Media/Telecom Service The world of pay TV
Pay TV: Important to both media and telecom industries As part of the media industry’s value chain, pay-TV operators provide broadcast services Overweight (Maintain) and distribute content. Thanks to their monthly (fixed-sum) subscription systems, pay- TV service providers enjoy steady cash flows, just as telecom companies (which use Industry Report similar fee structures) do. The pay TV business model, therefore, helps ensure stability April 23, 2015 amid the media industry’s rapid changes. We have noted the growing importance of media businesses within the telecom service
Daewoo Securities Co., Ltd. industry. Faced with stagnant population growth, domestic media and telecom firms have had to actively diversify their subscriber-based businesses to ensure additional [Telecom Service / Media] growth. Fortunately, the switch from analog to digital broadcasting has allowed such firms to diversify their sources of revenue, including VOD revenue from pay-TV Jee-hyun Moon +822-768-3615 subscribers, and N-screen subscription and mobile data revenue from wireless [email protected] subscribers.
Time for a turnaround
In Korea, pay-TV service providers’ combined net profit has trended down steadily for
the past three years, as intense competition for new subscribers amid the transition to
digital broadcasting has resulted in lower ARPU and higher costs. However, it is worth remembering that in the US, pay-TV operators—whose ARPU increased only modestly during the digital conversion—saw a sharp increase in ARPU and accelerated cash flow after the digital transition ended and the industry consolidated via M&As.
We believe the Korean pay-TV industry has reached a positive inflection point. The digital transition is coming to an end, and corporate M&As and policy support could provide a tailwind for the industry, helping to ease market competition. Moreover, business models are diversifying, and earnings are anticipated to expand YoY on a low base of comparison (due to one-off expenses recognized last year).
Maintain Overweight; Key recommendations are SK Telecom and KT Skylife We maintain our Overweight stance on media and telecom services. Our key recommendations are SK Telecom (SKT) and KT Skylife, which stand to benefit, respectively, from growing personalization and improving picture quality in TV broadcasts, and which also offer attractive dividends. Considering SKT’s plan to own SK Broadband in its entirety, mobile momentum is likely to drive its media business. As for KT Skylife, we raise our target price in light of expected positive changes in the business environment after uncertainties lift. We also raise our target price for KTH and Nasmedia, which are aiding the expansion of the pay-TV business.
Market value of pay-TV operators expected to increase, backed by improving domestic pay-TV business environment and earnings recovery (Wbn) Major pay-TV operators' combined net profit (L) (Wbn) 250 Major pay-TV operators' combined market cap (R) 4,500 - Digital conversion nearing end - Slowing fall in ARPU - Removal of one-off costs 200 - More room for dividends with FCF 4,000 recovery
150 3,500
- Depreciation on digital conversion 100 - Marketing expenses 3,000 - Fall in ARPU with expansion of bundled products - KT Skylife: One-off lawsuit cost - CJ HelloVision: Loss on disposable assets 50 2,500 2011 2012 2013 2014 2015F 2016F
Notes: SK Broadband, CJ HelloVision, and KT Skylife combined Source: Company data, KDB Daewoo Securities Research Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
April 23, 2015 Media/Telecom Service
CONTENTS
Pay TV set to turn around 3 1. The most stable business model in the media space 3 2. Investment strategy: Time to consider overweighting pay-TV service providers 5
Industry trends at home and abroad 6 1. Slowly changing market 6 2. Consolidation: Still too many players 8 3. Switch to digital broadcasting nearing completion 11 4. Platform revenue: Leveraging tool 13 5. Regulatory and policy issues 15
Domestic market outlook 17 1. Consolidation: Four conglomerates to be dominant 17 2. Digital broadcasting: Mobile is key 19 3. Business models: Diversification 22 4. Expectations for policy tailwinds 26 5. Potential expansion of foreign capital 27
Valuation 28 1. Valuation gap with global peers narrowing 28 2. Expectations for dividends 29
Key Recommendations 30 SK Telecom (017670 KS) 31 KT Skylife (053210 KS) 39 CJ HelloVision (037560 KS) 44 KT (030200 KS) 48 LG Uplus (032640 KS) 52 KT Hitel (036030 KQ) 56 Nasmedia (089600 KQ) 59
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Pay TV set to turn around
1. The most stable business model in the media space
(1) Digital conversion bringing new opportunities Pay TV offers the most stable business model in the media segment. Pay-TV operators use infrastructure (cable or internet networks) and distribution platforms to deliver content to viewers. Monthly subscription systems (using fixed-term contracts) allow pay-TV operators to enjoy stable revenue irrespective of changes in market conditions (a characteristic they share with telecom service providers).
Currently, most monthly subscribers tend to use their subscriptions in combination with pay-per- view (PPV). In the analog age, monthly subscriptions were the dominant source of revenue and business growth, along with fees charged to home-shopping companies and commissions collected from advertisers.
Now, the transition to digital broadcasting is offering more business opportunities to pay-TV service providers. Besides monthly subscriptions, VOD revenue is growing (up to 20% of total broadcast revenue for CJ HelloVision last year). Increasingly, VOD platforms are generating revenue from related advertising, and there has also been a rise in T-commerce (data broadcasting–based transactions). Alongside this business diversification, domestic pay-TV stocks are rebounding gradually after the sluggishness caused by the digital transition and intensified competition.
Figure 1. Relative share performances of global pay-TV operators: Korea has just joined the trend
(1/2014=100) CJ HelloVision (KR) KT Skylife (KR) 140 Charter (US) Time Warner Cable (US) Comcast (US) DirecTV (US) Dish Network (US) Sky Perfect JSAT (JP)
120
100
80
60
40 1/14 3/14 5/14 7/14 9/14 11/14 1/15 3/15
Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 2. Domestic pay-TV value chain and business model
Production/ Service/distribution Device programming
Cost Revenue Pay TV Content provider Program - Cable SOs Service Subscriber - Terrestrial usage fee - Satellite TV operators usage fee - Program provider - IPTV operators (telcos) - OTT operators
Revenue Revenue
Trans- Ad mission costs fees
Home shopping/ Advertisers T-commerce operators
Source: KDB Daewoo Securities Research
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(2) Adapting to rapid changes in the media environment With regard to consumer behavior and media, two major trends currently driving the industry are personalized broadcasting services and improvement in TV picture quality.
Regarding personalization, media companies face a growing need to cover demand from both individuals (using mobile media) and households (using TV). CJ HelloVision is taking the lead in this area with Tving, an over-the-top (OTT) video service. Telcos that provide IPTV services are also starting to offer mobile IPTV services.
TV makers that had been focused on hardware innovations such as 3D TV and smart TV are now turning their attention back to picture quality. According to DisplaySearch, UHD TVs will get on the path to commoditization, with annual sales volume projected to account for 10% of total TV sales globally this year. Given the probable launch of UHD broadcasting, the government is considering allocating licenses in the 700MHz frequency band to both broadcasters and telcos. In addition, domestic terrestrial channels plan to increase production of UHD content this year, and CJ E&M and KT Skylife are launching UHD-only channels.
Amid such changes in the business environment, traditional performance measures like market share are becoming less relevant as boundaries between media segments blur. While cable system operators (SOs) concentrated on expanding their market shares, telcos penetrated into the IPTV segment and added mobile services to their portfolios.
Accordingly, media firms and telcos need to pay attention to trends in consumers’ inclinations and lifestyles. For such companies, even more important than gaining market share from competition is gaining the “life share” of consumers—i.e., the extent to which consumers are exposed to a company’s media and content in their day-to-day lives.
In the pay-TV industry, both the quantity and quality of users’ experiences will increase in significance. To broaden the extent of such experiences, companies may begin to expand their footholds beyond TV to mobile media. To improve quality, we believe they will have to expand VOD content offerings and UHD services.
Figure 3. Instead of market share, content producers’ “life share” of consumers now holds the key
Market share “Life share”
Firm Firm
Firm Firm Firm Firm Firm
Firm Firm Firm Firm
Source: KDB Daewoo Securities Research
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2. Investment strategy: Time to consider overweighting pay-TV service providers
(1) Earnings normalization + benefits from changing industry paradigm Major domestic pay-TV firms have seen their combined net profit shrink YoY for three straight years. As the transition to digital TVs accelerated from 50% to 70%, companies increased investments, which led to a rise in depreciation costs. Amid intensifying competition for subscribers, companies’ ARPU declined while marketing expenses climbed. Furthermore, one-off costs in 2014 dragged down pay-TV firms’ net profit to the lowest level in three years.
However, we expect both the market environment and earnings to improve this year. With the transition to digital TV now in the final stage, pay-TV operators should see additional business opportunities emerge, while their investment burden should ease going forward. The government plans to introduce regulations on pay-TV bundled products (pay TV + telecom services), which will likely help increase Korea’s pay-TV ARPU, which is currently the lowest level in the world.
Earnings are projected to improve this year due to the dissipation of one-off factors, the addition of new revenue sources, and progress in the consolidation of the pay-TV industry. Furthermore, as media firms’ free cash flow improves, they will likely be able to pay out larger dividends in a more stable manner, as telecom plays do.
We advise investors to overweight media and telecom services firms that offer pay-TV services, and present SKT and KT Skylife as our top picks. SKT is likely to benefit from the growing personalization in TV broadcast services. With SKT planning to buy out the stake in SK Broadband it does not currently own, mobile momentum is likely to drive its media business. Meanwhile, KT Skylife stands to benefit from improving TV picture quality. The introduction of UHD set-top boxes (scheduled for 1H15), the launch of dish convergence solutions (DCS), and increasing platform revenue are anticipated to provide newfound momentum for the company. Both companies are also attractive dividend plays.
We forecast CJ HelloVision to see sharp earnings growth this year on the back of a low base of comparison (due to one-off costs, including an asset charge, recorded in 2014) and decreasing MVNO losses. KTH and Nasmedia also merit attention, as they are aiding the expansion of the pay-TV business.
Figure 4. Major pay-TV companies’ combined net profit and market value trend and forecast
(Wbn) Major pay-TV operators' combined net profit (L) (Wbn) 250 Major pay-TV operators' combined market cap (R) 4,500 - Digital conversion nearing end - Slowing fall in ARPU - Removal of one-off costs 200 - More room for dividends with FCF 4,000 recovery
150 3,500
- Depreciation on digital conversion 100 - Marketing expenses 3,000 - Fall in ARPU with expansion of bundled products - KT Skylife: One-off lawsuit cost - CJ HelloVision: Loss on disposable assets 50 2,500 2011 2012 2013 2014 2015F 2016F
Notes: SK Broadband, CJ HelloVision, and KT Skylife combined; KT Skylife recognized one-off lawsuit cost in 3Q14 Source: Company data, Thomson Reuters, KDB Daewoo Securities Research
Table 1. Domestic pay-TV industry Production and programing Service and distribution OTT Additional revenue
IPTV Btv Subsidiary SK Broadband SK Telecom B tv Mobile (subsidiary SK Broadband) (T-commerce) Hoppin (subsidiary SK Planet)
CJ HelloVision Affiliate CJ E&M Cable SO Tving Parent CJ O Shopping KT Skylife Subsidiary Skylife TV Satellite
LG Uplus IPTV tv G Uplus HDTV
KT IPTV Olleh TV Olleh tv mobile Subsidiary KTH (VOD, T-commerce)
Subsidiary Nasmedia (ad rep)
Source: KDB Daewoo Securities Research
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Industry trends at home and abroad
1. Slowly changing market
(1) Market shakeup: Entry of telcos into pay TV via IPTV The domestic pay-TV market has experienced two major developments over the past decade: digital conversion and the entry of telcos.
During the era of analog broadcasting, cable SOs occupied monopolistic positions in their local operating areas, allowing them to generate stable revenues and profits. As the conversion to digital broadcasting accelerated, however, cable SOs incurred additional investments and expenses due to the provision of set-top boxes and the payment of retransmission fees to terrestrial broadcasters. In the process, cable SOs with weak capital bases were merged together or acquired by multi-system operators (MSOs).
Changes in the pay-TV market accelerated in 2007, when telcos entered the market via the IPTV business. This caused the market’s digital conversion to pick up speed, as IPTV services are a form of digital broadcasting using internet networks. It also caused competition to intensify, as IPTV services were offered nationwide whereas cable SOs’ operations were restricted to local areas. When telcos first introduced IPTV, it was in the form of bundled products for existing broadband internet customers. As such, KT was the first to see its IPTV market share climb, given its higher fixed-line market share. Now, with the bundling of both fixed-line and wireless products, SK Broadband and LG Uplus are also gaining market share.
Figure 5. In the domestic market, 8 years was needed to reach 60% pay-TV digital conversion vs. 3 years to reach 60% LTE conversion
80% Digital conversion rate LTE conversion rate 74%
63% 60% 62%
40%
20%
0% 2% 05 06 07 08 09 10 11 12 13 14
Source: MSIP, KCC, KCTA, KISDI, KDB Daewoo Securities Research
Figure 6. Average annual number of subscribers (by technology type) in domestic pay-TV market
(mn persons) 30 IPTV (+18% over the past 3 years) Satellite (+4% over the past 3 years) 25 Cable SO (-0.5% over the past 3 years)
20
15
10
5
0 05 06 07 08 09 10 11 12 13 14
Notes: Redundancy caused by OTS (bundling of KT IPTV and KT Skylife) not removed Source: KDB Daewoo Securities Research
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(2) Pay-TV ARPU has grown in overseas markets With the digital conversion nearly complete, pay-TV ARPU is likely to climb, as the advanced equipment required for digital broadcasting should enhance service quality. In the domestic pay- TV market, monthly fixed-rate subscription fees for digital broadcasting range between W9,000 and W15,000, while those for analog broadcasting stand at W4,000-W5,000.
According to Informa data quoted by the Ministry of Science, ICT and Future Planning, Korea has a monthly average pay-TV ARPU of around US$7, which is far lower than those of the US (US$87), Australia (US$70), Japan (US$56), and even Indonesia (US$12).
Of note, in the US pay-TV market—which completed the digital conversion before Korea, in 2010—ARPU has been rising since 2011. In the Korean market, digital conversion is still underway. As of end-2014, the overall conversion ratio reached 74%, while the SO market conversion ratio stood at only 49%. CJ HelloVision, a major cable SO, saw a drop in average revenue per subscriber (ARPS) despite the acceleration of digital conversion, as bundling discounts increased due to higher competition for subscribers. However, we expect ARPU to pick up going forward, aided by the completion of digital conversion and the government’s policy support.
Figure 7. Pay-TV monthly ARPU by country: Korea has the lowest level
(US$) 100
80
60
40
20
0 Korea US Australia Japan Singapore Hong Kong Indonesia
Source: MSIP, Informa, Bloomberg, KDB Daewoo Securities Research
Figure 8. Time Warner Cable’s pay-TV ARPU and share price Figure 9. CJ HelloVision’s pay-TV ARPS and share price
(US$) (US$bn) (W) Pay-TV ARPS (L) (Wbn) 78 50 14,400 Market cap (R) 1,600 Pay-TV ARPU (L) Digital conversion competition Market cap (R)
76 Overall uptrend 40 13,800 1,300
74 30 13,200 1,000
72 20 12,600 700
70 10 12,000 400 1Q11 1Q12 1Q13 1Q14 1Q11 1Q12 1Q13 1Q14
Source: Bloomberg, Thomson Reuters, KDB Daewoo Securities Research Notes: ARPS (average revenue per subscriber) refers to total service revenue from one subscriber to CJ HelloVision, including broadband, VoIP, etc. Source: Company data, Thomson Reuters, KDB Daewoo Securities Research
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2. Consolidation: Still too many players
(1) There is still room for consolidation in the domestic market A government license is required to engage in the pay-TV business, as it is an infrastructure-based service similar to telecom services. Although pay-TV operators are protected by the government, they cannot easily expand overseas.
As such, to achieve profitability, deregulation and integration are necessary. Regulatory easing is important in light of the limited size of the domestic market. If pay-TV operators were to become larger, they would be able to achieve economies of scale from their network investments while exercising higher bargaining powers in dealing with content providers and home shopping channels.
The number of domestic pay-TV operators fell from 35 in 2005 to 19 in 2014 due to M&As. During this period, CJ HelloVision was able to increase its subscriber base thanks to M&As.
The government has already taken some deregulatory measures. Under the revised broadcasting law (which passed cabinet approval in January 2014), the market share cap for SOs was increased to one-third of the entire pay-TV market, from one-third of the cable SO market. This revision should allow for larger-scale M&A deals in the market.
As of now, roughly 10 domestic cable SOs are not affiliated with conglomerates. And among multiple-system operators (MSOs), C&M is currently available for sale. We believe M&A deals will boost the enterprise value of buyers.
Figure 10. M&As between cable SOs led to fall in number of domestic pay-TV companies
(no.) IPTV operators 40 Satellite TV operators Cable SOs Cable MSOs 30
21 20 20 25 23 23 21 18 19 10 11 10
0 05 06 07 08 09 10 11 12 13 14
Source: 2014 Broadcasting Industry Survey, KCTA, KDB Daewoo Securities Research
Figure 11. Acquisition of cable SOs was critical to CJ HelloVision’s growth in subscribers
('000 persons) (no.) 4,500 Number of SO M&As (R) 5 Broadcast subscribers (L) 4,000 4
3,500 3 3,000 2 2,500
1 2,000
1,500 0 05 06 07 08 09 10 11 12 13 14
Source: KDB Daewoo Securities Research
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(2) The US pay-TV market: A case of successful consolidation We believe the US pay-TV market underwent successful consolidation. In that market, cable SOs are a more dominant presence than IPTV service providers (i.e., telecom companies). Two giants, Comcast and Time Warner Cable, attempted a merger deal in early 2014, though this deal did not go through, given the FCC’s worries about monopoly. Nevertheless, M&A moves are still ongoing. Charter acquired Bright House (and may be weighing additional M&A deals), while AT&T is working to acquire DirecTV. Other cable service providers are also believed to be considering M&A deals.
In 2009, Time Warner Cable was split off from Time Warner. Although Time Warner Cable experienced sluggish earnings shortly after the split, its earnings have been growing since 2011, mostly driven by M&A deals.
These robust M&A deals are partially attributable to the heavy retransmission fees paid to broadcasters. Indeed, terrestrial broadcasters (e.g., CBS) and channel operators (e.g., Time Warner ad Disney) charge pay-TV platforms per-subscriber fees, and the fees are raised often in spite of slow subscriber growth. For that reason, pay-TV platforms have sought expansion as a means to increase their negotiating power.
In 2012, Korea’s three terrestrial broadcasters also began charging digital pay-TV platforms subscriber fees (approximately W280 per subscriber). They plan to renegotiate fees against cable MSOs and IPTV service providers. In response, we believe pay-TV service providers could seek M&As, just as US peers did.
Figure 12. M&As, share price, and earnings of US pay-TV operator Time Warner Cable
(US$) (US$) 160 Time Warner Cable EPS (R) 8 Time Warner Cable share price (L) Acquired Insight
Acquired 120 NaviSite 6 Acquired DukeNet 80 4 Announced plan to merge with Comcast 40 2
0 0 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
Source: Thomson Reuters, WSJ, KDB Daewoo Securities Research
Figure 13. Rising content-related costs, including retransmission fees, was one factor leading to pay-TV consolidation in the US
(US$bn) 10 Cable SO retransmission fees Satellite retransmission fees 8 Telco retransmission fees
6
4
2
0 13 14 15F 16F 17F 18F
Source: Bloomberg, KDB Daewoo Securities Research
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Figure 14. US pay-TV industry’s “Big Four” emerged after 20 years of integration
Source: WSJ, KDB Daewoo Securities Research
Figure 15. Total market value of major US pay-TV stocks
(US$bn) 140 Comcast Time Warner Cable Period of large M&As Charter 2012 digital conversion: Over 90% 2014: Comcast and Time Warner Cable announced merger 105
Medium to large-scale M&As begun in earnest 70 2005 digital conversion: 50%
35
Small-scale M&As
0 1Q95 1Q97 1Q99 1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13 1Q15
Source: Thomson Reuters, KDB Daewoo Securities Research
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3. Switch to digital broadcasting nearing completion
(1) Digital switch to be completed in two years
In Korea, more than 50% of pay-TV service providers switched to digital broadcasting in 2011, and the proportion exceeded 70% in 2014. As for cable SOs, nearly 50% of companies went digital last year. We believe the switch will be complete in two years.
Cable SOs’ digital transition accelerated in 2007, as telecom companies expanded into IPTV services. In 2010, the move picked up further speed, as KT launched Olleh TV Skylife (OTS) bundled products (IPTV Olleh TV service + Skylife service).
During 2010-2011, the transition was robust, as MSOs willing to go digital (e.g., CJ HelloVision) aggressively sought M&As. In addition, the smooth subscriber acquisition of late entrants (e.g., SK Broadband) played a role in accelerating the digital transition. Since 2013, SK Broadband has maintained monthly net subscriber additions of around 50,000 people.
Figure 16. Digital conversion in domestic pay-TV market has reached over 70%
Expansion in SK Broadband's net 80% Digital conversion rate in pay TV M&As subscriber additions 74% between 69% cable SOs 62% KT pursues OTS 60% 54% in earnest 46%
40% 37% Entry into IPTV 31% 23% 20% 15% 12%
0% 05 06 07 08 09 10 11 12 13 14
Notes: Cable SO, satellite, and IPTV combined Source: KCC, KDB Daewoo Securities Research
Figure 17. Change in number of analog/digital subscribers in domestic cable SO market: Digital conversion has reached around 50%
(mn persons) Subscribers to analog cable (L) Subscribers to digital cable (L) (%) Digital conversion rate (R) 16 60
50 12 40
8 30
20 4 10
0 0 05 06 07 08 09 10 11 12 13 14
Source: KCTA, KDB Daewoo Securities Research
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(2) In the US, OTT services have proliferated following completion of digital conversion After the US pay-TV market finished the digital conversion (between 2010 and 2011), over-the- top (OTT) services became available. The Korean market, on the other hand, is experiencing both the digital conversion and the spread of OTT services simultaneously.
In the US, pay-TV ARPU did not climb markedly when the digital conversion sped up between 2006 and 2009. During that period, ARPU was weighed by high discounts on contracts amid intense competition for subscribers among market players. However, ARPU began to rise notably in 2011, when the digital conversion ratio reached nearly 90%. Korea is also likely to see the downward pressure on ARPU ease when the digital conversion reaches its final stage.
OTT is currently a major buzzword in the US pay-TV market, as the number of N-screen service subscribers is on the rise. OTT services refer to delivery of audio, video, and other media over the internet without the involvement of an MSO in the control or distribution of content. Of note, while converting to digital broadcasting, pay-TV operators also built broadband internet infrastructure to enhance their pay-TV services, but this infrastructure created an environment where independent OTT services proliferated in the market (an example of an external effect).
In the US, OTT services are currently having an enormous impact on the pay-TV market. For conventional pay-TV services, the monthly fixed-rate scheme stands at US$125 (vs. US$80 when including discounts for contract plans), whereas Netflix, a major US OTT service provider, offers its services for only about US$10 per month. The situation in the Korean market is different in that 1) the rate difference between conventional digital pay TV and OTT services is only modest, and 2) the digital conversion and the proliferation of OTT services are progressing simultaneously
Figure 18. Pay-TV APRU in the US increased as digital conversion neared completion, after falling during period of accelerating conversion
(%) (US$) As digital 100 Avg. pay-TV ARPU (R) conversion neared 100 Digital conversion rate (L) completion, ARPU rose 90 90 As digital conversion accelerated, 80 ARPU fell 80 89% 70 87% 70
66% 60 60
58% 50 50
40 40 04 05 06 07 08 09 10 11 12 13 14
Source: KCC, Thomas et al. (2011), Bloomberg, Broadbandtvnews.com, KDB Daewoo Securities Research
Figure 19. Rapid growth in OTT-subscribing households represents both a threat and an opportunity for the existing US pay-TV market
(mn households) 20 US households with OTT subscriptions
16
12
8
4
0 11 12 13 14 15F 16F 17F 18F
Source: Bloomberg, KDB Daewoo Securities Research
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4. Platform revenue: Leveraging tool
(1) Home shopping and VOD models have taken root in Korea In the pay-TV market, platform revenue plays a key role in earnings growth. For pay-TV operators, achieving an ample subscriber base allows not only higher network efficiency and stronger bargaining power in equipment purchasing—thus achieving economies of scale—but also the creation of more revenue sources, including platform revenue.
Given the relatively low service rates that domestic pay-TV operators charge subscribers, they need additional revenue from home shopping channels or advertisers. In the domestic market, home shopping retransmission fees have taken root as a major platform revenue source since the era of analog broadcasting. In particular, between 2010 and 2012, competition among home shopping channels to secure so-called “golden channels” caused a sharp rise in retransmission fee revenue.
As this two-sided market started to expand, any expansion in ARPU was limited, and pay-TV operators did not need to raise ARPU. The digital conversion, however, has created additional revenue opportunities, including VOD, in the direct consumer billing market. Since 2013, indirect consumer billing growth (which includes home shopping revenues) has weakened, while the direct consumer billing market has seen accelerated growth, suggesting that overall platform revenues are growing.
Figure 20. Domestic home shopping transmission fee revenue: Significant variable for pay-TV companies’ earnings
(Wbn) (W) 800 Home shopping transmission fees (L) 30,000 Home shopping transmission fee revenue/no. of pay-TV households (R)
600 25,000
400 20,000
200 15,000
0 10,000 05 06 07 08 09 10 11 12 13
Notes: Accumulated pay-TV households (not accounting for redundancy due to OTS bundling) Source: 2014 Broadcasting Industry Survey, KCC, KDB Daewoo Securities Research
Figure 21. Domestic pay-TV VOD market seeing double-digit growth every year
(Wbn) (%) 600 Cable VOD sales (L) 25 IPTV VOD sales (L) 500 VOD utilization rate (R) 20
400 15 300 10 200
5 100
0 0 2011 2012 2013 2014
Source: KISDI, Nasmedia, Home Choice, KDB Daewoo Securities Research
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(2) Global trend: Increasing domestic platform revenue and expanding overseas via OTT Overseas pay-TV firms are also endeavoring to increase platform revenue. Major US pay-TV firms’ platform revenues are composed of ad and e-commerce revenues. Until the end of 2011, ad revenue exceeded e-commerce revenue, but starting in 2012, e-commerce revenue grew at a CAGR of 28% and by 2014 was double the amount of ad revenue. The situation in the Korean market is similar, as revenue related to home shopping channels has outstripped ad revenue.
PCCW, a Hong Kong-based company that engages in telecom services (HKT) and media businesses, has recently been expanding its platform business overseas via OTT. In March of this year, PCCW acquired Vuclip, a global mobile VOD service provider based in the US.
Pay-TV businesses based on offline infrastructure are limited in their ability to expand overseas, as such services are governed by licensing rules in each country. However, OTT is a platform business that can leverage existing infrastructure, allowing pay-TV firms to advance into global markets rapidly via the internet and mobile connections. Assuming it is possible to resolve broadcast copyright issues between countries, OTT services will likely expand platform revenue globally.
Figure 22. Major US pay-TV companies have seen increase in platform revenue with increasing focus on commerce
(US$bn) 12 Ad revenue (CAGR 4%) Commerce revenue (CAGR 28%)
9
6
3
0 10 11 12 13 14
Notes: Comcast, Time Warner Cable, and Charter combined Source: Bloomberg, KDB Daewoo Securities Research
Figure 23. PCCW seeking media business expansion through OTT platform
Notes: Vuclip, a mobile VOD service based in California, has coverage in India, Indonesia, Thailand, the UAE, etc. Source: KDB Daewoo Securities Research
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5. Regulatory and policy issues
(1) Combined market share rule: The most important regulatory issue at present The restriction on combined subscriber market share is currently the most important regulatory issue in the domestic pay-TV market. It is likely to have the greatest impact on KT Group, which has highest subscriber market share.
The enforcement decree of the Internet Multimedia Broadcasting Business Act (also dubbed the IPTV act) has been revised to restrict the subscriber market share of a pay-TV operator—based on the combined number of subscribers to all its pay-TV services—to no more than one-third. The combined subscriber market share of KT’s parent-based IPTV business and subsidiary KT Skylife will exceed the new cap (unless redundancy is removed as discussed below). The previous regulation imposed separate restrictions on the subscriber market shares of KT’s IPTV business and KT Skylife.
In enforcing the market share restriction, an important issue is how to count the number of subscribers. KT has redundant subscribers due to OTS products (IPTV service bundled with satellite broadcasting). Currently, the pay-TV subscriber figures of KT and KT Skylife include OTS subscribers.
We think the current circumstances are not necessarily dismal for KT and KT Skylife. Under the revised Internet Multimedia Broadcasting Business Act, the market share restrictions will be in effect for only three years before authorities reassess the rules and decide whether to change them. And it is unlikely that OTS subscribers will be counted redundantly. Based on the number of set-top boxes, we estimate that KT’s pay-TV market share will come out to approximately 29%, well below the one-third threshold.
Table 2. Key provisions of the Internet Multimedia Broadcasting Business Act (revised) Details
Chapter 3 Facilitation of fair competition Article 13 (Restrictions on market share, etc.) The number of subscribers to a single internet multimedia service provider shall not exceed one-third of Clause 1 the combined subscribers to all pay-TV service providers, including cable operators, satellite TV services, and broadband service providers.
Figure 24. KT Group subscribers (to be subject to combined market share restrictions)
('000 persons) 8,000 KT Skylife only OTS bundling KT IPTV only 6,000
4,000
2,000
0 10 11 12 13 14
Source: Company data, KDB Daewoo Securities Research
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(2) Net neutrality is a heated issue overseas In overseas pay-TV markets, net neutrality—the principle that internet service providers and governments should treat all internet data equally, not discriminating based on content, mode of communication, service, platform, or user—is emerging as an important issue.
Network providers (i.e., pay-TV service providers and telcos) are against this principle, as strict enforcement of net neutrality would likely cause an increase in network costs and investment burden. Indeed, given that most fixed-line subscriptions are based on unlimited data plans, if some subscribers or specific services use data especially heavily, it could cause traffic disruptions without additional charges.
In February 2015, the US Federal Communications Commission (FCC) approved open internet rules (slated to take effect in June 2015). Under the rules, broadband internet services (including pay-TV services) will be reclassified as telecom services. This will give the FCC the authority to regulate internet service providers.
The net neutrality policy will benefit internet companies and content providers such as over-the- top (OTT) companies, whereas pay-TV and cable service providers will inevitably be hit hard. Considering that US pay-TV service providers’ broadband internet services have shown robust revenue growth for the past four years, the implications of net neutrality appear to be especially gloomy for them.
Those voicing support for the government’s stance include major US internet giants such as Google and Facebook, which are expanding overseas. If net neutrality is guaranteed in their home country, it might be used as a reference in overseas markets. Indeed, some European countries once considered introducing usage-based internet pricing due to the heavy traffic to US-based services (e.g., YouTube).
Figure 25. US FCC now supports net neutrality: Negative to pay-TV
Notes: Tom Wheeler, chairman of FCC, approving open internet order Source: KDB Daewoo Securities Research
Figure 26. High-speed data has recently had a significant effect in driving growth of major US pay- TV companies
(%, YoY) High-speed data General cable Digital cable 12 Phone Commerce and other Broadcasting service
8
4
0
-4 2010 2011 2012 2013
Source: Bloomberg, KDB Daewoo Securities Research
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Domestic market outlook
1. Consolidation: Four conglomerates to be dominant
(1) KT, CJ, SK, and Taekwang worth watching We believe the domestic pay-TV market is likely to undergo consolidation, with four conglomerates—KT, CJ, SK, and Taekwang—anticipated to dominate the market.
KT boasts the largest number of pay-TV subscribers, followed by CJ, Taekwang, and SK. As of end- 2014, KT had 7.77mn subscribers (including both IPTV and Skylife subscribers), compared to 4.21mn for CJ HelloVision, 3.3mn for T-Broad, and 2.83mn for SK Broadband. SK Broadband recorded the strongest subscriber growth, followed by KT, CJ HelloVision, and T-Broad. Net subscriber additions have increased more quickly for IPTV services than for cable services.
Notably, KT and CJ have the most extensive value chains in the broadcasting business.
KT has the largest subscriber base. It holds Skylife TV (a second-tier subsidiary engaged in production and programming). KT (IPTV), KT Skylife (digital satellite broadcasting), and the Olleh TV mobile unit (OTT) are distributing content. Recently, Skylife has expanded the Skylife TV business.
CJ has the strongest competitiveness in content, with the program producer CJ E&M. CJ HelloVision holds cable SOs and Tving (an online/mobile distributor). CJ E&M and CJ HelloVision have assumed the leading positions in the cable content and platform segments, respectively. Recently, the content business (CJ E&M) has shown more promising growth potential than the platform business (CJ HelloVision).
Taekwang holds T-Cast (a cable channel operator with 10 channels, including E-Channel) and T- Broad (a service provider and content distributor). The company expanded into the OTT market in March 2015 by launching the T-Broad mobile TV app.
SK—unlike the three conglomerates just mentioned—does not have a program producer under its umbrella. SK Telecom sold off a program producer, while SK Broadband is prohibited from directly operating channels under the IPTV law. On the other hand, SK is showing the quickest growth in the service/distribution segment. SK Broadband is enjoying the strongest net subscriber additions for IPTV services, and the mobile app is also enjoying robust traffic based on SKT’s mobile subscriber base.
Figure 27. Healthy subscriber numbers for domestic “Big Four” pay-TV companies
('000 persons) +12% 8,000 Number of subscribers in 2014 Number of subscribers in 2013
6,000
+4% 4,000 -1% +35%
2,000
0 KT, KT Skylife CJ HelloVision Tbroad SK Broadband
Notes: In calculating KT figure, redundancy was removed (OTS subscribers counted only once) Source: KCTA, company data, KDB Daewoo Securities Research
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Figure 28. Broadcast business value chain of “Big Four” domestic pay-TV companies
Content Production Distribution consumption
Production Programming Services Distribution Devices
Terrestrial
SO
Satellite
DMB
IPTV
OTT
Source: KDB Daewoo Securities Research
(2) M&A of C&M The sale of C&M will likely mark the beginning of Korea’s pay-TV industry consolidation. C&M, an MSO with 2.37mn subscribers, was put up for sale in January 2014, after the enforcement decree of the Broadcasting Act was revised (lifting limits on cable SOs’ market share expansion and eliminating zone restrictions).
C&M is currently 93.81% held by Kookmin Cable Investment (KCI), which was established by private equity firms MBK Partners and Macquarie. The firm has several subsidiaries (cable SOs) operating mostly in Seoul and the neighboring Gyeonggi province, and recently added several cable channels and entertainment and production businesses via its April acquisition of iHQ. In March, only foreign companies submitted letters of intent because of the high offering price. However, we believe C&M’s business lineup makes it an attractive M&A target for domestic cable TV operators, as the eventual buyer will be able to secure subscriber bases in the Seoul capital area as well as add the content business.
Table 3. C&M’s 2014 consolidated earnings and subsidiaries (%, Wmn) Operating Consolidated Assets Liabilities Capital Net profit revenue C&M 1,155,312 905,511 249,801 609,372 39,057 Owner- Operating Subsidiary Assets Liabilities Capital Net profit ship revenue CU Media 73.25 101,631 25,355 76,276 68,578 7,617 Gyeonggi NCS 100 492 1 491 - 4 Nowon CATV 100 5,015 3,063 1,952 - -125 C&M Media One 100 2,199 6,227 -4,028 8,035 -1,031 C&M Teleworks 100 2,261 6,747 -4,485 10,485 -1,301 C&M Eastern Gyeonggi CATV 100 21,029 4,639 16,390 16,033 643 C&M Gangnam CATV 84.97 123,098 16,734 106,364 63,697 10,341 IHQ 58.86 61,133 26,590 34,543 35,946 -5,721 Owner- Operating CU Media’s subsidiary Assets Liabilities Capital Net profit ship revenue AXN Korea 51 9,638 5,987 3,651 7,816 -3,146 Notes: Acquired stake in IHQ in Apr. 2015; 2014 figures reported on a non-consolidated basis Source: FSS, company data, KDB Daewoo Securities Research
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2. Digital broadcasting: Mobile is key
(1) OTT has yet to take off full swing OTT services (N-screen) emerged as a game changer in the US pay-TV market following the completion of that country’s digital transition. We believe Korean pay-TV operators will also need to brace for the growth of the mobile platform in digital broadcasting.
OTT has not yet begun full-swing growth in Korea. Currently, mobile platforms in Korea offer exactly the same video content that can be enjoyed at home, but we now see a growing need for mobile-specific strategies.
Among N-screen services available in the domestic market, Tving—the first to hit the market—is believed to have the largest subscriber base. Among Android users, however, mobile IPTV services had more unique users (as of March 2015), possibly thanks to the large number of telcos’ existing mobile subscribers. Telcos offer such services at a discount for existing customers via bundling, and we believe they are better positioned to launch mobile-specific services given their experience in the wireless business.
In the US, the emergence of OTT had a damaging impact on existing pay-TV services due to its unrivalled price competitiveness. Given that Korea’s pay-TV ARPU is already low, however, OTT is likely to have a muted impact on the domestic market, and should simply become another source of revenue. And it should generate more and more revenue as service coverage widens (from indoors to outdoors/on-the-go, and from households to single-person households and individual subscribers).
Figure 29. Subscribers and monthly unique visitors to domestic N-screen apps (including mobile IPTV)
(mn persons) 8 Number of subscribers Monthly unique visitors
6
4
2
0 Tving Hoppin pooq Btv mobile U+HDTV Olleh TV mobile CJ HelloVision SK Telecom Content Alliance SK Telecom LG Uplus KT (SK Planet) Platform (SK Broadband)
Notes: Number of subscribers includes free subscribers (as of Jan.16th); Monthly unique visitors is based on Android app traffic in Mar. 2015; pooq is built in mobile IPTV, B tv mobile, U+HDTV, Olleh tv mobile, as PIP Source: Digital Times, Koreanclick, KDB Daewoo Securities Research
Figure 30. Mobile OTT likely to become new revenue source
Media used to watch VOD
Tablet PC 4%
Smartphone 25% Hellovision TV 54%
Single household, General household outdoor/mobile PC (ARPU about W10,000) environment 17% (ARPU W3,000-W10,000)
Source: KISDI, company data, KDB Daewoo Securities Research
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(2) Global OTT strategies: Netflix is a global success OTT service providers can expand overseas with relative ease, as the business does not require licenses or its own network infrastructure. Netflix, an internet streaming-media service headquartered in the US, operates in around 50 countries, having recently added Cuba, Australia, and New Zealand. It plans to expand into other countries, including China and Japan, next year, and hopes to increase its coverage to 200 countries by end-2016.
Netflix’s stronger-than-anticipated net subscriber addition (4.88mn) in 1Q15 has sent the stock higher. At the initial stage of growth, Netflix attracted customers with cheap prices. However, its strategy is evolving, as evidenced by the in-house production of the hugely popular show House of Cards. Now, an increasing number of viewers are purchasing subscriptions for Netflix’s exclusive content, and not simply because of its cheap price or high-quality streaming. The strong subscriber numbers in 1Q—driven mainly by the addition of exclusive content—has stoked particularly strong demand for Netflix’s stock given that subscriber growth slowed last year.
In April, the traditional media company Time Warner launched a new streaming service called HBO Now (after debuting the service via Apple in March). HBO is one of the most popular cable TV channels in the US, airing shows such as Game of Thrones. Although a monthly subscription to HBO Now is roughly US$7 more expensive than Netflix, we are upbeat on the new service given the growing importance of content in the OTT business.
Figure 31. Netflix’s number of subscribers and total market value
(mn persons) (US$bn) 70 Free streaming subscribers (L) 40 Paid streaming subscribers (L) 60 Netflix market value (R) 30 50
40 20 30
20 10 10
0 0 2011 2012 2013 2014 1Q15
Notes: 1Q15 subscriber data based on end-1Q; Total market cap as of 1Q earning release Source: Netflix, Thomson Reuters, KDB Daewoo Securities Research
Figure 32. Netflix’s coverage distribution: Entry into Asia planned for next year
Source: Company data, KDB Daewoo Securities Research
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(3) Telcos expand into OTT Aside from traditional media and internet service providers, an increasing number of telcos are also expanding into OTT around the globe. Korean telcos—which were the first to introduce LTE services—have taken the lead once again, becoming the first telcos to release OTT services, including mobile IPTV (where content can be viewed over an LTE network). Foreign telcos followed suit, with Singtel (early this year), PCCW (March) and Deutsche Telekom (March) acquiring or launching OTT services. European carriers and SoftBank of Japan also moved proactively to tap into the OTT market at the end of last year.
While telecom carriers have been reluctant to introduce OTT over their fixed-line networks, citing net neutrality, they seem more open to mobile-based OTT, given the possibility of additional revenue generation. Indeed, telcos can charge for such data use in addition to monthly subscriptions. Moreover, as mobile data is charged on a pay-per-use basis, mobile-based OTT is relatively free from net neutrality concerns.
Table 4. Status of foreign telcos’ OTT video service releases Date Telco Service Details Mar. 2015 PCCW (HK) Vuclip Acquired global mobile VOD service Vuclip; Expanding coverage to Mar. 2015 Deutsche Telekom VideoRise OfferingAsia, Middle VideoRise East, etc. in partnership with global program provider Jan. 2015 Singtel HOOQ ReleasedVubiquity service in Asia after establishing JV with Sony and Warner Dec. 2014 Tele2 Russia Tele2 TV ReleasedBros. N-screen TV app for mobile devices in Russia Dec. 2014 Cellcom Israel Cellcom TV Offering Cellcom TV in partnership with Vubiquity Dec. 2014 T-Mobile Czech Nangu.TV Expanded existing partnership with OTT Nangu.TV Nov. 2014 Softbank (JP) BB TV Next Operated by subsidiary TV Bank; Planning to expand to 50 channels Source: News reports, KDB Daewoo Securities Research(from current 12) by spring 2016
Figure 33. Domestic mobile video market growth being driven mainly by telcos’ OTT services
(mn min.) SKT B tv mobile LGU U+ HDTV 600 KT Olleh TV mobile CAP pooq for Android Top three telco OTTs SK Planet T store VOD CJ HelloVision Tving 500 SK Planet Hoppin
400
300
200
100
0 4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
Notes: Based on monthly total service hours on Android app Source: Koreanclick, KDB Daewoo Securities Research
Figure 34. LTE conversion has been an important factor for domestic telco’s ARPU growth; Demand for mobile video expected to rise further
(W) (mn min.) 38,000 Avg. total usage time of three major telcos' IPTV (R) 400 Three major telcos' average ARPU (L) 37,000 300 36,000
35,000 200
34,000 100 33,000
32,000 0 13.4 13.7 13.10 14.1 14.4 14.7 14.10 15.1
Notes: Sum of monthly total service hours for Mobile IPTV B tv mobile, Olleh TV mobile and U+HDTV Android app ; ARPU is conversion of quarterly average to monthly basis Source: SK telecom, KT, LG Uplus, Koreanclick, KDB Daewoo Securities Research
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3. Business models: Diversification
(1) Platform business to add revenue We believe domestic pay-TV companies are actively diversifying their business models. The domestic market, despite its relatively small size, is a useful test bed for various pay-TV business models, given the abundance of trend-conscious customers and the large number of companies.
In particular, we note the growth of the platform business, which directly affects pay-TV earnings. For pay-TV operators, having a platform business means having an additional source of revenue from existing businesses, such as T-commerce (from the home shopping business) and VOD ads (VOD business).
First, the IPTV VOD ad market is growing rapidly. Compared to general TV ads, advertising via IPTV VOD content allows advertisers to carry out more targeted ads to more active and engaged viewers. After growing slowly from 2009 to 2012, the market has been expanding sharply since 2013.
In 2013, telcos operating IPTV channels and cable SOs providing VOD services agreed to extend the holdback period—after which VOD content becomes free—from one to three weeks; this was done to accommodate requests by terrestrial broadcasters for VOD price hikes. This policy change has been one of the major drivers for the IPTV VOD market growth, as it pushed up demand for paid VOD, and IPTV channels introduced various monthly subscription schemes. Accordingly, advertising via IPTV VOD saw improved reach.
In 2014, while the overall ad market stagnated amid the aftermath of the ferry accident and the economic slowdown, the IPTV ad market grew markedly. In our view, the environment remains favorable for IPTV ads in 2015. Demand has strengthened since 2H14, with ad slots at three IPTVs having been sold out since last July. As of end-2014, the number of IPTV-subscribing households exceeded the 10mn mark. In addition, the average spending per advertiser is on the rise, which is boosting expectations for higher ad rates at IPTVs. Nasmedia, as a leading new media rep, stands to enjoy the greatest benefit from the growing IPTV VOD ad market.
Figure 35. IPTV VOD pre-loading ads draw attention from viewers
Terrestrial/cable: Many ads placed before the program
No. of Ads 1 Ads 2 Ads 3 Ads 4 ads
Olleh TV: Only one or two ads before the program
Source: KT Mhouse, Nasmedia, KDB Daewoo Securities Research
Figure 36. High growth in IPTV ad billings ; IPTV ads sold out since July 2014
(Wbn)
100 Volume of IPTV ads handled
IPTV ad slots of three 80 major operators sold out since July
60
40
20
0 09 10 11 12 13 14 15F
Notes: Three major IPTV companies combined Source: Nasmedia, KDB Daewoo Securities Research
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The T-commerce market is beginning to pick up. With T-commerce, which is based on data broadcasting technology, existing home shopping channels can be transmitted through both analog and digital systems in real-time, as programs are aired. As the Ministry of Science, ICT, and Future Planning withdrew plans to control T-commerce in December 2014, T-commerce programs can be broadcast through VOD and in real-time, similar to home shopping programs.
Pay-TV operators, which receive commissions for transmitting home-shopping programs, will also be able to receive commissions from T-commerce channels going forward. Currently, five non- home shopping companies—KTH, SK Broadband, i-digital, Dream Commerce (Hwasung Industrial), and TV Flea Market—as well as five home shopping channels (GS Home Shopping, CJ O Shopping, Hyundai Home Shopping, Lotte Home Shopping, and NS Home Shopping) hold T- commerce licenses.
Among those, the companies that have already launched T-commerce channels are mostly non- retail firms: KTH (channel name: K Shopping), i-digital (Shopping & T), Dream Commerce (Dream & Shopping), and SK Broadband (B shopping). Shinsegae is expected to acquire a stake in Dream Commerce. If retailers affiliated with large conglomerates enter the T-commerce business, the market’s growth should accelerate.
As of now, the T-commerce market is in the early stage of growth. Going forward, all of the companies that hold T-commerce licenses can be expected to enter the market. After the commoditization of services, channel operators will likely seek to expand coverage, pushing up billings and transmission commissions for pay-TV companies. Pay-TV operators should see an uptrend in transmission rates if an increase in billings leads to revenue growth, and if a rise in the number of shopping channels sparks competition for better channel numbers.
Figure 37. T-commerce market has ample room for growth
PC internet Mobile 77,728 Home shopping (live broadcasting) T-commerce (data broadcasting)
41.1 40.6 32,396
31,960 29.7 31,305
13,140 9,290 7.8 170 2,185
Annual transaction value (Wbn) Platform users and households Annual transaction value/users (mn persons) (W)
Notes: Based on 2014; T-commerce has expanded channels to other platforms besides KT since 2015 Source: Korea On-Line Shopping Association, MSIP, KCTA, KDB Daewoo Securities Research
(2) Beefing up the content business Besides the traditional platform business, pay-TV companies are now also turning to content in an effort to widen their subscriber bases. For such firms, strengthening the content business can help secure new sources of revenue. Such efforts could also serve as preemptive action ahead of the expected increase in content costs.
Faced with last year’s sharp slowdown in net subscriber growth amid intensifying competition and rising regulatory risks, KT Skylife began to beef up the content lineup at its operating subsidiary, Skylife TV. In addition, to strengthen brand identity, the company rebranded channel names to start with “Sky.”
Skylife TV increased the number of channels from seven to 11, including one—Sky Sports—that has managed to secure broadcasting rights from the Korea Baseball Organization (KBO). Using the technical advantages of satellite broadcasting, the company plans to raise the number of UHD channels to three. In addition, through cooperation with KTH, the company will likely be able to make VOD services available through all internet service providers. Previously, VOD services were provided only to bundled-product (KT’s IPTV and KT Skylife’s satellite) subscribers.
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Meanwhile, a potential increase in content costs is emerging as a major threat to domestic pay-TV operators. Since terrestrial broadcasters and pay-TV operators agreed on retransmission fees (per digital subscriber) for real-time content in 2012, digital subscribers incurred additional content costs. Retransmission fees could be raised again once the contract expires. By strengthening the content business, pay-TV companies should be able to secure additional sources of revenue, including ads and license fees, and improve its bargaining power in negotiations with broadcasters.
Figure 38. KT Skylife plans to increase the number of UHD channels to three by producing its own UHD content
Plan to have three UHD channels
Source: Skylife TV, KDB Daewoo Securities Research
Figure 39. Increase in content costs could prompt pay-TV operators to begin content production
(%) Pay-TV digital conversion rate (R) (%) 80 Terrestrial+PP broadcasing fee/CATV (SO+satellite) broadcasting fee (L) 74 80 69 62 70 IPTV entry 54 60 46
60 37 40 31 23 50 15 20 12 Terrestrial broadcasters and cable companies argue over retransmission fees 40 0 05 06 07 08 09 10 11 12 13 14
Notes: TV license fees only (except for program sales or additional revenue, etc.); KBS TV license fee (charged to viewers, not pay-TV operators) are also included Source: KCC, KDB Daewoo Securities Research
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(3) Sophistication of subscription models Pay-TV operators are also seeking to expand revenue by strengthening existing businesses, which includes efforts to make content subscription models more sophisticated. As broadcasting services are intangible experience goods, well-designed payment models are required for content to generate revenue. With Korea’s pay-TV ARPU at very low levels compared to global peers, domestic broadcasting service providers need to come up with models that lead to less resistance from consumers and encourage content consumption.
As mentioned previously, in 2013, telcos operating IPTV and cable SOs providing VOD services, at the request of terrestrial broadcasters, extended the holdback period of VOD and raised content prices to boost content revenue. Such measures gave rise to resistance from consumers. In an effort to capture demand from viewers who were hesitant to purchase VOD content and seeking more cost-efficient ways to consume content, pay-TV firms introduced fixed-rate monthly subscription schemes, in which subscribers use an unlimited amount of content at fixed subscription rates. After the extension of the holdback period of VOD in 2013, there was a sharp rise in subscribers to fixed-rate monthly fee schemes.
Of note, the pattern of digital content consumption is shifting from downloading to streaming— a shift already witnessed in the music market. In our view, a greater variety of monthly subscription schemes is necessary for video content to attract more subscribers. Pay-TV operators have already introduced subscription services for individual channels, as well as various packages for specific content (e.g., movies, US TV shows, etc.). They have also launched products targeting certain age groups. Going forward, we might also see products packaged by genre.
Figure 40. Price of VOD (W1,200) vs. monthly subscription (W4,900): Monthly subscriptions encouraged by showing subscription price next to unit price
W4,900 W1,200
Source: Tving, Company data, KDB Daewoo Securities Research
Figure 41. Viewers are increasingly streaming rather than downloading videos
(Wbn) IPTV monthly plan revenue (L) ('000 persons) 120 IPTV monthly plan subscribers (R) 1,400
Watching behavior shifting from download to streaming; Diversification of monthly plan types spurs subscriptions: 90 - Domestic broadcasting channel classification 1,050 (terrestrial, CJ E&M, JTBC) - Film-dedicated - US drama-dedicated 60 - Tailored to age, genre, etc. 700
30 350
0 0 2011 2012 2013 2014
Notes: 2014 figures are based on KDB Daewoo estimates Source: Company data, Parliament, Nasmedia, KDB Daewoo Securities Research
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4. Expectations for policy tailwinds
(1) Regulations on bundled products to accelerate ARPU normalization The government is currently working to revise regulations on telecom-pay TV product bundling under a framework of comprehensive measures to develop the broadcasting industry. The KCC plans to finalize the rule in 2H. The government believes improvement in ARPU for pay-TV platforms will be key for the broadcasting industry’s development, as any increase in ARPU should flow to content providers (terrestrial broadcasters and PPs).
New regulations on bundled products could include a ban on excessive discounts. Currently, MSIP does not allow discount rates for bundled products to exceed 30% of the price of individual products. A ban on excessive discounts would signal the ministry’s intention to remove downside pressure to ARPU and induce a steady rise in ARPU going forward. Easing price-cut competition would also lead to a decrease in marketing costs for companies.
Table 5. Revision to Notice on Telecommunication Bundled Products Subject Details Set forth details on prohibited acts regarding bundled products; Expected to be announced KCC in May-June. Task force teams to be assigned to investigate breaches. Task force teams to be assigned to study the strengthening market power of dominant MSIP players (to set forth pre-approval conditions) Oppose new regulations on bundled products (bundling allows the firm to offer products at SK Telecom cheaper prices) Largely favor the new regulation; SKT’s wireless market power affects the wired segment KT, LG Uplus competition Cable SOs Favor new regulations Source: Media press, KDB Daewoo Securities Research
Figure 42. Telco’s IPTV and broadband subscriber trend
(mn persons) (%) 20 IPTV subscribers (L) 80 Telco broadband subscribers (L) IPTV/broadband subscribers (R) 15 60
10 40
5 20
0 0 08 09 10 11 12 13 14
Source: Company data, MSIP, KCC, KDB Daewoo Securities Research
Figure 43. CJ HelloVision’s ARPS trend: Decreased amid competition for new subscribers, but likely to rise if bundled product regulations are introduced
(W) - ARPU fell as digital conversion accelerated (%) 15,000 Pay-TV ARPS (L) Discounts on bundled products likely increased due to 70 intensified competition for subscribers Broadcasting digital conversion rate (R) - Positive impact expected if excessive discounts are banned 60 14,000
50 13,000 40
12,000 30
11,000 20 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
Notes: ARPS (average revenue per subscriber) refers to total service revenue from one subscriber to CJ HelloVision, including broadband, VoIP, etc. Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 26
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5. Potential expansion of foreign capital
(1) Foreign ownership in pay-TV services remains restricted With firms and private funds from overseas bidding to acquire C&M, the possibility of foreign capital expanding in the domestic pay-TV market has emerged. In particular, since the US-Korea FTA provisions related to the media service segment took effect in March, market watchers have paid keen attention to whether the cap on foreign ownership will increase.
For now, foreign stakes in domestic pay-TV service providers remain capped at 49%. Under the US-Korea FTA, regulations affecting pay-TV services (including pay-TV offered through cable SOs, satellite TV, and IPTV) remain unchanged, or have been left for future negotiation. It seems unlikely that a foreign firm will acquire Kookmin Cable Investment’s (KCI) entire stake (93.81%) in C&M.
Table 6. Foreign capital-related clauses of domestic broadcasting laws Broadcasting law Details Impact Article 14 Investments by foreign capital Clause 1 Terrestrial broadcasters and public radio broadcasters shall not attract investments Attract foreign capital from foreign governments/institutions, foreigners, and entities in which foreign governments/institutions have a stake exceeding a certain proportion. However, subject to KCC approval, they may receive investments from foreign entities meant to promote education, physical activities, religious activities, and charities.
Table 7. US-Korea FTA media-related provisions (took effect on March 15th, 2015) Domestic services Details Impact Terrestrial broadcasters, No changes in foreign ownership and broadcast quotas Neutral satellite broadcasters, cable SOs Telecom/broadcasting No change to convergence (e.g., IPTV) services Neutral convergence services Cable program providers Some regulations will be eased, as follows: PP market competition is likely to intensify. Foreign stakes in Korean program providers will still be capped at 49% in the case of US global media groups could direct investments. However, foreigners that make indirect investments via a Korean expand into Korea. company will be allowed to own up to 100% (currently 50%) of Korean program providers, excluding news providers, multi-content providers, and home shopping channel operators.
The ceiling on the proportion of foreign programs carried by program providers will The number of foreign programs be eased. Program providers are currently required to have domestic content could expand. account for at least 35% of animated programs and 25% of movies. The required ratios will be lowered to 30% and 20%, respectively.
The quota will be lifted to 80% from 60% for any single country’s programs. The number of US programs could expand. Digital content Digital audio-video content services remain unregulated to promote competition. US global media groups could However, the government might intervene if access to domestic audio-video content expand into Korea. is difficult. Source: Ministry of Trade, Industry and Energy, KDB Daewoo Securities Research
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Valuation
1. Valuation gap with global peers narrowing
(1) Valuation discount easing Domestic pay-TV stocks traded at a discount to global peers last year, as they struggled with an industry slump, one-off negatives, and uncertainties (e.g., regulatory risks).
On the other hand, overseas peers traded at a premium, buoyed by: 1) eased investment burden following the completion of the digital transition, and 2) expectations for excess profits following market consolidation. Some stocks are generating a dividend yield of more than 3% thanks to stable free cash flow.
With domestic stocks picking up, however, the valuation gap has been narrowing. Nevertheless, CJ HelloVision and KT Skylife still seem undervalued relative to global peers. Factoring in P/E, ROE, and dividend yield, we believe KT Skylife is the most attractive among pay-TV stocks.
Table 8. Global pay-TV platforms (cable SO, satellite) profitability and valuation (Wbn, %, x) Total OP margin P/E P/B EV/EBITDA ROE Dividend Name of company mkt. cap 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F yield CJ HelloVision (Korea) 925 8.0 9.3 9.7 28.6 12.0 10.4 0.8 0.9 0.9 4.3 4.0 3.5 3.0 8.2 8.7 0.6 KT Skylife 918 12.5 14.0 14.2 15.8 13.9 13.0 2.0 1.9 1.7 5.4 4.9 4.5 13.2 14.4 13.8 2.1 Hyundai HCN 568 18.5 18.9 19.0 12.9 12.9 12.4 1.0 1.0 0.9 3.0 3.7 3.6 8.5 8.4 8.1 0.8 Sky Perfect JSAT (Japan) 2,432 12.6 13.0 13.9 19.3 16.4 14.7 1.2 1.2 1.1 4.6 5.6 5.1 6.6 7.6 8.4 1.5 Comcast (US) 160,026 21.7 22.4 22.6 20.0 18.2 16.1 2.8 2.7 2.5 8.4 8.0 7.5 16.2 15.3 16.0 1.7 Time Warner Cable 45,568 20.3 21.0 21.6 19.5 18.6 16.8 5.2 4.3 3.6 8.2 7.5 7.1 27.2 26.9 22.9 2.0 Liberty Global 47,648 12.2 15.0 17.6 - 162.7 63.4 3.1 3.2 3.4 11.5 10.0 9.4 -5.2 1.5 4.9 - Charter Communications 22,467 10.7 13.9 15.8 - 233.4 63.4 141.8 68.9 - 12.8 12.1 11.1 27.2 26.9 22.9 - Cablevision 5,502 14.3 14.3 14.8 21.0 22.0 19.7 - - - 7.7 7.2 7.0 - -4.3 -4.2 3.3 DirecTV (US) 47,552 15.4 16.0 15.9 14.5 14.7 13.8 - - 34.1 7.5 7.1 6.9 - -87.4 139.7 - Dish Network 34,968 12.5 12.0 11.7 35.0 42.0 40.2 16.0 11.3 8.4 13.3 12.7 12.5 63.2 32.6 24.9 - Shaw Communications 11,509 27.5 27.1 27.6 15.0 15.6 14.8 2.7 2.5 2.3 8.9 8.1 7.9 17.3 17.0 16.5 4.3 (Canada) British Sky (UK) 30,510 15.2 12.9 13.8 11.7 20.3 17.0 7.1 6.5 5.5 13.7 13.0 11.0 84.2 42.7 33.7 3.3 Beijing Gehua CATV 5,631 3.8 12.9 19.9 56.2 43.9 34.3 5.1 4.7 4.2 - 22.5 18.3 9.4 11.0 12.5 0.6 (China) Average 14.7 15.9 17.0 17.8 16.5 14.9 4.3 3.6 3.1 8.4 9.0 8.2 12.3 13.7 13.5 2.0 Note: Skylife and CJ HelloVision figures are KDB Daewoo Securities estimates; Excluded outlying values when calculating average; Dividend yield is based on 2015 KDB Daewoo Securities estimate Source: Bloomberg, KDB Daewoo Securities Research
Figure 44. Pay-TV forward P/E trend Figure 45. Pay-TV forward EPS consensus revision trend
(x) CJ HelloVision (-1Y=100) CJ HelloVision KT Skylife 35 KT Skylife 160 SK Broadband Time Warner Cable SK Broadband Comcast DirecTV Time Warner Cable Sky Perfect JSAT 30 Comcast 140 DirecTV Sky Perfect JSAT 120 25 100 20 80 15 60
10 40 Korean pay-TV stocks breaking away from undervaluation Korean pay-TV stocks adjusting upward this year 5 20 4/14 6/14 8/14 10/14 12/14 2/15 4/15 14.4 14.6 14.8 14.10 14.12 15.2 15.4
Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research
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2. Expectations for dividends
(1) Steady dividend plays could trade at a premium Like telecom stocks, pay-TV stocks are generating stable dividend yields, as their business models are not vulnerable to the economy. Steady dividend payout should provide support for these stocks. Overseas telecom stocks often trade at a premium owing to high dividend yields.
US-based Comcast saw a full-swing improvement in free cash flow as the country’s digital transition neared completion. Since then, the company’s dividend yield has remained at roughly 2%.
Currently, KT Skylife is generating a dividend yield of around 2%, partly in order to help its parent company KT make up for deteriorating cash flow. Last year, KT Skylife maintained a dividend payout ratio of 30% despite a decline in operating profit (caused by one-off expenses associated with an international lawsuit and a requirement to switch standard-definition subscribers to high- definition broadcasting). With the dissipation of one-off factors, dividend yields are likely to be stable.
Among telecom stocks that operate IPTV businesses, SKT appears the most attractive in terms of dividend yields (mid-3% level). In addition, we note the possibility that SKT might buy back shares to acquire the remaining stake in SK Broadband.
Figure 46. Comcast paid out steady dividends with recovery of FCF at the end of digital conversion
(%) (US$) 2.5 Comcast FCF per share (R) 8 Comcast dividend yield (L)
2.0 Dividend payout begins 6 - FCF per share recovers amid end of digital conversion 1.5 and industry integration 4 1.0
2 0.5
0.0 0 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 Notes: FCF per share is applied with 12-month forward estimate Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 47. KT Skylife started to pay out dividends as subscriber growth (since 2012) helped FCF recover
(%) (W) 3.0 KT Skylife FCF per share (R) 5,000 KT Skylife dividend yield (L) 2.5 Dividend payout begins -FCF per share 4,000 recovers as earnings 2.0 increase due to platform revenue 3,000 1.5 2,000 1.0
1,000 0.5
0.0 0 1Q11 1Q12 1Q13 1Q14 1Q15 Notes: FCF per share is applied with 12-month forward estimate Source: Thomson Reuters, KDB Daewoo Securities Research
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Key Recommendations
SK Telecom (017670 KS/Buy) Making inroads into media based on mobile leadership Pay TV: Mobile leadership to drive the media business Focusing on mainstay telecom business as well as new businesses Valuation: Maintain Buy and TP of W380,000; Top pick in media/telecom
KT Skylife (053210 KS/Buy) Uncertainties are dissipating Pay-TV business: UHD and DCS to be the focus Earnings forecast: Increase in earnings and dividend payout anticipated Valuation: Upgrade to Buy; Raise TP to W24,000
CJ HelloVision (037560 KS/Buy) Combining prudent and bold strategies Pay TV: ARPU to normalize; Digital conversion to provide earnings opportunity Other business: MVNO to break even Valuation: Raise TP to W16,000; Maintain Buy
KT (030200 KS/Buy) The light at the end of the tunnel Combined market share regulations: Negative, but largely insignificant Financial position to strengthen on proceeds from subsidiary sale (end-May) Valuation: Maintain Buy with TP of W40,000
LG Uplus (032640 KS/Buy) Pursuing Netflix-style content strategy based on LTE strength Pay TV: Pursuing exclusive mobile content strategy based on LTE strength Major business: Net subscriber additions continued in the MNP market Valuation: Reiterate Buy and TP of W16,000
KT Hitel (036030 KQ/Buy) Content and commerce businesses key for KT’s media strategy Pay TV: Content and commerce businesses to play a key role in KT Group’s media strategy Other flagship businesses: Coverage of T-commerce business to expand Valuation: Upgrade to Buy; Raise TP to W17,000
Nasmedia (089600 KQ/Buy) Well-positioned to take advantage of current media usage trends Pay TV: All of KT’s IPTV ad slots have been sold since June 2014 Major business: Solid mobile ad revenue growth Valuation: Maintain Buy and raise TP to W40,000
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SK Telecom (017670 KS) Making inroads into media based on mobile leadership
Telecom Service Pay TV: Mobile leadership to drive the media business
SK Telecom (SKT) stands to enjoy the most benefit from the increasing personalization (Maintain) Buy of broadcasting services. The company is the biggest telco in Korea, accounting for total mobile phone subscribers. In addition, the company holds SK Broadband, the fastest- Target Price (12M, W) 380,000 growing IPTV operator, and B tv mobile, an OTT service provider, under its umbrella. SKT is also set to take full ownership of SK Broadband on June 9th.
Share Price (04/23/15, W) 275,000 The media business is gaining increasing importance for telcos. SKT’s IPTV business has been generating additional revenue sources, including monthly fixed-rate subscription Expected Return 38% revenue, VOD ads, and T-commerce. The business also helps the company retain mobile and fixed-line service subscribers. In addition, mobile OTT services boost data revenue. OP (15F, Wbn) 2,129 Among the various N-screen applications available, an increasing amount of user traffic Consensus OP (15F, Wbn) 2,186 is being concentrated in telcos’ mobile IPTV services such as B tv mobile. Accordingly, EPS Growth (15F, %) 17.7 SKT is expected to see growth in both the media and telecom businesses going forward. Market EPS Growth (15F, %) 38.8 Focusing on mainstay telecom business as well as new businesses P/E (15F, x) 10.5 Market P/E (15F, x) 11.0 SKT is focusing on improving the profitability of its mainstay telecom business in 1H. KOSPI 2,173.41 Although the company’s voluntary retirement program in 1Q should push up costs in the Market Cap (Wbn) 22,205 short term, it should help reduce personnel and other related costs going forward. After Shares Outstanding (mn) 81 making SK Broadband a wholly-owned subsidiary, the company will likely carry out Free Float (%) 62.5 organizational and business restructuring for the media business to further improve Foreign Ownership (%) 44.3 efficiency and lower costs. Beta (12M) 0.43 SKT also plans to spur growth in new businesses. The new CEO hopes to steer the 52-Week Low 203,000 company toward a leading position in the platform segment. Among major global telcos, 52-Week High 301,000 Softbank has been the most aggressive in developing the platform business, having (%) 1M 6M 12M pursued gradual expansion and M&A strategies based on the belief that telcos need to Absolute -1.6 2.4 34.8 focus on platforms to take advantage of the telecom infrastructure. In addition, because Relative -7.8 -9.0 24.1 of the nature of OTT platforms, it is relatively easy for them to expand into the global market. It is worth paying attention to whether SKT’s outreach to the platform business 160 SK Telecom KOSPI delivers the anticipated results. 140
120 Valuation: Maintain Buy and TP of W380,000; Top pick in media/telecom
100 We maintain our Buy call on SKT and our target price of W380,000. The short-term outlook is unfavorable in light of retirement-related costs and the KCC’s expected 80 4.14 8.14 12.14 4.15 imposition of fines and a business suspension. However, the stock is anticipated to regain attractiveness on the back of earnings recovery in 2H, an additional share buyback, and larger dividend payout .
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 16,141 16,602 17,164 17,942 18,641 19,203 OP (Wbn) 1,730 2,011 1,825 2,129 2,277 2,293 OP margin (%) 10.7 12.1 10.6 11.9 12.2 11.9 NP (Wbn) 1,152 1,639 1,801 2,119 2,251 2,263 EPS (W) 14,263 20,298 22,307 26,244 27,874 28,022 ROE (%) 9.8 13.0 12.9 13.9 13.5 12.4 P/E (x) 10.7 11.3 12.0 10.5 9.9 9.8 P/B (x) 0.9 1.2 1.3 1.2 1.1 1.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
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Mobile leadership to drive the media business
The media business is gaining increasing importance for telcos. SKT’s IPTV business has been generating additional revenue sources, including monthly fixed-rate subscription revenue, VOD ads, and T-commerce. The business also helps the company retain mobile and fixed-line service subscribers. In addition, mobile OTT services boost data revenue.
Unlike corporate groups that have pay-TV operators as subsidiaries, SK Group has no subsidiary in charge of content production and programming. SKT sold a content production subsidiary, and SK Broadband is banned from having a direct operating channel under the IPTV Act.
Meanwhile, among major media groups (KT, CJ, Taekwang, and SK), SK Group has been expanding its presence in the service/distribution segment the most rapidly. SK Broadband’s Btv is seeing the highest net subscriber increase, and in the OTT service segment, B tv mobile is enjoying the strongest traffic growth. SK Planet has already been providing internet-based media services through Hoppin and T-store.
Among the various N-screen applications available, an increasing amount of user traffic is being concentrated in telcos’ mobile IPTV services such as B tv mobile. Accordingly, SKT is expected to see growth in both media and telecom businesses going forward.
Figure 48. SKT’s pay-TV value chain
Production/ Service/distribution Device programming
Cost Revenue Pay TV Content Subscriber provider Program SK Broadband: B tv IPTV, B tv mobile Service usage usage fee SK Planet: OTT Hoppin, T store VOD fee
Revenue
Trans- mission fees
T-commerce operator SK Broadband (cooperation with SK Planet)
Source: KDB Daewoo Securities Research
Figure 49. SKT’s media service subscriber trend
('000 persons) OTT hoppin unique visitors 8,000 OTT T store VOD unique visitors OTT B tv mobile unique visitors IPTV B tv subscribers 6,000
4,000
2,000
0 4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
Notes: Number of OTT users based on Android app monthly unique users Source: SK Broadband, Koreanclick, KDB Daewoo Securities Research
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Media business to support telco’s core businesses
Aside from traditional media and internet service providers, an increasing number of telcos are also expanding into OTT around the globe. While telecom carriers have been reluctant to introduce OTT over their fixed-line networks, citing net neutrality, they seem more open to mobile-based OTT.
Among Android users, mobile IPTV services had the most unique users as of March 2015. And SKT’s B tv mobile is one of the leading choices among mobile IPTV users. We believe the strong traffic to mobile IPTV services is attributable to telcos’ large number of existing mobile subscribers. Telcos offer such services at a discount for existing customers via bundling, and we believe they are better positioned to launch mobile- specific services given their experience in the wireless business.
OTT services allow telcos to charge for data use in addition to monthly subscriptions. Moreover, as mobile data charges are on a pay-per-use basis, mobile-based OTT is relatively free from net neutrality concerns. The ease with which customers can be charged (monthly subscription plus data charges) is another positive.
Telcos can also utilize OTT services to raise ARPU. Once the switch to LTE is complete, mobile carriers will need to find ways (e.g., mobile video traffic such as OTT) to generate additional revenue from existing LTE subscribers.
Moreover, OTT can become a useful tool for carriers to expand overseas. PCCW, which operates telecom (HKT) and media businesses in Hong Kong, recently expanded its operations to Asia and the Middle East by acquiring an equity stake in Vuclip, a global mobile VOD service provider.
Table 9. OTT video service released by foreign telcos Date Telco Service Detail Acquired Vuclip, a global mobile VOD service provider; expanding Mar. 2015 PCCW (HK) Vuclip regional coverage to include Asia and the Middle East Deutsche Offering VideoRise in partnership with Vubiquity,a global Mar. 2015 VideoRise Telekom contents program supplier Jan. 015 Singtel HOOQ Launched services in Asia via a JV with Sony and Warner Bros. Operated by subsidiary TV Bank; planning to expand to 50 Nov. 2014 Softbank (JP) BB TV Next channels by next spring Source: News reports, KDB Daewoo Securities Research
Figure 50. SKT’s ARPU and total time spent on B tv mobile
(W) (mn min.) 38,000 SKT B tv mobile total usage time 600 SKT ARPU (L) 500 37,000
400 36,000 300 35,000 200
34,000 100
33,000 0 4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
Notes: Total time spent on B tv mobile based on total monthly service hours spent on Android app; ARPU is monthly average for each quarter Source: Company data, Koreanclick, KDB Daewoo Securities Research
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SKT to take full ownership of SK Broadband
On June 9th, SKT will purchase the 49.44% stake in SK Broadband that it does not own already, taking full ownership of the subsidiary. SKT will give 0.0168936 SKT treasury shares for every common stock held by SK Broadband shareholders, at W285,434 for SKT shares and W4,822 for SK Broadband shares.
For the acquisition, SKT will distribute 2.47mn treasury shares (out of 9.8mn; 12.15% of total shares issued). Once the acquisition is finalized, the company may buy back treasury shares to strengthen its managerial control and increase shareholder returns.
The value of SK Broadband’s traditional business (wired network) has declined significantly, while that of its media business (IPTV) is growing. We see huge growth potential in the media business, in light of the following: 1) SK Broadband’s media content can be used on both wired and wireless LTE networks thanks to compatible copyright (e.g., the B tv mobile service). 2) Media services are often offered via product bundling (combined with traditional telecom services), helping prevent customer attrition. 3) The digital transition is likely to lead to higher ARPU, aided by greater VOD demand and T-commerce. 4) This year, new home shopping companies will begin operations, and T-commerce, still in its infancy, has much room for growth, generating platform revenue as well as monthly subscription revenue.
Meanwhile, SKT will need to strengthen its negotiating power to effectively deal with growing risks in the media industry. SK Broadband’s IPTV business, SKT’s B tv Mobile (in partnership with SK Broadband), and SK Planet’s Hoppin mostly function as content distribution platforms, and thus face the risk of higher content prices (due to pressure from content producers and broadcast stations). Competition from foreign rivals (Netflix’s OTT platform, Disney’s content, etc.) also poses a risk. We believe SKT’s full ownership in SK Broadband will help increase its negotiating power.
Table 10. Stock exchange between SKT and SK Broadband SK Broadband SKT (Wholly-owned (Parent company) subsidiary) Base price (W) 285,434 4,822 Share price for merger (W, per share) 285,434 4,822 Exchange ratio 1 0.0168936 Face value (W) 500 5,000 Number of SK Broadband shares currently owned 149,638,354
- Ownership (%) 50.56
Contract date March 23rd March 23rd Confirmation of shareholder list April 6th April 6th General shareholders’ meeting N/A April 21st Submission of dissent April 6-20th April 21st-May 5th General shareholders’ meeting for share exchange May 6th May 6th approval Appraisal rights Not assigned Assigned May 6- 26th Exercise price for appraisal right (W) N/A 4,645 Surrender of old shares N/A May 7th-June 8th Date of exchange/transfer June 9th June 9th Number of outstanding shares 80,745,711 295,959,087 Delisting date N/A June 30th Source: Company data, FSS, FnGuide, KDB Daewoo Securities Research
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Table 11. SK Broadband’s annual earnings (Wbn, %, ‘000 persons) 2012 2013 2013 2014 2015F Revenue 2,492 2,539 2,539 2,654 2,862 Broadband 935 909 909 861 867 IPTV 220 345 345 477 629 Home phones 257 197 197 161 130 B2B 928 1,028 1,028 1,117 1,196 Other 153 60 60 40 40 Operating profit 82 73 73 58 82 OP margin 3.3 2.9 2.9 2.2 2.9 Net profit 23 12 12 4 34 Net margin 0.9 0.5 0.5 0.2 1.2 YoY Revenue 8.6 1.9 1.9 4.5 7.8 Broadband -2.8 -2.8 -2.8 -5.3 0.7 IPTV 44.6 56.7 56.7 38.3 31.9 Home phones -8.7 -23.2 -23.2 -18.6 -18.8 B2B 20.2 10.8 10.8 8.6 7.1 Other 19.3 -60.7 -60.7 -34.1 0.0 Operating profit 25.7 -10.7 -10.7 -20.5 41.5 Net profit TTB -46.8 -46.8 -64.9 686.4 Key indicators Broadband 4,394 4,569 4,569 4,810 5,047 IPTV subscribers 1,445 2,096 2,096 2,829 3,539 Phones subscribers 4,510 4,568 4,568 4,513 4,492 Notes: All figures are based on non-consolidated K-IFRS; 2015F is KDB Daewoo estimates Source: Company data, KDB Daewoo Securities Research
Figure 51. SK Broadband is increasing its UHD content and offering benefits via product bundling
Source: Company data, KDB Daewoo Securities Research
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Platform business and corporate value
In unveiling next-generation platform strategies at a press conference in April, SKT discussed plans to focus on three platforms: 1) lifestyle, 2) media, and 3) IoT services. It also announced plans to build an open ecosystem based on its telecom infrastructure, transitioning from the traditional, closed ecosystem of telcos. The announcement shows SKT’s determination to retain its mobile customers while also expanding customer base by offering innovative services that meet users’ needs. 1) To promote the lifestyle platform, SKT said it will focus on “three “Cs”—content, community, and commerce. In addition to its well-established commerce business through SK Planet’s 11th Street and SK Broadband’s B Shopping, the company is expected to further develop content and community services. 2) In the media segment, SKT aims to become a comprehensive media services provider. The company plans to expand the number of mobile and fixed-line service subscribers to 15mn by 2018, almost double the end-2014 level. The acquisition of full ownership in SK Broadband and SK Planet’s business portfolio adjustment are in line with this goal. 3) In the IoT service area, the company in May plans to launch a smart home service, whereby home appliances can be controlled using its Mobius platform. For this business, the company is cooperating with NSOK (SKT’s security subsidiary) and iRiver (a consumer electronics company). Among major global telcos, Softbank has been the most aggressive in developing the platform business, having pursued gradual expansion and M&A strategies based on the belief that telcos need to focus on platforms to take advantage of the telecom infrastructure. In addition, because of the nature of OTT platforms, it is relatively easy for them to expand into the global market. It is worth paying attention to whether SKT’s outreach to the platform business delivers the anticipated results.
Figure 52. SKT’s next-generation platform strategy
Next-generation platforms
Open ecosystem based on telecoms network Innovative services that satisfy the needs of customers
Lifestyle platform Media platform IoT service platform
Source: SK Telecom, Seoul finance, KDB Daewoo Securities Research
Figure 53. Softbank is increasing its enterprise value via global platform business
Source: Softbank, KDB Daewoo Securities Research
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Telecom margins to improve; New businesses to take off
SKT is focusing on improving the profitability of its mainstay telecom business in 1H. Although the company’s voluntary retirement program in 1Q should push up costs in the short term, cutting surplus staff should help the company reduce personnel and other related costs going forward. Once SK Broadband becomes a wholly-owned subsidiary, the company will likely carry out organizational and business restructuring for the media business to further improve efficiency and lower costs.
SKT also plans to spur growth in new businesses, with platform likely to be the main focus. New businesses are anticipated to generate over W1tr in revenue this year, up from W900bn in 2014.
Table 12. Quarterly and annual earnings trends (Wbn, %, ‘000 persons) 1Q14 2Q14 3Q14 4Q14 1Q15F 2Q15F 3Q15F 4Q15F 2013 2014 2015F Revenue 4,202 4,305 4,368 4,289 4,287 4,429 4,492 4,734 16,602 17,164 17,942 Parent 3,264 3,265 3,304 3,181 3,246 3,275 3,312 3,506 12,860 13,013 13,339 Wireless 3,037 3,035 3,055 2,926 2,994 3,021 3,035 3,222 12,008 12,053 12,271 New 227 229 249 255 252 254 276 285 852 960 1,067 Subsidiaries 938 1,040 1,064 1,110 1,041 1,154 1,180 1,227 3,742 4,151 4,603 Operating profit 252 546 537 490 514 474 584 557 2,011 1,825 2,129 OP margin 6.0 12.7 12.3 11.4 12.0 10.7 13.0 11.8 12.1 10.6 11.9 Net profit 267 498 531 503 537 483 573 535 1,609 1,799 2,128 Net margin 6.4 11.6 12.2 11.7 12.5 10.9 12.8 11.3 9.7 10.5 11.9 QoQ Revenue -2.2 2.5 1.5 -1.8 -0.1 3.3 1.4 5.4 Parent -1.6 0.0 1.2 -3.7 2.0 0.9 1.1 5.9 Wireless -1.0 -0.1 0.7 -4.2 2.3 0.9 0.5 6.1 New -8.5 0.9 8.7 2.4 -1.2 0.9 8.7 3.0 Subsidiaries -4.2 10.9 2.3 4.3 -6.2 10.9 2.3 4.0 Operating profit -50.6 116.5 -1.7 -8.7 5.0 -7.9 23.3 -4.7 Net profit -9.0 86.2 6.7 -5.2 6.6 -10.1 18.8 -6.6 YoY Revenue 3.4 4.6 5.9 -0.1 2.0 2.9 2.9 10.4 1.9 3.4 4.5 Parent 4.9 1.7 2.5 -4.1 -0.6 0.3 0.2 10.2 4.3 1.2 2.5 Wireless 3.4 1.0 1.9 -4.6 -1.4 -0.5 -0.6 10.1 2.7 0.4 1.8 29. New 11.7 11.2 2.8 11.0 11.0 11.0 11.7 33.5 12.7 11.2 7 Subsidiaries -1.6 14.6 17.9 13.4 11.0 11.0 11.0 10.6 -5.7 10.9 10.9 Operating profit -37.7 0.1 -2.7 -3.8 104.1 -13.2 8.8 13.6 14.3 -9.2 16.6 Net profit -22.7 6.4 5.7 71.4 100.8 -3.0 8.0 6.3 44.2 11.8 18.3 Key indicators Wireless 27,814 27,889 28,403 28,613 28,400 28,596 28,791 29,183 27,352 28,613 29,183 subscribers LTE subscribers 14,773 15,381 16,212 16,737 17,295 17,853 18,411 18,969 13,487 16,737 18,969 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research
Table 13. Earning forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 15F 16F 15F 16F 15F 16F Revenue 17,926 18,559 17,942 18,641 0.1 0.4 - Revised up number of LTE subscribers Operating profit 2,251 2,260 2,129 2,277 -5.4 0.8 - Reflected voluntary retirement costs and later effects Net profit 2,207 2,221 2,128 2,260 -3.6 1.8 - Reflected dividend income from SK Hynix and KCC penalty EPS 27,397 27,577 26,244 27,874 -4.2 1.1 OP margin 12.6 12.2 11.9 12.2 Net margin 12.3 12.0 11.8 12.1 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to accumulation of controlling interests and minority interests; EPS is based on controlling interests Source: KDB Daewoo Securities Research
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April 23, 2015 Media/Telecom Service
SK Telecom (017670 KS/Buy/TP: W380,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 17,164 17,942 18,641 19,203 Current Assets 5,083 6,049 6,583 8,230 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 834 1,359 1,748 3,249 Gross Profit 17,164 17,942 18,641 19,203 AR & Other Receivables 3,083 3,402 3,498 3,603 SG&A Expenses 15,339 15,814 16,364 16,910 Inventories 268 295 307 316 Operating Profit (Adj) 1,825 2,129 2,277 2,293 Other Current Assets 898 993 1,030 1,062 Operating Profit 1,825 2,129 2,277 2,293 Non-Current Assets 22,858 23,936 24,410 24,519 Non-Operating Profit 429 538 555 554 Investments in Associates 6,298 6,951 7,222 7,440 Net Financial Income -264 -232 -192 -131 Property, Plant and Equipment 10,568 10,730 10,737 10,441 Net Gain from Inv in Associates 906 830 850 850 Intangible Assets 4,402 4,552 4,702 4,852 Pretax Profit 2,254 2,667 2,832 2,847 Total Assets 27,941 29,985 30,993 32,750 Income Tax 455 539 572 575 Current Liabilities 5,420 5,863 5,263 5,411 Profit from Continuing Operations 1,799 2,128 2,260 2,272 AP & Other Payables 1,657 1,829 1,901 1,958 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,151 1,151 367 367 Net Profit 1,799 2,128 2,260 2,272 Other Current Liabilities 2,612 2,883 2,995 3,086 Controlling Interests 1,801 2,119 2,251 2,263 Non-Current Liabilities 7,273 7,412 7,470 7,516 Non-Controlling Interests -2 9 9 9 Long-Term Financial Liabilities 5,930 5,930 5,930 5,930 Total Comprehensive Profit 1,771 2,128 2,260 2,272 Other Non-Current Liabilities 1,343 1,482 1,540 1,586 Controlling Interests 1,778 2,125 2,256 2,268 Total Liabilities 12,693 13,275 12,733 12,927 Non-Controlling Interests -7 3 4 4 Controlling Interests 14,506 15,959 17,500 19,054 EBITDA 4,717 5,117 5,370 5,489 Capital Stock 45 45 45 45 FCF (Free Cash Flow) 669 1,376 1,555 1,815 Capital Surplus 2,916 2,916 2,916 2,916 EBITDA Margin (%) 27.5 28.5 28.8 28.6 Retained Earnings 14,189 15,641 17,182 18,736 Operating Profit Margin (%) 10.6 11.9 12.2 11.9 Non-Controlling Interests 742 750 760 769 Net Profit Margin (%) 10.5 11.8 12.1 11.8 Stockholders' Equity 15,248 16,709 18,260 19,823
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 3,677 4,526 4,655 4,715 P/E (x) 12.0 10.5 9.9 9.8 Net Profit 1,799 2,128 2,260 2,272 P/CF (x) 4.5 4.4 4.2 4.2 Non-Cash Income and Expense 2,979 2,929 3,007 3,052 P/B (x) 1.3 1.2 1.1 1.0 Depreciation 2,892 2,988 3,093 3,196 EV/EBITDA (x) 5.9 5.5 5.0 4.6 Amortization 0 0 0 0 EPS (W) 22,307 26,244 27,874 28,022 Others 87 -59 -86 -144 CFPS (W) 59,177 62,628 65,235 65,941 Chg in Working Capital -707 211 125 71 BPS (W) 206,159 224,145 243,233 262,471 Chg in AR & Other Receivables -221 -248 -103 -83 DPS (W) 9,400 10,000 10,000 10,000 Chg in Inventories 0 -28 -12 -9 Payout ratio (%) 37.1 33.3 31.4 31.2 Chg in AP & Other Payables -335 29 12 10 Dividend Yield (%) 3.5 3.6 3.6 3.6 Income Tax Paid -183 -539 -572 -575 Revenue Growth (%) 3.4 4.5 3.9 3.0 Cash Flows from Inv Activities -3,683 -3,482 -3,325 -3,111 EBITDA Growth (%) -2.6 8.5 4.9 2.2 Chg in PP&E -2,983 -3,150 -3,100 -2,900 Operating Profit Growth (%) -9.2 16.7 7.0 0.7 Chg in Intangible Assets -120 -150 -150 -150 EPS Growth (%) 9.9 17.6 6.2 0.5 Chg in Financial Assets -178 -182 -75 -61 Accounts Receivable Turnover (x) 7.4 7.1 6.9 6.9 Others -402 0 0 0 Inventory Turnover (x) 77.2 63.7 61.9 61.6 Cash Flows from Fin Activities -559 -696 -1,521 -735 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities 413 0 -784 0 ROA (%) 6.6 7.3 7.4 7.1 Chg in Equity 0 0 0 0 ROE (%) 12.9 13.9 13.5 12.4 Dividends Paid -667 -667 -709 -709 ROIC (%) 10.2 11.4 12.0 12.2 Others -305 -29 -28 -26 Liability to Equity Ratio (%) 83.2 79.4 69.7 65.2 Increase (Decrease) in Cash -564 525 388 1,502 Current Ratio (%) 93.8 103.2 125.1 152.1 Beginning Balance 1,399 834 1,359 1,748 Net Debt to Equity Ratio (%) 36.6 29.8 20.7 11.4 Ending Balance 834 1,359 1,748 3,249 Interest Coverage Ratio (x) 5.6 6.8 7.7 8.2 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 38
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
KT Skylife (053210 KS) Uncertainties are dissipating
Media Pay-TV business: UHD and DCS to be the focus Uncertainties over KT Skylife are gradually dissipating. The stock has underperformed on (Upgrade) Buy 1) uncertainties arising from the upcoming restriction on combined subscriber market share, and 2) a slowdown in subscriber growth. However, the combined market share restriction, in its final form, is unlikely to impact the company significantly, in our view. Target Price (12M, W) 24,000 In addition, the company will likely stage a recovery in net subscriber growth by bolstering its technological strengths and making up for its weaknesses. Share Price (04/23/15, W) 19,200 KT Skylife plans to make full use of the advantages of satellite TV. To take the lead in picture quality improvement—one of the broadcast industry’s biggest trends at the Expected Return 25% moment—the company is expected to release a UHD set-top box (in May), produce its own UHD content, and increase the number of UHD channels in 1H. With UHD TVs OP (15F, Wbn) 89 likely to get on the path to commoditization this year, it will be important to watch Consensus OP (15F, Wbn) 96 whether the company can differentiate itself among pay-TV operators as a digital satellite TV provider that is better positioned in terms of bandwidth. The company is EPS Growth (15F, %) 19.2 also likely to seek approval for the introduction of dish convergence solutions (DCS). Market EPS Growth (15F, %) 38.8 P/E (15F, x) 13.9 Furthermore, the company is anticipated to address its lack of VOD features, which is Market P/E (15F, x) 11.0 often cited as one of the major weaknesses of satellite TV. Via its affiliate KTH, the KOSPI 2,173.41 company plans to make VOD content available through any internet service provider. We are encouraged by the company’s efforts to bolster its strengths and make up for its Market Cap (Wbn) 918 weaknesses, as the essence of the pay-TV business is differentiation based on superior Shares Outstanding (mn) 48 service competitiveness. Free Float (%) 49.3 Foreign Ownership (%) 13.2 Earnings forecast: Increase in earnings and dividend payout anticipated Beta (12M) 0.10 This year, platform revenue is likely to increase, contributing to earnings improvement. 52-Week Low 15,150 Home shopping commission revenue, one of the sources of platform revenue, appears to 52-Week High 27,400 be on the rise. In addition, negotiations on a home shopping commission hike are (%) 1M 6M 12M currently underway. Of note, KT Skylife is expected to increase the number of T- Absolute 23.5 -3.0 -20.8 commerce channels. Relative 15.7 -13.8 -27.1 Last year, the company’s earnings were dented by one-off expenses arising from 1) the loss of a lawsuit and 2) mandatory conversion to HD channels for standard definition 130 KT Skylife KOSPI (SD) channel subscribers. This year, with the elimination of one-off items, earnings are 110 expected to pick up, while dividend payout should increase as long as the company’s payout ratio of 30% remains intact. 90
70 Valuation: Upgrade to Buy; Raise TP to W24,000 We upgrade our rating on KT Skylife from Trading Buy to Buy and raise our target price 50 4.14 8.14 12.14 4.15 to W24,000 (from W20,000). We eliminated the discount that we applied to our previous target P/E, as uncertainties over the company are dissipating. Our target price represents the average of 1) global peers’ average multiple times 2015F EPS, and 2) 2015F DPS divided by the stock’s 2014 dividend yield (1.9%). Various positive changes in the pay-TV market are likely to boost the stock.
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 551 600 623 637 661 682 OP (Wbn) 67 102 78 89 94 97 OP margin (%) 12.2 17.0 12.5 14.0 14.2 14.2 NP (Wbn) 56 73 56 66 71 73 EPS (W) 1,178 1,526 1,162 1,384 1,478 1,521 ROE (%) 17.6 19.3 13.2 14.4 13.8 13.0 P/E (x) 28.4 19.4 15.8 13.9 13.0 12.6 P/B (x) 4.6 3.4 2.0 1.9 1.7 1.5 Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 39
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
Focus on UHD and DCS, once uncertainties dissipate
Once uncertainties dissipate, shares should find revenue momentum from UHD and DCS, as well as the platform business.
Recently, regulatory risks have been one of the biggest concerns for the company. The enforcement decree of the Internet Multimedia Broadcasting Business Act (also dubbed the IPTV act) has been revised to restrict the subscriber market share of a pay-TV operator—based on the combined number of subscribers to all of its pay-TV services—to no more than one-third; the regulation is slated to take effect in June. If redundancy is not removed, KT will be in violation of the new subscriber cap, as the combined subscriber market share of its parent-based IPTV business and subsidiary KT Skylife exceeds the new cap.
We think the situation is not necessarily bleak for KT and KT Skylife, however. The market share restriction has a sunset provision, meaning it will be in effect for only three years before authorities reassess the rules and decide whether to change them. And it is unlikely that OTS subscribers will be counted redundantly. Based on the number of set- top boxes, we estimate that KT’s pay-TV market share will come out to approximately 29%, well below the one-third threshold.
Going forward, we expect KT Skylife to once again seek approval to introduce the DCS business, while focusing on the UHD business.
Figure 54. Pay-TV value chain
Production/ Service/distribution Device programming
Cost Revenue Content provider Pay TV Subscriber Skylife TV Program Service usage usage fee KT Skylife, satellite TV operator fee (subsidiary)
Revenue
Transmission fees
Home shopping/T-commerce operators
Source: KDB Daewoo Securities Research
Figure 55. Media service subscriber trend
('000 persons) (%) 4,300 KT Skylife subscribers (L) 56 % of KT-Skylife OTS bundling (R) 55 4,200 54
4,100 53
52 4,000
51 3,900 50
3,800 49 4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
Source: Company data, KDB Daewoo Securities Research
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KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
Aggressive improvement in content lineup and T-commerce business
Lately, KT Skylife has been reinforcing the content business in an effort to widen its subscriber base. The company suffered a sharp slowdown in net subscriber growth last year amid intensifying competition and rising regulatory risks. Strengthening the content business could help secure new sources of revenue, and could also serve as preemptive action ahead of the expected increase in content costs.
KT Skylife has begun to beef up the content lineup at its channel operating subsidiary, Skylife TV. In addition, the company rebranded channel names to start with “Sky” to strengthen its brand identity. Skylife TV increased the number of channels from 7 to 11, including one—Sky Sports—that has secured broadcasting rights from the Korea Baseball Organization (KBO). Making full use of the technical advantages of satellite broadcasting, the company plans to raise the number of UHD channels to three.
In addition, through cooperation with KTH, the company will likely be able to make VOD services available through all internet service providers. Previously, VOD services were provided to only bundled product (KT’s IPTV and Skylife TV’s satellite TV) subscribers.
We estimate that commissions paid by home shopping companies (recognized as platform revenue) have been growing, and negotiations on a hike to existing home shopping customers’ commissions are currently underway. KT Skylife has been the most aggressive in the pursuit of T-commerce channel programs, which pay as much commissions as home shopping companies. Currently, five non-home shopping companies (including KTH and SK Broadband) and five home shopping companies (i.e., GS, CJ, Lotte, Hyundai, and NS) have licenses for T-commerce programs.
Figure 56. KT Skylife plans to increase the number of UHD channels to three by producing its own UHD content
Obtained baseball broadcasting right Plan to have three UHD channels
Source: Company data, KDB Daewoo Securities Research
Figure 57. T-commerce has ample room for growth
PC internet Mobile 77,728 Home shopping (live broadcasting) T-commerce (data broadcasting)
41.1 40.6 32,396
31,960 29.7 31,305
13,140 9,290 7.8 170 2,185
Annual transaction value (Wbn) Platform users and households Annual transaction value/users (mn persons) (W)
Notes: As of 2014 (in 2015, others besides KT Group have started expanding into T-commerce) Source: Korea On-Line Shopping Association, MSIP, KCTA, KDB Daewoo Securities Research
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KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
Earnings to improve on growing platform revenue and the dissipation of one-off expenses
This year, platform revenue is likely to increase, contributing to earnings improvement. Commissions paid by home shopping companies appear to be on the rise. Negotiations on a home shopping commission hike are currently underway. Of note, KT Skylife is expected to increase the number of T-commerce channels.
Last year, the company’s earnings were dented by one-off expenses arising from 1) the loss of a lawsuit and 2) mandatory conversion to HD (from SD channel subscribers). This year, with the elimination of one-off items, earnings are expected to pick up, while dividend payout should increase as long as the company’s payout ratio of 30% remains intact.
Table 14. Annual earnings (Wbn, %) 1Q14 2Q14 3Q14 4Q14 1Q15F 2Q15F 3Q15F 4Q15F 2013 2014 2015F Revenue 151 155 161 156 153 156 163 165 600 623 637 Service 97 96 94 92 92 92 92 96 391 378 371 Platform 30 31 35 35 36 36 39 40 108 130 152 Cost-related 14 14 14 12 13 13 13 12 54 53 52 Other 11 15 19 18 11 15 19 18 48 62 62 Operating profit 32 17 8 21 27 16 22 23 102 78 89 OP margin (%) 21.3 11.1 4.8 13.2 18.0 10.3 13.2 14.1 17.0 12.5 13.9 Net profit 24 14 4 13 22 12 16 17 73 56 66 Net margin (%) 15.8 9.3 2.6 8.4 14.1 7.7 10.0 10.0 12.2 8.9 10.4 QoQ growth Revenue -2.7 2.3 3.7 -2.7 -2.4 2.4 4.5 1.4 Service -4.6 -1.1 -1.7 -2.6 0.0 0.2 0.3 4.0 Platform 0.4 4.4 11.4 0.2 5.2 0.0 7.8 2.0 Cost-related 6.7 0.0 0.1 -9.0 8.3 0.0 0.0 -10.0 Operating profit 61.3 -46.6 -55.2 167.5 33.5 -41.4 33.8 8.6 Net profit 101.2 -39.6 -71.4 217.3 64.7 -44.3 36.4 0.9 YoY growth Revenue 1.7 5.0 7.7 0.5 0.9 0.9 1.7 5.9 8.9 3.7 2.3 Service 1.0 -1.2 -3.5 -9.6 -5.3 -3.9 -2.0 4.6 7.9 -3.4 -1.8 Platform 13.1 21.1 32.3 17.0 22.6 17.4 13.7 15.7 34.4 20.8 17.1 Cost-related -1.9 -1.5 -0.7 -2.8 -1.3 -1.3 -1.4 -2.6 -5.3 -1.3 -2.0 Operating profit -8.8 -5.9 -72.9 3.1 -14.7 -6.3 180.0 13.7 45.3 -23.6 13.7 Net profit -13.4 17.8 -80.7 10.2 -9.8 -16.8 297.1 26.3 22.4 -23.8 19.5 Key variables and assumptions Cumulative subscribers 4,218 4,244 4,258 4,261 4,262 4,281 4,300 4,338 4,181 4,261 4,338 (‘000 persons) % of OTS subscribers 54 54 55 55 54 54 55 55 53 55 55 Notes: All figures are based on non-consolidated K-IFRS. Operating profit data pre-2014 is back-dated and adjusted for changes to accounting standards, and thus differs from FSS disclosures Source: Company data, KDB Daewoo Research estimates
KDB Daewoo Securities Research 42
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
KT Skylife (053210 KS/Buy/TP: W24,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 623 637 661 682 Current Assets 249 342 351 434 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 108 100 102 153 Gross Profit 623 637 661 682 AR & Other Receivables 88 93 97 100 SG&A Expenses 545 548 567 585 Inventories 3 3 4 4 Operating Profit (Adj) 78 89 94 97 Other Current Assets 50 146 148 177 Operating Profit 78 89 94 97 Non-Current Assets 421 387 354 328 Non-Operating Profit -9 -6 -6 -6 Investments in Associates 25 26 27 28 Net Financial Income 1 2 5 8 Property, Plant and Equipment 309 273 238 211 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 39 39 39 39 Pretax Profit 69 83 88 91 Total Assets 670 728 705 762 Income Tax 14 17 18 18 Current Liabilities 221 169 95 100 Profit from Continuing Operations 56 66 71 73 AP & Other Payables 0 0 0 0 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 80 20 -60 -60 Net Profit 56 66 71 73 Other Current Liabilities 141 149 155 160 Controlling Interests 56 66 71 73 Non-Current Liabilities 13 74 75 75 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 60 60 60 Total Comprehensive Profit 52 66 71 73 Other Non-Current Liabilities 13 14 15 15 Controlling Interests 52 66 71 73 Total Liabilities 235 243 169 175 Non-Controlling Interests 0 0 0 0 Controlling Interests 436 485 536 587 EBITDA 149 157 152 147 Capital Stock 120 120 120 120 FCF (Free Cash Flow) 33 105 108 104 Capital Surplus 161 161 161 161 EBITDA Margin (%) 23.9 24.6 23.0 21.6 Retained Earnings 161 211 262 313 Operating Profit Margin (%) 12.5 14.0 14.2 14.2 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 9.0 10.4 10.7 10.7 Stockholders' Equity 436 485 536 587
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 128 133 128 124 P/E (x) 15.8 13.9 13.0 12.6 Net Profit 56 66 71 73 P/CF (x) 5.6 6.2 6.5 6.9 Non-Cash Income and Expense 102 82 71 60 P/B (x) 2.0 1.9 1.7 1.5 Depreciation 68 65 55 47 EV/EBITDA (x) 5.4 4.9 4.5 4.1 Amortization 3 3 3 3 EPS (W) 1,162 1,384 1,478 1,521 Others 31 14 13 10 CFPS (W) 3,287 3,109 2,956 2,786 Chg in Working Capital -6 -1 0 1 BPS (W) 9,266 10,302 11,363 12,436 Chg in AR & Other Receivables 18 -5 -4 -3 DPS (W) 350 420 450 470 Chg in Inventories -3 0 0 0 Payout ratio (%) 30.0 30.2 30.3 30.7 Chg in AP & Other Payables -11 0 0 0 Dividend Yield (%) 1.9 2.2 2.3 2.4 Income Tax Paid -25 -17 -18 -18 Revenue Growth (%) 3.8 2.2 3.8 3.2 Cash Flows from Inv Activities -12 -123 -25 -51 EBITDA Growth (%) -9.7 5.4 -3.2 -3.3 Chg in PP&E -94 -28 -20 -20 Operating Profit Growth (%) -23.5 14.1 5.6 3.2 Chg in Intangible Assets -4 -3 -3 -3 EPS Growth (%) -23.9 19.1 6.8 2.9 Chg in Financial Assets 90 -92 -2 -28 Accounts Receivable Turnover (x) 6.6 7.0 7.0 6.9 Others -4 0 0 0 Inventory Turnover (x) 159.3 193.7 192.0 191.5 Cash Flows from Fin Activities -24 -17 -100 -21 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities -1 0 -80 0 ROA (%) 8.3 9.5 9.9 9.9 Chg in Equity 0 0 0 0 ROE (%) 13.2 14.4 13.8 13.0 Dividends Paid -22 -17 -20 -21 ROIC (%) 20.6 23.6 28.2 32.9 Others -1 0 0 0 Liability to Equity Ratio (%) 53.9 50.1 31.6 29.7 Increase (Decrease) in Cash 91 -8 2 51 Current Ratio (%) 112.6 201.9 371.0 435.4 Beginning Balance 17 108 100 102 Net Debt to Equity Ratio (%) -16.8 -32.2 -44.7 -54.1 Ending Balance 108 100 102 153 Interest Coverage Ratio (x) 21.0 23.6 49.9 0.0 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 43
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
CJ HelloVision (037560 KS) Combining prudent and bold strategies
Media Pay TV: ARPU to normalize; Digital conversion to provide earnings opportunity
CJ HelloVision, which holds cable SOs, has struggled with the changing business (Maintain) Buy environment. The company’s operating profit has declined for the past four years, eroded by: 1) the increased investment burden and expenses associated with digital Target Price (12M, W) 16,000 conversion, and 2) entry into the MVNO business. While the digital conversion has picked up speed, ARPU has deteriorated.
Share Price (04/23/15, W) 11,950 CJ HelloVision’s pay-TV business appears to have increasingly bright prospects. In the US, pay-TV ARPU tended to stagnate when the digital conversion accelerated, but rose Expected Return 34% markedly once the digital conversion and market consolidation were complete. As of end-2014, CJ HelloVision’s digital subscribers already accounted for 60% of overall OP (15F, Wbn) 126 subscribers. Consensus OP (15F, Wbn) 117 Under a profit-oriented policy, CJ HelloVision is likely to move away from intensive EPS Growth (15F, %) 192.2 marketing campaigns for IPTV services and take a conservative marketing approach. If Market EPS Growth (15F, %) 38.8 the government limits excessive discounts on bundled plans, ARPU should improve and P/E (15F, x) 12.0 marketing expenses should decrease. In addition, digital conversion should provide Market P/E (15F, x) 11.0 opportunities to generate additional revenue. VOD revenue made a 20% contribution to KOSPI 2,173.41 broadcasting service revenue in 2014, and is likely to continue to boost ARPU this year. Market Cap (Wbn) 925 Given the launch of the T-commerce channel, commission incomes are forecast to grow. Shares Outstanding (mn) 77 Free Float (%) 45.2 Other business: MVNO to break even Foreign Ownership (%) 9.0 CJ HelloVision suffered margin deterioration following expansion into the MVNO Beta (12M) 0.25 business in 2012. However, the company enjoys a first-mover advantage, as it is the 52-Week Low 8,640 leader in the MVNO market. With related revenue outstripping handset revenue, losses 52-Week High 17,800 have been declining. We expect the domestic MVNO market to undergo restructuring, (%) 1M 6M 12M with some retailers (e.g., Homeplus) having discontinued the MVNO business and Absolute 19.5 7.2 -32.9 second-tier players (e.g., Korea Post) suffering losses due to only meager net subscriber Relative 12.0 -4.7 -38.2 growth. Market realignment should benefit top-tier firms such as CJ HelloVision.
120 CJ HelloVision KOSPI Valuation: Raise TP to W16,000; Maintain Buy 100 We reiterate our Buy rating and raise our target price to W16,000 (from W13,000). 80 Although one-off losses emerged late last year, earnings are forecast to grow YoY this 60 year. We expect the company to see benefits from pay-TV/MVNO market restructuring. Our target P/E corresponds to the average of global cable SOs’ P/Es (16x). 40 4.14 8.14 12.14 4.15
FY (Dec.) 12/12 12/13 12/14F 12/15F 12/16F 12/17F Revenue (Wbn) 891 1,160 1,270 1,349 1,438 1,499 OP (Wbn) 149 116 102 126 140 151 OP margin (%) 16.7 10.0 8.0 9.3 9.7 10.1 NP (Wbn) 104 77 26 77 89 96 EPS (W) 1,347 994 341 996 1,148 1,235 ROE (%) 15.5 9.6 3.0 8.2 8.7 8.7 P/E (x) 10.4 19.3 28.6 12.0 10.4 9.7 P/B (x) 1.5 1.7 0.8 0.9 0.9 0.8 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 44
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
ARPU to normalize; Digital conversion to provide earnings opportunity
CJ HelloVision holds cable SOs (broadcasting service providers/program distributors) and Tving (an online/mobile distributor) under its umbrella. The company is a subsidiary of CJ, which has the most extensive value chain in the broadcasting business. CJ HelloVision is also affiliated with the program producer CJ E&M and with CJ O Shopping, which pays commissions to CJ HelloVision for using its network.
CJ HelloVision’s pay-TV business appears to have increasingly bright prospects. In the US, pay-TV ARPU tended to stagnate when the digital conversion accelerated, but rose markedly once the digital conversion and market consolidation were complete. As of end-2014, CJ HelloVision’s digital subscribers already accounted for 60% of overall subscribers.
In addition, the digital conversion should provide opportunities to generate additional revenue. VOD revenue made a 20% contribution to broadcasting service revenue in 2014, and is likely to continue to boost ARPU this year. With the launch of the T- commerce channel, commission incomes are forecast to grow.
Under a profit-oriented policy, CJ HelloVision is likely to move away from intensive marketing campaigns for IPTV services and take a conservative marketing approach. If the government limits excessive discounts on bundled plans, ARPU should improve and marketing expenses should decrease.
Figure 58. Pay-TV value chain
Production/ Service/distribution Device programming
Cost Revenue Content provider Pay TV Program 서비스 Subscriber Skylife TV usage fee CJ HelloVision, cable SO Service usage 사용료fee (subsidiary)
Revenue
Trans- mission fees
Home shopping operator CJ O Shopping (parent)
Source: KDB Daewoo Securities Research
Figure 59. Media service subscriber trend
('000 persons) OTT Tving (web) unique visitor 7,000 OTT Tving (app) unique visitors Cable CJ HelloVision subscribers 6,000
5,000
4,000
3,000
2,000
1,000
0 4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
Notes: OTT users based on monthly unique users Source: Company data, Koreanclick, KDB Daewoo Securities Research
KDB Daewoo Securities Research 45
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
Digital conversion to accelerate; MVNO to break even
We expect CJ HelloVision’s digital conversion to continue to accelerate this year. Digital subscribers are anticipated to account for around 70% of the overall number by the end of this year. The company is also considering M&A deals, but even without such deals, the company should be able to continue expanding its digital subscriber base.
The company enjoys a first-mover advantage as the leader in the MVNO market. With related revenue outstripping handset revenue, losses have been declining. We expect the domestic MVNO market to undergo restructuring, and market realignment should benefit top-tier firms such as CJ HelloVision.
Table 15. Quarterly and annual earnings trends (Wbn, %, ‘000 persons) 1Q14 2Q14 3Q14 4Q14 1Q15F 2Q15F 3Q15F 4Q15F 2013 2014 2015F Revenue 307 317 326 320 322 334 335 359 1,160 1,270 1,349 TV 106 104 106 108 109 110 112 121 383 423 452 Internet/Phone 50 50 50 50 47 46 46 49 197 199 189 Ads (incl. home shopping) 62 65 66 69 67 71 72 75 232 262 284 New businesses 75 71 87 73 83 85 87 89 289 305 343 Other 14 28 17 21 15 21 20 24 59 81 81 Operating profit 27 28 25 22 27 33 31 36 116 102 126 OP margin 8.9 8.7 7.7 6.9 8.4 9.7 9.4 9.9 10.0 8.0 9.4 Net profit 15 16 12 -17 17 21 20 20 77 26 77 Net margin 5.0 5.0 3.6 -5.4 5.2 6.3 6.0 5.5 6.6 2.0 5.7 YoY Revenue 12.1 11.4 9.0 5.7 4.8 5.1 2.8 12.1 30.2 9.5 6.2 TV 16.4 14.2 10.4 2.2 3.3 6.3 5.3 12.4 8.1 10.5 6.9 Internet/Phone 5.4 3.5 1.2 -5.8 -5.2 -6.2 -8.2 -0.8 8.6 0.9 -5.1 Ads (incl. home shopping) 14.5 18.0 16.8 4.3 7.8 7.9 8.0 9.2 10.1 13.0 8.3 New businesses 7.1 -6.9 5.9 19.9 10.7 19.9 0.1 21.7 183.3 5.8 12.4 Other 25.7 88.7 11.3 21.0 7.7 -23.5 13.9 14.2 39.1 36.2 0.0 Operating profit 6.4 16.6 -26.8 -31.6 -0.7 17.4 24.6 61.1 -22.5 -11.8 23.8 Net profit -6.9 -4.5 -54.2 TTR 9.1 31.2 72.9 -215.5 -26.3 -66.7 201.9 Key indicators Broadcast subscribers 3,969 4,011 4,169 4,146 4,164 4,196 4,221 4,246 3,950 4,146 4,246 MVNO subscribers 657 731 789 832 884 936 988 1,040 599 832 1,040 Notes: All figures are based on consolidated K-IFRS; new businesses include MVNO services and revenue from device sales; MVNO sales are booked on a net basis effective 4Q13; Net profit is attributable to controlling and non-controlling interests Source: Company data, KDB Daewoo Securities Research estimates
Figure 60. Digital conversion rate Figure 61. MVNO business trends and forecast
('000 persons) (%) (Wbn) ('000 persons) 5,000 Cable subscribers (L) 80 250 MVNO service revenue (L) 1,250 Digital conversion rate (R) MVNO subscribers (R) 4,000 70 200 1,000
3,000 60 150 750
2,000 50 100 500
1,000 40 50 250
0 30 0 0 10 11 12 13 14 15F 12 13 14 15F
Source: Company data, KDB Daewoo Securities Research estimates Notes: Excludes MVNO handset revenue Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 46
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
CJ HelloVision (037560 KS/Buy/TP: W16,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14F 12/15F 12/16F 12/17F (Wbn) 12/14F 12/15F 12/16F 12/17F Revenue 1,270 1,349 1,438 1,499 Current Assets 445 423 550 691 Cost of Sales 798 848 904 942 Cash and Cash Equivalents 85 42 144 268 Gross Profit 472 501 534 557 AR & Other Receivables 301 319 340 354 SG&A Expenses 370 375 394 406 Inventories 25 26 28 29 Operating Profit (Adj) 102 126 140 151 Other Current Assets 34 36 38 40 Operating Profit 102 126 140 151 Non-Current Assets 1,758 1,685 1,660 1,622 Non-Operating Profit -66 -23 -21 -22 Investments in Associates 4 4 4 5 Net Financial Income -24 -24 -17 -4 Property, Plant and Equipment 806 769 728 678 Net Gain from Inv in Associates -1 0 0 0 Intangible Assets 825 787 802 812 Pretax Profit 36 103 119 129 Total Assets 2,203 2,108 2,210 2,313 Income Tax 10 27 31 34 Current Liabilities 534 366 384 396 Profit from Continuing Operations 26 77 88 95 AP & Other Payables 188 199 212 221 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 284 101 101 101 Net Profit 26 77 88 95 Other Current Liabilities 62 66 71 74 Controlling Interests 26 77 89 96 Non-Current Liabilities 764 766 768 769 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 737 737 737 737 Total Comprehensive Profit 25 77 88 95 Other Non-Current Liabilities 27 29 31 32 Controlling Interests 26 77 89 96 Total Liabilities 1,298 1,132 1,152 1,165 Non-Controlling Interests 0 0 -1 -1 Controlling Interests 904 975 1,058 1,148 EBITDA 388 421 456 481 Capital Stock 194 194 194 194 FCF (Free Cash Flow) 95 219 240 262 Capital Surplus 193 193 193 193 EBITDA Margin (%) 30.6 31.2 31.7 32.1 Retained Earnings 519 590 673 763 Operating Profit Margin (%) 8.0 9.3 9.7 10.1 Non-Controlling Interests 1 1 0 0 Net Profit Margin (%) 2.0 5.7 6.2 6.4 Stockholders' Equity 905 976 1,058 1,148
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14F 12/15F 12/16F 12/17F 12/14F 12/15F 12/16F 12/17F Cash Flows from Op Activities 320 369 400 422 P/E (x) 28.6 12.0 10.4 9.7 Net Profit 26 77 88 95 P/CF (x) 2.1 2.2 2.0 2.0 Non-Cash Income and Expense 335 345 364 368 P/B (x) 0.8 0.9 0.9 0.8 Depreciation 183 187 201 210 EV/EBITDA (x) 4.3 4.0 3.5 3.1 Amortization 103 108 115 120 EPS (W) 341 996 1,148 1,235 Others 49 50 48 38 CFPS (W) 4,667 5,449 5,836 5,978 Chg in Working Capital -7 -3 -5 -3 BPS (W) 11,669 12,590 13,663 14,823 Chg in AR & Other Receivables 2 -17 -19 -13 DPS (W) 75 75 75 75 Chg in Inventories -2 -2 -2 -1 Payout ratio (%) 22.1 7.6 6.6 6.1 Chg in AP & Other Payables -11 2 2 2 Dividend Yield (%) 0.8 0.6 0.6 0.6 Income Tax Paid -7 -27 -31 -34 Revenue Growth (%) 9.5 6.2 6.6 4.2 Cash Flows from Inv Activities -358 -222 -293 -292 EBITDA Growth (%) 13.5 8.5 8.3 5.5 Chg in PP&E -223 -150 -160 -160 Operating Profit Growth (%) -12.1 23.5 11.1 7.9 Chg in Intangible Assets 0 -70 -130 -130 EPS Growth (%) -65.7 192.1 15.3 7.6 Chg in Financial Assets -2 -2 -3 -2 Accounts Receivable Turnover (x) 4.8 4.8 4.8 4.8 Others -133 0 0 0 Inventory Turnover (x) 52.8 52.9 53.0 52.4 Cash Flows from Fin Activities 65 -189 -6 -6 Accounts Payable Turnover (x) 24.3 24.3 24.4 24.1 Chg in Financial Liabilities 87 -183 0 0 ROA (%) 1.2 3.6 4.1 4.2 Chg in Equity 0 0 0 0 ROE (%) 3.0 8.2 8.7 8.7 Dividends Paid -6 -6 -6 -6 ROIC (%) 4.2 5.3 6.1 6.6 Others -16 0 0 0 Liability to Equity Ratio (%) 143.5 116.1 108.8 101.5 Increase (Decrease) in Cash 25 -43 101 124 Current Ratio (%) 83.3 115.6 143.3 174.7 Beginning Balance 60 85 43 144 Net Debt to Equity Ratio (%) 101.6 79.8 63.9 48.0 Ending Balance 85 43 144 268 Interest Coverage Ratio (x) 3.0 3.8 4.7 5.1 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 47
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
KT (030200 KS) The light at the end of the tunnel
Telecom Service Combined market share regulations: Negative, but largely insignificant
KT has the largest pay-TV subscriber base in Korea, due to its subsidiary KT Skylife. As (Maintain) Buy such, compared to peers, the company has higher regulatory exposure to the upcoming combined subscriber market share restrictions. However, we believe the negative impact Target Price (12M, W) 40,000 will not be as significant as many have anticipated.
As the regulation includes a three-year sunset provision, it will expire after three years Share Price (04/23/15, W) 29,650 unless a decision is made to extend it following a review. Moreover, redundancy is likely to be removed in counting OTS subscribers. Based on the number of set-top boxes, we Expected Return 35% estimate that KT’s pay-TV market share will come out to approximately 29%, well below the one-third threshold above which the rule will apply. OP (15F, Wbn) 1,147 Consensus OP (15F, Wbn) 1,083 Faced with regulatory challenges, KT is expected to focus on maximizing its IPTV platform revenue, including VOD monthly subscriptions, IPTV ads, and T-commerce; EPS Growth (15F, %) - these businesses tend to post higher profits than non-platform businesses. Market EPS Growth (15F, %) 38.8 P/E (15F, x) 6.8 Financial position to strengthen on proceeds from subsidiary sale (end-May) Market P/E (15F, x) 11.0 KOSPI 2,173.41 In 2014, KT downsized its operations at both the parent and subsidiary levels, reporting large net losses and failing to pay out any dividends. However, earnings will likely expand Market Cap (Wbn) 7,742 this year on the back of lower fixed costs YoY. Shares Outstanding (mn) 261 Free Float (%) 84.9 At end-May, the company will recognize proceeds (roughly W60bn) from the sale of its Foreign Ownership (%) 45.4 car rental subsidiary (KT Rental, for W1.02tr) as non-operating income. With operating Beta (12M) 0.77 cash flow anticipated to improve from 2H, KT may resume dividend payments this year. 52-Week Low 28,500 52-Week High 36,800 Valuation: Maintain Buy with TP of W40,000
(%) 1M 6M 12M We reiterate our Buy rating on KT with a target price of W40,000. This year, KT is Absolute 0.7 -3.9 -9.2 anticipated to see a turnaround in earnings, and thus is likely to pay dividends, unlike last Relative -5.7 -14.6 -16.4 year. We expect to see stronger growth in 2H than in 1H, in light of the regulatory risks that have weighed on shares in 1H. In addition to the sale of its car rental subsidiary, 120 KT KOSPI 110 earnings are improving across the board, at both the parent and subsidiary levels. 100 90
80
70 4.14 8.14 12.14 4.15
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 23,856 23,811 23,422 22,683 22,826 23,184 OP (Wbn) 1,209 839 -292 1,147 1,215 1,373 OP margin (%) 5.1 3.5 -1.2 5.1 5.3 5.9 NP (Wbn) 1,046 -162 -1,055 1,131 665 805 EPS (W) 4,006 -622 -4,040 4,330 2,546 3,082 ROE (%) 8.7 -1.4 -9.5 10.4 5.7 6.6 P/E (x) 8.9 - - 6.8 11.6 9.6 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 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 48
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
Largest pay-TV operator in Korea
KT has the largest pay-TV subscriber base in Korea. Its businesses include: 1) a content production/programming company (Skylife TV, a second-tier subsidiary), and 2) service/distribution businesses, including IPTV (KT), digital satellite (KT Skylife), and Olleh TV Mobile, KT’s OTT platform.
Until recently, the combined market share restrictions raised uncertainties over KT due to its large pay-TV subscriber base. The revised law, taking effect in June, will prevent a single pay-TV operator from holding a share of subscribers exceeding one-third of the pay-TV market. The count will include subscribers to all of the operators’ pay-TV subsidiaries, even across different technology platforms. As such, the cap will apply to the combined subscribers of KT’s IPTV and subsidiary KT Skylife.
However, we believe the impact will be less significant than many have anticipated. As the regulation includes a three-year sunset provision, it will expire after three years unless a decision is made to extend it following a review. Moreover, it is likely that redundancy will be removed in counting OTS subscribers. Based on the number of set- top boxes, we estimate that KT’s pay-TV market share will come out to approximately 29%, well below the one-third threshold.
Looking ahead, KT is expected to see an increase in ARPU. Faced with regulatory challenges, the company is likely to focus on maximizing its IPTV platform revenue, including VOD monthly subscriptions, IPTV ads, and T-commerce.
Figure 62. Pay-TV value chain
Production/ Service/distribution Device programming
Cost Revenue Content provider Pay-TV
Skylife TV Service usage Subscriber Program KT: Olleh TV (IPTV), Olleh TV Mobile (OTT) fee usage fee KT Skylife, satellite subsidiary
Revenue Revenue
Trans- Ad costs mission fees
Ad rep company T-commerce Nasmedia KTH (subsidiary) (subsidiary)
Source: KDB Daewoo Securities Research
Figure 63. Media service subscriber trend
('000 persons) OTT KT Olleh tv mobile unique visitors Skylife subscribers only 10,000 KT-Skylife OTS bundling subscribers KT IPTV subscribers only
8,000
6,000
4,000
2,000
0 4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
Notes: OTT users based on monthly unique users Source: Company data Koreanclick, KDB Daewoo Securities Research
KDB Daewoo Securities Research 49
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
Proceeds from subsidiary sale to heighten dividend expectations
In 2014, the company downsized its operations at both the parent and subsidiary levels, reporting large net losses and failing to pay out any dividends.
This year, however, earnings will likely expand on the back of lower fixed costs YoY. At end-May, the company will recognize proceeds (roughly W60bn) from the sale of its car rental subsidiary (KT Rental, for W1.02tr) as non-operating income. With operating cash flow anticipated to improve from 2H, KT may resume dividend payments this year.
Table 16. Quarterly and annual earnings trends (Wbn, %, ‘000 persons) 1Q14 2Q14 3Q14 4Q14 1Q15F 2Q15F 3Q15F 4Q15F 2013 2014 2015F Revenue 5,846 5,896 5,956 5,724 5,516 5,650 5,782 5,735 23,810 23,422 22,683 Service revenue 4,859 4,988 5,131 4,984 4,739 4,825 4,916 4,971 19,843 19,961 19,451 Wireless 1,783 1,799 1,913 1,820 1,842 1,843 1,887 1,904 6,977 7,315 7,476 Wireline 1,420 1,408 1,371 1,339 1,304 1,281 1,286 1,261 5,966 5,538 5,132 Media/content 370 381 396 362 378 387 395 507 1,355 1,508 1,667 Financial/rental 987 1,018 1,073 1,092 902 914 954 911 3,860 4,170 3,680 Other services 299 382 378 371 313 400 395 389 1,687 1,430 1,496 Product revenue 987 908 825 740 777 825 866 764 3,967 3,460 3,232 Operating profit 152 -813 335 34 317 334 329 167 840 -292 1,147 OP margin 2.6 -13.8 5.6 0.6 5.7 5.9 5.7 2.9 3.5 -1.2 5.1 Net profit -41 -757 74 -241 290 530 162 135 -61 -966 1,117 Net margin -0.7 -12.8 1.2 -4.2 5.3 9.4 2.8 2.3 -0.3 -4.1 4.9 QoQ Revenue -4.2 2.4 3.8 -7.9 -5.7 -4.2 -2.9 0.2 -0.2 -1.6 -3.2 Service revenue -1.7 1.0 4.0 -0.9 -2.5 -3.3 -4.2 -0.2 3.1 0.6 -2.6 Wireless 1.5 2.7 11.6 3.8 3.3 2.4 -1.4 4.6 0.9 4.8 2.2 Wireline -6.7 -6.6 -6.2 -9.1 -8.2 -9.0 -6.3 -5.8 -6.7 -7.2 -7.3 Media/content 17.7 13.8 12.8 2.0 2.2 1.6 -0.2 40.2 26.8 11.3 10.5 Financial/rental 7.6 5.5 9.8 9.1 -8.6 -10.3 -11.1 -16.6 8.0 8.0 -11.8 Other services -30.7 1.0 -12.4 -16.7 4.5 4.7 4.6 4.8 29.0 -15.2 4.6 Product revenue -15.1 10.8 3.1 -37.5 -21.3 -9.1 5.0 3.2 -13.8 -12.8 -6.6 Operating profit -58.6 TTR 8.7 TTB 108.3 TTB -1.8 391.6 -31.4 TTR TTB Net profit TTR TTR -45.8 -55.6 TTB TTB 118.9 TTB TTR RR TTB YoY
Revenue 17,564 17,955 18,080 18,147 18,215 18,282 18,349 17,300 18,080 18,349 17,293 Service revenue 8,630 9,410 10,247 10,810 11,100 11,766 12,244 12,722 7,874 10,810 12,722
Wireless 31,020 31,211 31,248 31,313 31,126 31,033 30,940 31,053 31,248 30,940 30,984 Wireline 7,102 7,304 7,552 7,781 7,983 8,087 8,239 8,392 6,908 7,781 8,392 Notes: All figures are based on consolidated K-IFRS; Net profit is attributable to controlling interests; TTR, TTB, and RR refer to “turn to red,” “turn to black,” and “remain red,” respectively; Earnings to be reclassified into discontinued operations and gain on disposal from 2015 due to the sell-off of KT Rental in 2Q15 Source: Company data, KDB Daewoo Securities Research estimates
Table 17. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 15F 16F 15F 16F 15F 16F - Moved to discontinued operations account due to the sale of Revenue 23,360 23,435 22,683 22,826 -2.9 -2.6 KT Rental - Moved to discontinued operations account due to the sale of Operating profit 1,223 1,236 1,147 1,215 -6.2 -1.7 KT Rental Net profit 438 551 1,117 730 155.0 32.5 - Reflected reclassification related to the sale of KT Rental EPS 1,509 1,921 4,330 2,546 186.9 32.5 OP margin 5.2 5.3 5.1 5.3 Net margin 1.7 2.1 5.0 2.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 50
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
KT (030200 KS/Buy/TP: W40,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 23,422 22,683 22,826 23,184 Current Assets 8,751 11,065 10,571 12,316 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 1,889 4,191 3,652 5,290 Gross Profit 23,422 22,683 22,826 23,184 AR & Other Receivables 3,123 3,129 3,149 3,198 SG&A Expenses 23,713 21,536 21,611 21,811 Inventories 393 394 396 403 Operating Profit (Adj) -292 1,147 1,215 1,373 Other Current Assets 3,346 3,351 3,374 3,425 Operating Profit -292 1,147 1,215 1,373 Non-Current Assets 25,025 23,844 23,074 22,100 Non-Operating Profit -945 220 -278 -251 Investments in Associates 339 339 342 347 Net Financial Income -420 -422 -361 -310 Property, Plant and Equipment 16,468 15,685 15,233 14,504 Net Gain from Inv in Associates 18 613 0 0 Intangible Assets 3,544 3,144 2,821 2,558 Pretax Profit -1,237 1,367 937 1,122 Total Assets 33,776 34,909 33,645 34,416 Income Tax -271 270 206 247 Current Liabilities 9,992 10,005 8,194 8,305 Profit from Continuing Operations -966 1,097 730 875 AP & Other Payables 1,200 1,202 1,210 1,229 Profit from Discontinued Operations 0 20 0 0 Short-Term Financial Liabilities 3,000 3,000 1,145 1,145 Net Profit -966 1,117 730 875 Other Current Liabilities 5,792 5,803 5,839 5,931 Controlling Interests -1,055 1,131 665 805 Non-Current Liabilities 11,993 11,996 12,008 12,039 Non-Controlling Interests 89 -13 66 70 Long-Term Financial Liabilities 10,085 10,085 10,085 10,085 Total Comprehensive Profit -1,201 1,117 730 875 Other Non-Current Liabilities 1,908 1,911 1,923 1,954 Controlling Interests -1,277 1,114 727 872 Total Liabilities 21,985 22,001 20,203 20,344 Non-Controlling Interests 76 3 3 3 Controlling Interests 10,341 11,472 11,940 12,500 EBITDA 3,563 5,030 4,891 5,064 Capital Stock 1,564 1,564 1,564 1,564 FCF (Free Cash Flow) -936 1,892 1,723 2,107 Capital Surplus 1,440 1,440 1,440 1,440 EBITDA Margin (%) 15.2 22.2 21.4 21.8 Retained Earnings 8,571 9,702 10,171 10,731 Operating Profit Margin (%) -1.2 5.1 5.3 5.9 Non-Controlling Interests 1,449 1,436 1,502 1,572 Net Profit Margin (%) -4.5 5.0 2.9 3.5 Stockholders' Equity 11,790 12,908 13,442 14,072
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 1,916 4,392 4,423 4,607 P/E (x) - 6.8 11.6 9.6 Net Profit -966 1,117 730 875 P/CF (x) 1.9 1.5 1.6 1.5 Non-Cash Income and Expense 5,368 3,966 4,244 4,248 P/B (x) 0.7 0.6 0.6 0.6 Depreciation 3,242 3,283 3,152 3,229 EV/EBITDA (x) 5.7 3.5 3.3 2.9 Amortization 612 600 524 462 EPS (W) -4,040 4,330 2,546 3,082 Others 1,514 83 568 557 CFPS (W) 16,859 19,467 19,049 19,618 Chg in Working Capital -2,023 5 17 42 BPS (W) 42,921 47,251 49,047 51,191 Chg in AR & Other Receivables 13 -6 -20 -49 DPS (W) 0 800 1,000 1,000 Chg in Inventories 267 -1 -2 -6 Payout ratio (%) 0.0 17.5 33.5 28.0 Chg in AP & Other Payables -418 2 8 19 Dividend Yield (%) 0.0 2.7 3.4 3.4 Income Tax Paid -84 -275 -206 -247 Revenue Growth (%) -1.6 -3.2 0.6 1.6 Cash Flows from Inv Activities -3,171 -2,702 -2,908 -2,720 EBITDA Growth (%) -20.1 41.2 -2.8 3.5 Chg in PP&E -2,775 -2,500 -2,700 -2,500 Operating Profit Growth (%) - - 5.9 13.0 Chg in Intangible Assets -569 -200 -200 -200 EPS Growth (%) - - -41.2 21.1 Chg in Financial Assets 150 -2 -8 -20 Accounts Receivable Turnover (x) 7.4 7.3 7.3 7.3 Others 23 0 0 0 Inventory Turnover (x) 46.5 57.6 57.8 58.0 Cash Flows from Fin Activities 1,072 0 -2,051 -244 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities 1,292 0 -1,855 1 ROA (%) -2.8 3.3 2.1 2.6 Chg in Equity 0 0 0 0 ROE (%) -9.5 10.4 5.7 6.6 Dividends Paid -223 0 -196 -245 ROIC (%) -1.1 4.5 4.8 5.7 Others 3 0 0 0 Liability to Equity Ratio (%) 186.5 170.5 150.3 144.6 Increase (Decrease) in Cash -182 2,302 -538 1,637 Current Ratio (%) 87.6 110.6 129.0 148.3 Beginning Balance 2,071 1,889 4,191 3,652 Net Debt to Equity Ratio (%) 89.9 64.3 51.9 37.9 Ending Balance 1,889 4,191 3,652 5,290 Interest Coverage Ratio (x) -0.6 2.2 2.5 3.1 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 51
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
LG Uplus (032640 KS) Pursuing Netflix-style content strategy based on LTE strength
Telecom Service Pay TV: Pursuing exclusive mobile content strategy based on LTE strength
LG Uplus has gained strength in LTE, as the company led the way in the spread of LTE (Maintain) Buy services. As such, the company has strong brand awareness, having achieved subscriber growth at its wireless, fixed-line, and media businesses. In partnership with Google, the Target Price (12M, W) 16,000 company created TV G as a smart IPTV product. In 1Q, the company’s IPTV subscribers exceeded the 2mn mark for the first time in its history. Among pay-TV operators, the Share Price (04/23/15, W) 10,250 company currently ranks seventh in the number of subscribers. Moreover, its IPTV ads have been completed sold out since June of last year.
Expected Return 56% With regard to its mobile business strategy, we note that LG Uplus has started to supply exclusive mobile content based on its wide LTE bandwidth. The company’s exclusive OP (15F, Wbn) 704 mobile content strategy is similar to that of Netflix, a major video-streaming service Consensus OP (15F, Wbn) 676 provider in the US. In June 2014, LG Uplus launched Uflix Movie, which is optimized for EPS Growth (15F, %) 58.1 mobile video content. In addition, since signing a supply contract with the US cable Market EPS Growth (15F, %) 38.8 channel HBO in February 2015, the company has offered HBO content via its fixed-line P/E (15F, x) 12.4 and wireless services. In March, the company rolled out an LTE-video plan to promote Market P/E (15F, x) 11.0 the use of both TV services and mobile data. KOSPI 2,173.41 Major business: Net subscriber additions continued in the MNP market Market Cap (Wbn) 4,475 Shares Outstanding (mn) 437 We believe LG Uplus was the sole telco in 1Q to see net subscriber additions in the Free Float (%) 63.9 mobile number portability (MNP) market. As of March, the telco had added net Foreign Ownership (%) 34.0 subscribers for 10 straight months, in sharp contrast to its rivals, which have suffered Beta (12M) 0.53 net declines. The company has demonstrated strong business capabilities and profits in 52-Week Low 8,890 the face of significant industry events, such as the introduction of the new handset 52-Week High 12,850 distribution law and the launch of the iPhone 6 (the first iPhone carried by the telco). Along with robust net subscriber growth, traffic to U+ HDTV, the company’s mobile (%) 1M 6M 12M IPTV service, is also increasing, bolstering its growth potential. Absolute -3.8 -6.0 1.5 Relative -9.8 -16.4 -6.6 Since LG Uplus holds the largest share in the domestic payment gateway (PG) market, the company is anticipated to benefit from the budding simplified payment services 130 LG Uplus KOSPI 120 market. Backed by its solid PG competitiveness, the company is currently expanding 110 partnerships with other simplified payment services, while beefing up its own simplified 100 payment service, Paynow. 90 80 Valuation: Reiterate Buy and TP of W16,000 70 4.14 8.14 12.14 4.15 We maintain our Buy rating and target price of W16,000 on LG Uplus. Dividend payout in 2015 is likely to increase YoY considering the company’s financial condition (free cash flow to turn positive in 2015). Although the company has a relatively small subscriber base, we believe it has been making significant achievements in the domestic telecom and broadcasting services market via a concentration strategy. FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 10,905 11,450 11,000 10,781 10,934 10,985 OP (Wbn) 127 542 576 704 715 730 OP margin (%) 1.2 4.7 5.2 6.5 6.5 6.6 NP (Wbn) -60 279 228 361 385 412 EPS (W) -122 640 523 827 882 943 ROE (%) -1.6 7.2 5.6 8.3 8.3 8.4 P/E (x) - 16.8 22.0 12.4 11.6 10.9 P/B (x) 0.9 1.2 1.2 1.0 0.9 0.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 52
KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
OTT services to expand thanks to wide LTE bandwidth
LG Uplus has been actively expanding its mobile video services, aided by its wide LTE bandwidth. The company still has ample room to accommodate the simultaneous growth of both the mobile subscriber base and per-capita data use.
In June 2014, LG Uplus launched Uflix Movie, which is optimized for mobile video content. In March, the company rolled out an LTE-video plan to promote the use of both TV services and mobile data.
Since February, LG Uplus has been pursuing an exclusive mobile content strategy, similar to that of Netflix, based on its wide LTE bandwidth. Under this strategy, the company exclusively offers HBO content via its fixed-line and wireless services (having signed a supply contract with the US channel in February). HBO is famous for popular shows such as Game of Thrones and The Newsroom. In April, LG Uplus signed a contract with MGM, which is known for shows such as Vikings and The L Word, as well as movies such as Terminator and The Silence of the Lambs.
LG Uplus’ LTE-based exclusive content strategy appears to be paying off, given that both its fixed-line and mobile IPTV subscriber bases are expanding.
Figure 64. Pay-TV value chain
Production/ Service/distribution Device programming
Cost Revenue Pay TV Content Subscriber provider Program LG Uplus: G TV (IPTV), Service usage usage fee LG U+ HDTV (OTT) fee
Revenue
Trans-mission fees
Home shopping/T-commerce operators
Source: KDB Daewoo Securities Research
Figure 65. Media service subscriber trend
('000 persons) LTE video-exclusive monthly plan 5,000 OTT LG U+ HDTV unique visitors HBO-exclusive plan IPTV G tv subscribers Free KBS VOD 4,000 Uflix movie service
3,000
2,000
1,000
0 4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
Notes: OTT users based on monthly unique users, Source: Company data, Koreanclick, KDB Daewoo Securities Research
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Figure 66. Released Uflix Movie in June 2014 Figure 67. Released LTE video monthly plan in Mar. 2015
Figure 68. Signed exclusive contract with HBO in Feb. 2015 Figure 69. MGM has also signed a contract to supply content
Source: Company data, KDB Daewoo Securities Research
Table 18. Quarterly and annual earnings trends (Wbn, %, ‘000 persons) 1Q14 2Q14 3Q14 4Q14 1Q15F 2Q15F 3Q15F 4Q15F 2013 2014 2015F Revenue 2,780 2,774 2,762 2,684 2,621 2,694 2,680 2,785 11,450 11,000 10,781 Service revenue 2,016 2,065 2,090 2,208 2,142 2,167 2,194 2,256 7,834 8,380 8,759 Wireless 1,249 1,275 1,297 1,390 1,345 1,365 1,393 1,444 4,768 5,212 5,547 Fixed-line 769 783 788 817 797 802 802 812 3,061 3,157 3,212
Handset revenue 760 704 667 471 475 523 481 524 3,599 2,602 2,004 % of revenue
Service revenue 72.5 74.5 75.7 82.3 81.7 80.4 81.9 81.0 68.4 76.2 81.2
Handset revenue 27.3 25.4 24.1 17.5 18.1 19.4 18.0 18.8 31.4 23.7 18.6 Operating profit 113 98 175 191 164 170 184 187 542 576 704 OP margin (%) 4.1 3.5 6.3 7.1 6.2 6.3 6.8 6.7 4.7 5.2 6.5 Net profit 27 34 82 85 88 87 95 91 279 228 360 Net margin (%) 1.0 1.2 3.0 3.2 3.4 3.2 3.5 3.3 2.4 2.1 3.3 YoY growth Revenue -2.8 0.4 -4.1 -9.0 -5.7 -2.9 -3.0 3.8 5.0 -3.9 -2.0 Service revenue 9.1 6.7 5.1 7.1 6.2 4.9 5.0 2.2 11.7 7.0 4.5 Wireless 12.8 8.7 6.5 9.4 7.7 7.0 7.4 3.9 19.8 9.3 6.4 Fixed-line 4.0 2.8 2.1 3.7 3.5 2.4 1.7 -0.7 1.1 3.1 1.7
Handset revenue -24.4 -14.5 -24.6 -46.7 -37.5 -25.7 -27.9 11.4 -7.2 -27.7 -23.0 Operating profit -8.1 -32.3 17.4 52.5 44.6 73.4 5.2 -2.2 327.2 6.4 22.1
Net profit -63.9 -58.9 9.5 76.9 229.2 158.5 15.2 6.6 TTB -18.4 58.2 Key indicators
Wireless subscribers 10,875 11,008 11,159 11,267 11,411 11,589 11,678 11,767 10,874 11,267 11,767 LTE 7,462 7,813 8,182 8,457 8,784 9,112 9,439 9,767 7,089 8,457 8,457 Fixed-line subscribers 9,393 9,629 9,746 9,882 10,035 10,088 10,194 10,300 9,115 9,882 10,300 Media 1,672 1,784 1,875 1,949 2,040 2,075 2,137 2,200 1,550 1,949 2,200 Notes: All figures are based on consolidated K-IFRS; Net profit is attributable to controlling and non-controlling interests; TTB refers to “turn to black”; Handset revenue recognized on a net basis from 4Q14 Source: Company data, KDB Daewoo Securities Research
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LG Uplus (032640 KS/Buy/TP: W16,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 11,000 10,781 10,934 10,985 Current Assets 2,490 2,690 3,071 3,514 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 416 524 851 1,250 Gross Profit 11,000 10,781 10,934 10,985 AR & Other Receivables 1,633 1,695 1,715 1,723 SG&A Expenses 10,423 10,077 10,219 10,255 Inventories 276 287 291 292 Operating Profit (Adj) 576 704 715 730 Other Current Assets 165 184 214 249 Operating Profit 576 704 715 730 Non-Current Assets 9,523 9,721 9,663 9,532 Non-Operating Profit -256 -248 -228 -209 Investments in Associates 9 0 0 0 Net Financial Income -171 -168 -149 -116 Property, Plant and Equipment 7,254 7,500 7,456 7,339 Net Gain from Inv in Associates 1 0 0 0 Intangible Assets 1,116 1,074 1,059 1,046 Pretax Profit 320 456 487 521 Total Assets 12,013 12,411 12,734 13,046 Income Tax 92 96 102 109 Current Liabilities 3,486 3,576 3,610 3,622 Profit from Continuing Operations 228 360 385 411 AP & Other Payables 1,427 1,481 1,502 1,509 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,129 1,129 1,129 1,129 Net Profit 228 360 385 411 Other Current Liabilities 930 966 979 984 Controlling Interests 228 361 385 412 Non-Current Liabilities 4,349 4,363 4,371 4,374 Non-Controlling Interests 0 0 0 -1 Long-Term Financial Liabilities 3,787 3,779 3,779 3,779 Total Comprehensive Profit 221 360 385 411 Other Non-Current Liabilities 562 584 592 595 Controlling Interests 221 361 385 412 Total Liabilities 7,835 7,938 7,981 7,996 Non-Controlling Interests 0 -1 -1 -1 Controlling Interests 4,177 4,473 4,753 5,051 EBITDA 2,082 2,326 2,324 2,311 Capital Stock 2,574 2,574 2,574 2,574 FCF (Free Cash Flow) -129 302 584 663 Capital Surplus 837 837 837 837 EBITDA Margin (%) 18.9 21.6 21.3 21.0 Retained Earnings 764 1,060 1,340 1,638 Operating Profit Margin (%) 5.2 6.5 6.5 6.6 Non-Controlling Interests 1 0 0 -1 Net Profit Margin (%) 2.1 3.3 3.5 3.8 Stockholders' Equity 4,178 4,473 4,753 5,050
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 2,015 2,002 1,984 1,963 P/E (x) 22.0 12.4 11.6 10.9 Net Profit 228 360 385 411 P/CF (x) 2.2 2.0 2.0 2.0 Non-Cash Income and Expense 2,027 1,885 1,860 1,807 P/B (x) 1.2 1.0 0.9 0.9 Depreciation 1,334 1,454 1,444 1,418 EV/EBITDA (x) 4.6 3.8 3.7 3.5 Amortization 171 168 165 163 EPS (W) 523 827 882 943 Others 522 263 251 226 CFPS (W) 5,163 5,144 5,141 5,080 Chg in Working Capital -42 20 -10 -29 BPS (W) 9,567 10,244 10,886 11,569 Chg in AR & Other Receivables 254 -55 -21 -7 DPS (W) 150 240 260 280 Chg in Inventories 118 -11 -4 -1 Payout ratio (%) 28.8 29.1 29.5 29.7 Chg in AP & Other Payables -61 12 4 1 Dividend Yield (%) 1.3 2.3 2.5 2.7 Income Tax Paid -31 -96 -102 -109 Revenue Growth (%) -3.9 -2.0 1.4 0.5 Cash Flows from Inv Activities -2,307 -1,830 -1,552 -1,451 EBITDA Growth (%) 12.1 11.7 -0.1 -0.6 Chg in PP&E -2,136 -1,700 -1,400 -1,300 Operating Profit Growth (%) 6.3 22.2 1.6 2.1 Chg in Intangible Assets -175 0 -150 -150 EPS Growth (%) -18.3 58.1 6.7 6.9 Chg in Financial Assets 12 -5 -2 -1 Accounts Receivable Turnover (x) 7.3 7.3 7.3 7.2 Others -8 -125 0 0 Inventory Turnover (x) 32.8 38.3 37.9 37.7 Cash Flows from Fin Activities 309 -73 -105 -114 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities 376 -8 0 0 ROA (%) 1.9 3.0 3.1 3.2 Chg in Equity 0 0 0 0 ROE (%) 5.6 8.3 8.3 8.4 Dividends Paid -65 -65 -105 -114 ROIC (%) 4.9 6.3 6.4 6.6 Others -2 0 0 0 Liability to Equity Ratio (%) 187.5 177.5 167.9 158.3 Increase (Decrease) in Cash 18 108 328 399 Current Ratio (%) 71.4 75.2 85.1 97.0 Beginning Balance 398 416 524 851 Net Debt to Equity Ratio (%) 106.7 97.1 84.4 71.5 Ending Balance 416 524 851 1,250 Interest Coverage Ratio (x) 2.7 3.3 3.3 3.4 Source: Company data, KDB Daewoo Securities Research estimates
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KT Hitel (036030 KQ) Content and commerce businesses key for KT’s media strategy
Media Pay TV: Content and commerce businesses to play a key role in KT Group’s media strategy
(Upgrade) Buy KT Hitel (KTH) is focused on the content and commerce businesses. As the largest copyright holder for movie VOD services, the company is providing content to almost all Target Price (12M, W) 17,000 pay-TV platforms (including KT). In addition, the company was one of first movers in the T-commerce business. Share Price (04/23/15, W) 12,600 KT, the parent company, boasts the largest media subscriber base, but might need to change its media strategy in the face of regulatory risks related to subscriber market Expected Return 35% share. Now seems to be the time to focus more on quality (e.g., securing additional revenue sources) than quantity. We believe KTH will expand its role inside KT Group. OP (15F, Wbn) 10 Consensus OP (15F, Wbn) 15 In addition, KTH provides IT services for KT Group, designs IPTV platforms, and develops IPTV solutions, and has started to provide VOD content to KT Skylife channels. Due to EPS Growth (15F, %) -11.4 the technical nature of satellite broadcasting, KT Skylife relies on outside content Market EPS Growth (15F, %) 38.8 providers. P/E (15F, x) 41.7 Market P/E (15F, x) 11.0 Other flagship businesses: Coverage of T-commerce business to expand KOSDAQ 692.48 Currently, the T-commerce business is a flagship growth driver for KTH. Relevant Market Cap (Wbn) 450 revenue contribution is forecast to grow quickly, to 30% in 2015 (from 6% in 2013 and Shares Outstanding (mn) 36 20% in 2014). We also estimate that T-commerce gross sales grew in 1Q. The company, Free Float (%) 32.9 Foreign Ownership (%) 4.6 which had been providing T-commerce services only to KT Group’s platforms (Olleh TV Beta (12M) 0.53 and KT Skylife), expanded T-commerce channel coverage to C&M in March and CJ 52-Week Low 7,100 HelloVision in April. KTH plans to expand its coverage to almost every pay-TV platform. 52-Week High 14,800 The T-commerce market appears to have increasingly bright growth prospects. Recently, (%) 1M 6M 12M several companies with T-commerce business licenses have moved to commercially Absolute -10.3 56.9 56.5 launch channels, and the large retailer Shinsegae is pushing to acquire a T-commerce Relative -17.1 27.9 27.8 firm. Pay-TV platforms are also favorable to the T-commerce business, which should provide commission revenue. 190 KTH KOSDAQ 170 Valuation: Upgrade to Buy; Raise TP to W17,000 150 130 We upgrade KTH from Trading Buy to Buy, and raise our target price to W17,000 (from 110 W14,000). With the pay-TV business seeking additional revenue sources, the growth 90 prospects of the T-commerce market appear increasingly bright. The company’s T- 70 4.14 8.14 12.14 4.15 commerce business is expanding coverage and showing gross sales growth. In deriving our target price, we applied a P/B of 2.8x (the level of domestic home shopping companies during strong gross sales growth) to our 2016 BPS estimate.
FY (Dec.) 12/12 12/13 12/14F 12/15F 12/16F 12/17F Revenue (Wbn) 127 130 136 159 179 197 OP (Wbn) -7 2 7 10 18 23 OP margin (%) -5.5 1.5 5.1 6.3 10.1 11.7 NP (Wbn) -11 2 12 11 17 22 EPS (W) -306 64 341 302 479 617 ROE (%) -6.4 1.4 6.5 5.4 7.9 9.4 P/E (x) - 121.1 22.4 41.7 26.3 20.4 P/B (x) 1.8 1.6 1.4 2.2 2.0 1.8 Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates
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Pay TV: Content and commerce businesses to play a key role in KT Group’s media strategy
KTH is focused on the content and commerce businesses. As the largest copyright holder for movie VOD services, the company is providing content to almost all pay-TV platforms (including KT). In addition, the company was one of first movers in the T- commerce business.
Currently, the T-commerce business is a flagship growth driver for KTH. Relevant revenue contribution is forecast to grow quickly, to 30% in 2015 (from 6% in 2013 and 20% in 2014). We also estimate that T-commerce gross sales grew in 1Q. The company, which had been providing T-commerce services only to KT Group’s platforms (Olleh TV and KT Skylife), expanded T-commerce channel coverage to C&M in March and CJ HelloVision in April. KTH plans to expand its coverage to almost every pay-TV platform.
The T-commerce market appears to have increasingly bright growth prospects. Recently, several companies with T-commerce business licenses have moved to commercially launch channels, and the large retailer Shinsegae is pushing to acquire a T-commerce firm. Pay-TV platforms are also favorable to the T-commerce business, which should provide commission revenue.
Table 19. Annual earnings trends (Wbn, %) 2012 2013 2014 2015F 2016F Revenue 127 130 136 159 179 Content distribution 44 51 48 51 53 Smart solutions 68 70 62 60 60 T-commerce - 8 26 48 67 Mobile service 14 2 - - - Proportion of revenue Content distribution 34.9 38.8 35.0 32.3 29.3 Smart solutions 53.9 53.5 45.6 37.8 33.5 T-commerce 0.0 5.9 19.4 29.9 37.1 Operating profit -7 2 7 10 18 OP margin -5.8 1.7 5.1 6.2 9.9 Net profit -11 2 12 11 17 Net margin -8.3 1.8 9.0 6.6 9.8 YoY Revenue -2.9 2.7 4.5 16.7 12.8 Content distribution 25.9 14.2 -5.7 7.5 2.5 Smart solutions -6.3 1.9 -11.0 -3.2 0.0 T-commerce 240.6 80.0 40.0 Operating profit RR TTB 213.6 43.8 77.8 Net profit RR TTB 430.4 -13.8 66.1 Note: All figures are based on non-consolidated K-IFRS; TTB and RR refer to “turn to black” and “remain red,” respectively Source: KDB Daewoo Securities Research estimates
Figure 70. T-commerce (screen shot of “K shopping” service) Figure 71. T-commerce has ample room for growth
PC internet 77,728 Mobile Home shopping (live broadcasting) T-commerce (data broadcasting)
41.1 40.6 32,396
31,960 29.7 31,305
13,140 9,290 7.8 170 2,185
Annual transaction value Platform users and Annual transaction (Wbn) households value/users (mn persons) (W)
Source: KTH, KDB Daewoo Securities Research Notes: As of 2014 (in 2015, others besides KT Group have started expanding into T-commerce) Source: Korea On-Line Shopping Association, MSIP, KCTA, KDB Daewoo Securities Research T커머스는 2015년부터 KT 외의 플랫폼으로 채널 확대 KDB Daewoo Securities Research Source: 온라인쇼핑협회, 미래창조과학부, KCTA, KDB DAEWOO SECURITIES 57 RESEARH KDB Daewoo Securities Research
April 23, 2015 Media/Telecom Service
KT Hitel (036030 KQ/Buy/TP: W17,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14F 12/15F 12/16F 12/17F (Wbn) 12/14F 12/15F 12/16F 12/17F Revenue 136 159 179 197 Current Assets 120 123 136 154 Cost of Sales 120 138 150 165 Cash and Cash Equivalents 32 19 19 25 Gross Profit 16 21 29 32 AR & Other Receivables 25 29 32 36 SG&A Expenses 9 11 11 9 Inventories 1 1 1 1 Operating Profit (Adj) 7 10 18 23 Other Current Assets 62 74 84 92 Operating Profit 7 10 18 23 Non-Current Assets 107 120 129 137 Non-Operating Profit 5 2 1 2 Investments in Associates 1 1 1 2 Net Financial Income 0 0 0 0 Property, Plant and Equipment 17 19 17 16 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 25 26 26 27 Pretax Profit 12 12 19 25 Total Assets 227 243 265 291 Income Tax 0 1 2 2 Current Liabilities 30 35 39 43 Profit from Continuing Operations 12 11 17 22 AP & Other Payables 23 27 30 33 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 12 11 17 22 Other Current Liabilities 7 8 9 10 Controlling Interests 12 11 17 22 Non-Current Liabilities 1 2 2 2 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 12 11 17 22 Other Non-Current Liabilities 1 2 2 2 Controlling Interests 12 11 17 22 Total Liabilities 31 36 41 45 Non-Controlling Interests 0 0 0 0 Controlling Interests 196 207 224 246 EBITDA 23 26 34 39 Capital Stock 36 36 36 36 FCF (Free Cash Flow) 38 16 26 32 Capital Surplus 214 214 214 214 EBITDA Margin (%) 16.9 16.4 19.0 19.8 Retained Earnings -69 -58 -41 -19 Operating Profit Margin (%) 5.1 6.3 10.1 11.7 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 8.8 6.9 9.5 11.2 Stockholders' Equity 196 207 224 246
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14F 12/15F 12/16F 12/17F 12/14F 12/15F 12/16F 12/17F Cash Flows from Op Activities 40 21 28 34 P/E (x) 22.4 41.7 26.3 20.4 Net Profit 12 11 17 22 P/CF (x) 19.3 17.8 13.9 11.9 Non-Cash Income and Expense 2 15 15 16 P/B (x) 1.4 2.2 2.0 1.8 Depreciation 3 3 3 3 EV/EBITDA (x) 9.4 15.3 11.6 9.9 Amortization 13 13 13 13 EPS (W) 341 302 479 617 Others -14 -1 -1 0 CFPS (W) 396 708 904 1,058 Chg in Working Capital 22 -6 -5 -5 BPS (W) 5,487 5,790 6,268 6,886 Chg in AR & Other Receivables 11 -4 -4 -3 DPS (W) 0 0 0 0 Chg in Inventories -1 0 0 0 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 11 4 3 3 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid 0 -1 -2 -2 Revenue Growth (%) 4.6 16.9 12.6 10.1 Cash Flows from Inv Activities -33 -34 -29 -27 EBITDA Growth (%) 21.1 13.0 30.8 14.7 Chg in PP&E -2 -5 -2 -2 Operating Profit Growth (%) 250.0 42.9 80.0 27.8 Chg in Intangible Assets -21 -14 -14 -14 EPS Growth (%) 432.8 -11.4 58.6 28.8 Chg in Financial Assets -11 -15 -13 -11 Accounts Receivable Turnover (x) 4.6 6.1 6.0 5.9 Others 1 0 0 0 Inventory Turnover (x) 393.8 244.3 240.1 237.5 Cash Flows from Fin Activities 5 0 0 0 Accounts Payable Turnover (x) 7.0 5.6 5.3 5.2 Chg in Financial Liabilities - - - - ROA (%) 5.6 4.6 6.7 7.9 Chg in Equity 0 0 0 0 ROE (%) 6.5 5.4 7.9 9.4 Dividends Paid 0 0 0 0 ROIC (%) 8.2 10.9 18.1 22.0 Others - - - - Liability to Equity Ratio (%) 15.9 17.6 18.3 18.3 Increase (Decrease) in Cash 24 -12 0 6 Current Ratio (%) 405.4 354.3 347.1 357.5 Beginning Balance 8 32 19 19 Net Debt to Equity Ratio (%) -27.9 -22.3 -21.9 -23.8 Ending Balance 32 19 19 25 Interest Coverage Ratio (x) 0.0 0.0 0.0 0.0 Source: Company data, KDB Daewoo Securities Research estimates
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Nasmedia (089600 KQ) Well-positioned to take advantage of current media usage trends
Media Pay TV: All of KT’s IPTV ad slots have been sold since June 2014
As KT Group’s media representative (a company that takes orders from advertisers on (Maintain) Buy behalf of media firms), Nasmedia takes orders for IPTV ads, which usually last one to two minutes and play before KT Olleh TV’s VOD content begins playing. Target Price (12M, W) 40,000 KT’s IPTV ad slots have been completely sold since June 2014, pointing to strong demand from advertisers. KT Group’s media power and brand awareness have Share Price (04/23/15, W) 31,050 strengthened, as the group’s combined IPTV subscribers exceeded 10mn as of end-2014. In addition, ad rates are expected to rise in light of the increase in average spending per Expected Return 29% advertiser.
OP (15F, Wbn) 12 Major business: Solid mobile ad revenue growth Consensus OP (15F, Wbn) 12 Nasmedia started out in online display ads, but has since expanded to mobile display ads, EPS Growth (15F, %) 34.8 which are the company’s major growth driver. The revenue contribution of mobile ads Market EPS Growth (15F, %) 38.8 stood at less than 10% in 2013, but has climbed to more than 20%. For 2015, we expect P/E (15F, x) 23.9 online ads, including mobile ads, to account for 69% of total revenue, followed by Market P/E (15F, x) 11.0 outdoor ads (digital signage, 19%) and IPTV ads (12%). KOSDAQ 692.48 We are encouraged by the increase in orders from large customers. In particular, global Market Cap (Wbn) 256 mobile gaming companies are mounting all-out marketing campaigns, increasing ad Shares Outstanding (mn) 8 orders for domestic media firms. Demand for cross-media marketing (combining mobile Free Float (%) 30.0 and outdoor ads) is showing particularly strong growth. Nasmedia is well-positioned to Foreign Ownership (%) 3.9 benefit from this trend, as the company’s business portfolio includes both mobile and Beta (12M) 1.03 outdoor ads. 52-Week Low 14,900 52-Week High 34,250 In addition, the company has diversified its ad media since being acquired by KT in 2008.
(%) 1M 6M 12M On behalf of KT, the company takes a variety of ad orders, including IPTV, satellite TV, Absolute 6.7 27.5 91.1 mobile, and outdoor ads. Outdoor ads include subways, bus shelters, airports, apartment Relative -1.3 3.9 56.0 town boards, convenience stores, and movie theaters. Baseball park ads have recently been added thanks to the launch of the baseball team KT Wiz.
220 Nasmedia KOSDAQ Valuation: Maintain Buy and raise TP to W40,000 170 We maintain our Buy call on Nasmedia and raise our target price to W40,000 (from 120 W33,000). The company is one of the beneficiaries of new media ad market growth. We revised our 2015 EPS estimate by 11%. We derived our target by applying the average 70 P/E (31x) of Asian internet firms’ and global advertising companies’ multiples. 4.14 8.14 12.14 4.15
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 23 25 30 36 41 46 OP (Wbn) 8 6 9 12 16 19 OP margin (%) 34.8 24.0 30.0 33.3 39.0 41.3 NP (Wbn) 6 6 8 11 13 16 EPS (W) 887 681 965 1,301 1,610 1,910 ROE (%) 15.7 11.2 13.4 16.1 17.4 17.8 P/E (x) - 16.6 24.7 23.9 19.3 16.3 P/B (x) - 1.7 3.1 3.6 3.1 2.7 Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates
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April 23, 2015 Media/Telecom Service
KT’s IPTV ad slots have been completely sold since June 2014
Nasmedia takes IPTV ad orders from advertisers on behalf KT. IPTV ad revenue grew by 15% YoY in 2014, accounting for 15% of total revenue. IPTV ads, which usually last for one to two minutes and play before VOD content begins playing, tend to attract higher attention than conventional TV ads, as: 1) VOD viewers watch content more purposefully; and 2) the number of IPTV ads allocated to a VOD is limited to one or two.
The IPTV ad market has been growing markedly since 2013, aided by changes in VOD policies. In August 2013, at the request of terrestrial broadcasters, telcos operating IPTV channels and cable SOs providing VOD services agreed to extend the holdback period— after which VOD content becomes free—from one to three weeks, leading to higher VOD sales and increasing IPTV ad exposure to viewers.
We believe the business environment in 2015 is bright. KT’s IPTV ad slots have been completely sold since June 2014, pointing to strong demand from advertisers. KT Group’s media power has strengthened, with combined IPTV subscribers exceeding 10mn as of end-2014. In addition, ad rates are expected to climb in light of the rising average spending per advertiser. We project Nasmedia’s IPTV ad revenue to grow by 22% YoY in 2015.
Figure 72. IPTV VOD pre-loading ads drawing attention from viewers
Terrestrial/cable: Many ads placed before the program
No. of Ads 1 Ads 2 Ads 3 Ads 4 ads
Olleh TV: Only one or two ads before the program
Source: KT Mhouse, Company data, KDB Daewoo Securities Research
Figure 73. High growth of the IPTV ad market; KT IPTV ads have been sold out since last June
(Wbn) 100 Volume of IPTV ads handled
80
60
40
20
0 09 10 11 12 13 14 15F
Notes: Combined volume handled by three major IPTV companies Source: Company data, KDB Daewoo Securities Research
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April 23, 2015 Media/Telecom Service
Well-positioned to grow in the ad market
As a new media rep, Nasmedia is well-positioned to grow in the ad market. Its flagship mobile ad business is expanding, while ad orders are on the rise. Of note, as KT has the largest IPTV subscriber base, it could overhaul its IPTV ad strategy, given that the media firm is facing the combined subscriber market share restriction.
We revised up our 2015 revenue estimate to reflect mobile and IPTV ad market growth. We also raised our expense estimate in light of the addition of manpower and investments in new ad solutions arising from business expansion. However, we expect operating profit to increase by 41% YoY, as revenue growth should exceed expense growth.
Table 20. Annual earnings trends (Wbn, %) 2012 2013 2014 2015F 2016F Revenue 23 25 30 36 41 Online/mobile ads 19 17 21 25 28 IPTV ads 2.0 3.2 3.6 4.4 5.1 Digital outdoor ads 2.4 4.9 5.2 6.7 7.4 Proportion of revenue Online/mobile ads 81.1 67.4 70.3 68.9 69.5 IPTV ads 8.5 12.8 12.1 12.3 12.4 Digital outdoor ads 10.2 19.7 17.4 18.7 18.0 Operating profit 7.6 6.1 8.6 12.2 15.5 Operating margin 32.4 24.5 28.8 33.8 37.8 Net profit 6.5 5.6 8.0 10.7 13.3 Net margin 27.5 22.7 26.7 29.8 32.4 YoY Revenue 8.3 5.5 20.5 20.6 13.9 Online/mobile ads 1.3 -12.3 25.7 18.2 14.9 IPTV ads 38.8 58.6 14.5 22.0 14.7 Digital outdoor ads 98.9 103.8 6.5 29.5 9.8 Operating profit -2.8 -20.4 42.0 41.5 27.4 Net profit 7.5 -13.0 41.7 34.7 24.0 Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research
Table 21. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 15F 16F 15F 16F 15F 16F Revenue 35 40 36 41 1.5 3.0 - Reflected mobile and growth in IPTV ads Operating profit 12 15 12 16 -2.5 2.0 - Revised wage and new business investment estimates Net profit 10 12 11 13 11.5 13.5 - Revised non-operating profit and effective tax rate estimates EPS 1,167 1,419 1,301 1,610 11.5 13.5 OP margin 36.1 37.5 33.3 39.0 Net margin 27.8 30 30.6 31.7 Note: All figures are based on non-consolidated K-IFRS Source: KDB Daewoo Securities Research estimates
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Figure 74. Nasmedia’s advertising business is embracing new media
Nasmedia ads business
Internet ads Outdoor digital ads
Mobile ads Network ads
Digital broadcasting ads Solution
Source: Company data, KDB Daewoo Securities Research
Figure 75. Mobile business driving earnings growth
Source: Company data, KDB Daewoo Securities Research
Figure 76. KT’s wide media coverage (broadcasting, mobile, outdoor digital ads, and baseball park)
Broadcasting (IPTV, satellite) Mobile
Outdoor ads Traffic media Life media - Subway - Convenience store - Bus - Main street - Airport - Theater
Source: Company data, KDB Daewoo Securities Research
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Nasmedia (089600 KQ/Buy/TP: W40,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 30 36 41 46 Current Assets 90 106 123 142 Cost of Sales 0 0 0 0 Cash and Cash Equivalents 4 6 12 20 Gross Profit 30 36 41 46 AR & Other Receivables 59 71 81 90 SG&A Expenses 21 24 26 27 Inventories 0 0 0 0 Operating Profit (Adj) 9 12 16 19 Other Current Assets 27 29 30 32 Operating Profit 9 12 16 19 Non-Current Assets 7 7 7 7 Non-Operating Profit 1 2 1 1 Investments in Associates 0 0 0 0 Net Financial Income 1 1 1 1 Property, Plant and Equipment 0 0 0 0 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 1 1 1 1 Pretax Profit 10 14 17 20 Total Assets 98 113 130 149 Income Tax 2 3 4 5 Current Liabilities 33 40 46 51 Profit from Continuing Operations 8 11 13 16 AP & Other Payables 31 38 43 48 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Net Profit 8 11 13 16 Other Current Liabilities 2 2 3 3 Controlling Interests 8 11 13 16 Non-Current Liabilities 2 2 2 2 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 8 11 13 16 Other Non-Current Liabilities 2 2 2 2 Controlling Interests 8 11 13 16 Total Liabilities 35 42 48 54 Non-Controlling Interests 0 0 0 0 Controlling Interests 63 71 82 95 EBITDA 9 13 16 19 Capital Stock 4 4 4 4 FCF (Free Cash Flow) 1 6 9 12 Capital Surplus 22 22 22 22 EBITDA Margin (%) 30.0 36.1 39.0 41.3 Retained Earnings 36 45 56 69 Operating Profit Margin (%) 30.0 33.3 39.0 41.3 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 26.7 30.6 31.7 34.8 Stockholders' Equity 63 71 82 95
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 1 6 9 12 P/E (x) 24.7 23.9 19.3 16.3 Net Profit 8 11 13 16 P/CF (x) 18.3 19.7 15.7 13.1 Non-Cash Income and Expense 3 2 3 4 P/B (x) 3.1 3.6 3.1 2.7 Depreciation 0 0 0 0 EV/EBITDA (x) 18.5 17.6 13.5 10.8 Amortization 0 0 0 0 EPS (W) 965 1,301 1,610 1,910 Others 3 2 3 4 CFPS (W) 1,304 1,574 1,974 2,362 Chg in Working Capital -9 -6 -5 -5 BPS (W) 7,587 8,598 9,918 11,539 Chg in AR & Other Receivables -2 -2 -2 -2 DPS (W) 290 290 290 290 Chg in Inventories 0 0 0 0 Payout ratio (%) 30.1 22.3 18.0 15.2 Chg in AP & Other Payables -7 6 5 5 Dividend Yield (%) 1.2 0.9 0.9 0.9 Income Tax Paid -2 -3 -4 -5 Revenue Growth (%) 20.0 20.0 13.9 12.2 Cash Flows from Inv Activities 3 -2 -2 -2 EBITDA Growth (%) 50.0 44.4 23.1 18.8 Chg in PP&E 0 0 0 0 Operating Profit Growth (%) 50.0 33.3 33.3 18.8 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) 41.7 34.8 23.8 18.6 Chg in Financial Assets 4 -2 -2 -2 Accounts Receivable Turnover (x) 3.3 3.6 3.5 3.5 Others -1 0 0 0 Inventory Turnover (x) 0.0 0.0 0.0 0.0 Cash Flows from Fin Activities -1 -2 -2 -2 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0 Chg in Financial Liabilities - - - - ROA (%) 8.2 10.2 10.9 11.3 Chg in Equity 0 0 0 0 ROE (%) 13.4 16.1 17.4 17.8 Dividends Paid -1 -2 -2 -2 ROIC (%) 23.5 27.0 30.4 33.3 Others - - - - Liability to Equity Ratio (%) 55.8 59.4 58.7 56.6 Increase (Decrease) in Cash 3 2 6 8 Current Ratio (%) 269.9 263.0 267.7 276.4 Beginning Balance 1 4 6 12 Net Debt to Equity Ratio (%) -49.2 -48.5 -50.5 -53.4 Ending Balance 4 6 12 20 Interest Coverage Ratio (x) 0.0 0.0 0.0 0.0 Source: Company data, KDB Daewoo Securities Research estimates
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APPENDIX 1
Important Disclosures & Disclaimers 2-Year Rating and Target Price History
Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price CJ HelloVision(037560) 04/24/2015 Buy 16,000 08/03/2014 Buy 310,000 11/06/2014 Buy 13,000 10/29/2013 Buy 290,000 08/12/2014 Buy 20,000 07/19/2013 Buy 280,000 11/08/2013 Buy 22,000 06/11/2013 Buy 270,000 07/22/2013 Buy 23,000 No Coverage KT Skylife(053210) 04/24/2015 Buy 24,000 LG Uplus(032640) 01/25/2015 Buy 16,000 01/28/2015 Trading Buy 20,000 10/01/2014 Buy 15,000 10/30/2014 Trading Buy 23,000 07/31/2014 Buy 11,500 10/05/2014 Trading Buy 25,000 04/28/2014 Buy 13,000 07/28/2014 Buy 29,000 01/20/2014 Buy 15,000 04/29/2014 Buy 30,000 07/19/2013 Buy 16,000 10/29/2013 Trading Buy 34,000 06/11/2013 Buy 15,000 10/02/2013 Trading Buy 32,000 No Coverage 07/30/2013 Buy 41,000 07/22/2013 Buy 45,000 KT(030200) 01/20/2015 Buy 40,000 05/02/2013 Buy 50,000 10/01/2014 Buy 42,000 04/19/2013 Buy 42,000 05/01/2014 Buy 40,000 KTH(036030) 04/24/2015 Buy 17,000 01/20/2014 Trading Buy 36,000 03/10/2015 Trading Buy 14,000 11/03/2013 Trading Buy 38,000 11/26/2014 Trading Buy 10,000 08/04/2013 Buy 44,000 No Coverage 07/19/2013 Buy 45,000 Nasmedia(089600) 04/24/2015 Buy 40,000 06/11/2013 Buy 50,000 11/26/2014 Buy 33,000 No Coverage SK Telecom(017670) 10/01/2014 Buy 380,000
(W) (W) KT Skylife (W) CJ HelloVision KTH (W) Nasmedia (W) KT Skylife (W) Nasmedia 25,000 60,000 50,000 60,000 20,000 50,000 50,000 20,000 50,000 40,00040,000 40,000 15,000 40,000 15,000 30,00030,000 30,000 30,000 10,000 10,000 20,00020,000 20,000
5,000 10,000 5,000 10,00010,000
0 0 0 0 Apr 13 Apr 14 Apr 15 Apr 13 Apr 14 Apr 15 0 Apr 13 Apr 14 Apr 15 Apr 13 Apr 14 Apr 15 Apr 13 Apr 14 Apr 15
(W) SK Telecom (W) LG Uplus (W) KT 400,000 20,000 60,000
50,000 300,000 15,000 40,000 200,000 10,000 30,000 20,000 100,000 5,000 10,000
0 0 0 Apr 13 Apr 14 Apr 15 Apr 13 Apr 14 Apr 15 Apr 13 Apr 14 Apr 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.
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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.
Disclaimers This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.
Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.
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KDB Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 31st Floor
Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong, China United States Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower 42 Six Battery Road #11-01 7th Floor, Yusen Building 25 Old Broad St. Singapore, 049909 2-3-2 Marunouchi, Chiyoda-ku London EC2N 1HQ Tokyo 100-0005 United Kingdom Japan Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511 Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers Room 38T31, 38F SWFC Suite 2103, Saigon Trade Center B-12 Jianguomenwai Avenue 100 Century Avenue 37 Ton Duc Thang St,
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