Telecom Service Solid downside support and decent growth potential

In late phase of LTE era: Consumption diverging and becoming rational LTE technology came to Korea in end-2011 . Nearly five years later, the domestic telecom service industry is now entering the late phase of the LTE era. During the Overweight (Maintain) initial high-growth phase, early adopters purchased expensive handsets and subscribed to high-priced rate plans. Now, telecom service consumption trends are changing. 1) First, consumption is diverging, with the gap between telcos’ average 2H16 Outlook Report rates and MVNO rates widening further this year, compared to 2012 . 2) Second, June 3, 2016 consumers are becoming more rational. Low- to mid-end handset purchases out of all purchases are estimated to be near 30%, from less than 10% in 2012. In addition, the cumulative number of subscribers who have chosen a rate discount in lieu of

Mirae Asset Daewoo Co., Ltd. subsidies has surpassed 10% of overall mobile subscribers.

[Telecom Service / Media ] Risks from telecom plan restrictions; Opportunities from growing data usage and business expansion

Jee -hyun Moon The most serious threat to telcos in 2H should be downward pressure on plan +822 -768 -3615 prices. Once the new National Assembly takes office in June, a revision to the [email protected] handset distribution act and a bill related to telecom plan restrictions will likely be

Nu -ri Ha proposed. With ARPU growth slowing and service rate discounts being booked as +822 -768 -4130 sales discounts , telcos must find ways to deal with the growing pressure to lower telecom bills. In our view, they could point to the following facts to justify current [email protected] rates: 1) Telecom expenses as a percentage of household spending have steadily

decreased over the past decade. 2) Handset purchase expenses are a bigger driver of household spending growth than service plans. 3) Data plans are cheaper in Korea than in other countries. On the bright side, we believe telcos will find opportunities from high-priced rate plans amid growing data usage. In addition, telcos are expanding aggressively into new business areas, with a particular growing influence in the media business . Furthermore, capitalizing on nationwide IoT networks, telcos are planning full- swing launch of low-power wide-area network (LPWAN) services.

2H: Attractive dividend payout; Aggressive expansion; Retain Overweight Free cash flow at domestic telcos is improving markedly. Cap ex has been on the downswing in the era of advanced telecom technology, while variable costs have also decreased due to stable marketing competition. Given stable earnings and ample cash flow, we expect telcos to show attractive dividend payout. If shares correct due to regulatory risks, high dividend yields should provide downside support. Telcos’ growth prospects also appear decent in light of their aggressive business expansion.

We retain our Overweight rating on the telecom sector. In the short term, we recommend KT in light of its high earnings visibility and dividend growth . And from a longer-term perspective (through the end of the year), we recomm end SK Telecom (SKT) given its high dividend payout and aggressive business expansion.

Korean telecom service industry index long -term trend : Key variables are ARPU, dividends, and new businesses (W) [Increased dividends; New businesses] (p) 38,000 Average ARPU of three big telcos (L) Downside support, growth potential 50 Telecom service industry index (R) LTE KOSPI/50 (R) introduction 45 35,500

40 33,000 35 Telecom sector 30,500 trading range may rise 30

28,000 25 04 05 06 07 08 09 10 11 12 13 14 15 16F 17F 18F

Note: KOSPI divided by 50 to show on same axis as telecom index; Telecom index is FTSE Korea Telecom Index; Source: Thomson Reuters, respective companies’ data, Mirae Asset Daewoo Research

June 3, 2016 Telecom Service

C O N T E N T S

Industry trends: Entering late phase of LTE era 3 1. Consumption diverging 3 2. Consumers becoming increasingly rational 4 3. Cash utilization 5

Risks in 2H: Regulations 6 1. Pressure to cut telecom rates 6 2. How to handle growing pressure to lower monthly bills 7

Opportunities in 2H16: Growth strategy 9 1. Wireless 9 2. Media 14 3. Internet of Things (IoT) 20

Investment & valuation 22 1. Attractive dividend yields 22 2. Investment strategy 23 3. Valuation comparison 24

KT (030200 KS) 25 SK Telecom (017670 KS) 28 LG Uplus (032640 KS) 31

Mirae Asset Daewoo Research 2 June 3, 2016 Telecom Service

Industry trends: Entering late phase of LTE era

1. Consumption diverging

LTE technology came to Korea in end-2011. Nearly five years later, the domestic telecom service industry is now entering the late phase of the LTE era. During the initial high-growth phase, early adopters purchased expensive handsets and subscribed to high-priced rate plans. Now, telecom service consumption trends are changing.

First, consumption is diverging. While subscribers to relatively high-priced LTE plans are expanding, MVNO subscribers are also growing. Currently, MVNO subscribers account for 10.5% of overall subscriptions, and this figure is expected to grow to roughly 15% by year- end. And the gap between telcos’ average rates and MVNO rates has been widening further this year compared to 2012.

In France and Japan, which introduced MVNO before Korea, MVNO subscribers make up 10% and 17% of overall subscribers, respectively. Despite the later introduction, Korea has seen a swift increase in MVNO subscribers, aided by the government’s support and promotion and strong marketing activities by CJ HelloVision.

Figure 1. Consumption is diverging, as subscribers to high -priced LTE plans and low -priced MVNO plans are growing simultaneously

(mn people) (mn people) 50 Number of LTE subscribers (L) 7 Number of MVNO subscribers (R) 6 40 5

30 4

3 20

2 10 1

0 0 1/13 7/13 1/14 7/14 1/15 7/15 1/16

Source: MSIP, Mirae Asset Daewoo Research

Figure 2. The ARPU gap between traditional telcos (MNOs) and MVNOs is widening

(W) 40,000 Average MNO ARPU Average MVNO (CJ HelloVision) ARPU

35,000

30,000 W14,642 difference

25,000 W10,728 difference

20,000

15,000 1Q12 1Q13 1Q14 1Q15 1Q16

Note: ARPU = average revenue per user Source: Respective companies’ data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 June 3, 2016 Telecom Service

2. Consumers becoming increasingly rational

Consumers are becoming increasingly rational in choosing telecom services. An increasing number of subscribers are opting for a rate discount instead of subsidies when purchasing handsets. The option to receive a discount upon purchase was introduced in October 2014, and in April 2015, the government increased the discount to 20% (from 12%). Starting this year, consumers can look up whether discounted rates are available to them.

The handset distribution act placed a ceiling on subsidies. In addition, for premium models, initial subsidies are minimal, prompting consumers to opt for discounted rates.

Low- to mid-end handset purchases out of all purchases are estimated to be near 30%, from less than 10% in 2012. The average selling price at global handset producers declined to US$291 in 2016, from US$386 in 2012.

Overall improvement in smartphone specifications has contributed to the growth of low/mid-end phone sales. In efforts to boost sales volume, handset makers have been lowering the prices of premium models and/or expanding their low/mid-end lineups. Domestic telcos’ launch of low/mid-end handset brands—namely SKT’s LUNA—also contributed to an increase in subscribers.

Figure 3. Cumulative number of subscribers opting for discounted rates is growing , prom pted by increase in discount and introduction of discount eligibility inquiry se rvice

(mn people) 1/16: (%) 8 Cumulative number of subscribers opting for discount (L) Started discount 12 Proportion of all mobile subscribers (R) eligibility inquiry service 10 6 8

4 6

4 4/15: 2 Raised discount to 10/14: 20% from 12% 2 Introductionof discounted rate option 0 0 10/14 1/15 4/15 7/15 10/15 1/16

Source: MSIP, Mirae Asset Daewoo Research

Figure 4. Proportion of mid /low -end mobile phone purchases recently reached 30% , from below 10% in 2012

(%) 40 Proportion of low/mid-end smartphone purchases out of all purchases

30

20

10

0 2012 2013 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Note: Low/mid-end phones defined as those priced below W500,000 Source: MSIP, ATLAS, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 4 June 3, 2016 Telecom Service

3. Cash utilization

Free cash flow at domestic telcos is improving markedly. Capex has been on the downswing in the era of advanced telecom technology, while variable costs have also decreased due to stable marketing competition. Given stable earnings and ample cash flow, we expect telcos to show attractive dividend payout.

Thanks to its stable cash flow, we believe the telecom services industry will stay relatively immune from the wave of restructuring now affecting many other domestic industries. However, telcos’ revenue growth has slowed from the early stage of LTE. Thus, they are making various efforts to revitalize growth based on their surplus cash.

SKT has seen its free cash flow improve since 2013. The company has used its surplus cash to pay out dividends and purchase treasury shares. This year, the company is expanding investments in new businesses, including the acquisition of CJ HelloVision (which is now awaiting government approval). Meanwhile, SK Planet, SKT’s consolidated subsidiary, is strengthening the competitiveness of its online/mobile shopping mall 11th Street based on its cash and via external financing.

KT, too, has seen positive cash flow trends; free cash flow turned positive in 2015, and thus the company resumed dividend payments last year. And LG Uplus is increasing dividend payments, as its free cash flow also swung to positive territory in 2015.

Figure 5. SK T: Capex has been on the downswing, and FCF has Figure 6. SK Planet to bolster mobile commerce based on its improved since 201 3 cash and via external financing

(Wtr) (Wbn) 5 Capital expenditure 1,000 SK Planet net cash Planningto secure Purchase of treasury stock SK Planet free cash flow additional W1tr through external 4 Dividend payout 800 Free cash flow investment, including 600 W500bn from IMM 3 400 2 200 1 0

0 -200

-1 -400 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

Note: Based on non-consolidated K-IFRS; Dividend payout amount shown is Source: Korea Ratings Corporation, Mirae Asset Daewoo Research provision for the next year based on cash flow Source: Company data, Korea Ratings Corporation, Mirae Asset Daewoo Research

Figure 7. KT: Capex has decreased, and FCF turned positive in Figure 8. LG Uplus: Capex has decreased, and FCF also swung

2015 to positive in 2015

(Wtr) (Wtr) 5 Capital expenditure 3 Capital expenditure Dividend payout Free cash flow Dividend payout 4 Free cash flow 2 3

2 1

1 0

0 -1 -1

-2 -2 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

Note: Based on non-consolidated K-IFRS; Dividend payout amount shown is Note: Based on non-consolidated K-IFRS; Dividend payout amount shown is provision for the next year based on cash flow provision for the next year based on cash flow Source: Company data, Korea Ratings Corporation, Mirae Asset Daewoo Research Source: Company data, Korea Ratings Corporation, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 June 3, 2016 Telecom Service

Risks in 2H: Regulations

1. Pressure to cut telecom rates

The most serious threat to telcos in 2H should be downward pressure on plan prices. Once the new National Assembly takes office in June, a revision to the handset distribution act and a bill related to telecom plan restrictions will likely be proposed. As of now, both the ruling and opposition parties have agreed on the necessity of revising the handset distribution law to ease households’ telecommunications cost burden.

In addition to a separate subsidy disclosure scheme and separation of phone distribution and phone services, measures to abolish the base fee and apply caps on handset subsidies are also being discussed. Such policy trends should negatively affect telcos’ earnings.

With regard to potential abolition of the base fee, the plans that include base fees are mostly usage-based schemes that were more common in the past, when voice calling was popular. Today’s data-centric tariff schemes are mostly fixed-rate plans that do not charge base fees. As such, abolition of the base fee would likely not have a meaningful impact on telcos’ earnings.

SKT’s standard plan sets its base fee at W11,000 (or W12,100, including the surtax), with voice calls charged at W1.8/s (inclusive of 50 free text messages). The National Assembly has also set the base fee target at W11,000. Subscribers are mostly feature phone users, because the data rate (W0.25/0.5KB) is not attractive to smartphone users. Meanwhile, the carrier’s Band Data plans (for LTE services) are offered in eight different tiers (according to the amount of data), and a fixed sum is charged depending on the tiers. These plans do not charge base fees.

As the amount of subsidies given to handset buyers is already lower than the subsidy cap on average, and call/data plan discounts are being opted for widely (by subscribers that choose to buy phones without subsidies), removing subsidy caps is unlikely to have as strong an impact on telcos as the mounting pressure to lower telecom bills.

Table 1. Telecom-related bills (estimate) The Minjoo Saenuri People's Party Justice Party Plan/ Recognize the need to revise Recognize the need to Submit revisions to MCTDSIA Submit revisions to MCTDSIA Position MCTDSIA revise MCTDSIA Details 1. Removal of subsidiary caps 1. Removal of subsidiary caps - Lower household mobile bills - Encourage price competition 2. Removal of base fees 2. Reduction in base fees - Lower household mobile bills - Reduce household mobile bills 3. Separation of subsidies (carriers 3. Separation of subsidies * The People's Party and the Justice Party have yet to state their and manufacturers) (carriers and manufacturers) views on MCTDSIA revisions, except that they did not believe - Ensure transparent business - Ensure transparent business the revision would effectively lower household mobile bills. practices of carriers and their practices of carriers and their

retailers retailers 4. Introduction of the blacklist system - Prevent collusion between carriers

and manufacturers - Promote fair competition Source: Media reports, Mirae Asset Daewoo Research

Figure 9. Simple usage -based monthly plan with base fee of Figure 10 . Data -centric m onthly plan with no separate base

W11,000 fee

Source: SKT, Mirae Asset Daewoo Research Source: SKT, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 6 June 3, 2016 Telecom Service

Table 2. Reduction of phone bills Date Details Remarks Apr. 2000 SKT reduces base fees by 11% President Dae -jung Kim Mobile services account for 7% of Jan. 2003 SKT lowers voice rates from W21 to W20 per 10 seconds household spending June 2005 SKT cuts its mobile sign-up fee by W20,000 President Moo -hyun Roh Mobile services ’ share in household Sept. 2006 Government lowers data rates for youth by 30% spending falls below 7 % Government introduces telecom bundling Jul. 2007 (internet/multimedia) services SKT offers a discount when subscribers make calls to users Oct. 2007 on the same network Jan. 2008 SKT, KT, and LGU lower text message fees from W30 to W20 May 2008 Government raises bundling discounts to 20% President Myung -bak Lee Sept. 2009 SKT cuts its mobile sign-up fee by 30% (KT by 20%) Nov. 2009 SKT lowers its mobile sign-up fee by 28% Mar. 2010 SKT starts to charge voice calls per second Dec. 2010 KT and LGU start to charge voice calls per second SKT, KT, and LGU lower base fees by W1,000, and offer 50 Mobile services ’ share in household Oct. 2011 messages free of charge spending reaches 6% Aug. 2013 SKT, KT, and LGU cut the mobile sign-up fee by 40% President Geun -hye Park Aug. 2014 SKT, KT, and LGU reduce the mobile sign-up fee by 50% Government sets the discount rate for those signing up for Oct. 2014 mobile telecom services without getting device subsidies at 12 percent . Mobile services ’ share in household Nov. 2014 SKT removes mobile sign-up fees spending falls below 6% Mar. 2015 KT and LGU remove mobile sign-up fees Government raises the discount rate for those not Apr. 2015 getting device subsidies to 20% (from 12%) Carriers discount data plans by W1,000 (while keeping the Mobile services ’ share in household June 2015 data limit intact) spending falls to 5.8% Source: Respective company data, media reports, Mirae Asset Daewoo Research

Figure 11. Paradigm change in telecom services: Voice calls ‰‰‰ Data

Voice call Data centric centric

Finance +SNS

Voice Education communication Voice

Enter- tainment +LBS

User convenienceenhanced via multi-purposefunctions

Source: KCC, Mirae Asset Daewoo Research

2. How to handle growing pressure to lower monthly bills

With ARPU growth slowing and service rate discounts being booked as sales discounts, telcos need to come up with effective measures to deal with growing pressures to lower telecom bills. In our view, they could point to the following facts to justify current rates: 1) Telecom expenses as a percentage of household spending have steadily decreased over the past decade. 2) Handset prices, rather than service plans, are driving households’ average propensity to consume (APC) higher. 3) Data plans are cheaper in Korea than in other countries.

Mirae Asset Daewoo Research 7 June 3, 2016 Telecom Service

Table 3. Household telecom expenses out of total income and expenditure: % of total consumption expenditure has fallen Annual 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 average

% chg. Income (W’000) 2,631 2,788 2,898 3,038 3,200 3,391 3,432 3,632 3,842 4,077 4,162 4,302 4,373 4.0% Household expenditure 2,147 2,277 2,366 2,475 2,584 2,718 2,776 2,961 3,115 3,217 3,262 3,356 3,373 3.5% (W’000 ) Consumption 1,700 1,797 1,872 1,945 2,016 2,114 2,149 2,287 2,393 2,457 2,481 2,551 2,563 3.2% expenditure (W’000 ) Telecom expenditure (W) 125,530 131,233 131,342 132,199 134,287 133,984 132,468 138,646 142,909 152,359 152,792 150,350 147,725 1.3% Postal service (W) 278 253 256 220 257 194 173 214 253 242 238 287 308 0.8% Telecom equipment 6,568 7,147 6,792 6,736 5,188 2,531 1,897 1,750 2,613 6,743 9,456 23,766 22,676 10.0% (W) Telecom service (W) 118,684 123,833 124,294 125,244 128,842 131,259 130,398 136,682 140,044 145,374 143,098 126,297 124,741 0.4% Te lecom expenditure

breakdown Postal service (%) 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2

Telecom equipment (%) 5.2 5.4 5.2 5.1 3.9 1.9 1.4 1.3 1.8 4.4 6.2 15.8 15.4

Telecom service (%) 94.5 94.4 94.6 94.7 95.9 98.0 98.4 98.6 98.0 95.4 93.7 84.0 84.4

Telecom expenditure / total consumption 7.4 7.3 7.0 6.8 6.7 6.3 6.2 6.1 6.0 6.2 6.2 5.9 5.8 expenditure

Average propensity to 77.9 77.8 77.9 77.6 76.6 75.9 76.6 77.3 76.7 74.1 73.4 72.9 71.9 consume (%)

Note: Nationwide monthly average total income and expenditure per household (at least 2 people); Annual average % change is based on 2003-2015 Source: National Statistical Office, household survey data, Mirae Asset Daewoo Securities Research

Figure 12 . Telecom equipment is among the top three items Figure 13 . Telecom service is top item contributing to contributing to increase in household APC decrease in household APC

0.0 0.2 0.4 0.6 0.8 (%p) -1.2 -0.9 -0.6 -0.3 0 -1.03 Telecom service Actual housing expenses 0.61 (%p) -0.86 -0.79 Fuel expenses on motor vehicle Motor vehicle 0.53 Higher education

Telecom equipment 0.52 Primary education Meals Group travel expenses Other service Insurance Fresh fisheries Medicine Cultural services Overland transportation Other housing-related services Secondary education

Other transportation Items contributing to increase in APC Items contributing to decrease in APC Data processing equipment

Note: APC = average propensity to consume Note: APC = average propensity to consume Source: HRI, Mirae Asset Daewoo Research Source: HRI, Mirae Asset Daewoo Research

Figure 14 . Using 30GB of mobile data is cheaper in Korea than Figure 15. Mobile data cost per 1GB is also cheaper in Korea in other countries

(W) (W) 400,000 Cost of 30GB of data 60,000 Cost per 1GB of data

50,000 300,000 40,000

200,000 30,000

20,000 100,000 10,000

0 0 Korea AT&T (US) Google (US) Korea Google (US) Japan Verizon (US)

Source: MSIP, respective companies’ data, Mirae Asset Daewoo Research Source: MSIP, respective companies’ data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 8 June 3, 2016 Telecom Service

Opportunities in 2H16: Growth strategy

1. Wireless

1) Wireless service We believe one of the biggest opportunities for telcos is higher prices driven by higher data usage. In April 2016, monthly LTE data usage per subscriber was up 33.3% YoY to 4.66GB. Following the launch of data-oriented plans in May 2015, the average price level of data plans slightly fell, whereas the amount of data available remained unchanged. Since then, the number of subscribers has decreased for plans priced at W60,000 or above, but has increased for plans priced in the W40,000-W50,000 range. In the short term, this is likely to have an adverse effect on overall average prices. In the medium term, however, we believe lower prices have eased the entry barrier to data usage. The availability of plans offering more data at lower price points has made it easier for customers, who previously used 2GB per month, to sharply increase their monthly usage to 5GB. At present, we believe video streaming accounts for roughly 80% of data usage. Every year, data consumption tends to pick up in the third quarter, when the professional baseball season gets underway. This year, several global sporting events are scheduled to take place, including the Euro 2016 in June and the Rio 2016 Summer Olympics in August. Given the huge popularity of these events and the differences in time zones, we expect to see a pickup in data demand for mobile VOD.

Figure 16. Trend in LTE data usage per subscriber: Nearly 5GB per month

(GB) 5 2012 2013 2014 2015 2016

4

3

2

1 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.

Source: MSIP, Mirae Asset Daewoo Research

Figure 17 . Subscription s to W40,000 -W50,000 monthly plan s—corresponding to monthly LTE data usage of 5GB -6GB —have increased recently

(%) 80 Below W30,000 Between W40,000 and W50,000 Over W60,000

60

Launchof data- Handset centric monthly distributionlaw plans 40 takes effect

20

0 Jul-Sep 14 10/14 12/14 1/15 3/15 5/15 7/15 9/15 11/15 12/15 1/16 2/16 3/16

Source: MSIP, media reports, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 9 June 3, 2016 Telecom Service

Telcos are also seeking to encourage data usage and drive up prices by offering additional services that can be added to basic plans depending on the subscriber’s need. Such services include time- and location-based data plans, as well as plans optimized for viewing video content. Additional services are generally priced between W5,000 and W11,000 per month, with the majority costing around W8,000. Historically, it took roughly a decade for telcos’ ARPU to increase by W8,000. By offering a wider range of additional services, we think telcos could further push up their ARPU.

Table 4. Optional mobile telecom services: Detailed services of various types are being offered at W5,000-W10,000 per month Category SK Telecom KT LG Uplus ∙ “Premium flexible option” ∙ “LTE egg+” ∙ “Unlimited free data smartphone” (offers 50M B/day in addition to amount (connect directly to + Lite and internet through (offers large amount of data to various devices) included in basic monthly plan) smart phone) ∙ “Thank you for your service” ∙ “Style flexible data option” ∙ “Unlimited free data pack” (offers data to soldie rs, both serving and (purchasable by Style monthly plan (offers 1GB for web surfing on smart phone discharged) subscriber s) and PDA) ∙ “Flexible LTE option” ∙ “LTE data sharing” LTE (unlimited data for “unlimited 75 ” plan (able to share mobile data with other devices) data subscribers) ∙ “Free commute” ∙ “My time plan” (unlimited data during commuting time) (offers unlimited data during specified times) ∙ “Free subway” ∙ “Flexible LTE QoS option” (unlimited data calling in subway) (offers unlimited data at a lower speed) ∙ “Band free time” ∙ “Data roaming” (offers 1GB during commuting/lunchtime) (able to use data in major countries worldwide) ∙ “Band play pack” ∙ “Olleh content box” ∙ “Video/entertainment all together” (app se rvice providing various content, such as (exclusive video service such as real -time TV, (offers 2GB per day for oksusu TV) webtoon s) film, and VOD) ∙ “Oksusu free data” ∙ “Olleh school premium” ∙ “LTE video portal pack/video pack” (offers unlimited data for oksusu TV) (educational app service usable by all ages) (offers 3GB for media consumption) ∙ “MelOn ex-streaming” ∙ “Unlimited TV plus” ∙ “LTE all/game/HDTV/music/Box” Content (offer s discount on integrated optional services (offers unlimited data for MelOn music app) (unlimited TV broadcasting service) services) ∙ “Oksusu” ∙ “Genie music” ∙ “Uflix data pack” (offers full -year discount to subscribers of (oksusu content/real-time broadcast service) (offers 5GB for films and US dramas) monthly plan) ∙ “HD streaming free” (unlimited access to all music on Mnet) ∙ “Data Plus T membership” ∙ “Olleh navi” ∙ “Today’s weather” (offers additional data when using (navigation service showing fastest routes (provide s weather information 8 times /day T membership discount) based on real -time traffic) every 2 hours ) Other ∙ “T map navigation” ∙ “miTV” services (navigation service showing real-time traffic) (access various content such as news, sports) ∙ “Free data for 11st usage” ∙ “Stock investment note” (receive a text with financial market info. 3

times/ day) Source: Respective companies’ data, Mirae Asset Daewoo Research

Table 5. Study on actual LTE usage: Similar preference for subsidies vs. service discount; 50% opt for add-on service after subscription; 25% have paid excess charges Factors considered when choosing telco Average Usage frequency of required additional services Average 1. Subsidies for handset 26.9% 1. Never 18.9% 2. Service discount, such as integrated discount or membership 25.5% 2. Almost never 41.3% 3. Newest smartphone 18.3% 3. Sometimes 20.7% 4. Cheap monthly plan 17.4% 4. Somewhat often 16.8% 5. Brand image 9.5% 5. Often 2.3% 6. Other 2.4% Total (N=1,054) 100.0% Average score on 1 to 5 scale (N=518) 2.42 Experience of adding optional service Average Experience of paying excess charge Average Experience 52.5% Experience 24.1% No experience 47.5% No experience 75.9% Total (N=1,054) 100.0% Total (N=428) 100.0% Source: Korea Consumer Agency study on actual LTE usage conditions (2014), Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 10 June 3, 2016 Telecom Service

2) New spectrum investments

We believe telcos can also find growth opportunities in the new spectrums allocated in early May, which will likely help telcos further enhance wireless speed and support growing data usage. It remains to be seen whether higher data usage due to faster speeds will naturally lead to higher prices. SKT, which acquired 60MHz of bandwidth in the 2.6GHz band from the latest auction, plans to roll out a faster LTE network nationwide by 2019. The advanced network will support download speeds of up to 525Mbps through five-band carrier aggregation (CA) and up to 1Gbps through the additional application of 256 quadrature amplitude modulation technology. That is more than 13 times the speed of the current LTE service and allows users to download a two-hour long, high-definition movie in just 13 seconds. Table 6. 2016 telecom spectrum auction: Details and refarming estimates Category SKT KT LG Uplus Combined Govt. auction Auction results Bid amount Total on offer Winning bid (Wbn) 1,277.7 451.3 381.6 2,110.6 Secured block(s) D, E B C Frequency band 2.6GHz 1.8GHz 2.1GHz Secured bandwidth (MHz) 60 20 20 100 140 Period of utilization (years) 10 10 5 Estimated annual per -MHz price (Wbn) 10.6 11.3 19.1 12.5 Increasing global demand in line with the Adjacent to proliferation of LTE existing LTE Adjacent to existing 25% of auction price technology. frequency LTE frequency, must be paid in cash Easy to secure compatible Usable Usable starting year- within 90 days of the equipment . immediately after end after SKT returns Notes on secured spectrum auction; Remaining Usable immediately after paying deposit. spectrum. payments to be made paying deposit. Network Network investment in installments during Network investment investment requirement by 4th the period of utilization requirement by 4th year: requirement by year: 65% 65% for D, 40% for E 4th year: 40% (partial exemption likely) Frequency purchase Secured Possible Possible Securing of new LTE to be paid in cash; government establishment of establishment of Expected impact of bid wideband frequencies will be finances ultra-wideband wideband (60MHz in 2.6GHz) recognized as totaling about (55MHz in 1.8GHz) (40MHz in 2.1GHz) intangible assets W2.1tr Refarming estimates 2.1GHz refarming price estimates (Wbn) 545.6 545.6 (not applicable) 1,091.2 - 3% of revenue 164.0 164.0 (calculated by government, Wbn) - Tied to 2.1GHz C block bid (Wbn) 381.6 381.6 Bandwidth to be refarmed (MHz) 40 40 80 Period of utilization (years) 5 5 Total estimate (auction + refarming) Expected spectrum spending (Wbn) 1,823.3 996.9 381.6 3,201.8 Amount of bandwidth (MHz) 100 60 20 180 Expected annual per-MHz spending (Wbn) 11.8 12.9 19.1 13.0 Number of LTE subscribers 19.5 18.2 10.2 47.9 (Mar. 2016 , mn persons ) LTE-possible bandwidth per subscriber (Hz) 7.9 5.8 9.8 7.5 Secured LTE frequency (MHz) 155 105 100 360 Total secured frequency (except WiBro, MHz) 185 125 120 430 Additional annual amortization cost 236.9 154.3 76.3 on frequency (W bn) Note: Refarming price has not been confirmed and is thus based on our estimates; Per-MHz price is converted to 5-year utilization period; As SKT was simultaneously awarded blocks D and E, network investment requirements for block E are exempted, but 50% of the requirements of block E must be invested in block D Source MSIP, media reports, related companies’ data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 11 June 3, 2016 Telecom Service

Figure 18 . Newly allocated spectrum s will likely help telcos further enhance wireless speed and support growing data usage

Source: Mirae Asset Daewoo Research

3) Preparing for the 5G age

Domestic telcos are getting ready for the upcoming commercialization of 5G technology in 2020. Large-scale investments have not yet taken place, as the technology is not standardized and still in the testing stages.

That said, with a trial service planned for the 2018 PyeongChang Winter Olympic Games, we think domestic telcos will likely move ahead of other countries in developing 5G networks. The 2018 trial service is targeting a speed of 10Gbps using an eight-band CA technology that combines eight frequencies with 100MHz bandwidths. That would be 33 times faster than the current maximum speed of LTE (300Mbps). As the official partner of the Pyeongchang Olympics, KT plans to showcase a number of 5G-based media services, such as virtual ski-jumping and video recording using drones.

Table 7. 5G trial service specifications for 2018 (expected) 5G trial service category Technology standard Frequency bandwidth 800MHz (100MHz * 8CA) Number of MIMO index Max 8 Frame structure Independent structure Channel coding Low-density parity-check (LDPC) code 5G-LTE linkage method 5G-LTE inter-link (necessary) and 5G solely (selective) Subcarrier interval 75kHz Duplexing method Dynamic time division duplex (Dynamic TDD) Up-/downwind link structure Hybrid beam forming structure Note: CA = Carrier Aggregation, MIMO = multiple-input and multiple-output Source: The Fourth 5G Strategy and Planning Committee, etnews, Mirae Asset Daewoo Research

Figure 19 . 5G standardization and preparation timeline of three big telcos; Commercialization expected in 2020

Source: ITU, respective companies’ data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 12 June 3, 2016 Telecom Service

Figure 20. KT’s plan for demonstrating 5G service at 2018 Pyeongchang Winter Olympics

Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 13 June 3, 2016 Telecom Service

2. Media

1) Pay-TV to reach an inflection point

Among the areas into which telcos are expanding, the media business deserves attention. In November 2015, SKT announced its plan to acquire CJ HelloVision, the largest cable system operator (SO) and the second-largest pay-TV operator in Korea.

Currently, cable SOs hold a 46% share in the pay-TV market, telco-affiliated IPTVs 40%, and KT SKylife 14%. The market share gap between telcos and cable SOs has narrowed rapidly amid the digital switchover. Compared to telcos and the satellite TV operator, which adopted digital broadcasting systems from the very beginning, cable SOs have fallen behind in areas such as service bundling discounts, number of channels, VOD lineup, etc.

KT has become the unrivaled leader in pay-TV services following its acquisition of KT Skylife and aggressive service bundling discounts. If SKT wins government approval for the acquisition of CJ HelloVision, the combined market share of telcos will rise further. While telcos had been content with achieving organic growth in the media segment through technology advancement and the digital switchover, they now seem more focused on inorganic growth via M&As. This will likely signal an inflection point for the pay-TV market.

Figure 21. Major companies’ position in domestic pay-TV value chain

Source: Respective companies’ data, Mirae Asset Daewoo Research

Figure 22. Pay-TV M/S by number of subscribed households

Note: Based on end-1Q16 Source: KCTA, respective companies’ data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 14 June 3, 2016 Telecom Service

2) Pay-TV market status and outlook Looking ahead, the pay-TV market is likely to be dominated by two big players, with the market focus shifting from the digital switchover to mobile broadcasting and from subscriber numbers to ARPU growth. Consolidation : Market consolidation is expected to continue. In the past, consolidation occurred among cable SOs; CJ HelloVision has acquired 17 regional SOs since 2006, and IPTVs and the satellite TV operator gradually increased their subscriber base by absorbing analog TV subscribers switching from cable SOs. In November of last year, however, SKT announced its plan to acquire CJ HelloVision. Once approved, the acquisition deal will put SKT in the second-highest spot in the pay-TV market (a 26% market share), after KT (30%). From digital switchover to mobile : Following digital television transition, an increasing number of viewers are moving away from traditional TV screens to mobile TV. As telcos now roll out mobile-exclusive content and services (in addition to simply making existing TV services available on the mobile platform), we have noted sharp traffic growth in their mobile video apps. Moreover, Netflix recently introduced its video-streaming services in Korea, and CJ E&M acquired Tving from CJ HelloVision. ARPU growth: Going forward, ARPU growth will be a key management goal. So far, low B2C ARPU (less than W10,000 per month; less than W4,000 for analog services) has been offset by higher B2B revenue growth arising from SO fees paid by home shopping companies. However, home shopping growth is slowing, and fee negotiations are at a standstill. In a sense, highly profitable B2B revenue has been negative for B2C ARPU growth, as companies could afford to undercut prices to increase the subscriber base. Pay-TV operators have already monetized their B2C models, and thus can promote ARPU growth based on existing models. Looking ahead, factors that may positively affect ARPU are: normalization of service bundling discounts, enhancement in set-top box technology, and the spread of UHD TVs and VOD services. Figu re 23 . Domestic pay -TV M/S by number of subscriber s: Figure 24. Mobile video app usage time: Recent rise in oksusu Two dominant players expected to emerge

(%) KT SK Telecom SK Broadband oksusu Terrestrial pooq 35 CJ HelloVision T-broad (mn min) KT Olleh tv mobile LG U+ LTE video portal D'LiVE LG Uplus CJ E&M Tving SK Telecom hoppin 30 CMB Hyundai HCN 700 Netflix

600 25 500 20 400 15 300

10 200

5 100

0 0 05 06 07 08 09 10 11 12 13 14 15 16F 15.4 15.7 15.10 16.1 16.4

Note: Assuming merger of SKT and CJ HelloVision Note: Mainly RMC (Ready Made Content) app Source: Respective companies’ data, Mirae Asset Daewoo Research Source: Koreanclick, Mirae Asset Daewoo Research

Figure 25 . Korean pay -TV monthly fixed rate is low compared Figure 26 . US pay -TV market saw increasing ARPU in the later to other countries phase of digital conversion

(US$) (%) North America broadcast ARPU rosein (US$) 100 100 digital conversion rate (L) later stage of 100 North America pay-TV digital average ARPU (R) conversion 90 90 80 ARPU fell 80 early stage of 80 60 digital conversion 70 70 40 60 60

20 50 50

0 40 40 Korea US Australia Japan Singapore Hong Kong Indonesia 04 05 06 07 08 09 10 11 12 13 14

Source: MSIP, Informa, Bloomberg, Mirae Asset Daewoo Research Source: KCC, Bloomberg, Broadbandtvnews.com, Mirae Asset Daewoo Research

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3) Changing competitive landscape in the pay-TV market In the past, the main product of pay-TV service packages was wired broadband internet, with other services offered as add-ons. KT quickly gained ground in pay-TV services by bundling its dominant wired broadband service with IPTV. In the US, it was also wired broadband internet service providers (Comcast, Time Warner Cable, etc.) who quickly secured competitiveness in the pay-TV segment. Meanwhile, Verizon (wireless) and AT&T (wired and wireless) are late entrants in this segment. Now, wireless services (i.e., LTE) are believed to be the mainstay of pay-TV service bundling. This suggests that the dominance of mobile carriers can be carried over to pay-TV operations. The introduction of LTE services at end-2011 has allowed users to enjoy video content on the mobile platform (thanks to fast data transmission). The synchronization of broadband service and pay-TV subscriber growth has weakened since 2010, while that of wireless service and pay-TV subscriber growth has strengthened. LGU lagged behind its rivals in both wired and wireless services, but has gained market share in both segments since the introduction of LTE. Pay-TV operators’ subscriber share is restricted to up to one-third of the total market, pursuant to the Internet Multimedia Broadcast Services Act revised in 1H15. (The market share restriction clause will expire on June 28 th , 2018, but may be extended after discussions at the National Assembly.) SKT’s potential acquisition of CJ HelloVision will not cause a breach of this clause (post-acquisition market share is estimated at 26%). Thus, we expect pay-TV service providers to continue to engage in marketing promotions and M&As in the short term, until their respective market shares reach the limit. Over the long term, we project that various broadcast-related laws, now segmented based on technologies and time period, will eventually be integrated. Under the current laws, technology convergence (e.g., dish convergence solutions that integrate IPTV with satellite services) is illegal. From a consumer’s perspective, service lineups and bundling discounts have a bigger impact on consumers’ decisions than technological differences among service providers. Figure 27 . Before 2011, the main pr oduct of pay -TV service Figure 28 . Now , wireless services (i.e., LTE) are believed to be packages was wired broadband internet the mainstay of pay -TV service bundling

(mn people) (mn people) 35 Number of broadband subscribers 70 Number of wireless subscribers Number of pay-TV subscribers Number of LTE subscribers 60 Number of IPTV subscribers 30 50 1.6 25 times 40 8.2 4.4 1.4 times times 30 20 times 247 times 20 15 1.3 times 10

10 0 05 06 07 08 09 10 11 12 13 14 15 16F 05 06 07 08 09 10 11 12 13 14 15 16F

Source: MSIP, KCTA, Mirae Asset Daewoo Research Source: MSIP, KCTA, respective companies’ data, Mirae Asset Daewoo Research

Figure 29 . CJ HelloVision: In absence of M&A, s ubscriber Figure 30 . LG Uplus: Similar trend s in wireless, pay - growth is stagnating TV /broadband subscribers

(mn people) Number of broadcasting subscribers (L) ('000 people) (mn people) (mn people) 5 Number of fixed-line broadband subscribers (R) 1,000 4 Number of broadcasting subscribers (L) 13 Number of fixed-line broadband subscribers (L) Number of wireless subscribers (R) 4 800 12 3

3 600 11 2 4 M&A 1 M&A 2 400 10 cases case 4 M&A 1 M&A case cases 1 1 200 9

0 0 0 8 10 11 12 13 14 15 10 11 12 13 14 15

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

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4) SK Broadband + CJ HelloVision

SKT plans to buy a 30% stake in CJ HelloVision from CJ O Shopping, and allow CJ HelloVision to merge with SK Broadband. MSIP must approve/reject the acquisition plan (within 60 days) following consultation with the Fair Trade Commission and KCC consent. However, MSIP’s approval has been delayed, due to legislative and administrative issues involved in the acquisition.

If approved, the merged corporation (SK Broadband + CJ HelloVision) will become a media platform giant with capital of over W2tr and revenue of W4tr. Before acquiring CJ HelloVision, SKT’s subscriber base consists of around 20mn wireless and 10mn pay-TV subscribers. After the acquisition, the firm will have a more balanced subscriber base (over 20mn wireless and 20mn pay-TV subscribers), making it easier for the telco to offer integrated services and maintain its customer base.

Table 8. Approval and screening of CJ HelloVision’s acquisition by SKT and merger with SK Broadband Fair Trade Commission Korea Communications Commission Ministry of Science, ICT and Future Planning Role Negotiation with MSIP Notification of prior consent to MSIP Screening and result announcement Registration of stock acquisition and MSO (or switch to MSO) approval Approval for stock acquisition by facilities -based business combination Registration of merger approval for location telecommunications businesses Registration of merged corporation information service businesses Provision of public service by facilities-based Registration of merger of location-based service telecommunications businesses providers Merger approval for facilities-based telecommunications businesses Authorization of change in broadcaster’s Screening biggest investor Authorization of changes resulting from merger of program providers (T-commerce) Approval of changes resulting from merger of IPTV business Approval of changes resulting from merger of MSOs Assessment of potential impact on △ Guarantee of access to broadcast services ▲ Adequacy of financial and technical ability, market competition △ Diversity in sources of broadcast service supply and business operations - Whether merged corporation will △ Protection of rights and interests of viewers (users) ▲ Adequacy of information and gain market share at least 25%p △ Public accountability communication resources higher than the second largest △ Diversity in sources of content supply ▲ Impact on market competition of facilities- player △ Appropriateness of operation plans for local based telecommunications businesses Screening - Criteria for determining a market- channels ▲ Protection of users criteria dominating company △ Adequacy and efficiency of organization ▲ Impact on utilization of telecommunication (estimate) (A company holds a market share of △ Financial stability and reasonable investment plan equipment & facilities, network R&D 50% or higher, or the largest, second- △ Contribution to media industry growth efficiency, and public interest (such as the largest, and third-largest firms hold a international competitiveness of the combined market share of 75% or domestic telecom service industry) higher) ▲ Public accountability ▲ Fair competition in the pay -TV segment Source: Respective government agencies, media reports, Mirae Asset Daewoo Research

Table 9. SK Broadband and CJ HelloVision: Subscribers and financial information (‘000 people, Wbn) SK Broadband CJ HelloVision Total Total M/S Total market Subscriber s - Media 3,489 4,102 7,591 26% 28,799 - Broadband 5,036 860 5,896 29% 20,025 - VoIP 4,450 673 5,124 41% 12,458 Revenue 2,731 1,183 3,914 OP 64 105 169 Net profit 11 60 71 Assets 3,292 2,000 5,292 Liabilities 2,170 1,049 3,220 Equity 1,121 951 2,072 Note: Based on end-2015, Source: Mirae Asset Daewoo Research

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Figure 31. After acquisition of CJ HelloVision, SKT will have a more balanced subscriber base

(mn people) Subscriber basis 30

20

After acquisition

10

0 SK Telecom SK Broadband SK Telecom SK Broadband + CJ HelloVision Individual mobile Pay-TV households * 3 Individual mobile Pay-TV households * 3

Note: Based on end-1Q16; For computation; Assumed pay-TV subscribing households consist of three people Source: Respective companies’ data, Mirae Asset Daewoo Research

5) Next media

In terms of telcos’ approach to the media business, they can either mimic or differentiate themselves from conventional media firms.

Conventional firms focus on improving content competitiveness. Netflix, whose new media platform and big data curation services gives it a technological advantage, expanded into in- house content production in order to deliver a second phase of growth. Once a company achieves subscriber expansion, starting an in-house content business is advantageous, as it should take a shorter time to retrieve investments than it would with a small subscriber base.

Telcos are able to differentiate themselves on the back of their wireless communications technologies, including: 1) big data, which analyzes and maximizes efficiency of complicated digital media ecosystems, 2) interactive media businesses based on 5G networks (e.g., virtual reality), and 3) media cloud streaming, which will be necessary to replay large content at high quality.

These new media businesses will be based on telcos’ conventional business model (e.g., data traffic-based plans). Indeed, currently, 80% of LTE data is being used to play videos (media). In other words, expansion of the media business seems necessary to boost the growth of telecom services.

Figure 32 . Telcos are revitalizing the content business Figure 33 . Expecting big data analysis and serv ice through expansion of the media value chain improvement through platform enhancement

Source: SK Broadband, Mirae Asset Daewoo Research Source: SK Broadband, Mirae Asset Daewoo Research

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Figure 34 . Telcos expected to play a significant role in VR value Figure 35 . Telcos may use their wireless communications chain and ecosystem technologies to enter media cloud streaming business

Source: Nasmedia, KT, Mirae Asset Daewoo Research Source: Entrix, SKT, Mirae Asset Daewoo Research

Figure 36. Vision of new media in 5G era

Source: SKT, Mirae Asset Daewoo Research

Table 10. Content and related investments by telcos SKT KT LG Uplus

∙ SK B tv, B tv mobile ∙ KT Olleh tv, Olleh tv mobile ∙ U+ tv G, LTE video portal Service 3.68mn IPTV subscribers (+ CJ HelloVision: ∙ 6.72mn IPTV subscribers + Skylife (pay-TV market ∙ 2.38mn IPTV subscribers 4.15mn; pay-TV market share: 26%) share: 30%) (pay-TV market share: 8%) ∙ Secured 4,000 D reamWorks titles (including ∙ Channel-specific content (CJ E&M, JTBC, etc.) ∙ Uflix provides around 22,000 recent movies and VOD) popular HBO dramas ∙ Movies/dramas, sports/leisure, documentary, ∙ Broadest full HD channel lineup 160,000 VODs foreign (around 80 channels) ∙ 20,000 animations, 12,000 kids’ programs, etc. Content ∙ Children’s and educational content ∙ Exclusive distributor of NBC Universal content in ∙ B tv kidzone: Animation ∙ Most free movie content Korea (simultaneous broadcast) ∙ Joint investment/production with CJ E&M ∙ Exclusive contract with Sony Pictures; ∙ Providing popular Japanese (in partnership with ∙ Broadcasting 60 Disney programs Simultaneous broadcast of US dramas Fuji Television) and Chinese dramas Multi - channel ∙ Providing in-house content produced in ∙ Operating mobile MCN platform Hotzil ∙ Opened Power YouTuber service network partnership with DIA TV (MCN) ∙ Providing 360-degree VR services ∙ Providing 360 -degree VR real -time content for KT ∙ Operating VR game promotion center Virtual ∙ Planning in-house production of VR movies Wiz baseball team ∙ Working to provide VR VODs reality (VR) ∙ Providing AR and VR integrated content and T ∙ Planning to provide 200 pieces of VR mobile ∙ Planning to produce VR content for adults Real platform content this year

∙ Planning to establish a content production ∙ Offering premium services (GIGA UHD) ∙ Increasing ARPU by launching video data fund (W320bn) for in-house content targeting high-end customers plans Strategy production after acquisition of CJ HelloVision ∙ Planning to invest W5tr in content over the ∙ Increasing OTS su bscribers (bundling with ∙ Increasing the number of high-end customers next five years Skylife) (UHD IPTV, etc.)

Note: Number of subscribers is as of end-March for CJ HelloVision and as of end-April for others Source: Company data, media reports, Mirae Asset Daewoo Research

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3. Internet of Things (IoT) We expect to see telcos establish nationwide networks for IoT in 2H. In a bid to facilitate the IoT industry, MSIP plans to raise the cap on frequency output of unlicensed spectrum (900MHz) by 20x, which will help telcos reduce their network construction expenses by one- third. The government also plans to support the establishment of nationwide IoT networks in 1H. Specifically, the government plans to: 1) provide additional frequencies for IoT networks, 2) exempt IoT rate plans from the approval requirement, and 3) exempt location- based services from the approval requirement (changing to merely a reporting requirement).

In June, SKT is scheduled to complete the world’s first nationwide network dedicated to future IoT services, based on LPWAN technology. With this network, the company plans to launch remote metering services and IoT-specific plans. KT commercialized a nationwide LTE-M network in March, and plans to roll out IoT-specific plans. LG Uplus also adopted an LTE-M network and plans to further advance its IoT@home (smart home) services, aiming to attract more than 500,000 subscribers by the end of the year.

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 a relatively small investment, 2) seek quantitative subscriber growth amid the saturation of individual telecom subscriptions, and 3) take a first-mover advantage in the industry as network operators.

Figure 37 . Government plan s to improve IoT -related Figure 38. IoT network standard status regulations

Note: The Conference of Ministers and Regulatory Reform Source: SKT, Mirae Asset Daewoo Research Source: MSIP, Mirae Asset Daewoo Research

Table 11. Three major telcos’ IoT businesses SK Telecom KT LG Uplus

Door lock, dehumidifier, heater, gas valve lockout, Home CCTV MomCa, home fitness, 6 types of GiGA home fitness, door lock, Yodoc (diagnostic Smart home Petfit, T Pet, United Objects brand IoT@Home (switch/gas lock/energy meter tool), smart farm Safe Zone, GiGA homecam, IoT (Smart Beam 2/Linkage/Band), T Outdoor, JooN (for /door lock/hub/plug), thermostat, refrigerator, heater, gas valve lockout, open/close sensor, services children), refrigerator, smart farm, smart cash box, rice cooker, kitchen fire extinguisher, LTE magic health bike, golf putting, scale, health band Kia Motors UVO, T-car, smart auto scan, Health-on mirror, PetSTATION, StarWalk, IoT Cabs Platform/ ThingPlug (oneM2M)/Smart Home IoT makers/ GiGA IoT IoT@Home brand - LoRa (not standardized); Also using LTE-M - LTE-M (3GPP Rel.8) (completed standardization) - LTE-M (3GPP Rel.8) (completed standardization) - - For LoRa, planning to commercialize via separate - Utilizing existing LTE network Technology Utilizing existing LTE network network with non-licensed band (920MHz) - Providing 0.1mn module for free - Facilitates real-time management and mobility - Low volume, low power, price competitiveness - Facilitates real-time management and mobility - Establish over 30 services in 1H - Invest W100bn for IoT total care - Launch 30 services in a year - Provide home IoT products/services in officetels Business - Build world’s first nationwide IoT network - Aim for 0.5mn subscribed devices with 2,500 households plan - Develop smart home service for Hyundai E&C - Build world’s first nationwide narrow-band IoT - Apply intelligent IoT service enabling automatic Hillstate network remote control Number of - 1.81mn (broadcast control 0.72mn, wearables - 1.13mn (broadcast control 0.38mn, tablet PC - 1.07mn (broadcast control 0.48mn, wireless telecom 0.43mn) 0.30mn) payment 0.18mn) lines - M/S 39% - M/S 24% - M/S 39% Note: Number of telecom lines based on MSIP and includes vehicle control, broadcast control, wireless payment, wearables, and other; Excluded service subscribers counted by telcos themselves. Source: Respective companies’ data, media reports, MSIP, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 20 June 3, 2016 Telecom Service

Figure 39. IoT ecosystem telcos can provide: Embracing applications, platforms, networks

Source: SKT, ITU, Mirae Asset Daewoo Research

Figure 40 . IoT market as viewed by telcos vs. manufacturers : Remote network connection vs. connection between neighboring devices

Source: SKT, Mirae Asset Daewoo Research

Figure 41 . Expecting low -power wide -area network (LPWAN) service s to begin in earnest after establishment of nationwide IoT network in 1H

Source: SK Telecom, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 21 June 3, 2016 Telecom Service

Investment & valuation

1. Attractive dividend yields

Free cash flow at domestic telcos is improving markedly. Capex has been on the downswing in the era of advanced telecom technology, while variable costs have also decreased due to stable marketing competition. Given stable earnings and ample cash flow, we expect telcos to show attractive dividend payout.

Currently, SKT boasts the most attractive dividend yield of 4.6% (2016F dividend of W10,000/share based on the June 2 nd closing price), followed by LG Uplus (2.7%; W800) and KT (2.6%; W290). As for KT, dividend yield could be 3.2%, if dividend reaches W1,000 on the back of earnings growth.

The gap between SKT’s 2016F dividend yield and the three-year KTB yield has widened from 1%p in early 2014 to 3.1%p as of now. The dividend yields of LG Uplus and KT are also higher than the three-year KTB yield.

Figure 42. Three major telcos’ DPS and dividend yield trends and forecast

(W) (%) 12,000 DPS (L) 5 Dividend yield (R) 10,000 4

8,000 3 6,000 2 4,000

1 2,000

0 0 14 15 16F 14 15 16F 14 15 16F SK Telecom KT LG Uplus

Note: 2016F is based on our estimates Source: Respective companies’ data, Mirae Asset Daewoo Research

Figure 43 . Gap between telcos ’ dividend yield s and 3 Y KTB yield expanding; Telcos becoming increasingly attractive as dividend plays

(%, %p) 7 SKT dividend yield KT dividend yield 6 LG Uplus dividend yield 3Y KTB yield 5 Gap between SKT dividend yield and 3Y KTB yield 4.6 4 3.9

3 3.1 2.9 2 1.5 1 1.0

0 1/14 7/14 1/15 7/15 1/16

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 22 June 3, 2016 Telecom Service

2. Investment strategy We remain Overweight on telecom services. Despite stagnant market growth, telcos are expected to report robust earnings thanks to lower capex and marketing spend. In addition, telcos’ expansion of non-telecom businesses is anticipated to enhance their growth potential. Based on improved cash flow, they are also forecast to strengthen shareholder returns. In our view, telcos’ high dividend payout ratios will likely provide downside support to shares when regulatory risks weigh on shares. The 20 th National Assembly is expected to increase the pressure on telcos to reduce plan prices. In the past, telco shares experienced corrections whenever such issues emerged. However, investing during corrections could deliver high returns and dividend yields in line with the recovery of share prices. While stagnating ARPU and rising price-cut pressures should be negative to telcos, their efforts to 1) enhance data service quality by investing in new frequency bands and 2) boost earnings by offering various paid services are noteworthy. In addition, service plan prices are expected to rise steadily in line with growth in data consumption. Indeed, monthly per capita LTE data consumption is nearing 5GB in Korea. Meanwhile, the National Assembly’s proposal to abolish base fees should not have a significant impact on telcos, as today’s major tariff schemes (such as data plans) do not charge base fees. We also note that households’ telecom spending as a percentage of total expenditures has been on the downtrend over the past 10 years. Telcos are also aggressively pursuing new growth drivers, including media and IoT. We recommend KT in the short term in light of high earnings visibility and dividend growth. And from a longer-term perspective (through the end of the year), we recommend SKT given its high dividend payout and aggressive business expansion.

Figure 44 . Telco shares tend to experience corrections whenever telecom expenses emerges as an issue ; Investing during corrections could deliver high returns and dividend yields

(p) (max=100) 49 Telecom service stock price index (L) 0 Telecom expenses issue index (R, reverse) 46 20

43 40

40 60

37 80

34 100 1/15 4/15 7/15 10/15 1/16 4/16 Note: Computed telecom expenses issue index based on amount of search of telecom expenses on NAVER Source: Thomson Reuters, NAVER, Mirae Asset Daewoo Research

Figure 45. Note stocks with low valuation and high dividend yields: We particularly highlight SKT

P/B (x) 8 Verizon

6

4

NTT Docomo SingTel 2 Softbank AT&T China Mobile LG Uplus SKT KT Dividend yield (%) 0 0 1 2 3 4 5 6

Note: Domestic companies and foreign companies are based on our estimates and market consensus, respectively Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 23 June 3, 2016 Telecom Service

3. Valuation comparison

Domestic telcos are mostly undervalued compared to global peers due to 1) high regulatory risks, 2) low ROEs, and 3) inconsistent dividend policy.

Although regulatory risks and ROE are unlikely to improve in the short term, discount factors related to dividends have largely dissipated, in our view. KT and LG Uplus are expected to increase dividend payments from last year’s levels, and SKT guided its dividend yield at 4.6% (W10,000 per share).

Table 12. Major global telcos’ earnings forecast (Wbn) Market Revenue OP Net profit Company name cap. 15 16F 17F 15 16F 17F 15 16F 17F SKT 17,441 17,137 17,429 17,644 1,708 1,750 1,787 1,519 1,586 1,400 KT 8,121 22,281 22,560 22,574 1,293 1,415 1,440 553 581 646 LG Uplus 4,737 10,795 11,078 11,183 632 685 707 351 420 446 NTT Docomo 116,941 43,669 50,114 51,797 7,553 9,740 10,437 5,290 6,810 7,337 Softbank 79,095 88,298 98,819 101,473 9,641 12,034 13,793 4,574 6,124 7,652 China Mobile 279,361 120,392 126,586 132,405 19,909 20,955 23,024 19,552 19,735 21,553 Singapore Telecom 53,421 14,151 14,801 15,211 2,347 2,549 2,663 3,230 3,478 3,735 PCCW 5,954 5,742 6,132 6,365 871 941 1,017 335 357 396 AT&T 283,162 166,215 195,369 199,322 28,063 35,304 37,445 15,110 20,748 21,906 Verizon 244,142 149,026 152,043 152,373 37,432 35,211 36,227 20,243 19,135 19,542 Deutsche Telekom 96,767 86,989 94,435 96,982 8,831 11,782 13,159 4,089 5,558 6,191 BT Group 73,628 33,186 41,329 41,704 6,509 7,580 8,002 4,510 5,131 5,528 Orange 54,707 50,559 54,370 54,849 6,006 7,225 7,913 3,332 3,565 3,718 Note: Domestic companies and foreign companies are based on our estimates and market consensus respectively Source: Bloomberg, Mirae Asset Daewoo Research estimates

Table 13. Major global telcos’ valuation (x, %) P/E P/B EV/EBITDA ROE Dividend yield Company name 15 16F 17F 15 16F 17F 15 16F 17F 15 16F 15 16F SK Telecom 11.5 11.0 12.5 1.0 1.0 0.9 5.0 4.6 4.4 10.2 10.2 4.6 4.6 KT 13.3 14.0 12.6 0.6 0.7 0.6 3.0 2.6 2.8 5.2 5.2 1.8 2.6 LG Uplus 12.9 11.3 10.6 1.0 1.0 0.9 3.9 3.8 3.7 8.1 9.1 2.4 2.7 NTT Docomo 19.2 16.0 14.7 1.9 1.8 1.7 6.7 7.4 7.0 10.3 11.8 - 3.0 Softbank 14.8 12.1 9.6 2.7 2.2 1.8 6.8 6.9 6.5 17.4 19.6 - 0.7 China Mobile 14.2 14.0 12.8 1.7 1.6 1.5 4.4 4.5 4.2 12.0 11.5 3.0 3.0 Singapore Telecom 16.0 15.4 14.3 2.5 2.3 2.2 14.2 13.9 13.4 15.6 15.5 - 4.5 PCCW 16.7 15.2 13.7 3.5 3.3 3.2 6.0 6.0 5.7 21.7 22.0 4.9 4.9 AT&T 16.6 13.6 12.9 1.9 1.9 1.8 7.2 6.6 6.4 13.2 14.4 4.9 5.0 Verizon 12.5 12.8 12.5 11.0 8.1 6.2 6.6 6.8 6.7 128.4 80.2 4.5 4.5 Deutsche Telekom 12.8 17.9 16.0 2.5 2.3 2.2 6.0 6.1 5.9 19.5 13.1 - 3.5 BT Group 14.5 14.3 13.3 4.2 4.7 4.2 8.6 6.8 6.6 46.3 26.0 - 3.2 Orange 18.7 16.2 14.6 1.3 1.3 1.3 6.4 5.6 5.6 8.8 8.8 - 3.9 Average 14.9 14.1 13.1 2.1 2.0 1.9 5.9 5.6 5.5 12.9 12.8 3.7 3.5 Note: Domestic companies and foreign companies are based on our estimates and market consensus, respectively; Excluded outliers when computing average Source: Bloomberg, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 24 June 3, 2016 Telecom Service

KT (030200 KS) Stable earnings and higher dividends

Telecom Service Downside support: Stabilizing earnings and dividend expectations Earnings stability is improving. This year, KT’s operating profit and net profit are (Maintain) Buy forecast to jump 9.5% and 6.3%, respectively. The firm has consistently reported quarterly operating profit of over W300bn since last year, and non-consolidated Target Price (12M, W) 40,000 free cash flow turned positive last year.

Dividend expectations are also growing. Last year, KT’s DPS was W500 and dividend Share Price (06/02/16, W) 31,100 yield was less than 2%. This year, DPS is likely to climb to W800, and dividend yield to 2.5%. If DPS rises to W1,000 aided by earnings growth, dividend yield should rise Expected Return 29% above 3%.

OP (16F, Wbn) 1,415 Supplementary growth drivers: Solid non-telecom business revenue; Consensus OP (16F, Wbn) 1,381 Growth of real estate operations

EPS Growth (16F, %) 5.0 Among major telcos, KT boasts the highest revenue mix of non-telecom businesses. Market EPS Growth (16F, %) 16.6 The company is seeking to boost its asset value through real estate operations. P/E (16F, x) 14.0 Non-telecom business: This year, KT is anticipated to generate 37% of revenue Market P/E (16F, x) 10.6 from other services, including finance (BC Card) and media/content (IPTV, KT KOSPI 1,985.11 Skylife, Nasmedia, and KT Music). BC Card earnings are improving, along with a Market Cap (Wbn) 8,121 steady increase in payment volume. China UnionPay has diversified its revenue Shares Outstanding (mn) 261 sources after extending its reach globally in partnership with BC Card. In the Free Float (%) 85.9 media/content space, KT is seeing an increase in advertising and VOD revenues on Foreign Ownership (%) 49.0 the back of its dominant position in the pay-TV market. The firm’s media/content Beta (12M) 0.24 revenue is forecast to jump 10.5% this year. 52-Week Low 26,350 52-Week High 32,550 Real estate business: KT’s real estate holdings are estimated at W7.8tr in value. Around 30% of its properties are located in the Seoul metropolitan area (70% in (%) 1M 6M 12M terms of value), and those classified as profit maximization assets will be Absolute 1.0 4.7 5.6 developed/sold/leased for profit maximization. The firm’s real estate revenue came Relative 0.6 6.0 10.6 in at W250bn last year. (In 2013, real estate revenue hit W400bn, but the revenue

120 KT KOSPI was offset by consolidated net losses.) The firm plans to expand the corporate 110 housing rental business starting this year, and commence the development/pre-

100 sale business in 2018. We think the real estate business will help boost the firm’s overall earnings. 90

80 Raise TP to W40,000; Our short-term top pick in the telecom sector

70 6.15 10.15 2.16 6.16 We reiterate our Buy call on KT and raise our target price by 8% to W40,000 (from W37,000). We believe improved earnings visibility and dividend expectations will serve as positive share catalysts. In deriving our target price, we averaged: 1) our 2016F BPS multiplied by a P/B of 0.7x (the upper end of the recent three-year P/E band), and 2) a 2016F DPS multiplied by the three-year KTB yield.

FY (Dec.) 12/13 12/14 12/15 12/16F 12/17F 12/18F Revenue (Wbn) 23,811 22,312 22,281 22,560 22,574 22,677 OP (Wbn) 839 -407 1,293 1,415 1,440 1,401 OP margin (%) 3.5 -1.8 5.8 6.3 6.4 6.2 NP (Wbn) -162 -1,055 553 581 646 646 EPS (W) -622 -4,040 2,118 2,224 2,473 2,473 ROE (%) -1.4 -9.5 5.2 5.2 5.6 5.4 P/E (x) - - 13.3 14.0 12.6 12.6 P/B (x) 0.6 0.7 0.6 0.7 0.6 0.6 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 25 June 3, 2016 Telecom Service

Table 14. KT earnings trend and forecast (Wbn, %, ‘000 people) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16F 3Q16F 4Q16F 2014 2015 2016F Revenue 5,399 5,431 5,492 5,959 5,515 5,550 5,530 5,964 22,312 22,281 22,560 Service revenue 4,713 4,827 4,896 5,078 4,899 4,951 4,940 5,140 19,240 19,514 19,931 Wireless 1,822 1,829 1,844 1,875 1,851 1,858 1,859 1,857 7,316 7,371 7,426 Fixed-line 1,305 1,303 1,284 1,267 1,279 1,276 1,259 1,284 5,540 5,159 5,098 Media/content 384 409 429 441 442 456 469 470 1,508 1,662 1,837 Finance 791 801 836 983 823 841 848 991 3,222 3,411 3,503 Other 411 484 503 513 505 520 504 538 1,476 1,911 2,067 Product revenue 685 605 596 881 616 599 590 824 3,250 2,767 2,629 Operating profit 314 369 343 267 385 365 362 303 -407 1,293 1,415 OP margin 5.8 6.8 6.3 4.5 7.0 6.6 6.6 5.1 -1.8 5.8 6.3 Net profit 281 322 126 -97 215 198 186 72 -966 631 671 Net margin 5.2 5.9 2.3 -1.6 3.9 3.6 3.4 1.2 -4.3 2.8 3.0 YoYYoYYoY Revenue -3.5 -3.6 -2.9 9.9 2.2 2.2 0.7 0.1 -6.3 -0.1 1.3 Service revenue 0.4 0.2 -0.9 6.0 3.9 2.6 0.9 1.2 -3.0 1.4 2.1 Wireless 2.2 1.7 -3.6 3.0 1.6 1.6 0.8 -0.9 4.9 0.7 0.7 Fixed-line -8.1 -7.5 -6.4 -5.4 -2.0 -2.1 -2.0 1.4 -7.1 -6.9 -1.2 Media/content 3.8 7.3 8.2 21.9 15.3 11.5 9.4 6.6 11.4 10.2 10.5 Finance 2.6 1.8 2.0 16.4 4.0 5.0 1.5 0.8 -16.5 5.9 2.7 Other 34.2 20.8 28.3 36.0 22.9 7.4 0.2 4.9 -12.5 29.5 8.2 Product revenue -27.6 -29.4 -22.1 29.2 -10.2 -1.0 -1.0 -6.4 -18.1 -14.9 -5.0 Operating profit 155.0 TTB 18.0 1568.8 22.8 -1.1 5.6 13.4 TTR TTB 9.5 Net profit TTB TTB 70.3 RR -23.4 -38.5 47.9 TTB RR TTB 6.3 Key indicators Wireless subscribers 18,178 18,368 18,515 18,723 18,845 18,968 19,030 19,092 18,053 18,723 19,092 LTE subscribers 11,364 11,883 12,335 12,832 13,209 13,807 14,106 14,405 10,780 12,832 14,405 Fixed-line subscribers 31,313 31,397 31,496 31,561 31,604 31,667 31,747 31,826 31,248 31,561 31,826 Media subscribers 7,984 8,205 8,442 8,645 8,822 9,059 9,178 9,297 7,781 8,645 9,297 Notes: All figures are based on consolidated K-IFRS; Net profit is attributable to controlling interests and non-controlling interests; TTR, TTB, and RR refer to “turning to red,” “turning to black,” and “remaining in red,” respectively; Differences exist from FSS data due to retroactive changes to KT Rental/KT Capital data (reclassified as discontinued operations since 2014 due to sale in 2Q15); Revised number of wireless subscribers in line with MSIP disclosure standards; WiBro subscribers included Source: Company data, Mirae Asset Daewoo Research estimates

Figure 46 . Downside support to shares expected in light of Figure 47 . Supplementing growth: Steadiest revenue from dividend growth; 2016F consensus also indicates uptrend non -telecom business

(W) (%) (Wtr) Non-telecom service revenue (L) (%) 1,000 DPS (L) 3 8 Non-telecom service revenue/total service revenue (R) 40 Dividend yield (R)

800 6 30 2 600 4 20

400 1 2 10 200

0 0 0 0 2014 2015 2016F 2012 2013 2014 2015 2016F Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

KDB Daewoo Securities Research 26

June 3, 2016 Telecom Service

KT (030200 KS/Buy/TP: W40,000)

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 22,281 22,560 22,574 22,677 Current Assets 8,583 9,959 10,092 11,317 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 2,559 3,930 3,716 4,531 Gross Profit 22,281 22,560 22,574 22,677 AR & Other Receivables 3,007 3,009 3,011 3,025 SG&A Expenses 20,988 21,145 21,134 21,276 Inventories 525 526 526 529 Operating Profit (Adj) 1,293 1,415 1,440 1,401 Other Current Assets 2,492 2,494 2,839 3,232 Operating Profit 1,293 1,415 1,440 1,401 Non-Current Assets 20,742 19,647 18,960 18,269 Non-Operating Profit -574 -430 -387 -348 Investments in Associates 270 270 270 272 Net Financial Income -316 -205 -171 -145 Property, Plant and Equipment 14,479 13,545 13,142 12,672 Net Gain from Inv in Associates 6 0 0 0 Intangible Assets 2,600 2,438 2,152 1,927 Pretax Profit 719 985 1,053 1,053 Total Assets 29,341 29,622 29,068 29,602 Income Tax 229 314 336 336 Current Liabilities 8,640 8,176 7,099 7,131 Profit from Continuing Operations 490 671 717 717 AP & Other Payables 1,290 1,292 1,292 1,298 Profit from Discontinued Operations 141 0 0 0 Short-Term Financial Liabilities 1,831 1,361 280 0 Net Profit 631 671 717 717 Other Current Liabilities 5,519 5,523 5,527 5,833 Controlling Interests 553 581 646 646 Non-Current Liabilities 8,536 8,732 8,732 8,738 Non-Controlling Interests 78 91 72 72 Long-Term Financial Liabilities 7,108 7,508 7,508 0 Total Comprehensive Profit 562 671 717 717 Other Non-Current Liabilities 1,428 1,224 1,224 8,738 Controlling Interests 501 580 626 626 Total Liabilities 17,176 16,908 15,832 15,869 Non-Controlling Interests 61 91 91 91 Controlling Interests 10,845 11,303 11,753 12,179 EBITDA 4,933 5,407 4,828 4,796 Capital Stock 1,564 1,564 1,564 1,564 FCF (Free Cash Flow) 1,114 1,964 1,279 1,254 Capital Surplus 1,443 1,443 1,443 1,443 EBITDA Margin (%) 22.1 24.0 21.4 21.1 Retained Earnings 9,059 9,518 9,967 10,392 Operating Profit Margin (%) 5.8 6.3 6.4 6.2 Non-Controlling Interests 1,320 1,411 1,483 1,554 Net Profit Margin (%) 2.5 2.6 2.9 2.8 Stockholders' Equity 12,165 12,714 13,236 13,733

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 4,230 4,460 3,779 3,754 P/E (x) 13.3 14.0 12.6 12.6 Net Profit 631 671 717 717 P/CF (x) 1.4 1.6 1.8 1.8 Non-Cash Income and Expense 4,583 4,511 3,895 3,876 P/B (x) 0.6 0.7 0.6 0.6 Depreciation 3,031 3,430 2,903 2,970 EV/EBITDA (x) 3.0 2.6 2.8 2.6 Amortization 609 562 485 425 EPS (W) 2,118 2,224 2,473 2,473 Others 943 519 507 481 CFPS (W) 19,968 19,846 17,663 17,590 Chg in Working Capital -635 -203 -326 -358 BPS (W) 44,851 46,606 48,329 49,957 Chg in AR & Other Receivables 113 -3 -2 -14 DPS (W) 500 800 900 900 Chg in Inventories -179 0 0 -2 Payout ratio (%) 19.4 29.2 30.7 30.7 Chg in AP & Other Payables 81 1 1 6 Dividend Yield (%) 1.8 2.6 2.9 2.9 Income Tax Paid -77 -314 -336 -336 Revenue Growth (%) -0.1 1.3 0.1 0.5 Cash Flows from Inv Activities -2,402 -2,897 -2,715 -2,719 EBITDA Growth (%) 43.1 9.6 -10.7 -0.7 Chg in PP&E -3,087 -2,496 -2,500 -2,500 Operating Profit Growth (%) - 9.4 1.8 -2.7 Chg in Intangible Assets -374 -400 -200 -200 EPS Growth (%) - 5.0 11.2 0.0 Chg in Financial Assets 339 -1 -15 -19 Accounts Receivable Turnover (x) 7.3 7.5 7.5 7.5 Others 720 0 0 0 Inventory Turnover (x) 48.5 42.9 42.9 43.0 Cash Flows from Fin Activities -1,164 -192 -1,277 -220 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities -4,146 -70 -1,081 0 ROA (%) 2.0 2.3 2.4 2.4 Chg in Equity 3 0 0 0 ROE (%) 5.2 5.2 5.6 5.4 Dividends Paid -42 -122 -196 -220 ROIC (%) 4.8 5.9 6.3 6.3 Others 3,021 0 0 0 Liability to Equity Ratio (%) 141.2 133.0 119.6 115.6 Increase (Decrease) in Cash 671 1,370 -214 814 Current Ratio (%) 99.3 121.8 142.2 158.7 Beginning Balance 1,889 2,559 3,930 3,716 Net Debt to Equity Ratio (%) 50.0 36.5 28.4 21.3 Ending Balance 2,559 3,930 3,716 4,531 Interest Coverage Ratio (x) 3.4 4.8 5.2 5.4 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 27 June 3, 2016 Telecom Service

SK Telecom (017670 KS) Dividends and new business potential to outstrip negatives

Telecom Service Downside support: High dividend yield (4% level); Interim dividend likely

(Maintain) Buy SK Telecom’s (SKT) high dividend yield looks attractive not just among the three big telcos, but also among KOSPI 200 stocks. Factoring in a dividend per share of Target Price (12M, W) 280,000 W10,000, 2016F dividend yield is estimated at 4.6%. We forecast interim and year- end dividends to be W1,000 and W9,000, respectively. Although the possibility of Share Price (06/02/16, W) 216,000 restrictions on telecom rates and the government’s prolonged deliberation on the CJ HelloVision acquisition are weighing on SKT’s shares, we expect the company’s Expected Return 30% high dividend yield to provide downside support. Supplementary growth drivers: Expansion into non-telecom OP (16F, Wbn) 1,750 Consensus OP (16F, Wbn) 1,689 business; Acquisition of media; Investment in commerce

EPS Growth (16F, %) 4.5 SKT’s parent-based telecom revenue has experienced negative YoY growth since Market EPS Growth (16F, %) 16.6 4Q14. In October 2014, consumers were allowed to opt for discounted plan rates P/E (16F, x) 11.0 instead of subsidies when purchasing a handset. In April 2015, discount was raised Market P/E (16F, x) 10.6 from 12% to 20%. With the LTE market nearing saturation (LTE subscribers already KOSPI 1,985.11 exceed 70% of overall subscribers), SKT is making aggressive efforts to expand into non-telecom business areas. Market Cap (Wbn) 17,441 Shares Outstanding (mn) 81 Acquisition of media : SKT announced its plan to acquire CJ HelloVision in Free Float (%) 62.2 November 2015. The deal is under review by the Fair Trade Commission, the Korea Foreign Ownership (%) 40.4 Communications Commission, and the Ministry of Science, ICT, and Future Beta (12M) 0.03 Planning. In 2015, CJ HelloVision posted revenue of W1.1tr, operating profit of 52-Week Low 193,000 W105bn, and net profit of W60bn. And the company holds approximately 4.1mn 52-Week High 263,000 subscribers as of April 2016. Once CJ HelloVision is merged with SK Broadband, the (%) 1M 6M 12M combined number of subscribers will be 7.73mn, making the merged firm the Absolute 2.9 -7.5 -13.1 second-largest pay-TV operator. Also, the pay-TV subscriber base should help the Relative 2.5 -6.4 -9.0 company to expand into wired- and wireless integrated services and IoT services.

110 SK Telecom KOSPI Investment in commerce : In 1Q16, SK Planet was split off into three entities, 100 including a commerce business (11th Street). SKT’s investment is concentrated on 90 the commerce unit. In an effort to sharpen competitiveness of mobile shopping,

80 the commerce unit plans to use internal cash reserves (roughly W500bn) and

70 outside investment (W1tr) to enhance logistics systems and marketing activities. In addition, in April the unit launched services to directly purchase and deliver 60 6.15 10.15 2.16 6.16 products, while reinforcing efforts to reach SKT mobile subscribers (e.g., 11% discount for T membership subscribers). While mobile shopping competition is fierce, we note the business’s strong growth relative to telecom services. Furthermore, the value of the commerce unit could gain attention by itself. Retain

FY (Dec.) 12/13 12/14 12/15 12/16F 12/17F 12/18F Revenue (Wbn) 16,602 17,164 17,137 17,429 17,644 17,860 OP (Wbn) 2,011 1,825 1,708 1,750 1,787 1,842 OP margin (%) 12.1 10.6 10.0 10.0 10.1 10.3 NP (Wbn) 1,639 1,801 1,519 1,586 1,400 1,454 EPS (W) 20,298 22,307 18,807 19,645 17,336 18,011 ROE (%) 13.0 12.9 10.2 10.2 8.6 8.6 P/E (x) 11.3 12.0 11.5 11.0 12.5 12.0 P/B (x) 1.2 1.3 1.0 1.0 0.9 0.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 28 June 3, 2016 Telecom Service

Buy with TP of W280,000; Our longer-term top pick

We maintain our Buy call with a target price of W280,000. In the short term, SKT shares could be dragged down by uncertainties regarding regulatory risks and expenses related to non-telecom businesses. However, if uncertainties ease this year, we believe the stock will bounce back, aided by its deep correction relative to telecom peers, 10-year-low foreign ownership level, and high dividend yield.

Table 15. SKT earnings trends and forecast (Wbn, %, ‘000 people) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16F 3Q16F 4Q16F 2014 2015 2016F Revenue 4,240 4,256 4,261 4,379 4,229 4,329 4,369 4,503 17,164 17,137 17,429 Parent 3,133 3,144 3,142 3,138 3,098 3,179 3,182 3,176 13,013 12,557 12,635 Wireless 2,910 2,917 2,923 2,913 2,895 2,904 2,905 2,900 12,053 11,662 11,604 Other 224 227 219 225 203 274 277 277 960 895 1,031 Subsidiaries 1,107 1,112 1,119 1,241 1,131 1,151 1,187 1,326 4,151 4,580 4,794 Operating profit 403 413 491 402 402 438 474 436 1,825 1,708 1,750 OP margin (%) 9.5 9.7 11.5 9.2 9.5 10.1 10.8 9.7 10.6 10.0 10.0 Net profit 443 398 382 293 572 334 374 308 1,799 1,516 1,588 Net margin (%) 10.4 9.3 9.0 6.7 13.5 7.7 8.6 6.8 10.5 8.8 9.1 QoQ Revenue -1.1 0.4 0.1 2.8 -3.4 2.4 0.9 3.1 Parent -1.5 0.4 -0.1 -0.1 -1.3 2.6 0.1 -0.2 Wireless -0.5 0.2 0.2 -0.3 -0.6 0.3 0.0 -0.2 Other -12.2 1.3 -3.5 2.7 -9.8 35.1 1.0 -0.1 Subsidiaries -0.2 0.4 0.7 10.9 -8.9 1.8 3.1 11.8 Operating profit -17.8 2.5 18.9 -18.1 0.1 9.0 8.1 -8.0 Net profit -12.0 -10.1 -4.0 -23.2 95.1 -41.7 11.9 -17.6 YoY Revenue 0.9 -1.1 -2.4 2.1 -0.3 1.7 2.5 2.8 3.4 -0.2 1.7 Parent -4.0 -3.7 -4.9 -1.4 -1.1 1.1 1.3 1.2 1.2 -3.5 0.6 Wireless -4.2 -3.9 -4.3 -0.4 -0.5 -0.4 -0.6 -0.5 0.4 -3.2 -0.5 Other -1.3 -0.9 -12.0 -11.8 -9.4 20.8 26.5 23.0 12.7 -6.8 15.2 Subsidiaries 18.0 6.9 5.3 11.9 2.1 3.5 6.0 6.8 10.9 10.3 4.7 Operating profit 59.8 -24.4 -8.6 -18.0 -0.1 6.2 -3.5 8.5 -9.2 -6.4 2.5 Net profit 65.7 -20.0 -28.1 -41.7 29.2 -16.1 -2.1 5.0 11.8 -15.8 4.7 Key indicators Wireless subscribers 28,026 28,313 28,474 28,626 28,921 29,075 29,152 29,229 28,279 28,626 29,229 LTE subscribers 17,447 17,937 18,465 18,980 19,526 20,432 20,884 21,337 16,737 18,980 21,337 Notes: All figures are based on consolidated K-IFRS; Incurred one-off cost of W110bn related to early retirement plan in 2Q15; Reflected gain of W314.7bn from sell-off of stake in LOEN Entertainment Source: Company data, Mirae Asset Daewoo Research

Figure 48 . Downside support to shares expected in light of Figure 49 . Supplementing growth: Media (CJ HelloVision) and high dividends (even relative to global peers) commerce (11 th Street ) businesses are strengthening

(W) (%) 10,500 DPS (L) 5 Dividend yield (R)

10,000

4 9,500

9,000 3

8,500

8,000 2 2014 2015 2016F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 29 June 3, 2016 Telecom Service

SK Telecom (017670 KS/Buy/TP: W280,000)

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 17,137 17,429 17,644 17,860 Current Assets 5,160 6,670 6,963 7,467 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 769 1,709 1,952 2,394 Gross Profit 17,137 17,429 17,644 17,860 AR & Other Receivables 3,019 3,111 3,139 3,177 SG&A Expenses 15,429 15,680 15,858 16,019 Inventories 274 282 285 289 Operating Profit (Adj) 1,708 1,750 1,787 1,842 Other Current Assets 1,098 1,568 1,587 1,607 Operating Profit 1,708 1,750 1,787 1,842 Non-Current Assets 23,421 22,889 22,538 22,854 Non-Operating Profit 327 383 94 112 Investments in Associates 6,896 7,108 7,195 7,283 Net Financial Income -252 -253 -222 -199 Property, Plant and Equipment 10,371 9,618 9,010 9,070 Net Gain from Inv in Associates 786 671 300 400 Intangible Assets 4,213 4,095 4,245 4,395 Pretax Profit 2,035 2,133 1,881 1,954 Total Assets 28,581 29,560 29,501 30,321 Income Tax 519 545 480 498 Current Liabilities 5,256 5,384 4,614 4,667 Profit from Continuing Operations 1,516 1,588 1,401 1,456 AP & Other Payables 1,603 1,652 1,673 1,693 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,083 1,083 260 0 Net Profit 1,516 1,588 1,401 1,456 Other Current Liabilities 2,570 2,649 2,681 2,974 Controlling Interests 1,519 1,586 1,400 1,454 Non-Current Liabilities 7,951 8,111 8,127 8,144 Non-Controlling Interests -3 2 1 1 Long-Term Financial Liabilities 6,650 6,770 6,770 0 Total Comprehensive Profit 1,518 1,398 1,401 1,456 Other Non-Current Liabilities 1,301 1,341 1,357 8,144 Controlling Interests 1,522 1,441 1,406 1,461 Total Liabilities 13,207 13,495 12,741 12,811 Non-Controlling Interests -5 -43 -5 -5 Controlling Interests 15,251 15,940 16,634 17,382 EBITDA 4,701 4,823 4,895 4,982 Capital Stock 45 45 45 45 FCF (Free Cash Flow) 1,299 1,760 1,774 1,048 Capital Surplus 2,916 3,314 3,314 3,314 EBITDA Margin (%) 27.4 27.7 27.7 27.9 Retained Earnings 15,008 15,888 16,582 17,330 Operating Profit Margin (%) 10.0 10.0 10.1 10.3 Non-Controlling Interests 123 125 126 127 Net Profit Margin (%) 8.9 9.1 7.9 8.1 Stockholders' Equity 15,374 16,065 16,760 17,509

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 3,778 4,080 4,274 4,248 P/E (x) 11.5 11.0 12.5 12.0 Net Profit 1,516 1,588 1,401 1,456 P/CF (x) 3.7 3.6 3.6 3.6 Non-Cash Income and Expense 3,250 3,200 3,510 3,437 P/B (x) 1.0 1.0 0.9 0.9 Depreciation 2,993 3,073 3,108 3,140 EV/EBITDA (x) 5.0 4.6 4.4 4.2 Amortization 0 0 0 0 EPS (W) 18,807 19,645 17,336 18,011 Others 257 127 402 297 CFPS (W) 59,025 59,298 60,822 60,599 Chg in Working Capital -686 59 35 25 BPS (W) 216,875 225,407 233,998 243,265 Chg in AR & Other Receivables -4 -72 -30 -30 DPS (W) 10,000 10,000 10,000 10,000 Chg in Inventories -8 -8 -3 -3 Payout ratio (%) 46.7 44.5 50.4 48.5 Chg in AP & Other Payables -95 9 4 4 Dividend Yield (%) 4.6 4.6 4.6 4.6 Income Tax Paid -133 -545 -480 -498 Revenue Growth (%) -0.2 1.7 1.2 1.2 Cash Flows from Inv Activities -2,880 -2,791 -2,684 -3,385 EBITDA Growth (%) -0.3 2.6 1.5 1.8 Chg in PP&E -2,442 -2,320 -2,500 -3,200 Operating Profit Growth (%) -6.4 2.5 2.1 3.1 Chg in Intangible Assets -124 118 -150 -150 EPS Growth (%) -15.7 4.5 -11.8 3.9 Chg in Financial Assets -534 -505 -34 -35 Accounts Receivable Turnover (x) 7.2 7.3 7.3 7.3 Others 220 -84 0 0 Inventory Turnover (x) 63.3 62.8 62.2 62.2 Cash Flows from Fin Activities -965 -618 -1,559 -734 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities 653 120 -823 0 ROA (%) 5.4 5.5 4.7 4.9 Chg in Equity 0 398 0 0 ROE (%) 10.2 10.2 8.6 8.6 Dividends Paid -668 -706 -706 -706 ROIC (%) 8.7 9.3 9.9 10.4 Others -950 -430 -30 -28 Liability to Equity Ratio (%) 85.9 84.0 76.0 73.2 Increase (Decrease) in Cash -66 941 243 442 Current Ratio (%) 98.2 123.9 150.9 160.0 Beginning Balance 834 769 1,709 1,952 Net Debt to Equity Ratio (%) 39.9 30.2 22.5 18.9 Ending Balance 769 1,709 1,952 2,394 Interest Coverage Ratio (x) 5.7 5.8 6.2 6.8 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 30 June 3, 2016 Telecom Service

LG Uplus (032640 KS) Heading into the second phase of growth

Telecom Service Downside support: To maintain dividend payout ratio at 30% or over LG Uplus maintains a dividend payout ratio of 30%. Accordingly, earnings (Maintain) Buy improvement could further push up dividend expectations. We project the company’s dividend payments to increase to W290 per share this year, up W40 YoY, on the back of operating and net profit growth of 8.3% and 19.5%, respectively. Target Price (12M, W) 14,000 Supplementary growth drivers: Focus on new CEO’s strategy

Share Price (06/02/16, W) 10,850 Compared to peers, LG Uplus’ revenue structure is more focused on traditional telecom services. However, the telco’s new CEO is now seeking new growth drivers Expected Return 29% to accelerate growth.

Telecom services : LG Uplus introduced LTE services ahead of its peers in end-2011, OP (16F, Wbn) 685 and since then its mobile subscribers have increased to 11mn from 9mn. The Consensus OP (16F, Wbn) 691 company is the only telco to have recorded a net MoM increase in the number EPS Growth (16F, %) 19.5 portability subscribers for 12 straight months. The larger mix of direct subscribers Market EPS Growth (16F, %) 16.6 relative to MVNO subscribers should also be positive for its ARPU. The robust P/E (16F, x) 11.3 growth of the telecom services business is providing a boost to the fixed-line Market P/E (16F, x) 10.6 internet and IPTV businesses. Indeed, the share of LG Uplus’ IPTV service tv G in the KOSPI 1,985.11 pay-TV market has risen to 8% from 4% in 2011.

Market Cap (Wbn) 4,737 IoT : The new CEO’s strategy should influence the direction of the company’s IoT Shares Outstanding (mn) 437 businesses. Currently, its IoT businesses largely focus on smart home services Free Float (%) 63.9 (IoT@home). Going forward, the company plans to develop intelligence-based Foreign Ownership (%) 36.9 services, which will use big data to allow home devices to be operated without Beta (12M) 0.11 human control. The company aims to raise the number of smart home service 52-Week Low 8,920 subscribers by 500,000 this year. 52-Week High 12,900 The telco is also anticipated to expand the customer base of its IoT businesses to (%) 1M 6M 12M enterprises. Recently, in an effort to promote the IoT market, the government Absolute -3.6 3.8 18.1 began to ease regulations and support the establishment of dedicated networks. In Relative -3.9 5.1 23.6 the early stages of market formation, the important roles tend to be played by leading firms with a business model, capital, and marketing capabilities, along with

150 LG Uplus KOSPI the government. LG Uplus has created an IoT business model ahead of competitors

130 in the B2C space, becoming the first in Korea to introduce an IoT rate scheme. Accordingly, the company is also expected to take the lead in the B2B market. 110 Maintain Buy and TP of W14,000 90 We maintain our Buy call on LG Uplus and our target price of W14,000. Our 70 6.15 10.15 2.16 6.16 investment recommendation is premised on: 1) relatively robust growth amid the slowdown of the broader market, 2) expectations for a first-mover advantage in the IoT market, and 3) healthy dividend yield (around the mid-2% level).

FY (Dec.) 12/13 12/14 12/15 12/16F 12/17F 12/18F Revenue (Wbn) 11,450 11,000 10,795 11,078 11,183 11,308 OP (Wbn) 542 576 632 685 707 714 OP margin (%) 4.7 5.2 5.9 6.2 6.3 6.3 NP (Wbn) 279 228 351 420 446 462 EPS (W) 640 523 805 962 1,022 1,057 ROE (%) 7.2 5.6 8.1 9.1 9.1 8.8 P/E (x) 16.8 22.0 12.9 11.3 10.6 10.3 P/B (x) 1.2 1.2 1.0 1.0 0.9 0.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 31 June 3, 2016 Telecom Service

Table 16. LG Uplus earnings trends and forecast (Wbn, %, ‘000 people) 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16F 3Q16F 4Q16F 2014 2015 2016F Revenue 2,556 2,662 2,717 2,861 2,713 2,747 2,783 2,835 11,000 10,795 11,078 Service revenue 2,113 2,160 2,162 2,219 2,175 2,220 2,234 2,264 8,398 8,654 8,894 Wireless 1,304 1,336 1,333 1,325 1,321 1,345 1,353 1,356 5,212 5,298 5,375 Fixed-line 800 817 822 865 846 871 877 909 3,157 3,303 3,503 Handset revenue 443 502 554 642 538 527 549 571 2,602 2,141 2,184 % of revenue Service revenue 82.7 81.2 79.6 77.6 80.2 80.8 80.3 79.9 76.3 80.2 80.3 Handset revenue 17.3 18.8 20.4 22.4 19.8 19.2 19.7 20.1 23.7 19.8 19.7 Operating profit 155 192 172 113 171 205 175 134 576 632 685 OP margin (%) 6.1 7.2 6.3 4.0 6.3 7.5 6.3 4.7 5.2 5.9 6.2 Net profit 82 116 114 40 110 130 108 72 228 351 420 Net margin (%) 3.2 4.4 4.2 1.4 4.1 4.7 3.9 2.6 2.1 3.3 3.8 YoY Revenue -8.1 -4.1 -1.6 6.6 6.1 3.2 2.4 -0.9 -3.9 -1.9 2.6 Service revenue 4.6 4.4 3.2 0.3 2.9 2.8 3.3 2.0 7.2 3.1 2.8 Wireless 4.4 4.8 2.8 -4.7 1.3 0.7 1.5 2.3 9.3 1.7 1.5 Fixed-line 4.0 4.3 4.3 5.8 5.8 6.6 6.7 5.1 3.1 4.6 6.0 Handset revenue -41.7 -28.8 -16.9 36.4 21.3 5.0 -1.0 -11.1 -27.7 -17.7 2.0 Operating profit 36.7 96.3 -1.3 -40.7 10.2 6.5 1.9 18.6 6.4 9.7 8.3 Net profit 207.3 245.7 38.4 -53.6 33.6 12.2 -5.3 83.0 -18.4 54.3 19.5 Key indicators Wireless subscribers 11,566 11,690 11,794 11,949 12,104 12,243 12,330 12,416 11,381 11,949 12,416 LTE 8,906 9,216 9,512 9,879 10,190 10,371 10,618 10,864 8,570 9,879 10,864 Fixed -line subscribers 10,035 10,220 10,671 10,809 10,913 11,054 11,181 11,308 9,882 10,809 11,308 Media 2,040 2,123 2,199 2,280 2,355 2,430 2,502 2,575 1,949 2,280 2,575 Notes: All figures are based on consolidated K-IFRS; Handset revenue recognized on a net basis from 4Q14; Based number of wireless subscribers on MSIP’s official data Source: Company data, Mirae Asset Daewoo Research estimates

Figure 50 . Downside support to shares expected in light of Figure 51 . Supplementing growth: Expansion in IoT business dividends at the mid -2% level ( dividend payout ratio of 30% ) expected

(W) (%) 400 DPS (L) 3 Dividend yield (R)

300 2

200

1 100

0 0 2014 2015 2016F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 32 June 3, 2016 Telecom Service

LG Uplus (032640 KS/Buy/TP: W14,000)

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 10,795 11,078 11,183 11,308 Current Assets 2,599 2,831 3,215 3,304 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 292 501 714 719 Gross Profit 10,795 11,078 11,183 11,308 AR & Other Receivables 1,714 1,742 1,760 1,779 SG&A Expenses 10,163 10,393 10,477 10,594 Inventories 365 361 365 369 Operating Profit (Adj) 632 685 707 714 Other Current Assets 228 227 376 437 Operating Profit 632 685 707 714 Non-Current Assets 9,352 9,404 9,367 9,337 Non-Operating Profit -166 -128 -115 -102 Investments in Associates 7 0 0 0 Net Financial Income -151 -108 -72 -43 Property, Plant and Equipment 7,224 7,284 7,251 7,224 Net Gain from Inv in Associates -1 0 0 0 Intangible Assets 967 966 962 958 Pretax Profit 466 557 592 612 Total Assets 11,951 12,235 12,582 12,641 Income Tax 115 137 146 151 Current Liabilities 3,354 3,332 3,355 3,081 Profit from Continuing Operations 351 420 446 462 AP & Other Payables 1,355 1,342 1,355 1,370 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 944 944 944 0 Net Profit 351 420 446 462 Other Current Liabilities 1,055 1,046 1,056 1,711 Controlling Interests 351 420 446 462 Non-Current Liabilities 4,148 4,144 4,149 4,154 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 3,631 3,631 3,631 0 Total Comprehensive Profit 336 420 446 462 Other Non-Current Liabilities 517 513 518 4,154 Controlling Interests 336 420 446 462 Total Liabilities 7,503 7,475 7,503 7,236 Non-Controlling Interests 0 0 0 0 Controlling Interests 4,448 4,759 5,079 5,405 EBITDA 2,241 2,300 2,314 2,315 Capital Stock 2,574 2,574 2,574 2,574 FCF (Free Cash Flow) 417 485 622 626 Capital Surplus 837 837 837 837 EBITDA Margin (%) 20.8 20.8 20.7 20.5 Retained Earnings 1,036 1,347 1,666 1,993 Operating Profit Margin (%) 5.9 6.2 6.3 6.3 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 3.3 3.8 4.0 4.1 Stockholders' Equity 4,448 4,759 5,079 5,405

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 1,793 1,985 2,022 2,026 P/E (x) 12.9 11.3 10.6 10.3 Net Profit 351 420 446 462 P/CF (x) 1.9 2.1 2.1 2.1 Non-Cash Income and Expense 2,034 1,861 1,825 1,794 P/B (x) 1.0 1.0 0.9 0.9 Depreciation 1,434 1,440 1,433 1,427 EV/EBITDA (x) 3.9 3.8 3.7 3.5 Amortization 175 175 174 174 EPS (W) 805 962 1,022 1,057 Others 425 246 218 193 CFPS (W) 5,464 5,224 5,201 5,166 Chg in Working Capital -361 -50 -31 -36 BPS (W) 10,187 10,900 11,632 12,379 Chg in AR & Other Receivables -223 -30 -15 -17 DPS (W) 250 290 310 320 Chg in Inventories -89 3 -3 -4 Payout ratio (%) 31.1 30.2 30.3 30.3 Chg in AP & Other Payables 7 -3 3 3 Dividend Yield (%) 2.4 2.7 2.9 2.9 Income Tax Paid -72 -137 -146 -151 Revenue Growth (%) -1.9 2.6 0.9 1.1 Cash Flows from Inv Activities -1,511 -1,674 -1,682 -1,585 EBITDA Growth (%) 7.6 2.6 0.6 0.0 Chg in PP&E -1,363 -1,500 -1,400 -1,400 Operating Profit Growth (%) 9.7 8.4 3.2 1.0 Chg in Intangible Assets -172 -175 -170 -170 EPS Growth (%) 53.9 19.5 6.2 3.4 Chg in Financial Assets 42 1 -112 -15 Accounts Receivable Turnover (x) 7.3 7.2 7.2 7.2 Others -18 0 0 0 Inventory Turnover (x) 33.7 30.5 30.8 30.8 Cash Flows from Fin Activities -406 -109 -127 -435 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities -341 0 0 -300 ROA (%) 2.9 3.5 3.6 3.7 Chg in Equity 0 0 0 0 ROE (%) 8.1 9.1 9.1 8.8 Dividends Paid -65 -109 -127 -135 ROIC (%) 5.5 5.9 6.0 6.1 Others 0 0 0 0 Liability to Equity Ratio (%) 168.7 157.1 147.7 133.9 Increase (Decrease) in Cash -124 209 213 5 Current Ratio (%) 77.5 85.0 95.8 107.2 Beginning Balance 416 292 501 714 Net Debt to Equity Ratio (%) 95.4 84.8 73.1 62.8 Ending Balance 292 501 714 719 Interest Coverage Ratio (x) 3.4 4.1 4.2 4.4 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 33 June 3, 2016 Telecom Service

APPENDIX 1

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

Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price KT(030200) 06/03/2016 Buy 40,000 10/01/2014 Buy 380,000 05/02/2016 Buy 37,000 08/03/2014 Buy 310,000 01/31/2016 Buy 35,000 05/15/2014 Buy 290,000 11/01/2015 Trading Buy 35,000 LG Uplus(032640) 04/05/2016 Buy 14,000 08/02/2015 Buy 39,000 02/01/2016 Buy 13,000 01/20/2015 Buy 40,000 07/31/2015 Buy 15,000 10/01/2014 Buy 42,000 04/28/2015 Buy 14,000 05/15/2014 Buy 40,000 01/25/2015 Buy 16,000 SK Telecom(017670) 04/29/2016 Buy 280,000 10/01/2014 Buy 15,000 02/02/2016 Buy 300,000 07/31/2014 Buy 11,500 07/31/2015 Buy 350,000 05/15/2014 Buy 13,000 05/06/2015 Buy 360,000

(W) (W) (W) KT SK Telecom LG Uplus 50,000 400,000 20,000

40,000 300,000 15,000 30,000 200,000 10,000 20,000 100,000 10,000 5,000

0 0 Jun 14 Jun 15 Jun 16 Jun 14 Jun 15 Jun 16 0 Jun 14 Jun 15 Jun 16

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 Buy HoldHoldHold SellSellSell 68.29% 17.56% 14.15% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2016)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subj ect 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.

Mirae Asset Daewoo Research 34 June 3, 2016 Telecom Service

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 Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. 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 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 go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have 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.

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Mirae Asset Daewoo Research 35