a 1% compound growth rate in wireless revenue from 2025 to 2028, with growth driven mainly by data centers and cloud services; parent-company capital expenditure remains at 13%–14% of service revenue until the deployment of 6G in 2030, the medium-term operating margin is approximately 13%, SK Broadband's operating margin reaches approximately 12% by 2030 due to data-center growth, and annual dividends increase from W3,320 in 2026 to W4,000 in 2029. The bear case assumes continued declines in wireless revenue and higher capital expenditure, with long-term ROIC falling below 10%, slower dividend growth, no value assigned to SK Hyper, and the discount on AI investments raised to 50%.

Analysis framework

The report first compares the data-center expansion plans and AI revenue potential of the three South Korean operators, then assesses the conditions for rerating in light of share-price performance, valuations of Asian peers, and the interest-rate environment. It subsequently analyzes each company's earnings drivers, capital expenditure, shareholder returns, and catalysts, using sum-of-the-parts valuations to separate the value of core telecommunications businesses, listed or unlisted investments, and other subsidiaries. Finally, it tests the impact of changes in wireless revenue, margins, ROIC, AI asset values, and holding-company discounts on target prices under bull, base, and bear cases.

Methodology notes

• Valuation MethodSOTP Valuation

  Sum-of-the-Parts Valuation

  The report separately values core telecommunications businesses, data centers and AI investments, listed subsidiaries, real estate, credit cards, and other assets, then aggregates the values of each component to derive target prices for the three companies.

• Valuation MethodDCF Valuation

  DCF for Core Telecommunications Businesses

  The parent-company telecommunications businesses of KT and LG Uplus are valued by discounting future cash flows. The report raises the risk-free rate and WACC to reflect the negative impact of rising interest rates on long-term value.

• Valuation MethodDDM Valuation

  Dividend Discount Valuation for SK Telecom's Wireless Business

  SK Telecom's core wireless business is valued by discounting future dividends, using an 8.5% cost of equity and a 2% terminal growth rate, reflecting the importance of shareholder distributions as a source of value for its mature telecommunications business.

• Valuation MethodPB valuation

  Book-Value Multiple Valuation

  KT Estate is valued at 1.0 times P/B to reflect its land base, while BC Card is valued at 0.5 times P/B, consistent with listed peers; SK Broadband is also valued using a target P/B approach within SK Telecom's sum-of-the-parts framework.

• Valuation Method

  Holding-Company Discount

  The report applies a 30% discount to multiple listed subsidiaries and AI investments to reflect holding structures and limited synergies with the core business. SK Telecom's bear case raises the discount on AI investments to 50%, while the bull case applies no discount.

• Valuation Method

  Bull-, Base-, and Bear-Case Analysis

  The report develops three scenario prices by varying wireless revenue, capital expenditure, operating margins, ROIC, AI asset values, and valuation discounts, illustrating how key operating and valuation assumptions affect fair value.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• KT Corp（030200.KS）

  The report views AI-infrastructure investment, enterprise AI services, and earnings recovery as unpriced sources of rerating and upgrades the rating to Overweight.

  Strengths

  1GW capacity target over the next five years; new management is advancing both AI investment and “value up”; the drag from customer compensation expenses is expected to fade in the second half of 2026; potential disposal of non-core assets.

  Weaknesses

  Higher interest rates increase WACC and lead to a lower target price; commissioning timelines and return models for new AI capacity remain uncertain.

  Comparison

  Named the top pick among South Korea's three major operators, with more apparent valuation-recovery potential after underperforming peers in the first half of 2026.

  Risks

  Regulation leading to lower tariffs or higher capital expenditure, renewed wireless competition, and slower-than-expected progress on AI projects.

• LG Uplus Corp（032640.KS）

  Earnings recovery and the Paju data center support enterprise-business growth, but an insufficient AI narrative and lack of near-term catalysts lead to a downgrade to Equal-weight.

  Strengths

  Improving profitability following the 2025 restructuring; the Paju data-center cluster could drive enterprise revenue; dividends and share repurchases are gradually increasing.

  Weaknesses

  A relatively weak AI-infrastructure narrative, shareholder returns broadly in line with expectations, and rising interest rates weighing on yield-based valuations.

  Comparison

  The stock is valued at approximately 9 times expected 2026 P/E and offers around a 6% TSR, but the report believes it lacks a clear catalyst capable of triggering a rerating compared with KT.

  Risks

  Higher future capital and spectrum expenditure, regulation of telecommunications pricing, intensifying wireless competition, and delayed data-center revenue contributions.

• SK Telecom Co Ltd（017670.KS）

  Its large AIDC and AI investment portfolio increases sum-of-the-parts value and the target price, but insufficient transparency regarding project economics supports maintaining an Equal-weight rating.

  Strengths

  Active AIDC expansion; AI investment valuation of W4.6tn; stable core wireless business, with dividends expected to rise gradually under the base case.

  Weaknesses

  Planned capacity, capital expenditure, business models, and expected returns still require clarification, and the report believes the current share price already reflects most of the fundamentals.

  Comparison

  The increase in target price driven by AI investment value is the largest, but the target price corresponds to 15 times expected 2026 P/E, higher than KT and LG Uplus.

  Risks

  Lower expected returns from AI data centers, renewed wireless competition, reduced value or returns from AI investments, and higher capital expenditure.

Key data

• SK Telecom Data-Center Plan5GW beginning in 2029, with a long-term target of 15GWThe company's announced direction for AIDC capacity expansion
• KT Data-Center Target1GW over the next five yearsThe new management's AI-infrastructure investment plan
• LG Uplus Owned Data-Center Target270MW by 2030Nearly double its current capacity
• Bank of Korea Rate HikeRaised by 25 basis points in July 2026Morgan Stanley's macro team expects the terminal rate next year to exceed 3%
• Valuation Risk-Free Rate4.5%Raised by 50 basis points from the previous 4.0%
• KT Share-Price DrawdownDown 24% from the February 2026 peakThe report believes the current valuation does not reflect upside from AI infrastructure
• KT Rating and Target PriceOverweight, W62,000Upgraded from Equal-weight; target price cut 3% from W64,000, implying 18% upside
• KT Target-Price Valuation10 times expected 2026 P/E, 4.5% dividend yield, 6.5% TSRCalculated based on the W62,000 target price
• KT DCF AssumptionsWACC 7.2%, cost of equity 8.1%, terminal growth rate 0%WACC was previously 6.8%, and the cost of equity was previously 7.6%
• KT Scenario ValuesBull W75,000; base W62,000; bear W48,000The bull-case value was previously W80,000, while the bear-case value is unchanged
• LG Uplus Rating and Target PriceEqual-weight, W17,000Downgraded from Overweight; target price cut 6% from W18,000
• LG Uplus Target-Price Valuation9 times expected 2026 P/E, 4.7% dividend yield, 6.1% TSRCalculated based on the W17,000 target price
• LG Uplus DCF AssumptionsWACC 7.9%, terminal growth rate 1%WACC was previously 7.4%, and the risk-free rate was raised from 4.0% to 4.5%
• LG Uplus Scenario ValuesBull W19,000; base W17,000; bear W13,000The bull-case value was reduced due to the higher WACC, while the bear-case value is unchanged
• SK Telecom Rating and Target PriceEqual-weight, W90,000Rating maintained; target price raised from W80,000
• SK Telecom AI Investment ValueW4.6tnSum-of-the-parts valuation of investments in LLM and data-center solution companies
• SK Telecom NAV per ShareW87,000Previously W80,000 and rounded up to derive the W90,000 target price
• SK Telecom Target-Price Valuation15 times expected 2026 P/E, 3.4% dividend yieldCalculated based on the W90,000 target price
• SK Telecom DDM AssumptionsCost of equity 8.5%, terminal growth rate 2%The cost of equity was previously 8.0%, and the risk-free rate was raised from 4.0% to 4.5%
• SK Telecom Scenario ValuesBull W130,000; base W90,000; bear W70,000The previous bull- and bear-case values were W100,000 and W65,000, respectively
• SK Telecom Base-Case Operating AssumptionsWireless revenue CAGR of 1% from 2025 to 2028, with capital expenditure at 13%–14% of service revenueThe capital-expenditure assumption is maintained until the deployment of 6G around 2030
• SK Telecom Dividend AssumptionsW3,320 in 2026, W4,000 in 2029Annual dividend per share under the base case

Impact & implications

The report believes that the future rerating of South Korean telecommunications stocks will increasingly depend on whether data-center and AI investments can translate into visible revenue, returns, and asset value, rather than merely on traditional telecommunications earnings and dividends. KT's valuation pullback, the fading earnings drag, and management's new strategy create a relatively clear combination of catalysts; LG Uplus must wait for the Paju data center to contribute revenue; although SK Telecom has larger-scale AI optionality, its capital requirements, business models, and investment returns need further clarification. Meanwhile, rising interest rates increase discount rates and reduce the relative appeal of high-yield telecommunications stocks.

Risks

• The commissioning timelines, capital investment, business models, and expected returns for additional data-center capacity remain uncertain.
• Further interest-rate increases would raise DCF and DDM discount rates and weigh on the valuations of high-dividend telecommunications stocks.
• Regulatory pressure could lead to lower telecommunications tariffs or higher capital expenditure.
• Renewed intensification of wireless-market competition could increase marketing expenses and reduce revenue and margins.
• Slower-than-expected progress on AI-infrastructure projects or lower investment returns could weaken the rerating thesis.
• Higher-than-expected future spectrum, 6G, and other capital expenditure could reduce free cash flow and ROIC.
• Fluctuations in the valuation of SK Telecom's AI investments could increase share-price volatility.
• If the impact of compensation related to KT's data breach does not fade as expected, its earnings recovery could be delayed.

What to watch

• Track the data-center capacity, commissioning progress, capital commitments, business models, and expected returns disclosed by the three operators.
• Monitor KT's earnings recovery after customer compensation expenses fade in the second half of 2026, as well as growth in enterprise/B2B and AI-services revenue.
• Watch KT's wireless revenue growth, capital expenditure, marketing expenses, non-core asset disposals, and additional shareholder-return measures.
• Monitor the actual contribution of LG Uplus's Paju data center to data-center and enterprise revenue in coming quarters.
• Track LG Uplus's future capital and spectrum expenditure, marketing expenses related to wireless competition, and cost-saving measures.
• Monitor SK Telecom's wireless revenue growth, returns on AI-infrastructure investment, future valuations of AI investments, and value contributions from SK Hyper.
• Watch South Korea's interest-rate path and whether the terminal rate rises above 3% as cited in the report's forecast.
• Track the impact of 6G deployment around 2030 on the capital expenditure, operating margins, and ROIC of all three companies.