Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

2015 2H Outlook: Korean Telecom service industry

2,014 views

Published on

Telecom Service (Analyst Jee-hyun Moon)
Getting over the hump

[Summary] Getting over the hump
I. 2H15 outlook: Getting over the hump
II. Key themes and issues: O.V.E.R.
III. Valuation & investment strategy
IV. Top pick & stocks to watch
[Conclusion] Look to earnings improvements and dividend payout

  • Be the first to comment

2015 2H Outlook: Korean Telecom service industry

  1. 1. 2H15 Outlook Report June 10, 2015 2 4 16 40 44 60 [Summary] Getting over the hump I. 2H15 outlook: Getting over the hump II. Key themes and issues: O.V.E.R. III. Valuation & investment strategy IV. Top pick & stocks to watch SK Telecom KT LG Uplus [Conclusion] Look to earnings improvements and dividend payout Telecom Service Getting over the hump Jee-hyun Moon +822-768-3615 jeehyun.moon@dwsec.com Overweight (Maintain)
  2. 2. 2H15 Outlook 2 Domestic telcos are positioned for a rebound in 2H15 Notes: ARPU stands for average revenue per user Source: Company data, Thomson Reuters, KDB Daewoo Securities Research [Summary] Getting over the hump 25 30 35 40 45 50 55 60 28,000 30,000 32,000 34,000 36,000 38,000 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F (p)(W) ARPU of 3 major telcos (L) FTSE Korea Telecom Index (R) LTE penetration - Earnings recovery - Shareholder-friendly policies - Reflection of value of new businesses - Slow ARPU growth - Concerns over new service plans - More pressure from government
  3. 3. 2H15 Outlook 3 Positioned for a rebound in 2H15 • Stocks to look for a rebound after pullback in 1H • Increasing worries over policy headwinds • Strong need for new business strategies to overcome reckless competition and regulations Keys to recovery: 1) Looking beyond subscribers • Focus shifting from expanding subscriber share to increasing usage • Ongoing efforts to boost ARPU and IoT accounts 2) Looking beyond telecom • Focusing on non-telecom businesses that can benefit the existing telecom business • Media and platform are taking the lead 3) Looking beyond profit • Capex and expenses declining due to LTE saturation and handset distribution law • Improved FCF points to more room for shareholder returns • All three telcos to hand out dividends this year; SK Telecom to buy back shares Key themes and issues: • Sector keyword: O.V.E.R. O) Opportunity: New opportunities in mobile-only era • Emergence of B2B data market and platform business expansion • IoT initiatives to pick up pace (e.g., telcos to be allowed to make devices themselves) V) Velocity: The battle for speed continues • Spectrum allocation and auctions on the horizon • Gearing up for the 5G era E) Encouragement: Encouraging data usage • Continued efforts to improve ARPU • Segmentation of data plans based on usage and time/place/occasion R) Regulations: Regulations/policy direction are key • Pullbacks triggered by policy worries: Buying opportunity • Key issues: 1) Creation of fourth telco, 2) improvements to tariff approval scheme, and 3) potential revisions to handset distribution law [Summary] Getting over the hump
  4. 4. Telecom Service 2H15 Outlook 4 Notes: Average number of PC and mobile searches for “phone bill” and “fourth telco” based on a maximum of 100 Source: Naver Trend, Thomson Reuters, KDB Daewoo Securities Research Policy issues and telco index The greater an issue household telecom costs become, the more downside pressure arises on telco stocks A number of government efforts are underway to ease telecommunication costs, including the potential creation of a fourth telco Telecom service sector poised for recovery • Telco stocks are poised for a rebound in 2H after correcting in 1H • Attention is turning from earnings to shareholder returns (i.e., dividends and buybacks) • Telcos need to come up with business strategies and momentum to overcome competition and regulatory risks I. 2H15 outlook: Getting over the hump TIP 0 20 40 60 80 100 37 39 41 43 45 47 49 51 6/14 9/14 12/14 3/15 6/15 9/15 12/15 3/16 (max=100)(p) FTSE Korea Telecom (L) 'Phone bill' search frequency (inverted, R) 'Fourth telco' search frequency (inverted, R) Prices fell as search queries for "phone bill" and "fourth telco" increased Telcos likely to bottom around 3Q; solid fundamentals (i.e., earnings, dividends) to draw attention thereafter
  5. 5. Telecom Service 2H15 Outlook 5 Source: SK Telecom, KDB Daewoo Securities Research Competition has shifted from subsidies to products/services: Where will the next battle be? Competition in data plans is vitalizing telco products and services Excessive competition is penalized with regulations • Subsidies-driven marketing was a classic example of the industry’s reckless competition • The introduction of the handset distribution law has cooled subsidy competition • Now, competition is oriented towards products and services, as illustrated by the recent release of new data plans • Where will competition be focused next? I. 2H15 outlook: Getting over the hump TIP Subsidies Switch phone New (MNP) Products/ services Subsidies Products/ services - Monthly plans - Bundled products - Membership - Contents/platform
  6. 6. Telecom Service 2H15 Outlook 6 Source: KDB Daewoo Securities Research Telcos need to broaden their target group to all types of users The number of users accessing telecom networks without a subscription is increasing (MVNO, sponsored data, WiFi, etc.) 1) Looking beyond subscribers: The concept of “users” • The concept of “users” is coming into focus • To enhance ARPU, an effective strategy is to charge any person or entity (including service providers and indirect users, in addition to postpaid subscribers) for network access I. 2H15 outlook: Getting over the hump TIP Subscriber Individually contracted direct users Decrease Increase Diluted economies of scale, decrease in ARPU Subscriber basis + improving ARPU User Service providers; Indirect users
  7. 7. Telecom Service 2H15 Outlook 7 Notes: US$20 per month for unlimited voice and text; US$10 for one gigabyte of data; Available only for Nexus 6 users Source: Google, KDB Daewoo Securities Research Google’s Project Fi taps the networks of two major US carriers Internet companies are venturing into telecom services in an effort to increase their own traffic by providing seamless connectivity 1) Looking beyond subscribers: The concept of “users” • Network access by non-subscribers is growing; Key example is mobile virtual network operator (MVNO) • MVNOs are mobile service providers that lack their own infrastructure and therefore lease wireless capacity from major carriers • Google’s Project Fi, a type of MVNO service launched in April, uses the networks of both Sprint and T-Mobile I. 2H15 outlook: Getting over the hump TIP
  8. 8. Telecom Service 2H15 Outlook 8 Source: KTOA, MSIP, KCC, company data, KDB Daewoo Securities Research Wireless service revenue: Subscribers vs. ARPU In a market with a stagnant population, it is critical to increase ARPU 1) Looking beyond subscribers: ARPU > volume • Industry’s marketing war may end once companies let go of their fixation on subscriber share • Since mobile subscriber penetration reached 100% in 2011, companies have made numerous efforts to raise ARPU • The first such effort was the deployment of LTE; the second was service diversification I. 2H15 outlook: Getting over the hump TIP 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000 10 15 20 25 30 07 08 09 10 11 12 13 14 ('000 persons, W)(Wtr) Service revenue (L) No. of subscribers (R) ARPU of 3 major telcos (R) Subscriber growth (+5% on average) brought about increase in revenue Increase in ARPU (+8% on average) brought about increase in revenue Pene- tration above 100%
  9. 9. Telecom Service 2H15 Outlook 9 Source: Gartner, KDB Daewoo Securities Research Increasing number of internet-connected devices Expanding the customer base from people to “things” 1) Looking beyond subscribers: IoT • The advent of Internet of Things (IoT) has increased the number of device accounts • Service plans dedicated to wearables are being introduced in a bid to further lift ARPU • Device-to-device connection (via Bluetooth) does not generate network revenue • The development of more convenient devices and services is essential to encourage wireless network usage I. 2H15 outlook: Getting over the hump TIP 0 5 10 15 20 11 13 15F 17F 19F 21F IoT devices CAGR: 22% (bn units) Consumer electronics 6.3bn Buildings 4.9bn Auto 2bn Utilities 2.2bn Healthcare 1.1bn Other 1.6bn 2022F 18bn devices
  10. 10. Telecom Service 2H15 Outlook 10 Source: KDB Daewoo Securities Research Selection and concentration in non-telecom businesses A key priority for business diversification should be synergies with existing businesses 2) Looking beyond telecom: Synergy effects from non- telecom services • Companies should take a selection and concentration approach, focusing on non-telecom services that can benefit their existing telecom business • Fixed-line: Pressing need to address weaknesses and increase network utilization • Wireless: Diversification into areas that can contribute to maintaining subscribers and improving ARPU I. 2H15 outlook: Getting over the hump Initial period Stabilization period Transitional period Businesses that can pull on existing subscribers Businesses that help retain wireless subscribers & increase ARPU Businesses that can increase size of revenue Non-telecom? TIP
  11. 11. Telecom Service 2H15 Outlook 11 Source: Company data, KDB Daewoo Securities Research Telcos’ platform businesses are moving towards media and e-commerce Beneficial to growth and re-rating 2) Looking beyond telecom: Media and platform • Within non-telecom, media and platforms are taking center stage • Media: Telcos’ media operations complement their fixed-line and wireless businesses, and have strong upside to ARPU • Platform: Telcos’ platform operations are focused on expanding the mobile space, and have the potential to become global; In particular, the development of the internet market has moved towards the communications and e-commerce segments I. 2H15 outlook: Getting over the hump TIP Portal, music download – App store, communication – Video streaming – Commerce, fintech Olleh market U+ App market
  12. 12. Telecom Service 2H15 Outlook 12 Source: Softbank, KDB Daewoo Securities Research Softbank’s enterprise value scenario In M&As, Softbank believes it is important to gradually move up the value chain 2) Looking beyond telecom: Softbank’s example • Softbank’s M&A deals have been geared towards platforms • The Japanese company is turning its eye to platforms that can be built upon its network infrastructure. • Major platform deals include the acquisition of e-commerce sites and service apps • One major advantage of the platform business is its global scalability I. 2H15 outlook: Getting over the hump Aiming to become the goose that lays golden eggs - Premium for successful acquisitions - Diversification within ICT industry - Enhancing enterprise value from a long-term perspective TIP
  13. 13. Telecom Service 2H15 Outlook 13 Notes: Based on consolidated K-IFRS; Combined figures of SK Telecom, KT, and LG Uplus Source: Company data, KDB Daewoo Securities Research Combined operating profit and FCF of the three domestic telcos Operating profit is normalizing from last year’s sluggishness 3) Looking beyond profit: Earnings already normalizing • Operating profit is normalizing this year, supported by low base of comparison • Capex declining due to LTE market saturation • Disciplined marketing spend following introduction of handset distribution law I. 2H15 outlook: Getting over the hump TIP -1,000 0 1,000 2,000 3,000 4,000 5,000 10 11 12 13 14 15F 16F (Wbn) Operating profit FCF Operating profit: +81% FCF turned positive
  14. 14. Telecom Service 2H15 Outlook 14 Source: KDB Daewoo Securities Research Correlation between SK Telecom’s dividend yield and foreign buying Dividend stocks to make a comeback 3) Looking beyond profit: Shareholder returns • During times of volatility, dividend stocks offer a reliable bet • In the case of SK Telecom, foreign buying tends to increase when the stock’s expected dividend yield rises • The steeper the pullback, the greater the dividend appeal I. 2H15 outlook: Getting over the hump TIP 3.0 3.2 3.4 3.6 3.8 4.0 4.2 -0.20 -0.15 -0.10 -0.05 0.00 0.05 0.10 0.15 0.20 6/14 8/14 10/14 12/14 2/15 4/15 6/15 (%)(%p) Daily change in foreign ownership percentage (L) Expected dividend yield (R)
  15. 15. Telecom Service 2H15 Outlook 15 Notes: 2015F dividend yield is based on our DPS estimates and the most recent closing price Source: Company data, KDB Daewoo Securities Research Dividend yield trend of the three domestic telcos A consistent dividend policy should narrow valuation discounts On a P/E basis, telcos with a 3-5% dividend yield and those with a yield over 5% are trading at 10% and 33% premiums, respectively, vs. telcos with a yield lower than 3% 3) Looking beyond profit: All three telcos to hand out dividends this year • SK Telecom is likely to increase its interim and full-year dividends and plans to repurchase shares • KT, which suspended dividends last year, could resume payments this year • LG Uplus maintains a 30% payout policy I. 2H15 outlook: Getting over the hump TIP 4.0% 2.7% 2.6% 0 1 2 3 4 5 6 7 2011 2012 2013 2014 2015F (%) SK Telecom dividend yield KT dividend yield LG Uplus dividend yield All three providers expected to pay dividends in 2015 No dividends No dividends
  16. 16. Telecom Service 2H15 Outlook 16 Opportunity New opportunities in the mobile-only age Velocity Battle for speed continues Encouragement Encouraging more data usage Regulation Regulations/policy direction are keyR VO E Source: KDB Daewoo Securities Research Keyword for 2H15: O.V.E.R. II. Key themes and issues: O.V.E.R. Sector keyword: O.V.E.R. • Telecom sector keyword for 2H15: O.V.E.R. • O: Opportunity – New opportunities in the mobile-only age • V: Velocity – The battle for speed continues with 5G • E: Encouragement – Encouraging consumers to use more data to improve ARPU • R: Regulation – The importance of regulations and policy direction The opportunities and threats of the mobile-only age TIP
  17. 17. Telecom Service 2H15 Outlook 17 Source: Bassendean Means Business, KDB Daewoo Securities Research In the mobile-only age, new charging schemes are emerging II. Key themes and issues: Opportunity 1) Opportunity: Charging schemes are diversifying • Opportunity: New opportunities in the mobile-only age • Age of connectedness (via mobile devices) has brought more monetization opportunities to telcos • B2B: Charging service providers, not users, for data • B2C: Through platform business, telcos can charge for both network and service use Network value is maximizing Charging service providers (i.e., companies), not service users, for data Platform business: Charging for network + service usage simultaneously TIP
  18. 18. Telecom Service 2H15 Outlook 18 Source: SK Telecom, KDB Daewoo Securities Research Telcos’ IoT-related revenue sources to diversify from network to platform/solution/devices II. Key themes and issues: Opportunity 1) Opportunity: IoT • Telcos need to diversify IoT-related businesses • Currently, hardware accounts for 93% of the IoT market, while mobile network revenue is insignificant • After 10 years, hardware, system, and service/applications are projected to account for 37%, 30%, and 30% of the IoT market, respectively; Mobile network is projected to take up just 3% due to the development of device-to-device (D2D) technology Mobile network accounts for just a minor proportion of the IoT market Hardware, system, and service/applications segments will expand further TIP Connectivity Convergence Intelligence Network + Device Open Platform Market cultivation Solutions-based business transformation Valuable, intelligent business Sensing + Big Data Traditional telecom service Expansion
  19. 19. Telecom Service 2H15 Outlook 19 Source: Media reports, company data, KDB Daewoo Securities Research Major telcos’ IoT-based smart home services II. Key themes and issues: Opportunity 1) Opportunity: IoT partners are expanding • Telcos are expanding partnerships with consumer goods companies for the IoT business • SK Telecom: Cooperating with home appliance SMEs for its IoT platform Mobius • KT: Focusing on healthcare services targeting middle-aged and older customers; GIGA Internet • LG Uplus: Specializing in home appliance control services through cooperation with LG Electronics Telcos are expanding the IoT business through partnerships TIP SK Telecom KT LG Uplus Launched - Door locks (iRevo) - Dehumidifier (Winix) - Boiler (KyungDong Navien) - Gas shut-off device (Time Valve) - Pet services (Petfit, T-Pet) - Giga Home Fitness - Yodac (adult disease screening) - Safe Zone (children/elderly) MomCa 2 (home CCTV) Uplus GasLock To be launched - Boiler (Rinnai, Daesung Celtic, Altoen Daewoo) - Air purifier (Winia, Winix, Tongyang Magic) - Lighting (Kumho Electric, GE Lighting) - Smart outlet (DS Tech, Powervoice) - Smart switch (Bandi Tongsin) - Range hood (Haatz) - Water purifier (Kyowon Wells) - Security services - Smart air care (Coway) - Open home IoT platform - Time Valve Smart (Time Valve) - U-Safe Alarm (for the elderly) - Uplus Switch - Uplus Plug - Uplus Energy Meter - Uplus Doorlock - Uplus Thermostat (Kiturami Boiler) - Uplus Open Sensor - Home Chat Emphasis Based on SK TelecomÊs IoT platform Mobius Targeting middle-aged and older customers; Focus on healthcare Cooperating with LGE; Home appliance control services
  20. 20. Telecom Service 2H15 Outlook 20 Source: MISP, KDB Daewoo Securities Research Telcos’ device manufacturing to strengthen competitiveness of new and base industries II. Key themes and issues: Opportunity 1) Opportunity: Telcos’ handset production • The Ministry of Science, ICT, and Future Planning (MSIP) plans to allow telcos to manufacture telecom devices without needing approval • The plan was among the major ICT-related regulatory tasks formulated by the Information and Communication Strategy Committee in May • SK Telecom invested an additional W30bn (CB and rights offering) in subsidiary iRiver last Dec. • SK C&C established an IT service JV with Hon Hai Group and plans to continue the cooperation MSIP will revise Article 17 of the Telecommunications Business Act, which mandates that telcos receive ministry approval to manufacture telecom devices Such regulations do not exist overseas and are thought to disadvantage telcos Growth Competitiveness Target niche markets New business Strengthen competitive advantage Ensure next-generation competitiveness New business Foundation business Foundation business Maintain competitive advantage Big data Cloud service Wearable device Game (mobile) Mobile phone (Smart phone) Display Memory PC (inc. tablet PC) Broadcasting device (TV) Telecom service IT service Sensor Non-memory Infra SW Network equipment Broadcasting service Applied SW Production convergence Medical convergence Educational convergence Financial convergence Digital content IoT service Information protection Printer TIP Broadcasting equipment Server 1
  21. 21. Telecom Service 2H15 Outlook 21 Government’s frequency policy: Mobile Gwanggaeto Plan 2.0 II. Key themes and issues: Velocity 2) Velocity: Frequency, a requirement for higher speed 91KCC’s tax revenue is projected to decrease W157.2bn YoY to W1.044tr in 2016 due to 1) a decline in penalty income after the implementation of the Handset Distribution Act, and 2) a drop in frequency fees (frequency auction was delayed from 2H15 to 1H16) • Frequency is the most important requirement for higher speed • 700MHz: Broadcasters vs. telcos • 2.1GHz: SK Telecom vs. KT; Used for 3G; Licenses are set to expire in 2016 • 2.5GHz and 2.6GHz: Government to allocate the spectrum to a fourth telecom operator; FDD as well as LTE-TDD to be allowed Notes: FDD and TDD refer to frequency division duplex and time division duplex, respectively; WRC refers to World Radiocommunication Conference; ‘a’ in the 1st phase for 700MHz is the spectrum that could be additionally allocated for mobile communication after consultation with the KCC Source: MSIP, KDB Daewoo Securities Research TIP Category Potential ranges to be secured (MHz) TotalSecured (allocated in 2013) First (-2015) Second (-2018) Third (-2020) Fourth (-2023) Addition Refarming Addition Refarming Addition Refarming Addition FDD 700MHz 40 a 40+a 1.8GHz 60 (30) 20 100 (30) 2.1GHz 60 60 120 2.6GHz 80 (40) 20 10 110 (40) TDD 2.0GHz 40 40 2.3GHz 30 40 70 2.5GHz 40 40 FDD/TDD 3.5GHz 160 160 WRC additional distribution range Below 6GHz Min 200 Min 200 Above 7GHz Min 500 Min 500 Total 180 (70) 60+a 290 220 510 Addition 1260MHz+a 60 40 20 Refarming 120MHz
  22. 22. Telecom Service 2H15 Outlook 22 Government’s frequency auction (delayed to 1H16): Four spectrum packages II. Key themes and issues: Velocity 2) Velocity: Frequency auction plan Frequency auction: - Revenue for the government - Reallocation according to usage - ICT growth to be affected • Frequency auction is scheduled for early 2016; SK Telecom and KT likely to participate • So-called “golden frequency” to be auctioned; Four spectrum packages below 3GHz • Total allocation of 60MHz in the 2.6GHz band, 100MHz in the 2.1GHz (SK Telecom and KT) band, and 20MHz in the 1.8GHz band • Auction for 40MHz in the 700MHz band to be delayed due to the National Assembly’s slow progress on the issue Note: Mobile Gwanggaeto Plan 2.0 Source: MSIP, KDB Daewoo Securities Research TIP
  23. 23. Telecom Service 2H15 Outlook 23 Notes: Upstream frequency ranges for communication (740-752MHz) are currently used by wireless microphones and will be available after 2021; “Spare” entries marked with an asterisk indicate ranges that have been prepared for broadcasters to use Source: MSIP, news reports, KDB Daewoo Securities Research Government’s 700MHz allocation plan: 20MHz for disaster communication network, 40MHz for mobile communication, 24MHz for broadcasting II. Key themes and issues: Velocity 2) Velocity: Competition for frequency Broadcasters and telcos need additional frequency spectrum for UHD broadcasting and growing mobile data traffic, respectively In foreign countries, telcos had an upper hand in the 700MHz allocation Recently, Germany preemptively auctioned off 700MHz for mobile communication to prepare for the launch of 5G technology • 700MHz: Broadcasters and telcos are competing • Broadcasters: Asking for entire remaining spectrum for terrestrial UHD broadcasting • Telcos: Asking for at least 40MHz in preparation for a surge in mobile data traffic • Competition has intensified after the government allocated 20MHz for national disaster safety communication network; Concerns about spectrum fragmentation TIP Current: Government proposal: Spare range (108MHz) For telcos For telcos Spare* Spare* 2 terrestrial channels 2 terrestrial channels National disaster safety comm. network National disaster safety comm. network(MHz) Spare* Temporary band for DTV conversion
  24. 24. Telecom Service 2H15 Outlook 24 Notes: Numbers in parentheses in the 2.1GHz row indicate spectrums refarmed to LTE services Source: MSIP, KDB Daewoo Securities Research Frequency licenses of three telcos II. Key themes and issues: Velocity 2) Velocity: Note frequency usage periods 2.1GHz band to be reallocated via auctions • 2.1GHz: SK Telecom vs. KT; Licenses to expire in 2016 • In September 2014, the government approved 2.1GHz refarming for LTE. • As such, SK Telecom and KT currently use 20MHz (in the 2.1GHz band) for LTE services • MSIP plans to withdraw a total of 100MHz in the 2.1GHz band, and then reallocate 40MHz-wide spectrums TIP Category SK Telecom KT LGU Total Expiry (Period of utilization) 2G 800 10 30 June 2021 (10 years) 1.8GHz 20 3G 2.1GHz 60 (40) 40 (20) 100 December 2016 (15 years) LTE 800 20 10 20 200 June/December 2021 (8-10 years) 900 20 1.8GHz 35 35 2.1GHz (20) (20) 20 2.6GHz 40 WiBro 2.3GHz 30 30 60 March 2019 (7 years) Amount of frequency held 155 135 100 390
  25. 25. Telecom Service 2H15 Outlook 25 2.3GHz range: Existing WiBro (2,300-2,390MHz) 2.5GHz range: New WiBro (2,575-2,615MHz) SK Telecom Not allocated WLAN Source: KISDI, KDB Daewoo Securities Research Breakdown of frequency bands; Fourth carrier to be able to choose between WiBro and LTE-TDD in 2.5GHz II. Key themes and issues: Velocity 2) Velocity: Entrance of fourth carrier The fourth carrier will be able to utilize available frequency band for LTE-TDD, etc. in addition to WiBro LTE-TDD (time division duplex): The same frequency band is used for data transmission and receipt LTE-FDD (frequency division duplex): Separate frequency bands are used on the transmitter and receiver sides; Korean telcos use this technique • 2.5GHz and 2.6GHz to be allocated to the fourth carrier (both LTE-TDD and FDD allowed) • Originally, only 2.5GHz (40MHz-width) was approved for WiBro (LTE-TDD to be added) • 2.6GHz (40MHz-width) will also be approved this year (LTE-FDD technique to be allowed) • The broadening of the spectrum seems intended to facilitate the entrance of a new carrier LTE-TDD 40MHz LTE-FDD 40MHz TIP
  26. 26. Telecom Service 2H15 Outlook 26 Aggregating carriers within similar operating frequency (LTE range) Aggregating carriers operating in different frequencies (licensed & non-licensed ranges) Broadband LTE Source: SK Telecom, Qualcomm, 5G Forum, KDB Daewoo Securities Research LTE-Advanced: CA enhances data speed II. Key themes and issues: Velocity 2) Velocity: Carrier Aggregation Advancement of CA technology: Aggregating component carriers helps increase peak data rate Before CA, MC (multi-carrier) technology was in the spotlight; this technology enables one to find a faster network, but does not increase the peak data rate • LTE-Advanced: Steady increase in carrier aggregation (CA) • CA technology aims to increase network speeds by aggregating two or more frequency bands • Currently, the CA technology used in LTE-Advanced can aggregate two bands • Going forward, a technology combining three or more bands, or combining LTE and Wi-Fi frequency bands, is anticipated to be commercialized TIP
  27. 27. Telecom Service 2H15 Outlook 27 5G vision II. Key themes and issues: Velocity 2) Velocity: Bracing for 5G mobile networks 5G preparations: Domestic: 5G Forum, in which three telcos as well as Samsung Electronics and LG Electronics participate Japan: NTT Docomo R&D Center China: IMT-2020 (5G) promotion group UK: 5G Innovation Centre • 5G technology targets in Korea: Demonstration in 2018, commercialization by 2020 • Vision: 1Gbps, hyper-connectivity, and immersive experiences • Standardization not yet completed  Network investments (capex) not yet begun Source: 5G Forum, KDB Daewoo Securities Research TIP
  28. 28. Telecom Service 2H15 Outlook 28 Notes: Media reports; Details released on May 27th Source: MSIP, KDB Daewoo Securities Research MSIP’s vision for the PyeongChang 2018 Olympics II. Key themes and issues: Velocity 2) Velocity: Year 2018 MSIP plans to build the K-ICT Olympics Export Strategy Complex to test/verify ICT services to be provided during the Olympics (funding by 2018: W109.5bn from the government, and W76.8bn from the private sector) • MSIP has presented its ICT Olympics vision for 2018 (PyeongChang Olympics) • Provide ICT services and products for the successful hosting of the Olympics • Demonstrate 5G, IoT, UHD, etc. to help increase exports • Capex likely to increase around 2018 due to 5G network demonstration K-ICT Olympics: Demonstrate speed and convenience 5G network IoT services UHD broadcast • 5G network demonstration • 5G-based immersive media • Gigabyte Wi-Fi zone • Personalized services • Intelligent traffic system and disaster prevention • Games support • 4K, 8K UHD broadcast • Personal, social media, etc. • Multiplanar image system demonstration Export ICT services/products to other hosting countries TIP
  29. 29. Telecom Service 2H15 Outlook 29 Source: Dentsu, Creative Multiplier, KDB Daewoo Securities Research Business trend leaders: Those with the ability to drive lifestyle changes II. Key themes and issues: Encouragement 3) Encouragement: Evolution of customer management strategies • Encouragement: Detailed strategies are required to manage customers, who are sensitive to telecommunications expenses • In modern times, companies that are able to transform people’s lifestyles (on top of developing innovative technologies) drive business trends • Advertising, products, sales capacity, branding, businesses, and strategic promotions are increasingly geared toward influencing customers’ environments • Telecom services require comprehensive and well-balanced strategies, given the importance of both customer acquisition and retention Strategic moves to handle sensitive consumers TIP 광고부 상품기획부 사업부 브랜드 경영실 경영기획부 IR실 CSR 추진실 Advertising power Product power Total sales capacity Brand power Business planning Power Strategic marketing/ public relations power Company environment power 1980s 1990s 2000s 2010s Advertising Product planning Sales Brand management Planning IR CSR
  30. 30. Telecom Service 2H15 Outlook 30 Source: Connecting Lab, company data, KDB Daewoo Securities Research Data plan diversification II. Key themes and issues: Encouragement 3) Encouragement: A push for higher ARPU • New monthly plans have been launched in 2Q every year since the introduction of LTE • New monthly plans focus on providing greater convenience to customers (and raising ARPU) • Data plans are increasingly differentiated by service and smartphone model • Differentiation by time, place, and occasion is also evident Data plan diversification apart from volume: 1) Differentiated by service and smartphone model; 2) Optimized for time, place, and occasion; 3) Able to charge more parties (indirect users, businesses, etc.) Charging party: Sponsors (shopping, games, cab apps, etc.) Age: Kids, youth, etc. Time: Unlimited data for specific time zone, etc. Place: Subway, etc. Data plans (mostly volume-based) By time By service By volume By smartphone Charging party Cloud Multi-tier TIP By data volume By service By device
  31. 31. Telecom Service 2H15 Outlook 31 Note: A survey of more than 1,000 CIOs, COOs, and CMOs conducted by Accenture; A game changer is a newly introduced element or factor that changes an existing situation or activity in a significant way Source: Accenture, CIO Insight, Google, KDB Daewoo Securities Research Efficient data collection opportunity is a game changer II. Key themes and issues: Encouragement 3) Encouragement: Data on customer behavior • Staying connected to customers  Game changer • Telcos can identify consumers’ mobile life patterns • Note opportunities that big data can create • SK Telecom utilized the data usage patterns of its subscribers to launch a new plan, Band Timefree Ample potential for application of big data Areas in which big data will have a significant impact within 5 years, according to survey respondents: - Transforming customer relationships: 63% - Redefining product development: 58% - Overhauling organizations’ operations: 56% 59% Big data is a big asset 79% Big data is important to competitiveness 89% Big data will play a role as a game changer 83% Big data is used for corporate competitiveness TIP
  32. 32. Telecom Service 2H15 Outlook 32 II. Key themes and issues: Regulations 4) Regulations: Pressure has persisted • Regulations: Regulations and policy direction are key • Reduction in household telecom bills is a top priority for government • In line with the president’s campaign pledge, the government has repealed the sign-up fee, while implementing MVNO promotion policies • In addition, the government has increased policies to facilitate competition since the introduction of the handset distribution act Source: Statistics Korea, BOK, KDB Daewoo Securities Research Government efforts to reduce mobile service charges Proportion of telecom expenses in gross national consumer expenditure Source: Media reports, KDB Daewoo Securities Research 0 1 2 4 5 6 0 150 300 450 600 750 70 75 80 85 90 95 00 05 10 15F (%)(Wtr) Domestic household final consumption expenditure (L) Proportion of telecom expenses (R) Date Details May 2013 - MSIP announced plan to reduce household spending on communication services and to vitalize the MVNO market August 2013 - 40% decrease in sign-up fee (W26,000 →W21,600) August 2014 - 50% decrease sign-up fee (W21,600 →W10,800) October 2014 - Eliminated sign-up fee (W10,800→free) - Handset distribution law went into effect; Applied discount rate of 12% on monthly charge for customers not receiving subsidies April 2015 - KCC increased the discount rate to 20% for customers not receiving subsidies May 2015 - GovernmentÊs cut to network wholesale prices; Revitalization of the MVNO market; - Announcement of plans to cut household telecom expenses June 2015 - Public hearing on the promotion of competition in the mobile telecom market - Efforts to overhaul strict government oversight of rate plan adjustments - Seeking to introduce a fourth mobile operator
  33. 33. Telecom Service 2H15 Outlook 33 Source: MSIP, KDB Daewoo Securities Research Timeline of plan to allow a fourth mobile service provider II. Key themes and issues: Regulations 4) Regulations: Allowing a fourth mobile service provider • The MSIP has announced a basic plan for issuing a license to a facilities-based telecommunication business operator according to the revised Telecommunications Business Act • As such, a regulatory environment for allowing a fourth mobile service provider has been created • Bandwidths available to a new player: TDD 2.5GHz and FDD 2.6GHz (40MHz each) • A public hearing will be held on June 9th and public opinions gathered until June 11th; License applications will be accepted starting end-August The aim of the plan is to benefit subscribers and promote investments by facilitating competition TIP June 2015 End-Aug. to end-Sept. 2015 Oct. 2015 Nov. to Dec. 2015 Mar. 2016 2017 Announcement of basic plan for licensing a facilities- based telecom business operator Frequency allocation notice; Business license applications (including frequency application) Review of applicantsÊ qualifications; Notification of results Review of business plans; Selection of fourth operator (including frequency allocation review) Payment for frequency allocation; Issuance of business license Launch of fourth telcoÊs services
  34. 34. Telecom Service 2H15 Outlook 34 Source: Media reports, KDB Daewoo Securities Research Past applications for a fourth mobile service license: KMI applied and failed each time II. Key themes and issues: Regulations 4) Regulations: Allowing a fourth mobile service provider • Applications for a fourth mobile service license were submitted on six past occasions • KMI applied each time, and IST applied twice • All applicants were unqualified, mainly due to non-transparent financing plans and inadequate business plans • Introduction of new technologies, including LTE-TDD, was an important part of the evaluation criteria recently All past applicants have not been qualified TIP 1st June 2010 2nd Nov. 2010 3rd Aug. 2011 4th Oct. 2012 5th Nov. 2013 6th Mar. 2014 7th Aug. 2015 Applicant: KMI Result: Unqualified Reasons: Inadequate financial/ technological capabilities Applicant: KMI Result: Unqualified Reasons: Non-transparent financing plan; Too-optimistic demand forecast Applicants: KMI, IST Result: Unqualified Reasons: Weak shareholding structuring; Inadequate financial capability; Non-transparent financing plan Applicants: KMI, IST Result: Unqualified Reasons: Inadequate business plan Applicant: KMI Result: Withdrew voluntarily Reasons: Inadequate plan for payment for frequency allocation Applicant: KMI Result: Unqualified Reasons: Non- transparent financing/ business plan Applicant(s): TBD Result: (to be announced at year-end)
  35. 35. Telecom Service 2H15 Outlook 35 II. Key themes and issues: Regulations 4) Regulations: Allowing a fourth mobile service provider • The government’s move to allow a fourth mobile service provider is aimed at overhauling the market structure by increasing competition • Current market structure (three mobile operators) will likely provide no incentive for competition and increase household telecom expenses • The government has rationalized regulations to lay the foundation for a new player to enter the market • The government appears to be benchmarking France’s telecom policies: MVNO and a fourth mobile service provider Notes: As of early June Source: Media reports, KDB Daewoo Securities Research Subscriber base and market share of Free Mobile, the fourth mobile operator to receive a license in France Potential applicants for fourth mobile service license Notes: Market share is in parentheses Source: Free Mobile, KDB Daewoo Securities Research 0 5 8 10 11 0 2 4 6 8 10 12 1/12 12/12 12/13 12/14 12/15 (mn persons) No. of subscribers (Introduction) (8%) (12%) (15%) (15.5%) Consortium Representative KMI Jong-nyeol Gong (Former director of MOIC) IST Seung-taek Yang (Former minister of MOIC) Woori Telecom Yun-sik Jang (Former president of the MVNO association) Quantum Mobile Seong-do Park (Former vice-president of Hyundai Mobis) K Consortium Dang-yeong Lee (from Samsung Electronics)
  36. 36. Telecom Service 2H15 Outlook 36 Notes: Mobile charges are based on mobile network operators (MNOs) with a market share of more than 5%, excluding MVNOs Source: GSMA Intelligence, KDB Daewoo Securities Research EU: Mobile charge comparison of three-MNO vs. four-MNO markets II. Key themes and issues: Regulations 4) Regulations: Overseas cases of a fourth mobile service provider • Effects of a fourth mobile service provider need further monitoring • France: Free Mobile entered the market with a 12-year rate plan, triggering industry restructuring amid intense competition • Japan: Y!mobile had a market share of less than 3% for six years after launching its services; Company was acquired by Softbank this year • EU: Minimal mobile charge differences between three-player vs. four-player market structures France’s Free Mobile saw its market share rise up to 15% after its entry into the market. However, intensified competition led to decreased revenue and profits at mobile operators, triggering industry restructuring. MVNOs’ market shares also contracted Japan’s Y!mobile recorded a market share of 2.8% for seven years after its market entry. As the company was acquired by Softbank this year, the Japanese market has returned to a three-player structure TIP 0.22 0.21 0.07 0.00 0.05 0.10 0.15 0.20 0.25 0.30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (EUR/min.) 3-player markets 4-player markets
  37. 37. Telecom Service 2H15 Outlook 37 Note: The “regulatory guillotine” approach refers to efforts to revamp inefficient and unpractical regulations all at once. Source: Prime Minister's Office, KDB Daewoo Securities Research Repeal of rate plan approval system: Part of the “regulatory guillotine” approach discussed at a public-private meeting in end-2014 II. Key themes and issues: Regulations 4) Regulations: Repeal of rate plan approval system • Rate plan approval system: Currently, rate plan adjustments by dominant telcos are subject to approval; the purpose is to ensure steady revenue for second-tier firms by preventing dominant players from pushing through excessive rate cuts • The proposed repeal could promote rate cut competition, better protecting consumer rights • The Ministry of Science, ICT and Future Planning plans to hold a public hearing in June to come up with non-legislative solutions Proposed repeal is intended to reduce cost of telecom plans by promoting rate competition Since 2010, all telcos have been subject to a reporting system for rate cuts; for rate hikes, the rate plan approval system still applies TIP Agenda number Agenda Details 81 Repeal of rate plan approval system ▪ For SK TelecomÊs mobile services and KTÊs local call services, rate hikes or new plans are subject to approval  Need to ease competition-stifling regulations (such as by repealing rate plan approval system) Authorities Details Non-legislative Ministry of Science, ICT and Future Planning [Solution] ▪ Comprehensive measures to facilitate market competition to be presented (not only scrapping the rate plan approval system, but also stimulating telecom market competition, revamping wholesale systems, and improving MVNO competitiveness; public hearing slated for June). * Discussions among legislators, government officials, and private professionals being held
  38. 38. Telecom Service 2H15 Outlook 38 Source: National Assembly, KDB Daewoo Securities Research Major proposals related to MCTDSIA revisions II. Key themes and issues: Regulations 4) Regulations: Mobile Communications Terminal Distribution Structure Improvement Act (MCTDSIA) • Telecom-related bills, including MCTDSIA, will be discussed by the National Assembly in June • Both the ruling and opposition parties moved to repeal the ceiling and floor for handset subsidies • The opposition party proposed to completely separate mobile phone sales and service plans • However, there are many pending issues facing the National Assembly, including a confirmation hearing for a prime minister nominee and revisions to the National Assembly Act Matters under discussion related to MCTDSIA revisions: Repeal of ceiling for handset subsidies, complete separation of mobile phone sales from service plans, etc. TIP Date Author of proposal Bill details 8/19/2014 Byung-heon Jeon (NPAD) Repeal of strict government oversight of rate plan adjustments 10/14/2014 Min-hee Choi (NPAD) Introduction of a scheme requiring separate disclosure from telcos and handset makers concerning subsidies and sales incentives 10/17/2014 Deok-gwang Bae (Saenuri) Scrapping of subsidy cap;Introduction of a scheme requiring separate disclosure from telcos and handset makers concerning subsidies and sales incentives 11/7/2014 Myeong-suk Han (NPAD) Scrapping of subsidy cap;Introduction of a scheme requiring separate disclosure from telcos and handset makers concerning subsidies and sales incentives; Differentiating subsidy payment by subscription type 11/10/2014 Jae-cheol Shim (Saenuri) Scrapping of subsidy cap;Report to the KCC before changing disclosures 3/12/2015 Byung-heon Jeon (NPAD) Repeal of the handset distribution law;Complete separation of mobile phone sales and service plans under the revised telecommunications business act
  39. 39. Telecom Service 2H15 Outlook 39 Source: KPCB, KDB Daewoo Securities Research Currently, regulatory pressures are too strong; Business structure needs to evolve through innovation II. Key themes and issues: Regulations 4) Regulations: Business structure needs to evolve • Conventional business structure: Tight tensions between regulations and innovations • Currently, regulatory pressures are strong, and companies and consumers are sensitive to policy direction • In the future, companies will pursue innovation through active interactions with consumers, who are savvy about mobile devices and social media; Authorities’ main role will be support and monitoring Currently, both companies and consumers are sensitive to policy direction Companies are moving toward innovation through active interactions with consumers, who are savvy about mobile devices and social media TIP Regulation (Past) Incumbent Innovation Regulation (Present) Incumbent Innovation Company Consumer Company Consumer (Evolving direction) Incumbent Innovation Regulation Company Consumer
  40. 40. Telecom Service 2H15 Outlook 40 Source: KDB Daewoo Securities Research 2015: Regulations will likely be the most influential factor affecting telecom shares III. Valuation & investment strategy Determinants of telecom shares: Regulations, capex, earnings, and dividends • Telecom share prices are affected by regulations, capex, earnings, and dividends • The telecom industry requires investments in both tangible and intangible infrastructure; Less capex tends to lead to profit growth • Earnings are linked to regulations and capex: Earnings likely to normalize through 2015 • Dividends are linked to earnings; Expect dividend payout ratio to grow this year • 2015: While capex, earnings, and dividends are favorable, the regulatory environment is not Not all share determinants likely to be favorable in 2015 TIP Regulations Capex Earnings Dividends
  41. 41. Telecom Service 2H15 Outlook 41 III. Valuation & investment strategy Overblown concerns to provide investment opportunities • Telecom stocks tend to recover after pulling back on regulatory risks • Before the MCTDSIA took effect, the subsidies issue drove down shares • With the handset distribution environment changing, issues such as phone bills and the emergence of a fourth telco are sending shares down • Once a clearer picture of the policy landscape emerges in 3Q, downward pressures should ease Notes: Average of PC and mobile search frequencies for keyword “subsidy” Source: Naver Trend, Thomson Reuters, KDB Daewoo Securities Research After MCTDSIA: Shares being affected by issues such as telecom expenses and potential fourth telco Before MCTDSIA: Shares affected by subsidy competition Notes: Average of PC and mobile search frequencies for keywords “phone bill” and “fourth telco” Source: Naver Trend, Thomson Reuters, KDB Daewoo Securities Research 0 20 40 60 80 100 37 39 41 43 45 47 49 51 6/14 9/14 12/14 3/15 6/15 (max=100)(p) FTSE Korea Telecom Index (L) 'Phone bill' search frequency (inverted, R) 'Fourth telco' search frequency (inverted, R) 0 20 40 60 80 100 35 37 39 41 43 45 47 49 51 1/14 4/14 7/14 10/14 1/15 (max=100)(p) FTSE Korea Telecom Index (L) 'Subsidy' search frequency (inverted, R)
  42. 42. Telecom Service 2H15 Outlook 42 Source: KDB Daewoo Securities Research Regulatory risks to be offset by time and dividends; New businesses to boost enterprise value III. Valuation & investment strategy Time, dividends, and new businesses • Regulatory risks could be offset by the following factors: • Time: It will likely take time to review potential effects of new policies before actual implementation • New businesses: Overseas exports and expansion of jobs should boost enterprise value • Dividends: High dividend yields are likely to provide downside support Once regulatory risks ease, shares should reflect fundamentals Regulatory risks Fundamentals + improved enterprise value • Better margins of existing businesses • New businesses to boost growth potential TIP
  43. 43. Telecom Service 2H15 Outlook 43 SK Telecom’s 12-month forward P/B Earnings outlook and valuation of major telcos (Wbn, %, x) KT’s 12-month forward P/B Note: Based on our estimates for Korean firms and the consensus for the others, Source: Bloomberg, KDB Daewoo Securities Research III. Valuation & investment strategy: Global peer group Company Revenue (Wbn) OP (Wbn) NP (Wbn) OP margin (%) P/E (x) P/B (x) ROE (%) 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F SK Telecom 17,164 17,752 18,361 1,825 1,967 2,188 1,801 1,972 2,159 10.6 11.1 11.9 12.0 10.3 9.4 1.3 1.1 1.0 12.9 13.0 13.1 KT 23,422 22,021 22,015 -292 1,158 1,192 -1,055 1,127 647 -1.2 5.3 5.4 - 6.8 11.9 0.7 0.6 0.6 -9.5 10.3 5.5 LG Uplus 11,000 10,545 10,700 576 692 709 228 368 394 5.2 6.6 6.6 22.0 11.2 10.5 1.2 0.9 0.9 5.6 8.5 8.5 NTT Docomo (Japan) 42,429 40,318 41,785 6,186 6,061 6,678 3,969 4,103 4,558 14.6 15.0 16.0 22.9 19.6 17.3 1.7 1.6 1.6 7.4 8.3 8.8 Softbank 83,923 80,162 83,174 9,512 9,390 10,623 6,469 4,533 5,860 11.3 11.7 12.8 13.0 17.0 13.2 3.0 2.6 2.2 27.8 16.2 17.4 China Mobile (China) 109,678 121,149 127,310 20,693 21,705 23,181 18,685 19,806 21,134 18.9 17.9 18.2 15.0 15.1 14.0 1.9 1.8 1.7 13.3 12.4 12.3 China Unicom 48,676 52,199 54,318 3,580 3,801 4,381 2,061 2,466 2,849 7.4 7.3 8.1 21.6 18.7 16.1 1.1 1.1 1.0 5.3 5.9 6.7 PCCW (HK) 4,520 5,550 5,844 548 771 857 450 365 423 12.1 13.9 14.7 10.5 13.4 12.0 3.5 3.0 2.8 34.2 22.4 23.3 Singtel (Singapore) 14,183 14,403 14,837 2,405 2,466 2,590 3,114 3,265 3,497 17.0 17.1 17.5 17.3 16.6 15.5 2.6 2.5 2.4 15.6 15.5 16.0 AT&T (US) 139,510 149,607 154,161 12,372 25,620 26,424 6,556 14,609 15,205 8.9 17.1 17.1 14.2 13.7 13.3 2.1 2.1 2.0 6.5 15.2 16.4 Verizon 133,856 145,985 147,688 20,644 32,683 33,350 10,138 17,249 17,782 15.4 22.4 22.6 13.4 12.3 11.9 20.6 12.7 8.6 89.8 122.5 82.5 Deutsche Telekom (EU) 87,625 84,610 86,176 10,135 9,587 10,613 4,089 4,131 4,770 11.6 11.3 12.3 37.2 21.8 18.5 2.5 2.5 2.4 7.2 10.8 12.8 Orange 55,162 48,842 48,963 7,150 7,393 7,479 1,294 3,077 3,291 13.0 15.1 15.3 34.5 14.8 13.8 1.2 1.3 1.2 3.4 9.0 9.3 Average 11.1 13.2 13.7 19.5 14.7 13.6 1.9 1.8 1.6 10.8 12.3 12.5 20,000 25,000 30,000 35,000 40,000 45,000 50,000 10 11 12 13 14 15 16 17 (W) Adj. stock price 1.1x 0.9x 0.8x 0.7x 0.6x 100,000 150,000 200,000 250,000 300,000 350,000 10 11 12 13 14 15 16 17 (W) Adj. stock price 1.3x 1.2x 1.0x 0.8x 0.7x
  44. 44. Telecom Service 2H15 Outlook 44 Source: KDB Daewoo Securities Research IV. Top pick & stocks to watch Telecom Service (Overweight) KT (Buy) LG Uplus (Buy) Earnings recovery, dividend payout, stock buyback 2H point: Shareholder-friendly measures to come Value of subsidiaries: SK Planet, SK Broadband, SK Hynix, etc. Earnings normalizing thanks to cost decline following massive restructuring in 2014 2H point: Potential dividend payout High ARPU: High contribution of LTE subscribers 2H point: Steady subscriber acquisition Dividend payout ratio of 30% Operations normalizing: Swung to a net subscriber addition in 2Q; First telco to release data-oriented plans
  45. 45. Telecom Service 2H15 Outlook 45 SK Telecom (017670 KS)Top pick Shareholder returns to increase Investment points • Strong shareholder return policy: Plans for both dividend payment and treasury share purchase • Earnings recovery: Weak in 1H due to restructuring; Recovery to come in 2H • EV: Earnings growth and EV improvement at major subsidiaries, including SK Planet, SK Broadband, and SK Hynix • Platform business: Businesses with high growth potential (media, commerce, and IoT) to be emphasized Risks • As the market leader, sensitive to regulatory and policy environment; Need to defend subscriber base • Uncertainties related to ownership structure changes in SK Group Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests; Based on June 9th closing price Source: KDB Daewoo Securities Research FY (Dec.) 12/12 12/13 12/14F 12/15F 12/16F 12/17F Revenue (Wbn) 16,141 16,602 17,164 17,752 18,361 18,934 OP (Wbn) 1,730 2,011 1,825 1,967 2,188 2,242 OP margin (%) 10.7 12.1 10.6 11.1 11.9 11.8 NP (Wbn) 1,152 1,639 1,801 1,972 2,159 2,201 EPS (W) 14,263 20,298 22,307 24,427 26,739 27,263 ROE (%) 9.8 13.0 12.9 13.0 13.1 12.2 P/E (x) 10.7 11.3 12.0 10.3 9.4 9.2 P/B (x) 0.9 1.2 1.3 1.1 1.0 1.0 (Maintain) Buy Target Price (12M, W) 360,000 Share Price (6/9/15, W) 251,500 Expected Return 43% OP (15F, Wbn) 1,967 Consensus OP (15F, Wbn) 1,940 EPS Growth (15F, %) 9.5 Market EPS Growth (15F, %) 36.9 P/E (15F, x) 10.3 Market P/E (15F, x) 10.5 KOSPI 2,064.03 Market Cap (Wbn) 20,308 Shares Outstanding (mn) 377 Free Float (%) 62.6 Foreign Ownership (%) 44.5 Beta (12M) 0.77 52-Week Low 219,000 52-Week High 301,000 (%) 1M 6M 12M Absolute -1.9 -10.5 14.8 Relative -0.9 -14.5 10.7 80 90 100 110 120 130 14.6 14.10 15.2 15.6 SK Telecom KOSPI
  46. 46. Telecom Service 2H15 Outlook 46 SK Telecom (017670 KS)Top pick SK Telecom’s plans related to shareholder returns • Both dividend payment and treasury share purchase expected • Interim dividend: Announcement expected in June; Payment in July • Annual dividend: If interim dividend plans are changed, an announcement on the annual dividend plan can also be expected • Treasury share purchase: SK Telecom is likely to buy back shares used in the acquisition of SK Broadband and allocate a separate budget for shareholder returns Shareholder-friendly policies to be strongest in 4Q following dividend payment and treasury share purchase Notes: KDB Daewoo estimates Source: KDB Daewoo Securities Research Dividend and treasury shares Dividend Plan to pay out year-end dividend Treasury stock Start to buy back shares Dividend Plan to pay out interim dividend July September Year-end 1H: - Restructuring - Decrease in earnings - Concerns about regulations 2H: - Earnings recovery - Increase in dividend - Share buyback TIP
  47. 47. Telecom Service 2H15 Outlook 47 SK Telecom (017670 KS)Top pick SK Group’s ownership structure after merger of SK C&C and SK Holdings • SK C&C and SK Holdings to merge on August 1st • SK Telecom leads SK Group’s ICT businesses • Under SK Group’s growth strategy, SK Telecom is included in the portfolio of traditional businesses; SK Group to strengthen the management of the company • SK Telecom’s subsidiary SK Hynix belongs to the portfolio of new growth businesses; Group’s investment in SK Hynix to increase Investors need to pay close attention to changes in ownership structure Source: Company data, KDB Daewoo Securities Research Group ownership structure and growth strategy TIP SK Holdings SK C&C SK Holdings SK Innovation SK Telecom SK Networks SK E&C SK Shipping SK Securities SK Biopharm Infosec ESSENCORE SK E&S SKC SK Planet SK Broadband SK Hynix SK Energy SK Global Chemical Energy/Chemicals ICT/Semiconductor Marketing/Services SK Group holds: KoreaÊs top oil refinery KoreaÊs top mobile service provider WorldÊs no. 2 DRAM producer SK Lubricants SK Incheon Petrochemical Before merger
  48. 48. Telecom Service 2H15 Outlook 48 SK Telecom (017670 KS)Top pick SK Telecom likely to restructure its businesses • The group's growth strategy should boost SK Telecom’s enterprise value; In particular, SK Group will: • Strengthen management over existing SK subsidiaries (including SK Telecom) • Build a growth-oriented portfolio via larger investments in high-growth areas and businesses with promising futures (platform, etc.) • Encourage innovation in existing businesses and increase efficiency in businesses with deteriorating profits (wired network, etc.) SK Telecom businesses to undergo restructuring in line with SK Group’s growth strategy Source: SK, KDB Daewoo Securities Research Governance and growth strategies Building growth-oriented portfolio and innovating existing businesses Increasing investments in growth areas Rebuilding portfolio to shift focus to high- growth areas and promising businesses Strengthen portfolio value management Portfolio restructuring and proactive efforts toward management improvement TIP Slow growth and falling profitability
  49. 49. Telecom Service 2H15 Outlook 49 SK Telecom (017670 KS)Top pick SK Group to strengthen integrated ICT solutions business • SK Group to strengthen growth in integrated ICT solutions (SK Telecom’s subsidiary NEOS Networks) • SK Telecom increased investments in NSOK via rights offering on April 29th (roughly W40bn) • NSOK posted revenue of W33.3bn last year (high growth of +18% YoY) Integrated ICT solutions: IT services, integrated security, smart logistics, etc. Source: SK, KDB Daewoo Securities Research Governance and growth strategies TIP Information security Physical security Convergence security solutions Control center Emergency security services Temperature sensor NW security System security Application service
  50. 50. Telecom Service 2H15 Outlook 50 Source: SK, KDB Daewoo Securities Research SK Telecom (017670 KS)Top pick Corporate governance 10.0% 100% 100% 100% 100% 100% 100% 100% 100% 67.3% 100% Television Media Korea SK C&C (034730 KS) M & Service SK E&S Infosec 43.5% 100% SK Telink SK Wyverns SK Trading International SK Lubricants Daehan Oil Pipeline 33.4% UB Care (032620 KQ) SK Hynix (000660 KS) SK E&C SK Telecom (017670 KS) Daejeon Clean Water Gwangju Clean Water SK Gas (018670 KS) Happy Narae SK-W SK Telesys SKC Solmics (057500 KQ) SKC (011790 KS) SKC Lighting PS & Marketing F&U Credit Information Iriver SK Broadband (033630 KQ) SKC Airgas SK Pinx SK Networks Service SK Networks (001740 KS) Busan City Gas (015350 KS) Wirye Energy Service Chonnam City Gas Kangwon City Gas Chungcheong Energy Service Yeongnam Energy Service Jeonbuk Energy Service Pyeongtaek Energy Service SK ShippingSK Biopharm SK Chemical (006120 KS) SK Energy SK Global Chemical SK Innovation (096770 KS) 94.1% 83.1% 44.5%25.2% 42.3% 0.06% SK Securities (001510 KS) SK Encarsales.com 5.9% 50.0% 100% 31.8% 17.0% 45.5% 44.0% 100% 5.0% 28.3% 32.0% 42.0% 10.0%100% 100% 41.0% 86.5% 39.1% 100% 80.0% 40.9% 50.0% 90.0% 20.1% 83.5% 100% 50.6% 100% 50.0% 51.0% 100% 100% 100% 100% Service Top 100% 100% Ko-one Energy Service 89.5% SK Communications (066270 KQ) Choi Chang-won & affiliates Commerce Planet 100% 64.5% SK E&S 49.0% Service Ace SK Planet Network ONS 100% 100% Bizen 99.0% PMP Boryeong LNG Terminal 80.0% SK Forest 100% SK Hyeng SK Hystec Silicon File Tech. 100% 100% Choi Tae-won & affiliates SK Mobile Energy Happy Narae 100% SK Incheon Petrochemical 100% 42.5% Ulsan Aromatics 50.0% Speed Motors Entis Initz 66.0% 50.0% SK Advanced 65.0% Hanam Energy Service 100 % Kimcheon Energy Service 50.0% 100% SK Continental Emotion Korea 100% 42.5% NEOS Networks 66.7% 100% Jeonbuk Mass Energy SK D&D G Hub SK Petrochemical 100% 43.5% 100% SK (003600 KS) SK Syntec Notes: As of end-1Q15; SK C&C-SK Holdings merger to be completed Aug. 1st 2015; As SK Telecom participated in the rights offering of NEOS Networks, its ownership increased to 83.93% on Apr. 29th , 2015; As SK Telecom’s ownership in SK Broadband increased to 100% through a share exchange on June 9th , 2015, SK Broadband has been de-listed; SK Planet plans to spin off cloud streaming business on July 1st , 2015.
  51. 51. Telecom Service 2H15 Outlook 51 SK Telecom (017670 KS)Top pick Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Revenue 17,164 17,752 18,361 18,934 Current Assets 5,083 6,232 6,694 8,189 P/E (x) 12.0 10.3 9.4 9.2 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 834 1,609 1,927 3,227 P/CF (x) 4.5 4.1 3.9 3.8 Gross Profit 17,164 17,752 18,361 18,934 AR & Other Receivables 3,083 3,354 3,438 3,545 P/B (x) 1.3 1.1 1.0 1.0 SG&A Expenses 15,339 15,785 16,173 16,692 Inventories 268 291 301 311 EV/EBITDA (x) 5.9 5.2 4.7 4.3 Operating Profit (Adj) 1,825 1,967 2,188 2,242 Other Current Assets 898 978 1,028 1,106 EPS (W) 22,307 24,427 26,739 27,263 Operating Profit 1,825 1,967 2,188 2,242 Non-Current Assets 22,858 23,517 23,940 24,143 CFPS (W) 59,177 60,816 64,380 65,767 Non-Operating Profit 429 537 553 553 Investments in Associates 6,298 6,550 6,775 6,986 BPS (W) 206,159 222,328 240,282 258,760 Net Financial Income -264 -250 -214 -169 Property, Plant and Equipment 10,568 10,730 10,737 10,541 DPS (W) 9,400 10,000 10,000 10,000 Net Gain from Inv in Associates 906 830 850 850 Intangible Assets 4,402 4,552 4,702 4,852 Payout ratio (%) 37.1 35.8 32.7 32.1 Pretax Profit 2,254 2,504 2,741 2,795 Total Assets 27,941 29,749 30,634 32,332 Dividend Yield (%) 3.5 4.0 4.0 4.0 Income Tax 455 523 573 584 Current Liabilities 5,420 5,796 5,172 5,322 Revenue Growth (%) 3.4 3.4 3.4 3.1 Profit from Continuing Operations 1,799 1,981 2,168 2,211 AP & Other Payables 1,657 1,803 1,865 1,923 EBITDA Growth (%) -2.6 5.0 6.6 3.0 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,151 1,151 367 367 Operating Profit Growth (%) -9.2 7.8 11.2 2.5 Net Profit 1,799 1,981 2,168 2,211 Other Current Liabilities 2,612 2,842 2,940 3,032 EPS Growth (%) 9.9 9.5 9.5 2.0 Controlling Interests 1,801 1,972 2,159 2,201 Non-Current Liabilities 7,273 7,391 7,441 7,488 Accounts Receivable Turnover (x) 7.4 7.1 6.9 6.9 Non-Controlling Interests -2 8 9 9 Long-Term Financial Liabilities 5,930 5,930 5,930 5,930 Inventory Turnover (x) 77.2 63.5 62.0 61.9 Total Comprehensive Profit 1,771 1,981 2,168 2,211 Other Non-Current Liabilities 1,343 1,461 1,511 1,558 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Controlling Interests 1,778 1,977 2,165 2,207 Total Liabilities 12,693 13,187 12,613 12,810 ROA (%) 6.6 6.9 7.2 7.0 Non-Controlling Interests -7 3 3 4 Controlling Interests 14,506 15,812 17,262 18,754 ROE (%) 12.9 13.0 13.1 12.2 EBITDA 4,717 4,955 5,281 5,438 Capital Stock 45 45 45 45 ROIC (%) 10.2 10.4 11.5 11.7 FCF (Free Cash Flow) 669 1,195 1,430 1,608 Capital Surplus 2,916 2,916 2,916 2,916 Liability to Equity Ratio (%) 83.2 79.6 70.0 65.6 EBITDA Margin (%) 27.5 27.9 28.8 28.7 Retained Earnings 14,189 15,494 16,944 18,436 Current Ratio (%) 93.8 107.5 129.4 153.9 Operating Profit Margin (%) 10.6 11.1 11.9 11.8 Non-Controlling Interests 742 750 759 768 Net Debt to Equity Ratio (%) 36.6 28.6 20.1 11.8 Net Profit Margin (%) 10.5 11.1 11.8 11.6 Stockholders' Equity 15,248 16,562 18,021 19,522 Interest Coverage Ratio (x) 5.6 6.3 7.4 8.0 Source: SK Telecom, KDB Daewoo Securities Research estimates
  52. 52. Telecom Service 2H15 Outlook 52 KT (030200 KS) Stocks to watch Focus on normalization of earnings, dividends, and share price Investment points • Earnings normalizing: Quarterly operating profit recovered to the W300bn level this year thanks to a cost decline (following last year’s restructuring) • Operation normalizing: Swung to a net subscriber addition in 2Q15; At the forefront of releasing data-oriented plans • Likely to resume dividend payout this year after suspending its dividend last year; Long-term dividend investors likely to return • Valuation merits: P/B of just 0.6x; Valuation should look increasingly attractive alongside improvement in fundamentals Risks • Fixed-line revenue is on the decline • With subscribers increasingly moving to MVNOs, rise in ARPU might be slow Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests; Based on June 9th closing price Source: KDB Daewoo Securities Research FY (Dec.) 12/12 12/13 12/14F 12/15F 12/16F 12/17F Revenue (Wbn) 23,856 23,811 23,422 22,021 22,015 22,152 OP (Wbn) 1,209 839 -292 1,158 1,192 1,221 OP margin (%) 5.1 3.5 -1.2 5.3 5.4 5.5 NP (Wbn) 1,046 -162 -1,055 1,127 647 695 EPS (W) 4,006 -622 -4,040 4,318 2,479 2,663 ROE (%) 8.7 -1.4 -9.5 10.3 5.5 5.7 P/E (x) 8.9 - - 6.8 11.9 11.1 P/B (x) 0.7 0.6 0.7 0.6 0.6 0.6 (Maintain) Buy Target Price (12M, W) 40,000 Share Price (6/9/15, W) 29,500 Expected Return 36% OP (15F, Wbn) 1,158 Consensus OP (15F, Wbn) 1,120 EPS Growth (15F, %) - Market EPS Growth (15F, %) 36.9 P/E (15F, x) 6.8 Market P/E (15F, x) 10.5 KOSPI 2,064.03 Market Cap (Wbn) 7,703 Shares Outstanding (mn) 261 Free Float (%) 84.9 Foreign Ownership (%) 46.9 Beta (12M) 0.72 52-Week Low 28,500 52-Week High 36,800 (%) 1M 6M 12M Absolute -4.1 -7.7 -1.8 Relative -3.1 -11.8 -5.3 80 90 100 110 120 130 14.6 14.10 15.2 15.6 KT KOSPI
  53. 53. Telecom Service 2H15 Outlook 53 KT (030200 KS) Turnaround in progress Stocks to watch • KT to normalize in 2015 • Earnings and FCF are likely to turn positive thanks to a low base effect resulting from restructuring- related one-off expenses • Likely to resume dividend payout after suspending its dividend last year; Sale of subsidiaries to boost cash flow and earnings recovery Source: Company data, KDB Daewoo Securities Research Likely to resume dividend payoutOperating profit and FCF to turn positive this year Source: Company data, KDB Daewoo Securities Research -1,500 -1,000 -500 0 500 1,000 1,500 2,000 2,500 11 12 13 14 15F 16F (Wbn) Consolidated operating profit Consolidated FCF Swung to positive 0 500 1,000 1,500 2,000 2,500 11 12 13 14 15F 16F (W) DPS Resumption of dividend payments
  54. 54. Telecom Service 2H15 Outlook 54 KT (030200 KS) Stocks to watch Governance Notes: As of end-1Q15; KT Media Hub merged with KT on Mar. 31st ; Sale of KT Rental was completed on June 3rd ; KT’s stake in KT Innoedu changed to 79.54% on June 4th ; Sale of KT Capital was delayed Source: Company data, KDB Daewoo Securities Research 100% 100% 57.0% 100% KT Skylife (053210 KS) WIC Sofnics KT Estate KT Rental H&C Network 69.5% 99.0% 1.0% VP 50.9% Initech Smartro HoldingsSmartro 100% 61.2% Initech (053350 KQ) Skylife TV 50.0% 52.3% 77.7% 0.1% Animax Broadcasting Korea 48.0% 100% 19.9% KTH (036030 KQ) KT Commerce 63.7% KT Capital KTcs (058850 KS) 50.0% 36.9% 45.4% 93.8% 100% 51.0% 65.0% 82.8% 51.0% 83.6% 7.4% 100% 35.5% 100% 100% 86.8% 95.3% 100% 51.0% KT Sports Best Partners 48.4% 14.8% 26.2% 77.4% 100% 58.0% 60.0% 100% KT Rental Autocare KT Autolease Green Car KT (030200 KS) KT AMC KD Living 51.0% 18.0%6.0% 4.0% 6.0% BC Card 29.3% KT WiBro Infra 26.2% KT Powertel 44.8% 19.0% 16.4% 81.0% 11.6% 11.3% KT Sports 6.0% 3.4% KT NexR 100% KT Media Hub Nasmedia (089600 KQ) CentiosKT Sat T-on Telecom KT Mhows Smart Channel KT Innoedu U-stream Korea KT Autopion KTDS KT-SB Data Service KT Linkus KT Telecop KT Submarine (060370 KQ) KT M&S KT Music (043610 KQ) KT ENS KTIS (058860 KS) EnswersSold Sold Liquidated Liquidated Merged
  55. 55. Telecom Service 2H15 Outlook 55 KT (030200 KS) Stocks to watch Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Revenue 23,422 22,021 22,015 22,152 Current Assets 8,751 10,894 10,618 12,168 P/E (x) - 6.8 11.9 11.1 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 1,889 4,131 3,555 4,605 P/CF (x) 1.9 1.5 1.6 1.5 Gross Profit 23,422 22,021 22,015 22,152 AR & Other Receivables 3,123 3,078 3,077 3,097 P/B (x) 0.7 0.6 0.6 0.6 SG&A Expenses 23,713 20,863 20,823 20,931 Inventories 393 388 387 390 EV/EBITDA (x) 5.7 3.5 3.4 3.2 Operating Profit (Adj) -292 1,158 1,192 1,221 Other Current Assets 3,346 3,297 3,599 4,076 EPS (W) -4,040 4,318 2,479 2,663 Operating Profit -292 1,158 1,192 1,221 Non-Current Assets 25,025 24,027 23,251 22,266 CFPS (W) 16,859 19,654 19,030 19,160 Non-Operating Profit -945 279 -280 -252 Investments in Associates 339 334 334 336 BPS (W) 42,921 47,239 48,968 50,694 Net Financial Income -420 -431 -381 -343 Property, Plant and Equipment 16,468 15,885 15,433 14,704 DPS (W) 0 800 1,000 1,000 Net Gain from Inv in Associates 18 613 0 0 Intangible Assets 3,544 3,144 2,821 2,558 Payout ratio (%) 0.0 17.6 34.4 32.4 Pretax Profit -1,237 1,437 912 969 Total Assets 33,776 34,921 33,869 34,434 Dividend Yield (%) 0.0 2.7 3.4 3.4 Income Tax -271 320 201 213 Current Liabilities 9,992 9,601 8,034 8,077 Revenue Growth (%) -1.6 -6.0 0.0 0.6 Profit from Continuing Operations -966 1,117 711 756 AP & Other Payables 1,200 1,183 1,182 1,190 EBITDA Growth (%) -20.1 41.5 -3.4 0.9 Profit from Discontinued Operations 0 -3 0 0 Short-Term Financial Liabilities 3,000 2,709 1,144 1,144 Operating Profit Growth (%) - - 2.9 2.4 Net Profit -966 1,114 711 756 Other Current Liabilities 5,792 5,709 5,708 5,743 EPS Growth (%) - - -42.6 7.4 Controlling Interests -1,055 1,127 647 695 Non-Current Liabilities 11,993 12,415 12,415 12,427 Accounts Receivable Turnover (x) 7.4 7.1 7.2 7.2 Non-Controlling Interests 89 -13 64 60 Long-Term Financial Liabilities 10,085 10,535 10,535 10,535 Inventory Turnover (x) 46.5 56.4 56.8 57.0 Total Comprehensive Profit -1,201 1,114 711 756 Other Non-Current Liabilities 1,908 1,880 1,880 1,892 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Controlling Interests -1,277 1,111 708 753 Total Liabilities 21,985 22,016 20,448 20,503 ROA (%) -2.8 3.2 2.1 2.2 Non-Controlling Interests 76 3 3 3 Controlling Interests 10,341 11,469 11,920 12,370 ROE (%) -9.5 10.3 5.5 5.7 EBITDA 3,563 5,041 4,868 4,912 Capital Stock 1,564 1,564 1,564 1,564 ROIC (%) -1.1 4.3 4.6 4.9 FCF (Free Cash Flow) -936 1,646 1,414 1,532 Capital Surplus 1,440 1,440 1,440 1,440 Liability to Equity Ratio (%) 186.5 170.6 152.4 147.2 EBITDA Margin (%) 15.2 22.9 22.1 22.2 Retained Earnings 8,571 9,699 10,150 10,601 Current Ratio (%) 87.6 113.5 132.2 150.7 Operating Profit Margin (%) -1.2 5.3 5.4 5.5 Non-Controlling Interests 1,449 1,436 1,500 1,561 Net Debt to Equity Ratio (%) 89.9 66.1 56.0 46.2 Net Profit Margin (%) -4.5 5.1 2.9 3.1 Stockholders' Equity 11,790 12,905 13,420 13,931 Interest Coverage Ratio (x) -0.6 2.2 2.4 2.6 Source: KT, KDB Daewoo Securities Research estimates
  56. 56. Telecom Service 2H15 Outlook 56 LG Uplus (032640 KS) Investment points • Continued net subscriber growth: Net subscriber growth has continued in the MNP market, proving the company has solid business capabilities that are immune to the changing market environment • Fundamental changes in the subscriber base: Focus has been on high-ARPU subscribers since the introduction of LTE services; Percentage of MVNO subscribers is the lowest • Consistent dividend policy: Payout ratio of 30%; Improving free cash flow to provide more room for dividend payout this year • Benefits from the proliferation of simplified payment: The company is beefing up its own simplified payment service, Paynow, backed by its dominance in the domestic payment gateway market Risks • Growth could slow, as the proportion of LTE subscribers in the total subscriber base is higher than the market average • The company, which ranks third in market share, is the most sensitive to the entry of a fourth player Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests; Based on June 9th closing price Source: KDB Daewoo Securities Research FY (Dec.) 12/12 12/13 12/14F 12/15F 12/16F 12/17F Revenue (Wbn) 10,905 11,450 11,000 10,545 10,700 10,764 OP (Wbn) 127 542 576 692 709 715 OP margin (%) 1.2 4.7 5.2 6.6 6.6 6.6 NP (Wbn) -60 279 228 368 394 410 EPS (W) -122 640 523 844 903 940 ROE (%) -1.6 7.2 5.6 8.5 8.5 8.4 P/E (x) - 16.8 22.0 11.2 10.5 10.1 P/B (x) 0.9 1.2 1.2 0.9 0.9 0.8 (Maintain) Buy Target Price (12M, W) 14,000 Share Price (6/9/15, W) 9,470 Expected Return 48% OP (15F, Wbn) 692 Consensus OP (15F, Wbn) 674 EPS Growth (15F, %) 61.4 Market EPS Growth (15F, %) 36.9 P/E (15F, x) 11.2 Market P/E (15F, x) 10.5 KOSPI 2,064.03 Market Cap (Wbn) 4,135 Shares Outstanding (mn) 437 Free Float (%) 63.9 Foreign Ownership (%) 34.8 Beta (12M) 0.68 52-Week Low 8,890 52-Week High 12,850 (%) 1M 6M 12M Absolute -3.4 -14.3 1.1 Relative -2.4 -18.2 -2.6 Solid business capabilities 80 100 120 140 160 14.6 14.10 15.2 15.6 LG Uplus KOSPI Stocks to watch
  57. 57. Telecom Service 2H15 Outlook 57 LG Uplus (032640 KS) Stocks to watch • Virtuous cycle of steady earnings improvement backed by solid business capabilities, leading to improved dividend payment • Steady net subscriber growth in the MNP market, despite implementation of the handset distribution act, iPhone launches, data-oriented rate plans, etc. • Dividend payout ratio to reach 30%; Divided per share to rise; Dividend yield also likely to rise with recent share price correction Source: KTOA, KDB Daewoo Securities Research LG Uplus’ dividend yield to riseLG Uplus achieving steady net subscriber growth in the MNP market Note: 2015F and 2016F dividend yields are based on Daewoo Securities’ estimates Source: LG Uplus, KDB Daewoo Securities Research Rising earnings and dividend payout demonstrate improved fundamentals 2.6% 2.9% 0.0 0.5 1.0 1.5 2.0 2.5 3.0 11 12 13 14 15F 16F (%) Dividend yield -50,000 -40,000 -30,000 -20,000 -10,000 0 10,000 20,000 30,000 40,000 50,000 6/14 8/14 10/14 12/14 2/15 4/15 (persons) SKT KT LG Uplus
  58. 58. Telecom Service 2H15 Outlook 58 LG Uplus (032640 KS) Stocks to watch Corporate governance Source: LG, KDB Daewoo Securities Research 100% 100% 64.8% 100% 51.0% 50.0% 100% 100% 61.3% 93.1% LG Life Science (068870 KS) LG Solar Energy Media Log Dacom Crossing CS Leader A-in Teleservice LG CNS Ucess Partners Serveone LG Sports 33.5% 50.0% 34.0% 30.4% 37.9% 48.6% 33.7% 85.0% 100% 100% Ji Heung 100% 27.9% Koo Bon-moo & affiliates LG (003550 KS) LG UPlus (032640 KS) 100% 36.0% Korea Elecom BNE The Face Shop Lusem LG Siltron HS Ad L Best 100% Global Dynasty Natural Resource PEF Sal de Vida Korea 33.3% 7.5% 50.0% 35.0% Fuser 100% 33.5% TOSTEM BM 50.0% Hausys ENG100% 100% 98.4% 51.0% LG Hausys (108670 KS) LG H&H (051900 KS) 100% Haitai Beverage Hiplaza HiBusiness Logistics 40.8% 100% 100% LG Innotek (011070 KS) Himsolutek 100% HiTeleservice 100% Hausys Interpane 80.0% LG MMA LG Pure Cell Systems LG MDI Coca-Cola Korea CleanSoul 100% 90.0% 100% Ace R&A Hientech 100% 100% LG N-Sys 100% LG-Toyo Engineering Konjiam Yewon 90.0% 70.0% LG International (001120 KS) Hankook Beverage LG Chem (051910 KS) G2R (035000 KS) Nanumnuri 100% Innowid100% LG-Hitachi Water Solutions 51.0% 75.0% 100% Silicon Works (108320 KQ) 28.2% Hanuri 100% Haengboknuri 100% CS ONE Partner WithU 100% EverON See Tec Oneseen Skytech 90.8% LG Electronics (066570 KS) LG Display (034220 KS)
  59. 59. Telecom Service 2H15 Outlook 59 Stocks to watch LG Uplus (032640 KS) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Revenue 11,000 10,545 10,700 10,764 Current Assets 2,490 2,626 3,023 3,476 P/E (x) 22.0 11.2 10.5 10.1 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 416 475 813 1,215 P/CF (x) 2.2 1.8 1.8 1.9 Gross Profit 11,000 10,545 10,700 10,764 AR & Other Receivables 1,633 1,667 1,689 1,699 P/B (x) 1.2 0.9 0.9 0.8 SG&A Expenses 10,423 9,853 9,991 10,049 Inventories 276 282 286 288 EV/EBITDA (x) 4.6 3.8 3.6 3.5 Operating Profit (Adj) 576 692 709 715 Other Current Assets 165 202 235 274 EPS (W) 523 844 903 940 Operating Profit 576 692 709 715 Non-Current Assets 9,523 9,711 9,639 9,496 CFPS (W) 5,163 5,158 5,175 5,086 Non-Operating Profit -256 -201 -184 -168 Investments in Associates 9 0 0 0 BPS (W) 9,567 10,261 10,914 11,583 Net Financial Income -171 -176 -162 -130 Property, Plant and Equipment 7,254 7,533 7,516 7,419 DPS (W) 150 250 270 280 Net Gain from Inv in Associates 1 0 0 0 Intangible Assets 1,116 1,033 978 930 Payout ratio (%) 28.8 29.7 29.9 29.8 Pretax Profit 320 491 525 547 Total Assets 12,013 12,337 12,663 12,972 Dividend Yield (%) 1.3 2.6 2.9 3.0 Income Tax 92 123 131 137 Current Liabilities 3,486 2,896 2,929 2,942 Revenue Growth (%) -3.9 -4.1 1.5 0.6 Profit from Continuing Operations 228 368 394 410 AP & Other Payables 1,427 1,456 1,477 1,486 EBITDA Growth (%) 12.1 9.4 0.2 -1.0 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,129 649 649 649 Operating Profit Growth (%) 6.3 20.1 2.5 0.8 Net Profit 228 368 394 410 Other Current Liabilities 930 791 803 807 EPS Growth (%) -18.3 61.4 7.0 4.1 Controlling Interests 228 368 394 410 Non-Current Liabilities 4,349 4,961 4,969 4,973 Accounts Receivable Turnover (x) 7.3 7.2 7.2 7.2 Non-Controlling Interests 0 0 0 -1 Long-Term Financial Liabilities 3,787 4,387 4,387 4,387 Inventory Turnover (x) 32.8 37.8 37.7 37.5 Total Comprehensive Profit 221 368 394 410 Other Non-Current Liabilities 562 574 582 586 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Controlling Interests 221 368 394 410 Total Liabilities 7,835 7,856 7,898 7,915 ROA (%) 1.9 3.0 3.1 3.2 Non-Controlling Interests 0 -1 -1 -1 Controlling Interests 4,177 4,480 4,765 5,058 ROE (%) 5.6 8.5 8.5 8.4 EBITDA 2,082 2,277 2,282 2,259 Capital Stock 2,574 2,574 2,574 2,574 ROIC (%) 4.9 5.8 5.9 6.0 FCF (Free Cash Flow) -129 78 549 621 Capital Surplus 837 837 837 837 Liability to Equity Ratio (%) 187.5 175.4 165.8 156.5 EBITDA Margin (%) 18.9 21.6 21.3 21.0 Retained Earnings 764 1,067 1,352 1,645 Current Ratio (%) 71.4 90.7 103.2 118.1 Operating Profit Margin (%) 5.2 6.6 6.6 6.6 Non-Controlling Interests 1 0 0 -1 Net Debt to Equity Ratio (%) 106.7 100.8 87.7 74.7 Net Profit Margin (%) 2.1 3.5 3.7 3.8 Stockholders' Equity 4,178 4,480 4,765 5,057 Interest Coverage Ratio (x) 2.7 3.2 3.2 3.2 Source: LG Uplus, KDB Daewoo Securities Research estimates
  60. 60. Telecom Service 2H15 Outlook 60 Telecom service sector: Take note of telcos likely to deliver differentiated performance Source: KDB Daewoo Securities Research [Conclusion] Look to earnings improvements and dividend payout Stocks to watch 1) Resumption of dividend payout: KT 2) Net subscriber growth: LG Uplus Top pick Likely to recover on high dividend yield and new business value in the event regulatory risks ease SK Telecom
  61. 61. Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price SK Telecom(017670) 05/06/2015 Buy 360,000 07/19/2013 Buy 45,000 10/01/2014 Buy 380,000 06/11/2013 Buy 50,000 08/03/2014 Buy 310,000 No Coverage 10/29/2013 Buy 290,000 LG Uplus(032640) 04/28/2015 Buy 14,000 07/19/2013 Buy 280,000 01/25/2015 Buy 16,000 06/11/2013 Buy 270,000 10/01/2014 Buy 15,000 No Coverage 07/31/2014 Buy 11,500 KT(030200) 01/20/2015 Buy 40,000 04/28/2014 Buy 13,000 10/01/2014 Buy 42,000 01/20/2014 Buy 15,000 05/01/2014 Buy 40,000 07/19/2013 Buy 16,000 01/20/2014 Trading Buy 36,000 06/11/2013 Buy 15,000 11/03/2013 Trading Buy 38,000 No Coverage 08/04/2013 Buy 44,000 Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. 0 100,000 200,000 300,000 400,000 Jun 13 Jun 14 Jun 15 (W) SK Telecom 0 10,000 20,000 30,000 40,000 50,000 60,000 Jun 13 Jun 14 Jun 15 (W) KT 0 5,000 10,000 15,000 20,000 Jun 13 Jun 14 Jun 15 (W) LG Uplus
  62. 62. Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have Equity Ratings Distribution Buy Trading Buy Hold Sell 71.9% 13.8% 14.3% 0% * Based on recommendations in the last 12-months (as of March 31, 2015) Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for single stock futures backed by shares of KT as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.
  63. 63. not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction. KDB Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office 34-3 Yeouido-dong, Yeongdeungpo-gu Seoul 150-716 Korea Two International Finance Centre Suites 2005-2012 8 Finance Street, Central Hong Kong, China 320 Park Avenue 31st Floor New York, NY 10022 United States Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower 42 25 Old Broad St. London EC2N 1HQ United Kingdom Six Battery Road #11-01 Singapore, 049909 7th Floor, Yusen Building 2-3-2 Marunouchi, Chiyoda-ku Tokyo 100-0005 Japan Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511 Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue Chaoyang District, Beijing 100022 China Room 38T31, 38F SWFC 100 Century Avenue Pudong New Area, Shanghai 200120 China Suite 2103, Saigon Trade Center 37 Ton Duc Thang St, Dist. 1, Ho Chi Minh City, Vietnam Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000 Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLC PT. Daewoo Securities Indonesia 2401B, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue, Chaoyang District, Beijing 100022 China #406, Blue Sky Tower, Peace Avenue 17 1 Khoroo, Sukhbaatar District Ulaanbaatar 14240 Mongolia Equity Tower Building Lt.50 Sudirman Central Business District Jl. Jendral Sudirman Kav. 52-53, Jakarta Selatan Indonesia 12190 Tel: 86-10-6567-9699 Tel: 976-7011-0807 Tel: 62-21-515-1140

×