2H15 Outlook Overweight Report (Maintain) June 10, 2015
[Summary] Getting over the hump 2 I. 2H15 outlook: Getting over the hump 4 II. Key themes and issues: O.V.E.R. 16 III. Valuation & investment strategy 40 IV. Top pick & stocks to watch 44 SK Telecom KT LG Uplus [Conclusion] Look to earnings improvements 60 and dividend payout Telecom Service Getting over the hump
Jee-hyun Moon +822-768-3615 [email protected] [Summary] Getting over the hump
Domestic telcos are positioned for a rebound in 2H15
(W) (p) - Earnings recovery 38,000 ARPU of 3 major telcos (L) FTSE Korea Telecom Index (R) - Shareholder-friendly policies 60 - Reflection of value of new businesses
55
36,000 LTE penetration 50
34,000 45
40 32,000
- Slow ARPU growth 35 - Concerns over new service plans 30,000 - More pressure from government
30
28,000 25 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F
Notes: ARPU stands for average revenue per user Source: Company data, Thomson Reuters, KDB Daewoo Securities Research 2H15 Outlook 2 [Summary] Getting over the hump
Positioned for a rebound in 2H15 Key themes and issues: • Stocks to look for a rebound after pullback in 1H • Sector keyword: O.V.E.R. • Increasing worries over policy headwinds O) Opportunity: New opportunities in mobile-only era • Strong need for new business strategies to overcome • Emergence of B2B data market and platform business reckless competition and regulations expansion Keys to recovery: • IoT initiatives to pick up pace (e.g., telcos to be allowed to 1) Looking beyond subscribers make devices themselves) • Focus shifting from expanding subscriber share to V) Velocity: The battle for speed continues increasing usage • Spectrum allocation and auctions on the horizon • Ongoing efforts to boost ARPU and IoT accounts • Gearing up for the 5G era 2) Looking beyond telecom E) Encouragement: Encouraging data usage • Focusing on non-telecom businesses that can benefit the • Continued efforts to improve ARPU existing telecom business • Segmentation of data plans based on usage and • Media and platform are taking the lead time/place/occasion 3) Looking beyond profit R) Regulations: Regulations/policy direction are key • Capex and expenses declining due to LTE saturation and • Pullbacks triggered by policy worries: Buying opportunity handset distribution law • Key issues: 1) Creation of fourth telco, 2) improvements • Improved FCF points to more room for shareholder returns to tariff approval scheme, and 3) potential revisions to • All three telcos to hand out dividends this year; SK Telecom handset distribution law to buy back shares
2H15 Outlook 3 Telecom I. 2H15 outlook: Getting over the hump Service
Telecom service sector • Telco stocks are poised for a rebound in 2H after correcting in 1H poised for recovery • Attention is turning from earnings to shareholder returns (i.e., dividends and buybacks) • Telcos need to come up with business strategies and momentum to overcome competition and regulatory risks
TIP Policy issues and telco index
The greater an issue household (p) (max=100) telecom costs become, the 51 FTSE Korea Telecom (L) 0 more downside pressure arises 'Phone bill' search frequency (inverted, R) on telco stocks 'Fourth telco' search frequency (inverted, R) 49 20 A number of government efforts are underway to ease 47 telecommunication costs, including the potential creation 40 of a fourth telco 45
60 43
Prices fell as search 41 queries for "phone bill" and "fourth telco" increased 80 Telcos likely to bottom around 3Q; 39 solid fundamentals (i.e., earnings, dividends) to draw 100 attention thereafter 37 6/14 9/14 12/14 3/15 6/15 9/15 12/15 3/16
Notes: Average number of PC and mobile searches for “phone bill” and “fourth telco” based on a maximum of 100 Source: Naver Trend, Thomson Reuters, KDB Daewoo Securities Research 2H15 Outlook 4 Telecom I. 2H15 outlook: Getting over the hump Service
Excessive competition is • Subsidies-driven marketing was a classic example of the industry’s reckless competition penalized with regulations • The introduction of the handset distribution law has cooled subsidy competition • Now, competition is oriented towards products and services, as illustrated by the recent release of new data plans • Where will competition be focused next?
TIP Competition has shifted from subsidies to products/services: Where will the next battle be?
Competition in data plans is vitalizing telco products and services Products/ Products/ services Subsidies services Subsidies
- Monthly plans Switch - Bundled products phone - Membership New - Contents/platform (MNP)
Source: SK Telecom, KDB Daewoo Securities Research
2H15 Outlook 5 Telecom I. 2H15 outlook: Getting over the hump Service
1) Looking beyond • The concept of “users” is coming into focus subscribers: The concept • To enhance ARPU, an effective strategy is to charge any person or entity (including service providers and indirect users, in addition to postpaid subscribers) for network access of “users”
TIP Telcos need to broaden their target group to all types of users
The number of users accessing telecom networks without a subscription is increasing Subscriber basis + improving ARPU (MVNO, sponsored data, WiFi, etc.)
Increase User Subscriber Service providers; Individually Indirect users contracted direct users Decrease
Diluted economies of scale, decrease in ARPU
Source: KDB Daewoo Securities Research
2H15 Outlook 6 Telecom I. 2H15 outlook: Getting over the hump Service
1) Looking beyond • Network access by non-subscribers is growing; Key example is mobile virtual network operator (MVNO) subscribers: The concept MVNOs are mobile service providers that lack their own infrastructure and therefore lease wireless of “users” • capacity from major carriers • Google’s Project Fi, a type of MVNO service launched in April, uses the networks of both Sprint and T-Mobile
TIP Google’s Project Fi taps the networks of two major US carriers
Internet companies are venturing into telecom services in an effort to increase their own traffic by providing seamless connectivity
Notes: US$20 per month for unlimited voice and text; US$10 for one gigabyte of data; Available only for Nexus 6 users Source: Google, KDB Daewoo Securities Research 2H15 Outlook 7 Telecom I. 2H15 outlook: Getting over the hump Service
1) Looking beyond • Industry’s marketing war may end once companies let go of their fixation on subscriber share subscribers: Since mobile subscriber penetration reached 100% in 2011, companies have made numerous ARPU > volume • efforts to raise ARPU • The first such effort was the deployment of LTE; the second was service diversification
TIP Wireless service revenue: Subscribers vs. ARPU
In a market with a stagnant population, it is critical to (Wtr) Service revenue (L) Pene- ('000 persons, W) increase ARPU 30 No. of subscribers (R) tration 60,000 ARPU of 3 major telcos (R) above 100% 55,000 Subscriber growth (+5% on average) 25 brought about increase in revenue 50,000
45,000 20 40,000
35,000 15
Increase in ARPU (+8% on average) 30,000 brought about increase in revenue 10 25,000 07 08 09 10 11 12 13 14 Source: KTOA, MSIP, KCC, company data, KDB Daewoo Securities Research
2H15 Outlook 8 Telecom I. 2H15 outlook: Getting over the hump Service
1) Looking beyond • The advent of Internet of Things (IoT) has increased the number of device accounts subscribers: IoT • Service plans dedicated to wearables are being introduced in a bid to further lift ARPU • Device-to-device connection (via Bluetooth) does not generate network revenue • The development of more convenient devices and services is essential to encourage wireless network usage
TIP Increasing number of internet-connected devices
Expanding the customer base (bn units) from people to “things” IoT devices 20 Healthcare 1.1bn Other Consumer 1.6bn electronics 15 6.3bn Utilities CAGR: 22% 2.2bn 2022F 18bn devices Auto 10 2bn
Buildings 4.9bn
5
0 11 13 15F 17F 19F 21F Source: Gartner, KDB Daewoo Securities Research
2H15 Outlook 9 Telecom I. 2H15 outlook: Getting over the hump Service
2) Looking beyond telecom: • Companies should take a selection and concentration approach, focusing on non-telecom services that can benefit their existing telecom business Synergy effects from non- Fixed-line: Pressing need to address weaknesses and increase network utilization telecom services • • Wireless: Diversification into areas that can contribute to maintaining subscribers and improving ARPU
TIP Selection and concentration in non-telecom businesses
A key priority for business diversification should be synergies with existing businesses Non-telecom? Businesses that help retain wireless subscribers & increase ARPU Businesses that can pull on existing subscribers Stabilization Businesses period that can increase size of revenue Transitional period
Initial period
Source: KDB Daewoo Securities Research
2H15 Outlook 10 Telecom I. 2H15 outlook: Getting over the hump Service
2) Looking beyond • Within non-telecom, media and platforms are taking center stage telecom: Media and • Media: Telcos’ media operations complement their fixed-line and wireless businesses, and have strong upside to ARPU platform • Platform: Telcos’ platform operations are focused on expanding the mobile space, and have the potential to become global; In particular, the development of the internet market has moved towards the communications and e-commerce segments
TIP Telcos’ platform businesses are moving towards media and e-commerce
Beneficial to growth and re-rating
Portal, music download – App store, communication – Video streaming – Commerce, fintech
Olleh market U+ App market
Source: Company data, KDB Daewoo Securities Research
2H15 Outlook 11 Telecom I. 2H15 outlook: Getting over the hump Service
2) Looking beyond • Softbank’s M&A deals have been geared towards platforms telecom: Softbank’s • The Japanese company is turning its eye to platforms that can be built upon its network infrastructure. example • Major platform deals include the acquisition of e-commerce sites and service apps • One major advantage of the platform business is its global scalability
TIP Softbank’s enterprise value scenario
In M&As, Softbank believes it is important to gradually move up the value chain
Aiming to become the goose that lays golden eggs
- Premium for successful acquisitions - Diversification within ICT industry - Enhancing enterprise value from a long-term perspective
Source: Softbank, KDB Daewoo Securities Research
2H15 Outlook 12 Telecom I. 2H15 outlook: Getting over the hump Service
3) Looking beyond profit: • Operating profit is normalizing this year, supported by low base of comparison Earnings already • Capex declining due to LTE market saturation normalizing • Disciplined marketing spend following introduction of handset distribution law
TIP Combined operating profit and FCF of the three domestic telcos
Operating profit is normalizing (Wbn) Operating profit FCF from last year’s sluggishness 5,000 Operating profit: +81% FCF turned positive
4,000
3,000
2,000
1,000
0
-1,000 10 11 12 13 14 15F 16F
Notes: Based on consolidated K-IFRS; Combined figures of SK Telecom, KT, and LG Uplus Source: Company data, KDB Daewoo Securities Research 2H15 Outlook 13 Telecom I. 2H15 outlook: Getting over the hump Service
3) Looking beyond profit: • During times of volatility, dividend stocks offer a reliable bet Shareholder returns • In the case of SK Telecom, foreign buying tends to increase when the stock’s expected dividend yield rises • The steeper the pullback, the greater the dividend appeal
TIP Correlation between SK Telecom’s dividend yield and foreign buying
Dividend stocks to make a (%p) Daily change in foreign ownership percentage (L) (%) comeback 0.20 Expected dividend yield (R) 4.2
0.15 4.0
0.10
3.8 0.05
0.00 3.6
-0.05 3.4
-0.10
3.2 -0.15
-0.20 3.0 6/14 8/14 10/14 12/14 2/15 4/15 6/15
Source: KDB Daewoo Securities Research 2H15 Outlook 14 Telecom I. 2H15 outlook: Getting over the hump Service
3) Looking beyond profit: • SK Telecom is likely to increase its interim and full-year dividends and plans to repurchase shares All three telcos to hand • KT, which suspended dividends last year, could resume payments this year out dividends this year • LG Uplus maintains a 30% payout policy
TIP Dividend yield trend of the three domestic telcos
A consistent dividend policy (%) SK Telecom dividend yield KT dividend yield LG Uplus dividend yield should narrow valuation 7 discounts
6 On a P/E basis, telcos with All three providers expected to pay a 3-5% dividend yield and those dividends in 2015 with a yield over 5% are trading 5 at 10% and 33% premiums, respectively, vs. telcos with 4.0% a yield lower than 3% 4
3 2.7% 2.6%
2
1 No dividends No dividends
0 2011 2012 2013 2014 2015F
Notes: 2015F dividend yield is based on our DPS estimates and the most recent closing price Source: Company data, KDB Daewoo Securities Research 2H15 Outlook 15 Telecom II. Key themes and issues: O.V.E.R. Service
Sector keyword: • Telecom sector keyword for 2H15: O.V.E.R. O.V.E.R. • O: Opportunity – New opportunities in the mobile-only age • V: Velocity – The battle for speed continues with 5G • E: Encouragement – Encouraging consumers to use more data to improve ARPU • R: Regulation – The importance of regulations and policy direction
TIP Keyword for 2H15: O.V.E.R.
The opportunities and threats of the mobile-only age Opportunity Velocity New opportunities in the mobile-only age Battle for speed continues
O V
Encouragement Regulation Encouraging more data usage E R Regulations/policy direction are key
Source: KDB Daewoo Securities Research
2H15 Outlook 16 Telecom II. Key themes and issues: Opportunity Service
1) Opportunity: Charging • Opportunity: New opportunities in the mobile-only age schemes are diversifying • Age of connectedness (via mobile devices) has brought more monetization opportunities to telcos • B2B: Charging service providers, not users, for data • B2C: Through platform business, telcos can charge for both network and service use
TIP In the mobile-only age, new charging schemes are emerging
Network value is maximizing Charging service Platform business: providers (i.e., Charging for companies), not network + service usage service users, for data simultaneously
Source: Bassendean Means Business, KDB Daewoo Securities Research
2H15 Outlook 17 Telecom II. Key themes and issues: Opportunity Service
1) Opportunity: IoT • Telcos need to diversify IoT-related businesses • Currently, hardware accounts for 93% of the IoT market, while mobile network revenue is insignificant • After 10 years, hardware, system, and service/applications are projected to account for 37%, 30%, and 30% of the IoT market, respectively; Mobile network is projected to take up just 3% due to the development of device-to-device (D2D) technology
TIP Telcos’ IoT-related revenue sources to diversify from network to platform/solution/devices
Mobile network accounts for just a minor proportion of the IoT market Intelligence Traditional Expansion telecom service Hardware, system, and Convergence service/applications segments will expand further Sensing + Big Data Connectivity
Open Platform
Network + Device
Solutions-based Valuable, intelligent Market cultivation business transformation business
Source: SK Telecom, KDB Daewoo Securities Research
2H15 Outlook 18 Telecom II. Key themes and issues: Opportunity Service
1) Opportunity: IoT • Telcos are expanding partnerships with consumer goods companies for the IoT business partners are expanding • SK Telecom: Cooperating with home appliance SMEs for its IoT platform Mobius • KT: Focusing on healthcare services targeting middle-aged and older customers; GIGA Internet • LG Uplus: Specializing in home appliance control services through cooperation with LG Electronics
TIP Major telcos’ IoT-based smart home services
Telcos are expanding the IoT SK Telecom KT LG Uplus business through partnerships
- Door locks (iRevo) - Giga Home Fitness - Dehumidifier (Winix) - Yodac (adult disease screening) MomCa 2 (home CCTV) Launched - Boiler (KyungDong Navien) - Safe Zone Uplus GasLock - Gas shut-off device (Time Valve) (children/elderly) - Pet services (Petfit, T-Pet)
- Boiler (Rinnai, Daesung Celtic, Altoen Daewoo) - Air purifier (Winia, Winix, - Uplus Switch Tongyang Magic) - Smart air care (Coway) - Uplus Plug - Lighting - Open home IoT platform - Uplus Energy Meter To be (Kumho Electric, GE Lighting) - Time Valve Smart - Uplus Doorlock launched - Smart outlet (Time Valve) - Uplus Thermostat (DS Tech, Powervoice) - U-Safe Alarm (Kiturami Boiler) - Smart switch (Bandi Tongsin) (for the elderly) - Uplus Open Sensor - Range hood (Haatz) - Home Chat - Water purifier (Kyowon Wells) - Security services
Based on SK TelecomÊs IoT platform Targeting middle-aged and older Cooperating with LGE; Emphasis Mobius customers; Focus on healthcare Home appliance control services
Source: Media reports, company data, KDB Daewoo Securities Research 2H15 Outlook 19 Telecom II. Key themes and issues: Opportunity Service
1) Opportunity: Telcos’ • The Ministry of Science, ICT, and Future Planning (MSIP) plans to allow telcos to manufacture telecom devices without needing approval handset production • The plan was among the major ICT-related regulatory tasks formulated by the Information and Communication Strategy Committee in May • SK Telecom invested an additional W30bn (CB and rights offering) in subsidiary iRiver last Dec. • SK C&C established an IT service JV with Hon Hai Group and plans to continue the cooperation
TIP Telcos’ device manufacturing to strengthen competitiveness of new and base industries
MSIP will revise Article 17 of Growth the Telecommunications IoT service Business Act, which mandates that telcos receive ministry New business New business approval to manufacture Target niche markets Strengthen competitive advantage telecom devices
Wearable device Such regulations do not exist Game (mobile) overseas and are thought to Big data disadvantage telcos Medical convergence Cloud service Educational convergence Mobile phone (Smart phone) Financial convergence Production Digital content convergence
Broadcasting service Applied SW Telecom service Infra SW IT service Display Non-memory Information protection
Sensor PC (inc. tablet PC) Memory Printer Server 1 Broadcasting Foundation business equipment Foundation business Broadcasting device Ensure next-generation Network equipment Maintain competitive advantage (TV) competitiveness Competitiveness Source: MISP, KDB Daewoo Securities Research 2H15 Outlook 20 Telecom II. Key themes and issues: Velocity Service
2) Velocity: Frequency, a • Frequency is the most important requirement for higher speed requirement for higher • 700MHz: Broadcasters vs. telcos speed • 2.1GHz: SK Telecom vs. KT; Used for 3G; Licenses are set to expire in 2016 • 2.5GHz and 2.6GHz: Government to allocate the spectrum to a fourth telecom operator; FDD as well as LTE-TDD to be allowed
Government’s frequency policy: Mobile Gwanggaeto Plan 2.0 TIP
Potential ranges to be secured (MHz) 91KCC’s tax revenue is Fourth projected to decrease Category Secured First (-2015) Second (-2018) Third (-2020) Total (-2023) W157.2bn YoY to W1.044tr in (allocated in 2013) 2016 due to Addition Refarming Addition Refarming Addition Refarming Addition 1) a decline in penalty income 700MHz 40 a 40+a after the implementation of the 1.8GHz 60 (30) 20 100 (30) Handset Distribution Act, and FDD 2) a drop in frequency fees 2.1GHz 60 60 120 (frequency auction was delayed 2.6GHz 80 (40) 20 10 110 (40) from 2H15 to 1H16) 2.0GHz 40 40 TDD 2.3GHz 30 40 70 2.5GHz 40 40 FDD/TDD 3.5GHz 160 160 WRC additional Below 6GHz Min 200 Min 200 distribution range Above 7GHz Min 500 Min 500 Addition 180 (70) 60+a 290 220 510 1260MHz+a Total Refarming 60 40 20 120MHz
Notes: FDD and TDD refer to frequency division duplex and time division duplex, respectively; WRC refers to World Radiocommunication Conference; ‘a’ in the 1st phase for 700MHz is the spectrum that could be additionally allocated for mobile communication after consultation with the KCC Source: MSIP, KDB Daewoo Securities Research 2H15 Outlook 21 Telecom II. Key themes and issues: Velocity Service
2) Velocity: Frequency • Frequency auction is scheduled for early 2016; SK Telecom and KT likely to participate auction plan • So-called “golden frequency” to be auctioned; Four spectrum packages below 3GHz • Total allocation of 60MHz in the 2.6GHz band, 100MHz in the 2.1GHz (SK Telecom and KT) band, and 20MHz in the 1.8GHz band • Auction for 40MHz in the 700MHz band to be delayed due to the National Assembly’s slow progress on the issue
TIP Government’s frequency auction (delayed to 1H16): Four spectrum packages
Frequency auction: - Revenue for the government - Reallocation according to usage - ICT growth to be affected
Note: Mobile Gwanggaeto Plan 2.0 Source: MSIP, KDB Daewoo Securities Research 2H15 Outlook 22 Telecom II. Key themes and issues: Velocity Service
2) Velocity: Competition • 700MHz: Broadcasters and telcos are competing for frequency • Broadcasters: Asking for entire remaining spectrum for terrestrial UHD broadcasting • Telcos: Asking for at least 40MHz in preparation for a surge in mobile data traffic • Competition has intensified after the government allocated 20MHz for national disaster safety communication network; Concerns about spectrum fragmentation
TIP Government’s 700MHz allocation plan: 20MHz for disaster communication network, 40MHz for mobile communication, 24MHz for broadcasting Broadcasters and telcos need additional frequency spectrum Current: for UHD broadcasting and growing mobile data traffic, respectively Temporary band for DTV conversion In foreign countries, telcos had an upper hand in the 700MHz Spare* Spare* Spare range (108MHz) allocation Spare*
Recently, Germany preemptively auctioned off Government proposal: 700MHz for mobile communication to prepare for the launch of 5G technology
For telcos For telcos
2 terrestrial channels National disaster safety 2 terrestrial channels National disaster safety (MHz) comm. network comm. network
Notes: Upstream frequency ranges for communication (740-752MHz) are currently used by wireless microphones and will be available after 2021; “Spare” entries marked with an asterisk indicate ranges that have been prepared for broadcasters to use Source: MSIP, news reports, KDB Daewoo Securities Research 2H15 Outlook 23 Telecom II. Key themes and issues: Velocity Service
2) Velocity: • 2.1GHz: SK Telecom vs. KT; Licenses to expire in 2016 Note frequency usage • In September 2014, the government approved 2.1GHz refarming for LTE. periods • As such, SK Telecom and KT currently use 20MHz (in the 2.1GHz band) for LTE services • MSIP plans to withdraw a total of 100MHz in the 2.1GHz band, and then reallocate 40MHz-wide spectrums
TIP Frequency licenses of three telcos
2.1GHz band to be reallocated Expiry via auctions Category SK Telecom KT LGU Total (Period of utilization)
800 10 June 2021 2G 30 (10 years) 1.8GHz 20 60 40 December 2016 3G 2.1GHz 100 (40) (20) (15 years) 800 20 10 20
900 20 June/December LTE 1.8GHz 35 35 200 2021 (8-10 years) 2.1GHz (20)(20) 20
2.6GHz 40 March 2019 WiBro 2.3GHz 30 30 60 (7 years) Amount of frequency held 155 135 100 390
Notes: Numbers in parentheses in the 2.1GHz row indicate spectrums refarmed to LTE services Source: MSIP, KDB Daewoo Securities Research 2H15 Outlook 24 Telecom II. Key themes and issues: Velocity Service
2) Velocity: Entrance of • 2.5GHz and 2.6GHz to be allocated to the fourth carrier (both LTE-TDD and FDD allowed) fourth carrier • Originally, only 2.5GHz (40MHz-width) was approved for WiBro (LTE-TDD to be added) • 2.6GHz (40MHz-width) will also be approved this year (LTE-FDD technique to be allowed) • The broadening of the spectrum seems intended to facilitate the entrance of a new carrier
TIP Breakdown of frequency bands; Fourth carrier to be able to choose between WiBro and LTE-TDD in 2.5GHz
The fourth carrier will be able to utilize available frequency band for LTE-TDD, etc. in addition to 2.3GHz range: Existing WiBro (2,300-2,390MHz) WiBro
LTE-TDD (time division duplex): SK Telecom WLAN The same frequency band is Not allocated used for data transmission and receipt
LTE-FDD (frequency division duplex): Separate frequency 2.5GHz range: New WiBro (2,575-2,615MHz) bands are used on the transmitter and receiver sides; LTE-TDD 40MHz LTE-FDD 40MHz Korean telcos use this technique
Source: KISDI, KDB Daewoo Securities Research
2H15 Outlook 25 Telecom II. Key themes and issues: Velocity Service
2) Velocity: Carrier • LTE-Advanced: Steady increase in carrier aggregation (CA) Aggregation • CA technology aims to increase network speeds by aggregating two or more frequency bands • Currently, the CA technology used in LTE-Advanced can aggregate two bands • Going forward, a technology combining three or more bands, or combining LTE and Wi-Fi frequency bands, is anticipated to be commercialized
TIP LTE-Advanced: CA enhances data speed
Advancement of CA technology:
Aggregating component Broadband LTE carriers helps increase peak data rate Aggregating carriers Before CA, MC (multi-carrier) within similar technology was in the spotlight; operating frequency this technology enables one to (LTE range) find a faster network, but does not increase the peak data rate
Aggregating carriers operating in different frequencies (licensed & non-licensed ranges)
Source: SK Telecom, Qualcomm, 5G Forum, KDB Daewoo Securities Research
2H15 Outlook 26 Telecom II. Key themes and issues: Velocity Service
2) Velocity: Bracing for 5G • 5G technology targets in Korea: Demonstration in 2018, commercialization by 2020 mobile networks • Vision: 1Gbps, hyper-connectivity, and immersive experiences • Standardization not yet completed Network investments (capex) not yet begun
TIP 5G vision
5G preparations:
Domestic: 5G Forum, in which three telcos as well as Samsung Electronics and LG Electronics participate
Japan: NTT Docomo R&D Center
China: IMT-2020 (5G) promotion group
UK: 5G Innovation Centre
Source: 5G Forum, KDB Daewoo Securities Research 2H15 Outlook 27 Telecom II. Key themes and issues: Velocity Service
2) Velocity: Year 2018 • MSIP has presented its ICT Olympics vision for 2018 (PyeongChang Olympics) • Provide ICT services and products for the successful hosting of the Olympics • Demonstrate 5G, IoT, UHD, etc. to help increase exports • Capex likely to increase around 2018 due to 5G network demonstration
TIP MSIP’s vision for the PyeongChang 2018 Olympics
MSIP plans to build the K-ICT Olympics Export Strategy Complex to test/verify ICT K-ICT Olympics: Demonstrate speed and convenience services to be provided during the Olympics (funding by 2018: W109.5bn from the government, and W76.8bn from 5G network IoT services UHD broadcast the private sector) • 5G network • Personalized services • 4K, 8K UHD broadcast demonstration • Intelligent traffic system • Personal, social media, • 5G-based immersive and disaster prevention etc. media • Games support • Multiplanar image • Gigabyte Wi-Fi zone system demonstration
Export ICT services/products to other hosting countries
Notes: Media reports; Details released on May 27th Source: MSIP, KDB Daewoo Securities Research
2H15 Outlook 28 Telecom II. Key themes and issues: Encouragement Service
3) Encouragement: • Encouragement: Detailed strategies are required to manage customers, who are sensitive to telecommunications expenses Evolution of customer • In modern times, companies that are able to transform people’s lifestyles (on top of developing innovative management strategies technologies) drive business trends • Advertising, products, sales capacity, branding, businesses, and strategic promotions are increasingly geared toward influencing customers’ environments • Telecom services require comprehensive and well-balanced strategies, given the importance of both customer acquisition and retention TIP
Strategic moves to handle Business trend leaders: Those with the ability to drive lifestyle changes sensitive consumers
1980s 1990s 2000s 2010s
Advertising Product Sales Brand Planning IR CSR 광고부 상품기획부 사업부 브랜드 경영실 경영기획부 IR실 CSR 추진실 planning management
Total Business Company Advertising sales planning environment power capacity Strategic Product Brand Power power marketing/ power power public relations power
Source: Dentsu, Creative Multiplier, KDB Daewoo Securities Research
2H15 Outlook 29 Telecom II. Key themes and issues: Encouragement Service
3) Encouragement: A push • New monthly plans have been launched in 2Q every year since the introduction of LTE for higher ARPU • New monthly plans focus on providing greater convenience to customers (and raising ARPU) • Data plans are increasingly differentiated by service and smartphone model • Differentiation by time, place, and occasion is also evident
TIP Data plan diversification
Data plan diversification apart Charging Multi-tier from volume: Cloud 1) Differentiated by service and party smartphone model; 2) Optimized for time, place, and occasion; 3) Able to charge more parties By time (indirect users, businesses, By data volume etc.) By service By service By device By volume
By smartphone
Data plans (mostly volume-based) Charging party: Sponsors (shopping, games, cab apps, etc.) Age: Kids, youth, etc. Time: Unlimited data for specific time zone, etc. Place: Subway, etc.
Source: Connecting Lab, company data, KDB Daewoo Securities Research
2H15 Outlook 30 Telecom II. Key themes and issues: Encouragement Service
3) Encouragement: • Staying connected to customers Game changer Data on customer • Telcos can identify consumers’ mobile life patterns behavior • Note opportunities that big data can create • SK Telecom utilized the data usage patterns of its subscribers to launch a new plan, Band Timefree
TIP Efficient data collection opportunity is a game changer
Ample potential for application of big data Areas in which big data will have a significant impact within 5 years, according to survey respondents: - Transforming customer relationships: 63% - Redefining product development: 79% 89% 83% 58% 59% - Overhauling organizations’ operations: 56% Big data is Big data will Big data is used Big data important to play a role as a for corporate is a big asset competitiveness game changer competitiveness
Note: A survey of more than 1,000 CIOs, COOs, and CMOs conducted by Accenture; A game changer is a newly introduced element or factor that changes an existing situation or activity in a significant way Source: Accenture, CIO Insight, Google, KDB Daewoo Securities Research 2H15 Outlook 31 Telecom II. Key themes and issues: Regulations Service
4) Regulations: Pressure • Regulations: Regulations and policy direction are key has persisted • Reduction in household telecom bills is a top priority for government • In line with the president’s campaign pledge, the government has repealed the sign-up fee, while implementing MVNO promotion policies • In addition, the government has increased policies to facilitate competition since the introduction of the handset distribution act
Proportion of telecom expenses in gross Government efforts to reduce mobile service charges national consumer expenditure
(Wtr) (%) Date Details 750 Domestic household final consumption expenditure (L) 6 - MSIP announced plan to reduce household spending on communication Proportion of telecom expenses (R) May 2013 services and to vitalize the MVNO market
August 2013 - 40% decrease in sign-up fee (W26,000 →W21,600) 600 5
August 2014 - 50% decrease sign-up fee (W21,600 →W10,800)
450 4 - Eliminated sign-up fee (W10,800→free) October 2014 - Handset distribution law went into effect; Applied discount rate of 12% on monthly charge for customers not receiving subsidies
300 2 April 2015 - KCC increased the discount rate to 20% for customers not receiving subsidies
- GovernmentÊs cut to network wholesale prices; Revitalization of the May 2015 MVNO market; 150 1 - Announcement of plans to cut household telecom expenses - Public hearing on the promotion of competition in the mobile telecom market June 2015 - Efforts to overhaul strict government oversight of rate plan adjustments 0 0 - Seeking to introduce a fourth mobile operator 70 75 80 85 90 95 00 05 10 15F Source: Statistics Korea, BOK, KDB Daewoo Securities Research Source: Media reports, KDB Daewoo Securities Research
2H15 Outlook 32 Telecom II. Key themes and issues: Regulations Service
4) Regulations: Allowing a • The MSIP has announced a basic plan for issuing a license to a facilities-based telecommunication business operator according to the revised Telecommunications fourth mobile service Business Act provider • As such, a regulatory environment for allowing a fourth mobile service provider has been created • Bandwidths available to a new player: TDD 2.5GHz and FDD 2.6GHz (40MHz each) • A public hearing will be held on June 9th and public opinions gathered until June 11th; License applications will be accepted starting end-August
TIP
The aim of the plan is to benefit subscribers and promote investments by facilitating Timeline of plan to allow a fourth mobile service provider competition
End-Aug. June 2015 Oct. 2015 Nov. to Dec. 2015 Mar. 2016 2017 to end-Sept. 2015
Announcement of Frequency allocation Review of applicantsÊ Review of business Payment for frequency Launch of fourth basic plan for notice; Business qualifications; plans; allocation; Issuance of telcoÊs services licensing a facilities- license applications Notification of results Selection of fourth business license based telecom operator business operator (including frequency application) (including frequency allocation review)
Source: MSIP, KDB Daewoo Securities Research
2H15 Outlook 33 Telecom II. Key themes and issues: Regulations Service
4) Regulations: Allowing a • Applications for a fourth mobile service license were submitted on six past occasions fourth mobile service • KMI applied each time, and IST applied twice provider • All applicants were unqualified, mainly due to non-transparent financing plans and inadequate business plans • Introduction of new technologies, including LTE-TDD, was an important part of the evaluation criteria recently
TIP
All past applicants have not been qualified Past applications for a fourth mobile service license: KMI applied and failed each time
1st 2nd 3rd 4th 5th 6th 7th June 2010 Nov. 2010 Aug. 2011 Oct. 2012 Nov. 2013 Mar. 2014 Aug. 2015
Applicant: Applicant: Applicants: Applicants: Applicant: Applicant: Applicant(s): KMI KMI KMI, IST KMI, IST KMI KMI TBD
Result: Unqualified Result: Unqualified Result: Unqualified Result: Unqualified Result: Withdrew Result: Unqualified Result: voluntarily (to be announced Reasons: Reasons: Reasons: Weak Reasons: Reasons: Non- at year-end) Inadequate Non-transparent shareholding Inadequate Reasons: transparent financial/ financing plan; structuring; business plan Inadequate plan for financing/ technological Too-optimistic Inadequate payment for business plan capabilities demand forecast financial capability; frequency Non-transparent allocation financing plan
Source: Media reports, KDB Daewoo Securities Research
2H15 Outlook 34 Telecom II. Key themes and issues: Regulations Service
4) Regulations: Allowing a • The government’s move to allow a fourth mobile service provider is aimed at overhauling the market structure by increasing competition fourth mobile service • Current market structure (three mobile operators) will likely provide no incentive for competition and increase provider household telecom expenses • The government has rationalized regulations to lay the foundation for a new player to enter the market • The government appears to be benchmarking France’s telecom policies: MVNO and a fourth mobile service provider
Subscriber base and market share of Free Mobile, the fourth Potential applicants for fourth mobile service license mobile operator to receive a license in France
(mn persons) Consortium Representative 12 No. of subscribers 11 10 (15.5%) (15%) Jong-nyeol Gong KMI 10 (Former director of MOIC) 8 (12%) Seung-taek Yang 8 IST (Former minister of MOIC) 5 (8%) Yun-sik Jang 6 Woori Telecom (Former president of the MVNO association) 4 Seong-do Park Quantum Mobile (Former vice-president of Hyundai Mobis) 2 0 (Introduction) Dang-yeong Lee K Consortium (from Samsung Electronics) 0 1/12 12/12 12/13 12/14 12/15
Notes: As of early June Notes: Market share is in parentheses Source: Media reports, KDB Daewoo Securities Research Source: Free Mobile, KDB Daewoo Securities Research 2H15 Outlook 35 Telecom II. Key themes and issues: Regulations Service
4) Regulations: Overseas • Effects of a fourth mobile service provider need further monitoring cases of a fourth mobile • France: Free Mobile entered the market with a 12-year rate plan, triggering industry restructuring amid intense competition service provider • Japan: Y!mobile had a market share of less than 3% for six years after launching its services; Company was acquired by Softbank this year • EU: Minimal mobile charge differences between three-player vs. four-player market structures
TIP EU: Mobile charge comparison of three-MNO vs. four-MNO markets
France’s Free Mobile saw its (EUR/min.) market share rise up to 15% 0.30 3-player markets after its entry into the market. 4-player markets However, intensified competition led to decreased 0.25 revenue and profits at mobile operators, triggering industry 0.22 restructuring. MVNOs’ market shares also contracted 0.20 0.21
Japan’s Y!mobile recorded a 0.15 market share of 2.8% for seven years after its market entry. As the company was acquired by Softbank this year, the 0.10 Japanese market has returned to a three-player structure 0.07 0.05
0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Notes: Mobile charges are based on mobile network operators (MNOs) with a market share of more than 5%, excluding MVNOs Source: GSMA Intelligence, KDB Daewoo Securities Research 2H15 Outlook 36 Telecom II. Key themes and issues: Regulations Service
4) Regulations: Repeal of • Rate plan approval system: Currently, rate plan adjustments by dominant telcos are subject to rate plan approval system approval; the purpose is to ensure steady revenue for second-tier firms by preventing dominant players from pushing through excessive rate cuts • The proposed repeal could promote rate cut competition, better protecting consumer rights • The Ministry of Science, ICT and Future Planning plans to hold a public hearing in June to come up with non-legislative solutions
TIP Repeal of rate plan approval system: Part of the “regulatory guillotine” approach discussed at a public-private meeting in end-2014 Proposed repeal is intended to reduce cost of telecom plans by Agenda number Agenda Details promoting rate competition ▪ For SK TelecomÊs mobile services and KTÊs local call services, rate hikes or new plans are subject to approval Since 2010, all telcos have Repeal of rate plan 81 been subject to a reporting approval system Need to ease competition-stifling regulations (such as by repealing system for rate cuts; for rate rate plan approval system) hikes, the rate plan approval system still applies Authorities Details
[Solution] ▪ Comprehensive measures to facilitate market competition to be presented (not only scrapping the rate plan approval system, but also Ministry of Science, stimulating telecom market competition, revamping wholesale systems, Non-legislative ICT and Future Planning and improving MVNO competitiveness; public hearing slated for June).
* Discussions among legislators, government officials, and private professionals being held
Note: The “regulatory guillotine” approach refers to efforts to revamp inefficient and unpractical regulations all at once. Source: Prime Minister's Office, KDB Daewoo Securities Research 2H15 Outlook 37 Telecom II. Key themes and issues: Regulations Service
4) Regulations: Mobile • Telecom-related bills, including MCTDSIA, will be discussed by the National Assembly in June Communications Terminal • Both the ruling and opposition parties moved to repeal the ceiling and floor for handset subsidies Distribution Structure • The opposition party proposed to completely separate mobile phone sales and service plans Improvement Act • However, there are many pending issues facing the National Assembly, including a confirmation (MCTDSIA) hearing for a prime minister nominee and revisions to the National Assembly Act
TIP
Matters under discussion Major proposals related to MCTDSIA revisions related to MCTDSIA revisions: Repeal of ceiling for handset subsidies, complete separation Date Author of proposal Bill details of mobile phone sales from service plans, etc. 8/19/2014 Byung-heon Jeon (NPAD) Repeal of strict government oversight of rate plan adjustments
Introduction of a scheme requiring separate disclosure from telcos 10/14/2014 Min-hee Choi (NPAD) and handset makers concerning subsidies and sales incentives
Scrapping of subsidy cap; Introduction of a scheme requiring separate 10/17/2014 Deok-gwang Bae (Saenuri) disclosure from telcos and handset makers concerning subsidies and sales incentives Scrapping of subsidy cap; Introduction of a scheme requiring separate 11/7/2014 Myeong-suk Han (NPAD) disclosure from telcos and handset makers concerning subsidies and sales incentives; Differentiating subsidy payment by subscription type Scrapping of subsidy cap; Report to the KCC before changing 11/10/2014 Jae-cheol Shim (Saenuri) disclosures Repeal of the handset distribution law; Complete separation of mobile 3/12/2015 Byung-heon Jeon (NPAD) phone sales and service plans under the revised telecommunications business act
Source: National Assembly, KDB Daewoo Securities Research
2H15 Outlook 38 Telecom II. Key themes and issues: Regulations Service
4) Regulations: Business • Conventional business structure: Tight tensions between regulations and innovations structure needs to evolve • Currently, regulatory pressures are strong, and companies and consumers are sensitive to policy direction • In the future, companies will pursue innovation through active interactions with consumers, who are savvy about mobile devices and social media; Authorities’ main role will be support and monitoring
TIP Currently, regulatory pressures are too strong; Business structure needs to evolve through innovation Currently, both companies and consumers are sensitive to Regulation policy direction
Companies are moving toward Regulation innovation through active Company interactions with consumers, Consumer who are savvy about mobile Incumbent devices and social media Innovation (Past)
Company Regulation Consumer Incumbent (Present) Innovation
Company Consumer Incumbent (Evolving direction) Innovation
Source: KPCB, KDB Daewoo Securities Research
2H15 Outlook 39 Telecom III. Valuation & investment strategy Service
Determinants of telecom • Telecom share prices are affected by regulations, capex, earnings, and dividends shares: Regulations, capex, • The telecom industry requires investments in both tangible and intangible infrastructure; Less capex tends to earnings, and dividends lead to profit growth • Earnings are linked to regulations and capex: Earnings likely to normalize through 2015 • Dividends are linked to earnings; Expect dividend payout ratio to grow this year • 2015: While capex, earnings, and dividends are favorable, the regulatory environment is not
TIP 2015: Regulations will likely be the most influential factor affecting telecom shares
Not all share determinants likely to be favorable in 2015
Dividends
Capex Earnings
Regulations
Source: KDB Daewoo Securities Research
2H15 Outlook 40 Telecom III. Valuation & investment strategy Service
Overblown concerns to • Telecom stocks tend to recover after pulling back on regulatory risks provide investment • Before the MCTDSIA took effect, the subsidies issue drove down shares opportunities • With the handset distribution environment changing, issues such as phone bills and the emergence of a fourth telco are sending shares down • Once a clearer picture of the policy landscape emerges in 3Q, downward pressures should ease
After MCTDSIA: Shares being affected by issues such as Before MCTDSIA: Shares affected by subsidy competition telecom expenses and potential fourth telco (p) FTSE Korea Telecom Index (L) (max=100) (p) (max=100) 51 'Subsidy' search frequency (inverted, R) 0 51 0
49 49 20 20 47 47
45 40 40 45 43 60 60 43 41
80 41 80 39
FTSE Korea Telecom Index (L) 37 39 100 'Phone bill' search frequency (inverted, R) 100 'Fourth telco' search frequency (inverted, R) 35 37 1/14 4/14 7/14 10/14 1/15 6/14 9/14 12/14 3/15 6/15 Notes: Average of PC and mobile search frequencies for keyword “subsidy” Notes: Average of PC and mobile search frequencies for keywords “phone bill” and “fourth telco” Source: Naver Trend, Thomson Reuters, KDB Daewoo Securities Research Source: Naver Trend, Thomson Reuters, KDB Daewoo Securities Research 2H15 Outlook 41 Telecom III. Valuation & investment strategy Service
Time, dividends, and new • Regulatory risks could be offset by the following factors: businesses • Time: It will likely take time to review potential effects of new policies before actual implementation • New businesses: Overseas exports and expansion of jobs should boost enterprise value • Dividends: High dividend yields are likely to provide downside support
TIP Regulatory risks to be offset by time and dividends; New businesses to boost enterprise value
Once regulatory risks ease, shares should reflect fundamentals Regulatory risks Fundamentals + improved enterprise value • Better margins of existing businesses • New businesses to boost growth potential
Source: KDB Daewoo Securities Research
2H15 Outlook 42 Telecom III. Valuation & investment strategy: Global peer group Service
Earnings outlook and valuation of major telcos (Wbn, %, x)
Revenue (Wbn) OP (Wbn) NP (Wbn) OP margin (%) P/E (x) P/B (x) ROE (%) Company 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F SK Telecom 17,164 17,752 18,361 1,825 1,967 2,188 1,801 1,972 2,159 10.6 11.1 11.9 12.0 10.3 9.4 1.3 1.1 1.0 12.9 13.0 13.1 KT 23,422 22,021 22,015 -292 1,158 1,192 -1,055 1,127 647 -1.2 5.3 5.4 - 6.8 11.9 0.7 0.6 0.6 -9.5 10.3 5.5 LG Uplus 11,000 10,545 10,700 576 692 709 228 368 394 5.2 6.6 6.6 22.0 11.2 10.5 1.2 0.9 0.9 5.6 8.5 8.5 NTT Docomo (Japan) 42,429 40,318 41,785 6,186 6,061 6,678 3,969 4,103 4,558 14.6 15.0 16.0 22.9 19.6 17.3 1.7 1.6 1.6 7.4 8.3 8.8 Softbank 83,923 80,162 83,174 9,512 9,390 10,623 6,469 4,533 5,860 11.3 11.7 12.8 13.0 17.0 13.2 3.0 2.6 2.2 27.8 16.2 17.4 China Mobile (China) 109,678 121,149 127,310 20,693 21,705 23,181 18,685 19,806 21,134 18.9 17.9 18.2 15.0 15.1 14.0 1.9 1.8 1.7 13.3 12.4 12.3 China Unicom 48,676 52,199 54,318 3,580 3,801 4,381 2,061 2,466 2,849 7.4 7.3 8.1 21.6 18.7 16.1 1.1 1.1 1.0 5.3 5.9 6.7 PCCW (HK) 4,520 5,550 5,844 548 771 857 450 365 423 12.1 13.9 14.7 10.5 13.4 12.0 3.5 3.0 2.8 34.2 22.4 23.3 Singtel (Singapore) 14,183 14,403 14,837 2,405 2,466 2,590 3,114 3,265 3,497 17.0 17.1 17.5 17.3 16.6 15.5 2.6 2.5 2.4 15.6 15.5 16.0 AT&T (US) 139,510 149,607 154,161 12,372 25,620 26,424 6,556 14,609 15,205 8.9 17.1 17.1 14.2 13.7 13.3 2.1 2.1 2.0 6.5 15.2 16.4 Verizon 133,856 145,985 147,688 20,644 32,683 33,350 10,138 17,249 17,782 15.4 22.4 22.6 13.4 12.3 11.9 20.6 12.7 8.6 89.8 122.5 82.5 Deutsche Telekom (EU) 87,625 84,610 86,176 10,135 9,587 10,613 4,089 4,131 4,770 11.6 11.3 12.3 37.2 21.8 18.5 2.5 2.5 2.4 7.2 10.8 12.8 Orange 55,162 48,842 48,963 7,150 7,393 7,479 1,294 3,077 3,291 13.0 15.1 15.3 34.5 14.8 13.8 1.2 1.3 1.2 3.4 9.0 9.3 Average 11.1 13.2 13.7 19.5 14.7 13.6 1.9 1.8 1.6 10.8 12.3 12.5
SK Telecom’s 12-month forward P/B KT’s 12-month forward P/B
(W) (W) Adj. stock price 350,000 Adj. stock price 1.3x 50,000 1.1x 0.9x 45,000 300,000 1.2x 0.8x 1.0x 40,000 250,000 0.8x 35,000 0.7x 200,000 30,000 0.7x 0.6x 150,000 25,000
100,000 20,000 10 11 12 13 14 15 16 17 10 11 12 13 14 15 16 17
Note: Based on our estimates for Korean firms and the consensus for the others, Source: Bloomberg, KDB Daewoo Securities Research
2H15 Outlook 43 Telecom IV. Top pick & stocks to watch Service
2H point: Shareholder-friendly measures to come
Earnings recovery, dividend payout, stock buyback
Value of subsidiaries: SK Planet, SK Broadband, SK Hynix, etc.
2H point: Potential dividend payout
Earnings normalizing thanks to cost decline Telecom Service KT (Buy) following massive restructuring in 2014 (Overweight) Operations normalizing: Swung to a net subscriber addition in 2Q; First telco to release data-oriented plans
2H point: Steady subscriber acquisition
High ARPU: High contribution of LTE subscribers LG Uplus (Buy)
Dividend payout ratio of 30%
Source: KDB Daewoo Securities Research
2H15 Outlook 44 Top pick Telecom SK Telecom (017670 KS) Service
Shareholder returns to increase
Investment points (Maintain) Buy • Strong shareholder return policy: Plans for both dividend payment and treasury share purchase Target Price (12M, W) 360,000 • Earnings recovery: Weak in 1H due to restructuring; Recovery to come in 2H Share Price (6/9/15, W) 251,500 • EV: Earnings growth and EV improvement at major subsidiaries, including SK Planet, SK Broadband, and SK Hynix Expected Return 43% • Platform business: Businesses with high growth potential (media, commerce, and IoT) to be emphasized OP (15F, Wbn) 1,967 Consensus OP (15F, Wbn) 1,940 EPS Growth (15F, %) 9.5 Risks Market EPS Growth (15F, %) 36.9 • As the market leader, sensitive to regulatory and policy environment; Need to defend subscriber P/E (15F, x) 10.3 base Market P/E (15F, x) 10.5 • Uncertainties related to ownership structure changes in SK Group KOSPI 2,064.03 Market Cap (Wbn) 20,308 Shares Outstanding (mn) 377 Free Float (%) 62.6 FY (Dec.) 12/12 12/13 12/14F 12/15F 12/16F 12/17F 130 SK Telecom KOSPI Foreign Ownership (%) 44.5 Revenue (Wbn) 16,141 16,602 17,164 17,752 18,361 18,934 120 OP (Wbn) 1,730 2,011 1,825 1,967 2,188 2,242 Beta (12M) 0.77 110 OP margin (%) 10.7 12.1 10.6 11.1 11.9 11.8 52-Week Low 219,000 NP (Wbn) 1,152 1,639 1,801 1,972 2,159 2,201 52-Week High 301,000 100 EPS (W) 14,263 20,298 22,307 24,427 26,739 27,263 (%) 1M 6M 12M 90 ROE (%) 9.8 13.0 12.9 13.0 13.1 12.2 Absolute -1.9 -10.5 14.8 P/E (x) 10.7 11.3 12.0 10.3 9.4 9.2 80 Relative -0.9 -14.5 10.7 14.6 14.10 15.2 15.6 P/B (x) 0.9 1.2 1.3 1.1 1.0 1.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests; Based on June 9th closing price Source: KDB Daewoo Securities Research 2H15 Outlook 45 Top pick Telecom SK Telecom (017670 KS) Service
Dividend and treasury • Both dividend payment and treasury share purchase expected shares • Interim dividend: Announcement expected in June; Payment in July • Annual dividend: If interim dividend plans are changed, an announcement on the annual dividend plan can also be expected • Treasury share purchase: SK Telecom is likely to buy back shares used in the acquisition of SK Broadband and allocate a separate budget for shareholder returns
TIP SK Telecom’s plans related to shareholder returns
Shareholder-friendly policies to be strongest in 4Q following dividend payment and treasury share purchase 1H: July September Year-end - Restructuring - Decrease in earnings - Concerns about regulations Dividend Treasury Dividend stock 2H: - Earnings recovery Plan to pay Start to buy Plan to pay - Increase in dividend out interim back shares out year-end - Share buyback dividend dividend
Notes: KDB Daewoo estimates Source: KDB Daewoo Securities Research 2H15 Outlook 46 Top pick Telecom SK Telecom (017670 KS) Service
Group ownership • SK C&C and SK Holdings to merge on August 1st structure and growth • SK Telecom leads SK Group’s ICT businesses strategy • Under SK Group’s growth strategy, SK Telecom is included in the portfolio of traditional businesses; SK Group to strengthen the management of the company • SK Telecom’s subsidiary SK Hynix belongs to the portfolio of new growth businesses; Group’s investment in SK Hynix to increase
TIP SK Group’s ownership structure after merger of SK C&C and SK Holdings
Investors need to pay close attention to changes in SK Group holds: ownership structure Before SK C&C KoreaÊs top oil refinery merger SK Holdings KoreaÊs top mobile service provider SK Holdings WorldÊs no. 2 DRAM producer
Energy/Chemicals ICT/Semiconductor Marketing/Services
SK Innovation SK Telecom SK Networks
SK Energy SK Planet SK Global SK E&C Chemical SK Broadband SK Incheon SK Shipping Petrochemical SK Hynix SK Lubricants SK Securities Infosec SK E&S SK Biopharm SKC ESSENCORE
Source: Company data, KDB Daewoo Securities Research 2H15 Outlook 47 Top pick Telecom SK Telecom (017670 KS) Service
Governance and growth • The group's growth strategy should boost SK Telecom’s enterprise value; In particular, SK strategies Group will: • Strengthen management over existing SK subsidiaries (including SK Telecom) • Build a growth-oriented portfolio via larger investments in high-growth areas and businesses with promising futures (platform, etc.) • Encourage innovation in existing businesses and increase efficiency in businesses with deteriorating profits (wired network, etc.) TIP SK Telecom likely to restructure its businesses
SK Telecom businesses to undergo restructuring in line with SK Group’s growth Building growth-oriented portfolio and innovating existing businesses strategy
Increasing investments in growth areas
Rebuilding portfolio to shift focus to high- growth areas and promising businesses
Slow growth and falling profitability
Strengthen portfolio value management
Portfolio restructuring and proactive efforts toward management improvement
Source: SK, KDB Daewoo Securities Research 2H15 Outlook 48 Top pick Telecom SK Telecom (017670 KS) Service
Governance and growth • SK Group to strengthen growth in integrated ICT solutions (SK Telecom’s subsidiary NEOS strategies Networks) • SK Telecom increased investments in NSOK via rights offering on April 29th (roughly W40bn) • NSOK posted revenue of W33.3bn last year (high growth of +18% YoY)
TIP SK Group to strengthen integrated ICT solutions business
Integrated ICT solutions: IT services, integrated security, smart logistics, etc.
Information security Physical security
Convergence security solutions
Emergency Temperature security sensor services
NW System Application security security service Control center
Source: SK, KDB Daewoo Securities Research 2H15 Outlook 49 Top pick Telecom SK Telecom (017670 KS) Service
Corporate governance Notes: As of end-1Q15; SK C&C-SK Holdings merger to be completed Aug. 1st 2015; As SK 99.0% Telecom participated in the rights offering of NEOS Networks, its ownership increased to 83.93% Bizen Choi Tae-won & on Apr. 29th, 2015; As SK Telecom’s ownership in SK Broadband increased to 100% through a affiliates share exchange on June 9th, 2015, SK Broadband has been de-listed; SK Planet plans to spin off 100% st Infosec cloud streaming business on July 1 , 2015. 43.5% 0.06% 5.9% SK E&S 31.8% SK C&C SK SK Biopharm SK Forest SK Shipping Choi Chang-won & 50.0% (034730 KS) (003600 KS) affiliates SK Encarsales.com 100% 100% 83.1% 17.0% 33.4% 25.2% 42.3% 39.1% 94.1% 44.5% SK Innovation SK Telecom SKC SK Networks 28.3% SK Chemical SK E&S SK E&C (096770 KS) (017670 KS) (011790 KS) (001740 KS) (006120 KS) 100% 50.6% 67.3% Busan City Gas SK Energy SK Broadband 100% 32.0% 45.5% (033630 KQ) SKC Lighting 100% (015350 KS) Daejeon SK Gas 10.0% Speed Motors Clean Water 100% 100% 100% (018670 KS) Service Top 80.0% PMP SK Global Chemical SKC Airgas 86.5% SK Networks 42.0% 5.0% 20.1% Service 100% Gwangju Happy Narae 50.0% SK Hynix Chonnam Clean Water Ulsan Aromatics City Gas (000660 KS) 40.9% SKC Solmics 100% (057500 KQ) SK Pinx 100% 100% 83.5% Kangwon 65.0% SK Continental SK Telink City Gas SK Advanced Emotion Korea 50.0% 100% SK Telesys 10.0% SK Securities 100% Chungcheong 43.5% 100% SK Wyverns (001510 KS) Energy Service SK Lubricants SK D&D 90.0% 100% 100% SK-W Jeonbuk 41.0% PS & Marketing Energy Service 100% Daehan G Hub Oil Pipeline 100% 50.0% F&U Yeongnam 100% Energy Service 42.5% 42.5% Credit Information SK Hyeng Happy Narae 100% 44.0% UB Care 49.0% Pyeongtaek (032620 KQ) Iriver 100% Energy Service 100% SK Hystec SK Mobile 100% 100 Energy 100% Ko-one % Hanam 50.0% Service Ace 100% Energy Service Energy Service Entis 100% Silicon File Tech. SK Incheon 89.5% Petrochemical 100% Wirye Network ONS Energy Service 66.0% 100% 100% Initz SK Trading M & Service 80.0% International 66.7% Kimcheon NEOS Networks 51.0% Television Energy Service 100% SK Syntec 100% Media Korea 100% 64.5% Jeonbuk SK Planet SK Communications Mass Energy (066270 KQ) 50.0% SK Petrochemical 100% Boryeong LNG Commerce Planet Terminal 100% Source: SK, KDB Daewoo Securities Research
2H15 Outlook 50 Top pick Telecom SK Telecom (017670 KS) Service
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)
(Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F
Revenue 17,164 17,752 18,361 18,934 Current Assets 5,083 6,232 6,694 8,189 P/E (x) 12.0 10.3 9.4 9.2
Cost of Sales 0 0 0 0 Cash and Cash Equivalents 834 1,609 1,927 3,227 P/CF (x) 4.5 4.1 3.9 3.8
Gross Profit 17,164 17,752 18,361 18,934 AR & Other Receivables 3,083 3,354 3,438 3,545 P/B (x) 1.3 1.1 1.0 1.0
SG&A Expenses 15,339 15,785 16,173 16,692 Inventories 268 291 301 311 EV/EBITDA (x) 5.9 5.2 4.7 4.3
Operating Profit (Adj) 1,825 1,967 2,188 2,242 Other Current Assets 898 978 1,028 1,106 EPS (W) 22,307 24,427 26,739 27,263
Operating Profit 1,825 1,967 2,188 2,242 Non-Current Assets 22,858 23,517 23,940 24,143 CFPS (W) 59,177 60,816 64,380 65,767
Non-Operating Profit 429 537 553 553 Investments in Associates 6,298 6,550 6,775 6,986 BPS (W) 206,159 222,328 240,282 258,760
Net Financial Income -264 -250 -214 -169 Property, Plant and Equipment 10,568 10,730 10,737 10,541 DPS (W) 9,400 10,000 10,000 10,000
Net Gain from Inv in Associates 906 830 850 850 Intangible Assets 4,402 4,552 4,702 4,852 Payout ratio (%) 37.1 35.8 32.7 32.1
Pretax Profit 2,254 2,504 2,741 2,795 Total Assets 27,941 29,749 30,634 32,332 Dividend Yield (%) 3.5 4.0 4.0 4.0
Income Tax 455 523 573 584 Current Liabilities 5,420 5,796 5,172 5,322 Revenue Growth (%) 3.4 3.4 3.4 3.1
Profit from Continuing Operations 1,799 1,981 2,168 2,211 AP & Other Payables 1,657 1,803 1,865 1,923 EBITDA Growth (%) -2.6 5.0 6.6 3.0
Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,151 1,151 367 367 Operating Profit Growth (%) -9.2 7.8 11.2 2.5
Net Profit 1,799 1,981 2,168 2,211 Other Current Liabilities 2,612 2,842 2,940 3,032 EPS Growth (%) 9.9 9.5 9.5 2.0
Controlling Interests 1,801 1,972 2,159 2,201 Non-Current Liabilities 7,273 7,391 7,441 7,488 Accounts Receivable Turnover (x) 7.4 7.1 6.9 6.9
Non-Controlling Interests -2 8 9 9 Long-Term Financial Liabilities 5,930 5,930 5,930 5,930 Inventory Turnover (x) 77.2 63.5 62.0 61.9
Total Comprehensive Profit 1,771 1,981 2,168 2,211 Other Non-Current Liabilities 1,343 1,461 1,511 1,558 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0
Controlling Interests 1,778 1,977 2,165 2,207 Total Liabilities 12,693 13,187 12,613 12,810 ROA (%) 6.6 6.9 7.2 7.0
Non-Controlling Interests -7 3 3 4 Controlling Interests 14,506 15,812 17,262 18,754 ROE (%) 12.9 13.0 13.1 12.2
EBITDA 4,717 4,955 5,281 5,438 Capital Stock 45 45 45 45 ROIC (%) 10.2 10.4 11.5 11.7
FCF (Free Cash Flow) 669 1,195 1,430 1,608 Capital Surplus 2,916 2,916 2,916 2,916 Liability to Equity Ratio (%) 83.2 79.6 70.0 65.6
EBITDA Margin (%) 27.5 27.9 28.8 28.7 Retained Earnings 14,189 15,494 16,944 18,436 Current Ratio (%) 93.8 107.5 129.4 153.9
Operating Profit Margin (%) 10.6 11.1 11.9 11.8 Non-Controlling Interests 742 750 759 768 Net Debt to Equity Ratio (%) 36.6 28.6 20.1 11.8
Net Profit Margin (%) 10.5 11.1 11.8 11.6 Stockholders' Equity 15,248 16,562 18,021 19,522 Interest Coverage Ratio (x) 5.6 6.3 7.4 8.0
Source: SK Telecom, KDB Daewoo Securities Research estimates
2H15 Outlook 51 Stocks Telecom to watch KT (030200 KS) Service
Focus on normalization of earnings, dividends, and share price
Investment points (Maintain) Buy • Earnings normalizing: Quarterly operating profit recovered to the W300bn level this year thanks Target Price (12M, W) 40,000 to a cost decline (following last year’s restructuring) • Operation normalizing: Swung to a net subscriber addition in 2Q15; At the forefront of releasing Share Price (6/9/15, W) 29,500 data-oriented plans
Expected Return 36% • Likely to resume dividend payout this year after suspending its dividend last year; Long-term dividend investors likely to return OP (15F, Wbn) 1,158 • Valuation merits: P/B of just 0.6x; Valuation should look increasingly attractive alongside Consensus OP (15F, Wbn) 1,120 improvement in fundamentals EPS Growth (15F, %) - Market EPS Growth (15F, %) 36.9 Risks P/E (15F, x) 6.8 Fixed-line revenue is on the decline Market P/E (15F, x) 10.5 • KOSPI 2,064.03 • With subscribers increasingly moving to MVNOs, rise in ARPU might be slow Market Cap (Wbn) 7,703 Shares Outstanding (mn) 261 Free Float (%) 84.9 FY (Dec.) 12/12 12/13 12/14F 12/15F 12/16F 12/17F 130 KT KOSPI Foreign Ownership (%) 46.9 Revenue (Wbn) 23,856 23,811 23,422 22,021 22,015 22,152 120 OP (Wbn) 1,209 839 -292 1,158 1,192 1,221 Beta (12M) 0.72 OP margin (%) 5.1 3.5 -1.2 5.3 5.4 5.5 52-Week Low 28,500 110 NP (Wbn) 1,046 -162 -1,055 1,127 647 695 52-Week High 36,800 100 EPS (W) 4,006 -622 -4,040 4,318 2,479 2,663 (%) 1M 6M 12M 90 ROE (%) 8.7 -1.4 -9.5 10.3 5.5 5.7 Absolute -4.1 -7.7 -1.8 P/E (x) 8.9 - - 6.8 11.9 11.1 80 Relative -3.1 -11.8 -5.3 14.6 14.10 15.2 15.6 P/B (x) 0.7 0.6 0.7 0.6 0.6 0.6
Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests; Based on June 9th closing price Source: KDB Daewoo Securities Research 2H15 Outlook 52 Stocks Telecom to watch KT (030200 KS) Service
Turnaround in progress • KT to normalize in 2015 • Earnings and FCF are likely to turn positive thanks to a low base effect resulting from restructuring- related one-off expenses • Likely to resume dividend payout after suspending its dividend last year; Sale of subsidiaries to boost cash flow and earnings recovery
Operating profit and FCF to turn positive this year Likely to resume dividend payout
(Wbn) (W) 2,500 Consolidated operating profit 2,500 DPS Consolidated FCF 2,000 Swung to positive 2,000 1,500
1,000 1,500
500 Resumption 1,000 of dividend payments 0
-500 500
-1,000
-1,500 0 11 12 13 14 15F 16F 11 12 13 14 15F 16F Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
2H15 Outlook 53 Stocks Telecom to watch KT (030200 KS) Service
26.2% KT 44.8% Governance KT KT Powertel WiBro Infra (030200 KS) 69.5% 1.0% 99.0% 57.0% Initech 63.7% 83.6% BC Card H&C Network KTH (053350 KQ) KT Capital (036030 KQ) 16.4% 50.9% 11.3% 3.4% 19.0% 7.4% 4.0% VP 100% KTcs KT Commerce (058850 KS) 81.0% 19.9% 61.2% Initech Smartro Smartro Holdings 29.3% 11.6% 35.5% KT Sports KTIS Enswers (058860 KS) Sold
KT Music 50.0% 100% 0.1% KT ENS KT Skylife (043610 KQ) (053210 KS) 50.0% KT Submarine 36.9% 100% KT M&S 48.0% (060370 KQ) Animax Broadcasting Korea Nasmedia 45.4% 100% Merged KT Media Hub 14.8% 77.7% (089600 KQ) Skylife TV
93.8% 86.8% 26.2% KT Linkus KT Telecop WIC
100% 82.8% 77.4% 100% KT Sat Centios Sofnics KT AMC
100% 51.0% 100% 51.0% T-on Telecom Liquidated KT Mhows KT Estate KD Living
65.0% 48.4% 58.0% 100% Smart Channel KT Innoedu Sold KT Rental KT Autolease
51.0% 100% 100% 100% Best Partners KT Rental U-stream Korea Liquidated KT Autopion Autocare 6.0% 52.3% 51.0% 60.0% 95.3% KT Sports Green Car KTDS KT-SB Data Service 100% 6.0% 18.0%
KT NexR Notes: As of end-1Q15; KT Media Hub merged with KT on Mar. 6.0% 31st; Sale of KT Rental was completed on June 3rd; KT’s stake in th Source: Company data, KDB Daewoo Securities Research KT Innoedu changed to 79.54% on June 4 ; Sale of KT Capital was delayed 2H15 Outlook 54 Stocks Telecom to watch KT (030200 KS) Service
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)
(Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F
Revenue 23,422 22,021 22,015 22,152 Current Assets 8,751 10,894 10,618 12,168 P/E (x) - 6.8 11.9 11.1
Cost of Sales 0000Cash and Cash Equivalents 1,889 4,131 3,555 4,605 P/CF (x) 1.9 1.5 1.6 1.5
Gross Profit 23,422 22,021 22,015 22,152 AR & Other Receivables 3,123 3,078 3,077 3,097 P/B (x) 0.7 0.6 0.6 0.6
SG&A Expenses 23,713 20,863 20,823 20,931 Inventories 393 388 387 390 EV/EBITDA (x) 5.7 3.5 3.4 3.2
Operating Profit (Adj) -292 1,158 1,192 1,221 Other Current Assets 3,346 3,297 3,599 4,076 EPS (W) -4,040 4,318 2,479 2,663
Operating Profit -292 1,158 1,192 1,221 Non-Current Assets 25,025 24,027 23,251 22,266 CFPS (W) 16,859 19,654 19,030 19,160
Non-Operating Profit -945 279 -280 -252 Investments in Associates 339 334 334 336 BPS (W) 42,921 47,239 48,968 50,694
Net Financial Income -420 -431 -381 -343 Property, Plant and Equipment 16,468 15,885 15,433 14,704 DPS (W) 0 800 1,000 1,000
Net Gain from Inv in Associates 18 613 0 0 Intangible Assets 3,544 3,144 2,821 2,558 Payout ratio (%) 0.0 17.6 34.4 32.4
Pretax Profit -1,237 1,437 912 969 Total Assets 33,776 34,921 33,869 34,434 Dividend Yield (%) 0.0 2.7 3.4 3.4
Income Tax -271 320 201 213 Current Liabilities 9,992 9,601 8,034 8,077 Revenue Growth (%) -1.6 -6.0 0.0 0.6
Profit from Continuing Operations -966 1,117 711 756 AP & Other Payables 1,200 1,183 1,182 1,190 EBITDA Growth (%) -20.1 41.5 -3.4 0.9
Profit from Discontinued Operations 0 -3 0 0 Short-Term Financial Liabilities 3,000 2,709 1,144 1,144 Operating Profit Growth (%) - - 2.9 2.4
Net Profit -966 1,114 711 756 Other Current Liabilities 5,792 5,709 5,708 5,743 EPS Growth (%) - - -42.6 7.4
Controlling Interests -1,055 1,127 647 695 Non-Current Liabilities 11,993 12,415 12,415 12,427 Accounts Receivable Turnover (x) 7.4 7.1 7.2 7.2
Non-Controlling Interests 89 -13 64 60 Long-Term Financial Liabilities 10,085 10,535 10,535 10,535 Inventory Turnover (x) 46.5 56.4 56.8 57.0
Total Comprehensive Profit -1,201 1,114 711 756 Other Non-Current Liabilities 1,908 1,880 1,880 1,892 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0
Controlling Interests -1,277 1,111 708 753 Total Liabilities 21,985 22,016 20,448 20,503 ROA (%) -2.8 3.2 2.1 2.2
Non-Controlling Interests 76333Controlling Interests 10,341 11,469 11,920 12,370 ROE (%) -9.5 10.3 5.5 5.7
EBITDA 3,563 5,041 4,868 4,912 Capital Stock 1,564 1,564 1,564 1,564 ROIC (%) -1.1 4.3 4.6 4.9
FCF (Free Cash Flow) -936 1,646 1,414 1,532 Capital Surplus 1,440 1,440 1,440 1,440 Liability to Equity Ratio (%) 186.5 170.6 152.4 147.2
EBITDA Margin (%) 15.2 22.9 22.1 22.2 Retained Earnings 8,571 9,699 10,150 10,601 Current Ratio (%) 87.6 113.5 132.2 150.7
Operating Profit Margin (%) -1.2 5.3 5.4 5.5 Non-Controlling Interests 1,449 1,436 1,500 1,561 Net Debt to Equity Ratio (%) 89.9 66.1 56.0 46.2
Net Profit Margin (%) -4.5 5.1 2.9 3.1 Stockholders' Equity 11,790 12,905 13,420 13,931 Interest Coverage Ratio (x) -0.6 2.2 2.4 2.6
Source: KT, KDB Daewoo Securities Research estimates
2H15 Outlook 55 Stocks Telecom to watch LG Uplus (032640 KS) Service
Solid business capabilities
Investment points (Maintain) Buy • Continued net subscriber growth: Net subscriber growth has continued in the MNP market, proving the Target Price (12M, W) 14,000 company has solid business capabilities that are immune to the changing market environment • Fundamental changes in the subscriber base: Focus has been on high-ARPU subscribers since the Share Price (6/9/15, W) 9,470 introduction of LTE services; Percentage of MVNO subscribers is the lowest • Consistent dividend policy: Payout ratio of 30%; Improving free cash flow to provide more room for Expected Return 48% dividend payout this year
OP (15F, Wbn) 692 • Benefits from the proliferation of simplified payment: The company is beefing up its own simplified payment service, Paynow, backed by its dominance in the domestic payment gateway market Consensus OP (15F, Wbn) 674 EPS Growth (15F, %) 61.4 Risks Market EPS Growth (15F, %) 36.9 P/E (15F, x) 11.2 • Growth could slow, as the proportion of LTE subscribers in the total subscriber base is higher than the market average Market P/E (15F, x) 10.5 KOSPI 2,064.03 • The company, which ranks third in market share, is the most sensitive to the entry of a fourth player Market Cap (Wbn) 4,135 Shares Outstanding (mn) 437 Free Float (%) 63.9 FY (Dec.) 12/12 12/13 12/14F 12/15F 12/16F 12/17F 160 LG Uplus KOSPI Foreign Ownership (%) 34.8 Revenue (Wbn) 10,905 11,450 11,000 10,545 10,700 10,764 OP (Wbn) 127542576692709715 Beta (12M) 0.68 140 OP margin (%) 1.2 4.7 5.2 6.6 6.6 6.6 52-Week Low 8,890 120 NP (Wbn) -60279228368394410 52-Week High 12,850 EPS (W) -122 640 523 844 903 940 (%) 100 1M 6M 12M ROE (%) -1.6 7.2 5.6 8.5 8.5 8.4 Absolute -3.4 -14.3 1.1 P/E (x) - 16.8 22.0 11.2 10.5 10.1 80 Relative -2.4 -18.2 -2.6 14.6 14.10 15.2 15.6 P/B (x) 0.9 1.2 1.2 0.9 0.9 0.8
Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests; Based on June 9th closing price Source: KDB Daewoo Securities Research 2H15 Outlook 56 Stocks Telecom to watch LG Uplus (032640 KS) Service
Rising earnings and • Virtuous cycle of steady earnings improvement backed by solid business capabilities, leading to improved dividend payment dividend payout Steady net subscriber growth in the MNP market, despite implementation of the handset demonstrate improved • distribution act, iPhone launches, data-oriented rate plans, etc. fundamentals • Dividend payout ratio to reach 30%; Divided per share to rise; Dividend yield also likely to rise with recent share price correction
LG Uplus achieving steady net subscriber growth in the MNP market LG Uplus’ dividend yield to rise
(persons) (%) 50,000 SKT KT LG Uplus 3.0 Dividend yield 2.9% 2.6% 40,000 2.5 30,000
20,000 2.0 10,000
0 1.5
-10,000
1.0 -20,000
-30,000 0.5 -40,000
-50,000 0.0 6/14 8/14 10/14 12/14 2/15 4/15 11 12 13 14 15F 16F
Source: KTOA, KDB Daewoo Securities Research Note: 2015F and 2016F dividend yields are based on Daewoo Securities’ estimates Source: LG Uplus, KDB Daewoo Securities Research 2H15 Outlook 57 Stocks Telecom to watch LG Uplus (032640 KS) Service
33.3% Corporate governance Sal de Vida Korea Ji Heung Koo Bon-moo LG International & affiliates (001120 KS) 100% 27.9% Global Dynasty Natural Resource PEF 7.5%
48.6%
LG (003550 KS) 33.5% 33.7% 36.0% 35.0%
LG Chem LG Electronics LG UPlus G2R (051910 KS) (066570 KS) (032640 KS) (035000 KS) 85.0% 50.0% See Tec CS Leader 100% 37.9% LG Display 100% LG CNS Haengboknuri (034220 KS) 98.4% 100% Media Log HS Ad 100% 100% 33.5% LG Hausys LG N-Sys Nanumnuri 51.0% (108670 KS) Dacom Crossing 100% 40.8% 93.1% L Best 80.0% LG Innotek 100% Korea Elecom Hausys Interpane (011070 KS) A-in Teleservice 50.0% 100% TOSTEM BM 100% Innowid 100% CS ONE Partner Ucess Partners Silicon Works 28.2% 100% 100% 61.3% Hausys ENG Hiplaza 100% (108320 KQ) WithU BNE 34.0% LG H&H 100% (051900 KS) HiBusiness Logistics 100% 75.0% Serveone EverON 100% 100% 100% The Face Shop Himsolutek LG Sports 90.8% Oneseen Skytech 50.0% 100% CleanSoul 100% LG Solar Energy HiTeleservice 100% 51.0% 70.0% Fuser LG Siltron LG-Toyo Engineering 100% 100% Ace R&A 64.8% Haitai Beverage Lusem 90.0% 90.0% 100% 50.0% Konjiam Yewon Coca-Cola Korea Hientech LG MMA 100% 51.0% 100% LG-Hitachi LG Pure Cell Systems Hankook Beverage Water Solutions 30.4% 100% 100% LG Life Science Hanuri LG MDI (068870 KS) Source: LG, KDB Daewoo Securities Research
2H15 Outlook 58 Stocks Telecom to watch LG Uplus (032640 KS) Service
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)
(Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F
Revenue 11,000 10,545 10,700 10,764 Current Assets 2,490 2,626 3,023 3,476 P/E (x) 22.0 11.2 10.5 10.1
Cost of Sales 0 0 0 0 Cash and Cash Equivalents 416 475 813 1,215 P/CF (x) 2.2 1.8 1.8 1.9
Gross Profit 11,000 10,545 10,700 10,764 AR & Other Receivables 1,633 1,667 1,689 1,699 P/B (x) 1.2 0.9 0.9 0.8
SG&A Expenses 10,423 9,853 9,991 10,049 Inventories 276 282 286 288 EV/EBITDA (x) 4.6 3.8 3.6 3.5
Operating Profit (Adj) 576 692 709 715 Other Current Assets 165 202 235 274 EPS (W) 523 844 903 940
Operating Profit 576 692 709 715 Non-Current Assets 9,523 9,711 9,639 9,496 CFPS (W) 5,163 5,158 5,175 5,086
Non-Operating Profit -256 -201 -184 -168 Investments in Associates9000BPS (W) 9,567 10,261 10,914 11,583
Net Financial Income -171 -176 -162 -130 Property, Plant and Equipment 7,254 7,533 7,516 7,419 DPS (W) 150 250 270 280
Net Gain from Inv in Associates 1 0 0 0 Intangible Assets 1,116 1,033 978 930 Payout ratio (%) 28.8 29.7 29.9 29.8
Pretax Profit 320 491 525 547 Total Assets 12,013 12,337 12,663 12,972 Dividend Yield (%) 1.3 2.6 2.9 3.0
Income Tax 92 123 131 137 Current Liabilities 3,486 2,896 2,929 2,942 Revenue Growth (%) -3.9 -4.1 1.5 0.6
Profit from Continuing Operations 228 368 394 410 AP & Other Payables 1,427 1,456 1,477 1,486 EBITDA Growth (%) 12.1 9.4 0.2 -1.0
Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,129 649 649 649 Operating Profit Growth (%) 6.3 20.1 2.5 0.8
Net Profit 228 368 394 410 Other Current Liabilities 930 791 803 807 EPS Growth (%) -18.3 61.4 7.0 4.1
Controlling Interests 228 368 394 410 Non-Current Liabilities 4,349 4,961 4,969 4,973 Accounts Receivable Turnover (x) 7.3 7.2 7.2 7.2
Non-Controlling Interests 0 0 0 -1 Long-Term Financial Liabilities 3,787 4,387 4,387 4,387 Inventory Turnover (x) 32.8 37.8 37.7 37.5
Total Comprehensive Profit 221 368 394 410 Other Non-Current Liabilities 562 574 582 586 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0
Controlling Interests 221 368 394 410 Total Liabilities 7,835 7,856 7,898 7,915 ROA (%) 1.9 3.0 3.1 3.2
Non-Controlling Interests 0 -1 -1 -1 Controlling Interests 4,177 4,480 4,765 5,058 ROE (%) 5.6 8.5 8.5 8.4
EBITDA 2,082 2,277 2,282 2,259 Capital Stock 2,574 2,574 2,574 2,574 ROIC (%) 4.9 5.8 5.9 6.0
FCF (Free Cash Flow) -129 78 549 621 Capital Surplus 837 837 837 837 Liability to Equity Ratio (%) 187.5 175.4 165.8 156.5
EBITDA Margin (%) 18.9 21.6 21.3 21.0 Retained Earnings 764 1,067 1,352 1,645 Current Ratio (%) 71.4 90.7 103.2 118.1
Operating Profit Margin (%) 5.2 6.6 6.6 6.6 Non-Controlling Interests 1 0 0 -1 Net Debt to Equity Ratio (%) 106.7 100.8 87.7 74.7
Net Profit Margin (%) 2.1 3.5 3.7 3.8 Stockholders' Equity 4,178 4,480 4,765 5,057 Interest Coverage Ratio (x) 2.7 3.2 3.2 3.2
Source: LG Uplus, KDB Daewoo Securities Research estimates
2H15 Outlook 59 Telecom [Conclusion] Look to earnings improvements and dividend payout Service
Telecom service sector: Take note of telcos likely to deliver differentiated performance
Top pick Likely to recover on high dividend yield and new business value in the event regulatory risks ease SK Telecom
Stocks to watch
1) Resumption of dividend payout: KT
2) Net subscriber growth: LG Uplus
Source: KDB Daewoo Securities Research
2H15 Outlook 60 Important Disclosures & Disclaimers 2-Year Rating and Target Price History
Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price SK Telecom(017670) 05/06/2015 Buy 360,000 07/19/2013 Buy 45,000 10/01/2014 Buy 380,000 06/11/2013 Buy 50,000 08/03/2014 Buy 310,000 No Coverage 10/29/2013 Buy 290,000 LG Uplus(032640) 04/28/2015 Buy 14,000 07/19/2013 Buy 280,000 01/25/2015 Buy 16,000 06/11/2013 Buy 270,000 10/01/2014 Buy 15,000 No Coverage 07/31/2014 Buy 11,500 KT(030200) 01/20/2015 Buy 40,000 04/28/2014 Buy 13,000 10/01/2014 Buy 42,000 01/20/2014 Buy 15,000 05/01/2014 Buy 40,000 07/19/2013 Buy 16,000 01/20/2014 Trading Buy 36,000 06/11/2013 Buy 15,000 11/03/2013 Trading Buy 38,000 No Coverage 08/04/2013 Buy 44,000
(W) SK Telecom (W) KT (W) LG Uplus
400,000 60,000 20,000
50,000 300,000 15,000 40,000
200,000 30,000 10,000
20,000 100,000 5,000 10,000
0 0 0 Jun 13 Jun 14Jun Jun 13 15 Jun 14Jun Jun 13 15 Jun 14 Jun 15
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 Daewoo Securities, 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 Buy Trading Buy Hold Sell 71.9% 13.8% 14.3% 0%
* Based on recommendations in the last 12-months (as of March 31, 2015)
Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for single stock futures backed by shares of KT as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.
Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws 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. Daewoo Securities Co., Ltd. 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 Daewoo Securities, 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 Daewoo Securities Co., Ltd. except as otherwise stated herein.
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