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IT/Telecom Service/Media: Shenzhen Visit Note

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IT/Telecom Service/Media: China Shenzhen visit note
IT industry in Shenzhen: Opportunities and risks
IOTE 2016 overview
Market trends in Chinese media content
Visits to Shenzhen-based Tencent and DJI

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IT/Telecom Service/Media: Shenzhen Visit Note

  1. 1. IT/Telecom Service/Media Shenzhen visit note IT industry in Shenzhen: Opportunities and risks Shenzhen, China is home to 70% of global smartphone production. However, the region is losing its competitiveness as a low-cost smartphone manufacturing powerhouse due to recent increases in labor costs, which have prompted large smartphone makers to increasingly pursue the adoption of automated facilities. Notably, we believe demand for automated facilities will continue to rise over the medium to long term. On the other hand, a number of start-ups, including DJI, are taking advantage of Shenzhen’s smartphone production ecosystem. With only a business plan, a startup can attract investment from start-up accelerators (e.g., IngDan) and easily purchase all necessary parts from local electronics markets (i.e., Huaqiangbei). IOTE 2016 overview We attended Asia’s largest Internet of Things (IoT) event, the Shenzhen International IoT and Smart China Exhibition (IOTE), which took place August 18th - 20th . Highlights included smart homes, telecom service-linked wearables, healthcare devices, robots, and virtual reality devices. China already boasts the highest degree of IoT connectivity in the world. It is expected that there will be 330mn IoT connections in the country by 2020, much higher than the US level of 170mn. The Chinese government considers IoT technologies essential for China’s future growth and provides proactive support to nurture the industry. Indeed, the government believes that IoT will provide answers to problems like traffic and air pollution. Furthermore, China’s major telcos, including China Mobile, are shifting their focus to IoT, creating value chains based on their networks and expanding their IoT businesses from B2B to B2C. Market trends in Chinese media content Korean media names are concerned over 1) a potential tightening of Chinese regulations on foreign media content and 2) a slowdown at the Chinese box office. At a meeting with Tencent, we confirmed that concerns exist among Chinese companies as well. We were told that local internet companies have not yet been provided with detailed guidelines, and that demand for Korean video content is very high amid fierce competition for customers. We believe the Chinese film market is poised for qualitative growth. Among Chinese film plays, IMAX China is the only company posting solid share price gains. In addition, Wanda Cinema Line is trying to boost its stock price by signing a deal to build 150 additional IMAX theaters over the next six years. Visits to Shenzhen-based Tencent and DJI We visited Shenzhen-based companies Tencent and DJI. 1) Tencent holds a dominant market share in the social media space, including messaging services. We were able to confirm that the growth of the digital content market in China is being supported by the government’s intellectual property rights enforcement system as well as competition among the three BAT companies (Baidu, Alibaba, and Tencent). Against this backdrop, we believe that Korean content companies will be presented with opportunities. 2) DJI controls 70% of the global civilian drone market. In our view, it is noteworthy that the company is expanding its business scope by launching a camera brand and developing action cameras. Overweight (Maintain) Event Summary August 23, 2016 Mirae Asset Daewoo Co., Ltd. [Telecom Service / Media] Jee-hyun Moon +822-768-3615 jeehyun.moon@dwsec.com Chuljoong Kim +822-768-4162 chuljoong.kim@dwsec.com Nu-ri Ha +822-768-4130 nuri.ha@dwsec.com
  2. 2. IT/Telecom Service/Media 2 August 23, 2016 Mirae Asset Daewoo Research C O N T E N T S I. IT industry in Shenzhen 3 1. Opportunities and risks 3 2. Marriage of media and hardware 4 3. Easy payments to be part of daily life 5 II. IOTE 2016 overview 6 1. Overview and major market trends 6 2. Government support for IoT 8 3. Telecom-based IoT services and products 9 4. IoT devices 15 5. VR devices 16 III. China’s media content market 17 1. Outlook for Korean content/entertainment businesses in China 17 2. Drivers for IMAX China shares 19 Tencent 20 DJI 23
  3. 3. IT/Telecom Service/Media 3 August 23, 2016 Mirae Asset Daewoo Research Research I. IT industry in Shenzhen 1. Opportunities and risks In 1982 Deng Xiaoping’s government decided to use Shenzhen as the starting point for its experiment in capitalism. Currently, the city has a population of roughly 20mn, double the 2014 level. With 860,000 companies registered in the city as of 2014, the city boasts the most businesses per capita in China. As the epicenter of start-ups, the average age of the city’s population is just 33. It is said that 85% of global handsets are produced in China, and that 80% of Chinese production comes from Shenzhen. For smartphones specifically, Shenzhen is home to 70% of global production. However, the region is losing its competitiveness as a low-cost smartphone manufacturing powerhouse due to recent increases in labor costs, which have prompted large smartphone makers to increasingly pursue the adoption of automated facilities. Notably, we believe demand for automated facilities will continue to rise over the medium to long term. On the other hand, a number of start-ups, including DJI, are taking advantage of Shenzhen’s smartphone production ecosystem. With only a business plan, a startup can attract investment from startup accelerators (e.g., IngDan) and easily purchase all necessary parts from electronics markets (i.e., Huaqiangbei). Figure 1. Monthly minimum wage on a sustained uptrend in key Chinese cities Figure 2. Shenzhen venture capital investment trends Source: KOTRA, Mirae Asset Daewoo Research Source: Zero2IPO, Mirae Asset Daewoo Research Figure 3. Start-up accelerator IngDan’s booth Figure 4. Huaqiangbei electronics market Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research 0 40 80 120 160 200 0 200 400 600 800 1,000 1,200 2011 2012 2013 2014 1H2015 (US$mn) Total investments(L) No. of investments(R)2,030 2,020 1,720 1,850 0 500 1,000 1,500 2,000 2,500 Shenzhen Shanghai Beijing Tianjin (RMB) 2013 2014 2015
  4. 4. IT/Telecom Service/Media 4 August 23, 2016 Mirae Asset Daewoo Research 2. Marriage of media and hardware 1) LeEco LeEco (formerly LeTV) got its start as an online video platform company before expanding into TV hardware business (set-top boxes in 2012; smart TV services in 2013). After establishing a smartphone-producing subsidiary in 2014, the company released three smartphone models in 2015. Just one year after entering the market, cumulative sales exceeded 10mn units in May 2016. We believe that investors should pay close attention to LeEco’s expansion into handsets from media services. With the IoT era entering full swing, the company should be able to comfortably enter emerging devices as well. Indeed, the company is steadily expanding into new business areas such as virtual reality (VR) devices and electric vehicle (EV) technologies. Figure 5. LeEco, which started out as an online video service, has expanded into device manufacturing Source: Atlas Research, Mirae Asset Daewoo Research 2) PPTV PPTV is the fifth-largest online video website in China. And PPTV also engages in the smartphone business. (We found the King 7 model widely available on the shelves of Huaqiangbei stores.) One of PPTV’s key shareholders is electronics retailer Suning Commerce Group, which attracted a W5tr investment from e-commerce leader Alibaba last year. Considering its ties to Alibaba (operator of e-commerce and video service websites including Youku and Tudou) and Suning (brick-and-mortar retailer), PPTV should enjoy smooth distribution and sales of smartphones. Figure 6. Online video service PPTV’s smartphone model Figure 7. PPTV sells its King 7 model for RMB 999 Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
  5. 5. IT/Telecom Service/Media 5 August 23, 2016 Mirae Asset Daewoo Research Research 3. Easy payments to be part of daily life Upon arriving in Shenzhen, we noticed that the city’s two-year-old airport was clean and spacious but featured fewer stores than other airports. Notably, throughout the structure, there was a wide array of vending machines featuring the iconic WeChat speech balloon logo. Travelers seeking to buy earplugs, sleep masks, and beverages at the Shenzhen airport are presented with WeChat Pay as a payment option (with QR codes dotting vending machines). And we witnessed online-to-offline (O2O) food delivery electric bikes lining the streets of Huaqiangbei. At stores, consumers seemed to prefer mobile payments to cash. Indeed, WeChat Pay is expanding its presence in China, where credit card penetration is still low. WeChat is an instant messaging service launched by Tencent in 2011. Currently, the number of monthly active users (MAU) stands at around 800mn. Notably, QR code-based WeChat Pay has been applied to various services such as business card exchange services, bank/hospital appointment scheduling, and food delivery. Now, mobile WeChat Pay is the most widely used simple payment service in China. WeChat Pay will likely expand its presence in Korea. Tencent launched the service at limited stores (e.g., duty-free shops, department stores) in April 2015. However, the company announced a plan to expand Korean services starting in August 2016. Chinese tourists will likely be able to use WeChat Pay at various locations through Tencent’s partners, including Hana Card, Woori Bank, Shinsegae I&C, NICE Information and Telecommunication, NHN KCP, KG Inicis, and Danal. Figure 8. WeChat users can pay for vending machine items by scanning QR codes Figure 9. Vending machines at airport accept payment WeChat Pay Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research Figure 10. Apple Pay accepted at touchscreen ordering kiosks Figure 11. Huaqiangbei: O2O food delivery services and payment via WeChat Pay Source: Mirae Asset Daewoo Research Source: Atlas Research, Mirae Asset Daewoo Research
  6. 6. IT/Telecom Service/Media 6 August 23, 2016 Mirae Asset Daewoo Research II. IOTE 2016 overview 1. Overview and major market trends IOTE is Asia’s largest Internet of Things (IoT) event. With roughly 400 participating businesses from around the globe, the event normally attracts 30,000 people. This year, the exhibition focused on IoT, RFID, smart cards, smart electronics, and future experiences. We took notice of: 1) smart homes and wearables that could be linked with telecom services, 2) healthcare devices and robots, and 3) VR devices that could be linked with media services. The busiest booths involved robots and VR devices. In particular, small robots featuring speech-recognition technologies and the VR simulation booth attracted long lines. Figure 12. Entrance to IOTE hall Figure 13. IOTE booths Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research Figure 14. Gowild’s speech-recognition robot drew serious attention Figure 15. Lenkewi’s VR/AR devices were also popular Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
  7. 7. IT/Telecom Service/Media 7 August 23, 2016 Mirae Asset Daewoo Research Research Table 1. Major IoT firms in China Classification Company Business IoT Xiaomi Creating anetworkofhealthcare, smarthome, and otherproducts Smart home BroadLink A smarthomesolutionsprovider; productsinclude remote controlled smartpower plugs;developed BroadLinkDNA,aWi-Fisolutionfor existing home appliances; Xiaomi’s smartWi-Fi routerfeaturessmart home solutionsprovided byBroadLink Gizwits Offers softwaredevelopmentplatformsand microcontrollerboardsfor smarthome gadgets and home appliances LifeSmart A Hangzhou-based start-up developingsmart homegadgets, smart controlcenters, smart sockets, surveillance cameras, and sensors Yeelink Designs/developsplatforms thathelp companies manufactureconnecteddevices and app-enabled hardware Landing Technology A Shenzhen-based makerofsmarthome gadgetsand wearables; ownsbrandssuch as Ivylink and Goldweb MXChip A developer of short-distance wirelessnetworkproductsand technologies Phantom A smarthomesolutionsprovider focused on smartlighting and surveillance equipment ByunIOT A smart city/home technologydeveloper manufacturing home securityappliances, cloud smartbulbs, etc. Orvibo ManufacturesIoTand smarthomegadgets,includingdigitaldoorbells and cloud platforms Bestfu A smarthomesolutionsprovider focused on smart city/home/officesolutions HeimanTechnology A smarthomesolutionsprovider focused on security/fire alarms Healthcare Ospicon A Singapore/Hong Kong-based firmmanufacturing smartpillows andbabybedding Sleepace A sleeppatternanalysisdevicemaker;productsinclude Sleep Dot(sleep monitoring devicethatattaches topillows), NoxSleep Light,and RestOn(flexible strip thatis spread acrossthe mattressto monitorsleep patterns); resultsare sent to smartphones;received aUS$7mninvestmentin2015. Robots Shenzhen Gowild Robotics(Gowild) Manufactures small-sized speech-recognition robots similartoJibo (controls air conditioning,TV, etc.). Lithops Produces vacuum/windowcleaning robots, which canbe remotely controlled by a smartphoneapp LejuRobot Manufactures small-sized robots(Aelos), which canbe remotelycontrolled by a smartphoneapp or ajoystickover aWi-FInetwork V-Cat Makes small-sized robotsembedded with smart cameras (theheadcanrotate360 degrees); the robot can actas ababymonitor VR Lenkewi ManufacturesVR/ARgadgets(head-mounted deviceswithcontrollers);users can enjoygames usingBluetooth-connected guns/smartphones Blue Helmet A Shenzhen-based smartwearables maker GuangzhouLongzeElectronics ProducesVR,4D filmsimulators ShenzhenJingminDigitalMachine (JMDM) A Shenzhen-based VR simulatormaker Wearables Doki Headquartered in Hong Kong;develops/manufactures smartwatchesforchildren at a factoryinShenzhen; received funding from Kickstarter, and saleswillstartatend- Augustinpartnership withChinaUnicom Design Innozen A Shenzhen-based industrialdesignfirm; thefirm’sproductTouchjetturnsTVscreens into touchscreens; major customers include Huawei,Tencent, Lenovo, and Haier. Source: IOTE, TechNode, respective company data, Mirae Asset Daewoo Research Figure 16. IoT industry in China Source: KOTRA, Mirae Asset Daewoo Research 0 300 600 900 1,200 2010 2011 2012 2015 2020 (RMBbn) ChinaIoTindustry
  8. 8. IT/Telecom Service/Media 8 August 23, 2016 Mirae Asset Daewoo Research 2. Government support for IoT 1) An essential growth driver for China China designated IoT as one of its key future growth drivers, and is providing substantial support to the industry. In 2009, the Chinese government established the Sensing China Center to aid in the establishment of a nationwide IoT industrial network, and has sponsored the IOTE in Shenzhen every year since. In 2010, the government invested RMB800mn to build a machine-to-machine (M2M) communications center, and designated M2M as a top 10 promising technology. In 2012, an IoT development plan was included in the country’s 12th five-year plan (2011-15). In the same year, the ITU officially adopted China’s IoT standards. Moreover, smart city construction is underway, again led by the government. IoT technologies are believed to hold the key to reducing the unwanted by-products of China’s rapid economic development, such as traffic congestion and pollution. In 2014, China selected 202 cities for its pilot smart city projects. Figure 17. China’s IoT industry is showing strong growth thanks in part to policy support Source: Atlas Research, Mirae Asset Daewoo Research Table 2. Chinese IoT examples Example Detail ShanghaiPudong International Airport Implemented wirelesssensornetwork (30,000 sensornodes) tosetupanintrusiondetection system Yuanboyuan (Jinan) Adopted wirelessbulb system for streetlights (ZigBee technology) Wuhan Establishedcomprehensiveplatform for sewagetreatmentusing IoT and cloud computing (smart cityproject) Xinjiang Production and ConstructionCorps Reduced water usageby16% for 8,000hectares offarmland byimplementing a management system Lake Tai (Jiangsu) Waterquality control/floodprotection via intelligentmanagement system(blue-green algae) Source: KOTRA, ChinaEconomic Net, KIET, Mirae Asset Daewoo Research
  9. 9. IT/Telecom Service/Media 9 August 23, 2016 Mirae Asset Daewoo Research Research 3. Telecom-based IoT services and products 1) Smart home: Smart home solutions Connectivity is the foundation of the IoT environment. As such, the development of smart home platforms should provide telcos with opportunities to bundle wireless/wired services and IPTV set-top boxes as well as collect monthly fee revenue. In addition to traditional B2C businesses, telcos can also operate B2B businesses on the smart home platform (e.g., installing built-in telecommunication systems in partnership with construction firms). Noteworthy smart home solutions providers among IOTE participants were Byun IOT, Orvibo, Heiman Technology, and Bestfu. Figure 18. Byun IOT’s smart home solutions exhibit Figure 19. Orvibo’s smart home solutions exhibit Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research Figure 20. Heiman Technology joined Z-Wave/ZigBee alliance Figure 21. Bestfu provides smart home solutions through alliance with ZTE Smart Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
  10. 10. IT/Telecom Service/Media 10 August 23, 2016 Mirae Asset Daewoo Research 2) Smart home: Internet of Small Things Once the infrastructure is put in place—including Wi-Fi connections, cloud platforms, and device control solutions—a wide array of “small things,” i.e., small-sized smart devices, can be connected to create a smart home. Notably, telcos will be able to produce gadgets connected to their own telecom networks. China Unicom has already signed revenue- sharing partnerships with several smart gadget manufacturers. Xiaomi is the most prominent firm in the Internet of Small Things (IoST) category. At the Shenzhen expo, lighting and social robot makers drew our attention in this segment. Figure 22. Xiaomi’s MiJia smart home products Source: Xiaomi, Atlas Research, Mirae Asset Daewoo Research Figure 23. Byun IOT’s Cloud Magic Bulb (smart music light) Figure 24. V-Cat’s baby monitor robot Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
  11. 11. IT/Telecom Service/Media 11 August 23, 2016 Mirae Asset Daewoo Research Research 3) Wearables: Telecom services and device sales Wearables should no longer be viewed as novelties. Indeed, technological barriers have been visibly lowered in the category. For telcos, however, wearables can still generate additional revenue, as embedded 3G or LTE antennae enable data use. Carriers can also sell wearable devices to generate handset revenue. At the Shenzhen exhibition and the nearby electronics market, smartwatches for children that feature voice calls caught our attention. In China, demand is particularly high for smartwatches for children, due to the phasing out of the one-child policy and a high number of missing child cases. Doki has recently released a smartwatch model that supports video calls. It plans to introduce call plans for this product in partnership with China Unicom. LeEco also launched an LTE smartwatch for children, Kido. China’s LTE penetration has recently exceeded 50%, according to China Mobile. Wearables recently released by China’s electronics giants include Huawei’s TalkBand B3 (a smartband that also functions as a Bluetooth headset), and Xiaomi’s Mi Band 2 (which features an OLED display). Figure 25. Doki’s smartwatch for children offers video calling Figure 26. LeEco’s smartwatch for children, Kido, is LTE-ready Source: Doki.com, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research Figure 27. Huawei’s smartwatch TalkBand B3 can also be used as a Bluetooth headset Figure 28. Xiaomi’s Mi Band 2 features an OLED display Source: Huawei.com, Mirae Asset Daewoo Research Source: Xiaomi-mi.com, Mirae Asset Daewoo Research
  12. 12. IT/Telecom Service/Media 12 August 23, 2016 Mirae Asset Daewoo Research 4) Telcos’ IoT businesses China is currently taking the lead in the IoT space. At end-2014, China’s IoT device connections exceeded 70mn, accounting for one-third of the global total. According to the GSMA (which represents the interests of mobile operators worldwide), IoT device connections will reach 330mn in China, 170mn in the US, and 40mn in Japan by 2020. Of note, major Chinese telcos, including China Mobile, China Unicom, and China Telecom, are playing pivotal roles in IoT development. In addition to providing connectivity, they are evolving to create value chains via service/system integration. In addition, they are expanding their business scope from B2B business models to include B2C models through partnerships with manufacturers (including B2B2C models with automakers). Table 3. Major Chinese telcos’ IoT businesses Company IoTbusinesses ChinaMobile - Launched M2M services in2007 -IoTservicesincludeCarServiceLink,Elevator Guardian, and FireControlSystem - Advanced intothecar marketbysetting up anInternetofVehicles (IoV)withDeutscheTelekom -IoTconnectionsexpected togrowby 60%over thenext five years ChinaUnicom - Projects that the market for connected consumer goods will grow more sharply than the traditional M2M market - Aiming tobecome amajor smarthome solutionsprovider -Currently collaborating withinternetfirms and hardware manufacturers -Inrevenue-sharing partnerships withhardwaremanufacturers ChinaTelecom - Aggressivelyinvesting inIoV technology - Launched thesmarthomeserviceYueMe in2014 -YueMe offershome videos,healthcare services, onlineeducation,TVhome shopping, etc. - Partnering with contentproviders, TVmakers, chipset manufacturers,handset makers,TV channels, and mobile app developers Source: GSMA, Mirae Asset Daewoo Research Table 4. China Mobile’s M2M applications Applications Details Emergencycare - Sharepatients’treatmentdata and contactnumberswithdispatch centers - Allowhospitalstotreatpatientsmoreefficiently and contact theirfamilymembers moreswiftly Noise monitoring - Anoise monitoring system automaticallycollectsnoisedataviasensors/wireless telecomnetworks -Used bythe Xiamengovernmentto monitor constructionsites -Currentlyused in46 areas;lowered the noise complaint rateby 77% -Inplacein24residentialareas Smart farming -Developed IoTappstoboostfarmers’productivityand income Health monitoring -Doctors are able tomonitorthe conditionsofpatientsafterdischarge - Monitorpatients’ conditions and notifydoctorsof anyproblems Real-time transportation information - Real-timetransportationinformationfor drivers;Access tobusroutes, schedules, and locations - Alreadyinplace inJiangsu,Guangxi,Guizhou, and Hainan Smart mining - Developed an electronic coal mine information system for Zhengzhou Coal Industry’s subsidiary Xinzheng Coaland ElectricCompany - Efficiently arranges manpower by providing access to real-time operation information, such as gas density,ventilation, and equipment conditions Smart oilfields -Quickanalysis,remoteinstructions, and automated control -Increase yield and oilrecoveryrateby2-4% and2-7%, respectively - Alreadyinplace inKaramay,Daqing,and Shenglioil fields Travel safety - Warnings sent viaCarGuardian, anapp connected topolicesystems - Alreadyinplace inJiangsu,Fujian, Shanghai,and Jiangxi;used by morethan500,000 subscribers Smart forestry - Monitoring the riskofforestfire in realtime and collecting weather/temperature informationinFujian - Prevented lossofRMB770mnby averting forestfires on 325occasionsthus far - Provided protection to aShandong forest viaa mobileforestpatrolplatform Safer cities - Supporting real-timetransportationand securityservicesaspartofa safe cityproject - Development of a smart safety system to alert residents and district offices in the event of thefts, fires, gasleaks, etc., in Guangxi Tackling the digitaldivide - Established apubliceducationmaterial serviceplatformtoreduce regionalgapsineducationservices -Currentlyinplace in more than900 schools -Distributionof1,000 tablet PCsto more than20 schoolsinBeijing andGuangdong Source: GSMA, Mirae Asset Daewoo Research
  13. 13. IT/Telecom Service/Media 13 August 23, 2016 Mirae Asset Daewoo Research Research Korean telcos are expanding their smart home businesses. They have been launching a variety of smart home devices and services in collaboration with other firms. In addition, they have already rolled out monthly plans exclusively for tablets/wearables. In 2H16, telcos will likely launch low-power wide-area network (LPWAN) services (including remote metering) and IoT-specific plans, backed by government support and a network dedicated to IoT services (completed in 1H). In the short term, IoT services should have only a minimal impact on telcos’ earnings. However, we note that IoT gives telcos opportunities to: 1) expand into new businesses with relatively small investments, 2) seek quantitative subscriber growth amid the saturation of the core market, and 3) leverage first-mover advantages (given the integral role they play). Table 5. Korean telcos’ smart home businesses SK Telecom KT LG Uplus Smart home/ IoST/services Plugs, switches,doorsensors,gasvalve lockout,doorlocks, United Objectbrand (Smart Beam/Speaker/Petfit/Linkage/Albert), T Outdoor,TPet, Health-On,T-Car, Smart AutoScan,humidifiers, rice cookers, refrigerators,smartfarming, Smart CashBox, air filters,boilers,gas ranges, a/c,washing machines, ovens, robot vacuumcleaners, waterpurifiers,home blackboxes, etc. Yodoc (diagnostic tool), SafeZone(children seniors), Yodoc-m (diagnostic toolforchronicdisease), home cameras,boilers, plugs,gasvalvelockout,doorsensors,locks, smart farming, GigaIoT Health(bike/golf/weight management), lifetechjackets, a/c, air filters, refrigerators, TVs, washing machines, cleaners, ovens, etc. Home CCTV MomCa,homefitness, sixtypes ofIoT@home (switches/gasvalvelockout/energy meters/doorlocks/hubs/plugs), thermostats,LTE MagicMirror,ricecookers, IoTCaps,doorlocks, PetSTATION, StarWalk,kitchenfire extinguishing equipment, FESCO care, refrigerators,a/c,washing machine, helmets, dehumidifiers, robotvacuum cleaners,ovens, smart farming, etc. Services/fee structure - SmartHomeOne, Smart HomeUnlimited. etc. -Variesbased onnumber/type ofdevices -Othertelcos’subscribers areable to subscribe - Noseparatemonthlyplanbutdiscounts based ondevice counts -Diversifying sales channels/rental system for healthdevices -Othertelcos’subscribers areable to subscribeviaseparate line - 1by1plan,IoTunlimited plan,bundled plan, etc. -Configurable regarding type and number of devicesneeded -Othertelcos’subscribers areable to subscribeviaseparate line Platforms/ brands ThingPlug (oneM2M)/SmartHome IoTMakers/GiGAIoT IoT@home Technologies Both LTE-M (standardized)and LoRa(non- standardized) -Utilizes existing LTEnetwork -Facilitates real-time management and mobility - LoRaneedsseparatenetworkwith unlicensed band (920MHz) - Lowvolume,lowpower,price competitiveness LTE-M (standardized) -Utilizes existing LTEnetwork -Facilitates real-time management and mobility LTE-M (standardized) -Utilizes existing LTEnetwork -Facilitates real-time management and mobility Partnerships LH (home), Livart (home),HyundaiE&C (home),Commax(home), Gobiz (home),Cisco (platform),Hanyang Construction (home), Iran(solutions), Indonesiapublictelco (comprehensive IoT), etc. TaerimConstruction (home),Hanssem (home), SHCorp. (home), KISTEC (security), Gyeryong Group (construction),BBB(healthcare), SaemaulFitness (health),ChinaMobile (total IoT),etc. K Weather (home), Honeywell (home), DaewooE&C (home), AhouConstruction (home), ADD Information Tech. (solutions) ADTCaps (security), Paratech (security), Jibo (robots), etc. Business plan overview - World congress forIoT(LoRa) - Establishment of firstnationwideIoT network service -Funding arrangementtosupport and find IoTstart-ups - Establishment of smartstadium - Launching 30 services in ayear; 0.5mn connected devices - Targeting 4mnconnected devicesonIoST in 2018 -InvestingW150bninnarrowband IoT (standardizationinMar. 2017) - World’s firstnationwidenarrow-band IoT network - Aiming for 0.5mnhome IoTsubscribers ina year - Providing homeIoTproducts/servicesto largehousing complexes - Helping SMEs commercializeIoTproducts - ApplyingintelligentIoT services (remote control) Numberof connections - 1.89mn (broadcasting 0.58mn, wearables0.48mn) - M/S45% - 1.21mn (vehicles 0.40mn,tabletPC 0.30mn) - M/S28% - 1.13mn (broadcasting 0.51mn, other0.13mn) - M/S27% Source: Company data, mediareports, Mirae Asset Daewoo Research
  14. 14. IT/Telecom Service/Media 14 August 23, 2016 Mirae Asset Daewoo Research Figure 29. IoT ecosystem: Telcos can provide applications, platforms, and networks Source: SK Telecom, ITU, Mirae Asset Daewoo Research Figure 30. IoT market as viewed by telcos and manufacturers: Remote network connections vs. connections between neighboring devices Source: SK Telecom, Mirae Asset Daewoo Research Figure 31. Expecting LPWAN services to begin in earnest after establishment of nationwide IoT network in 1H Source: SK Telecom, Mirae Asset Daewoo Research
  15. 15. IT/Telecom Service/Media 15 August 23, 2016 Mirae Asset Daewoo Research Research 4. IoT devices 1) Healthcare In the healthcare segment, many IoT devices perform sleeping pattern analysis. For example, Ospicon’s sleeping mat checks a baby’s sleeping data and sends it to their parents’ smartphones. Sleepace, often cited as a successful case for the start-up accelerator IngDan, also offers sleeping pattern analysis devices, including Sleep Dot (attached to a pillow), Nox Sleep Light, and RestOn (mattress band). Of note, Sleepace attracted a US$7mn investment in 2015. Figure 32. Ospicon’s sleeping mat and pillow Figure 33. Sleepace’s Nox Sleep Light and RestOn Source: Mirae Asset Daewoo Research Source: Sleepace, Mirae Asset Daewoo Research 2) Robots The robots on display at IOTE were mainly linked to smartphone platforms. Gowild exhibited an intelligent robot that can control home appliances, including TVs and air conditioners, via speech-recognition technology. The robot went on sale for RMB1,900 (W320,000) in January. In addition, Leju Robot (recreational robots) and Lithops (robot vacuum cleaners) participated in the event. Figure 34. Gowild’s intelligent robot Figure 35. Recreational robots from Leju Robot Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
  16. 16. IT/Telecom Service/Media 16 August 23, 2016 Mirae Asset Daewoo Research 5. VR devices VR booths drew a lot of attention at IOTE. Many people waited in line for access to booths offering test runs on VR simulators. Shenzhen-based VR/AR device manufacturers, including Lenkewi, Blue Helmet, and JMDM, as well as Guangzhou-based VR and 4D movie simulator makers, including Longze, are worth keeping an eye on. Figure 36. China’s VR market Figure 37. Lenkewi exhibiting VR/AR devices Source: iiMediaResearch, Mosaic Partners, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research Figure 38. Longze’s VR simulator Figure 39. JMDM’s VR simulator Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research 0 75 150 225 300 0 15 30 45 60 2015 2016F 2017F 2018F 2019F 2020F (%)(RMBbn) ChinaVRmarket (L) YoYgrowth(R)
  17. 17. IT/Telecom Service/Media 17 August 23, 2016 Mirae Asset Daewoo Research Research III. China’s media content market 1. Outlook for Korean content/entertainment businesses in China 1) Tencent IR: Despite concerns, demand remains robust According to a Tencent IR officer, Korean actors and musicians could see shrinking opportunities in China due to political issues surrounding the deployment of the Terminal High Altitude Area Defense (THAAD) system in Korea. Indeed, at the government level, there are growing calls for stricter regulations on the commercial activities of Korean celebrities. However, no detailed measures have been drawn up yet. Our Tencent contact said that demand for Korean content is unlikely to decrease sharply despite a potential tightening of regulations, in light of the strong popularity of Korean dramas and artists. The Tencent official noted that Korea’s entertainment industry is highly developed. Tencent recently signed an agreement with a Korean video content producer and won government approval to air Korean TV programs via its platform. The company has made investments in YG Entertainment to participate in the digital distribution of Big Bang’s albums and the production of music entertainment programs. It also premiered CJ E&M’s online reality show New Journey to the West in China. Of note, Korean content is increasingly being used as a tool to boost monthly subscriptions to digital content services. Indeed, Baidu’s online video streaming subsidiary iQiyi sharply pushed up paid monthly subscriptions by making the first and second episodes of Descendants of the Sun available only to paid subscribers at first. (The series was broadcast simultaneously in Korea and China.) Tencent is also making efforts to boost the number of monthly subscribers to its digital music and video services. The company charges RMB15 per month for a music subscription and RMB20 for a video content subscription. Tencent’s music streaming service QQ Music is strengthening its dominance in the market via the exclusive digital distribution of music from YG Entertainment artists such as Bing Bang, G-Dragon, and Black Pink as well as through the recent acquisition of China’s leading digital music distributor China Music Corporation. In our view, any tightening of regulations on Korean entertainment firms and content will be aimed at protecting homegrown artists and content in addition to expressing anxiety over THAAD deployment. In addition, it is also worth noting that China is stepping up the screening of content produced in other countries besides Korea. Figure 40. Korean dramas distributed by Tencent Figure 41. Big Bang’s music is exclusively distributed by Tencent’s QQ Music in China Source: V.QQ.Com, Mirae Asset Daewoo Research Source: Y.QQ.Com, Mirae Asset Daewoo Research
  18. 18. IT/Telecom Service/Media 18 August 23, 2016 Mirae Asset Daewoo Research 2) Popularity of Korean artists and dramas remains strong During our visit, we confirmed that the popularity of Korean artists and content remains strong in China and Hong Kong. At the Huaqiangbei electronics market, we saw photos of the actor Song Joong-ki, a spokesperson for Chinese smartphone maker Vivo, everywhere. And Vivo’s billboard at the entrance to the duty-free area at the Shenzhen Bao’an International Airport, also featured the actor. In addition, Vivo TV commercials starring Song were aired on CCTV during Olympic broadcasts. Song Joong-ki has emerged as the most popular Korean celebrity in China following the release of Descendants of the Sun via iQiyi earlier this year. As of 2Q16, Vivo is the third-largest smartphone maker in China by market share. Oppo, a sister brand of Vivo under the umbrella of BBK Electronics, is the second-largest player. Backed by the strong market shares of Vivo and Oppo, BBK is leading the Chinese smartphone market. Notably, in 2009, the company succeeded in enhancing the awareness of the Oppo brand in Asia by hiring Super Junior, a Korean boy band, to endorse its products. And on the back of the popularity of Song Joong-ki, Vivo achieved 75% YoY growth in sales volume in 2Q in China, outpacing the growth of major peers, including Huawei, Xiaomi, and Apple. On the subway heading to Hong Kong, we observed a multitude of passengers using smartphones to watch Korean dramas, including SBS’s Doctors, which has yet to air in China. The drama is expected to be available on China’s online streaming sites (distributed by SBS Contents Hub) after the series concludes in Korea. The fact that Chinese viewers are willing to watch Korean programs through illegal means suggests that demand for Korean content is still strong. Figure 42. Outdoor ads in Huaqiangbei Figure 43. Song Joong-ki is a spokesperson for Vivo Figure 44. Life-sized cardboard cutouts featuring Song Joong-ki Figure 45. Large ad featuring Song Joong-ki in the airport Figure 46. Commercial during the Olympics (CCTV broadcast) Figure 47. Chinese commuter watching SBS drama Doctors on a smartphone Source: Mirae Asset Daewoo Research
  19. 19. IT/Telecom Service/Media 19 August 23, 2016 Mirae Asset Daewoo Research Research 2. Drivers for IMAX China shares We also visited an IMAX China theater in Shenzhen. The company has been displaying relatively robust share performance recently, while China’s largest multiplex chain, Wanda Cinema Line, and largest private producer, Huayi Brothers, have seen their shares plunge by around 40% from early-year levels. The theater’s tickets are priced at RMB60-160 (W10,000-27,000) on weekends, with a popcorn and drink combo for two people priced at RMB30 (W5,000) and a pair of 3D glasses at RMB10-30 (W1,700-5,000). The theater also charges RMB30 to play a VR game. If a family of three visits the theater on a weekend, the family will likely spend around RMB280 (W48,000) on a move ticket, concessions, and the VR game. After signing a deal with Shanghai Aurora Movie to install 10 IMAX theaters, the company also forged an agreement with Wanda Cinema Line to add 150 IMAX theaters in China over a six-year period, marking the largest deal in the company’s 50-year history. Wanda Cinema Line acquired Legendary Entertainment, the producer of Jurassic World, at the beginning of this year, and is now in talks with Viacom for the acquisition of a 49% stake in Paramount Pictures. Wanda’s moves could be viewed as signs of a shift in China’s film industry from quantitative to qualitative growth. The company is pursuing vertical integration of its value chain by acquiring major film studios capable of producing blockbuster films while building IMAX theaters to raise average ticket price. Figure 48. IMAX box office in Shenzhen Figure 49. IMAX China is the only Chinese film player performing well Source: Mirae Asset Daewoo Research Source: Thomson Reuters, Mirae Asset Daewoo Research Figure 50. IMAX film ticket prices: RMB60-160 Figure 51. Snacks (popcorn and beverages) for two people cost RMB30 Figure 52. 3D glasses costs RMB10-30 Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research 50 60 70 80 90 100 110 1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 (1/16=100) IMAXChina WandaCinemaLine Huayi Brothers
  20. 20. IT/Telecom Service/Media 20 August 23, 2016 Mirae Asset Daewoo Research Tencent Founded in Shenzhen in 1998; The largest internet firm in China Earnings surprise in 2Q on the back of rapid growth in mobile games Ongoing robust investment in digital content distribution (e.g., games, music, video) Overview Tencent is an internet company with a focus on messaging services and game publishing. As of now, it is the largest internet firm in China by market cap and 1H earnings. Tencent was founded by Ma Huateng and Zhang Zhidong in 1998, and its largest shareholder is the South African media company Naspers. In 2Q, 72% of its revenue came from value-added services (i.e., messaging services and games), 18% from online advertising, and 10% from other sources. Tencent is comparable to US-based Facebook in that its strengths lie in the messaging and social networking service segments. Among Korean firms, we believe Kakao is the closest analog to Tencent given that messaging services and games are its core strengths. Recent issues and risks Tencent’s 2Q earnings significantly beat the market consensus, with revenue and net profit growing 52% YoY and 47% YoY, respectively. Of note, mobile game revenue drove earnings by generating more than a quarter of overall earnings. 2Q16 mobile game revenue was equivalent to 50% of 2015 mobile game revenue. Recently, the company acquired Finnish game maker Supercell (developer of Clash of Clans), and China Music Corporation (China’s largest music distributor). Meanwhile, we see risks such as high volatility in the advertising segment (which is in the initial phase of growth) and losses at the online video business. Strong relationships with Korean content producers Tencent has built close relationships with Korean content producers, internet firms, and ad agencies. The company is third-largest shareholder of Netmarble Games (subsidiary of CJ E&M), and has published online games in China for Korea’s leading developers (e.g., NCSOFT, Nexon, and Smilegate). In addition, Tencent has forged an online video content distribution contract with CJ E&M, and invested in drama producer HB Entertainment via a joint venture with Huayi Brothers. It is a major shareholder of YG Entertainment and Kakao, and has forged online ad partnerships with PengTai (Chinese subsidiary of Cheil Worldwide) and Nasmedia. Major institutions’ ratings and target prices Rating Targetprice Buy/Hold/Sell 38/3/0 (HK$mn) ICBC International Research Buy 233 Credit Suisse Overweight 232 Goldman Sachs Buy/Neutral 214 Source: Bloomberg, Mirae Asset Daewoo Research Summary 2013 2014 2015 2016F 2017F Revenue 60,437 78,932 102,863 148,504 192,365 EBITDA 20,568 30,738 42,941 64,027 79,903 Margin (%) 34.0% 38.9% 41.7% 43.1% 41.5% Net Income 15,502 23,810 28,806 44,738 57,941 Margin (%) 25.6% 30.2% 28.0% 30.1% 30.1% Diluted EPS 1.7 2.5 3.1 4.8 6.2 TEV/EBITDA 35.1 29.1 31.0 30.8 25.6 P/E 48.4 38.1 42.8 44.5 36.3 P/B 13.6 11.0 10.8 10.8 10.6 Note: Basedon localcurrency (mn) Source: S&P CapitalIQ, Mirae Asset Daewoo Research China Internet Share price (/8/16/22) 204.8 Recommendation(Average) Buy Market cap (HK$mn) 1,938,701 Free float (%) 57.6 Dividend yield (%) 0.2 52-weekhigh 205.0 52-weeklow 124.0 Ownership (%) MIH TC Holdings 33.3 Ma Huateng 8.7 JP MorganChase 6.7 (%) 1M 6M 12M Absolute 5.7 40.3 36.3 Relative 3.4 30.1 57.4 50 70 90 110 130 150 170 190 15.8 15.10 15.12 16.2 16.4 16.6 SEHK:700 Hang Seng Index 0 10 20 30 40 50 60 0 1 2 3 4 5 6 7 2013 2014 2015 2016E 2017E Diluted EPS P / E (배) 21% 53% 20% 58% 28% 0% 10% 20% 30% 40% 50% 60% 70% 2013 2014 2015 2016E 2017E EPS Growth
  21. 21. IT/Telecom Service/Media 21 August 23, 2016 Mirae Asset Daewoo Research 1. Chinese digital content market 1) Growth supported by government policies and BAT competition Considering Tencent’s significant role in distributing digital content for Korean firms, an analysis of the Chinese digital content market appears worthwhile. First and foremost, it is important to note that China’s intellectual property protection policies have been effective for two years. And fierce competition among the BAT companies (Baidu, Alibaba, and Tencent) is helping a wide array of digital business models take root. With regard to the game market, the mobile segment is growing rapidly, more than offsetting the stagnation of the PC online segment and driving up the overall market. Of note, with Chinese mobile LTE proliferation exceeding 50%, the mobile game market has been gaining momentum. We see the music market as relatively healthy. While competition is easing, sales of monthly fixed-rate plans are growing stronger. Recently, Tencent acquired China Music Corporation, China’s largest music streaming service. Once the service is combined with Tencent’s QQ Music (the second-largest service) the merged entity will boast market share in excess of 50%. This level of relative market leadership is comparable to that of Loen Entertainment, which operates the Melon service in Korea. The monthly fixed-rate fee for QQ Music is roughly RMB15 (W2,500). The online video market is characterized by intense competition. While games and music streaming services enjoy a certain degree of loyalty, video viewers frequently switch from platform to platform. As such, the top three Chinese online giants are forced to pursue aggressive content buying and marketing activities, leading to losses at their video businesses. IQiyi, an online video platform owned by Baidu, won exclusive rights to the smash Korean drama Descendants of the Sun earlier this year. In addition, Tencent recently signed an exclusive Chinese broadcasting contract for NBA games. Notably, pre-roll ads are proving to be a major revenue source. In addition, fixed-rate monthly payment plans for VIP customers are being introduced gradually. Tencent charges RMB20 (W3,400) for its fixed-rate monthly plan. 2) Digital ad market: Mobile growth offers opportunities to Tencent In the Chinese digital ad market, social media and mobile advertising are displaying accelerating growth backed by increasing LTE penetration, offering opportunities to Tencent. In the PC era, the ad market was driven by search ads. In the mobile era, the rising popularity of social media and messaging services has been driving up advertisers’ interest in WeChat and Weixin, a cross-platform instant messaging service developed by Tencent. Of note, Tencent is expanding joint ad sales with Cheil Worldwide’s Chinese subsidiary PengTai as well as Nasmedia. Earlier this year, a college student died after clicking through a misleading healthcare-related search ad on Baidu, which has resulted in a tightening of government regulations on search ads. The tragedy has cast a negative light on Baidu, which should benefit Tencent. Table6.Tencentrecordedstrongest1H16earningsamongBATplayers (RMBmn) Baidu Alibaba Tencent Mainbusinessareas Search, cloud E-commerce,payments Messaging,games Founding date Jan.2000 Apr.1999 Dec. 1998 Headquarters Beijing Hangzhou Shenzhen 1H16 revenue 34,084 56,338 67,686 1H16netprofit 4,381 12,456 20,148 Note: Net profit is attributable to controllingandnon-controllinginterests Source: Company data, Mirae Asset Daewoo Research
  22. 22. IT/Telecom Service/Media 22 August 23, 2016 Mirae Asset Daewoo Research 2. Current businesses and outlook 1) Short-term growth driver: Mobile games We believe Tencent’s short-term growth driver is mobile games, as: 1) global game publishing channels, including Google Play, are blocked in China; and 2) the company will be able to leverage WeChat’s existing user base. To distribute quality mobile game content, Tencent will likely continue to strive to secure intellectual property from across the globe. A case in point is its recent acquisition of Supercell. In addition, the company is expected to deliver revenue growth via in-house development as well as licensing. 2) Medium/long-term growth drivers: Games, mobile ads, payments Smartphone games are expected to drive up Tencent’s growth over the medium to long term. Of note, the company is steadily pursuing genre diversification, moving beyond the casual space into player-vs.-player (PvP) role playing games (RPGs) and hardcore gaming. These efforts should help the company attract more players, and generate higher ARPU. The mobile ad business, which is still in its initial growth stage, holds huge potential. And leveraging its dominance over its BAT rivals in the messaging and social media segments, Tencent should benefit greatly from rising interest in social marketing campaigns. To mitigate user resistance, the company will increase ad inventory only gradually. The payments business also holds great potential. Due to the low penetration of credit cards in China, smartphone-based payment services are rapidly becoming popular. Tencent has aggressively expanded its foothold in the payments market via its mobile messenger app WeChat. Currently, WeChat Pay leads China’s O2O payment service market. In addition, Tencent’s investment in and cooperation with JD.com, the second largest e-commerce firm in China, will likely provide a boost to the business. Figure 53. Tencent is China’s topsocial media company (including QQ, WeChat, etc.) Figure 54. Tencent increasing its dominance through active partnerships and investments Source: Tencent, Mirae Asset Daewoo Research Source: Tencent, Mirae Asset Daewoo Research
  23. 23. IT/Telecom Service/Media 23 August 23, 2016 Mirae Asset Daewoo Research DJI Civilian drone maker established in Shenzhen in 2006 Controls 70% of the global civilian drone market; Valued at US$10bn in 2015 Launched Phantom 4; Expanding its business scope by launching a camera brand and developing action cameras Company overview DJI is a Chinese drone manufacturer founded by Frank Wang in 2006. The company got its start by developing flight control systems for radio-controlled helicopters. In 2013 the company ventured into the civilian drone market by launching its first Phantom model. It now controls 70% of the global civilian drone market and generated revenue of US$1bn in 2015 (vs. US$130mn in 2013). Last year, DJI received US$75mn in funding from Accel Partners. The company is currently valued at around US$10bn. China’s drone industry China’s drone industry has grown rapidly thanks in large part to the country’s status as the largest smartphone component supplier in the world. Indeed, drone makers, including Ehang, Xaircraft, Syma as well as DJI, have formed a cluster in Shenzhen, a major smartphone parts production base, which allows for easy sourcing of parts used in both handsets and drones. Issues DJI’s latest model, the Phantom 4, was unveiled early this year. Its battery boasts a capacity of 5,350mAh (vs. 4,480mAh for the previous model), but total flight time still falls short of 30 minutes. Sunwoda Electronics (300207 CH) is believed to be the firm’s battery supplier. The Phantom 4’s vision positioning system enables obstacle avoidance. And the model features wider-range obstacle detection compared to the previous model as well as a Sony 12MP 4K camera. DJI has recently branched out into aerial zoom cameras (Zenmuse Z3) and action cams (Osmo), launching flagship stores at home and abroad to improve brand value. Figure 55. DJI revenue trend Figure 56. DJI flagship store in Shenzhen Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research ChinaChinaChinaChina Drone ManufacturingDrone ManufacturingDrone ManufacturingDrone Manufacturing ((((UnlistedUnlistedUnlistedUnlisted)))) 4 26 130 500 1,000 0 200 400 600 800 1,000 1,200 2009 2010 2011 2012 2013 2014 2015 2016 Revenue (US$mn) 1/13 Phantom1 4/15 Phantom3 - Recorded NArevenueof US$5.6mn - EstablishedUSaffiliate 3/16 Phantom4
  24. 24. IT/Telecom Service/Media 24 August 23, 2016 Mirae Asset Daewoo Research Figure 57. Phantom 4 is the most popular model Figure 58. Phantom 4 packaging (including accessories) Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research Figure 59. Phantom 4 features higher-capacity battery Figure 60. Vision positioning sensor is located on the underside of the Phantom 4 Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research Figure 61. Zenmuse Z3 Figure 62. Osmo camera Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
  25. 25. IT/Telecom Service/Media 25 August 23, 2016 Mirae Asset Daewoo Research APPENDIX 1 Important Disclosures & Disclaimers Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. 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. Mirae Asset Daewoo Co., Ltd. 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