Company December 4, 2012

Media KT Skylife (053210 KS) Daewoo Securities Co., Ltd. Jee-hyun Moon Rosy outlook for subscriber expansion and profitability +822-768-3615 [email protected] What’s new: Better-than-expected November subscribers; KT MediaHub launched

rd On December 3 , KT Skylife released its November operating results, which beat market expectations. The increase in subscribers for November was 62,000

(+4% MoM; +77% YoY), exceeding the market estimate (60,000). The number of new subscribers reached 94,000 in the month, the highest amount since 2004.

On the same day, KT launched KT MediaHub, a subsidiary that will take charge of KT

Buy (Maintain) GroupÊs media and content business. In the near term, the subsidiary aims to Target Price (12M, W) 36,000 expand the IPTV subscriber base for KT Group, as well as improve content and Share Price (12/03/12, W) 31,250 mobile-TV services. For the medium- to long-term, we believe KT MediaHub will Expected Return (%) 15.2 likely diversify its content and media business areas. EPS Growth (12F, %) 57.8 Market EPS Growth (12F, %) 9.5 We believe KT Skylife is poised for subscriber expansion due to a favorable P/E (12F, x) 29.6 operating environment. We project a continued increase in the number of Market P/E (12F, x) 10.4 subscribers to Olleh TV Skylife (OTS; a bundled package from KT and KT Skylife) as KOSPI 1,940.02 a result of KT GroupÊs focus on its media business. Furthermore, we expect KT Market Cap (Wbn) 1,490 SkylifeÊs increased market share of apartment buildings with master-TV antennas to Shares Outstanding (mn) 48 accelerate the increase in subscribers for KT SkylifeÊs own non-bundled products. Avg Trading Volume (60D, '000) 328 Avg Trading Value (60D, Wbn) 10 KT Skylife is proceeding with the master-television antenna installation project Dividend Yield (12F, %) 0.0 commissioned by KBS (in light of the scheduled termination of analogue Free Float (%) 49.7 broadcasting by terrestrial broadcasters). 52-Week Low (W) 17,350 52-Week High (W) 35,000 Catalyst: Profitability projected to improve in 2013 Beta (12M, Daily Rate of Return) 0.45 KT Skylife is scheduled to renegotiate transmission commission rates with home- Price Return Volatility (12M Daily, %, SD) 2.7 Foreign Ownership (%) 9.0 shopping companies in 1H13 (home-shopping transmission commissions make up Major Shareholder(s) the majority of the companyÊs platform revenues). In addition, we expect a growing KT and et al. (50.3%) subscriber base will enable the company to generate additional platform revenues. KBS (6.8%) The platform businessÊ high profitability makes it the greatest contributor to pay TV NPS (5.04%) companiesÊ earnings leverage. Specific to KT Skylife, there appears to be significant Price Performance room for growth for its platform revenues given the firmÊs small platform revenues (%) 1M 6M 12M per subscriber (relative to those of its competitors). Absolute -0.3 66.7 22.3 Relative -1.4 60.9 21.1 For 4Q, we project KT SkylifeÊs revenues and operating profit to jump 27.9% YoY and 79.2% YoY, respectively. For 2013, we expect the companyÊs revenues to grow

15.5%. And we forecast its 2013 operating profit to leap 74.9% thanks to high- margin platform revenue growth.

Valuation: Maintain Buy call with TP of W36,000 We maintain our Buy call with a target price of W36,000. The companyÊs subscriber

Share price FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 150 KOSPI (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (X) (X) (X) 130 12/10 427 45 10.6 34 858 83 25 34.8 0.0 0.0 1.7 110 12/11 464 42 9.0 31 670 89 -13 16.4 40.9 5.3 14.5 90 12/12F 547 69 12.7 50 1,058 113 47 16.0 29.6 5.0 12.7 70 12/13F 632 121 19.2 88 1,845 166 129 22.8 16.9 3.8 8.0

50 12/14F 744 195 26.3 145 3,033 232 175 28.8 10.3 2.8 5.0 11/11 3/12 7/12 11/12 Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates

This document is a summary of a report prepared by Daewoo Securities Co., Ltd. („Daewoo‰) and published on our website. Please review the compliance notices contained in the original report. Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for informational purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose. Company December 4, 2012

expansion has progressed well, in line with our expectations.

This year, major global pay-TV shares have risen as a whole on the back of the non- cyclical nature of the media business, and the expansion of subscriber bases. Since the beginning of 4Q, however, media company shares have seen mixed performances. For example, forward P/E for , a US-based cable system operator, has fallen following the companyÊs announcement of a decrease in subscribers, and smaller-than-expected 3Q earnings.

Korean pay-TV companies are competing against each other to acquire more subscribers. We project these companies will seek ways to differentiate their services as this competition intensifies next year. In our opinion, only those companies that achieve both subscriber growth and profitability will maintain their valuation premiums. We believe KT Skylife will meet market expectations from 4Q through 2013.

Figure 1. KT Skylife monthly net new subscribers, and share price

('000) Monthly net new subscribers (1 month delayed, L) November net increase in subscribers: (W) 68 Monthly share price () +4% MoM and +77% YoY 34,000

51 30,000

34 26,000

17 22,000

0 18,000 7/11 10/11 1/12 4/12 7/12 10/12

Source: Company data, Thomson Reuters, KDB Daewoo Securities Research

Figure 2. Forward P/E for major global pay-TV stocks

(x) 31 KT Skylife Hyundai HCN Time Warner Cable Outstanding subscriber growth and 25 DirecTV CJ Hellovision profitability

19

3Q earnings missed consensus; 13 Subscribers decreased Cable TV MSOs saw stagnant growth 7 due to regulations 4/12 5/12 6/12 7/12 8/12 9/12 10/12 11/12 Source: Thomson Reuters, KDB Daewoo Securities Research

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