[2016 Outlook] Telecom Service

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including tAnalysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including tAnalysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including tAnalysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. he U.S. he U.S. he U.S.

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

Telecom Service SAFE: Time for a defensive play

2016 outlook: Defensive play and growth opportunities

We see challenges ahead for telecom stocks. ARPU growth is slowing as the LTE market

matures, which should cause the stocks to grow sensitive to outside events/regulatory

issues in 2016 (such as the legislative election and frequency auctions). Nevertheless,

amid a slowdown in the domestic economy, telecom stocks are likely to garner investors’

attention as defensive plays, owing to their steady earnings and high dividend yields.

Digital technology is transforming how we live, as smart machines move beyond just

automation of physical tasks to higher functions that exemplify the “second machine

age,” which includes advances in telecommunications and data communications. For

example, physical objects embedded with telecom chips can collect and exchange data

for a variety of purposes. As the IT industry continues to focus on products/services that

make life easier, we believe the telecom industry will play an increasingly important role

in this transformation, helping to connect technology with humans. In the coming year,

we believe telecom companies will be strongly motivated to actively seek growth

opportunities.

S.A.F.E.

S - Shareholder return: Korean telcos are seeing stronger free cash flow (FCF), which

should allow them to increase shareholder returns. For global telcos, higher dividend

yields tend to go hand in hand with valuation premiums; those with dividend yields of

around 3-4% trade at an average P/B of 2.8x. Based on the November 26th closing price,

SK Telecom’s (SKT) annual and year-end dividend yields are estimated at 4.3% and 3.8%,

respectively, yet the stock is trading at a P/B of only 1.1x.

A - ARPU Growth: ARPU growth is slowing as the LTE market matures, whereas data

traffic growth is accelerating. The first major uptick in ARPU occurred during the

transition from 3G to LTE services, and we believe a second can be expected with the

further segmentation of LTE plans (higher charges for higher data usage, and more

segmented plans allowing subscribers to choose from a range of prices for different

intended uses). The increase in data consumption has been driven by growing demand

for video streaming.

F - Frequency auction: In early 2016, the government plans to auction 700MHz, 1.8GHz,

2.1GHz, and 2.6GHz bands. SKT and KT are expected to actively participate in the bid, as

their 2.1GHz licenses will expire at end-2016.

E - Expanding businesses (new businesses and M&As): In 2016, telecom companies are

likely to actively seek new business opportunities, in light of the slowdown in existing

businesses and regulatory issues. New business areas include media (platform and

content), IoT (smart home) and fintech (payment and online-only banks).

Overweight; Top pick is SK Telecom

We reiterate our Overweight rating on the telecom sector. In 2016, telcos’ shareholder

returns will likely increase. Moreover, telcos are anticipated to seek growth opportunities

actively, navigating regulatory headwinds early next year.

Our top pick is SKT (017670 KS/Buy/TP of W350,000), in light of the stock’s top-of-the-

class dividend yields and major efforts to pursue growth. We also advise closely

watching LG Uplus (032640 KS/Buy/TP of W15,000) and KT (030200 KS/Trading Buy/TP

of W35,000).

Overweight (Maintain)

2016 Outlook Report

November 27, 2015

Daewoo Securities Daewoo Securities Daewoo Securities Daewoo Securities CCCCo., Ltd.o., Ltd.o., Ltd.o., Ltd.

[Telecom Service / Media]

Jee-hyun Moon

+822-768-3615 [email protected]

Nu-ri Ha +822-768-4130

[email protected]

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November 27, 2015

KDB Daewoo Securities Research

Figure Figure Figure Figure 1111. . . . Telecom service sector landscape in 2016: WTelecom service sector landscape in 2016: WTelecom service sector landscape in 2016: WTelecom service sector landscape in 2016: Worriesorriesorriesorries to ease with to ease with to ease with to ease with strengtheningstrengtheningstrengtheningstrengthening of of of of shareholder returns and efforts to find new growth driversshareholder returns and efforts to find new growth driversshareholder returns and efforts to find new growth driversshareholder returns and efforts to find new growth drivers

Source: KDB Daewoo Securities Research

Figure Figure Figure Figure 2222. Key themes . Key themes . Key themes . Key themes forforforfor telecom service sector in 2016telecom service sector in 2016telecom service sector in 2016telecom service sector in 2016: S.A.F.E.: S.A.F.E.: S.A.F.E.: S.A.F.E.


Figure Figure Figure Figure 3333. . . . Dividend yields of domestic telcosDividend yields of domestic telcosDividend yields of domestic telcosDividend yields of domestic telcos and 3and 3and 3and 3----year KTB yield: SKT highly attractive in the short termyear KTB yield: SKT highly attractive in the short termyear KTB yield: SKT highly attractive in the short termyear KTB yield: SKT highly attractive in the short term

Note: DPS is based on KDB Daewoo Securities Research estimates

Source: Thomson Reuters, KDB Daewoo Securities Research

1

2

3

4

5

1/15 2/15 3/15 4/15 5/15 6/15 7/15 8/15 9/15 10/15 11/15

(%)

SKT (annual) SKT (year-end, excluding interim dividend)

LG Uplus KT

3Y KTB yield

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C O N T E N T S

I. 2016 outlook 4 1. Shareholder returns to increase 4 2. Telcos aggressively in search of new growth drivers 5 3. Keyword for 2016: SAFE 6

II. 2016 keyword: S.A.F.E. 7 1. S: Shareholder return 7 2. A: ARPU growth 8 3. F: Frequency auction 9 4. E: Expanding business – New business expansion, M&A deals 11

III. Valuation and investment strategy 15 1. Overweight; Top pick is SK Telecom 15 2. Dividend yield and valuation 15 3. Comparison with global peers 16

Key Recommendations 17 SK Telecom (017670 KS) 18 LG Uplus (032640 KS) 21 KT (030200 KS) 23

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I. 2016 outlook

1. Shareholder returns to increase

Telecom stocks have remained range-bound in 2H after declining in 1H. The potential entry of a

fourth telecom company and rate discounts have soured investor sentiment. In 2H, stabilized

earnings and the possibility of higher dividend yields have provided downside support for telecom

shares.

We still see challenges ahead next year. ARPU growth is slowing as the LTE market matures,

which should cause the stocks to grow sensitive to outside events/regulatory issues in 2016 (such

as the legislative election and frequency auctions). Nevertheless, amid a slowdown in the

domestic economy, telecom stocks are likely to garner investors’ attention as defensive plays,

owing to their steady earnings and high dividend yields.

FigureFigureFigureFigure 4.4.4.4. HighHighHighHigh----dividend stockdividend stockdividend stockdividend stockssss outperformoutperformoutperformoutperformedededed thethethethe domestic stock market domestic stock market domestic stock market domestic stock market overoveroverover the the the the past three yearspast three yearspast three yearspast three years


FigureFigureFigureFigure 5.5.5.5. TTTTelcoselcoselcoselcos’’’’ annual annual annual annual dividend yielddividend yielddividend yielddividend yield trendtrendtrendtrend

Note: 2015F and 2016F are based on our estimates


1.0

1.5

2.0

2.5

3.0

3.5

4.0

80

100

120

140

160

180

200

1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15

High-dividend stocks (L) KOSPI (L) 3Y KTB yield (R)

(1/2012=100)

High-dividend stocks+78.3%

KOSPI +11.7%

(%)

All three expected to pay dividends thisyear and next

4.3%

1.7%

2.7%

0

1

2

3

4

5

6

7

2011 2012 2013 2014 2015F 2016F

(%) SKT KT LG Uplus

KT No dividend

LGUplusNo dividend

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November 27, 2015


2. Telcos aggressively in search of new growth drivers

Digital technology is transforming how we live, as smart machines move beyond just automation

of physical tasks to higher functions that exemplify the “second machine age,” which includes

advances in telecommunications and data communications. For example, physical objects

embedded with telecom chips can collect and exchange data for a variety of purposes, allowing

new businesses (e.g., IoT, virtual reality, and smart healthcare) to emerge.

As the IT industry continues to focus on products/services that make life easier, we believe the

telecom industry will play an increasingly important role in this transformation, helping to

connect technology with humans.

In 2016, telcos are expected to step up efforts to find growth opportunities, taking pivotal roles

in the IoT, media content, and fintech industries. With their traditional telecom businesses

expected to slow (evidenced by weakening ARPU growth) and regulatory pressures expected to

increase going forward, telcos must strengthen their efforts to find new growth engines.

FigureFigureFigureFigure 6.6.6.6. ARPU growth ARPU growth ARPU growth ARPU growth is slowing as the LTE market matures, raising the need for more active is slowing as the LTE market matures, raising the need for more active is slowing as the LTE market matures, raising the need for more active is slowing as the LTE market matures, raising the need for more active strategiesstrategiesstrategiesstrategies


FigureFigureFigureFigure 7.7.7.7. Media, fintech, IoT Media, fintech, IoT Media, fintech, IoT Media, fintech, IoT areareareare keykeykeykey to telcosto telcosto telcosto telcos’’’’ efforts to expand into new businessesefforts to expand into new businessesefforts to expand into new businessesefforts to expand into new businesses


24

30

36

42

48

54

28,000

30,000

32,000

34,000

36,000

38,000

04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F 18F

(p)(W)

Average ARPU of three major telcos (L)

Telecom service sector index (R)

LTE penetration

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November 27, 2015


3. Keyword for 2016: SAFE

S - Shareholder return

Korean telcos are seeing stronger free cash flow (FCF), which should allow them to increase

shareholder returns. For global telcos, higher dividend yields tend to go hand in hand with

valuation premiums; those with dividend yields of around 3-4% trade at an average P/B of 2.8x.

Based on the November 26th closing price, SKT’s annual and year-end dividend yields are

estimated at 4.3% and 3.8%, respectively, yet the stock is trading at a P/B of only 1.1x.

A - ARPU growth

ARPU growth is slowing as the LTE market matures, whereas data traffic growth is accelerating.

The first major uptick in ARPU occurred during the transition from 3G to LTE services, and we

believe a second can be expected with the further segmentation of LTE plans (higher charges for

higher data usage, and more segmented plans allowing subscribers to choose from a range of

prices for different intended uses). The increase in data consumption has been driven by growing

demand for video streaming.

F - Frequency auction

In early 2016, the government plans to auction 700MHz, 1.8GHz, 2.1GHz, and 2.6GHz bands. SKT

and KT are expected to actively participate in the bid, as their 2.1GHz licenses will expire at end-

2016.

E - Expanding business: New businesses and M&As

In 2016, telecom companies are likely to actively seek new business opportunities, in light of the

slowdown in existing businesses and regulatory issues. New business areas include media

(platform and content), IoT (smart home) and fintech (payment and online-only banks).

FigureFigureFigureFigure 8.8.8.8. Key themes Key themes Key themes Key themes forforforfor telecom service sector in 2016 telecom service sector in 2016 telecom service sector in 2016 telecom service sector in 2016


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II. 2016 keyword: S.A.F.E.

1. S: Shareholder return

In the global stock market, companies’ shareholder return policies (including dividend payments

and treasury share purchase/cancellation) have become increasingly important for their share

performances. Domestic telcos’ infrastructure investments are currently in a lull, between the

launch of LTE in end-2011 and the expected introduction of 5G in 2020. Accordingly, Korean

telcos are now seeing stronger FCF, which should allow them to increase shareholder returns.

For global telcos, higher dividend yields tend to go hand in hand with valuation premiums. While

stocks with dividend yields of 2% and below are trading at a P/B of 1.4x on average, those whose

dividend yields of around 3-4% and 5% and over are trading at average P/Bs of 2.8x and 3.1x,

respectively.

SKT’s annual and year-end dividend yields are estimated at 4.3% and 3.8%, respectively, yet the

stock is trading at a P/B of only 1.1x. We believe domestic telcos will likely maintain robust

dividend yields in 2016.

Figure 9. Figure 9. Figure 9. Figure 9. Listed Korean firms’ dividend payouts and yields have improvedListed Korean firms’ dividend payouts and yields have improvedListed Korean firms’ dividend payouts and yields have improvedListed Korean firms’ dividend payouts and yields have improved since 2014since 2014since 2014since 2014

Source: WiseFN, KDB Daewoo Securities Research

Figure 10. Estimated 2015F dividend yields of domestic telcos: SKT highly attractive at aboutFigure 10. Estimated 2015F dividend yields of domestic telcos: SKT highly attractive at aboutFigure 10. Estimated 2015F dividend yields of domestic telcos: SKT highly attractive at aboutFigure 10. Estimated 2015F dividend yields of domestic telcos: SKT highly attractive at about 4%4%4%4%

Source: Thomson Reuters, KDB Daewoo Securities Research

0

10

20

30

40

50

1.0

1.5

2.0

2.5

3.0

00 02 04 06 08 10 12 14

(%)(%)

Korean firms' dividend payout ratio (R)

KOSPI 200 dividend yield (L)

1

2

3

4

5

1/15 2/15 3/15 4/15 5/15 6/15 7/15 8/15 9/15 10/15 11/15

(%)

SKT (annual) SKT (year-end, excluding interim dividend)

LG Uplus KT

3Y KTB yield

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November 27, 2015


2. A: ARPU growth

ARPU growth is slowing as the LTE market matures. The first major uptick in ARPU occurred

during the transition from 3G to LTE services, and we believe a second can be expected with the

further segmentation of LTE plans (higher charges for higher data usage, and more segmented

allowing subscribers to choose from a range of prices for different intended uses).

Of note, growing demand for video streaming is believed to be the major driver for the increase in

data consumption. To take advantage of this trend, telcos must secure a wide-ranging pool of

video content, expand their mobile and fixed-line subscriber bases, improve download/upload

speed, and develop network and cloud computing technology for next-generation media content,

like virtual reality.

FigureFigureFigureFigure 11. Amount of data usage has accelerated in 11. Amount of data usage has accelerated in 11. Amount of data usage has accelerated in 11. Amount of data usage has accelerated in the late stagethe late stagethe late stagethe late stage of LTE penetration of LTE penetration of LTE penetration of LTE penetration

Source: MSIP, KDB Daewoo Securities Research

Figure 12. Video is the growth engine for global mobile data Figure 12. Video is the growth engine for global mobile data Figure 12. Video is the growth engine for global mobile data Figure 12. Video is the growth engine for global mobile data traffictraffictraffictraffic

Source: Cisco, KDB Daewoo Securities Research

0

500

1,000

1,500

2,000

2,500

3,000

0

30

60

90

120

150

180

1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15

(MB)('000 TB)

Total data traffic (L)

Data traffic per subscriber (R)

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3. F: Frequency auction

(1) Frequency auctions scheduled for 2016

In early 2016, the government plans to auction 700MHz, 1.8GHz, 2.1GHz, and 2.6GHz bands. SKT

and KT are expected to actively participate in the bid, as their 2.1GHz licenses will expire at end-

2016.

The 2.1GHz spectrum is called the “golden frequency,” due to its global use for 3G and LTE

services and low costs for overseas roaming and equipment procurement. The spectrum may also

be used for 5G in the future. Thus, domestic telcos are competing fiercely to secure the band.

In reallocating frequency bands, the government will take into account the facts that 1) license

periods for frequency bands are usually eight to 10 years and 2) licenses for most bands expire

within five years from now. It is all the more important for telcos to secure frequency bands in

light of the upcoming launch of 5G in 2020. Accordingly, the auction could confirm telcos’ efforts

to take the lead in 5G and improve their technology.

Figure 13. Figure 13. Figure 13. Figure 13. Government’s frequency auctGovernment’s frequency auctGovernment’s frequency auctGovernment’s frequency auction plan: Four spectrum packages ion plan: Four spectrum packages ion plan: Four spectrum packages ion plan: Four spectrum packages

Source: MSIP Mobile Gwanggaeto Plan 2.0, KDB Daewoo Securities Research

Table Table Table Table 1111. . . . Three major domestic telcos’ frequency holdings Three major domestic telcos’ frequency holdings Three major domestic telcos’ frequency holdings Three major domestic telcos’ frequency holdings (MHz)

CategoryCategoryCategoryCategory SK TelecomSK TelecomSK TelecomSK Telecom KTKTKTKT LG UplusLG UplusLG UplusLG Uplus TotalTotalTotalTotal Expiry Expiry Expiry Expiry

(Period of utilization)(Period of utilization)(Period of utilization)(Period of utilization)

2G 800 10

30 June 2021 (10 years) 1.8GHz 20

3G 2.1GHz 60 40

100

December 2016 December 2016 December 2016 December 2016 (15 years)(15 years)(15 years)(15 years) (40) (20)

LTE

800 20 10 20

200

June/December 2021

900 20 (8-10 years)

1.8GHz 35 35

2.1GHz (20) (20) 20

2.6GHz 40

WiBro 2.3GHz 30 30 60 March 2019 (7 years)

Amount of frequency held 155 135 100 390

Note: Numbers in parentheses in the 2.1GHz row indicate spectrums refarmed to LTE services

Source: MSIP, KDB Daewoo Securities Research

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(2) Medium/long-term frequency policy

Frequency is the key resource for mobile communications networks, but the pool of useful bands

is limited. Frequency band utilization could affect a country’s GDP growth. Frequency allocation

methods and policy trends also affect the growth potential of related companies and industries.

Misguided policies could lead to a frequency shortage.

The Korean government is increasing the mobile frequency spectrum in four phases under the

“Mobile Gwanggaeto Plan 2.0.” The government’s frequency allocation plans could change

depending on terrestrial broadcasters’ use of the UHD frequency and the potential designation of

a fourth telco. Given that the government’s 2.1GHz reallocation method is coming under criticism

from telcos, the government is expected to announce a “Mobile Gwanggaeto Plan 3.0” sometime

soon.

The US estimates the annual value of unlicensed frequency bands and its contribution to GDP

growth at US$222.4bn and US$6.7bn, respectively. Since 10 years ago, the US government has

sought to boost GDP growth via consistent ICT and frequency policies, led by the FCC. By

maximizing frequency utilization, the government has created jobs, supported ailing industries,

and invested in infrastructure, education, healthcare, and clean energy.

TableTableTableTable 2222. . . . Mobile Gwanggaeto Plan 2.0Mobile Gwanggaeto Plan 2.0Mobile Gwanggaeto Plan 2.0Mobile Gwanggaeto Plan 2.0; G; G; G; Government to unveil Plan 3.0overnment to unveil Plan 3.0overnment to unveil Plan 3.0overnment to unveil Plan 3.0 soon soon soon soon (MHz)

CategoryCategoryCategoryCategory

Potential ranges to be secured Potential ranges to be secured Potential ranges to be secured Potential ranges to be secured

TotalTotalTotalTotal Secured Secured Secured Secured (allocated (allocated (allocated (allocated in 2013)in 2013)in 2013)in 2013)

First (2015)First (2015)First (2015)First (2015) Second Second Second Second (2018)(2018)(2018)(2018) Third (2020)Third (2020)Third (2020)Third (2020) Fourth Fourth Fourth Fourth (2023)(2023)(2023)(2023)

AdditionAdditionAdditionAddition RefarmingRefarmingRefarmingRefarming AdditionAdditionAdditionAddition RefarmingRefarmingRefarmingRefarming AdditionAdditionAdditionAddition RefarmingRefarmingRefarmingRefarming AdditionAdditionAdditionAddition

FDD

700MHz 40 a 40+a

1.8GHz 60 (30) 20 100 (30)

2.1GHz 60 60 120

2.6GHz 80 (40) 20 10 110 (40)

TDD

2.0GHz 40 40

2.3GHz 30 40 70

2.5GHz 40 40

FDD/TDD 3.5GHz 160 160

WRC Additional

distribution range

Below 6GHz Min 200 Min 200

Above 7GHz Min 500 Min 500

Total 180 (70) 60+a 290 220 510

Addition 1260MHz+a

60 40 20 Refarming 120MHz

Notes: FDD and TDD refer to frequency division duplex and time division duplex, respectively; WRC refers to World Radiocommunication Conference;

‘a’ in the 1st phase for 700MHz is the spectrum that could be additionally allocated for mobile communication after consultation with the KCC


Table Table Table Table 3333. . . . US seekUS seekUS seekUS seekinginginging to boost GDP growth (+US$6.7bn) by utilizing unlicensed frequencyto boost GDP growth (+US$6.7bn) by utilizing unlicensed frequencyto boost GDP growth (+US$6.7bn) by utilizing unlicensed frequencyto boost GDP growth (+US$6.7bn) by utilizing unlicensed frequency (US(US(US(US$bn$bn$bn$bn))))

Use of nonUse of nonUse of nonUse of non----licensed frequencylicensed frequencylicensed frequencylicensed frequency EffectEffectEffectEffect Economic Economic Economic Economic valuevaluevaluevalue

GDPGDPGDPGDP ConsumerConsumerConsumerConsumer surplussurplussurplussurplus

Supplier Supplier Supplier Supplier surplussurplussurplussurplus

TotalTotalTotalTotal surplussurplussurplussurplus

Easing spectrum congestion Value of Wi-Fi access in public areas and effect of increase in data transmission speed on GDP

1.9 10.7 12.6 3.1

Wi-Fi for households Use of additional internet access devices and cost of devices 36.1 0.0 36.1 -

Wireless internet service providing industry

Revenue of wireless service providers

- - - 1.4

Tablet PC market accessible only to Wi-Fi

Tablet PC market revenue

8.0 34.9 42.9

Construct personal Wi-Fi network

Total revenue from network

- - 0.0 2.2

RFID (radio frequency identification) Retail business

26.3 68.6 94.8 -

Medical services

4.0 32.0 36.0 -

Electronic tag

Intermediate total 30.3 100.5 130.8 -

Total 76.2 146.1 222.4 6.7

Note: Value based on 2013, Economic value is approximately W240tr, and incremental effect on GDP is W8tr based on current foreign exchange rate

Source: US Telecom Advisory Service, KISDI, KDB Daewoo Securities Research

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4. E: Expanding business – New business expansion, M&A deals

(1) Digital media platform and content

SKT is at the forefront of the media platform business. Notably, the company plans to acquire CJ

HelloVision and merge it with SK Broadband in April 2016.

In the US, pay-TV ARPU climbed after 2010 as digitalization neared 90% and large-scale M&As

gathered momentum. It will be important to watch whether a similar development unfolds in

Korea when digitalization is completed and the market is consolidated.

Meanwhile, given that households are the subscribers for pay-TV services, telcos are likely to use

their pay-TV subscribers as a base to expand the “smart home” business.

With regard to content, we note the possibility that Netflix might partner with a local IPTV

service provider when entering the Korean market in early 2016. An alliance with Netflix would

increase awareness of telcos’ efforts to improve content quality, while also furthering business

diversification (into paid video content services).

FiFiFiFiguregureguregure 14141414. . . . Domestic payDomestic payDomestic payDomestic pay----TV M/S trend (based on subscribers): TV M/S trend (based on subscribers): TV M/S trend (based on subscribers): TV M/S trend (based on subscribers): SKT to emerge asSKT to emerge asSKT to emerge asSKT to emerge as secondsecondsecondsecond----largest largest largest largest paypaypaypay----TV TV TV TV operator operator operator operator with acquisition of CJ with acquisition of CJ with acquisition of CJ with acquisition of CJ HelloVisionHelloVisionHelloVisionHelloVision

Source: KCTA, Company data, KDB Daewoo Securities Research

Table Table Table Table 4444.... Content and related investments by telcosContent and related investments by telcosContent and related investments by telcosContent and related investments by telcos

SKTSKTSKTSKT KTKTKTKT LG UplusLG UplusLG UplusLG Uplus

Service

∙ SK B tv, B tv mobile ∙ KT Olleh tv, Olleh tv mobile ∙ U+ tv G, LTE video portal

∙ 3.3mn IPTV subscribers (+ CJ HelloVision: 4.1mn; pay-TV market share: 27%)

∙ 6.4mn IPTV subscribers + Skylife (pay-TV market share: 30%)

∙ 2.19mn IPTV subscribers (pay-TV market share: 8%)

Content

∙ Channel-specific content (CJ E&M, JTBC, etc.)

∙ Movie/drama, sports/leisure, documentary, foreign (around 80 channels)

∙ B tv kidzone: Animation

∙ Joint investment/production with CJ E&M

∙ Broadest full HD channel lineup 160,000 VODs

∙ Children’s and educational content

∙ Most free movie content

∙ Exclusive contract with Sony Pictures; simultaneous broadcast of US dramas

∙ Partnership with MGM to air US dramas and VODs in Korea

∙ Exclusive distributor of NBC Universal content in Korea (simultaneous broadcast)

∙ 30,000 knowledge/lifestyle content offerings

∙ Uflix provides around 22,000 latest movies and popular HBO dramas

Investment strategy

∙ Subscriber target: 15mn by 2018

∙ Partnership with production companies to develop in-house content

∙ Offer premium services (GIGA UHD) targeting high-end customers

∙ Increase OTS subscribers (bundling with Skylife)

∙ Increase ARPU by launching video data plans

∙ Increase the number of high-end customers (UHD IPTV, etc.)

Source: Company data, Media report, KDB Daewoo Securities Research

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(2) Next-generation media content

In our view, telcos are likely to invest in next-generation media content and strive to create a

related ecosystem. In particular, virtual reality (VR) systems appear likely to proliferate, with the

VR ecosystem already quickly penetrating the wearable device and content distribution areas.

Telcos are expected to play an important role in facilitating the growth of the VR market by

helping to shorten transmission times. Currently, content is transmitted via smartphone networks

or downloads from PCs (using a memory card). However, transmitting VR content (which blends

multiple video clips into one VR video) is inconvenient because it takes a long time to download or

necessitates the use of PCs (due to significant memory storage requirements).

Shortening transmission times and addressing inconveniencies related to storing/moving VR

content will likely require 5G broadband networks providing speeds of at least 1Gbps.

Technological advancements in mobile networks and next-generation migration have provided a

boost to the mobile ecosystem. With VR content networks in the process of upgrading, we should

also see distribution platforms and VR devices evolve.

Telecoms have already established a foundation for next-generation media content, and also

provide cloud services that are optimal for media streaming. That said, domestic telcos are

working to improve technologies and speed related to 4G-based downloads/uploads.

FigureFigureFigureFigure 15.15.15.15. HMD (headHMD (headHMD (headHMD (head----mounted display)mounted display)mounted display)mounted display) penetration penetration penetration penetration to increase thanks to fto increase thanks to fto increase thanks to fto increase thanks to fall in price all in price all in price all in price and and and and incincincincreasing contentreasing contentreasing contentreasing content

Source: Apple, Tractica, KT, KDB Daewoo Securities Research

FigureFigureFigureFigure 16161616. . . . VRVRVRVR vvvvalue alue alue alue cccchain: hain: hain: hain: Telecom service sector to play a key role inTelecom service sector to play a key role inTelecom service sector to play a key role inTelecom service sector to play a key role in ttttransmission network ransmission network ransmission network ransmission network technology base and cloud servicetechnology base and cloud servicetechnology base and cloud servicetechnology base and cloud servicessss

Source: KT, KDB Daewoo Securities Research

5.4

15.7

30.1

57.4

109.5

1.6 3.4

30.0

38.8(E)

47.7(E)

0.2 2.7

14.9(E)

26.5(E)

38.8(E)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Y Y+1 Y+2 Y+3 Y+4

(mn units)

Apple iPhone (since 2007)

Smart watch (since 2013)

HMD (since 2014)

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(3) IoT

Smart homes have taken center stage in the development of the IoT industry. Demand is

anticipated to rise in Korea amid population aging (Korea is projected to become an “aged

society” in 2018) and the rise in single-person households. SKT is striving to establish a related

ecosystem and platform, and is cooperating with major home electronics producers SEC and LGE.

KT is forging business alliances to provide customized services (including healthcare). LG Uplus

launched the IoT@home brand to expand its B2C monthly fixed-rate subscriber base.

We think the telematics market is also an area of the IoT business into which telcos should

advance aggressively. Notably, LG Group—which has been investing heavily in the electric vehicle

(EV) business—recently transferred the CEO of LG Chem, an EV battery maker, to be the new CEO

of LG Uplus. As such, LG Uplus is likely to join the LG Group’s EV value chain.

Telematics (telecommunications + informatics) refers to the use of wireless devices/technologies

to transmit data in real time, and encompasses telecommunications, vehicular technologies, road

transportation, road safety, electrical engineering, and computer science. By 2019, cars equipped

with telematics devices in Japan, the US, the UK, France, Germany, Italy, Spain, and China are

projected to total 50mn, and should account for around 80% of new car sales volume in these

countries. Of note, US and European authorities’ recent moves to make the use of safety-related

infotainment devices mandatory is likely to promote the growth of the telematics market.

Table Table Table Table 5555. . . . Smart home services by telcoSmart home services by telcoSmart home services by telcoSmart home services by telcossss

SKTSKTSKTSKT KTKTKTKT LG UplusLG UplusLG UplusLG Uplus

On the market

Door lock, dehumidifier, heater, gas valve lockout, Petfit (for pets),

T Outdoor, JooN (for kids), T Pet, United Objects

(Smart Beam 2/Linkage/Band)

GiGA home fitness, Yodoc (diagnostic tool),

Safe Zone, GiGA homecam

Home CCTV MomCa3, 6 types of IoT@Home

(Switch/Gas lock/ Energy meter/

Door lock/Hub/Plug) Thermostat

In the pipeline

Air purifier, lighting, smart switch, smart plugs, water

purifier, gas range hood, air conditioner,

robot cleaner, video phone, security service, etc. (about 30

products/services by 1H16)

Smart air care, time value, alert services for seniors, and smart

homes within this year

Home chat appliances, oven, refrigerator,

air conditioner, robot cleaner, washing machine, EV,

about 10 products by end of 2015

Charac- teristics

Platform: Smart Home Partner: Samsung Electronics/LG

Electronics

Platform: IoT makers- GiGA IoT alliance (100 Korean

and foreign companies)

Platform: IoT@home Partner: LG Electronics

Source: Company data, Media report, KDB Daewoo Securities Research

FigureFigureFigureFigure 17171717. . . . TTTTelematicselematicselematicselematics----equipped carsequipped carsequipped carsequipped cars forecast forecast forecast forecast ((((US, Japan, China, and five US, Japan, China, and five US, Japan, China, and five US, Japan, China, and five EuropeanEuropeanEuropeanEuropean countriescountriescountriescountries))))

Source: YANO Research, Etnews, KDB Daewoo Securities Research

40

42

44

46

48

50

52

13 14 15F 16F 17F 18F 19F

(mn units)

Number of cars equipped with telematics devices

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(4) Fintech business

Major variables for the fintech business include mobile simple payment services and online-only

banks.

Competition in the simple payment services market is intensifying. LG Uplus (Paynow) and SKT

(SK Planet’s Syrup Pay) are expanding their services, while KT’s smart wallet CLiP, which gives an

automatic notice of discount benefits, will likely add payment functions

KT’s K-Bank and SKT’s I-Bank consortiums are currently pursuing online-only banks. The KT

consortium has a competitive edge in big data analysis and know-how, while the SKT consortium

holds massive commerce-based data. License approvals will be released soon, after deliberations

by the Financial Supervisory Service and an independent evaluation committee.

Table Table Table Table 6666. . . . FintechFintechFintechFintech servicesservicesservicesservices

Mobile payment servicesMobile payment servicesMobile payment servicesMobile payment services

LG Uplus LG Uplus LG Uplus LG Uplus ---- PaynowPaynowPaynowPaynow SK Planet SK Planet SK Planet SK Planet –––– Syrup PaySyrup PaySyrup PaySyrup Pay

∙ Launched in November 2013 ∙ Released in April 2015

∙ Largest number of participating merchants in Korea (110,000 on/offline shops)

∙ Expanding services to various commerce areas (in connection with 11th Street and Syrup Order)

∙ Recently expanded service coverage to overseas shops

Preliminary approval request for onlinePreliminary approval request for onlinePreliminary approval request for onlinePreliminary approval request for online----only banksonly banksonly banksonly banks

KT’s KKT’s KKT’s KKT’s K----Bank consortium Bank consortium Bank consortium Bank consortium SKT’s Interpark consortium (ISKT’s Interpark consortium (ISKT’s Interpark consortium (ISKT’s Interpark consortium (I----Bank)Bank)Bank)Bank)

∙ 20 participants including KT, Woori Bank, GS Retail, KG Inisis, etc.

∙ 15 participants, including Interpark, NHN Entertainment, Industrial Bank of Korea, etc.

∙ Plans to launch loans with varied interest rates (based on big data analysis)

∙ One-stop, digital life bank (based on e-commerce and platform service know-how)

Source: Company data, media reports, FSS, KDB Daewoo Securities Research

FigureFigureFigureFigure 18.18.18.18. Fintech sector to provide diversified serviceFintech sector to provide diversified serviceFintech sector to provide diversified serviceFintech sector to provide diversified servicessss apart from paymentapart from paymentapart from paymentapart from payment; O; O; O; Onlinenlinenlinenline----only only only only bankbankbankbanks s s s expectedexpectedexpectedexpected to launchto launchto launchto launch in in in in 2016 2016 2016 2016

Source: Mobile Trend 2016, KDB Daewoo Securities Research

Fintech

Simple

payment

Online-only

bank

P2P loan

NFC

Robo

advisor

Virtual money

UBI

Remittance

service

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III. Valuation and investment strategy

1. Overweight; Top pick is SK Telecom

We reiterate our Overweight rating on the telecom sector. In 2016, telcos’ shareholder returns

will likely increase. Moreover, telcos are anticipated to seek growth opportunities actively,

navigating regulatory headwinds early next year.

Our top pick is SKT (017670 KS/Buy/TP of W350,000), in light of the stock’s top-of-the-class

dividend yields and major efforts to pursue growth. We also advise watching LG Uplus (032640

KS/Buy/TP of W15,000) and KT (030200 KS/Trading Buy/TP of W35,000).

2. Dividend yield and valuation

Shares of global telcos typically receive valuation premiums for higher dividend yields. Indeed,

telco stocks with a dividend yield of less than 2% are currently trading at an average 2015F P/B of

1.4x, while those with dividend yields of 3-4% and more than 5% are trading at P/Bs of 2.8x and

3.1x, respectively. Meanwhile, based on the November 26th closing price, SKT’s annual and year-

end dividend yields are estimated at 4.3% and 3.8%, respectively, yet the stock is trading at a P/B

of only 1.1x.

Currently, the domestic telecom industry is at a mid-point between the introduction of LTE

services at end-2011 and the launch of new 5G services in 2020, and is thus experiencing a lull in

capex. The resultant rise in FCF should allow domestic telcos to strengthen their shareholder

return policies.

We think increasing shareholder return policies, including dividend growth, will have a positive

impact on the easing of domestic telcos’ valuation discounts against their global peers.

FigureFigureFigureFigure 19191919. . . . Telcos’ divided yieldTelcos’ divided yieldTelcos’ divided yieldTelcos’ divided yieldssss and valuationand valuationand valuationand valuationssss are highly correlated are highly correlated are highly correlated are highly correlated

Note: Based on 40 global telcos

Source: Bloomberg, KDB Daewoo Securities Research

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3. Comparison with global peers

Korean telcos are undervalued against their global peers due to 1) regulatory uncertainties, 2)

inconsistent dividend policy, and 3) relatively low growth potential and profitability.

However, we believe that valuation discounts will gradually dissipate due to the following.

First of all, with regard to regulations, the handset distribution law is taking root, while an

increasing number of subscribers are opting for discounted rates instead of handset subsidies. In

addition, the introduction of a fourth telco is unlikely to materialize.

Second, for shareholder return, KT is expected to resume dividend payout in 2015, and LG Uplus

plans to raise per-share dividend to a dividend yield of around 2%. Furthermore, SKT is

considering a per-share dividend increase for the first time in seven years.

Third, with regard to growth potential, all three domestic telcos are expected to pursue ARPU

growth strategies and new business expansion starting in 2016. In addition, profitability will likely

stabilize thanks to the dissipation of one-off issues, including restructuring, and a fall in the

volatility of marketing expenses.

TableTableTableTable 7777. . . . Earnings outlook of global major telcosEarnings outlook of global major telcosEarnings outlook of global major telcosEarnings outlook of global major telcos (Wbn, %)

Company nameCompany nameCompany nameCompany name Mkt capMkt capMkt capMkt cap RevenueRevenueRevenueRevenue OPOPOPOP OP marginOP marginOP marginOP margin Net profitNet profitNet profitNet profit

14141414 15F15F15F15F 16F16F16F16F 14141414 15F15F15F15F 16F16F16F16F 14141414 15F15F15F15F 16F16F16F16F 14141414 15F15F15F15F 16F16F16F16F

SK Telecom (KR) 18,975 17,164 17,076 17,290 1,825 1,814 1,901 10.6 10.6 11.0 1,799 1,659 1,666

KT 7,742 23,422 21,853 21,987 -292 1,367 1,382 -1.2 6.3 6.3 -966 926 821

LG Uplus 4,606 11,000 10,671 10,798 576 694 708 5.2 6.5 6.6 228 408 430

NTT Docomo (JP) 90,635 42,429 42,242 43,649 6,186 6,782 7,388 14.6 16.1 16.9 3,969 4,646 5,121

Softbank 73,534 83,923 84,734 87,265 9,512 10,118 10,648 11.3 11.9 12.2 6,469 5,494 5,301

China Mobile (CH) 273,399 109,678 121,316 128,702 20,693 20,701 23,088 18.9 17.1 17.9 18,685 20,951 21,694

China Unicom 34,708 48,676 50,491 52,498 3,580 3,099 3,382 7.4 6.1 6.4 2,061 2,143 2,187

Singtel (SG) 49,565 14,183 14,028 14,374 2,425 2,410 2,494 17.1 17.2 17.3 3,114 3,177 3,374

PCCW(HK) 5,241 4,520 5,719 5,958 548 830 919 12.1 14.5 15.4 450 371 442

AT&T (US) 236,366 139,510 169,456 194,292 12,372 29,163 35,067 8.9 17.2 18.0 6,556 16,754 20,009

Verizon 209,936 133,856 152,316 152,492 20,644 35,203 35,398 15.4 23.1 23.2 10,138 18,797 18,838

Deutsche Tel. (EU) 97,898 87,625 86,097 87,889 10,135 9,767 11,173 11.6 11.3 12.7 4,089 4,303 4,863

Orange 53,548 55,162 48,882 49,548 6,693 7,083 7,498 12.1 14.5 15.1 1,294 3,116 3,388

Average 11.1 13.3 13.8

Note: KDB Daewoo Securities Research estimates for Korean companies


TablTablTablTableeee 8888. . . . VVVValuations of global major telcosaluations of global major telcosaluations of global major telcosaluations of global major telcos (x, %)

Company nameCompany nameCompany nameCompany name P/EP/EP/EP/E P/BP/BP/BP/B ROEROEROEROE Dividend yieldDividend yieldDividend yieldDividend yield

14141414 15F15F15F15F 16F16F16F16F 14141414 15F15F15F15F 16F16F16F16F 14141414 15F15F15F15F 16F16F16F16F 14141414 15F15F15F15F 16F16F16F16F

SK Telecom (KR) 12.0 11.5 11.4 1.3 1.1 1.0 12.9 10.9 10.1 3.5 4.3 4.3

KT - 9.0 10.4 0.7 0.6 0.6 -9.5 8.0 6.5 0.0 1.7 2.7

LG Uplus 22.0 11.3 10.7 1.2 1.0 1.0 5.6 9.4 9.2 1.3 2.7 2.7

NTT Docomo (JP) 19.7 18.6 16.7 1.7 1.7 1.6 8.5 9.1 9.6 - 3.0 2.9

Softbank 14.2 13.7 13.8 2.5 2.3 1.9 19.2 18.4 15.5 - 0.6 0.6

China Mobile (CH) 13.9 13.2 12.5 1.7 1.6 1.5 12.7 13.0 12.5 3.0 3.2 3.2

China Unicom 20.0 15.5 15.6 0.8 0.8 0.8 4.2 5.4 5.3 2.6 2.6 2.6

Singtel (SG) 15.6 15.6 14.7 2.5 2.4 2.3 16.0 15.4 15.6 - 4.6 4.6

PCCW (HK) 10.4 14.1 11.9 3.4 3.2 3.0 33.4 20.9 23.4 5.1 4.6 4.6

AT&T (US) 13.5 12.4 11.8 1.7 1.7 1.7 4.9 15.0 14.3 5.6 5.6 5.6

Verizon 11.8 11.3 11.3 13.9 12.9 7.6 69.0 121.8 81.2 4.7 5.0 5.0

Deutsche Tel. (EU) 35.9 23.1 20.3 2.9 2.7 2.6 8.2 11.4 12.9 - 2.9 2.9

Orange 44.7 17.2 16.0 1.5 1.5 1.5 4.5 9.0 9.4 - 3.6 3.6

Average 19.5 14.4 13.6 2.7 2.6 2.1 14.6 20.6 17.3 3.2 3.4 3.5

Note: KDB Daewoo Securities Research estimates for Korean companies


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Key Recommendations

SK Telecom (017670 KS/Buy) Two-track strategy for growth

� Investment points: Shareholder return and growth

� Catalysts: Higher dividends and new businesses

� Valuation: Buy with TP of W350,000; Top pick for in the telecom service segment

LG Uplus (032640 KS/Buy) Higher dividends and leadership change

� Investment points: Higher earnings raise dividend expectations

� Catalyst: Meaningful rise in dividend yields and new leadership

� Valuation: Reiterate Buy with TP of W15,000

KT (030200/Trading Buy) Earnings stabilization to be followed by dividend growth

� Investment points: Earnings are improving

� Catalyst: Note dividend growth in the medium/long term

� Valuation: Maintain Trading Buy with TP of W35,000

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Investment points: Shareholder return and growth

When it comes to domestic telcos’ pursuit of a “two-track” strategy—shareholder return

plus new growth drivers—SK Telecom (SKT) stands out the most.

In an effort to enhance shareholder value, SKT purchased treasury shares in 1H15 and

announced that it will raise its dividend payout ratio. Based on the November 26th

closing price, the stock’s annual and year-end dividend yields are estimated at 4.3% and

3.8%, respectively, sharply exceeding the KOSPI’s average.

In addition, SKT has been the most aggressive in searching for new growth engines, as

illustrated by its recent decision to acquire CJ HelloVision, the leading cable SO and

MVNO in Korea. While the media business in the past served mainly as a marketing tool

for telcos’ telecom business, it should become an important source of earnings going

forward.

Catalysts: Higher dividends and new businesses

SKT announced that it will increase its dividend payments for the first time in seven

years. For global telcos, higher dividend yields tend to go hand in hand with valuation

premiums. While stocks with dividend yields of 2% and below are trading at a P/B of 1.4x

on average, those whose dividend yields of around 3-4% and 5% and over are trading at

average P/Bs of 2.8x and 3.1x, respectively. An expected increase in dividends will likely

contribute to a re-rating of SKT stocks.

SKT is scheduled to merge SK Broadband and CJ HelloVision after completing the

acquisition of CJ HelloVision in April 2016. After 2010, US broadcast firms enjoyed sharp

growth in ARPU as pay-TV digitalization neared 90% and large-scale M&As gathered

momentum. It is worth watching whether domestic telcos’ advance into the media

industry via M&As will have a similar positive effect. Of note, pay-TV firms’ household

subscriber base is expected to serve as strong foothold for telcos’ new businesses,

especially the smart home business.

Valuation: Maintain Buy with TP of W350,000; Top pick in the telecom

service segment

We select SKT as our top pick in the telecom service segment, as telecom stocks are

likely to hinge on shareholder-return policies and growth potential in 2016. We maintain

our Buy rating with a target price of W350,000. The stock’s 2015 dividend yield is

currently 3.8%. And with the stock trading at a P/B of 1.1x, it seems attractive in the

short term.

SK Telecom (017670 KS)

Two-track strategy for growth

FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F

Revenue (Wbn) 16,141 16,602 17,164 17,076 17,290 17,639

OP (Wbn) 1,730 2,011 1,825 1,814 1,901 1,928

OP margin (%) 10.7 12.1 10.6 10.6 11.0 10.9

NP (Wbn) 1,152 1,639 1,801 1,654 1,661 1,691

EPS (W) 14,263 20,298 22,307 20,488 20,571 20,945

ROE (%) 9.8 13.0 12.9 10.9 10.1 9.7

P/E (x) 10.7 11.3 12.0 11.5 11.4 11.2

P/B (x) 0.9 1.2 1.3 1.1 1.0 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) 350,000

Share Price (11/26/15, W) 235,000

Expected Return 49%

OP (15F, Wbn) 1,814

Consensus OP (15F, Wbn) 1,818

EPS Growth (15F, %) -8.2

Market EPS Growth (15F, %) 23.0

P/E (15F, x) 11.5

Market P/E (15F, x) 11.5

KOSPI 2,030.68

Market Cap (Wbn) 18,975

Shares Outstanding (mn) 81

Free Float (%) 62.6

Foreign Ownership (%) 40.0

Beta (12M) 0.09

52-Week Low 227,000

52-Week High 301,000

(%)(%)(%)(%) 1M1M1M1M 6M6M6M6M 12M12M12M12M

Absolute -7.5 -11.0 -17.1

Relative -6.7 -6.0 -19.1

70

80

90

100

110

120

11.14 3.15 7.15 11.15

SK Telecom KOSPI

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TablTablTablTableeee 9999. . . . Quarterly and annual earnings trend and forecastQuarterly and annual earnings trend and forecastQuarterly and annual earnings trend and forecastQuarterly and annual earnings trend and forecast (Wbn, %, ‘000 persons)

1Q141Q141Q141Q14 2Q142Q142Q142Q14 3Q143Q143Q143Q14 4Q144Q144Q144Q14 1Q151Q151Q151Q15 2Q152Q152Q152Q15 3Q153Q153Q153Q15 4Q15F4Q15F4Q15F4Q15F 2014201420142014 2015F2015F2015F2015F 2016F2016F2016F2016F

Revenue 4,202 4,305 4,368 4,289 4,240 4,256 4,261 4,319 17,164 17,076 17,290

Parent 3,264 3,265 3,304 3,181 3,133 3,144 3,142 3,193 13,013 12,612 12,628

Wireless 3,037 3,035 3,055 2,926 2,910 2,917 2,923 2,950 12,053 11,700 11,701

New 227 229 249 255 224 227 219 242 960 912 927

Subsidiaries 938 1,040 1,064 1,110 1,107 1,112 1,119 1,126 4,151 4,465 4,663

Operating profit 252 546 537 490 403 413 491 508 1,825 1,814 1,901

OP margin (%) 6.0 12.7 12.3 11.4 9.5 9.7 11.5 11.8 10.6 10.6 11.0

Net profit 267 498 531 503 443 398 382 436 1,799 1,659 1,666

Net margin (%) 6.4 11.6 12.2 11.7 10.4 9.3 9.0 10.1 10.5 9.7 9.6

QoQ QoQ QoQ QoQ

Revenue -2.2 2.5 1.5 -1.8 -1.1 0.4 0.1 1.4

Parent -1.6 0.0 1.2 -3.7 -1.5 0.4 -0.1 1.6

Wireless -1.0 -0.1 0.7 -4.2 -0.5 0.2 0.2 0.9

New -8.5 0.9 8.7 2.4 -12.2 1.3 -3.5 10.5

Subsidiaries -4.2 10.9 2.3 4.3 -0.2 0.4 0.7 0.6

Operating profit -50.6 116.5 -1.7 -8.7 -17.8 2.5 18.9 3.6

Net profit -9.0 86.2 6.7 -5.2 -12.0 -10.1 -4.0 14.3

YoY YoY YoY YoY

Revenue 3.4 4.6 5.9 -0.1 0.9 -1.1 -2.4 0.7 3.4 -0.5 1.3

Parent 4.9 1.7 2.5 -4.1 -4.0 -3.7 -4.9 0.4 1.2 -3.1 0.1

Wireless 3.4 1.0 1.9 -4.6 -4.2 -3.9 -4.3 0.8 0.4 -2.9 0.0

New 29.7 11.7 11.2 2.8 -1.3 -0.9 -12.0 -5.1 12.7 -5.0 1.7

Subsidiaries -1.6 14.6 17.9 13.4 18.0 6.9 5.3 1.5 10.9 7.6 4.4

Operating profit -37.7 0.1 -2.7 -3.8 59.8 -24.4 -8.6 3.7 -9.2 -0.6 4.8

Net profit -22.7 6.4 5.7 71.4 65.7 -20.0 -28.1 -13.3 11.8 -7.8 0.4

Key indicatorsKey indicatorsKey indicatorsKey indicators

Wireless subscribers 27,814 27,889 28,403 28,279 28,026 28,313 28,474 28,670 28,279 28,670 29,328

LTE subscribers 14,773 15,381 16,212 16,737 17,447 17,937 18,465 18,635 16,737 18,635 21,116

Note: All figures are based on consolidated K-IFRS, Net profit is attributable to controlling interests and non-controlling interests

Source: Company data, KDB Daewoo Securities Research

FigureFigureFigureFigure 20202020. . . . High dividend yield vs. undervaluation High dividend yield vs. undervaluation High dividend yield vs. undervaluation High dividend yield vs. undervaluation FigureFigureFigureFigure 21212121. . . . Media business strengthening markedly, especially Media business strengthening markedly, especially Media business strengthening markedly, especially Media business strengthening markedly, especially with planned acquisition ofwith planned acquisition ofwith planned acquisition ofwith planned acquisition of CJCJCJCJ HelloVisionHelloVisionHelloVisionHelloVision

Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

0.8

0.9

1.0

1.1

1.2

1.3

1.4

0

2

4

6

8

2012 2013 2014 2015F 2016F

(x)(%)

Dividend yield (L)

P/B (R)

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November 27, 2015


SK Telecom (017670 KS/Buy/TP: W350,000)

Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)Statement of Financial Condition (Summarized)Statement of Financial Condition (Summarized)Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F

RevenueRevenueRevenueRevenue 17,16417,16417,16417,164 17,07617,07617,07617,076 17,29017,29017,29017,290 17,63917,63917,63917,639 Current AssetsCurrent AssetsCurrent AssetsCurrent Assets 5,0835,0835,0835,083 6,0736,0736,0736,073 6,1566,1566,1566,156 7,2377,2377,2377,237

Cost of Cost of Cost of Cost of SalesSalesSalesSales 0000 0000 0000 0000 Cash and Cash Equivalents 834 1,794 1,826 2,820

Gross ProfitGross ProfitGross ProfitGross Profit 17,16417,16417,16417,164 17,07617,07617,07617,076 17,29017,29017,29017,290 17,63917,63917,63917,639 AR & Other Receivables 3,083 3,104 3,141 3,204

SG&A ExpensesSG&A ExpensesSG&A ExpensesSG&A Expenses 15,33915,33915,33915,339 15,26215,26215,26215,262 15,38915,38915,38915,389 15,71115,71115,71115,711 Inventories 268 270 273 278

Operating Profit (Adj)Operating Profit (Adj)Operating Profit (Adj)Operating Profit (Adj) 1,8251,8251,8251,825 1,8141,8141,8141,814 1,9011,9011,9011,901 1,9281,9281,9281,928 Other Current Assets 898 905 916 935

Operating ProfitOperating ProfitOperating ProfitOperating Profit 1,8251,8251,8251,825 1,8141,8141,8141,814 1,9011,9011,9011,901 1,9281,9281,9281,928 NonNonNonNon----Current AssetsCurrent AssetsCurrent AssetsCurrent Assets 22,85822,85822,85822,858 23,36023,36023,36023,360 23,61423,61423,61423,614 23,62523,62523,62523,625

NonNonNonNon----Operating ProfitOperating ProfitOperating ProfitOperating Profit 429429429429 387387387387 309309309309 322322322322 Investments in Associates 6,298 6,613 6,696 6,831

Net Financial Income -264 -243 -227 -197 Property, Plant and Equipment 10,568 10,826 10,833 10,537

Net Gain from Inv in Associates 906 732 540 595 Intangible Assets 4,402 4,309 4,459 4,609

Pretax Profit 2,254 2,201 2,210 2,250 Total AssetsTotal AssetsTotal AssetsTotal Assets 27,94127,94127,94127,941 29,43329,43329,43329,433 29,76929,76929,76929,769 30,86230,86230,86230,862

Income Tax 455 542 544 554 Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities 5,4205,4205,4205,420 5,9105,9105,9105,910 5,2835,2835,2835,283 5,3715,3715,3715,371

Profit from Continuing Operations 1,799 1,659 1,666 1,696 AP & Other Payables 1,657 1,669 1,690 1,724

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,151 1,610 929 929

Net ProfitNet ProfitNet ProfitNet Profit 1,7991,7991,7991,799 1,6591,6591,6591,659 1,6661,6661,6661,666 1,6961,6961,6961,696 Other Current Liabilities 2,612 2,631 2,664 2,718

Controlling Interests 1,801 1,654 1,661 1,691 NonNonNonNon----Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities 7,2737,2737,2737,273 7,4607,4607,4607,460 7,4777,4777,4777,477 7,5047,5047,5047,504

Non-Controlling Interests -2 5 5 5 Long-Term Financial Liabilities 5,930 6,108 6,108 6,108

Total Comprehensive ProfitTotal Comprehensive ProfitTotal Comprehensive ProfitTotal Comprehensive Profit 1,7711,7711,7711,771 1,7251,7251,7251,725 1,6661,6661,6661,666 1,6961,6961,6961,696 Other Non-Current Liabilities 1,343 1,352 1,369 1,396

Controlling Interests 1,778 1,716 1,656 1,686 Total LiabilitiesTotal LiabilitiesTotal LiabilitiesTotal Liabilities 12,69312,69312,69312,693 13,37013,37013,37013,370 12,76012,76012,76012,760 12,87512,87512,87512,875

Non-Controlling Interests -7 10 9 10 Controlling InterestsControlling InterestsControlling InterestsControlling Interests 14,50614,50614,50614,506 15,92915,92915,92915,929 16,87116,87116,87116,871 17,84417,84417,84417,844

EBITDA 4,717 4,808 4,994 5,124 Capital Stock 45 45 45 45

FCF (Free Cash Flow) 669 1,022 1,172 1,463 Capital Surplus 2,916 2,916 2,916 2,916

EBITDA Margin (%) 27.5 28.2 28.9 29.0 Retained Earnings 14,189 15,162 16,105 17,077

Operating Profit Margin (%) 10.6 10.6 11.0 10.9 NonNonNonNon----Controlling InterestsControlling InterestsControlling InterestsControlling Interests 742742742742 134134134134 139139139139 143143143143

Net Profit Margin (%) 10.5 9.7 9.6 9.6 Stockholders' EquityStockholders' EquityStockholders' EquityStockholders' Equity 15,24815,24815,24815,248 16,06316,06316,06316,063 17,01017,01017,01017,010 17,98717,98717,98717,987

Cash Flows (Summarized)Cash Flows (Summarized)Cash Flows (Summarized)Cash Flows (Summarized) Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized) (Wbn)(Wbn)(Wbn)(Wbn) 12/1412/1412/1412/14 12/15F12/15F12/15F12/15F 12/16F12/16F12/16F12/16F 12/17F12/17F12/17F12/17F 12/1412/1412/1412/14 12/15F12/15F12/15F12/15F 12/16F12/16F12/16F12/16F 12/17F12/17F12/17F12/17F

Cash Flows from Op Activities 3,677 4,225 4,272 4,363 P/E (x) 12.0 11.5 11.4 11.2

Net Profit 1,799 1,659 1,666 1,696 P/CF (x) 4.5 3.9 3.8 3.8

Non-Cash Income and Expense 2,979 3,150 3,265 3,292 P/B (x) 1.3 1.1 1.0 1.0

Depreciation 2,892 2,994 3,093 3,196 EV/EBITDA (x) 5.9 5.1 4.7 4.4

Amortization 0 0 0 0 EPS (W) 22,307 20,488 20,571 20,945

Others 87 156 172 96 CFPS (W) 59,177 59,560 61,057 61,775

Chg in Working Capital -707 -57 28 42 BPS (W) 206,159 219,198 230,866 242,910

Chg in AR & Other Receivables -221 -88 -30 -49 DPS (W) 9,400 10,000 10,000 10,000

Chg in Inventories 0 -3 -3 -6 Payout ratio (%) 37.1 43.4 43.2 42.4

Chg in AP & Other Payables -335 -109 3 6 Dividend Yield (%) 3.5 4.3 4.3 4.3

Income Tax PaidIncome Tax PaidIncome Tax PaidIncome Tax Paid ----183183183183 ----373373373373 ----544544544544 ----554554554554 Revenue Growth (%) 3.4 -0.5 1.3 2.0

Cash Flows from Inv Activities -3,683 -3,100 -3,272 -3,086 EBITDA Growth (%) -2.6 1.9 3.9 2.6

Chg in PP&E -2,983 -3,189 -3,100 -2,900 Operating Profit Growth (%) -9.2 -0.6 4.8 1.4

Chg in Intangible Assets -120 -119 -150 -150 EPS Growth (%) 9.9 -8.2 0.4 1.8

Chg in Financial Assets -178 -12 -22 -36 Accounts Receivable Turnover (x) 7.4 7.1 7.1 7.2

OthersOthersOthersOthers ----402402402402 220220220220 0000 0000 Inventory Turnover (x) 77.2 63.6 63.7 64.0

Cash Flows from Fin Activities -559 -419 -1,425 -743 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Chg in Financial Liabilities 413 638 -681 0 ROA (%) 6.6 5.8 5.6 5.6

Chg in Equity 0 0 0 0 ROE (%) 12.9 10.9 10.1 9.7

Dividends Paid -667 -668 -719 -719 ROIC (%) 10.2 9.2 9.5 9.7

OthersOthersOthersOthers ----305305305305 ----389389389389 ----25252525 ----24242424 Liability to Equity Ratio (%) 83.2 83.2 75.0 71.6

Increase (Decrease) in Cash -564 960 32 994 Current Ratio (%) 93.8 102.8 116.5 134.7

Beginning Balance 1,399 834 1,794 1,826 Net Debt to Equity Ratio (%) 36.6 32.7 26.6 19.6

Ending BalanceEnding BalanceEnding BalanceEnding Balance 834834834834 1,7941,7941,7941,794 1,8261,8261,8261,826 2,8202,8202,8202,820 Interest Coverage Ratio (x) 5.6 6.0 6.3 6.7


Telecom Service

21

November 27, 2015


Investment points: Higher earnings raise dividend expectations

Expectations have mounted for LG Uplus to increase dividends on the back of its strong

earnings growth. The company posted a 79% YoY rise in net profit in the first three

quarters of 2015. As such, the company is likely to pay out more dividends this year in

accordance with its payout ratio target.

Setting a payout ratio target can be positive for investors in two ways: 1) When profits

rise, shares may also see a corresponding increase. 2) Moreover, dividend yields may

increase, as a certain percentage of profit is paid out in dividends.

Catalyst: Meaningful rise in dividend yields and new leadership

1) LG Uplus did not pay dividends in 2012. In 2013 and 2014, it paid dividends but

dividend yields were modest, at around 1%, which is similar to deposit interest rates and

the three-year KTB yield. But this year’s dividend yield, forecast at 2.7%, is enough to

put the company on the list of dividend plays.

2) A new CEO that previously served as CEO of LG Chem and LG Display will take

leadership in the coming year. The new CEO is anticipated to put a strategic focus on

global businesses, environmental values (new and renewable energy), and mobility.

Under his leadership, LG Display expanded the LCD and OLED businesses, and signed

supply contracts with Apple. And LG Chem became the world’s largest mid/large-sized

battery maker (EV and ESS) under his management.

The leadership change will likely affect IoT and B2B businesses the most, with the CEO’s

rich overseas experiences likely to transform LG Uplus’ domestic-oriented businesses. LG

Group’s group-wide focus on EVs is also positive, given that cars are the biggest mobile

device for telcos. LG Uplus may join the group’s EV value chain with vehicle telematics.

Valuation: Reiterate Buy with TP of W15,000

We retain our Buy rating on LG Uplus with a target price of W15,000. The stock is

anticipated to meet two 2016 themes for telecom stocks: shareholder-return policies

and growth potential.

LG Uplus is concentrating on high-ARPU subscriber acquisition in the telecom service

business. As for non-telecom areas, the company is engaging in the IoT and payment

gateway (where it is the market leader) businesses. Furthermore, the company’s

aggressive simple payment business is noteworthy.

LG Uplus (032640 KS)

Higher dividends and leadership change

FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F

Revenue (Wbn) 10,905 11,450 11,000 10,671 10,798 10,875

OP (Wbn) 127 542 576 694 708 721

OP margin (%) 1.2 4.7 5.2 6.5 6.6 6.6

NP (Wbn) -60 279 228 409 431 451

EPS (W) -122 640 523 936 986 1,034

ROE (%) -1.6 7.2 5.6 9.4 9.2 9.0

P/E (x) - 16.8 22.0 11.3 10.7 10.2

P/B (x) 0.9 1.2 1.2 1.0 1.0 0.9



Telecom Service

(Maintain) Buy


Share Price (11/26/15, W) 10,550

Expected Return 42%

OP (15F, Wbn) 694

Consensus OP (15F, Wbn) 695

EPS Growth (15F, %) 79.1


P/E (15F, x) 11.3


KOSPI 2,030.68



Free Float (%) 63.9


Beta (12M) -0.10

52-Week Low 9,060

52-Week High 12,900

(%)(%)(%)(%) 1M1M1M1M 6M6M6M6M 12M12M12M12M

Absolute -9.4 8.8 -6.6

Relative -8.7 14.8 -8.9

70

80

90

100

110

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11.14 3.15 7.15 11.15

LG Uplus KOSPI

Telecom Service

22

November 27, 2015


LG Uplus (032640 KS/Buy/TP: W15,000)

Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)Statement of Financial Condition (Summarized)Statement of Financial Condition (Summarized)Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F


Cost of SalesCost of SalesCost of SalesCost of Sales 0000 0000 0000 0000 Cash and Cash Equivalents 416 365 740 1,193



Operating Profit (Adj)Operating Profit (Adj)Operating Profit (Adj)Operating Profit (Adj) 576576576576 694694694694 708708708708 721721721721 Other Current Assets 165 152 176 203

Operating ProfitOperating ProfitOperating ProfitOperating Profit 576576576576 694694694694 708708708708 721721721721 NonNonNonNon----Current AssetsCurrent AssetsCurrent AssetsCurrent Assets 9,5239,5239,5239,523 9,4259,4259,4259,425 9,3449,3449,3449,344 9,1939,1939,1939,193

NonNonNonNon----Operating ProfitOperating ProfitOperating ProfitOperating Profit ----256256256256 ----157157157157 ----142142142142 ----127127127127 Investments in Associates 9 0 0 0


Net Gain from Inv in Associates 1 0 0 0 Intangible Assets 1,116 1,008 947 895

Pretax Profit 320 537 566 594 Total AssetsTotal AssetsTotal AssetsTotal Assets 12,01312,01312,01312,013 12,14912,14912,14912,149 12,49112,49112,49112,491 12,83612,83612,83612,836

Income Tax 92 129 136 143 Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities 3,4863,4863,4863,486 3,0793,0793,0793,079 3,1053,1053,1053,105 3,1223,1223,1223,122

Profit from Continuing Operations 228 408 430 451 AP & Other Payables 1,427 1,455 1,472 1,483

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,129 833 833 833

Net ProfitNet ProfitNet ProfitNet Profit 228228228228 408408408408 430430430430 451451451451 Other Current Liabilities 930 791 800 806

Controlling Interests 228 409 431 451 NonNonNonNon----Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities 4,3494,3494,3494,349 4,5504,5504,5504,550 4,5574,5574,5574,557 4,5614,5614,5614,561

Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 3,787 3,977 3,977 3,977

Total Comprehensive ProfitTotal Comprehensive ProfitTotal Comprehensive ProfitTotal Comprehensive Profit 221221221221 409409409409 430430430430 451451451451 Other Non-Current Liabilities 562 573 580 584

Controlling Interests 221 409 431 451 Total LiabilitiesTotal LiabilitiesTotal LiabilitiesTotal Liabilities 7,8357,8357,8357,835 7,6287,6287,6287,628 7,6627,6627,6627,662 7,6827,6827,6827,682

Non-Controlling Interests 0 0 0 0 Controlling InterestsControlling InterestsControlling InterestsControlling Interests 4,1774,1774,1774,177 4,5214,5214,5214,521 4,8294,8294,8294,829 5,1545,1545,1545,154

EBITDA 2,082 2,292 2,290 2,272 Capital Stock 2,574 2,574 2,574 2,574

FCF (Free Cash Flow) -129 327 600 680 Capital Surplus 837 837 837 837

EBITDA Margin (%) 18.9 21.5 21.2 20.9 Retained Earnings 764 1,107 1,416 1,740

Operating Profit Margin (%) 5.2 6.5 6.6 6.6 NonNonNonNon----Controlling InterestsControlling InterestsControlling InterestsControlling Interests 1111 0000 0000 0000

Net Profit Margin (%) 2.1 3.8 4.0 4.1 Stockholders' EquityStockholders' EquityStockholders' EquityStockholders' Equity 4,1784,1784,1784,178 4,5214,5214,5214,521 4,8294,8294,8294,829 5,1545,1545,1545,154

Cash Flows Cash Flows Cash Flows Cash Flows (Summarized)(Summarized)(Summarized)(Summarized) Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized) (Wbn)(Wbn)(Wbn)(Wbn) 12/1412/1412/1412/14 12/15F12/15F12/15F12/15F 12/16F12/16F12/16F12/16F 12/17F12/17F12/17F12/17F 12/1412/1412/1412/14 12/15F12/15F12/15F12/15F 12/16F12/16F12/16F12/16F 12/17F12/17F12/17F12/17F

Cash Flows from Op Activities 2,015 1,795 2,000 1,980 P/E (x) 22.0 11.3 10.7 10.2

Net Profit 228 408 430 451 P/CF (x) 2.2 1.9 2.0 2.0



Amortization 171 171 161 152 EPS (W) 523 936 986 1,034

Others 522 374 284 255 CFPS (W) 5,163 5,449 5,259 5,169

Chg in Working Capital -42 -308 -13 -22 BPS (W) 9,567 10,354 11,060 11,804

Chg in AR & Other Receivables 254 -333 -21 -12 DPS (W) 150 280 290 300

Chg in Inventories 118 -6 -3 -2 Payout ratio (%) 28.8 29.9 29.4 29.0

Chg in AP & Other Payables -61 6 4 2 Dividend Yield (%) 1.3 2.7 2.7 2.8

Income Tax PaidIncome Tax PaidIncome Tax PaidIncome Tax Paid ----31313131 ----101101101101 ----136136136136 ----143143143143 Revenue Growth (%) -3.9 -3.0 1.2 0.7

Cash Flows from Inv Activities -2,307 -1,684 -1,502 -1,401 EBITDA Growth (%) 12.1 10.1 -0.1 -0.8

Chg in PP&E -2,136 -1,461 -1,400 -1,300 Operating Profit Growth (%) 6.3 20.5 2.0 1.8

Chg in Intangible Assets -175 -215 -100 -100 EPS Growth (%) -18.3 79.0 5.3 4.9

Chg in Financial Assets 12 -3 -2 -1 Accounts Receivable Turnover (x) 7.3 6.7 6.2 6.2

OthersOthersOthersOthers ----8888 ----5555 0000 0000 Inventory Turnover (x) 32.8 38.3 38.1 38.0

Cash Flows from Fin Activities 309 -172 -122 -127 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Chg in Financial Liabilities 376 -106 0 0 ROA (%) 1.9 3.4 3.5 3.6

Chg in Equity 0 0 0 0 ROE (%) 5.6 9.4 9.2 9.0

Dividends Paid -65 -65 -122 -127 ROIC (%) 4.9 6.0 6.0 6.2

OthersOthersOthersOthers ----2222 ----1111 0000 0000 Liability to Equity Ratio (%) 187.5 168.7 158.7 149.1

Increase (Decrease) in Cash 18 -51 376 452 Current Ratio (%) 71.4 88.5 101.4 116.7

Beginning Balance 398 416 365 740 Net Debt to Equity Ratio (%) 106.7 97.4 83.4 69.3

Ending BalanceEnding BalanceEnding BalanceEnding Balance 416416416416 365365365365 740740740740 1,1931,1931,1931,193 Interest Coverage Ratio (x) 2.7 3.5 3.6 3.6


Telecom Service

23

November 27, 2015


Investment points: Earnings are improving

KT’s earnings have been recovering in 2015. KT posted massive losses in 2014 due to

expenses related to its early retirement program. In 2015, however, the company

recorded a quarterly operating profit of around W300bn from 1Q to 3Q thanks to 1)

subscriber and ARPU growth at the mobile and media units and 2) tight cost control.

Catalyst: Note dividend growth in the medium/long term

KT’s 2015F dividend yield stands at 1.7%, lower than those of other domestic telcos and

the three-year KTB yield. However, it should be noted that the company’s financial

conditions are improving. In particular, FCF is swinging to positive territory. In 2016, per-

share dividend will likely be higher than in 2015.

Shares of KT are discounted due to the company‘s inconsistent dividend policies as well

as low dividend yield. Shares of global telcos typically receive valuation premiums for

higher dividend yields. Indeed, telco stocks with a dividend yield of less than 2% are

currently trading at an average 2015F P/B of 1.4x, while those with a dividend yield of

3% are trading at around 3.0x. Going forward, we think KT’s valuation discount will

gradually dissipate on dividend growth.

The Financial Services Commission (FSC) will announce soon whether it will grant online-

only banking licenses. One of the candidates is KT’s K-Bank consortium, which China’s

Alipay recently joined. Notably, KT has a financial subsidiary (BC Card) and superior

know-how in big data analysis. If the KT consortium obtains the license, it will likely serve

as a share catalyst.

In the meantime, KT’s absolute market leadership in the cable-TV and pay-TV segments

is weakening, as its competitor SKT is set to acquire CJ HelloVision in April 2016. KT’s

weakening market status might make the stock volatile for the time being. For 2016, KT

will need to prove its growth potential, the profitability of its media and content

business, and its competitive edge over peers.

Valuation: Maintain Trading Buy with TP of W35,000

We retain our Trading Buy rating with a target price of W35,000. Given that the

company turned to positive territory in 2015, we will revisit our rating if 2016 dividend

yield comes in at a meaningful level.

KT (030200 KS)

Earnings stabilization to be followed by dividend growth

FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F

Revenue (Wbn) 23,856 23,811 23,422 21,853 21,987 22,013

OP (Wbn) 1,209 839 -292 1,367 1,382 1,386

OP margin (%) 5.1 3.5 -1.2 6.3 6.3 6.3

NP (Wbn) 1,046 -162 -1,055 863 747 779

EPS (W) 4,006 -622 -4,040 3,307 2,862 2,983

ROE (%) 8.7 -1.4 -9.5 8.0 6.5 6.4

P/E (x) 8.9 - - 9.0 10.4 9.9

P/B (x) 0.7 0.6 0.7 0.6 0.6 0.6



Telecom Service

(Maintain) Trading Buy


Share Price (11/26/15, W) 29,650

Expected Return 18%

OP (15F, Wbn) 1,367

Consensus OP (15F, Wbn) 1,230

EPS Growth (15F, %) -


P/E (15F, x) 9.0


KOSPI 2,030.68



Free Float (%) 85.6


Beta (12M) 0.19

52-Week Low 28,400

52-Week High 33,100

(%)(%)(%)(%) 1M1M1M1M 6M6M6M6M 12M12M12M12M

Absolute -3.4 -1.0 -10.4

Relative -2.6 4.5 -12.6

70

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90

100

110

120

11.14 3.15 7.15 11.15

KT KOSPI

Telecom Service

24

November 27, 2015


KT (030200 KS/Trading Buy/TP: W35,000)

Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized) Statement of Statement of Statement of Statement of Financial Condition (Summarized)Financial Condition (Summarized)Financial Condition (Summarized)Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F


Cost of SalesCost of SalesCost of SalesCost of Sales 0000 0000 0000 0000 Cash and Cash Equivalents 1,889 1,926 1,782 2,960



Operating Profit (Adj)Operating Profit (Adj)Operating Profit (Adj)Operating Profit (Adj) ----292292292292 1,3671,3671,3671,367 1,3821,3821,3821,382 1,3861,3861,3861,386 Other Current Assets 3,346 3,232 3,528 3,996

Operating ProfitOperating ProfitOperating ProfitOperating Profit ----292292292292 1,3671,3671,3671,367 1,3821,3821,3821,382 1,3861,3861,3861,386 NonNonNonNon----Current AssetsCurrent AssetsCurrent AssetsCurrent Assets 25,02525,02525,02525,025 21,69621,69621,69621,696 20,92620,92620,92620,926 19,93719,93719,93719,937

NonNonNonNon----Operating ProfitOperating ProfitOperating ProfitOperating Profit ----945945945945 ----386386386386 ----301301301301 ----272272272272 Investments in Associates 339 327 329 330


Net Gain from Inv in Associates 18 5 0 0 Intangible Assets 3,544 2,817 2,487 2,215

Pretax Profit -1,237 981 1,081 1,114 Total AssetsTotal AssetsTotal AssetsTotal Assets 33,77633,77633,77633,776 30,25230,25230,25230,252 29,65529,65529,65529,655 30,31630,31630,31630,316

Income Tax -271 232 259 267 Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities 9,9929,9929,9929,992 8,3248,3248,3248,324 7,0167,0167,0167,016 7,0257,0257,0257,025

Profit from Continuing Operations -966 749 821 847 AP & Other Payables 1,200 1,159 1,167 1,168

Profit from Discontinued Operations 0 178 0 0 Short-Term Financial Liabilities 3,000 1,568 219 219

Net ProfitNet ProfitNet ProfitNet Profit ----966966966966 926926926926 821821821821 847847847847 Other Current Liabilities 5,792 5,597 5,630 5,638

Controlling Interests -1,055 863 747 779 NonNonNonNon----Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities 11,99311,99311,99311,993 9,3719,3719,3719,371 9,3839,3839,3839,383 9,3859,3859,3859,385

Non-Controlling Interests 89 63 74 68 Long-Term Financial Liabilities 10,085 7,528 7,528 7,528

Total Comprehensive ProfitTotal Comprehensive ProfitTotal Comprehensive ProfitTotal Comprehensive Profit ----1,2011,2011,2011,201 946946946946 821821821821 847847847847 Other Non-Current Liabilities 1,908 1,843 1,855 1,857

Controlling Interests -1,277 872 747 772 Total LiabilitiesTotal LiabilitiesTotal LiabilitiesTotal Liabilities 21,98521,98521,98521,985 17,69617,69617,69617,696 16,39916,39916,39916,399 16,40916,40916,40916,409

Non-Controlling Interests 76 74 74 74 Controlling InterestsControlling InterestsControlling InterestsControlling Interests 10,34110,34110,34110,341 11,21711,21711,21711,217 11,84111,84111,84111,841 12,42412,42412,42412,424

EBITDA 3,563 5,177 5,058 5,077 Capital Stock 1,564 1,564 1,564 1,564

FCF (Free Cash Flow) -936 732 1,563 1,605 Capital Surplus 1,440 1,440 1,440 1,440

EBITDA Margin (%) 15.2 23.7 23.0 23.1 Retained Earnings 8,571 9,406 10,031 10,614

Operating Profit Margin (%) -1.2 6.3 6.3 6.3 NonNonNonNon----Controlling InterestsControlling InterestsControlling InterestsControlling Interests 1,4491,4491,4491,449 1,3401,3401,3401,340 1,4141,4141,4141,414 1,4821,4821,4821,482

Net Profit Margin (%) -4.5 3.9 3.4 3.5 Stockholders' EquityStockholders' EquityStockholders' EquityStockholders' Equity 11,79011,79011,79011,790 12,55712,55712,55712,557 13,25513,25513,25513,255 13,90613,90613,90613,906

Cash Flows (Summarized)Cash Flows (Summarized)Cash Flows (Summarized)Cash Flows (Summarized) Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized) (Wbn)(Wbn)(Wbn)(Wbn) 12/1412/1412/1412/14 12/15F12/15F12/15F12/15F 12/16F12/16F12/16F12/16F 12/17F12/17F12/17F12/17F 12/1412/1412/1412/14 12/15F12/15F12/15F12/15F 12/16F12/16F12/16F12/16F 12/17F12/17F12/17F12/17F

Cash Flows from Op Activities 1,916 4,900 4,263 4,105 P/E (x) - 9.0 10.4 9.9

Net Profit -966 926 821 847 P/CF (x) 1.9 1.5 1.6 1.6



Amortization 612 600 530 472 EPS (W) -4,040 3,307 2,862 2,983

Others 1,514 429 474 443 CFPS (W) 16,859 19,781 19,040 19,076

Chg in Working Capital -2,023 174 -234 -433 BPS (W) 42,921 46,274 48,667 50,900

Chg in AR & Other Receivables 13 12 -19 -4 DPS (W) 0 500 800 800

Chg in Inventories 267 -16 -2 0 Payout ratio (%) 0.0 13.2 23.8 23.1

Chg in AP & Other Payables -418 -30 7 1 Dividend Yield (%) 0.0 1.7 2.7 2.7

Income Tax PaidIncome Tax PaidIncome Tax PaidIncome Tax Paid ----84848484 ----127127127127 ----259259259259 ----267267267267 Revenue Growth (%) -1.6 -6.7 0.6 0.1

Cash Flows from Inv Activities -3,171 -3,903 -2,933 -2,731 EBITDA Growth (%) -20.1 45.3 -2.3 0.4

Chg in PP&E -2,775 -4,157 -2,700 -2,500 Operating Profit Growth (%) - - 1.1 0.3

Chg in Intangible Assets -569 -272 -200 -200 EPS Growth (%) - - -13.5 4.2

Chg in Financial Assets 150 44 -33 -31 Accounts Receivable Turnover (x) 7.4 7.1 7.3 7.2

OthersOthersOthersOthers 23232323 482482482482 0000 0000 Inventory Turnover (x) 46.5 56.5 57.7 57.5

Cash Flows from Fin Activities 1,072 -825 -1,472 -196 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Chg in Financial Liabilities 1,292 -3,989 -1,349 0 ROA (%) -2.8 2.9 2.7 2.8

Chg in Equity 0 0 0 0 ROE (%) -9.5 8.0 6.5 6.4

Dividends Paid -223 -42 -122 -196 ROIC (%) -1.1 5.3 5.8 6.0

OthersOthersOthersOthers 3333 3,2063,2063,2063,206 ----1111 0000 Liability to Equity Ratio (%) 186.5 140.9 123.7 118.0

Increase (Decrease) in Cash -182 37 -143 1,178 Current Ratio (%) 87.6 102.8 124.4 147.8

Beginning Balance 2,071 1,889 1,926 1,782 Net Debt to Equity Ratio (%) 89.9 52.6 40.5 29.9

Ending BalanceEnding BalanceEnding BalanceEnding Balance 1,8891,8891,8891,889 1,9261,9261,9261,926 1,7821,7821,7821,782 2,9602,9602,9602,960 Interest Coverage Ratio (x) -0.6 3.4 4.5 4.9


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APPENDIX 1

Important Disclosures & Disclaimers

2222----Year Rating and Target Price HistoryYear Rating and Target Price HistoryYear Rating and Target Price HistoryYear Rating and Target Price History

Company Company Company Company ((((Code)Code)Code)Code) DateDateDateDate RatingRatingRatingRating Target PriceTarget PriceTarget PriceTarget Price Company Company Company Company ((((Code)Code)Code)Code) DateDateDateDate RatingRatingRatingRating Target PriceTarget PriceTarget PriceTarget Price

SK Telecom(017670) 07/31/2015 Buy 350,000 04/28/2014 Buy 13,000

05/06/2015 Buy 360,000 01/20/2014 Buy 15,000

10/01/2014 Buy 380,000 10/29/2013 Buy 16,000

08/03/2014 Buy 310,000 KT(030200) 11/01/2015 Trading Buy 35,000

10/30/2013 Buy 290,000 08/02/2015 Buy 39,000

LG Uplus(032640) 07/31/2015 Buy 15,000 01/20/2015 Buy 40,000

04/28/2015 Buy 14,000 10/01/2014 Buy 42,000

01/25/2015 Buy 16,000 05/01/2014 Buy 40,000

10/01/2014 Buy 15,000 01/20/2014 Trading Buy 36,000

07/31/2014 Buy 11,500 11/04/2013 Trading Buy 38,000

Equity Ratings DistributionEquity Ratings DistributionEquity Ratings DistributionEquity Ratings Distribution

BuyBuyBuyBuy Trading BuyTrading BuyTrading BuyTrading Buy HoldHoldHoldHold SellSellSellSell

72.77% 13.86% 13.37% 0.00%

* Based on recommendations in the last 12-months (as of September 30, 2015) DisclosuresDisclosuresDisclosuresDisclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Analyst CertificationAnalyst CertificationAnalyst CertificationAnalyst 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. DisclaimersDisclaimersDisclaimersDisclaimers 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

Stock RatingsStock RatingsStock RatingsStock Ratings Industry RatingsIndustry RatingsIndustry RatingsIndustry 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

100,000

200,000

300,000

400,000

Nov 13 Nov 14 Nov 15

(W)SK Telecom

0

5,000

10,000

15,000

20,000


(W) LG Uplus

0

10,000

20,000

30,000

40,000

50,000


(W) KT

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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. DistributionDistributionDistributionDistribution 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.

KDB Daewoo Securities International Network

Daewoo Securities Co. Ltd. (Seoul)Daewoo Securities Co. Ltd. (Seoul)Daewoo Securities Co. Ltd. (Seoul)Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Daewoo Securities (America) Inc. Daewoo Securities (America) Inc. Daewoo Securities (America) Inc. Head Office 34-3 Yeouido-dong, Yeongdeungpo-gu Seoul 150-716 Korea

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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 (Europe) Ltd. Daewoo Securities (Europe) Ltd. Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Daewoo Securities (Singapore) Pte. Ltd. Daewoo Securities (Singapore) Pte. Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo BranchTokyo BranchTokyo BranchTokyo Branch 41st Floor, Tower 42 25 Old Broad St. London EC2N 1HQ United Kingdom

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Beijing Representative OfficeBeijing Representative OfficeBeijing Representative OfficeBeijing Representative Office Shanghai Representative OfficeShanghai Representative OfficeShanghai Representative OfficeShanghai Representative Office Ho Chi Minh Representative Office Ho Chi Minh Representative Office Ho Chi Minh 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

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Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000

Daewoo Investment Advisory (Beijing) Co., Ltd.Daewoo Investment Advisory (Beijing) Co., Ltd.Daewoo Investment Advisory (Beijing) Co., Ltd.Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Daewoo Daewoo Daewoo Securities (Mongolia) LLCSecurities (Mongolia) LLCSecurities (Mongolia) LLCSecurities (Mongolia) LLC PT. Daewoo Securities IndonesiaPT. Daewoo Securities IndonesiaPT. Daewoo Securities IndonesiaPT. Daewoo Securities Indonesia

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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