KT Skylife (053210 KS) KT Skylife

Korea Consumer Discretionary 14 October 2016

Target price: KRW19,000 Share price (13 Oct): KRW17,050 | Up/downside: +11.4%

Initiation: recovering with steady UHD migration

 Only satellite broadcaster in Korea; competitive paid TV offerings Thomas Y. Kwon (82) 2 787 9181  Fundamentals should improve in 2017 on rising UHD, DCS subscribers [email protected]  Initiating with an Outperform (2) rating and 12-month TP of KRW19,000

Investment case: We initiate coverage of KT Skylife (Skylife), the only Share price performance satellite broadcasting service provider in Korea, with an Outperform (2) (KRW) (%) rating. We believe the operator is well positioned to capture emerging 21,000 110 demand for ultra-high definition (UHD) TV content through its marketing 19,250 101 initiatives for dish convergence solution (DCS) services, and attractive 17,500 93 15,750 84 bundled offerings with its parent company, KT Corporation (030200 KS, 14,000 75 KRW31,600, Outperform [2]). Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

KT Skylife (LHS) Relative to KOSPI (RHS) Catalysts: Fundamentals likely to bottom from 1Q17. We expect Skylife to regain growth momentum in paid-TV subscribers from 1Q17, as it 12-month range 14,100-20,850 leverages its compelling content offerings and enhanced sales networks. Market cap (USDbn) 0.71 We forecast the company’s total subscriber numbers to rise by 0.6-0.8% 3m avg daily turnover (USDm) 1.43 Shares outstanding (m) 48 YoY for 2017-18E on rising high-quality content and effective marketing Major shareholder KT Corp (50.0%) promotions. We estimate the subscriber mix for 2016 to be: Skylife-only (53%) and Olleh TV Skylife (OTS, 47%). Financial summary (KRW) Year to 31 Dec 16E 17E 18E Finding ways to grow with UHD and DCS. Skylife looks likely to be one Revenue (bn) 642 656 674 of key beneficiaries of paid-TV users’ migration to UHD TV, thanks to its Operating profit (bn) 94 97 100 Net profit (bn) 72 75 78 early moves in the market and scalable network assets. We forecast the Core EPS (fully-diluted) 1,497 1,559 1,623 company’s UHD subscriber numbers to increase by 123% YoY for 2017E EPS change (%) (3.9) 4.1 4.1 and 58% YoY for 2018E, representing 32% of its total users (4.4m as of the Daiwa vs Cons. EPS (%) (0.5) 4.5 5.2 PER (x) 11.4 10.9 10.5 end-2018), compared with 5.2% of total subscribers at the end-2Q16. With Dividend yield (%) 2.6 2.8 2.9 the final approval for DCS offerings on 10 October, we expect Skylife to DPS 450 470 490 ramp up its DCS marketing, which should improve its subscriber mix from PBR (x) 1.5 1.3 1.2 1Q17 onward. EV/EBITDA (x) 3.9 3.5 3.2 ROE (%) 13.7 12.9 12.3

Source: FactSet, Daiwa forecasts Platform revenue to boost earnings strongly. By enhancing its platform power with premium UHD users, we forecast Skylife’s lucrative non-service revenue (platform) to see a CAGR of 12.6% for 2015-18E and account for 32% of 2017E revenue from 30% in 2016.

Valuation: Our 12-month TP of KRW19,000 is based on a target 2016-17E PER of 12.4x, the global peer average, based on the Bloomberg- consensus forecasts. We believe Skylife will reward long-term investors with stable cash flow, an attractive dividend yield of 2.7% on DPS of KRW450 for 2016E, and solid growth of non-service businesses. We initiate with an Outperform (2) rating as we see the shares outperforming the Kospi from 1Q17 on improving fundamentals for its paid-TV segment.

Risks: The key risks to our call include slower-than-expected migration to UHD services and ARPU growth, regulatory initiatives to control the combined market share of the KT group, and a further slowdown in home shopping and T-commerce (home shopping without a live show).

See important disclosures, including any required research certifications, beginning on page 24

KT Skylife (053210 KS): 14 October 2016

Table of contents

Fundamentals set to bottom in 2017 ...... 6 The only satellite broadcaster in Korea ...... 8 Going through a transition ...... 10 Adapting and executing in turbulent times ...... 12 The broadcaster starts harvesting the platform ...... 14

KT Skylife (053210 KS): 14 October 2016

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Skylife: revenue mix by core service offering (2011-18E, KRWbn) We expect Skylife to regain its growth momentum in paid- 600 20

TV subscribers from 1Q17 onward on increasing UHD 500 content, the ramp-up of DCS sales promotions after final 400 15 approval from the Ministry of Science, ICT, and Future Planning (MSIP) on 10 October, and the ongoing addition 300 of new premium content. With a steady rise in ARPU by 200 10 UHD consumers, we believe Skylife could increase its top 100 line in 2016-18E, helped by the revenue contribution from ads and home shopping commissions. We forecast the 0 5 2011 2012 2013 2014 2015 2016E 2017E 2018E company’s revenue to increase at a CAGR of 2.5% for Service revenue Home shopping 2015-18E. Advertising Operating-profit margin (%, RHS) Net profit margin (%, RHS) Source: Company, Daiwa forecasts

Valuation Skylife: share-price trend and quarterly operating profit In our view, the stock’s current valuation is attractive, given 50,000 40 we expect the company’s core-service fundamentals to 45,000 35 improve from 1Q17. We also think its shares will trade at 40,000 30 the average of its global peers (a PER of 12.4x), while 35,000 25 Skylife shares will be rerated for 2017-18 on a growing 30,000 20 number of UHD users, enhanced marketing capability with 25,000 15 DCS offerings, and increasing ads and commission 20,000 10 revenue from home shopping and T-commerce companies. 15,000 5 10,000 0 Jun-11 Mar-12 Jan-13 Nov-13 Sep-14 Jul-15 May-16 Operating profit (KRWbn, RHS) Share price (KRW, LHS) No. of subscribers (hundreds, LHS) Source: Company, FNData, Daiwa

Earnings revisions Skylife: Daiwa’s EPS forecasts vs. Bloomberg consensus The Bloomberg-consensus 2016-17 earnings forecasts for (KRW) Skylife have been revised down since 1Q16 to factor in a 1,900 1,800 fall in subscribers, slower-than-expected migration to UHD 1,700 services, and low visibility of DCS service offerings. 1,600 However, we expect the consensus forecasts to move up 1,500 thanks to the company’s improving subscriber mix, the final 1,400 approval of DCS offerings, and new ads and commission 1,300 revenue from home shopping and T-commerce companies. 1,200 1,100 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Daiwa forecast 2016 Consensus 2016 Daiwa forecast 2017 Consensus 2017

Source: Bloomberg, Daiwa forecasts

KT Skylife (053210 KS): 14 October 2016

Financial summary Key assumptions Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Total outstanding subscribers (m) 3.2 3.8 4.2 4.3 4.3 4.4 4.4 4.4 UHD subscribers to total users (%) 0.0 0.0 0.0 0.0 2.5 9.2 20.4 32.0 % of platform sales to total revenues 9.5 14.5 17.9 20.9 25.9 30.4 32.3 34.3 (%)

Profit and loss (KRWbn) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Service Revenues 326 362 391 378 356 344 345 349 Platform Revenues 44 80 108 130 162 195 212 231 Other Revenue 90 109 102 115 108 103 99 94 Total Revenue 460 551 600 623 626 642 656 674 Other income 0 0 0 0 0 0 0 0 COGS 0 0 0 0 0 0 0 0 SG&A (400) (464) (498) (545) (529) (548) (559) (574) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 60 87 102 78 98 94 97 100 Net-interest inc./(exp.) (2) 2 3 1 2 2 4 4 Assoc/forex/extraord./others (1) 3 (5) (10) (1) (2) (2) (2) Pre-tax profit 57 92 99 69 99 94 99 103 Tax (7) (16) (26) (14) (24) (23) (24) (25) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 49 76 73 55 74 72 75 78 Net profit (adjusted) 49 76 73 55 74 72 75 78 EPS (reported)(KRW) 1,131 1,583 1,526 1,159 1,557 1,497 1,559 1,623 EPS (adjusted)(KRW) 1,131 1,583 1,526 1,159 1,557 1,497 1,559 1,623 EPS (adjusted fully-diluted)(KRW) 1,131 1,583 1,526 1,159 1,557 1,497 1,559 1,623 DPS (KRW) 0 350 455 350 350 450 470 490 EBIT 60 87 102 78 98 94 97 100 EBITDA 108 142 165 149 175 172 173 177

Cash flow (KRWbn) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Profit before tax 57 92 99 69 99 94 99 103 Depreciation and amortisation 48 55 63 71 77 79 76 76 Tax paid 11 32 26 (3) 40 23 24 25 Change in working capital (5) 41 (18) 8 (31) (19) 20 0 Other operational CF items (21) (59) (40) (11) (38) (55) (53) (56) Cash flow from operations 90 161 130 134 147 122 166 149 Capex (97) (95) (107) (94) (81) (80) (82) (84) Net (acquisitions)/disposals 21 22 (97) 86 11 (44) 0 0 Other investing CF items (31) 6 (5) (10) (9) 3 3 3 Cash flow from investing (107) (67) (208) (19) (79) (122) (79) (81) Change in debt (120) (21) (1) (1) (20) 0 0 0 Net share issues/(repurchases) (0) 0 0 0 0 0 0 0 Dividends paid 0 0 (17) (22) (17) (17) (21) (22) Other financing CF items 101 2 (5) (2) (0) 0 0 0 Cash flow from financing (19) (18) (22) (24) (37) (17) (21) (22) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (37) 76 (100) 91 31 (16) 66 45 Free cash flow (7) 67 24 39 66 42 84 65 Source: FactSet, Daiwa forecasts

KT Skylife (053210 KS): 14 October 2016

Financial summary continued … Balance sheet (KRWbn) As at 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Cash & short-term investment 112 167 153 153 169 199 265 310 Inventory 2 2 5 3 3 8 3 3 Accounts receivable 106 113 112 91 99 102 104 107 Other current assets 0 0 1 1 0 0 0 0 Total current assets 220 282 271 249 271 310 372 420 Fixed assets 200 246 289 309 298 297 300 305 Goodwill & intangibles 45 40 39 39 39 39 39 39 Other non-current assets 58 55 68 72 91 102 103 109 Total assets 523 623 665 670 698 748 814 872 Short-term debt 100 1 1 80 0 0 0 0 Accounts payable 0 0 0 136 112 102 119 122 Other current liabilities 124 189 172 5 20 20 20 21 Total current liabilities 224 189 173 221 133 123 139 143 Long-term debt 1 81 80 0 60 60 60 60 Other non-current liabilities 7 5 5 13 12 12 13 13 Total liabilities 233 275 258 235 204 195 212 215 Share capital 119 119 120 120 120 120 120 120 Reserves/R.E./others 171 228 288 316 374 433 482 538 Shareholders' equity 290 348 407 436 494 553 602 657 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 523 623 665 670 698 748 814 872 EV 805 730 743 742 706 676 610 565 Net debt/(cash) (10) (85) (72) (73) (109) (140) (205) (250) BVPS (KRW) 6,086 7,273 8,553 9,158 10,382 11,624 12,653 13,815

Key ratios (%) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Sales (YoY) 7.8 19.9 8.9 3.7 0.6 2.4 2.2 2.7 EBITDA (YoY) 20.1 31.9 16.4 (9.9) 17.3 (1.2) 0.5 2.0 Operating profit (YoY) (4.8) 45.2 17.4 (23.7) 25.8 (4.4) 3.9 3.4 Net profit (YoY) (6.0) 53.2 (3.4) (24.0) 34.4 (3.9) 4.1 4.1 Core EPS (fully-diluted) (YoY) (14.7) 40.0 (3.6) (24.1) 34.4 (3.9) 4.1 4.1 Gross-profit margin 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 EBITDA margin 23.4 25.7 27.5 23.9 27.9 26.9 26.4 26.2 Operating-profit margin 13.0 15.8 17.0 12.5 15.6 14.6 14.8 14.9 Net profit margin 10.7 13.7 12.2 8.9 11.9 11.2 11.4 11.5 ROAE 23.4 23.7 19.3 13.1 16.0 13.7 12.9 12.3 ROAA 9.4 13.2 11.3 8.3 10.9 9.9 9.5 9.2 ROCE 15.7 21.2 22.2 15.5 18.3 16.0 15.2 14.6 ROIC 21.1 26.3 25.1 17.8 19.7 17.8 18.1 18.8 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 13.1 17.8 26.6 20.0 24.6 24.2 24.6 24.6 Accounts receivable (days) 71.1 72.5 68.5 59.6 55.6 57.4 57.4 57.2 Current ratio (x) 1.0 1.5 1.6 1.1 2.0 2.5 2.7 2.9 Net interest cover (x) 31.2 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 0.0 22.1 29.8 30.2 22.5 30.1 30.2 30.2 Free cash flow yield n.a. 8.2 2.9 4.8 8.1 5.1 10.4 8.0 Source: FactSet, Daiwa forecasts

Company profile

KT Skylife is the only satellite broadcasting company in Korea with total subscribers of 4.4m and controls 13.64% of Korea's paid-TV market as of 2Q16. KT Corporation is a major shareholder with a 49.99% stake.

KT Skylife (053210 KS): 14 October 2016

Fundamentals look set to bottom in 1Q17

Seasoned player with a compelling valuation Initiating with We initiate coverage of Skylife with an Outperform (2) rating and 12-month target price of Outperform (2) rating KRW19,000, based on a target 2016-17E PER of 12.4x, the global peer average, based on the Bloomberg-consensus forecasts.

We believe Skylife will see solid business growth from 1Q17 onward, on the back of its improving subscriber mix, diversifying revenue streams into platforms and ads, and potential synergies in the media businesses with affiliates within the KT group. We expect the broadcaster to start to see a rebound in its earnings growth from 1Q17, helped by new revenue from its platform strategy, effective control of subscriber-acquisition costs, and solid operating leverage. In our view, Skylife will be able to capture the emerging demand for high-quality media content in Korea and sustain its steady revenue growth on a rising number of premium users.

Three reasons to own We highlight 3 main reasons for our positive stance on Skylife. Skylife  Reigniting subscriber-growth momentum. We expect Skylife to regain momentum in subscriber growth from 1Q17 on the back of its initiatives to offer competitive UHD channels, broaden its service coverage into nationwide, and ramp up its sales promotion for DCS services as a result of the final approval having been given by the MSIP on 10 October 2016. We forecast Skylife’s total subscriber numbers to increase by 0.6-0.8% YoY for 2017-18E.

 Ample platform-business opportunities. Since its listing, Skylife has been diversifying its revenue models by migrating its paid subscribers for satellite TV into platform services for home shopping channels and related advertising. Thanks to the relatively high profitability of its legacy service segment, we believe the company can benefit through increasing revenue from both platform and ads sales, especially advanced real-time advertising (ARA) ads. We forecast Skylife’s platform revenue to rise at a CAGR of 12.6% for 2015-18E and account for 32% of total revenue in 2017E.

 A key beneficiary of the KT group’s media strategy. In our view, Skylife and the KT group’s move in July 2016 to team up augurs well for the emerging opportunity for UHD content, given that we believe Skylife could help the KT group overcome its service limitations, in terms of network coverage and bandwidth efficiency. As a leading paid-TV service provider in Korea, the KT group will be able to leverage Skylife’s strong and available service coverage by satellite to lead the competition over other paid-TV service providers like cable TV operators. The KT group aims to increase its media business over the medium term, while improving the profitability of its Internet protocol television (IPTV) segment and take effective control over content outsourcing and user acquisition.

We expect Skylife’s revenue and earnings to increase steadily for 2016-18E, on growing revenue from its platform division, lucrative ad sales, and disciplined cost strategy. We forecast the company’s EPS to rise by 4.1% YoY for 2017-18E and its operating-profit margin to improve to 14.9% in 2018E from 14.6% in 2016E.

Picking low hanging fruit A compelling stock for We expect Skylife shares to outperform the Kospi from 4Q16 and trade in line with global value-oriented investors peers, as we expect its subscriber mix to improve with UHD content and a diversified revenue mix with ads and platform services. Skylife’s current valuation looks attractive, given we believe its blended ARPU will continue to rise on an increase in numbers of premium UHD consumers, and its revenue stream enhanced with profitable ads and platform sales, leading to visible and sustainable earnings growth over the medium term.

KT Skylife (053210 KS): 14 October 2016

Valuation discount is In our view, Skylife shares should be rerated in 2017 on the back of: 1) the meaningful likely to shrink addition of UHD subscribers, 2) the ramp-up of marketing for its DCS offerings, 3) a solid earnings contribution from non-service segments (ads and retransmission fee of home shopping channels), and importantly, 4) strong benefits from the potential synergies in its core-service operations, as a result of jointly cooperating with the KT group.

Healthy balance sheet We also believe investors would appreciate Skylife’s strong capability to generate visible recurring revenue, solid operating cash flow, a scalable business model using satellite, and attractive payout ratio of over 30%. The company has a strong balance sheet with cash and cash equivalents of KRW180bn (22% of total market capitalisation) as at end-2Q16. In our view, the company should be able to gain share in Korea’s paid TV segment, where local subscribers are likely to migrate to UHD content, while the successful execution with KT should heighten visibility on long-term business growth.

Global peer valuation (as of 13 October 2016) Rev. growth YoY EPS growth YoY Company Ticker Price Mkt cap PER (x) EV/EBITDA (X) (%) (%) ROAE (%) OPM (%) (Local curr) (USDbn) FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E FY1E FY2E

KT SKYLIFE* 053210 KS 17,050 0.7 11.4 10.9 3.9 3.5 2.4 2.2 (3.9) 4.1 13.7 12.9 14.6 14.8 CJ HELLOVISION 037560 KS 8,550 0.6 10.1 8.8 3.2 3.5 (3.5) 2.7 2.9 14.4 6.6 7.1 8.5 9.1 HYUNDAI HCN 126560 KS 3,640 0.3 9.1 8.8 1.5 1.6 (0.6) (0.7) 16.8 3.1 7.2 7.0 18.4 18.7 Korea Average-ex Skylife 9.6 8.8 2.3 2.6 (2.0) 1.0 9.9 8.7 6.9 7.1 13.4 13.9

SKY PERFECT JSAT HOLDINGS** 9412 JP 504 1.7 10.5 11.4 - - 17.9 (16.0) (13.4) (7.7) 7.5 - 11.4 12.3 WOWOW** 4839 JP 2,775 0.8 11.7 10.7 - - 2.6 1.7 (4.6) 9.1 13.4 - 11.8 12.8 DISH NETWORK DISH US 57 26.5 18.8 20.6 11.8 12.3 0.0 (0.7) 22.5 (9.0) 40.7 26.6 14.4 13.3 SKY NETWORK TELEVISION** SKT NZ 5 1.3 14.0 14.8 7.1 7.3 (0.5) (1.0) (8.2) (5.5) 10.0 9.4 22.2 20.8 Global ex-Korea average 13.7 14.4 9.5 9.8 5.0 (4.0) (0.9) (3.3) 17.9 18.0 15.0 14.8

Global average-ex Skylife 12.4 12.5 5.9 6.2 2.7 (2.3) 2.7 0.7 14.2 12.5 14.5 14.5

Source: Bloomberg, Daiwa forecasts Note: * indicates Daiwa forecasts, ** indicates March-end fiscal year for Japanese companies and June-end fiscal year for New Zealand companies

Skylife: PER bands Skylife: EV/EBITDA bands (KRW) (KRW) 80,000 60,000 70,000 14.1X 49.1X 50,000 60,000 11.6X 39.2X 40,000 50,000 9.0X 40,000 29.3X 30,000 6.5X 30,000 19.3X 20,000 20,000 10,000 3.9X 10,000 9.4X 0 0 Jun-11 Mar-12 Dec-12 Sep-13 Jun-14 Mar-15 Dec-15 Sep-16 Jun-11 Mar-12 Dec-12 Sep-13 Jun-14 Mar-15 Dec-15 Sep-16 Source: Bloomberg, FNData, Daiwa forecasts Source: Bloomberg, FNData, Daiwa forecasts

KT Skylife (053210 KS): 14 October 2016

The only satellite broadcaster in Korea

About the company Skylife was established in January 2001, after it obtained a broadcasting licence from the Korean Government in 2000, which was keen to provide a broadcasting solution for areas where cable-TV operators could not reach and reception was poor. After changing its name to Skylife from Korea Digital Satellite Broadcasting (KDSB) in March 2002, its shares were listed on the Korea stock exchange in June 2011.

The company started its digital satellite broadcasting with 84 channels and had 1m subscribers by November 2003. It started to offer high definition (HD) broadcasting with 16 channels in April 2008 and UHD commercial services in June 2015. KT Corporation (KT) became a major shareholder in Skylife with a cumulative 49.9% stake in December 2013 after various transactions since 2011.

Skylife is now one of the leading digital broadcasters in Korea, and its DCS and OTS services compete with cable-TV operators and IPTV service providers. As at the end of 2Q16, Skylife had 4.3m subscribers, including 2.1m OTS users and 0.23m UHD users. According to the company, it had a 17.41% share of Korea’s digital paid-TV market as of 2Q16.

Service expertise The operator has 3 primary businesses: 1) services (digital satellite broadcasting, set-top box rental, and video content), 2) platform operations (ads and home shopping and T- commerce commission), and 3) cost-offset and others (installation, channel rental, and others). Basically, it generates revenue (broadcasting fees, commission, rental fees, etc) by transmitting broadcasts through satellites leased from KT Sat (not listed). Recently, the company has diversified its revenue streams by selling digital ads, paid content, and other broadcasting-related services. The revenue mix for 2Q16 was: services (53.2%), platforms (30.9%), cost-offset and others (15.9%).

Korea: media industry value chain

Source: Company

Competitive edge Skylife’s competitive edge lies in it being able to offer competitive digital broadcasting, in terms of HD as well as UHD, appealing service plans with various convergence services like OTS and DCS covering broader service areas, and a scalable broadcasting network. The company competes with both CATV operators and 3 local IPTV service providers in the broadcasting platform segment, while increasing its share in the broadcasting ads market. As a programme provider (PP), its subsidiary (Skylife TV) claims 1.7% of the domestic multiple PP market, and in 2015 specialised in entertainment, TV drama, and variety shows.

KT Skylife (053210 KS): 14 October 2016

Skylife: shareholding structure (as of 2Q16)

Others 34.57% KBS(Korean Broadcasting System) 6.77%

Templeton Asset Management 8.67%

KT CORP 49.99%

Source: Company, Daiwa

KT Skylife (053210 KS): 14 October 2016

Going through a transition

Industry landscape Korea’s paid-TV industry is moving on to the next phase of its evolution, mainly driven by: 1) more consumption of digital content by new smart devices, and 2) strong demand for convergence services, ie, between cable, mobile, over-the-top (OTT), and all broadcasting platforms. We also see increasing demand for personalised services using data mining and big data analytics on its broadcasting platform. More importantly, we believe paid-TV users will continue to migrate to UHD services, which theoretically feature 4-16x higher resolution than HD services.

According to the Korea Cable TV Association (KCTA) and Skylife, Korea’s number of paid- TV users rose at a CAGR of 7.6% for 2010-15 and 1.1% to 31.4m for 1Q16 from 31m at the end-4Q15. As 3 telecom service providers have entered the domestic paid-TV market since 2009, both cable-TV operators and Skylife have faced tough competition due to local telcos’ strong bundled offerings with wireless and Internet, as well as powerful marketing and distribution networks. With more competitors coming from all sides, the traditional CATV operators have continued to lose ground and recorded total subscribers of 14.5m at the end-2Q16 (45.5% of total paid-TV users).

Korea paid TV: subscriber trends by broadcasting platform (m) 12% 16 14 10% 12 8% 10 8 6%

6 4% 4 2% 2 0 0% 2009 2010 2011 2012 2013 2014 2015 Jun-16 CATV subs IPTV subs KT Skylife Total_subs growth (YoY, RHS)

Source: companies, KCTA Note: OTS subscribers are counted for both KT and KT Skylife, Cable TV operator numbers are as of April 2016

OTT services are One noticeable trend in Korea is that we are seeing more OTT players, such as Netflix emerging, but … (NFLX US) and the Tving service from CJ Hellovision (037560 KS), taking aggressive steps in the Korea market with strong content offerings and better accessibility. We estimate Korea had around 25m OTT service users as of July 2015. However, we doubt OTT service providers will become mainstream in the market as they have weak price competitiveness and marketing capability, while offering limited bundled services.

… IPTV is a stronger As of the end-2Q16, 3 IPTV services providers -- SK Telecom (017670 KS, KRW219,500, competitor Outperform [2]), KT Corporation (030200 KS, KRW31,600, Outperform [2]) and LG Uplus (032640 KS, KRW11,250, Hold [3]) – had 13m total subscribers and generated 41% of total paid-TV revenue in 2015. Thanks to strong bundled offerings with wireless and high speed Internet, they continued to take share away from the CATV operators and even Skylife. Given these IPTV service providers started to see a slowdown in subscriber growth in 1H16, we expect them to continue to enhance their content offerings in order to increase their ARPU and paid user bases over the long term.

Although SK Telecom failed in its effort to acquire CJ Hellovision in July 2016, we expect industry consolidation to take place over the medium term, given the slowdown in subscriber growth, weak ARPU growth, and difficulty in achieving scale in broadcasting services as a result of regulation and a rise in content-outsourcing costs. Additionally, we believe strong user demand for multiple play services (MPS) will accelerate industry consolidation among market leaders to capitalise on the emerging smart media market.

KT Skylife (053210 KS): 14 October 2016

Korea paid TV: competitive landscape

T Broad Dlive 7.2% CMB 11.7% 5.4% Hyundai HCN CJ Hellovision 4.9% 13.7% Others 6.6%

SKB KT Skylife 12.1% 11.0%

LGU+ KT 9.1% 18.3% Source: MSIP (May, 2016) Note: OTS subscriber is counted as 0.5 for both KT IPTV (Olleh TV: OTV) and Skylife

Skylife should benefit Strategically, Skylife has been focusing on the broadcasting ads market to sustain its from growing demand revenue growth over the long term. As more ad dollars shift to digital media from traditional for its ad inventory on formats like newspapers, we believe advertisers will appreciate a strong ad mix with broadcasting channels interactive digital media, and Skylife will benefit from growing demand for its ad inventory on broadcasting channels. The company generates ad revenue by selling ad inventory for its own channels or third-party channels. Despite the slowdown in domestic consumption, Korea’s broadcasting industry revenue rose at a CAGR of 8.1% for 2006-15 and that for the satellite segment climbed 5.1% over the same period.

Korea broadcasting: industry revenue trend by media (KRWtn) 5 100

4 80

3 60

2 40

1 20

0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 SO KT Skylife IPTV

KT Skylife M/S (%, RHS) IPTV M/S (%, RHS) SO M/S (%, RHS) Source: KCC, MSIP Note: system operators (SO): cable-TV operators, and market share (M/S)

First joint venture with During the 2008-13 period, Skylife benefited strongly from the KT group’s IPTV growth KT initiatives, which were aimed at boosting the group’s media business as well as increasing its wireless subscriber numbers. In fact, the KT group also leveraged Skylife’s strong offerings for HD channels and content for its IPTV services (OTV) by promoting Olleh TV Skylife (OTS), which offered subscribers both Skylife and OTV with just the click of a remote control.

Skylife’s total subscribers surged by 48.8% to 4.2m in 2013 from 2.8m in 2010, on the back of a thriving number of OTS subscribers (up 246.7% YoY to 2.2m in 2013 from 0.6m 2010). Meanwhile, Skylife experienced a deceleration in its subscriber growth from 2014 after the parent company shifted its IPTV strategy to focus on OTV services. Skylife’s subscriber YoY growth rate fell to 1-2% in 2014-15 from 10-17% for 2010-13.

KT Skylife (053210 KS): 14 October 2016

Adapting and executing in turbulent times

Escaping from the Over the past 2 years, Skylife has been through a tough time, where it has seen a decline downturn through in overall subscriber-growth rates, a slowdown in ARPU growth, a looser partnership with convergence its parent company, and an uncertain regulatory environment. The company is striving to technologies find ways to reignite its business-growth momentum through DCS and UHD services, as it expects these new initiatives to help it acquire new users and retain subscribers by significantly improving the consumer experience.

In our view, DCS mitigates users’ concerns about installing a satellite dish, while benefiting consumers with lower signal-drop rates and broader service coverage. Unlike the traditional direct-to-home service through a satellite dish, both intermediate frequency (IF) and DCS use different access to homes through an installed dish on the roof (IF) and Internet Protocol (DCS) to transmit the broadcasting signal.

Skylife: intermediate frequency services started in 2009 Skylife: a DCS concept

Source: Company Source: Company Note: In IF, a satellite dish on roof of each apartment building receives a broadcasting signal, Note: In DCS, a satellite dish on KT’s phone office receives a broadcasting signal, and and distributes it to each apartment through each TV line distributes it to each household by converting the signal into Internet Protocol

The MSIP finally On 10 October, the MISP approved Skylife’s DCS service without any conditions on the approved DCS services service region; previously, it had been limited only to certain areas. As a result, we think in October consumers will strongly benefit from an improved quality of satellite broadcasting services, interactive VoD services, and broader paid-TV offerings. In addition to IF services, Skylife is likely to focus more on DCS services in order to cover broader service regions nationally and enhance its bundling power. Management expects to ramp up DCS marketing and hence increase its DCS subscriber numbers from 1,300 as of end-2Q16.

In 2016, both the KT group and Skylife resumed joint operations on paid-TV offerings after having ceased working together in 2014 because KT lost its incentive to promote OTS rather than OTV due to it: 1) having acquired enough HD channels to promote its own OTV, and 2) revenue sharing with KT Skylife. From July 2016, KT stopped subsidising the cost for Skylife users to switch to its own OTV, and resumed joint promotion of both companies’ double play service (DPS) or triple play service (TPS), bundled with fixed line, broadband, and VoIP. We expect the KT group and Skylife to work more closely together on paid-TV offerings once more UHD demand emerges in the Korea’s paid TV market in 2017.

KT Skylife (053210 KS): 14 October 2016

Key differences between HD and UHD High definition (HD) Ultra high definition (UHD) Definition and unique proposition 720p 1280x720 4K UHD 3840x2160 1080i 1920x1080 8K UHD 7580x4320 1080p 1920x1080 Minimum viewing distance 3 x picture height 1.5 x picture height Scanning format and aspect ratio Interlaced and progressive Progressive format only 4:3 and 16:9 16:9 only Analogue and Digital Digital only Bit rates Full HD - 6-15 Mbit/s 4K UHD 30-40 + Mbit/s Contrast or dynamic range Standard Dynamic Range, Rec. ITU-R BT.1886 4K UHD – SDR/ 8K UHD -HDR Field of vision Full HD - 30 degree 4K UHD - 60 degree/ 8K UHD – 100 degree Audio 5.1 surround sound system and stereo 5.1 surround sound system and stereo. Expandable to 24 channels, channel and 3D object based audio

Source: Media Entertainment Info (2015), HJ Park (2011)

UHD should boost More importantly, Skylife is keen to reignite its revenue and earnings growth momentum, Skylife’s revenue growth by improving the portion of UHD offerings in its subscriber mix. It kicked off its UHD broadcasting service in June 2015 and as of October 2016 offered 5 channels. Although the company’s UHD channels are arguably not competitive and powerful enough to draw users away from IPTV competitors, we highlight that Skylife is benefiting from its early- mover advantage over CATV services. We estimate around 40% of its new subscribers are UHD consumers, whose contribution to ARPU is around KRW3,000 higher than for non- UHD services.

Skylife aims to increase its total UHD subscriber numbers to 0.4m (9.2% of its total subscribers) by end-2016, from 0.3m at end-3Q16. Management has an ambitious subscriber target for its UHD services. It plans to increase its UHD user numbers by 149% YoY to 1m in 2017, on the back of the strong UHD demand, and terrestrial broadcasters’ target to start offering UHD content from February 2017 and increase the portion of UHD broadcasting content to 100% by 2027. This plan is based on the following service roadmap: 5% (2017), 25% (2020), 50% (2023), and 100% (2027).

Skylife: subscriber trend, churn rate, and % of UHD subscribers 4.38 35 4.36 30 4.34 25 4.32 20 4.30 15 4.28 10 4.26 4.24 5 4.22 0 4.20 (5) 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16E 4Q16E Outstanding subscribers (m) Net additions (Thousands, RHS)

Churn rate (%, RHS) % of UHD subscribers (%, RHS) Source: Company, Daiwa forecasts Note: Churn rate for outstanding subscriber is based on the average of 2 quarters

KT Skylife (053210 KS): 14 October 2016

The broadcaster starts harvesting the platform

Target market A paid-TV service provider like Skylife and CATV operators generate commission revenue opportunity from home shopping and T-commerce sites, after negotiating annual contract terms based on home shopping companies’ gross merchandise volume (GMV) and sales, paid TV’s subscriber trends, and preferred channels for shoppers. We estimate Korea’s home shopping industry revenue (excluding Internet and mobile) fell by 6.4% YoY for 2015, compared to 17.5% YoY growth seen in 2012, on a decline (9% YoY in 2015 from 35% YoY in 2012) in commissions to paid-TV operators by home shopping companies. In our view, all industry players have suffered from shoppers’ migration to smart devices.

Korea home shopping market: revenue (excluding Internet and mobile, KRWtn) 4 40

3 20

0 1

0 -20 2009 2010 2011 2012 2013 2014 2015E Paid TVs' HS commission revenue (LHS) Total HS revenue ex-internet & mobile (LHS) Paid TVs' HS commission revenue YoY growth (%, RHS) Total HS revenue ex-internet & mobile YoY growth (%, RHS)

Source: KOTA, KCC, Daiwa forecasts

Weathering the storm in In our view, over the course of 2016-18E, Skylife will be able to offset the weak revenue the home shopping from the home shopping segment by increasing the total number of shopping channels and industry accelerating its monetisation on T-commerce services, which are similar to home shopping services but use the video on demand (VoD) format. We note that in 3Q15 it added one home-shopping channel to its list, bringing its total number of home shopping channels to 7 currently, and in 2015 it increased its total T-commerce channels to 8 from 1 in 4Q14. The Korea TV Commerce Association (KTVC) forecasts Korea’s total T-commerce transaction volume to jump by 180% YoY to KRW0.7tn for 2016, from KRW0.25tn for 2015.

Commission revenue is a key revenue source for Skylife’s platform segment, and its commission from both home shopping and T-commerce companies saw a CAGR of 24.2% for 2012-15, and accounted for 20% of total revenue in 2015.

Skylife: revenue from home shopping and T-commerce and number of channels (KRWbn) 45 12

40 10

35 8

30 6

25 4

20 2

15 0 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16E Home shopping revenue(LHS) T-Commerce revenue(LHS)

# of HS channels(RHS) # of T-Commerce channels(RHS) Source: Daiwa forecasts

In 2016, we expect Skylife to see solid momentum in its commission revenue from T- commerce companies and even home shopping companies, following the addition of 2 T- commerce channels in 1H16 (giving it a total of 7 home shopping and 10 T-commerce service channels). We believe it will see full revenue contributions from the newly added channels from 2016 onward.

KT Skylife (053210 KS): 14 October 2016

In addition, management believes the company will benefit from home shopping and T- commerce companies relocating their channels to low-digit channel numbers (below 30), which are more likely to be watched by viewers, and which pay commission based on channel category and viewer ratings.

Korea paid TV: home shopping revenue and its % of broadcasting revenue (KRWbn) 2010 2011 2012 2013 2014 2015 S ystem operators (SOs) 438 555 709 749 763 771 # of subscribers for SO (m) 14.8 14.7 13.8 Home shopping commission YoY growth (%) 27% 28% 6% 2% 1% Home shopping commission % of broadcasting revenue 23% 26% 31% 31% 33% 34% Skylife 19 30 64 82 100 123 # of subscribers for KT Skylife (m) 3.06 3.09 3.07 Home shopping commission YoY growth (%) 58% 115% 28% 21% 23% Home shopping commission % of broadcasting revenue 5% 8% 13% 15% 18% 22% IPTV 97 136 175 240 # of subscribers for IPTV (m) 7.61 9.67 10.99 Home shopping commission YoY growth (%) 41% 29% 37% Home shopping commission % of broadcasting revenue 11% 11% 12% 13%

Source: KCC, MSIP, Inspection of State Administration, complied by Daiwa Note: subscriber figures for 2015 are based on the average of 2H15, and OTS is counted as 0.5 subscribers for both KT and KT Skylife

Going forward, we expect Skylife to expand its total user base with a growing number of premium UHD consumers living in urban areas, who have greater purchasing power and watch home-shopping channels frequently. Its subscriber profile for Skylife-only services has changed in the past few months, with 49% of its urban subscribers now signed up for UHD services, compared with 38% for its existing subscribers at the end of August 2016. Given the current commission discount to CATV operators, we see upside for Skylife to generate additional commission revenue, especially as the user traffic for CATV services continues to decline.

Capitalising on its Marketing company Cheil Worldwide forecasts Korea’s total ads market to see weak broadcasting platform growth of 1.8% YoY for 2016, from a 6.2% YoY increase in 2015. We also believe Korea’s broadcasting industry will see a slowdown in YoY revenue growth over 2016-18E, while mobile ads and programme providers’ ads continue to increase their market share thanks to growing traffic and improving content quality.

Korea: broadcasting-ads industry (KRWtn) Advertising spending Ads dollar growth (%, YoY) % of total broadcasting-ads market 2014 2015 2016E 2015 2016E 2014 2015 2016E OTA TV 1.97 1.97 1.96 (0.2) (0.4) 50.1 46.6 45.6 Cable/non OTA channels 1.52 1.78 1.84 16.7 3.5 38.6 42.0 42.7 Radio 0.27 0.30 0.31 8.2 3.9 7.0 7.0 7.2 IPTV 0.06 0.08 0.09 26.1 13.0 1.6 1.9 2.1 Satellite TV 0.02 0.02 0.02 2.1 2.0 0.5 0.5 0.5 DMB 0.01 0.01 0.01 (20.6) (1.2) 0.3 0.2 0.2 SO (cable TV operator) 0.08 0.08 0.08 0.9 2.4 1.9 1.8 1.8 Total 3.9 4.2 4.3 7.3 1.9 100 100 100

Source: Cheil Worldwide (March 2016) forecasts Note: OTA TV refers to over-the-air channels / DMB refers to Digital Multimedia Broadcasting, or TV broadcasts for mobile devices

A paid-TV operator like Skylife has its own ad inventory (station breaks or spot ads airing for 12-120 seconds per hour) between the programme and the programme providers’ TV commercials. The company generated total ad revenue of KRW24bn in 2015, which is equivalent to 15% of its platform sales and 4% of its total revenue. Management believes advertisers benefit from Skylife’s paid-TV ad offerings, which give customers a way to purchase ads more efficiently (unlike programme provider ads, ads bought through paid- TV operators can be broadcasts via multiple channels).

KT Skylife (053210 KS): 14 October 2016

Paid TV operators: advertising placement Paid TV Paid TV PP PP commercial PP PP commercial Commercial Program A Commercial (2min per hour) Commercial Program B Commercial (2min per hour) WBO heavy MBC Sports 2016 MLB MBC Sports Skylife MBC Sports MBC Sports Skylife weight title commercial wild card commercial commercial commercial commercial commercial match

Source: Company Note: Program Providers (PP) (broadcasting channels), MBC Sports (Cable TV channel in Korea)

In December 2015, the company unveiled its advanced realtime advertising (ARA) platform for its station-break ads inventory, based on a big data solution from Internet connectivity service provider KT Hitel (036030 KS, not rated). Advertisers pay KRW5 per person upon a full viewing of the listed ad, and can check the accompanying user data by region, time and channel. Following its commercial launch in November 2015, the company noted that this ad format recorded cumulative ad contracts for KT Skylife worth KRW1bn in 1Q16, while its total ad sales dropped by 32% YoY in the quarter. We understand that small advertisers particularly appreciate this performance-ad product, and as such KT Skylife saw its contract-renewal rate surge to 92% for 1H16, compared with 50-60% as of December 2015.

Skylife: ads-revenue outlook (2010-18E, KRWbn) 45 50 40 40 35 30 30 20 25 10 20 0 15 10 (10) 5 (20) 0 (30) 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Advertising revenue YoY growth (%, RHS) % of platform revenue (RHS)

Source: KCC, MSIP

We believe Skylife saw soft ad demand in 1H16, while its ARA ads continued to expand on increasing new advertisers from big corporations as well as various industries. With a steady rise in ad-inventory sales and repurchasing rate, Skylife’s ads revenue looks set to rise at a CAGR of 18% for 2015-18, on our forecasts, and contribute 14-17% of its total platform revenue in 2016-18E.

KT Skylife (053210 KS): 14 October 2016

Climbing up the value chain

We expect 2016-18E We believe Skylife’s 2016-18E revenue growth will be driven by: 1) a gradual rebound in revenue to benefit from service revenue on increasing ARPU from a growing number of UHD subscribers, 2) a the contribution of new solid increase in commission revenue from both home shopping and especially T- services commerce companies, and 3) robust growth in ad sales stemming from ARA ads. We forecast Skylife’s total number of subscribers to increase by 1.1% YoY to 4.4m for 2016, of which its UHD users account for 9.2%. Meanwhile, we look for the company’s service ARPU decline to decelerate from -4.5% YoY in 2016E to -0.4% YoY in 2017E, and edge up 0.3% YoY in 2018E on the back of an improving subscriber mix as UHD subscribers make up a bigger portion.

Skylife: subscriber-mix outlook (m) 5.0 60 4.5 4.0 50 3.5 40 3.0 2.5 30 2.0 1.5 20 1.0 10 0.5 0.0 0 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E KT Skylife only subscribers OTS subscribers

Total subscriber YoY growth (%, RHS) OTS to total subscribers (%, RHS) Source: Company, Daiwa forecasts

For 2016, we forecast Skylife’s revenue to increase by 2.4% YoY, boosted by a resilient revenue contribution from its platform segment. The revenue mix for 2016E: services (54%), platform (30%), cost offset (7%), and others (9%). We project its platform revenue to see a CAGR of 13% for 2015-18E, on the back of increasing ads sales and steady increase in commission revenues from home shopping and T-commerce retailers.

Skylife: revenue mix (KRWbn) 800 40 700 35 600 30 500 25 400 20 300 15 200 10 100 5 0 0 2011 2012 2013 2014 2015 2016E 2017E 2018E Service Platform Cost offset Others Platform revenue to total revenue (%, RHS)

Source: company, Daiwa forecasts

On our forecasts, the company’s 2016-18E operating-profit margin will hover around 15%, compared to 12.5% in 2014, on the increasing scale of satellite broadcasting services, improving subscriber mix with growth in the number of premium UHD users, and a disciplined cost strategy. As its revenue mix continues to shift to more profitable platform businesses, we expect solid operating leverage in 2016-18, while expecting a rise in operating costs for content outsourcing from programme providers (PPs), including terrestrial broadcasters. We forecast Skylife to record a net-profit margin of 11-12% for 2016-18E.

KT Skylife (053210 KS): 14 October 2016

Skylife: profitability outlook (2011-18E, KRWbn) 600 19

500 17 15 400 13 300 11 200 9 100 7 0 5 2011 2012 2013 2014 2015 2016E 2017E 2018E Service revenue Home shopping Advertising

Operating-profit margin (%, RHS) Net profit margin (%, RHS) Source: company, Daiwa forecasts

The company is scheduled to report its 3Q16 results on 25 October. For 3Q16, we project Skylife’s revenue to grow by 1.2% YoY and 0.9% QoQ, and operating profit to increase by 18.3% YoY on a modest net addition of 1% YoY in subscribers, slowdown in ARPU decline as a result of growth in the number UHD subscribers, and its disciplined cost strategy. In our view, its platform division will be a bright spot, for which we expect the revenue to grow by 18% YoY and contribute 31% of the company’s total revenue in 3Q16. We look for revenue-growth momentum to accelerate from 4Q16 as the company finalises commission negotiations with home-shopping companies and on higher seasonal demand for T- commerce.

Skylife: quarterly earnings trends (2Q15-3Q16E, KRWbn) 3Q16E 2Q15 3Q15 4Q15 1Q16 2Q16 Daiwa Consensus Total revenue 153.8 160.9 164.3 149.9 161.4 162.8 164.3 YoY growth (%) (0.6) 0.3 5.1 1.7 4.9 1.2 2.1 QoQ growth (%) 4.4 4.6 2.1 (8.8) 7.7 0.9 1.8 Operating profit 31.0 13.8 22.6 23.0 29.0 16.3 16.8 YoY growth (%) 79.6 81.7 9.4 (24.3) (6.4) 18.3 22.1 QoQ growth (%) 1.9 (55.6) 64.4 1.7 26.1 (43.9) (42.1) Operating-profit margin (%) 20.1 8.6 13.8 15.4 18.0 10.0 10.2

Source: company, Daiwa forecasts

We forecast Skylife’s EPS to expand by 4.1% YoY in 2017-18, on solid growth in platform revenue, a modest rise in ARPU, and solid operating leverage. The company had total KRW180bn in cash and cash equivalents as of end-2Q16, and management notes the company intends to maintain its payout ratio of 30% in 2016 on a consolidated basis.

KT Skylife (053210 KS): 14 October 2016

Investment concerns

Regulatory issues and We think the following issues relating to Skylife’s core business stand as the key risks to competition are our key our Outperform (2) rating: 1) weak ARPU growth due to slower-than-expected UHD concerns migration, 2) slowdown of the home shopping and T-commerce industries, and 3) the potential extension of market-share limits beyond 2018.

 Slower-than-expected rebound in ARPU. Although we expect the company to see growth in its ARPU with expansion in the number of its premium UHD users, there is uncertainty in the industry regarding the penetration of UHD TV and UHD content production. This uncertainty might lead to weaker-than-expected growth in its ARPU and service revenue for 2016-18, in our view.

 Potential extension of the market-share limit bill. In March 2015, Korea’s National Assembly passed a bill (3-year life span: June 2015-May 2018) restricting any one broadcasting companies from controlling over 33% of the paid-TV market. Although KT and Skylife together had a market share of 29.34% as of 2H15, the bill could serve to cap their combined market-share (if the government amends the bill in June 2018, it could lift the cap or extend it).

 Consolidation of the home shopping industry. We are also concerned about slower growth in paid TV viewer and home shoppers as mobile commerce has become a mainstream alternative, particularly for the younger generation. We believe T-commerce will face similar issues as young consumers continue to favour smart devices over televisions.

KT Skylife (053210 KS): 14 October 2016

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; John HETHERINGTON (852) 2773 8787 [email protected] Shipbuilding; Steel Regional Deputy Head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] Rohan DALZIELL (852) 2848 4938 [email protected] Banking; Capital Goods (Construction and Machinery) Regional Head of Asia Pacific Product Management Iris PARK (82) 2 787 9165 [email protected] Kevin LAI (852) 2848 4926 [email protected] Consumer/Retail Chief Economist for Asia ex-Japan; Macro Economics (Regional) SK KIM (82) 2 787 9173 [email protected] Olivia XIA (852) 2773 8736 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Macro Economics (Hong Kong/China) Thomas Y KWON (82) 2 787 9181 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Head of Automobiles; Transportation and Industrial (Hong Kong/China) Kevin JIN (82) 2 787 9168 [email protected] Brian LAM (852) 2532 4341 [email protected] Small/Mid Cap

Auto Components; Transportation – Railway; Construction and Engineering (China) TAIWAN Leon QI (852) 2532 4381 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Banking; Diversified financials; Insurance (Hong Kong/China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Yan LI (852) 2773 8822 [email protected] (Regional) Banking (China) Christie CHIEN (886) 2 8758 6257 [email protected] Anson CHAN (852) 2532 4350 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional) Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Adrian CHAN (852) 2848 4427 [email protected] IT/Technology Hardware (PC Hardware) Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (Handsets and Components) Gaming and Leisure (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] John CHOI (852) 2773 8730 [email protected] Small/Mid Cap Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Carlton LAI (852) 2532 4349 [email protected] INDIA Small/Mid Cap (Hong Kong/China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Dennis IP (852) 2848 4068 [email protected] Head of India Research; Strategy; Banking/Finance Power; Utilities; Renewables and Environment (Hong Kong/China) Saurabh MEHTA (91) 22 6622 1009 [email protected] Jonas KAN (852) 2848 4439 [email protected] Capital Goods; Utilities Head of Hong Kong and China Property Cynthia CHAN (852) 2773 8243 [email protected] SINGAPORE Property (China) Ramakrishna MARUVADA (65) 6499 6543 [email protected] Thomas HO (852) 2773 8716 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Custom Products Group David LUM (65) 6329 2102 [email protected] Banking; Property and REITs PHILIPPINES Royston TAN (65) 6321 3086 [email protected] Patricia Tamase (63) 2 797 3024 [email protected] Oil and Gas; Capital Goods Banking Shane GOH (65) 64996546 [email protected]

Property and REITs; Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore)

KT Skylife (053210 KS): 14 October 2016

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KT Skylife (053210 KS): 14 October 2016

SK Telecom: share price and Daiwa recommendation trend Date Target price Rating Date Target price Rating Date Target price Rating 22/04/14 230,000 Outperform 01/04/15 305,000 Outperform 02/02/16 240,000 Outperform 03/07/14 261,000 Outperform 06/05/15 287,000 Outperform 28/04/16 230,000 Outperform 28/08/14 312,000 Outperform 21/07/15 270,000 Outperform 28/07/16 245,000 Outperform 29/10/14 290,000 Outperform 10/09/15 280,000 Outperform

29/01/15 310,000 Outperform 02/11/15 258,000 Outperform 320,000 312,000 310,000 305,000 300,000 290,000 287,000 280,000 280,000 270,000 260,000 261,000 255,000 258,000 245,000 240,000 240,000 230,000 230,000 220,000

200,000

180,000

Jul-15 Jul-14 Jul-16

Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16

Jan-14 Jun-14 Jan-15 Jun-15 Jan-16 Jun-16

Feb-14 Mar-14 Feb-15 Mar-15 Feb-16 Mar-16

Aug-16 Nov-13 Dec-13 Aug-14 Sep-14 Nov-14 Dec-14 Aug-15 Sep-15 Nov-15 Dec-15 Sep-16

May-14 May-15 May-16

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

LG Uplus: share price and Daiwa recommendation trend Date Target price Rating Date Target price Rating Date Target price Rating 14/01/14 12,500 Outperform 23/01/15 12,500 Hold 01/02/16 10,000 Hold 28/04/14 11,500 Outperform 28/04/15 11,300 Hold 28/04/16 10,600 Hold 31/07/14 10,300 Outperform 27/07/15 11,000 Hold 01/08/16 11,000 Hold

27/10/14 12,000 Outperform 28/10/15 10,900 Hold 15,000

14,200 14,000 13,700 13,000 12,500 12,500 12,000 12,000 11,500 11,300 11,000 11,000 10,900 11,000 10,600 10,300 10,000 10,000

9,000

8,000

Jul-14 Jul-15 Jul-16

Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16

Jan-14 Jun-14 Jan-15 Jun-15 Jan-16 Jun-16

Mar-16 Feb-14 Mar-14 Feb-15 Mar-15 Feb-16

Nov-14 Aug-16 Nov-13 Dec-13 Aug-14 Sep-14 Dec-14 Aug-15 Sep-15 Nov-15 Dec-15 Sep-16

May-14 May-15 May-16

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

KT Skylife (053210 KS): 14 October 2016

KT Corporation: share price and Daiwa recommendation trend Date Target price Rating Date Target price Rating Date Target price Rating 24/01/14 30,000 Hold 22/04/15 31,200 Outperform 29/01/16 31,000 Outperform 30/04/14 36,500 Outperform 09/07/15 32,000 Outperform 29/04/16 34,500 Outperform

30/01/15 32,000 Outperform 06/10/15 33,000 Outperform 29/07/16 36,000 Outperform 38,000 38,000

36,500 36,000 36,000 35,000 34,500 34,000 33,000 32,000 32,000 32,000 31,200 31,000 30,000 30,000

28,000

26,000

Jul-14 Jul-15 Jul-16

Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16

Jan-14 Jun-14 Jan-15 Jun-15 Jan-16 Jun-16

Mar-16 Feb-14 Mar-14 Feb-15 Mar-15 Feb-16

Nov-14 Aug-16 Nov-13 Dec-13 Aug-14 Sep-14 Dec-14 Aug-15 Sep-15 Nov-15 Dec-15 Sep-16

May-14 May-15 May-16

Target price (KRW) Closing Price (KRW)

Source: Daiwa Note: where appropriate, historical target prices have been adjusted to reflect the current share count

KT Skylife (053210 KS): 14 October 2016

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Name of Analyst : Thomas Y. Kwon

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1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets.

Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report:

1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity.

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The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report.

"1": the security could outperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated. "2": the security is expected to outperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next 12 months, unless otherwise stated. "4": the security is expected to underperform the KOSPI by 5-15% over the next 12 months, unless otherwise stated. "5": the security could underperform the KOSPI by more than 15% over the next 12 months, unless otherwise stated.

“Positive” means that the analyst expects the sector to outperform the KOSPI over the next 12 months, unless otherwise stated. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next 12 months, unless otherwise stated. “Negative” means that the analyst expects the sector to underperform the KOSPI over the next 12 months, unless otherwise stated.

Additional information may be available upon request.

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KT Skylife (053210 KS): 14 October 2016

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Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

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Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

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KT Skylife (053210 KS): 14 October 2016

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 64.0% Hold** 21.2% Sell*** 14.8% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2016. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

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If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

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