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2H19 Outlook
Telecom Services 5G-driven paradigm shift
Hakmoo Lee +822-3774-1785 [email protected]
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. Contents
[Summary] 5G to be commercialized in 2019 3
I. Short-term 5G strategy 4
II. Medium/long-term opportunities in the 5G era: OTT 10
III. Medium/long-term opportunities in the 5G era: Cloud gaming 16
IV. Top pick 20 SK Telecom [Summary] 5G to be commercialized in 2019
5G technology to stimulate innovation in various industries over the medium to long term
Source: Mirae Asset Daewoo Research
3| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research I. Short-term 5G strategy
Technological advances • 3G was expected to create newfound demand related to data transmission/consumption, but the technology did from 4G not find a strong foothold due to underdeveloped infrastructure. • Key to success for 4G ‰ High-speed data transmission based on orthogonal frequency division multiplexing (OFDM) • 5G is expected to increase the speed of existing applications in the near term; over the long term, the technology, along with 4G, will facilitate the proliferation of innovative equipment/devices such as autonomous cars.
Telecom generations and key applications
1G 2G 3G 4G 5G
Voice Voice Data Data Data
Key applications
Core FM CDMA CDMA OFDM OFDM technology
Network speed - 10x 100x 70x 20x improvement
Source: Press materials, Mirae Asset Daewoo Research
4| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research I. Short-term 5G strategy
5G service expansion to • Key differentiating factors for 5G: The high-speed transmission of large quantities of data, low latency, and hyper- progress in phases connectivity • In the early stages of 5G service deployment, the first point—the high-speed transmission of large quantities of data—will likely come into focus. • Once 5G is fully adopted, we are likely to see the expansion of markets for actual 5G applications, such as autonomous driving, IoT, and VR.
Comparison of 4G and 5G
Three major characteristics of 4G (IMT-Advanced) 5G (IMT-2020) 5G - High-speed transmission of 1Gbps Peak data rate 20Gbps large volumes of data - Low latency - Hyper-connectivity 10ms Latency 1ms
Maximum no. of device 0.1/m² 1/m² connections (density)
10Mbps User-experienced data rate 100-1,000Mbps
Spectrum efficiency 3x 4G
350km/h Mobility 500km/h
Energy efficiency 100 times 4G level
0.1Mbps/m² Traffic capacity 10Mbps/m²
Note: The International Telecommunication Union is a specialized agency of the UN that is responsible for issues that concern information and communication technologies; WP5D under the ITU-R group addresses all relevant technical issues related to the introduction and deployment of mobile networks. Source: GSMA, Mirae Asset Daewoo Research 5| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research I. Short-term 5G strategy
Data usage to increase • 5G technology is expected to be more widely deployed than 3G. steadily • While the major application of 2G was voice telephony, 4G’s key application is data. • While usage time for voice services has limited upside, data consumption has plenty of room to run.
Mobile data usage trend Data usage per user
(TB) (MB) 450,000 4G 9,000 4G smartphone Total 3G smartphone 8,000 Overall avg. 7,000
300,000 6,000
5,000
4,000
150,000 3,000
2,000
1,000
0 0 1/15 7/15 1/16 7/16 1/17 7/17 1/18 7/18 1/19 1/15 7/15 1/16 7/16 1/17 7/17 1/18 7/18 1/19
Source: MSIT, Mirae Asset Daewoo Research Source: MSIT, Mirae Asset Daewoo Research
6| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research I. Short-term 5G strategy
Telcos need to develop • 3G era: Although plans were designed to lower base/voice call rates and increase data usage, telcos’ earnings plans that fit consumer deteriorated due to subscribers’ limited data usage. • The failure of 3G services was mainly because much-anticipated videotelephony services failed to resonate with needs consumers. • 4G era: Telco earnings increased, backed by subscribers’ strong shift toward 4G plans.
Comparison of 3G and 4G plans
Shift 2G ‰ 3G 3G ‰ 4G
Monthly fixed-rate W12,000 W12,000 W55,000 W62,000 scheme
- Voice rate per 10 - Free voice calls: - Unlimited data seconds: W18 - Free data: 3-4GB Five minutes plans Details - Video call rate - Free voice calls: - Voice rate per 10 - Free voice calls: per 10 seconds: 350 minutes seconds: W20 300 minutes W36
Note: Details may vary by provider. Source: Mirae Asset Daewoo Research
7| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research I. Short-term 5G strategy
Telcos’ recent 5G data • The 5G data plans unveiled by the three major telcos will ultimately encourage the use of multiple devices (vs. plans confirm their focus smartphone only), which should drive ARPU higher. • Accordingly, the success of 5G will hinge on telcos’ ability to boost data usage and ARPU through device on boosting content expansion. consumption • In the short to medium term, increased consumption of media content on mobile networks and the introduction of cloud games should be key factors, in our view.
5G data plans
Telcos SK Telecom KT LG Uplus
Plan name Platinum Prime Standard Slim Premium Special Basic Slim Premium Special Standard Light
Monthly fixedrate (W) 125,000 95,000 75,000 55,000 130,000 100,000 80,000 55,000 95,000 85,000 75,000 55,000
9GB + 250GB + 200GB + 150GB + 150GB + 8GB + 8GB + (max 300GB + 200GB + (max speed (max speed (max speed Data (max speed of (max speed of Unlimited (max speed of speed of (throttling) (throttling) of 10Mbps) of 10Mpbs) of 5Mpbs) 5Mbps) 1Mbps) 1Mbps) 1Mpbs)
Unlimited calls to fixed-line/mobile users Unlimited calls to fixed-line/mobile users Unlimited calls to fixed-line/mobile users Voice (+ 300 minutes of video calling) (+ 300 minutes of video calling) (+ 300 minutes of video calling)
Pooq Pooq U+ Mobile TV Flo Content Flo 5GX Game Pack 5GX Game Pack - U+ Mobile TV Genie 5GX Game 5GX Game Pack Music Pack
Extras Two free One free Two free Multiple device device - - One free device connection - device - devices connections connection connections
Unlimited Extra Free VR Free VR 50% discount Unlimited data roaming Extra 50GB Extra 10GB Other - data roaming - 100GB - headset headset on VR headset (100kbps ) sharing sharing (3 Source: SK Telecom, KT, LG Uplus, Mirae Asset Daewoo Research 8| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research I. Short-term 5G strategy High-quality (HD) • Smartphones and tablet PCs typically have 5-12” displays supporting viewing distances ranging from 40cm to content growth to drive 60cm. • At these distances, most mobile users should be able to see the benefits of full/quad HD; in our view, mobile data data usage growth usage has the potential to increase more than fourfold once currently available video content advances beyond 720p. • Proliferation of OTTs should help boost content consumption on mobile networks, while high-definition content offerings should drive up data usage. Optimal viewing distances to see benefits of high-resolution displays Viewing distance (cm) 160 1920 x 1080p (full HD) 2560 x 1440p (quad HD) 3840 x 2160p (4K UHD) 7680 x 4320p (8K UHD) 120 80 40 Screen size (inches) 0 5 10 15 20 25 30 Source: Starico, Mirae Asset Daewoo Research 9| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research II. Medium/long-term opportunities in the 5G era: OTT Shift in media content • In Korea, OTT services have not yet become dominant; an extremely high proportion of content is still viewed via distribution channels: conventional platforms/channels, such as cable TV, IPTV, and satellite TV. • The percentage of content watched via mobile platforms has increased significantly, but small-sized mobile IPTV ‰‰‰ OTT screens still pose limitations. • Increasing utilization of mobile network connections by users of larger-screen tablets/laptops should further drive up OTT demand going forward. • In addition, content offerings dedicated to mobile OTT could also drive up mobile content consumption. Contribution of OTT to global pay-TV revenue Rankings of domestic OTT players (in terms of MAU) (%) ('000) 10 OTT contribution to pay TV revenue 30,000 MAU 20,000 5 10,000 0 0 12 13 14 15 16 17 Source: KISDI, Mirae Asset Daewoo Research Source: Nielsen KoreanClick, Mirae Asset Daewoo Research 10| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research II. Medium/long-term opportunities in the 5G era: OTT Content providers to play • Following the world’s first commercial movie screening in 1895, specialized storefront motion picture theaters a key role in the film popped up around the world. • The rapid growth of the film market based on these theaters gave rise to the establishment of major production market firms (studios). • Against this background, 26 first-run theater chains attempted to join forces to gain pricing power over studios. • In response, film studios acquired major theaters in large cities on the back of their strong capital power. While theaters operated by studios represented just 17% of all movie theaters in number, they accounted for the lion’s share (70%) of total box office revenue. Proliferation of Content makers emerge as First-ever motion picture Rise of major film studios nickelodeon theaters dominant platform players 1895 1905 1910s-1920s 1930s-1940s Source: Press materials, Mirae Asset Daewoo Research 11| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research II. Medium/long-term opportunities in the 5G era: OTT Broadcasters dominated • With the introduction of TVs, broadcasters began to produce TV content leveraging the power of their platforms platforms in the TV era (established through radio and capital power). • While film studios also provided content to TV broadcasters in an effort to diversify their business portfolios, most content was produced by broadcasters.. • The development of the TV ad market further strengthened broadcasters’ capital power. 1920s 1930s-1940s 1940s-1950s Emergence of radio broadcasters Broadcasters’ TV content production Major film studios’ TV content production Source: Mirae Asset Daewoo Research 12| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research II. Medium/long-term opportunities in the 5G era: OTT OTT players operating • Despite being a latecomer, Netflix (NFLX US/CP: US$359.31) successfully entered the DVD rental market based on robust platforms have a unique online ordering/mailing system.. • In 2007, the company rolled out an OTT platform, improving convenience and access to content. begun to produce • Amid Netflix’s rapid growth, content providers sharply raised prices. ‰ The value of Netflix’s content acquisition content in-house deals increased tenfold from US$180mn in 2010 to US$1.98bn in 2012. • The company began to produce content in-house in 2011 to reduce costs. 1997 2004-10 2011 Founding of Netflix Growth Increasing content production Genre 2013 2014 2015 2016 2017 Drama 15 8 32 53 66 Animation 4 7 15 20 20 Foreignlanguage 0 0 1 3 6 Documentary 1 1 3 11 15 Comedy 4 8 17 30 75 Movie 1 7 9 48 80 Total 25 31 77 165 262 Source: Netflix, Mirae Asset Daewoo Research 13| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research II. Medium/long-term opportunities in the 5G era: OTT Accelerating • In the media market, dominant platform players tend to enjoy strong bargaining power. consolidation of content • In our view, Netflix has yet to become a truly dominant player in the OTT platform market. and platform providers • Due to a relatively weak first-mover advantage in the OTT market, traditional content producers could successfully make forays into the market. • Content producers could leverage their content competitiveness to strengthen their platforms. 2010-15 Present Increasing consolidation of content Diversification of content infrastructure producers and platforms and distribution platforms • Comcast acquired a 51% stake in NBCUniversal in 2011 • DreamWorks acquired AwesomenessTV in May 2013 • AT&T acquired DirecTV in May 2014 • Comcast acquired Time Warner Cable in March 2014 • Disney acquired Maker Studios in March 2014 Source: Netflix, Mirae Asset Daewoo Research 14| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research II. Medium/long-term opportunities in the 5G era: OTT Korean OTT players need • In Korea, domestic OTT services need to focus on content distribution in light of the popularity of domestic to focus more on content content. • Homegrown OTT players will likely adopt the business model of system operators (SOs), achieving breakeven via distribution content distribution and making profits on transmission commissions from home shopping channels. • The growth of domestic OTT services should hinge on the extend of their market influence. Domestic OTT M/S breakdown Oksusu subscriber count ('000) YouTube Oksusu NAVER TV U+ Video Portal 10,000 No. of Oksusu subscribers Olleh TV Mobile AfreecaTV Pooq TVING 0.021 0.019 0.035 0.045 7,500 0.058 5,000 0.074 0.661 0.087 2,500 0 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 Source: Nielsen KoreanClick, Mirae Asset Daewoo Research Source: SK Telecom, Mirae Asset Daewoo Research 15| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research III. Medium/long-term opportunities in the 5G era: Cloud gaming Cloud gaming to boost • If the mobile-based cloud gaming market flourishes, data usage will increase sharply. mobile data usage • Developers are committed to boosting the cloud gaming market. • We believe that the expansion of cloud games will boost the overall gaming market, given that cloud games are less difficult to develop and less reliant on device performance, compared with conventional games. Cloud gaming overview Source: Newzoo, Mirae Asset Daewoo Research 16| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research III. Medium/long-term opportunities in the 5G era: Cloud gaming Cloud gaming platforms Cloud gaming supply chain currently available Source: Newzoo, Mirae Asset Daewoo Research Source: Company materials, Mirae Asset Daewoo Research 17| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research III. Medium/long-term opportunities in the 5G era: Cloud gaming Cloud gaming services set to be launched Verizon Gaming Apple Arcade Source: Verizon, Mirae Asset Daewoo Research Source: Apple, Mirae Asset Daewoo Research Google Stadia Microsoft Project xCloud Source: Google, Mirae Asset Daewoo Research Source: Microsoft, Mirae Asset Daewoo Research 18| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research III. Medium/long-term opportunities in the 5G era: Cloud gaming Entries of Microsoft and • Sony (6758 JP/CP: JPY5,933) and Nvidia (NVDA US/CP: US$160.19) have already launched cloud gaming. Google to be positive for • Apple (AAPL US/CP: US$190.08), Microsoft (MSFT US/CP: US$128.93), and Google aim to release cloud gaming services by the end of the year. market growth • Given the importance of efficient operation of cloud/edge servers, the entries of Microsoft and Google, dominant cloud service providers, into the cloud gaming market will likely be positive for market growth. Global status of cloud gaming services/platforms Available Company Name Release date Supporting devices Notes games About 300,000 in -The App Store contains about 300,000 free and paid games. Apple Apple Arcade 3Q19F iPhone, iPad, Mac, Apple TV App Store -About 100 exclusive games will be added immediately after launch. All devices with internet access -Stadia offers 4K resolution, 60fps, and high dynamic range (HDR) sound. In the Google Stadia 2019F TBD and Chrome near future, Stadia will offer 8K resolution 120fps. -Microsoft plans to offer a gaming environment that users can access PC, consoles, smartphones, Microsoft Project xCloud 2019F Over 3,000 anywhere, anytime; The company also plans to provide technical support to tablets allow users to play without a console. Amazon plans to allow global game users to access tens of thousands of Amazon Undecided 2020F All devices TBD games through Amazon Web Services (AWS). Beta services Shield TV, Shield Portable PC, Nvidia GeForceNow Over 500 -120fps video quality with GTX graphic card and 4K HDR video on Shield TV (2015, 2017) MAC OS, Windows OS, Android Sony PlayStation Now 2014 PS4, PS3, PS Vita, PC Over 700 -Currently operating in 12 countries with 700 game titles. TBD (undergoing -Verizon currently offers PC games through Shield TV and tablets; currently in Verizon Verizon Gaming Shield, Android OS 135 testing) closed beta testing for Windows and Mac PCs -Recently announced that more than 1,000 employees are working on the EA Project Atlas TBD EA server TBD project -Recently announced that Instant Play will be launched in partnership with TBD (undergoing Tencent Instant Play PC, Android devices, TV TBD Intel; promised to offer 60fps and a latency of less than 40ms with 1080p testing) resolution. Source: Press releases, Mirae Asset Daewoo Research 19| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research SK Telecom (017670 KS) Likely to benefit from a new paradigm Investment points (Maintain) Buy • When a new network technology is first rolled out, the telco with the largest subscriber base is better positioned to benefit thanks to its higher efficiency. Target Price (12M, W) 335,000 • SK Telecom can build synergies with subsidiaries in OTT, commerce, and IoT services. As such, we believe the telco is poised to strengthen its position under the new 5G paradigm. Share Price (5/3/19, W) 256,000 • For cloud gaming, smooth transmission via robust cloud/edge servers is critical. Against this backdrop, we believe that SK Telecom, which has the largest subscriber base in cloud services, is positioned to gain the upper hand in negotiations with cloud gaming companies. Expected Return 31% Risks OP (19F, Wbn) 1,271 • Intense competition in 5G network services Consensus OP (19F, Wbn) 1,312 • Delays to 5G network stabilization EPS Growth (19F, %) -34.9 Additional government regulations Market EPS Growth (19F, %) -18.2 • P/E (19F, x) 10.2 Market P/E (19F, x) 12.2 KOSPI 2,196.32 Market Cap (Wbn) 20,671 140 FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F SK Telecom Shares Outstanding (mn) 81 130 KOSPI Revenue (Wbn) 17,092 17,520 16,874 17,463 17,935 18,283 Free Float (%) 62.2 OP (Wbn) 1,536 1,537 1,202 1,271 1,395 1,479 120 Foreign Ownership (%) 40.4 OP margin (%) 9.0 8.8 7.1 7.3 7.8 8.1 110 Beta (12M) 0.10 NP (Wbn) 1,676 2,600 3,128 2,035 3,114 3,229 52-Week Low 220,500 100 EPS (W) 20,756 32,198 38,738 25,202 38,572 39,993 52-Week High ROE (%) 10.7 15.4 15.5 8.8 12.5 11.8 289,500 90 (%) 1M 6M 12M P/E (x) 10.8 8.3 7.0 10.2 6.6 6.4 80 Absolute 5.3 -0.6 10.6 P/B (x) 1.0 1.1 0.9 0.8 0.7 0.7 Relative 5.7 -5.1 25.2 70 Div.Yield (%) 4.5 3.7 3.7 3.9 3.9 3.9 18.4 18.8 18.12 19.4 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: SK Telecom, Mirae Asset Daewoo Research estimates 20| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research Coverage overview Target Price Current Price Company Ticker Rating (12M, W) (5/3/19, W) SK Telecom 017670 KS Buy 335,000 256,000 KT 030200 KS Buy 36,500 27,650 LG Uplus 032640 KS Buy 20,200 15,100 KT Skylife 053210 KS Buy 15,500 11,850 CJ Hello 037560 KS Buy 12,000 8,890 Source: Mirae Asset Daewoo Research 21| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research APPENDIX 1 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) 10/27/2017 Buy 330,000 10/17/2018 Buy 335,000 07/09/2017 Buy 310,000 07/11/2018 Buy 293,000 01/26/2017 Buy 290,000 05/05/2018 Buy 280,000 04/22/2018 Buy 290,000 (W) SK Telecom 400,000 300,000 200,000 100,000 0 May 17 May 18 May 19 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 & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 83.52% 8.24% 8.24% 0.00% Investment Banking Services 82.61% 4.35% 13.04% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2019) 22| 2H19 Outlook [Telecom Services] Mirae Asset Daewoo Research APPENDIX 1 Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of SK Telecom as an underlying asset; other than this, Mirae Asset Daewoo has no other special interests in the covered companies. 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 or regulations thereof. 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