KT Skylife (053210 KS) Challenging market environment and lack of positive catalysts Media 4Q15 review: Service revenue weak, but platform revenue better than expected KT Skylife reported 4Q15 earnings that slightly topped our expectations and the Results Comment consensus. January 27, 2016 Positives: Platform revenue was stronger than expected, as the addition of T-commerce channels boosted shopping channel transmission commissions. Thanks to increased revenue from the high-margin platform business, overall operating profit improved 10% (Downgrade) Trading Buy YoY. Non-operating expenses also declined YoY, contributing to an improvement in net profit. Target Price (12M, W) 17,000 Negatives: Service revenue contracted QoQ and YoY due to a simultaneous decline in the number of subscribers (QoQ) and ARPU. The fall in ARPU comes despite the fact Share Price (01/26/16, W) 14,900 that the mix of Olleh TV Skylife (OTS; a bundled package from KT IPTV and KT Skylife), which has a below-average ARPU, is declining, while the mix of UHD offerings, which Expected Return 14% have above-average ARPU, is steadily increasing. Meanwhile, the company declared a 2015 cash dividend of W350 per share. The company did not increase its dividends because its net profit growth was largely due to one-time reversals of expenses. OP (15F, Wbn) 98 Consensus OP (15F, Wbn) 97 Unfavorable market environment and limited DCS and UHD effects EPS Growth (15F, %) 33.8 Market environment: April will likely mark a major inflection point for the domestic pay- Market EPS Growth (15F, %) 20.4 TV market, as SK Telecom (SKT), the largest domestic telco, is set to take over CJ P/E (15F, x) 11.1 HelloVision, the largest domestic cable operator. If the deal goes through, the domestic Market P/E (15F, x) 11.1 pay-TV market is likely to become a two-horse race between KT affiliates (combined KOSPI 1,871.69 subscriber m/s of 30%) and SKT affiliates (27% m/s). Market Cap (Wbn) 713 Wired/wireless integration: With domestic LTE penetration now exceeding 70%, we Shares Outstanding (mn) 48 believe mobile video services will become even more important. And as bundled Free Float (%) 49.4 packages between wired and wireless services become more widespread in the pay-TV Foreign Ownership (%) 18.3 industry, investor attention will likely fall on companies that can generate business Beta (12M) 0.97 synergies from such integration. In this context, we think telcos owning IPTV businesses 52-Week Low 14,100 are better positioned to take the lead in the pay-TV market. 52-Week High 23,900 DCS/UHD: KT Skylife’s services are optimized to real-time TV broadcasts, rather than (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M mobile. And the company has focused on standalone satellite services since 2H15. The company’s dish convergence solution (DSC), which was supposed to begin this year, has Absolute -14.6 -34.2 -10.0 been approved only for shadow zones, meaning the impact on subscriber attraction will Relative -9.2 -28.1 -6.9 likely be limited. Meanwhile, UHD broadcasting is becoming more widely adopted , but it 150 KT Skylife KOSPI will likely take some time for it to have an actual impact on service ARPU. 130 Downgrade to Trading Buy and Cut TP to W17,000 110 We downgrade our rating on KT Skylife to Trading Buy (from Buy) and cut our target 90 price to W17,000 (from W25,000), reflecting a lower P/E multiple. In 2016, earnings are expected to decline YoY due to the dissipation of last year’s one-time items. In addition, 70 1.15 5.15 9.15 1.16 the company could fall behind the broader trends reshaping the industry, while DCS and UHD are unlikely to serve as any meaningful share catalysts. Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 551 600 623 626 648 663 [Telecom Service / Media] OP (Wbn) 67 102 78 98 87 90 Jee-hyun Moon OP margin (%) 12.2 17.0 12.5 15.7 13.4 13.6 +822-768-3615 NP (Wbn) 56 73 56 74 67 69 [email protected] EPS (W) 1,178 1,526 1,162 1,554 1,395 1,438 ROE (%) 17.6 19.3 13.2 16.0 12.9 12.1 Nu-ri Ha +822-768-4130 P/E (x) 28.4 19.4 15.8 11.1 10.7 10.4 [email protected] P/B (x) 4.6 3.4 2.0 1.7 1.3 1.2 Notes: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDAPPENDIXIX 1 AT THE END OF REPORT. January 27, 2016 KT Skylife Earnings and forecasts TableTableTable 111.1... 4Q15P review (Wbn, %) 4Q15P Growth 444Q144Q14Q14Q14 333Q13Q1Q1Q15555 Preliminary KDB Daewoo Consensus YoYYoYYoY QoQQoQQoQ Revenue 156 161 164 161 159 5.1 2.1 Operating profit 21 14 23 22 22 9.8 66.0 OP margin 13.2 8.5 13.8 13.7 13.6 Net profit 13 9 18 15 17 38.7 101.6 Notes: All figures are based on non-consolidated K-IFRS, Source: Company data, FnGuide, KDB Daewoo Research estimates TableTableTable 222.2. Quarterly and annual earnings (Wbn, %) 1Q151Q151Q15 2Q152Q152Q15 3Q153Q153Q15 4Q154Q154Q15P4Q15 PPP 1Q161Q161Q16F1Q16 FFF 2Q162Q162Q16F2Q16 FFF 3Q163Q163Q16F3Q16 FFF 4Q164Q164Q16F4Q16 FFF 201420142014 201520152015 2016F2016F2016F Revenue 147 154 161 164 160 161 163 164 623 626 648 Service 90 89 89 88 88 89 87 86 378 356 351 Platform 34 39 43 46 46 46 48 50 130 162 191 Cost-related 11 11 13 12 12 12 11 10 53 47 46 Other 13 14 17 18 13 14 17 18 62 62 62 Operating profit 30 31 14 23 33 23 14 17 78 98 87 OP margin 20.6 20.1 8.5 13.8 20.6 14.5 8.4 10.2 12.5 15.7 13.4 Net profit 22 26 9 18 25 18 10 13 56 74 67 Net margin 14.7 16.7 5.6 11.0 15.6 11.0 6.4 8.0 8.9 11.8 10.3 QoQ growth Revenue -5.6 4.3 4.5 2.1 -2.7 1.0 1.2 0.4 Service -1.9 -0.3 -0.8 -0.9 0.2 0.6 -1.4 -1.1 Platform -1.8 15.2 8.5 9.4 0.0 0.0 3.0 3.8 Cost-related -14.4 4.4 17.4 -5.0 -2.1 0.0 -5.0 -10.5 Operating profit 47.7 1.8 -56.0 66.0 45.4 -29.1 -41.2 22.6 Net profit 65.9 18.5 -65.0 101.6 37.2 -28.8 -40.8 25.0 YoY growth Revenue -2.5 -0.6 0.2 5.1 8.4 4.9 1.6 -0.1 3.7 0.6 3.5 Service -7.1 -6.3 -5.4 -3.8 -1.8 -0.9 -1.6 -1.8 -3.4 -5.7 -1.5 Platform 14.4 26.3 23.1 34.4 36.8 18.7 12.7 6.9 20.8 24.8 17.5 Cost-related -22.0 -18.6 -4.5 -0.4 13.9 9.2 -11.7 -16.8 -1.3 -12.0 -2.3 Operating profit -5.6 80.1 77.0 9.8 8.1 -24.7 0.7 -25.7 -23.6 25.5 -11.3 Net profit -9.2 78.2 118.3 38.7 14.7 -31.1 16.6 -27.7 -23.8 34.1 -11.2 Key variables and assumptions Cumulative subscribers 4,262 4,292 4,312 4,310 4,318 4,343 4,364 4,376 4,261 4,310 4,376 (‘000 persons) % of OTS subscribers 54 54 53 51 51 50 49 48 55 51 48 Notes: All figures are based on non-consolidated K-IFRS; Assuming recognition of negotiation of home shopping commissions in platform revenue in 3Q16 and expenses related to broadcasting development fund Source: Company data, KDB Daewoo Research estimates TableTableTable 333.3. Earning forecast revisions (Wbn, W, %) Previous Revised % chg. NotesNotesNotes 202020120 1116666FFFF 202020120 1117777FFFF 202020120 1116666FFFF 202020120 1117777FFFF 202020120 1116666FFFF 202020120 1117777FFFF - Revised up platform revenue estimates, assuming fall in Revenue 635 648 648 663 2.0 2.3 service ARPU will gradually slow - Reflects improvement in margin from higher Operating profit 78 81 87 90 11.5 11.1 platform revenue estimates - Revised down non-operating expenses estimates & Net profit 57 60 67 69 17.5 15.0 revised effective tax rate EPS 1,195 1,255 1,395 1,438 16.7 14.6 OP margin 12.3 12.5 13.4 13.6 Net margin 9.0 9.3 10.3 10.4 Notes: All figures are based on non-consolidated K-IFRS Source: KDB Daewoo Research estimates KDB Daewoo Securities Research 2 January 27, 2016 KT Skylife Main points Figure 111.1. Domestic paypay----TVTV market to become a twotwo----horsehorse race betbetweenween KT and SKT Source: KCTA, company data, KDB Daewoo Securities Research Figure 222.2. Sluggish growth in KT Skylife subscribers ('000 persons) (%) 4,350 Number of KT Skylife subscribers (L) 56 Proportion of KT-KT Skylife OTS bundled product (R) 4,300 55 4,250 54 4,200 53 4,150 52 4,100 51 1/14 4/14 7/14 10/14 1/15 4/15 7/15 10/15 Notes: OTS refers to Olleh TV Skylife that is a bundled product of KT IPTV and KT Skylife satellite Source: Company data, KDB Daewoo Securities Research Figure 333.3.