Display, Telecom and Software

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Jeff Kim Analyst / IT Display, Telecom and 82-2-6114-2913 [email protected] Joonsop Kim Analyst Telecom Services/Holdings 82-2-6114-2935 [email protected] Software Danny Lee Analyst Internet, Game, Media, Leisure 82-2-6114-2960 [email protected] 5G, OLED and Content to Stand Out in 2019 Changmin Lee Analyst / IT 82-2-6114-2917 [email protected] Goun Whang RA 82-2-6114-2932 [email protected] MWC19: More immersive fun at faster speeds and on larger screens Caleb Kim RA 82-2-6114-2977 [email protected] We visited the Mobile World Congress 2019 (MWC19 held from Feb 25-28), in Sukyung Lee RA Barcelona, Spain. MWC19 provided us with valuable insight into the hot topics of the 82-2-6114-2914 [email protected] display & consumer electronics, communication and software industries by offering a Jeonghoon Son RA 82-2-6114-2910 [email protected] glimpse of how immersive content can be accessed through smartphones that operate on 5G, the platform for Industry 4.0, without any time or space constraints. This contrasted with IT exhibitions up to this point that only presented abstract concepts March 4, 2019 focusing on self-driving cars. Considering the dawning era of immersive content accessed via 5G foldable handsets, our top picks are Samsung Electronics (SEC), SEMCO, SK Telecom (SKT), NCSOFT, SFA Engineering and Hansol Chemical. We also Positive maintain believe AfreecaTV deserves attention. Recommendations March 4, 2019 Samsung Electronics (005930) Buy Foldable handsets to create added value in various industries Current price KRW44,850 Target price KRW52,000 When connected with other industries through 5G networks, the portability and convenience of foldable smartphones will create added value in numerous industries SEMCO (009150) Buy Current price KRW100,700 throughout the world. This is because foldable handsets, assuming they can be folded Target price KRW148,000 numerous times, will encase screens comparable to PCs and TVs (15-65”) in size, which will expand their usage in education, digital healthcare, games, media and other areas SK Telecom (017670) Buy Current price KRW261,000 when combined with the high communication speeds of 5G networks. A total of 16 Target price KRW360,000 countries will have 5G services available within 2019, while 5G smartphones are NCSOFT (036570) Buy projected to account for 18% of the global market by 2022. Some consider the price Current price KRW448,000 (KRW2.2mn-2.9mn) and physical dimensions (weight, thickness etc.) as obstacles for Target price KRW550,000 foldable handsets, but the expansion of the market will naturally lead to form factor SFA Engineering (056190) Buy improvements and price cuts. Current price KRW43,900 Target price KRW55,000

Telcos to occupy higher ground in 5G ecosystem Hansol Chemical (014680) Buy While MWC18 focused on how 5G could be realized, MWC19 was more focused on Current price KRW88,700 Target price KRW110,000 what would become possible with 5G. In addition to the emphasis on the high speeds, ultra-low latency and super connectivity of 5G networks, MWC19 also AfreecaTV (067160) Not Rated Current price KRW47,450 showcased robotics, IoT and other services enabled by the new communication Target price NA technology. In particular, MWC19 also hinted at the possibility of the telecom ecosystem trinity (network, handset, service) making immersive media services (AR/VR/MR/XR) a reality. Not only does immersive media (AR/VR) provide entertainment, but it has also become a crucial feature in smart factories. This is the reason why the booths of Magic Leap One, MS Hololens and other similar companies attracted many people. MWC19 also reconfirmed that, when excluding certain areas, telcos maintain dominance in two areas of the telecom ecosystem trinity: network and service.

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5G foldable handsets to stimulate immersive content demand The commercial launch of 5G services in 2019 is forecast to result in a sharp increase in the quantity and quality of immersive content. The proliferation of cloud gaming services is expected to boost accessibility to games demanding high system requirements, while contributing to the spread of subscription-based services and revenue growth at game developers and platform operators. Furthermore, 4K live streaming, upon realization, will boost the supply of secondary content – particularly, interactive media content. Foldable handsets, such as Galaxy Fold, offer both access to larger screens and portability, which are expected to stimulate demand for games, videos and other premium content. Meanwhile, they will boost the usage time for 5G mobile devices as their superior multi-tasking capabilities allow users to carry on other tasks while viewing content.

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I. Digital Transformation: 5G to Encompass Everything

MWC19: Focus on changes in telcos’ 5G revenue models and communication service ecosystem

5G to change B2B2X revenue models 5G has been the main theme of MWC since 2015. All booths have been featuring emphasis on the basic characteristics of 5G networks, such as unparalleled speed and ultra-low latency, while providing glimpses into future services, such as self- driving cars, robotics and IoT. This has led some to conclude that 5G is all talk and does not yield tangible services that consumers can experience. However, we believe, unlike its predecessors, MWC19 was a testament to the changed telecom ecosystem.

4YFN: the main arena of startups Handset and communication equipment manufacturers grabbed headlines at previous MWC events. However, MWC19 featured much more diversity, placing more prominence on participants from a wider range of areas, such as automobiles and consulting. Nearly a quarter (23,000) of all visitors to MWC19 flocked to the Fira Montjuic exhibition center, where the 4YFN (4 years from now) took place. The reason for the keen attention to 4YFN is because the revenue models of telcos will shift from conventional B2C models to B2B2X models in the 5G era.

Fig 1. Industrial-use IoT using 5G technology Fig 2. Smart factory using 5G technology

Source: Huawei, MWC19 Source: KT, MWC19

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Fig 3. Smart city using 5G and AI technology Fig 4. 5G and AI used in product distribution

Source: Huawei, MWC19 Source: Huawei, MWC19

B2B2X revenue model expected Many companies that opened booths at MWC19 seemed to be focusing more on B2B2X as the revenue model for 5G networks than the B2C model employed by current network formats (3G, 4G LTE etc.). This suggests a strong possibility that the clients of telcos will be enterprises providing services to ordinary consumers. This means that companies developing services have acknowledged the attributes and distinct characteristics of 5G networks. As a result, consulting firms (Accenture, McKinsey, etc.) opened booths alongside communication and communication equipment companies, which was a notable factor that distinguished MWC19 from its predecessors.

Diversity in communication The 5G market will differ from 3G and 4G markets due to the need to develop specifications to give telcos services that offer the high speeds of broadband transmissions as well as utilizing advantage in service development the ultra-low latency and super connectivity of 5G networks. Since the characteristics of communication networks need to be considered when designing services, telcos will rise to prominence since they have such experience.

2026 OR of telcos to be 13.6% Assuming telcos continue to focus on providing communication infrastructure as higher than in 2016 when relying on they did during the 3G and 4G eras, the value of the 5G market for all telcos will simple communication line sales hover at around USD204bn (around 10% of combined 2026 OR), which accounts for a mere 5.9% of the total digital transformation market. Considering that the combined OR of all telcos in the world hovered at around USD1.5tr in 2016, this represents a 13.6% increase over 2016 levels.

2026 OR of telcos to be 41% higher However, if telcos generate revenues by developing 5G services, the value of the 5G than in 2016 if telcos spearhead 5G market for telcos is projected at around USD619bn (26% of combined 2026 OR), service development which is on a par with the digital transformation-related revenues of non-telcos. The estimated revenue from digital transformation utilizing 5G will account for 41% of 2016 OR.

Main clients to be smart In the global market, the consumers of 5G services are likely to be smart factories, manufacturing companies, smart smart energy companies and smart city operators. A common characteristic of these energy companies and smart city entities is that they can significantly improve productivity through automated operators production processes and services that have been refined by analyzing data collected via massive sensor networks. We assumed that communication line sales generate 50% of revenues generated from 5G services.

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Fig 5. Expansion of telcos’ business areas using 5G B2B to be main revenue model for 5G networks

Source: GSMA

Fig 6. Functions required by B2B clients among services that telcos can provide

Source: Arthur D Little, Ericsson, KB Securities

Domestic 5G Market to be Worth KRW3.1tr in 2020; 5G to Begin Generating Revenues in 2019

Domestic 5G market to be worth The Electronic & Telecommunications Research Institute (ETRI) projects the KRW0.6tr-3.1tr in 2020 with smart domestic 5G market to be scaled at KRW3.1tr in 2020 and KRW5.6tr in 2021. manufacturing being main consumer Meanwhile, the OECD has projected the value of the domestic 5G market at USD5.0bn in 2019. Ericsson, a communication equipment manufacturer, scaled the domestic 5G market at KRW600.0bn in 2020. The major difference between the estimates is caused by difficulties in forecasting detailed market statistics. Such difficulties are created because B2B sales will form the bulk of early 5G service sales. However, it is worth noting that the aforementioned institutions all believe that early 5G service sales efforts will be focused on MR service providers and smart factories. In other words, corporate consumers will be the first to consider employing 5G. We have predicted that in 2020, the 5G networks of telcos will earn KRW1.4tr in revenues from immersive service providers and at least KRW530.0bn from pervasive service providers.

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Characteristics of B2B sales to cause Considering B2B sales tend to require some time before generating revenues, 5G telcos’ OR to show “low 1H, high 2H” network revenues are expected to begin materializing in 2H19. Meanwhile, telcos pattern in 2019 are forecast to gain similar market shares as it will be difficult for one player to gain an advantage.

MWC19 attracts participants from When viewing the domestic digital transformation market alone, smart factories, wide range of areas because digital smart energy companies and smart city operators will spearhead the growth of the transformation is global theme 5G market. By 2026, the domestic 5G market is projected to be worth KRW28tr with smart factories, smart energy companies and smart city operators accounting for 45%.

Smart Factories to Fuel 5G Market Growth Early On

5G services for smart factories to Unlike 4G, which was largely accessed by smartphones, 5G networks can be yield revenues from beginning accessed by a large range of devices. As more and more devices connect to the network, the market will see an increase in services involving communication between devices (no human interaction). Based on the extent, services will distinguished into smart homes, smart buildings, smart factories, smart cities and so on, but they all fall into the boundary of IoT. Among IoT services, 5G services to smart factories will generate revenues from the start.

Connecting devices of various The production paradigm of manufacturing companies is changing as companies are business crucial for smart factors; required to respond to consumer demands, which are becoming more clear-cut and 5G networks essential to do so diverse. Hence, companies must be able to generate revenues, while fulfilling the individual needs of consumers. Going beyond improving the efficiency of their factories, manufacturing companies have been considering integrating factories into supply chains to gain flexibility in adapting to uncertainties. Companies have gained the ability to respond pertinently to variables caused by the changing business environment via integrating feedstock suppliers, logistics companies, wholesalers and other related entities, along with their factories, into the supply process that gets products from the factory to consumers. Highly-integrated smart factories are what makes this possible and 5G networks are essential for establishing such facilities. Telcos are expected to generate KRW530bn in revenues from 5G network services provided to smart factories.

Fig 7. Conceptualization of integration between factories and supply chains using 5G 5G networks capable of comprehensive management of factories and supply chains as they can handle 10 times more connected devices than 4G networks, but with 1/10 latency

Source: 5G PPP

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II. Foldable Smartphones: Competition between SEC and Huawei

2019 to mark genesis of foldable 2019 will market the genesis of the foldable smartphone market. Smartphones have smartphone market maintained the same form factor since Apple released the first iPhone in 2007 in a rectangular shape. Companies began competing to establish an early presence in the foldable handset market after Royole unveiled the “FlexPai” in Nov, 2018, which was followed by SEC’s “Galaxy Fold” and Huawei’s “Mate X.” The huge amount of attention foldable smartphones drew at MWC19 proved that they have become a key topic in the smartphone market.

Foldable handsets to fuel market Disregarding technological innovations, Galaxy Fold and Mate X are both at the growth pinnacle of their respective makers’ product line-ups in terms quality and specifications. Both models are slated to be released within 1H19, but were kept in glass showcases as they both required more polishing. Both products had gaps where the display folded, but had lacked battery capacity for devices of their size. Given that these products have just been unveiled and employ technology that have just been commercialized, these issues are likely to be eliminated over time. But, both models were successful in capturing the attention of consumers and were more appealing than current smartphones as the larger display enabled better viewing of media contents and multi-tasking functions, which suggests future advances in the smartphone market will be driven by foldable handsets.

Foldable smartphone market to The market research firm, Strategy Analytics, projects that global foldable grow at CAGR of 250% until 2022 smartphone shipment volume will grow at a CAGR of 250% until 2022, increasing from 3.2mn units in 2019 to 50.1mn units in 2022. SEC raised its shipment volume target for Galaxy Fold from 1mn units to over 1mn units, while Huawei has announced its target at 200,000 units. Since the market has just begun to bloom, foldable smartphones will account for a small portion of global smartphone unit sales. The foldable smartphone market will begin fast-paced growth if technological advances lead to price cuts and the related ecosystem expands.

Foldable handsets employing various The world is expected to see foldable handsets employing various concepts from concepts to emerge 2020 and after. Related technologies are forecast to evolve in various ways, such as double-folding panels, which differs from the in-folding panel used in Galaxy Fold and the out-folding panel used by Mate X. As of now, the foldable phones house displays similar in size to those of tablet PCs (7-8”). Over time, the size of displays will increase to 12-14”, allowing foldable smartphones to absorb some laptop demand.

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Fig 8. Global foldable smartphone shipment forecast Fig 9. Foldable smartphone shipment target by manufacturers

(10,000 units) (%) (10K Unit) Shipment (L) Shipment share in smartphone market (R) 6,000 3 120 100 5,000 100

4,000 2 80

3,000 60

2,000 1 40 20 1,000 20

0 0 0 SEC Huawei 2019E 2020E 2021E 2022E Source: Strategy Analytics, Media reports, KB Securities Source: Media reports, KB Securities

5G Smartphones: Hardware Upgrades Essential

5G smartphones to be released after The 5G era dawned in Dec, 2018, when Korea transmitted the world’s first 5G signal. Mar “Galaxy S10” 5G will be the vanguard of 5G smartphones and will be followed by a series of 5G models as handset manufacturers race to establish early market presences.

5G smartphones require high-spec One of the most notable characteristics of 5G smartphones is hardware components specifications, which have been pushed to the limit. The commercialization of 5G services is forecast to trigger sharp increases in demand for large content, such as UHD videos, and VR/AR contents. Hence, high-spec components are essential to support such content. In other words, smartphones will need 1) large amounts of memory and storage capacity to run and store such large files, 2) batteries with enough capacity to manage increased power consumption and 3) highly integrated parts to cope with the increased number of components and battery size.

Fig 10. 5G smartphones' memory and storage Fig 11. 5G smartphones' battery capacity

(GB RAM) (GB) (mAh) Memory (L) Storage (R) 10 600 4,600

500 4,400 8

400 4,200 6 300 4,000 4 200 3,800

2 100 3,600

0 0 3,400 Galaxy Fold GalaxyS10 5G V50 ThinQ Mate X Mi Mix3 5G Galaxy Fold GalaxyS10 5G V50 ThinQ Mate X Mi Mix3 5G

Source: GSMarena, KB Securities Source: GSMarena, KB Securities

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III. 5G to be New Growth Engine for Semiconductors

5G communication to boost Global memory chip majors (SEC, SK Hynix and Micron) suggest 5G and AI will semiconductor demand become the main sources of the semiconductor market’s growth momentum after 2020. When announcing its 2018 capex plans, SEC presented 5G as one of the four future growth industries and acquired Zhilabs, which specializes in 5G network quality and traffic analysis, in Oct, 2018. In a recent column, SEC stated that memory chip demand will be boosted by 1) an increase in 5G base station servers to support UHD smartphones, VR devices, UHD videos, self-driving cars, IoT devices, remote healthcare and other services and 2) jumps in data center demand and mobile storage capacity following the growth of the 5G market. Meanwhile, Micron suggested that mobile edge computing, self-driving cars, industrial IoT, network infrastructure and private/public cloud computing will be the 5G services that affect the memory chip sector.

At MWC19, the majority of semiconductor companies presented various ideas for 5G networks. Intel showcased 1) its 5G “Xeon D Processor” via a VR game developed through a collaborative effort with Warner Bros, 2) a robotics project with HPE and 3) smart synergy between LG Electronics devices and AT&T technology. Qualcomm displayed various 5G products, which includes the “X55” (5G smartphone chip), “Snapdragon 855” and its automotive 5G chip.

Fig 12. SEC's 4 major growth businesses Fig 13. Micron expanding 5G business

(KRWtr)

30 Semi

Display 20 90 AI/5G/Bio/Auto

Overseas M&A 25 Others 20

Source: Korea Economic Daily, KB Securities Source: Micron, KB Securities

5G to accelerate demand for data Data centers are forecast to lead the growth of the memory market in the 5G era as centers well. Data centers are destined to expand due to increasing data processing demand from hyper-connected devices, which is a key feature of 5G telecom services. Intel projects its 5G-related capex to reach USD326bn until 2025 (data centers, edge computing, network transformation, modem & IP), while data centers are expected to account for 56% of total 5G capex. Meanwhile, SEC said at its investor conference in 2018 that the commercial launch of autonomous driving and 5G and consequent demand for server memory will lead the semiconductor market over the long term.

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Cloud giants to preemptively Amazon cited increased efficiencies across its networks of data centers at its 3Q18 execute data center investments in earnings conference, while Microsoft commented on the improving efficiency of its 2019 data center hardware in Feb, 2019. Likewise, cloud giants are expected to continue pouring dollars into data centers. The combined capex of US IDC companies (Microsoft, Amazon, Google, Facebook) is projected to reach USD75.4bn in 2019 (FY2019E capex +18%: Microsoft +27%, Amazon +15%, Google +4%, Facebook +36%). Most of the US companies announced they will execute capex focusing on data centers in 2019. We project that major IDC companies will rev up the efficiency of their data centers and preemptively establish new data centers in 2H19 in order to brace for the full-fledged growth of the AI and 5G markets. Accordingly, both memory and non-memory chip markets stand to benefit.

Fig 14. Capex trend of major IDCs in US and China Fig 15. Capex trend of major IDCs in US and China

US IDC China IDC (USDbn) (USDbn) 120 20 18 18 17 16 16 100 16 13 80 14 11 12 11 60 10 8 8 40 6

20 4 2 0 0 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019E FY2020E 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Source: Bloomberg, KB Securities Source: Bloomberg, KB Securities

Fig 16. Capex forecast of major US IDCs Fig 17. Server DRAM shipment forcast

Capex (L) YoY (R) Server (L) Server share (R) (USDbn) (%) (MGb) (%) 100 60.3 70 140,000 50

60 120,000 80 40 41.1 50 100,000 60 29.6 29.7 40 80,000 30 30 40 17.6 60,000 20 10.1 9.5 20 20 40,000 2.7 10 10 0 0 20,000

0 0 2017 2018 2019E 2020E 2021E 2022E

Source: Bloomberg, KB Securities Source: IHS, KB Securities estimates

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Interactive growth of 5G and AI Amid a data-driven paradigm shift in the field of AI since mid-2000, various AI- based services (e.g., video processing, translation, voice assistant) were commercially launched on the back of cumulative data and machine learning. Data- based AI services have grown, led by: 1) new mobile devices and social media services, which generate massive data volume and 2) infrastructure for data storage and processing. As seen at IFA 2018, a number of consumer electronics companies applied the voice-assistant technologies of global Internet giants to their devices and pursued more personalized services while utilizing accumulated consumer data. AI voice-recognition services currently deliver more than 70% accuracy and understand the context of conversations, as: 1) voice-recognition platforms are installed on various devices and 2) relevant consumer data is being accumulated.

5G outstrips 4G in terms of speed, latency, and connectivity to multiple devices. As 5G is poised to spawn a variety of new devices and services (e.g., self-driving cars, IoT, and AR/VR streaming), the commercial launch of 5G is expected to help AI services take another leap. In addition, AI will help improve the efficiency of 5G networks and process data more effectively, while the release of AI-supporting devices will speed up the growth of the 5G market. For this reason, AI and 5G are forecast to grow together while interacting with each other.

Fig 18. Interactive development of 5G and AI technologies

Source: GSMA, KB Securities

5G and edge computing to boost Software companies (e.g., Cisco and Oracle) and hardware companies (e.g., Intel) data efficiency showcased their 5G edge architecture at the MWC19. With data volume exploding across hyper-connected devices in 5G networks, it is crucial to disperse massive data volume and AI chips will help improve data efficiency. For this reason, edge computing technology will play a major role in the 5G era. While existing cloud computing technology relies on centralized data centers in 4G networks, 5G-based edge computing processes data at edge data centers before storing them in centralized clouds. Edge computing reduces data traffic and latency at clouds and harbors less cyber security risks.

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AI gaining more importance at data Major cloud services, such as Amazon’s AWS and Microsoft’s Azure, are offering AI centers services to outdistance competitors. If edge computing fully takes off, the AI functions of data centers will gain more importance. This is because cloud servers will create machine learning models and transfer them to edge platforms and the transferred data will be processed in real time. According to Micron’s CEO, AI servers require six times more DRAM content than general servers and two times more DRAM content than SSD servers. This heralds the mid/long-term growth of memory demand amid the expansion of the AI market.

Mobile data volume expected to The global smartphone market suffered negative growth in 2018 and is projected to surge due to 5G networks grow only about 1% until 2022. However, 5G smartphones will spur market growth on the back of rising mobile memory content.

Mobile video traffic has grown 45% per year, driven by streaming video-supporting 4G smartphones (source: Ericsson). Ericsson projected that: 1) 5G networks will handle 25% of global mobile data traffic by 2024, 2) total mobile data traffic will increase by a factor of five during 2018-24, and 3) video will account for 74% of global mobile data traffic in 2024. As 5G technology enables AR, VR, UHD, and 360- degree video streaming services, data demand is poised to grow exponentially ahead.

Fig 19. 5G smartphones to account for 18% of entire smartephone market in 2022

Others 5G (mnUnits)

2,500

2,000

1,500

1,000

500

0 2017 2018 2019E 2020E 2021E 2022E

Source: Industry data, KB Securities

5G smartphones’ memory two times Micron projected that 5G smartphones will require 12GB storage capacity in 2019 larger compared to 4G and 1TB by 2021, given the high frequency and speed of 5G. Despite slowed set shipments, the mobile memory market has steadily expanded thanks to increasing per-device memory content. Such a market uptrend will continue, because 5G smartphones require two-times larger memory content compared to 4G. During 2018-22, DRAM content per high-end smartphone (costing more than USD150) is estimated to double to 7.6Gb, while the proportion of smartphones with more than 8GB capacity is expected to reach more than 50%. During the same period, average NAND content per box is expected to more than triple. We believe the expansion of AI devices and services will expand memory storage capacity requirements of 5G devices over the mid/long term.

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Table 1. Device memory requirements by generation

Generation 1G 2G 3G 4G 5G Transmission speed 0 ~40kbps ~21.6Mbps ~1Gbps ~20Gbps Year 1981 1991 1998 2008 2018 <256MB Memory <6GB Memory >8GB Memory Memory - - <16GB Storage <256GB Storage >512GB Storage

Source: Micron, KB Securities

5G Networks to Accelerate Content Consumption

The dawning of the 5G era carries significant implications for the content business since 5G pursues ultra-speed, hyper-connectivity, and ultra-low latency (ULL). Delivering content at much faster speed with low latency will improve the quality of content and expand choice options. 5G networks boast more than 20 times faster transfer and about one hundredth of the latency of existing networks. Faster delivery of HD video content will act as a boon to video content providers and cloud gaming companies. Growth of streaming 4K live content With 5G networks enabling 4K live streaming, the quality of streaming content is to benefit video platform companies expected to improve in the mobile landscape. Should streaming 4K video become available, related ecosystems will be enriched (i.e., 4K content production, penetration of 4K hardware). In addition, video platform providers are forecast to see the expansion of client bases and ARPU growth backed by higher 4K rate schemes.

Cloud gaming to accelerate growth The spread of cloud gaming is forecast to accelerate the penetration of of high-spec games and subscription-based gaming services as well. With global companies (e.g., Sony, subscription-based services NVIDIA, Microsoft) launching cloud gaming services, the main revenue source of the game industry has shifted from game sales to subscriptions. IT giants, such as Amazon, Google, and Tencent, are scheduled to launch subscription-based services within this year. Subscription-based services will act as an earnings catalyst for platform providers and game companies, just as the game industry achieved robust growth previously by shifting its main revenue model from monthly flat rates to micro-transaction models.

Fig 20. Comparison of Network Speed and Delay Rate by Generation 5G boasts more than 20 times faster speed and 1/100 of latency compared to 4G

Source: Research Gate, KB Securities

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1) Video Content

5G pivotal to 4K video streaming With 5G networks realizing 4K live streaming, the quality of streaming content is expected to improve in the mobile landscape. Bandwidth of around 5Mb/s is enough to stream regular HD video content, but ultra-high definition 4K content requires five times higher bandwidth. Therefore, users currently need PCs or have to download content in advance to view 4K content without hitches. However, 5G networks will provide fast broadband connections to enable live streaming of 4K content regardless of devices. This will boost consumer convenience and therefore, translate into increased profits for platform operators.

Major OTT services in Korea are supporting the streaming of 4K content or developing necessary technologies. Meanwhile, mobile devices are slow in transmitting 4K video content, making it difficult to smoothly stream content. If the penetration of 5G networks enables 4K video streaming, 4K content ecosystems will flourish, boosted by the production of 4K content and expanding penetration of 4K- supporting hardware. Appealing rate plans supporting 4K content will also benefit video platform companies ahead in expanding subscriber bases and ARPU growth.

Table 2. Maximum resolution quality by major OTT Service Resolution Number of frames Bit rate NAVER TV 1,080p, developing 4K 30fps 7Mbps Afreeca TV 1080p 60fps 8Mbps Twitch 2160p (4K) 60fps No limit Kakao TV 1080p 60fps 8Mbps Youtube 4320p (8K) 60fps 10Mbps Netflix 2160p (4K) 60fps 25Mbps

Source: Each company, KB Securities

2) Cloud Streaming Expected to Result in Wide Penetration of High-Spec Games

Penetration of 5G to accelerate The cloud gaming market is expected to receive a direct boost from 5G, as 5G will growth of cloud gaming markets enable faster cloud streaming. Game publishers and platform operators as well as game console manufacturers such as Microsoft, Sony and Nintendo are currently providing cloud services or plan to launch them. We believe the introduction 5G holds the key to the proliferation of cloud games.

Cloud gaming enables users to enjoy games across various devices, TVs, PCs or mobile by receiving video signals from outside servers. Users do not have to buy game software, but simply have to subscribe to cloud games provided by platform operators and pay a monthly subscription fee.

Penetration of 5G networks to 5G holds the key to the penetration of cloud gaming, because it is able to address enable cloud service for high- various issues involving cloud games in compressing data, expanding network definition games bandwidth and minimizing latency. Normally, around 10-20ms in latency causes no problems in playing first-person shooter (FPS) games or action games requiring swift responses. However, 4G to 5G evolution can dramatically lower latency from 100ms to 1ms, so 5G-enabled rapid transmission of high-definition 4K content will allow users to enjoy graphics without quality deterioration.

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Foldable Smartphones to Result in New Content Consumption Pattern

Foldable smartphones are expected to create an entirely new content consumption pattern. The new gadget is expected to create new values and new markets in the mobile arena, driven by: 1) the use of both small and large displays, 2) multi-tasking functionality and 3) new form factors.

1) Increasing Size of Foldable Screens Resolves Limitations of Tablet PCs

Smartphone games continue The advent of foldable smartphones is expected to have far-reaching implications in spearheading growth of game the game market beyond the impact of tablet PCs. Mobile games accounted for market in 2018 more than half (51%) of the global game market in 2018. Among others, the smartphone game market increased 29% YoY (vs. tablet PC game market +13.1% YoY), spearheading the growth of the total game market.

Tablet PCs lose luster due to The tablet PC game market is relatively lackluster, due to: 1) diminishing merits of disadvantages relative to PCs and tablet PCs and decreased shipments caused by the sizing-up trend of smartphones, smartphones 2) the absence of tablet PC-only content and 3) relatively lower portability. Tablet PCs share the merits of both smartphones and PCs but have relative weaknesses as well. Tablet PCs have larger displays, but are less portable than smartphones, while they are lighter in weight but are not fit for complicated operations compared to PCs.

Fig 21. Global game market size (2018) Smartphone game market spearheading growth of total game market

Source: Newzoo, KB Securities

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2) Galaxy Fold’s Multi-tasking Functionality to Enhance User Convenience

Galaxy Fold’s multi-tasking Galaxy Fold, unveiled at Samsung’s Galaxy Unpacked launch event and MWC 2019, functionality helps run three apps drew keen attention for its multi-window function that allows three apps to run simultaneously simultaneously. Google’s Android has already introduced a multi-window function on smartphones and tablet PCs, but its versatility will increase with the launch of foldable phones.

Foldable smartphones expected to As aforementioned, the absence of tablet PC-dedicated content has made it account for larger share of total difficult to differentiate tablet PCs from smartphones. Also, the image definition of smartphone market apps on tablet PCs has slightly improved from ones on smartphones, creating no added values. However, the advent of foldable phones will create new app ecosystems, once the device becomes mainstream in the smartphone market, whose shipments are around 450 times higher than shipments of tablet PCs. Foldable phone shipments are estimated only at 3.2mn units in 2019, accounting for a mere 0.2% of total smartphone shipments, but are forecast to rise to 30.4mn units (2% share) by 2021.

Game and video content markets The multi-tasking function of foldable phones is expected to contribute to growth in expected to receive boost session durations on mobile devices, benefiting game and video content businesses.

MMORPG has been spearheading the growth of the mobile game market over the past few years in Korea, while the genre boasts a long per-player session duration. Comparing the per-player session durations of the top-selling game “Blade & Soul Revolution” across game genres, multiplayer online battle arena (MOBA), sports, casual, board games and MMORPG shows that MMORPG players tend to stay in the games longer than other genres. However, more than half of mobile MMORPGs have introduced automatic combat functionality, causing the proportion of actual game-playing times to drop significantly compared to actual session durations. Meanwhile, foldable phones will allow users to multi-task while playing games, thus contributing to longer session durations.

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3) New Form Factor Expected to Create New Ecosystems

New form factor hardware expected Foldable smartphones, a new form factor, will create new markets in addition to to lead to new software VR/AR/MR as well as new demand. The emergence of new form factors in the game developments console market led to the creation of new game methods. For instance, Nintendo launched various games on its game console “Nintendo DS,” utilizing the effects of dual screens, including resistive touchscreens as well as dual cameras on the game console, while the Nintendo’s other game console, “Wii,” spawned multiple gesture- recognition games. We believe creating new form factors harbors high potential in appealing to consumers and spawning new software developments.

Fig 22. Nintendo DS game using pressure-sensitive Fig 23. Wii game with camera and gyroscope touch pen

Source: Nintendo, KB Securities Source: Nintendo, KB Securities

Out-folding method is beneficial for MWC 2019 unveiled Samsung’s in-folding type of smartphone, Galaxy Fold, and establishing app ecosystems, but Huawei’s out-folding type of smartphone, “Mate X.” In-folding is difficult to realize hardware quality is more critical to technologically but is superior in quality, while the merits of the out-folding method success lie in using both sides of the displays when folding the smartphone. We believe that becoming the first to establish app ecosystems as well as creating peripheral devices in partnership with hardware and software companies should be essential for them to gain a competitive edge in the market. Users are able to use both sides of panels on the Huawei Mate X when the device is folded, while having access to a high- definition main camera when unfolded. We believe Huawei needs to appeal to consumers who are interested in such user experience.

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Disclosures Rating and Target Price Changes (Share price ━, Target Price ━)

Samsung Electronics (005930) Date R ating Target Price Differential (%) KRW Samsung Electronics (KRW) Av g. Max / Min 70,000 17-03-24 Buy 54,000 -17.65 -10.56 62,000 17-07-03 Buy 56,000 -12.69 -4.25 54,000 17-10-11 Buy 64,000 -18.11 -10.59 46,000 18-02-02 Buy 60,000 -17.57 -11.67 18-05-15 Buy 60,000 -18.56 -12.17 38,000 18-07-06 Buy 58,000 -20.55 -16.47 30,000 18-10-05 Buy 55,000 -21.39 -17.64 17.3 17.7 17.11 18.3 18.7 18.11 19.3 18-10-31 Buy 52,000 -18.64 -13.08 18-12-20 Buy 48,000 -20.07 -19.17 19-01-08 Buy 45,000 -5.78 3.11 19-01-31 Buy 52,000

SEMCO (009150) Date R ating Target Price Differential (%) KRW SEMCO (KRW) Av g. Max / Min 250,000 17-03-08 Buy 72,000 -11.22

200,000 17-03-24 Buy 80,000 -4.52 18.75 17-06-22 Buy 130,000 -21.25 -15.38 150,000 17-07-21 Buy 140,000 -31.22 -23.93 100,000 17-08-28 Buy 130,000 -21.36 -13.85 17-10-30 Buy 140,000 -26.74 -21.79 50,000 18-01-30 Buy 145,000 -33.30 -26.55 17.3 17.7 17.11 18.3 18.7 18.11 19.3 18-03-05 Buy 125,000 -20.36 -14.00 18-04-03 Buy 140,000 -17.08 -8.57 18-04-26 Buy 160,000 -16.98 -3.44 18-06-27 Buy 200,000 -23.80 -18.75 18-07-25 Buy 210,000 -27.69 -22.38 18-09-06 Buy 220,000 -37.57 -28.86 18-10-31 Buy 180,000 -39.54 -25.00 19-01-29 Buy 145,000 -23.50 -20.34 19-02-21 Buy 148,000

SK Telecom (017670) Date R ating Target Price Differential (%) KRW SK Telecom (KRW) Av g. Max / Min 400,000 17-07-25 Hold 320,000 -17.59 -11.41 360,000 18-01-25 6 month later 320,000 -17.24 -16.41 320,000 18-02-05 Hold 290,000 -19.24 -11.90 280,000 18-04-26 Buy 300,000 -22.11 -13.50 18-08-08 Buy 330,000 -17.95 -12.27 240,000 18-12-03 Buy 360,000 200,000 17.3 17.7 17.11 18.3 18.7 18.11 19.3

NCSOFT (036570) Date R ating Target Price Differential (%) KRW NCSOFT (KRW) Av g. Max / Min 600,000 17-05-12 Buy 440,000 -16.11 -13.75 17-05-22 Buy 490,000 -22.68 -15.10 520,000 17-08-07 Buy 520,000 -18.37 -7.98 440,000 17-11-09 Buy 550,000 -24.22 -11.27 360,000 18-05-09 6 month later 550,000 280,000 18-05-10 Buy 470,000 -21.85 -15.96 200,000 18-08-14 Buy 480,000 -13.17 -5.21 17.3 17.7 17.11 18.3 18.7 18.11 19.3 18-11-12 Buy 550,000

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SFA Engineering (056190) Date R ating Target Price Differential (%) KRW SFA Engineering (KRW) Av g. Max / Min 60,000 17-03-24 Buy 40,000 1.48 19.38 54,000 17-08-09 Buy 40,000 -0.34 18.25 48,000 18-02-09 6 month later 40,000 -6.38 -6.38 42,000 18-02-13 Buy 43,000 -18.28 -3.84 18-08-13 6 month later 43,000 -13.67 -1.40 36,000 19-01-28 Buy 50,000 -15.77 -11.60 30,000 19-02-11 Buy 55,000 17.3 17.7 17.11 18.3 18.7 18.11 19.3

Hansol Chemical (014680) Date R ating Target Price Differential (%) KRW Hansol Chemical (KRW) Av g. Max / Min 144,000 17-03-24 Buy 100,000 -24.08 -15.70 17-08-14 Buy 95,000 -22.67 -14.11 116,000 18-02-14 6 month later 95,000 -21.65 -12.42 18-08-14 6 month later 95,000 -15.00 -8.11 88,000 18-11-29 Buy 100,000 -22.49 -18.30 19-01-25 Buy 110,000 60,000 17.3 17.7 17.11 18.3 18.7 18.11 19.3

AfreecaTV (067160) Date R ating Target Price Differential (%) KRW AfreecaTV (KRW) Av g. Max / Min 60,000 19-03-04 Not Rated 50,000 40,000 30,000 20,000

10,000 17.3 17.7 17.11 18.3 18.7 18.11 19.3

Name M&A- Less than BW/CW/EW Underwriting Holds more than Acquisition/ ELW Guarantee Relationship Tender offer-

related one year underwriting contracts for 1% of company's disposal of Issuer Liquidity of debt with affiliate related Samsung Electronics ○ ○ SEMCO ○ ○ SK Telecom ○ ○ NCSOFT ○ ○ SFA Engineering Hansol Chemical AfreecaTV

KB Securities has not provided in advance the material contained in this report to any Proportion of investment rating (as of December 31, 2018) institutional investor or third party. The analyst(s), who wrote this report, does not have any financial interest in the company(ies) covered herein. The author(s) of this report Buy Hold Sell confirms that the material contained herein correctly represents his/her/their opinion 70.6 29.4 - and that it has been prepared faithfully without any undue influence or intervention.

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Classification and Standards for Investment Rating All KB Securities Research is available via the following electronic databases: Bloomberg, Thomson Reuters, FactSet. Contact your KB Securities sales representative for access. Investment Rating for Company (based on estimation of six-month absolute returns) This report has been prepared for informational purposes only, and does not constitute Buy: +15% or beyond Hold: Between 15% and -15% Sell: -15% or beyond an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources

Note: KB Securities’s classification of investment ratings has shifted from four stages KB Securities considers reliable. However, KB Securities does not guarantee that the (Strong BUY, BUY, Marketperform, Underperform) to three stages (Buy, Hold, Sell) information and data are accurate or complete, and, therefore, this report is subject to based on Korean reports since February 23, 2017. change without prior notice. Individual investments should be made based on each client’s own judgment and we expressly disclaim all liability for any investment decisions Investment Rating for Industry and any results thereof. This report is a copyrighted material of KB Securities and, thus, (based on estimation of six-month absolute returns) it may not be reproduced, distributed, or modified without the prior consent of KB Positive: Neutral: Negative: Securities. This report is not prepared for academic purposes and any third party wishing To outperform market To match market performance To underperform market to quote from it for academic publications should receive the prior consent of KB Securities.

Notes: The industry rating system of KB Securities has shifted from (Overweight, Neutral, Underweight) to (Positive, Neutral, Negative) as of Jun 28, 2017

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Disclosures Rating and Target Price Changes (Share price ━, Target Price ━)

KRW Samsung Electronics Samsung Electronics (005930) Date R ating Target Price Differential (%) 70,000 (KRW) Av g. Max / Min 62,000 17-03-24 Buy 54,000 -17.65 -10.56 54,000 17-07-03 Buy 56,000 -12.69 -4.25 46,000 17-10-11 Buy 64,000 -18.11 -10.59 38,000 18-02-02 Buy 60,000 -17.57 -11.67

30,000 18-05-15 Buy 60,000 -18.56 -12.17 17.3 17.7 17.11 18.3 18.7 18.11 19.3 18-07-06 Buy 58,000 -20.55 -16.47 18-10-05 Buy 55,000 -21.39 -17.64 18-10-31 Buy 52,000 -18.64 -13.08 18-12-20 Buy 48,000 -20.07 -19.17 19-01-08 Buy 45,000 -5.78 3.11 19-01-31 Buy 52,000

KRW SEMCO SEMCO (009150) Date R ating Target Price Differential (%) 250,000 (KRW) Av g. Max / Min 200,000 17-03-08 Buy 72,000 -11.22 17-03-24 Buy 80,000 -4.52 18.75 150,000 17-06-22 Buy 130,000 -21.25 -15.38 100,000 17-07-21 Buy 140,000 -31.22 -23.93

50,000 17-08-28 Buy 130,000 -21.36 -13.85 17.3 17.7 17.11 18.3 18.7 18.11 19.3 17-10-30 Buy 140,000 -26.74 -21.79 18-01-30 Buy 145,000 -33.30 -26.55 18-03-05 Buy 125,000 -20.36 -14.00 18-04-03 Buy 140,000 -17.08 -8.57 18-04-26 Buy 160,000 -16.98 -3.44 18-06-27 Buy 200,000 -23.80 -18.75 18-07-25 Buy 210,000 -27.69 -22.38 18-09-06 Buy 220,000 -37.57 -28.86 18-10-31 Buy 180,000 -39.54 -25.00 19-01-29 Buy 145,000 -23.50 -20.34 19-02-21 Buy 148,000

KRW SK Telecom SK Telecom (017670) Date R ating Target Price Differential (%) 400,000 (KRW) Av g. Max / Min 360,000 17-07-25 Hold 320,000 -17.59 -11.41 320,000 18-01-25 6 month later 320,000 -17.24 -16.41 280,000 18-02-05 Hold 290,000 -19.24 -11.90 240,000 18-04-26 Buy 300,000 -22.11 -13.50

200,000 18-08-08 Buy 330,000 -17.95 -12.27 17.3 17.7 17.11 18.3 18.7 18.11 19.3 18-12-03 Buy 360,000

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KRW NCSOFT NCSOFT (036570) Date R ating Target Price Differential (%) 600,000 (KRW) Av g. Max / Min 520,000 17-05-12 Buy 440,000 -16.11 -13.75 440,000 17-05-22 Buy 490,000 -22.68 -15.10 360,000 17-08-07 Buy 520,000 -18.37 -7.98 280,000 17-11-09 Buy 550,000 -24.22 -11.27

200,000 18-05-09 6 month later 550,000 17.3 17.7 17.11 18.3 18.7 18.11 19.3 18-05-10 Buy 470,000 -21.85 -15.96 18-08-14 Buy 480,000 -13.17 -5.21 18-11-12 Buy 550,000

KRW SFA Engineering SFA Engineering (056190) Date R ating Target Price Differential (%) 60,000 (KRW) Av g. Max / Min 54,000 17-03-24 Buy 40,000 1.48 19.38 48,000 17-08-09 Buy 40,000 -0.34 18.25 42,000 18-02-09 6 month later 40,000 -6.38 -6.38 36,000 18-02-13 Buy 43,000 -18.28 -3.84

30,000 18-08-13 6 month later 43,000 -13.67 -1.40 17.3 17.7 17.11 18.3 18.7 18.11 19.3 19-01-28 Buy 50,000 -15.77 -11.60 19-02-11 Buy 55,000

KRW Hansol Chemical Hansol Chemical (014680) Date R ating Target Price Differential (%) 144,000 (KRW) Av g. Max / Min 17-03-24 Buy 100,000 -24.08 -15.70 116,000 17-08-14 Buy 95,000 -22.67 -14.11 18-02-14 6 month later 95,000 -21.65 -12.42 88,000 18-08-14 6 month later 95,000 -15.00 -8.11

60,000 18-11-29 Buy 100,000 -22.49 -18.30 17.3 17.7 17.11 18.3 18.7 18.11 19.3 19-01-25 Buy 110,000

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KRW AfreecaTV AfreecaTV (067160) Date R ating Target Price Differential (%) 60,000 (KRW) Av g. Max / Min 50,000 19-03-04 Not Rated 40,000 30,000 20,000

10,000 17.3 17.7 17.11 18.3 18.7 18.11 19.3

Nam e M&A- L ess than BW/CW/EW Underwriting Holds more than Acquisition/ ELW Guarantee Relationship Tender offer- related one year underwriting contracts for 1% of company's disposal of Issuer L iquidity of debt with affiliate related

Notes: The industry rating system of KB Securities has shifted from (Overweight, Neutral, Underweight) to (Positive, Neutral, Negative) as of Jun 28, 2017