KT Skylife (053210 KS ) Subscribers and margins improve

Media 2Q16 review: Margins improve on higher platform revenue KT Skylife’s 2Q16 earnings came in above our expectations and the consensus. This Results Comment was primarily attributable to increased platform revenue (+21% QoQ, +27% YoY). July 27, 2016 Platform is a high-margin business generating additional revenue based on the number of subscribers. Platform revenue includes ad revenue and commission s

paid by home shopping and T-commerce channels. In 2Q16, platform revenue (Maintain) Trading Buy increased, boosted by higher commissions paid by T-commerce channels after negotiations, as well as an upturn in ad revenue. Target Price (12M, W) 21,000 subscriber additions stood at 27,000, slightly down from 30,000 in 2Q15 , but sharply up from 1,000 in 1Q16. We believe the QoQ increase was due to robust sales Share Price (07/26/16, W) 18,000 of KT Skylife’s standalone UHD offerings, and the mo ving season. ARPU continued to decline QoQ and YoY, but the rate of decline has been slowing this year. Expected Return 17%

Continued net subscriber additions and platform revenue to boost shares OP (16F, Wbn) 93 KT Skylife shares have rebounded on 1) increased subscriber additions in 2Q16, Consensus OP (16F, Wbn) 87 and 2) the collapse of SK Telecom’s (SKT) acquisition of CJ HelloVision (KT Skylife’s competitor) in July. We believe continued net subscriber additions and platform EPS Growth (16F, %) -5.2 revenue growth will act as positive catalysts for the stock. Market EPS Growth (16F, %) 18.4 P/E (16F, x) 12.2 Subscriber acquisition: We believe subscriber growth in the domestic pay-TV Market P/E (16F, x) 10.7 market is the best investment point for KT Skylife. 3Q is typically a weaker season KOSPI 2,027.34 than 2Q due to vacations, the rainy season, and the Chuseok holidays. However, we are optimistic about continued net subscriber additions, given that 1) KT Skylife has Market Cap (Wbn) 861 attempted to prevent Olleh TV Skylife (OTS; a bundled package from KT IPTV and Shares Outstanding (mn) 48 KT Skylife satellite) cancellations by charging replacement commissions for Free Float (%) 49.4 switching from OTS to Olleh TV (OTV; standalone from KT IPTV), and 2) 40% of new Foreign Ownership (%) 16.9 subscribers are choosing UHD. Beta (12M) 1.04 52-Week Low 14,100 Platform revenue: In 3Q16, KT Skylife has been engaged in additional negotiations 52-Week High 23,900 with T-commerce and home shopping channels over commissions. Once (%) 1M 6M 12M negotiations prove successful, this should contribute to profits. Ad revenue is likely Absolute 13.2 20.8 -20.5 to improve, as the number of large advertisers has been rising thanks to the Relative 7.5 11.5 -19.8 Advanced Real Time Advertising (ARA) solution. We expect this year’s platform revenue to jump about 20% YoY, with its contribution to overall revenue increasing

110 KT Skylife KOSPI 4%p YoY to about 30%. 100 90 Raise TP to W21,000; Reiterate Trading Buy 80 70 We raise our target price on KT Skylife to W21,000 (from W18,000), as we revised 60 up our 2016F EPS and DPS in light of rising high-margin platform revenue. Still, w e 50 keep our Trading Buy rating on the stock, considering weak growth of service 7.15 11.15 3.16 7.16 ARPU, and the low average multiple of the maturing pay-TV industry.

Mirae Asset Daewoo Co., Ltd. FY (Dec.) 12/13 12/14 12/15 12/16F 12/17F 12/18F

[Telecom Service / Media ] Revenue (Wbn) 600 623 626 646 655 667 OP (Wbn) 102 78 98 93 95 99 Jee -hyun Moon OP margin (%) 17.0 12.5 15.7 14.4 14.5 14.8 +822 -768 -3615 [email protected] NP (Wbn) 73 56 74 71 73 75 EPS (W) 1,526 1,162 1,557 1,475 1,519 1,578 Nu -ri Ha ROE (%) 19.3 13.2 16.0 13.6 12.7 12.0 +822 -768 -4130 P/E (x) 19.4 15.8 11.1 12.2 11.9 11.4 [email protected] P/B (x) 3.4 2.0 1.7 1.6 1.4 1.3

Notes: All figures are based on non-consolidated K-IFRS Source: Company data, Mirae Asset Daewoo Research estimates

July 27, 2016 KT Skylife

Earnings and forecasts

Table 1. 2Q16P review (Wbn, %) 2Q16P Growth 2Q15 1Q16 Mirae Asset Consensus Preliminary YoY QoQ Daewoo Revenue 154 150 161 156 156 4.9 7.6 Operating profit 31 23 29 20 23 -6.4 25.8 OP margin (%) 20.1 15.4 18.0 12.6 14.6 Net profit 26 18 22 15 18 -14.1 22.4 Notes: All figures are based on non-consolidated K-IFRS, Source: Company data, FnGuide, Mirae Asset Daewoo Research estimates

Table 2. Quarterly and annual earnings (Wbn, %) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16P 3Q16F 4Q16F 2014 2015 2016F Revenue 147 154 161 164 150 161 165 170 623 626 646 Service 90 89 89 88 87 86 86 88 378 356 346 Platform 34 39 43 46 41 50 51 53 130 162 195 Cost-related 11 11 13 12 11 11 11 10 53 47 42 Other 13 14 17 18 12 15 17 18 62 62 62 Operating profit 30 31 14 23 23 29 17 24 78 98 93 OP margin (%) 20.6 20.1 8.5 13.8 15.4 18.0 10.6 14.0 12.5 15.6 14.4 Net profit 22 26 9 18 18 22 13 18 56 74 71 Net margin (%) 14.7 16.7 5.6 11.0 12.0 13.7 8.0 10.5 8.9 11.9 11.0 QoQ growth Revenue -5.6 4.3 4.5 2.1 -8.7 7.6 2.1 2.9 Service -1.9 -0.3 -0.8 -0.9 -1.6 -0.7 0.1 2.2 Platform -1.8 15.2 8.5 9.4 -11.7 21.5 3.0 3.5 Cost-related -14.4 4.4 17.4 -5.0 -14.1 2.6 0.0 -6.0 Operating profit 47.7 1.8 -56.0 66.0 1.9 25.8 -39.8 36.3 Net profit 65.9 18.5 -65.0 101.6 -0.6 22.4 -40.3 35.1 YoY growth Revenue -2.5 -0.6 0.2 5.1 1.7 4.9 2.5 3.3 3.7 0.6 3.1 Service -7.1 -6.3 -5.4 -3.8 -3.6 -4.0 -3.1 -0.1 -3.4 -5.7 -2.7 Platform 14.4 26.3 23.1 34.4 20.7 27.3 20.8 14.3 20.8 24.8 20.5 Cost-related -22.0 -18.6 -4.5 -0.4 0.0 -1.7 -16.3 -17.2 -1.3 -12.0 -9.4 Operating profit -5.6 80.1 77.0 9.8 -24.3 -6.4 28.1 5.2 -23.6 25.5 -4.6 Net profit -9.2 78.2 118.3 38.7 -16.9 -14.1 46.6 -1.7 -23.8 34.1 -4.6 Key variables and

assumptions Cumulative subscribers 4,262 4,292 4,312 4,310 4,311 4,338 4,363 4,392 4,261 4,310 4,392 (‘000 persons) % of OTS subscribers 54 54 53 51 50 49 48 47 55 51 47 Notes: All figures are based on non-consolidated K-IFRS; 1Q15-2Q15 figures reflect one-off reversal of lawsuit-related commission expenses; 3Q16 forecast assumes completion of home shopping commission negotiations (for platform revenue) and expenses related to broadcasting development fund Source: Company data, Mirae Asset Daewoo Research estimates

Table 3. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 16F 17F 16F 17F 16F 17F - Revised up platform revenue and subscribers estimates, Revenue 636 644 646 655 1.5 1.7 and revised down service ARPU estimates - Reflect s upward revision to platform revenue ; Operating profit 78 81 93 95 19.6 17.8 revised down program usage commission estimates Net profit 60 62 71 73 18.5 17.3 EPS 1,250 1,288 1,475 1,519 18.0 17.9 OP margin 12.3 12.6 14.4 14.5 Net margin 9.4 9.6 11.0 11.1 Notes: All figures are based on non-consolidated K-IFRS Source: Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 2 July 27, 2016 KT Skylife

Key charts

Figure 1. Increase in platform revenue contributed to increase in total revenue and enhancement of profitability

(Wbn) (Wbn) 60 Total revenue () Platform revenue (L) 180 OP - announced (L) OP - adjusted (L) 50 160 40

30 140

20 120 10

0 100 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

Notes: Adjusted OP is after excluding one-off reversal of lawsuit-related commission expenses Source: Company data, Mirae Asset Daewoo Research

Figure 2. Increase in monthly net subscriber additions

(persons) r 20,000 Net subscriber additions 14,084 13,824 15,000 12,242

10,000

5,000

0

-5,000

-10,000

-15,000 1/14 4/14 7/14 10/14 1/15 4/15 7/15 10/15 1/16 4/16

Source: Company data, Mirae Asset Daewoo Research

Figure 3. Main pay -TV companies ’ 12 -month forward P /E: Higher premium on KT Skylife compared to domestic and Japanese peers

(x) * 30 KT Skylife CJ HelloVision Hyundai HCN Perfect JSAT (JP) 25 (US)

20

15

10

5 1/16 2/16 3/16 4/16 5/16 6/16 7/16

Source: Thomson Reuters, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 July 27, 2016 KT Skylife

KT Skylife (053210 KS/Trading Buy/TP: W21,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/15 12/16F 12/17F 12/18F (Wbn) 12/15 12/16F 12/17F 12/18F Revenue 626 646 655 667 Current Assets 271 265 301 350 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 139 131 159 198 Gross Profit 626 646 655 667 AR & Other Receivables 88 91 93 94 SG&A Expenses 529 553 559 568 Inventories 3 3 3 3 Operating Profit (Adj) 98 93 95 99 Other Current Assets 41 40 46 55 Operating Profit 98 93 95 99 Non-Current Assets 427 491 511 520 Non-Operating Profit 1 0 1 1 Investments in Associates 25 26 26 27 Net Financial Income 2 2 2 3 Property, Plant and Equipment 298 359 378 384 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 39 40 41 42 Pretax Profit 99 93 96 100 Total Assets 698 756 811 869 Income Tax 24 23 24 25 Current Liabilities 133 137 139 142 Profit from Continuing Operations 74 71 73 75 AP & Other Payables 0 0 0 0 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 74 71 73 75 Other Current Liabilities 133 137 139 142 Controlling Interests 74 71 73 75 Non-Current Liabilities 72 72 72 73 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 60 60 60 0 Total Comprehensive Profit 75 69 73 75 Other Non-Current Liabilities 12 12 12 73 Controlling Interests 75 69 73 75 Total Liabilities 204 210 212 214 Non-Controlling Interests 0 0 0 0 Controlling Interests 494 546 600 655 EBITDA 175 174 179 184 Capital Stock 120 120 120 120 FCF (Free Cash ) 59 -6 56 70 Capital Surplus 161 161 161 161 EBITDA Margin (%) 28.0 26.9 27.3 27.6 Retained Earnings 219 272 325 380 Operating Profit Margin (%) 15.7 14.4 14.5 14.8 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 11.8 11.0 11.1 11.2 Stockholders' Equity 494 546 600 655

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/15 12/16F 12/17F 12/18F 12/15 12/16F 12/17F 12/18F Cash Flows from Op Activities 140 135 156 160 P/E (x) 11.1 12.2 11.9 11.4 Net Profit 74 71 73 75 P/CF (x) 4.5 4.9 4.8 4.7 Non-Cash Income and Expense 111 104 105 107 P/B (x) 1.7 1.6 1.4 1.3 Depreciation 74 79 81 83 EV/EBITDA (x) 4.1 4.4 4.1 3.7 Amortization 3 2 2 2 EPS (W) 1,557 1,475 1,519 1,578 Others 34 23 22 22 CFPS (W) 3,880 3,644 3,714 3,808 Chg in Working Capital -39 -16 0 0 BPS (W) 10,482 11,581 12,702 13,853 Chg in AR & Other Receivables -7 3 -1 -2 DPS (W) 350 400 430 460 Chg in Inventories 1 0 0 0 Payout ratio (%) 22.4 27.0 28.2 29.0 Chg in AP & Other Payables -20 -23 0 0 Dividend Yield (%) 2.0 2.2 2.4 2.6 Income Tax Paid -8 -25 -24 -25 Revenue Growth (%) 0.5 3.2 1.4 1.8 Cash Flows from Inv Activities -72 -140 -109 -100 EBITDA Growth (%) 17.4 -0.6 2.9 2.8 Chg in PP&E -81 -141 -100 -90 Operating Profit Growth (%) 25.6 -5.1 2.2 4.2 Chg in Intangible Assets -8 -3 -3 -3 EPS Growth (%) 34.0 -5.3 3.0 3.9 Chg in Financial Assets 15 1 -6 -7 Accounts Receivable Turnover (x) 7.1 7.2 7.1 7.1 Others 2 3 0 0 Inventory Turnover (x) 217.5 248.0 245.4 246.1 Cash Flows from Fin Activities -37 -17 -19 -20 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities -20 0 0 0 ROA (%) 10.9 9.7 9.3 9.0 Chg in Equity 0 0 0 0 ROE (%) 16.0 13.6 12.7 12.0 Dividends Paid -17 -17 -19 -20 ROIC (%) 22.8 19.6 18.0 18.1 Others 0 0 0 0 Liability to Equity Ratio (%) 41.4 38.4 35.3 32.7 Increase (Decrease) in Cash 31 -8 27 39 Current Ratio (%) 204.2 193.2 216.1 246.6 Beginning Balance 108 139 131 159 Net Debt to Equity Ratio (%) -22.1 -18.2 -22.1 -27.3 Ending Balance 139 131 159 198 Interest Coverage Ratio (x) 46.7 58.4 59.6 62.0 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 4 July 27, 2016 KT Skylife

APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) KT Skylife KT Skylife(053210) 07/26/2016 Trading Buy 21,000 40,000 04/26/2016 Trading Buy 18,000 01/26/2016 Trading Buy 17,000 30,000 10/27/2015 Buy 25,000 07/28/2015 Buy 29,000 20,000 04/24/2015 Buy 24,000 10,000 01/28/2015 Trading Buy 20,000

10/30/2014 Trading Buy 23,000 0 10/05/2014 Trading Buy 25,000 Jul 14 Jul 15 Jul 16 07/28/2014 Buy 29,000 07/01/2014 Buy 30,000

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 Mirae Asset Daewoo Co., Ltd., 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.

Equity Ratings Distribution BuyBuyBuy Trading BuyBuyBuy HoldHoldHold SellSellSell 70.73% 17.56% 11.71% 0.00% * Based on recommendations in the last 12-months (as of June 30, 2016)

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. (“Mirae Asset Daewoo”) 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 Mirae Asset Daewoo, 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 Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report is published by Mirae Asset 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 Mirae Asset 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 . 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. Mirae Asset 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 Mirae Asset 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

Mirae Asset Daewoo Research 5 July 27, 2016 KT Skylife

or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo. Mirae Asset 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. Mirae Asset 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 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 not received this report under any express or implied understanding that they will direct commission income to Mirae Asset 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 Mirae Asset 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 Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

Mirae Asset Daewoo International Network

Mirae Asset Daewoo Co., Ltd. () Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 31st Floor

Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong, China 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 Representative Office 41st Floor, Tower 42 Six Battery Road #11-01 7th Floor, Yusen Building 25 Old Broad St. Singapore, 049909 2-3-2 Marunouchi, Chiyoda-ku London EC2N 1HQ Tokyo 100-0005 United Kingdom 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 Room 38T31, 38F SWFC Suite 2103, Saigon Trade Center B-12 Jianguomenwai Avenue 100 Century Avenue 37 Ton Duc Thang St,

Chaoyang District, Beijing 100022 Pudong New Area, Shanghai 200120 Dist. 1, Ho Chi Minh City, China China 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 #406, Blue Sky Tower, Peace Avenue 17 Equity Tower Building Lt.50 B-12 Jianguomenwai Avenue, 1 Khoroo, Sukhbaatar District Sudirman Central Business District Jl.

Chaoyang District, Beijing 100022 Ulaanbaatar 14240 Jendral Sudirman Kav. 52 -53, Jakarta Selatan China Mongolia Indonesia 12190 Tel: 86-10-6567-9699 Tel: 976-7011-0807 Tel: 62-21-515-1140

Mirae Asset Daewoo Research 6