Mirae Asset Daewoo Telecom Service (Overweight /Maintain ) Spectrum auction to kick off next week with the participation of all three telcos On April 18 th , MSIP finished accepting applications for its spectrum auction, with all Sector Update three major telcos submitting their participation April 19, 2016 The auction, which offers a total of five blocks in four different frequency bands , is anticipated to kick off between April 25th and 28 th , with the final results expected before mid-May Daewoo Securities C o., Ltd. LG Uplus has the most options, while SKT and KT must also consider renewal prices [Telecom Service / Media ] Jee -hyun Moon All three telcos sign up for frequency auction +822 -768 -3615 [email protected] On April 18th, the Ministry of Science, ICT and Future Planning (MSIP) finished accepting applications for its upcoming wireless spectrum auction, with all three major telcos Nu -ri Ha +822 -768 -4130 submitting their participation. The auction will feature a total of five blocks in four [email protected] different frequency bands. We expect the auction to kick off between April 25th and 28th following eligibility screening. Since the entire process is expected to take a maximum of eight days, the final results are likely to be revealed before mid-May, which should help ease uncertainties. The auction will be conducted based on a combination of ascending and sealed bids. The first stage will be a simultaneous ascending auction in which participants make increasingly higher bids for a maximum of 50 rounds. Bidders must place a bid at least 0.75% higher than the bid made by the winner of the previous round, within 40 minutes. If the ascending auction fails to produce a winner, a sealed auction, in which bidders do not unveil their prices to other participants, will take place. Bids for the sealed auction must be higher than the highest bids submitted for each block in the ascending auction. In addition, a maximum bid will be set for the sealed auction based on the results of the ascending auction. Final winners will be decided based on the highest bids placed per block combination. LG Uplus has the most options and least need We see limited risks of overheated bidding, as the new blocks up for sale are deemed supplementary. The previous auction in 2013 occurred immediately after the rollout of LTE and, at that time, winning additional spectrum was considered essential for subscriber acquisition. Today, however, the LTE market has matured, and telcos already have broadband dedicated to LTE. Telcos are also better at managing traffic efficiency through carrier aggregation. Given the current status of each telco, we think LG Uplus is most favorably positioned in this year’s spectrum auction. The company has the most options, as four (B, C, D, and E) of the five blocks on offer are adjacent to the company’s existing spectrum. In addition, the company currently has sizeable LTE frequency holdings, meaning the need for spectrum is less pressing. On the other hand, SK Telecom (SKT) and KT face a greater need for additional spectrum, given their larger subscriber bases. The two telcos also have to renew licenses for their respective 40MHz blocks in the 2.1GHz band (set to expire at the end of the year), which could come at a high price tag. The renewal prices will be tied to the outcome of the auction, as prices will be calculated based on the average of 3% of revenue and the final bid for the 20MHz up for auction in the 2.1GHz band. April 19, 2016 Telecom Service Figure 1. 2016 spectrum auction plan: Spectrum packages to be allocated (A-E blocks) Notes: Bidder can only obtain one wide band (A or D), and maximum bandwidth that can be allocated is limited to 60MHz Source: MSIP, Yonhap News, Mirae Asset Daewoo Research Table 1. Details of 2016 spectrum auction plan Minimum Period of Frequency Band- Block bid price utilization Notes band width (Wbn) (years) Relatively few compatible devices A 700MHz 40MHz 762.0 10 Network investment requirements: 1st year 15%, 2nd year 45%, 3rd year 55%, 4th year 65% Spectrum adjacent to KT’s LTE frequency and LG Uplus’s 2G frequency B 1.8GHz 20MHz 451.3 10 Network investment requirements: 1st year 10%, 2nd year 25%, 3rd year 35%, 4th year 40% Only 20MHz out of the 60MHz to be returned by SKT is to be put up for auction; afterwards the spectrum will be adjusted to be adjacent to the allocated company’s existing spectrum. C 2.1GHz 20MHz 381.6 5 Converted to a 10-year period, minimum bid price would be the most expensive, at W763.2bn. The bid price will be linked to the license renewal prices for SKT and KT. Network investment requirements: 1st year 15%, 2nd year 45%, 3rd year 55%, 4th year 65% Spectrum adjacent to LG Uplus’s LTE frequency D 2.6GHz 40MHz 655.3 10 Network investment requirements: 1st year 15%, 2nd year 45%, 3rd year 55%, 4th year 65% Spectrum adjacent to LG Uplus’s LTE frequency E 2.6GHz 20MHz 327.7 10 Network investment requirements: 1st year 10%, 2nd year 25%, 3rd year 35%, 4th year 40% Note: Auctions will proceed in two steps: simultaneous ascending bids (maximum of 50 rounds) followed by sealed bids. Source: MSIP, KISDI, Mirae Asset Daewoo Research Table 2. Three major domestic telcos’ frequency holdings (MHz) Category SKT KT LG Uplus Total Expiry 800 10 2G 30 Jun. 2021 1.8GHz 20 3G 2.1GHz 20 20 40 Dec. 2016 800 20 10 20 Jun. 2021 (SKT, LG Uplus), Jun. 2022 (KT) 900 20 Jun. 2021 LTE 1.8GHz 35 35 260 Dec. 2021 (SKT), Jun. 2021 (KT) 2.1GHz 40 20 20 Dec. 2016 (SKT, KT), Dec. 2021(LG Uplus) 2.6GHz 40 Sep. 2021 WiBro 2.3GHz 30 30 60 Mar. 2019 Amount of frequency held 155 135 100 390 Note: MSIP approved repurposing of 2.1GHz for LTE Source: MSIP, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 April 19, 2016 Telecom Service Table 3. Bidding results of the previous spectrum auction (Aug. 30, 2013) (Wbn) Available blocks B2 C2 D2 Total (2.6GHz , 40MHz ) (1.8GHz , 35MHz ) (1.8GHz , 15MHz ) Winner LG Uplus SKT KT Winning bid 478.8 1,050.0 900.1 2,428.9 Minimum price 478.8 673.8 288.8 1,441.4 Amount above min. 0.0 376.2 611.3 987.5 Notes: Allocation conditions: 1) If either SKT or KT acquires the C2 block, they must relinquish their current 1.8GHz band within six months. 2) If KT acquires the D2 block, it can only launch the service in the Seoul metropolitan area immediately after allocation, and then in March 2014 in other major cities and July 2014 nationwide; conditions can be nullified if another operator provides the service first or a roaming agreement is reached between operators. 3) The 2.6GHz band allows interference by specified radio equipment in the 2.4GHz band; use of the D2 block is preconditioned on the protection of existing radio stations. Source: MSIP, Mirae Asset Daewoo Research Table 4. Previous domestic spectrum auctions Auctioned spectrum Method of auction Total winning bid 800MHz 2011 1.8GHz Simultaneous ascending bids W1,701.5bn 2.1GHz 1.8GHz Mixed method: 2013 Simultaneous ascending bid s W2,428.9bn 2.6GHz (50 rounds) + sealed b ids Source: MSIP, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 April 19, 2016 Telecom Service APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price SK Telecom (017670) 02/02/2016 Buy 300,000 05/01/2014 Buy 40,000 07/31/2015 Buy 350,000 04/09/2014 Trading Buy 36,000 05/06/2015 Buy 360,000 LG Uplus (032640) 04/05/2016 Buy 14,000 10/01/2014 Buy 380,000 02/01/2016 Buy 13,000 08/03/2014 Buy 310,000 07/31/2015 Buy 15,000 04/15/2014 Buy 290,000 04/28/2015 Buy 14,000 KT (030200) 01/31/2016 Buy 35,000 01/25/2015 Buy 16,000 11/01/2015 Trading Buy 35,000 10/01/2014 Buy 15,000 08/02/2015 Buy 39,000 07/31/2014 Buy 11,500 01/20/2015 Buy 40,000 04/28/2014 Buy 13,000 10/01/2014 Buy 42,000 03/10/2014 Buy 15,000 (W) SK Telecom (W) KT (W) LG Uplus 400,000 50,000 20,000 40,000 300,000 15,000 30,000 200,000 10,000 20,000 100,000 5,000 10,000 0 0 0 Apr 14 Apr 15 Apr 16 Apr 14 Apr 15 Apr 16 Apr 14 Apr 15 Apr 16 Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ─), Target price ( ▬), Not covered ( ■), Buy ( ▲), Trading Buy ( ■), Hold ( ●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development.