Transcript
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.
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
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
similar fee structures) do. The pay TV business model, therefore, helps ensure stability
amid the media industry’s rapid changes.
We have noted the growing importance of media businesses within the telecom service
industry. Faced with stagnant population growth, domestic media and telecom firms
have had to actively diversify their subscriber-based businesses to ensure additional
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
subscribers, and N-screen subscription and mobile data revenue from wireless
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.
Overweight (Maintain)
Industry Report
April 23, 2015
Daewoo Securities Co., Ltd.
[Telecom Service / Media]
Jee-hyun Moon
+822-768-3615
jeehyun.moon@dwsec.com
Market value of pay-TV operators expected to increase, backed by improving domestic
pay-TV business environment and earnings recovery
Notes: SK Broadband, CJ HelloVision, and KT Skylife combined
Source: Company data, KDB Daewoo Securities Research
2,500
3,000
3,500
4,000
4,500
50
100
150
200
250
2011 2012 2013 2014 2015F 2016F
(Wbn)(Wbn) Major pay-TV operators' combined net profit (L)
Major pay-TV operators' combined market cap (R)
- Depreciation on digital conversion- Marketing expenses - Fall in ARPU with expansion of bundled products- KT Skylife: One-off lawsuit cost- CJ HelloVision: Loss on disposable assets
- Digital conversion nearing end- Slowing fall in ARPU- Removal of one-off costs- More room for dividends with FCF
recovery
Media/Telecom Service
2
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
C O N T E N T S
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
Media/Telecom Service
3
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
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
Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 2. Domestic pay-TV value chain and business model
Source: KDB Daewoo Securities Research
40
60
80
100
120
140
1/14 3/14 5/14 7/14 9/14 11/14 1/15 3/15
(1/2014=100) CJ HelloVision (KR) KT Skylife (KR)Charter (US) Time Warner Cable (US)Comcast (US) DirecTV (US)Dish Network (US) Sky Perfect JSAT (JP)
Product ion/
programmingDevice
Content provider
- Ter restr ia l
- Program provider
Cost Revenue
Subscr iber
Revenue Revenue
Adver t isers
Home shopping/
T -commerce
operators
Pay TV
- Cable SOs
- Satellite TV operators
- IPTV operators ( telcos)
- OTT operators
Service/distr ibut ion
Program
usage fee
Service
usage fee
T rans-
missionfees
Ad
costs
Media/Telecom Service
4
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
(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
Source: KDB Daewoo Securities Research
Firm Firm
Market share “Life share”
Firm
FirmFirm
Firm Firm
FirmFirm
FirmFirm
Media/Telecom Service
5
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
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
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
SK Telecom
IPTV Btv
(subsidiary SK Broadband) 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
2,500
3,000
3,500
4,000
4,500
50
100
150
200
250
2011 2012 2013 2014 2015F 2016F
(Wbn)(Wbn) Major pay-TV operators' combined net profit (L)
Major pay-TV operators' combined market cap (R)
- Depreciation on digital conversion- Marketing expenses - Fall in ARPU with expansion of bundled products- KT Skylife: One-off lawsuit cost- CJ HelloVision: Loss on disposable assets
- Digital conversion nearing end- Slowing fall in ARPU- Removal of one-off costs- More room for dividends with FCF
recovery
Media/Telecom Service
6
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
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
Source: MSIP, KCC, KCTA, KISDI, KDB Daewoo Securities Research
Figure 6. Average annual number of subscribers (by technology type) in domestic pay-TV market
Notes: Redundancy caused by OTS (bundling of KT IPTV and KT Skylife) not removed
Source: KDB Daewoo Securities Research
62%
74%
2%
63%
0%
20%
40%
60%
80%
05 06 07 08 09 10 11 12 13 14
Digital conversion rate
LTE conversion rate
0
5
10
15
20
25
30
05 06 07 08 09 10 11 12 13 14
(mn persons)
IPTV (+18% over the past 3 years)
Satellite (+4% over the past 3 years)
Cable SO (-0.5% over the past 3 years)
Media/Telecom Service
7
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
(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$12).
Of note, in the US pay-TV market—which completed the digital conversion before Korea, in
2010—ARPU has been rising since 2011. In the Korean market, digital conversion is still
underway. As of end-2014, the overall conversion ratio reached 74%, while the SO market
conversion ratio stood at only 49%. CJ HelloVision, a major cable SO, saw a drop in average
revenue per subscriber (ARPS) despite the acceleration of digital conversion, as bundling
discounts increased due to higher competition for subscribers. However, we expect ARPU to pick
up going forward, aided by the completion of digital conversion and the government’s policy
support.
Figure 7. Pay-TV monthly ARPU by country: Korea has the lowest level
Source: MSIP, Informa, Bloomberg, KDB Daewoo Securities Research
Figure 8. Time Warner Cable’s pay-TV ARPU and share price Figure 9. CJ HelloVision’s pay-TV ARPS and share price
Source: Bloomberg, Thomson Reuters, KDB Daewoo Securities Research Notes: ARPS (average revenue per subscriber) refers to total service revenue
from one subscriber to CJ HelloVision, including broadband, VoIP, etc.
Source: Company data, Thomson Reuters, KDB Daewoo Securities Research
0
20
40
60
80
100
Korea US Australia Japan Singapore Hong Kong Indonesia
(US$)
10
20
30
40
50
70
72
74
76
78
1Q11 1Q12 1Q13 1Q14
(US$bn)(US$)
Pay-TV ARPU (L)
Market cap (R)
Overall uptrend
400
700
1,000
1,300
1,600
12,000
12,600
13,200
13,800
14,400
1Q11 1Q12 1Q13 1Q14
(Wbn)(W) Pay-TV ARPS (L)Market cap (R)
Digital conversion competition
Media/Telecom Service
8
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
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
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
Source: KDB Daewoo Securities Research
0
1
2
3
4
5
1,500
2,000
2,500
3,000
3,500
4,000
4,500
05 06 07 08 09 10 11 12 13 14
(no.)('000 persons)
Number of SO M&As (R)Broadcast subscribers (L)
2120
25 23 2321
18 19
11 10
0
10
20
30
40
05 06 07 08 09 10 11 12 13 14
(no.) IPTV operators
Satellite TV operators
Cable SOs
Cable MSOs
Media/Telecom Service
9
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
(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
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
Source: Bloomberg, KDB Daewoo Securities Research
0
2
4
6
8
0
40
80
120
160
1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
(US$)(US$)
Time Warner Cable EPS (R)
Time Warner Cable share price (L) Acquired Insight
Acquired NaviSite
Announced plan to merge with Comcast
Acquired DukeNet
0
2
4
6
8
10
13 14 15F 16F 17F 18F
(US$bn)Cable SO retransmission fees
Satellite retransmission fees
Telco retransmission fees
Media/Telecom Service
10
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
Figure 14. US pay-TV industry’s “Big Four” emerged after 20 years of integration
Source: WSJ, KDB Daewoo Securities Research
Figure 15. Total market value of major US pay-TV stocks
Source: Thomson Reuters, KDB Daewoo Securities Research
0
35
70
105
140
1Q95 1Q97 1Q99 1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13 1Q15
(US$bn)
Comcast
Time Warner Cable
Charter
Small-scale M&As
Period of large M&As2012 digital conversion: Over 90%
2014: Comcast and Time Warner Cable announced merger
Medium to large-scale M&As begun in earnest2005 digital conversion: 50%
Media/Telecom Service
11
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
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%
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%
Source: KCTA, KDB Daewoo Securities Research
12%15%
23%
31%
37%
46%
54%
62%
69%
74%
0%
20%
40%
60%
80%
05 06 07 08 09 10 11 12 13 14
Digital conversion rate in pay TV
Entry into IPTV
KT pursues OTSin earnest
M&Asbetween
cable SOs
Expansion in SK Broadband's net subscriber additions
0
10
20
30
40
50
60
0
4
8
12
16
05 06 07 08 09 10 11 12 13 14
(%)(mn persons) Subscribers to analog cable (L) Subscribers to digital cable (L)Digital conversion rate (R)
Media/Telecom Service
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April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
(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$10 per month. The situation in the Korean market is different in
that 1) the rate difference between conventional digital pay TV and OTT services is only modest,
and 2) the digital conversion and the proliferation of OTT services are progressing simultaneously
Figure 18. Pay-TV APRU in the US increased as digital conversion neared completion, after falling
during period of accelerating conversion
Source: KCC, Thomas et al. (2011), Bloomberg, Broadbandtvnews.com, KDB Daewoo Securities Research
Figure 19. Rapid growth in OTT-subscribing households represents both a threat and an
opportunity for the existing US pay-TV market
Source: Bloomberg, KDB Daewoo Securities Research
58%
66%
87%
89%
40
50
60
70
80
90
100
40
50
60
70
80
90
100
04 05 06 07 08 09 10 11 12 13 14
(US$)(%)
Avg. pay-TV ARPU (R)
Digital conversion rate (L)
As digital conversion accelerated,
ARPU fell
As digital conversion neared
completion, ARPU rose
0
4
8
12
16
20
11 12 13 14 15F 16F 17F 18F
(mn households)
US households with OTT subscriptions
Media/Telecom Service
13
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
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
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
Source: KISDI, Nasmedia, Home Choice, KDB Daewoo Securities Research
10,000
15,000
20,000
25,000
30,000
0
200
400
600
800
05 06 07 08 09 10 11 12 13
(W)(Wbn)
Home shopping transmission fees (L)
Home shopping transmission fee revenue/no. of pay-TV households (R)
0
5
10
15
20
25
0
100
200
300
400
500
600
2011 2012 2013 2014
(%)(Wbn)
Cable VOD sales (L)
IPTV VOD sales (L)
VOD utilization rate (R)
Media/Telecom Service
14
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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
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
0
3
6
9
12
10 11 12 13 14
(US$bn)
Ad revenue (CAGR 4%)
Commerce revenue (CAGR 28%)
Media/Telecom Service
15
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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.)
Clause 1
The number of subscribers to a single internet multimedia service provider shall not exceed one-third of
the combined subscribers to all pay-TV service providers, including cable operators, satellite TV services,
and broadband service providers. <Amended 2/29/2008, 3/23/2013, 3/27/2015>
Clause 2
If Clause 1 is breached, the Minister of the Ministry of Science, ICT and Future Planning (MSIP) shall
issue an order for correction and set a deadline of within six months. <Amended 2/29/2008,
3/23/2013>
Clause 3 Operators subject to correction orders under Clause 2 shall make necessary changes before the
deadline.
Clause 4 In counting the number of subscribers, the MSIP minister may exclude mountainous areas and islands
that receive only satellite broadcasting (under Clause 1 ) <New 3/27/2015>
Clause 5 Counting the number of subscribers under Clause 1 is based on a presidential decree <New 3/27/2015>
Notes: Provisions will be in effect for three years before reassessment
Source: National Assembly, KDB Daewoo Securities Research
Figure 24. KT Group subscribers (to be subject to combined market share restrictions)
Source: Company data, KDB Daewoo Securities Research
0
2,000
4,000
6,000
8,000
10 11 12 13 14
('000 persons)
KT Skylife only
OTS bundling
KT IPTV only
Media/Telecom Service
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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
Source: Bloomberg, KDB Daewoo Securities Research
-4
0
4
8
12
2010 2011 2012 2013
(%, YoY) High-speed data General cable Digital cable
Phone Commerce and other Broadcasting service
Media/Telecom Service
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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
Notes: In calculating KT figure, redundancy was removed (OTS subscribers counted only once)
Source: KCTA, company data, KDB Daewoo Securities Research
+12%
+4%
-1%+35%
0
2,000
4,000
6,000
8,000
KT, KT Skylife CJ HelloVision Tbroad SK Broadband
('000 persons)
Number of subscribers in 2014Number of subscribers in 2013
Media/Telecom Service
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Figure 28. Broadcast business value chain of “Big Four” domestic pay-TV companies
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)
Consolidated Assets Liabilities Capital Operating
revenue Net profit
C&M 1,155,312 905,511 249,801 609,372 39,057
Subsidiary Owner-
ship Assets Liabilities Capital
Operating
revenue Net profit
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
CU Media’s subsidiary Owner-
ship Assets Liabilities Capital
Operating
revenue Net profit
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
Product ion
Production Programming Services Distribution
Ter restr ia l
Satellite
OTT
IPTV
S O
DMB
Distr ibut ionContent
consumption
Devices
Media/Telecom Service
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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)
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
Source: KISDI, company data, KDB Daewoo Securities Research
TV
54%
PC
17%
Smartphone
25%
Tablet PC
4%
Media used to watch VOD
General household
(ARPU about W10,000)
Single household,
outdoor/mobile
environment
(ARPU W3,000-W10,000)
Hellovision
0
2
4
6
8
Tving Hoppin pooq Btv mobile U+HDTV Olleh TV mobile
CJ HelloVision SK Telecom(SK Planet)
Content AlliancePlatform
SK Telecom(SK Broadband)
LG Uplus KT
(mn persons)
Number of subscribers Monthly unique visitors
Media/Telecom Service
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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$7 more expensive than Netflix, we are upbeat on the new service given
the growing importance of content in the OTT business.
Figure 31. Netflix’s number of subscribers and total market value
Notes: 1Q15 subscriber data based on end-1Q; Total market cap as of 1Q earning release
Source: Netflix, Thomson Reuters, KDB Daewoo Securities Research
Figure 32. Netflix’s coverage distribution: Entry into Asia planned for next year
Source: Company data, KDB Daewoo Securities Research
0
10
20
30
40
0
10
20
30
40
50
60
70
2011 2012 2013 2014 1Q15
(US$bn)(mn persons)
Free streaming subscribers (L)
Paid streaming subscribers (L)
Netflix market value (R)
Media/Telecom Service
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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
Asia, Middle East, etc. Mar. 2015 Deutsche Telekom VideoRise Offering VideoRise in partnership with global program provider
Vubiquity Jan. 2015 Singtel HOOQ Released service in Asia after establishing JV with Sony and Warner
Bros. Dec. 2014 Tele2 Russia Tele2 TV Released 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
(from current 12) by spring 2016 Source: News reports, KDB Daewoo Securities Research
Figure 33. Domestic mobile video market growth being driven mainly by telcos’ OTT services
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
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
0
100
200
300
400
500
600
4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
(mn min.) SKT B tv mobile LGU U+ HDTV
KT Olleh TV mobile CAP pooq for Android
SK Planet T store VOD CJ HelloVision Tving
SK Planet Hoppin
Top three telco OTTs
0
100
200
300
400
32,000
33,000
34,000
35,000
36,000
37,000
38,000
13.4 13.7 13.10 14.1 14.4 14.7 14.10 15.1
(mn min.)(W)
Avg. total usage time of three major telcos' IPTV (R)
Three major telcos' average ARPU (L)
Media/Telecom Service
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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
Source: KT Mhouse, Nasmedia, KDB Daewoo Securities Research
Figure 36. High growth in IPTV ad billings ; IPTV ads sold out since July 2014
Notes: Three major IPTV companies combined
Source: Nasmedia, KDB Daewoo Securities Research
0
20
40
60
80
100
09 10 11 12 13 14 15F
(Wbn)
Volume of IPTV ads handled
IPTV ad slots of three major operators sold out since July
Olleh TV: Only one or two ads before the program
Ads 1 Ads 2 Ads 3 Ads 4No. ofads
Terrestrial/cable: Many ads placed before the program
Media/Telecom Service
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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
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.
31,960
41.1
77,728
13,140
40.6 32,396
9,290
29.7 31,305
170
7.82,185
Annual transaction value (Wbn) Platform users and households(mn persons)
Annual transaction value/users(W)
PC internet Mobile
Home shopping (live broadcasting) T-commerce (data broadcasting)
Media/Telecom Service
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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
Source: Skylife TV, KDB Daewoo Securities Research
Figure 39. Increase in content costs could prompt pay-TV operators to begin content production
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
12 15
23
31
37
46
54
62
69
74
0
20
40
60
80
40
50
60
70
80
05 06 07 08 09 10 11 12 13 14
(%)(%) Pay-TV digital conversion rate (R)
Terrestrial+PP broadcasing fee/CATV (SO+satellite) broadcasting fee (L)
Terrestrial broadcasters and cable companies argue over
retransmission fees
IPTV entry
Plan to have three UHD channels
Media/Telecom Service
25
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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
Source: Tving, Company data, KDB Daewoo Securities Research
Figure 41. Viewers are increasingly streaming rather than downloading videos
Notes: 2014 figures are based on KDB Daewoo estimates
Source: Company data, Parliament, Nasmedia, KDB Daewoo Securities Research
0
350
700
1,050
1,400
0
30
60
90
120
2011 2012 2013 2014
('000 persons)(Wbn) IPTV monthly plan revenue (L)
IPTV monthly plan subscribers (R)
Watching behavior shifting from download to streaming;Diversification of monthly plan types spurs subscriptions:- Domestic broadcasting channel classification
(terrestrial, CJ E&M, JTBC)- Film-dedicated- US drama-dedicated- Tailored to age, genre, etc.
W4,900 W1,200
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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
KCC Set forth details on prohibited acts regarding bundled products; Expected to be announced in May-June. Task force teams to be assigned to investigate breaches.
MSIP Task force teams to be assigned to study the strengthening market power of dominant players (to set forth pre-approval conditions)
SK Telecom Oppose new regulations on bundled products (bundling allows the firm to offer products at cheaper prices)
KT, LG Uplus Largely favor the new regulation; SKT’s wireless market power affects the wired segment competition
Cable SOs Favor new regulations
Source: Media press, KDB Daewoo Securities Research
Figure 42. Telco’s IPTV and broadband subscriber trend
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
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
20
30
40
50
60
70
11,000
12,000
13,000
14,000
15,000
1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
(%)(W)
Pay-TV ARPS (L)
Broadcasting digital conversion rate (R)
- ARPU fell as digital conversion acceleratedDiscounts on bundled products likely increased due to intensified competition for subscribers
- Positive impact expected if excessive discounts are banned
0
20
40
60
80
0
5
10
15
20
08 09 10 11 12 13 14
(%)(mn persons)
IPTV subscribers (L)
Telco broadband subscribers (L)
IPTV/broadband subscribers (R)
Media/Telecom Service
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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
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. <Amended
2/29/2008, 3/23/2013>
Attract foreign capital
Clause 2 Multi-channel operators and relay cable operators shall not attract, respectively, stakes
exceeding 20% and 10% from foreign governments/institutions, foreigners, and
entities in which foreign governments/institutions have a stake exceeding a certain
proportion.
Protect management control from
foreign capital
Clause 3 SOs, satellite broadcasters, program providers, and network operators shall not attract
stakes exceeding 49% from foreign governments/institutions, foreigners, and entities
in which foreign governments/institutions have a stake exceeding a certain proportion.
Protect management control from
foreign capital
Internet multimedia
broadcasting law
Details Impact
Article 9 Restrictions on foreign ownership
Clause 1 Foreign governments/institutions, foreigners, and entities in which foreign
governments/institutions or foreigners have more than a 15% stake shall not own a
stake exceeding 49% in internet multimedia broadcast providers. <Amended,
12/30/2014>
Protect management control from
foreign capital
Source: Korea Ministry of Government Legislation, KDB Daewoo Securities Research
Table 7. US-Korea FTA media-related provisions (took effect on March 15th, 2015)
Domestic services
Details Impact
Terrestrial broadcasters,
satellite broadcasters, cable SOs
No changes in foreign ownership and broadcast quotas Neutral
Telecom/broadcasting
convergence services
No change to convergence (e.g., IPTV) services Neutral
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
direct investments. However, foreigners that make indirect investments via a Korean
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.
US global media groups could
expand into Korea.
The ceiling on the proportion of foreign programs carried by program providers will
be eased. Program providers are currently required to have domestic content
account for at least 35% of animated programs and 25% of movies. The required
ratios will be lowered to 30% and 20%, respectively.
The number of foreign programs
could expand.
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.
However, the government might intervene if access to domestic audio-video content
is difficult.
US global media groups could
expand into Korea.
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)
Name of company Total
mkt. cap
OP margin P/E P/B EV/EBITDA ROE Dividend
yield 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F
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
(Canada) 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
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
(China) 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
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
Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research
5
10
15
20
25
30
35
4/14 6/14 8/14 10/14 12/14 2/15 4/15
(x) CJ HelloVisionKT SkylifeSK BroadbandTime Warner CableComcastDirecTVSky Perfect JSAT
Korean pay-TV stocks breaking away from undervaluation
20
40
60
80
100
120
140
160
14.4 14.6 14.8 14.10 14.12 15.2 15.4
(-1Y=100) CJ HelloVision KT SkylifeSK Broadband Time Warner CableComcast DirecTVSky Perfect JSAT
Korean pay-TV stocks adjusting upward this year
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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
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
Notes: FCF per share is applied with 12-month forward estimate
Source: Thomson Reuters, KDB Daewoo Securities Research
0
2
4
6
8
0.0
0.5
1.0
1.5
2.0
2.5
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14
(US$)(%)
Comcast FCF per share (R)
Comcast dividend yield (L)
Dividend payout begins- FCF per share recovers
amid end of digital conversion and industry integration
0
1,000
2,000
3,000
4,000
5,000
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1Q11 1Q12 1Q13 1Q14 1Q15
(W)(%)
KT Skylife FCF per share (R)
KT Skylife dividend yield (L)
Dividend payout begins-FCF per sharerecovers as earnings increase due to platform revenue
Media/Telecom Service
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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
Media/Telecom Service
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Pay TV: Mobile leadership to drive the media business
SK Telecom (SKT) stands to enjoy the most benefit from the increasing personalization
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-
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.
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.
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 the media and telecom businesses going forward.
Focusing on mainstay telecom business as well as new businesses
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, it should help reduce personnel and other related costs going forward. After
making SK Broadband 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. The new CEO hopes to steer the
company toward a leading position in the platform segment. 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.
Valuation: Maintain Buy and TP of W380,000; Top pick in media/telecom
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
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 .
SK Telecom (017670 KS)
Making inroads into media based on mobile leadership
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
Telecom Service
(Maintain) Buy
Target Price (12M, W) 380,000
Share Price (04/23/15, W) 275,000
Expected Return 38%
OP (15F, Wbn) 2,129
Consensus OP (15F, Wbn) 2,186
EPS Growth (15F, %) 17.7
Market EPS Growth (15F, %) 38.8
P/E (15F, x) 10.5
Market P/E (15F, x) 11.0
KOSPI 2,173.41
Market Cap (Wbn) 22,205
Shares Outstanding (mn) 81
Free Float (%) 62.5
Foreign Ownership (%) 44.3
Beta (12M) 0.43
52-Week Low 203,000
52-Week High 301,000
(%) 1M 6M 12M
Absolute -1.6 2.4 34.8
Relative -7.8 -9.0 24.1
80
100
120
140
160
4.14 8.14 12.14 4.15
SK Telecom KOSPI
Media/Telecom Service
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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
Source: KDB Daewoo Securities Research
Figure 49. SKT’s media service subscriber trend
Notes: Number of OTT users based on Android app monthly unique users
Source: SK Broadband, Koreanclick, KDB Daewoo Securities Research
Product ion/
programmingDevice
Content
provider
Cost Revenue
Subscriber
S erv ice/dis t ribut ion
Pay TV
S K B roadband: B tv IPTV, B tv mobile
S K P lanet : OTT Hoppin, T store VOD
T-commerce operator
S K B roadband
(cooperation with SK Planet)
Revenue
Programusage fee
Service usagefee
Trans-mission
fees
0
2,000
4,000
6,000
8,000
4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
('000 persons) OTT hoppin unique visitors
OTT T store VOD unique visitors
OTT B tv mobile unique visitors
IPTV B tv subscribers
Media/Telecom Service
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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
Mar. 2015 PCCW (HK) Vuclip Acquired Vuclip, a global mobile VOD service provider; expanding
regional coverage to include Asia and the Middle East
Mar. 2015 Deutsche
Telekom VideoRise
Offering VideoRise in partnership with Vubiquity,a global
contents program supplier
Jan. 015 Singtel HOOQ Launched services in Asia via a JV with Sony and Warner Bros.
Nov. 2014 Softbank (JP) BB TV Next Operated by subsidiary TV Bank; planning to expand to 50
channels by next spring
Source: News reports, KDB Daewoo Securities Research
Figure 50. SKT’s ARPU and total time spent on B tv mobile
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
0
100
200
300
400
500
600
33,000
34,000
35,000
36,000
37,000
38,000
4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
(mn min.)(W)
SKT B tv mobile total usage time
SKT ARPU (L)
Media/Telecom Service
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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
SKT
(Parent company)
SK Broadband
(Wholly-owned
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
approval May 6th May 6th
Appraisal rights Not assigned Assigned May 6- 26th
Exercise price for appraisal right (W) N/A 4,645
Surrender of old shares
Date of exchange/transfer
N/A
June 9th
May 7th-June 8th
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
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
Next-generation platforms
Lifestyle platform Media platform IoT service platform
Open ecosystem based on telecoms network
Innovative services that satisfy the needs of customers
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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
New 29.
7 11.7 11.2 2.8 11.0 11.0 11.0 11.7 33.5 12.7 11.2
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
subscribers 27,814 27,889 28,403 28,613 28,400 28,596 28,791 29,183 27,352 28,613 29,183
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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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
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Pay-TV business: UHD and DCS to be the focus
Uncertainties over KT Skylife are gradually dissipating. The stock has underperformed on
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.
In addition, the company will likely stage a recovery in net subscriber growth by
bolstering its technological strengths and making up for its weaknesses.
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
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
likely to get on the path to commoditization this year, it will be important to watch
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
also likely to seek approval for the introduction of dish convergence solutions (DCS).
Furthermore, the company is anticipated to address its lack of VOD features, which is
often cited as one of the major weaknesses of satellite TV. Via its affiliate KTH, the
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
weaknesses, as the essence of the pay-TV business is differentiation based on superior
service competitiveness.
Earnings forecast: Increase in earnings and dividend payout anticipated
This year, platform revenue is likely to increase, contributing to earnings improvement.
Home shopping commission revenue, one of the sources of platform revenue, appears to
be on the rise. In addition, 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 channels for standard definition
(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.
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
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.
KT Skylife (053210 KS)
Uncertainties are dissipating
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
Media
(Upgrade) Buy
Target Price (12M, W) 24,000
Share Price (04/23/15, W) 19,200
Expected Return 25%
OP (15F, Wbn) 89
Consensus OP (15F, Wbn) 96
EPS Growth (15F, %) 19.2
Market EPS Growth (15F, %) 38.8
P/E (15F, x) 13.9
Market P/E (15F, x) 11.0
KOSPI 2,173.41
Market Cap (Wbn) 918
Shares Outstanding (mn) 48
Free Float (%) 49.3
Foreign Ownership (%) 13.2
Beta (12M) 0.10
52-Week Low 15,150
52-Week High 27,400
(%) 1M 6M 12M
Absolute 23.5 -3.0 -20.8
Relative 15.7 -13.8 -27.1
50
70
90
110
130
4.14 8.14 12.14 4.15
KT Skylife KOSPI
Media/Telecom Service
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KDB Daewoo Securities Research
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
Source: KDB Daewoo Securities Research
Figure 55. Media service subscriber trend
Source: Company data, KDB Daewoo Securities Research
P roduct ion/
programmingDevice
Content
provider
S kylife TV
(subsidiary)
Cost Revenue
Subscriber
S erv ice/dis t ribut ion
Pay TV
K T S kylife, satellite TV operator
Revenue
Home shopping/T-commerce
operators
Programusage fee
Service usagefee
Transmissionfees
49
50
51
52
53
54
55
56
3,800
3,900
4,000
4,100
4,200
4,300
4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
(%)('000 persons)
KT Skylife subscribers (L)
% of KT-Skylife OTS bundling (R)
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KDB Daewoo Securities Research
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
Source: Company data, KDB Daewoo Securities Research
Figure 57. T-commerce has ample room for growth
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
31,960
41.1
77,728
13,140
40.6 32,396
9,290
29.7 31,305
170
7.82,185
Annual transaction value (Wbn) Platform users and households(mn persons)
Annual transaction value/users(W)
PC internet Mobile
Home shopping (live broadcasting) T-commerce (data broadcasting)
Obtained baseball broadcasting right Plan to have three UHD channels
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KDB Daewoo Securities Research
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, %)
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
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
(‘000 persons) 4,218 4,244 4,258 4,261 4,262 4,281 4,300 4,338 4,181 4,261 4,338
% of OTS subscribers 54 54 55 55 54 54 55 55 53 55 55
Media/Telecom Service
43
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KDB Daewoo Securities Research
KDB Daewoo Securities Research
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
Media/Telecom Service
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KDB Daewoo Securities Research
Pay TV: ARPU to normalize; Digital conversion to provide earnings opportunity
CJ HelloVision, which holds cable SOs, has struggled with the changing business
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
conversion, and 2) entry into the MVNO business. While the digital conversion has
picked up speed, ARPU has deteriorated.
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.
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. In addition, 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.
Given the launch of the T-commerce channel, commission incomes are forecast to grow.
Other business: MVNO to break even
CJ HelloVision suffered margin deterioration following expansion into the MVNO
business in 2012. However, the company enjoys a first-mover advantage, as it is 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,
with some retailers (e.g., Homeplus) having discontinued the MVNO business and
second-tier players (e.g., Korea Post) suffering losses due to only meager net subscriber
growth. Market realignment should benefit top-tier firms such as CJ HelloVision.
Valuation: Raise TP to W16,000; Maintain Buy
We reiterate our Buy rating and raise our target price to W16,000 (from W13,000).
Although one-off losses emerged late last year, earnings are forecast to grow YoY this
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).
CJ HelloVision (037560 KS)
Combining prudent and bold strategies
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
Media
(Maintain) Buy
Target Price (12M, W) 16,000
Share Price (04/23/15, W) 11,950
Expected Return 34%
OP (15F, Wbn) 126
Consensus OP (15F, Wbn) 117
EPS Growth (15F, %) 192.2
Market EPS Growth (15F, %) 38.8
P/E (15F, x) 12.0
Market P/E (15F, x) 11.0
KOSPI 2,173.41
Market Cap (Wbn) 925
Shares Outstanding (mn) 77
Free Float (%) 45.2
Foreign Ownership (%) 9.0
Beta (12M) 0.25
52-Week Low 8,640
52-Week High 17,800
(%) 1M 6M 12M
Absolute 19.5 7.2 -32.9
Relative 12.0 -4.7 -38.2
40
60
80
100
120
4.14 8.14 12.14 4.15
CJ HelloVision KOSPI
Media/Telecom Service
45
April 23, 2015
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KDB Daewoo Securities Research
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
Source: KDB Daewoo Securities Research
Figure 59. Media service subscriber trend
Notes: OTT users based on monthly unique users
Source: Company data, Koreanclick, KDB Daewoo Securities Research
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
('000 persons) OTT Tving (web) unique visitor
OTT Tving (app) unique visitors
Cable CJ HelloVision subscribers
P roduct ion/
programmingDevice
Content
provider
S kylife TV
(subsidiary)
Cost Revenue
Subscriber
S erv ice/dis t ribut ion
Pay TVCJ HelloV is ion, cable SO
Revenue
Home shopping operator
CJ O Shopping (parent)
서비스
사용료Service usage
fee
Programusage fee
Trans-mission
fees
Media/Telecom Service
46
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
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
Source: Company data, KDB Daewoo Securities Research estimates Notes: Excludes MVNO handset revenue
Source: Company data, KDB Daewoo Securities Research estimates
30
40
50
60
70
80
0
1,000
2,000
3,000
4,000
5,000
10 11 12 13 14 15F
('000 persons) (%)
Cable subscribers (L)
Digital conversion rate (R)
0
250
500
750
1,000
1,250
0
50
100
150
200
250
12 13 14 15F
(Wbn) ('000 persons)
MVNO service revenue (L)
MVNO subscribers (R)
Media/Telecom Service
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April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
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
Media/Telecom Service
48
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
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
such, compared to peers, the company has higher regulatory exposure to the upcoming
combined subscriber market share restrictions. However, we believe the negative impact
will not be as significant as 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, redundancy is likely
to 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 above which the rule will apply.
Faced with regulatory challenges, KT is expected to focus on maximizing its IPTV
platform revenue, including VOD monthly subscriptions, IPTV ads, and T-commerce;
these businesses tend to post higher profits than non-platform businesses.
Financial position to strengthen on proceeds from subsidiary sale (end-May)
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
this year 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.
Valuation: Maintain Buy with TP of W40,000
We reiterate our Buy rating on KT with a target price of W40,000. This year, KT is
anticipated to see a turnaround in earnings, and thus is likely to pay dividends, unlike last
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,
earnings are improving across the board, at both the parent and subsidiary levels.
KT (030200 KS)
The light at the end of the tunnel
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
Telecom Service
(Maintain) Buy
Target Price (12M, W) 40,000
Share Price (04/23/15, W) 29,650
Expected Return 35%
OP (15F, Wbn) 1,147
Consensus OP (15F, Wbn) 1,083
EPS Growth (15F, %) -
Market EPS Growth (15F, %) 38.8
P/E (15F, x) 6.8
Market P/E (15F, x) 11.0
KOSPI 2,173.41
Market Cap (Wbn) 7,742
Shares Outstanding (mn) 261
Free Float (%) 84.9
Foreign Ownership (%) 45.4
Beta (12M) 0.77
52-Week Low 28,500
52-Week High 36,800
(%) 1M 6M 12M
Absolute 0.7 -3.9 -9.2
Relative -5.7 -14.6 -16.4
70
80
90
100
110
120
4.14 8.14 12.14 4.15
KT KOSPI
Media/Telecom Service
49
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
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
Source: KDB Daewoo Securities Research
Figure 63. Media service subscriber trend
Notes: OTT users based on monthly unique users
Source: Company data Koreanclick, KDB Daewoo Securities Research
P roduct ion/
programmingDevice
Content provider
S kylife TV
Cost Revenue
Subscriber
Revenue Revenue
Ad rep company
Nasmedia
(subsidiary)
T-commerce
K TH
(subsidiary)
S erv ice/dis t ribut ion
Pay-TV
K T: Olleh TV (IPTV), Olleh TV Mobile (OTT)
K T S kylife, satellite subsidiary
Programusage fee
Service usagefee
Trans-mission
feesAd costs
0
2,000
4,000
6,000
8,000
10,000
4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
('000 persons) OTT KT Olleh tv mobile unique visitors Skylife subscribers only
KT-Skylife OTS bundling subscribers KT IPTV subscribers only
Media/Telecom Service
50
April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
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
17,293 17,564 17,955 18,080 18,147 18,215 18,282 18,349 17,300 18,080 18,349
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
30,984 31,020 31,211 31,248 31,313 31,126 31,033 30,940 31,053 31,248 30,940
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
Revenue 23,360 23,435 22,683 22,826 -2.9 -2.6 - Moved to discontinued operations account due to the sale of
KT Rental
Operating profit 1,223 1,236 1,147 1,215 -6.2 -1.7 - Moved to discontinued operations account due to the sale of
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
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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
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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
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
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
company currently ranks seventh in the number of subscribers. Moreover, its IPTV ads
have been completed sold out since June of last year.
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
mobile content strategy is similar to that of Netflix, a major video-streaming service
provider in the US. In June 2014, LG Uplus launched Uflix Movie, which is optimized for
mobile video content. In addition, since signing a supply contract with the US cable
channel HBO in February 2015, the company has offered HBO content via its fixed-line
and wireless services. In March, the company rolled out an LTE-video plan to promote
the use of both TV services and mobile data.
Major business: Net subscriber additions continued in the MNP market
We believe LG Uplus was the sole telco in 1Q to see net subscriber additions in the
mobile number portability (MNP) market. As of March, the telco had added net
subscribers for 10 straight months, in sharp contrast to its rivals, which have suffered
net declines. The company has demonstrated strong business capabilities and profits in
the face of significant industry events, such as the introduction of the new handset
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
IPTV service, is also increasing, bolstering its growth potential.
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
market. Backed by its solid PG competitiveness, the company is currently expanding
partnerships with other simplified payment services, while beefing up its own simplified
payment service, Paynow.
Valuation: Reiterate Buy and TP of W16,000
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.
LG Uplus (032640 KS)
Pursuing Netflix-style content strategy based on LTE
strength
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
Telecom Service
(Maintain) Buy
Target Price (12M, W) 16,000
Share Price (04/23/15, W) 10,250
Expected Return 56%
OP (15F, Wbn) 704
Consensus OP (15F, Wbn) 676
EPS Growth (15F, %) 58.1
Market EPS Growth (15F, %) 38.8
P/E (15F, x) 12.4
Market P/E (15F, x) 11.0
KOSPI 2,173.41
Market Cap (Wbn) 4,475
Shares Outstanding (mn) 437
Free Float (%) 63.9
Foreign Ownership (%) 34.0
Beta (12M) 0.53
52-Week Low 8,890
52-Week High 12,850
(%) 1M 6M 12M
Absolute -3.8 -6.0 1.5
Relative -9.8 -16.4 -6.6
70
80
90
100
110
120
130
4.14 8.14 12.14 4.15
LG Uplus KOSPI
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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
Source: KDB Daewoo Securities Research
Figure 65. Media service subscriber trend
Notes: OTT users based on monthly unique users,
Source: Company data, Koreanclick, KDB Daewoo Securities Research
P roduct ion/
programmingDevice
Content
provider
Cost Revenue
Subscriber
S erv ice/dis t ribut ion
Pay TV
LG Uplus: G TV (IPTV),
LG U+ HDTV (OTT)
Revenue
Home shopping/T-commerce
operators
Programusage fee
Service usagefee
Trans-missionfees
0
1,000
2,000
3,000
4,000
5,000
4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
('000 persons)
OTT LG U+ HDTV unique visitors
IPTV G tv subscribers
LTE video-exclusive monthly plan
Uflix movie service
Free KBS VOD
HBO-exclusive plan
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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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Pay TV: Content and commerce businesses to play a key role in KT Group’s
media strategy
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
pay-TV platforms (including KT). In addition, the company was one of first movers in the
T-commerce business.
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
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.
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
the technical nature of satellite broadcasting, KT Skylife relies on outside content
providers.
Other flagship businesses: Coverage of T-commerce business to expand
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.
Valuation: Upgrade to Buy; Raise TP to W17,000
We upgrade KTH from Trading Buy to Buy, and raise our target price to W17,000 (from
W14,000). With the pay-TV business seeking additional revenue sources, the growth
prospects of the T-commerce market appear increasingly bright. The company’s T-
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.
KT Hitel (036030 KQ)
Content and commerce businesses key for KT’s media
strategy
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
Media
(Upgrade) Buy
Target Price (12M, W) 17,000
Share Price (04/23/15, W) 12,600
Expected Return 35%
OP (15F, Wbn) 10
Consensus OP (15F, Wbn) 15
EPS Growth (15F, %) -11.4
Market EPS Growth (15F, %) 38.8
P/E (15F, x) 41.7
Market P/E (15F, x) 11.0
KOSDAQ 692.48
Market Cap (Wbn) 450
Shares Outstanding (mn) 36
Free Float (%) 32.9
Foreign Ownership (%) 4.6
Beta (12M) 0.53
52-Week Low 7,100
52-Week High 14,800
(%) 1M 6M 12M
Absolute -10.3 56.9 56.5
Relative -17.1 27.9 27.8
70
90
110
130
150
170
190
4.14 8.14 12.14 4.15
KTH KOSDAQ
Media/Telecom Service
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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
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
Source: 온라인쇼핑협회, 미래창조과학부, KCTA, KDB DAEWOO SECURITIES
RESEARH
31,960
41.1
77,728
13,140
40.6 32,396
9,290
29.7 31,305
170
7.82,185
Annual transaction value(Wbn)
Platform users andhouseholds
(mn persons)
Annual transactionvalue/users
(W)
PC internet
Mobile
Home shopping (live broadcasting)
T-commerce (data broadcasting)
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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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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
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.
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
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
advertiser.
Major business: Solid mobile ad revenue growth
Nasmedia started out in online display ads, but has since expanded to mobile display ads,
which are the company’s major growth driver. The revenue contribution of mobile ads
stood at less than 10% in 2013, but has climbed to more than 20%. For 2015, we expect
online ads, including mobile ads, to account for 69% of total revenue, followed by
outdoor ads (digital signage, 19%) and IPTV ads (12%).
We are encouraged by the increase in orders from large customers. In particular, global
mobile gaming companies are mounting all-out marketing campaigns, increasing ad
orders for domestic media firms. Demand for cross-media marketing (combining mobile
and outdoor ads) is showing particularly strong growth. Nasmedia is well-positioned to
benefit from this trend, as the company’s business portfolio includes both mobile and
outdoor ads.
In addition, the company has diversified its ad media since being acquired by KT in 2008.
On behalf of KT, the company takes a variety of ad orders, including IPTV, satellite TV,
mobile, and outdoor ads. Outdoor ads include subways, bus shelters, airports, apartment
town boards, convenience stores, and movie theaters. Baseball park ads have recently
been added thanks to the launch of the baseball team KT Wiz.
Valuation: Maintain Buy and raise TP to W40,000
We maintain our Buy call on Nasmedia and raise our target price to W40,000 (from
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
P/E (31x) of Asian internet firms’ and global advertising companies’ multiples.
Nasmedia (089600 KQ)
Well-positioned to take advantage of current media
usage trends
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
Media
(Maintain) Buy
Target Price (12M, W) 40,000
Share Price (04/23/15, W) 31,050
Expected Return 29%
OP (15F, Wbn) 12
Consensus OP (15F, Wbn) 12
EPS Growth (15F, %) 34.8
Market EPS Growth (15F, %) 38.8
P/E (15F, x) 23.9
Market P/E (15F, x) 11.0
KOSDAQ 692.48
Market Cap (Wbn) 256
Shares Outstanding (mn) 8
Free Float (%) 30.0
Foreign Ownership (%) 3.9
Beta (12M) 1.03
52-Week Low 14,900
52-Week High 34,250
(%) 1M 6M 12M
Absolute 6.7 27.5 91.1
Relative -1.3 3.9 56.0
70
120
170
220
4.14 8.14 12.14 4.15
Nasmedia KOSDAQ
Media/Telecom Service
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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
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
Notes: Combined volume handled by three major IPTV companies
Source: Company data, KDB Daewoo Securities Research
0
20
40
60
80
100
09 10 11 12 13 14 15F
(Wbn)
Volume of IPTV ads handled
Olleh TV: Only one or two ads before the program
Ads 1 Ads 2 Ads 3 Ads 4No. ofads
Terrestrial/cable: Many ads placed before the program
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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
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)
Source: Company data, KDB Daewoo Securities Research
Nasmedia ads business
Internet ads
Mobile ads
Digital broadcasting ads Solution
Network ads
Outdoordigital ads
Outdoor ads
MobileBroadcasting (IPTV, satellite)
Traffic media- Subway - Bus- Airport
Life media- Convenience store- Main street- Theater
Media/Telecom Service
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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
Media/Telecom Service
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KDB Daewoo Securities Research
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
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.
0
10,000
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30,000
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(W) KT Skylife
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Media/Telecom Service
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KDB Daewoo Securities Research
KDB Daewoo Securities Research
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.
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.
Media/Telecom Service
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April 23, 2015
KDB Daewoo Securities Research
KDB Daewoo Securities Research
KDB Daewoo Securities International Network
Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc.
Head Office
34-3 Yeouido-dong, Yeongdeungpo-gu
Seoul 150-716
Korea
Two International Finance Centre
Suites 2005-2012
8 Finance Street, Central
Hong Kong, China
320 Park Avenue
31st Floor
New York, NY 10022
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
25 Old Broad St.
London EC2N 1HQ
United Kingdom
Six Battery Road #11-01
Singapore, 049909
7th Floor, Yusen Building
2-3-2 Marunouchi, Chiyoda-ku
Tokyo 100-0005
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
B-12 Jianguomenwai Avenue
Chaoyang District, Beijing 100022
China
Room 38T31, 38F SWFC
100 Century Avenue
Pudong New Area, Shanghai 200120
China
Suite 2103, Saigon Trade Center
37 Ton Duc Thang St,
Dist. 1, Ho Chi Minh City,
Vietnam
Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000
Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLC PT. Daewoo Securities Indonesia
2401B, 24th Floor, East Tower, Twin Towers
B-12 Jianguomenwai Avenue,
Chaoyang District, Beijing 100022
China
#406, Blue Sky Tower, Peace Avenue 17
1 Khoroo, Sukhbaatar District
Ulaanbaatar 14240
Mongolia
Equity Tower Building Lt.50
Sudirman Central Business District Jl.
Jendral Sudirman Kav. 52-53, Jakarta Selatan
Indonesia 12190
Tel: 86-10-6567-9699 Tel: 976-7011-0807 Tel: 62-21-515-1140
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