Telecom Services - file.truefriend.com

Looking to unleash data explosion momentum

Smartphone growth sets off data explosion The number of smartphone subscribers is forecast to grow from 7.18mn in

2010 to 20mn in 2011 and to 31.8mn in 2012. The telecom services

market has seen a phenomenal increase in mobile data traffic driven by

the surge in smartphone users and the introduction of unlimited data

service. Korea’s mobile data jumped 15.3x in the past 14 months and is

projected to expand 8.7x over the next two years.

Three carriers taking different paths in dealing with data growth In June, the Korea Communications Commission (KCC) will announce

guidelines for the allotment of 1.8GHz and 2.1GHz spectrums. Telcos’

networks have four strategies to deal with the data explosion 1) additional

spectrum acquisition, 2) LTE network rollout, 3) alternative networks such

as WiFi and femtocell, and 4) existing network upgrade through HSPA+,

cell splitting and cloud service. SK Telecom (SKT) is upgrading its 3G

network (HSPA+, cell splitting) and is also preparing to launch LTE. KT

plans to enlist the help of WiFi/WiBro networks and cloud services. KT lags

behind peers in its LTE rollout plan. LGU+ aims to roll out a nationwide

LTE network by July 2012 and build a nationwide WiFi network by drawing

on its pool of household WiFi access points.

Profitability to remain healthy despite capex increase Growing mobile traffic brings with it concerns over increased capex

requirement for infrastructure improvement and over additional frequency

band acquisition costs. However, we expect telcos’ profitability to remain

firm. Traffic growth will boost carriers’ revenue significantly and per-bit data

transmission cost will be minimized through the use of alternative networks.

Also, tariff plans are likely to be restructured in the direction of scrapping or

revamping the unlimited data plans and bringing usage-based pricing into

the market. We do not expect the infrastructure investment and frequency

acquisition costs to eat into profitability.

OVERWEIGHT, SKT and KT our top picks Korean telcos have been underperforming the market year-to-date, while

overseas peers have seen substantial gains in share price. We maintain

OVERWEIGHT on the telecom services sector due to its compelling

valuations, attractive dividend prospects, and profitability improvement

from increased smartphone exposure. Our top picks are SKT and KT.

Explosive mobile data traffic growth is reshaping the competitive

landscape of the telecom services industry around network and voice call

quality as well as service (competitive content) quality, as opposed to the

previous marketing focus of handset subsidies. We find SKT best

positioned to benefit from the mobile data explosion thanks to its edge in

subscriber base, frequency band, financial capacity, and content (T-map,

mobile music portal service Melon, etc). We also like KT for its competitive

fixed-line network and deep pockets.

Sector Report / Telecom Services

Telecom Services

May 20, 2011

Overweight (Maintain)

Company Rating TP (won)

� SK Telecom BUY (-) 222,000 (-)

� KT BUY (-) 54,000 (-)

� LG Uplus Hold (-) 7,900 (-)

Contents

I. Oversold, OVERWEIGHT ..........................................1

II. Mobile data explosion .................................................5

1. Unprecedented growth of smartphones and

tablet PCs

2. Wireless data traffic up tenfold in two years

III. Data traffic strategies differ by carrier .............7

1. Additional frequency allocation and network

neutrality issue

2. Taking different paths on network issue

IV. Is data explosion a threat? ..................................11

1. Opportunity: ARPC hike, usage-based

pricing and network neutrality exception

2. Threats: Added capex burden, frequency

acquisition costs, and wVoIP

V. Profitability to remain at a healthy level ....16

VI. The strong get stronger as competition surrounds network capacity..............................19

Company.........................................................................................21

Telecom Services

1

I. Oversold, OVERWEIGHT

Korean telcos have underperformed the broader market by 16.1%p year-to-date,

while overseas peers have rallied, remaining in step with overall market

performance. Korean telcos have seen profitability improvement in 1Q11 but also

came under increased regulatory pressure, as the government stepped up tariff-

cut pressure. Concerns over possible capex increase to deal with the exponential

growth in data traffic further weighed down on telcos’ share prices.

We maintain OVERWEIGHT on the telecom services sector which we find way

oversold. First, valuations has become compelling due to excessive share price

declines and improved profitability. Second, downside risk from tariff-cut pressure

appears limited, as we believe such concerns are mostly priced in. Third,

marketing costs will probably drop as subscriber acquisition drives eased off in

2011. Fourth, the increasing number of smartphone subscribers will lead to

revenue growth and profitability improvement.

First, mobile operators’ valuations are at historical lows. SKT’s and KT’s ADR

(American depository receipts) premiums are about 16% and 14%, respectively,

clear evidence of how these shares have been sidelined by domestic investors.

SKT, KT, and LG Uplus (LGU+) trade at 2011 PERs of 5.7x, 5.8x, 5.3x vs. the

Kospi average of 10.3x and the global peer average of 15.4x. Telcos are also

attractive dividend stocks. We expect the total 2011 dividend yield (cash dividend +

treasury stock buyback) to be 7.6% for SKT, 6.5% for KT and 6.0% for LGU+.

Second, tariff-cut risk has been factored in share prices to a great extent, as the

issue has been up for discussion over the past four months. We expect finalized

tariff cuts to be announced in May with details about module-type plans (the

combination of free voice call, data and SMS at users’ disposal), the introduction of

the IMEI blacklist system (separating handset purchase from activation) and a

gradual reduction in monthly base fees and signup fees. Telco shares tend to take

a hit from tariff-cut pressure but rebound when tariff cuts are announced and

implemented. We see downside risk from the actual tariff-cut announcement as

quite limited.

Third, telcos will save on marketing costs as the tension on the subscriber tug-of-

war eases off in 2011. First, telcos need to reduce marketing costs to meet their

elevated earnings guidance. SKT guides for operating profit to increase 10% (K-

GAAP) and LGU+ is aiming at a 16.8% jump in EBITDA. Second, competition will

ease with telcos now playing on a more level field in terms of smartphone lineup,

as carriers launch the latest high-end smartphone models in lockstep. With the

removal of the handset lineup disadvantage, marketing costs will decline and

profitability will improve.

Fourth, mobile Internet growth will accelerate with the increasing penetration of

smartphones and tablet PCs. The number of smartphone users vaulted from

750,000 in 2009 to 7.18mn in 2010 (14.1% of total mobile subscribers) and is

forecast to jump to 20mn (38.4%) in 2011. Average revenue per user (ARPU)

growth will be minor due to an increase in subscribers with two or more handsets

and discount-rate tariff plans. However, average revenue per customer (ARPC) will

increase sharply. Smartphone growth will drive telcos’ revenue and profitability

upward.

We present SKT and KT as our top picks. Mobile carriers with competitive network

and content will benefit the most from the explosion in data traffic growth, and

those without will be increasingly stymied. SKT is best positioned in this

competitive landscape followed by KT.

Telcos are way oversold

Oversold,

OVERWEIGHT

Attractive valuation and

dividend payout

Tariff-cut pressure

already priced in

Marketing costs to

decline in 2011

The surge in

smartphone

subscribers to translate

into higher ARPC and

profitability

Top picks – SKT and KT

Telecom Services

2

SKT, a pure mobile service provider, is likely to enjoy the most notable revenue

and profitability improvement from increasing smartphone users. SKT is also the

most attractively valued among the three domestic carriers.

KT has the largest exposure to smartphone subscribers among the three mobile

carriers and has a superior fixed-line/wireless integrated network. Also, real estate

development will make an increasing contribution to profit, and the IPTV business

is expected to turn to the black in early 2012 on subscriber growth.

Capex and rate-cut pressure are the biggest risk factors that telcos currently face.

As wireless data traffic swells, capex and frequency band acquisition costs are

expected to shoot up. However, profitability will remain healthy barring excessive

tariff cuts and capex should be controlled and affordable. Mobile tariff cuts will be

announced in May and the presidential and general elections to be held next year

may bring additional tariff cut decisions.

Domestic and overseas telecom sector indexes over the past 12 months

70

80

90

100

110

120

130

140

Jan-10 Apr-10 Jun-10 Sep-10 Dec-10 Mar-11

KOSPI Domestic telecom

MSCI MSCI telecom

(2010.01=100)(pt)

Source: Quantiwise, Korea Investment & Securities

12-month share performance of domestic telcos relative to Kospi

60

70

80

90

100

110

120

130

140

Jan-10 Apr-10 Jun-10 Sep-10 Dec-10 Mar-11

KT LGU+ SKT

SKB KOSPI(2010.01=100)

(pt)

Source: Quantiwise, Korea Investment & Securities

Capex and rate-cut

pressure

Telecom Services

3

Overseas telecom shares on the rise

60

80

100

120

140

160

180

May -10 Jun-10 Aug-10 Sep-10 Nov -10 Dec-10 Jan-11 Mar-11 Apr-11

AT&T Sprint Nextel

Sof tbank Verizon

BT

(pt)

Source: Korea Investment & Securities

Telecom sector’s 12MF PER and discount rate: Discounted to the market

0

5

10

15

20

25

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

-40

-20

0

20

40

60

80Market premium/discount (RHS)

KIS telecom univ erse 12MF PER (LHS)

(x) (%)


Telecom Services

4

Deep discount to domestic market average and global peers

PER (x) EV/EBITDA (x) FCF yield (%) Div. yield (%)

FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY12

SPRINT NEXTEL NA NA 5.4 5.2 1.0 2.1 - -

VODAFONE 10.5 9.8 6.8 6.6 7.5 8.4 5.8 6.4

TAIWAN MOBILE 15.7 14.7 9.4 9.0 6.0 6.3 5.8 6.2

NTT DOCOMO 11.8 11.1 3.5 3.2 8.8 9.2 3.8 3.9

SOFTBANK 13.0 11.6 5.5 5.0 6.1 7.2 0.2 0.2

KDDI 9.6 8.8 3.2 2.9 9.2 10.8 2.6 2.8

CHINA MOBILE 9.6 9.4 3.7 3.5 7.7 8.6 4.6 4.8

CHINA UNICOM 59.1 26.0 6.0 5.2 (3.7) (0.3) 0.9 1.5

Mobile average 18.4 13.0 5.4 5.1 5.3 6.5 3.0 3.2

AT&T 13.2 12.3 5.5 5.2 7.4 8.4 5.5 5.7

VERIZON 16.7 14.1 5.1 4.6 5.4 7.0 5.3 5.4

DEUTSCHE 13.7 13.2 5.1 5.1 11.8 11.6 6.9 6.9

BT GROUP 9.2 8.8 4.7 4.5 13.3 13.3 4.3 4.9

FRANCE TELECOM 9.1 9.1 4.8 4.7 12.0 12.3 9.1 9.1

CHINA TELECOM 16.3 14.0 4.4 4.3 40.9 44.0 2.1 2.3

SINGAPORE TELECOM 12.5 11.6 8.6 8.2 7.7 8.6 5.9 5.7

PCCW 11.2 9.2 6.1 5.8 16.9 18.3 5.7 7.0

NIPPON T&T 9.3 8.6 2.9 2.6 12.4 13.4 3.4 3.6

Fixed-line average 12.4 11.2 5.2 5.0 14.2 15.2 5.4 5.6

SK Telecom 5.7 5.4 3.2 2.8 12.9 15.5 5.7 5.7

KT 5.8 6.1 3.3 3.3 12.2 11.9 6.3 6.3

LG Uplus 9.3 8.1 3.1 2.8 (5.9) 4.3 6.2 6.2

SK Broadband 61.2 16.3 4.8 4.4 3.8 9.1 - -

Domestic market avg. 10.3 9.2 7.2 6.3 - - - -

Domestic telecom avg. 7.1 6.9 3.4 3.2 - - - -

Note: Domestic market avg. is based on KIS Universe. Source: I/B/E/S, Korea Investment & Securities

Telecom Services

5

II. Mobile data explosion

1. Unprecedented growth of smartphones and tablet PCs

The number of smartphone users is growing at a blistering rate. KT introduced

iPhone in Korea in late November 2009, setting off what turned out to be a period

of explosive smartphone growth. The number of smartphone users rocketed from

750,000 at end-2009 to 7.18mn by end-2010. We expect the number to reach

20mn in 2011 and 31.8mn in 2012 driven by the power of smartphones’ strong

marketability and telcos’ aggressive marketing. Smartphones represented just

1.6% of total mobile handsets in 2009 but the portion ballooned to 14.1% in 2010

and is expected to jump to 38.4%.

Smartphones will continue to penetrate deeper into the mass market, accounting

for more than 60% of total mobile handsets in 2011, up from 30% in 2010.

Smartphone handset lineups will expand, ranging from high-end to mass market

models.

Smartphone subscriber trend

0

5,000

10,000

15,000

20,000

25,000

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11F 3Q11F 4Q11F

SKT KT LGU+

('000 subs)

Source: Company data, Korea Investment & Securities

Smartphone subscriber estimates (‘000, %)

2009 2010F 2011F 2012F 2013F 2014F

Subscribers

SK Telecom 24,270 25,705 26,323 26,643 26,893 27,143

KT 15,016 16,041 16,542 16,752 16,932 17,112

LG U+ 8,658 9,022 9,207 9,347 9,477 9,607

Total 47,944 50,768 52,072 52,742 53,302 53,862

Smartphone subscribers 0 0 0 0 0 0

SK Telecom 460 3,910 10,000 16,100 20,000 22,500

KT 280 2,737 6,500 10,200 12,500 14,500

LG U+ 8 531 3,500 5,500 6,900 7,900

Total 748 7,178 20,000 31,800 39,400 44,900

Smartphone portion 0 0 0 0 0 0

SK Telecom 1.9 15.2 38.0 60.4 74.4 82.9

KT 1.9 17.1 39.3 60.9 73.8 84.7

LG U+ 0.1 5.9 38.0 58.8 72.8 82.2

Total 1.6 14.1 38.4 60.3 73.9 83.4

Smartphone subscriber net additions 0 0 0 0 0 0

SK Telecom 460 3,450 6,090 6,100 3,900 2,500

KT 280 2,457 3,763 3,700 2,300 2,000

LG U+ 8 523 2,969 2,000 1,400 1,000

Total 748 6,430 12,822 11,800 7,600 5,500


Smartphone

subscribers to reach

20mn in 2011 and

31.8mn in 2012

Smartphone penetration

to soar to over 60%

Telecom Services

6

2. Wireless data traffic up tenfold in two years

Mobile data traffic has been surging on the proliferation of smartphones and tablet

PCs. The introduction of a flat-rate unlimited data service in August 2010 further

fueled the traffic growth. The number of subscribers on unlimited data service

plans totaled 5.74mn (SKT 3.15mn, KT 1.95mn, and LGU+ 640,000) as of March

2011, representing 55.8% of total smartphone subscribers or 11.2% of total mobile

subscribers.

Domestic mobile traffic surged 15.3x from 400TB in December 2009 to 6,112TB in

February 2011. The number of smartphone subscribers swelled 12.3x, while total

mobile subscribers increased 6.7%.

Domestic mobile data traffic trend (TB)

Oct-09 Dec Jan-10 Mar May Jun Sep Nov Feb-11

SK Telecom 128 140 156 165 196 323 794 1,659 3,411

KT 117 185 218 268 379 465 611 1,271 2,177

LG Uplus 70 75 81 81 102 128 164 252 524

Total 315 400 455 514 677 916 1,569 3,182 6,112

Note: Adopted iPhone in October 2009. Started unlimited data service in July 2010. Source: Korea Communication Commission, Korea Information Society Development Institute

Mobile traffic will continue to rise, driven by the increasing penetration of smart

devices and upgraded content services such as broadcasting and streaming video.

Exponential mobile data demand growth will continue for the foreseeable future.

Mobile industry watchers forecast domestic mobile data traffic to increase 8.7-fold

over January 2011 - December 2012.

Mobile data traffic forecast

5,4967,458

11,025

14,576

18,785

24,199

31,422

39,285

47,913

0

10,000

20,000

30,000

40,000

50,000

60,000

Jan-11 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

Total traf f ic

(TB)

Source: Korea Information Society Development Institute

Mobile data traffic

increased 15.3x over 14

months from December

2009 to February 2011

Mobile traffic demand to

grow 8.7x over the next

two years

Telecom Services

7

III. Data traffic strategies differ by carrier

1. Additional frequency allocation and network neutrality issue

1) Government to allocate more spectrum to decongest network

The policy of the KCC to deal with growing mobile traffic is based on frequency band redistribution, reassessment of the network neutrality principle, and revamping the current unlimited data service. The KCC plans to put up for auction 20MHz of spectrum in the 2.1GHz and 1.8GHz band each, in June 2011. Later, the redistribution of 108MHz in the 700MHz band should be on the table as well. If the government permits it, the 700MHz frequency band should be used for telecommunications from 2013 when analog broadcasting is no longer available. However, broadcasters argue that the 700MHz spectrum must be used for 3D broadcasting while digital broadcasting is aired through 470-698MHz. The total bandwidth that can be redistributed from the three frequency bands - 2.1GHz, 1.8GHz and 700MHz - amounts to 148MHz. Telecom service researchers believe Korea’s mobile carriers will need at least 240MHz of additional spectrum by 2015 and 390MHz by 2020. Frequency bands to be allocated in major overseas mobile service markets in the next five to ten years amount to roughly 2-3x the frequency bands currently used by carriers. Increased frequency bands equal more traffic capacity.

Frequency band redistribution plans

Band Bandwidth Redistribution period

2.1GHz 20MHz 11.6 - 20MHz of spectrum immediately available. Golden band globally used for 3G and offer advantages in smartphone lineup and global roaming.

1.8GHz 20MHz 11.6 - 20MHz of spectrum to be available when KT’s 2G is terminated in July. - Some European companies are deploying LTE on 1.8GHz band. - However, domestic carriers may risk handset lineup disadvantage compared to 2.1GHz and 700MHz.

700MHz 108MHz ? - Available from 2013 after the switch to digital TV broadcasting is completed. Prime LTE band.

Total 148MHz - Notably short of minimum 240MHz needed by 2015. A pressing need for policies to secure additional frequency bands.

Source: KISDI policy open forum, Professor Kang, Choon-gu of Korea University

2) Revisiting network neutrality issue

Voice over IP over wireless (wVoIP) network and instant messaging services that allow users to bypass paying mobile networks are seeing rapid growth. Google Voice and Skype are the leading wVoIP services offered overseas. Domestic mobile users using flat-rate tariff plans of over W55,000 a month are allowed to use wVoIP services. The market has seen an increase in demand for free or low-cost mobile messenger services - such as KakaoTalk, MeToday, Twitter, Facebook, and Cyworld - as alternatives for voice calls and SNS. However, mobile instant messaging volume growth has come to crowd the mobile network, resulting in the deterioration of voice call quality. Telcos are increasing network capex to deal with rising traffic, but the free wVoIP and messaging services put mobile operators in a tough spot as they have an adverse effect on revenue. Usage-based pricing for mobile data traffic is gaining support in major mobile markets including the US, UK, Japan, France, Spain, Italy, and Norway. Usage-based pricing supporters argue that the mobile network should be an exception to network neutrality (unlimited access). The Korean government is expected to bring this issue to the public in 2H11.

Additional frequency bands to be auctioned

out

Mobile carriers need an additional 240-390MHz

by 2015

Telcos and Internet portals at odds over

wVoIP and SNS

Government to weigh ‘usage-based pricing’ for mobile networks

from 2H11

Telecom Services

8

2. Taking different paths on network issue

The three mobile carriers are taking differing approaches in dealing with the data

explosion. Their network strategies are 1) additional spectrum acquisition, 2) LTE

network rollout, 3) alternative networks such as WiFi and femtocell, and 4) existing

network upgrade through HSPA+, cell splitting and cloud service.

1) High-stakes competition over frequency bands

Mobile operators are bent on securing additional frequency bandwidth. The 20MHz

spectrum on the 2.1GHz and 1.8GHz band set to be redistributed is the most

coveted spectrum. Competition will also be intense for the golden low-frequency

700MHz band although the band will not be freed up by analog broadcasters until

end-2012 and the redistribution of the band has not been fixed yet.

If the government decides to auction off 2.1GHz, 1.8GHz, and 700MHz bands at

the same time, mobile carriers will have some flexibility in their network strategy.

Considering LGU+’s weak financial capacity, we do not believe mobile carriers will

end up bleeding too much over frequencies.

Frequency band assigned by company (as of 2010)

800MHz 900 1800 2100 2300

SK Telecom 2G(50) 3G(40) WiBro(27)

KT 2G(40) 3G(40) WiBro(27)

LG Uplus 2G(20)


Spectrums for possible use by mobile operators after reallocation (July 2011) and the forecast of future

spectrum allocation

700MHz 800 900 1800 2100 2300

SK Telecom 3G or LTE (108) 2G(20) LTE(10) 3G or LTE (20) 3G(40) 3G(20) 3G(20) WiBro(27)

KTPossible spectrum

reallocation LTE(20) LTE(20)

To be

reallocated3G(40)

To be

reallocatedWiBro(27)

LG UplusAvailable for use

after 2013LTE(20) 2G(20)

KT to terminate 2G

service

Note: 1. Figures in parenthesis indicates channel bandwidth. 2. As of April 2011. Source: Korea Investment & Securities

2) Next-generation networks: LTE

The long-term evolution (LTE) is a core part of telcos’ traffic growth strategy. LTE,

also called a 3.9G system, provides a maximum downlink speed of 40Mbps vs.

14.4Mbps of the current 3G (HSUPA) network and 100Mbps of the 4G LTE

advanced. About 17 carriers around the world have already launched LTE service

and the number is expected to rise to 64 by end-2012.

Over the long term, mobile carriers will have to move up to 4G. However, the LTE

commercialization decision hinges on the issues of 1) 3G investment payback

period, 2) voice revenue decline, and 3) slower data revenue growth vs. explosive

traffic growth. For now, domestic carriers’ traffic growth strategies are primarily

based on 3G upgrades and alternative networks.

Telcos to compete

for the golden

2.1GHz, 1.8GHz

Looking to LTE to cope

with rising data demand

Telecom Services

9

KT plans to make best use of alternative networks such as WiFi and WiBro. Its

planned migration to LTE lags behind competitors’ timelines. In the meantime, KT

plans to fall back on the High Speed Packet Access+ (HSPA+) services. SKT

intends to channel data traffic over to alternative networks such as WiFi and

femtocell, while moving up its scheduled migration of 3G network to HSPA+ and

LTE. SKT plans to complete its nationwide LTE network by 2013. SKT is expected

to maintain a dual network strategy of using LTE for data and 3G for voice for a

while. LGU+ does not have a 3G network but upgraded its CDMA network to EV-

DO Rev.B in April 2011. The third-ranked carrier plans to kick off LTE service for

the capital region in July 2011 and complete a nationwide network by July 2012.

Mobile technology evolution process: SKT, KT (HSPA+); LGU+ (EV-DO r.B); eventually migrating towards 4G

technology

2G 3G 4G

1995 1999 2000 2002 2006 2007 2009 2010 2011 2013

CDMA IS-95A/B CDMA 1X EV-DO r.0 EV-DO r.A EV-DO r.B

(14.4~56kbps) (144kbps) (2.4/0.154Mbps) (3.1/1.8Mbps) (9.3/5.4Mbps)

GSM GSM GPRS W-CDMA HSDPA HSUPA HSPA+ 3G LTE LTE Advanced

(10kbps) (171kbps) (2.3Mbps) (14.4/2.3Mbps) (14.4/5.8Mbps) (28Mbps) (30~100Mbps) (100Mbps)

Wireless LAN WLAN WiBro

(24.8/5.2Mbps)

Note: 1. (Upload/download rates). 2. LTE (long-term evolution): The long-term evolution of mobile technology that offers upgrade path from 3G networks. Source: Korea Investment & Securities

Comparison of 3G, 4G mobile technologies

3G 4G

Technology WCDMA HSPA+ LTE Rel.8/Rel.9 LTE Advanced

Generic technology CDMA OFDMA

Speed ~2Mbps ~28Mbps 40Mbps~ 100Mbps~

Bandwidth 10MHz 10MHz 10/20/40MHz 10/20/40MHz

Note: CDMA technology evolution was closed after the development of CDMA EVDO REV.A/B. There are only few mobile operators that selected WiMAX as the key technology, so we only consider evolution towards LTE in the table.


LTE in the US

AT&T Verizon T-Mobile Clearwire/Sprint MetroPCS

Technology LTE LTE HSPA+ WiMAX LTE

Speed 7-10 Mbps 5-12 Mbps 4-7 Mbps 3-6 Mbps 2-8 Mbps

Avg. MHz spectrum in top 100 markets 100 88 54 160(CLWR), 54(Sprint) 20

Spectrum band for 4G 700 MHz, AWS 700 MHz AWS 2.5GHz PCS, AWS

Commercial launch 2,011 4Q10 4Q10 3Q09 3Q10


Average MHz of spectrum (US mobile operators)

AT&T Verizon Sprint T-Mobile Clearwire Other

700 MHz, 698-758; 776-787 MHz 29 30 0 0 0 11

Cellular/SMR, 809-849; 854-894; 896-901; 935-940MHz 25 25 18 0 0 6

AWS, 1710-1755; 2110-2155 MHz 12 13 0 27 0 38

PCS, 1850-1910; 1930-1990 MHz 35 20 36 27 0 2

EBS/BRS, 2500-2690 MHz 0 0 0 0 160 34

Total 100 88 51 54 160 91


LGU+ eager for LTE, KT

lukewarm

Telecom Services

10

3) Alternative data network: Microcells (WiFi, data femtocells)

Since the step-up from 3G to LTE will only increase network capacity by two- to

three-fold and indoor mobile traffic accounts for 60-70% of total mobile traffic,

operators are building microcells such as WiFi and femtocells as alternative data

paths for increasing data traffic. According to the carriers’ plans, the combined

number of WiFi spots will mushroom from 62,600 in 2010 to 212,000 in 2011. KT

has been leading in WiFi coverage. LGU+ launched its ‘U+zone’ service by

connecting household WiFi APs and public WiFi hotspots. Along with the

investment in LTE, telcos will build more femtocells. SKT plans to set up 10,000

data femtocells in 2011. Femtocells allow data traffic to make a detour around 3G

base stations to the fixed-line network. While femtocells cost more to build

compared to WiFi zones, femtocells have an edge in handover performance.

4) Existing network upgrade: HSPA+, cell splitting, cloud services

SKT and KT are upgrading their 3G network to HSPA+. SKT is moving toward

HSPA+ and LTE at the same time. It is also carrying out cell splitting for congested

areas. KT is putting a heavier emphasis on WiFi and WiBro (backhaul) over

HSPA+ upgrade and has been less enthusiastic toward LTE than its peers. KT will

also utilize a ‘Cloud Communication Center’ to further distribute data traffic. LGU+

upgraded to EV-DO Revision B (average downlink data rate of 9.3Mbps) in April

2011.

Subscriber breakdown by communication type ('000 subs, %)

SKT KT LGU+

3G 16,525 15,289 0

2G 9,463 1,010 9,077

Smartphones 5,300 4,840 1,150

Feature phones 20,689 11,459 7,927

Total mobile subscribers 25,989 16,299 9,077

Mobile portion 50.6 31.7 17.7

Smartphone portion 20.4 29.7 12.7

Note: As of March 2011. Source: Company data, Korea Investment & Securities

To disperse traffic over

WiFi and data

femtocells

SKT and LGU+ upgrade

network using HSPA+

and EV-DO Rev.B,

respectively

Telecom Services

11

IV. Is data explosion a threat?

Increasing mobile data traffic presents an opportunity of a rejuvenated growth

driver for mobile carriers, but it also poses a threat of added capex burden.

1. Opportunity: ARPC hike, usage-based pricing and network neutrality exception

Explosive data growth present telcos with opportunities - 1) growth in smartphone

subscribers and ARPU, 2) possible introduction of usage-based pricing, 3) network

neutrality exception, and 4) convergence services in partnership with other

industries.

First, increasing smartphone subscribers will stimulate revenue growth by pushing

up ARPU. Despite the discounted tariff plans (smartphones sold at reduced

subsidy but tariff discounts) and multiple devices-per-person trend, smartphones

are more lucrative for carriers than feature phones. ARPU growth (revenue per

handset) could be minor if more consumers opt for multiple devices, but ARPC

(revenue per customer) will still increase markedly.

Smartphones will also boost ARPU, as an increased portion of smartphone users

selected a flat-rate monthly plan of more than W55,000 since the introduction of

unlimited data service in August 2010. In the US, where smartphones were made

available earlier than in Korea, overall mobile ARPU has been steadily rising with

the increase in carriers’ exposure to smartphone users.

Second, even with network upgrades to LTE and 4G, snowballing data traffic will

make it difficult for telcos to maintain unlimited data service as it is now. We believe

the unlimited data service will be discontinued or overhauled, and the idea of

introducing usage-based pricing will gain traction. Usage-based pricing will allow

carriers to directly channel data explosion into revenue growth.

Third, ‘network neutrality’ will likely be revisited. The wireless network in particular

will probably become an exception to network neutrality. Paying for network usage

in proportion to actual traffic will boost carriers’ sales and help shorten their capex

payback period. Unlike fixed-line communication, a number of users share limited

frequency bandwidth for wireless communication, which we believe makes the

mobile network a reasonable exception to network neutrality that advocates

unlimited access. If network neutrality is sustained, a small number of bandwidth

hogs can inconvenience other users.

Fourth, smartphones are penetrating into the mass market and new business

opportunities will arise as a result. For example, mobile payment services using

‘near field communication’ will become more widely available. We also expect to

see an increase in convergence services in a tie-up with other businesses such as

education and medical services.

Smartphone subscriber

growth to lead to higher

ARPC

Usage-based pricing,

exception to network

neutrality, and

convergence services

Telecom Services

12

US mobile carrier postpaid ARPU

0.5%

0.2%

0.7%

0.1%

1.0%

1.4%1.3%

2.1%

2.4%

40

42

44

46

48

50

52

54

56

58

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%Postpaid ARPU (LHS)

Postpaid ARPU YoY change (RHS)

(USD)

Note: Average of postpaid subscribers. Source: Company data, Korea Investment & Securities

2. Threats: Added capex burden, frequency acquisition costs, and wVoIP

The surge in data traffic entails the risks of: 1) capex increase; 2) cost burden to

secure more frequencies; 3) tariff-cut pressure; and 4) proliferation of wVoIP and

SNS.

1) Added capex burden

Exploding data demand is heightening concerns over the heavier burden of capex

laid on mobile carriers. The combined capex of Korea’s four telcos is expected to

expand 18.6% to W7.595trn in 2011 from W6.405trn in 2010. However, we believe

the extent of the capex increase will be manageable by telcos. Pre-investments

are concentrated in 2011, indicating capex will slightly decline in 2012 compared to

2011. The ratio of capex to sales in 2011 and 2012 will remain within the range of

15-17%. This is because capex will not be limited to establishing the next-

generation LTE network, but will be dispersed to areas such as the upgrade of

previous 2G and 3G networks (HSPA+, CDMA Rev.B) and investments in

alternative networks such as WiFi and femtocells to offload data traffic.

LGU+, the most eager to invest in LTE, is expected to spend W1.2trn in building a

nationwide network from 2011 to June 2012. LTE equipment prices have declined

to a mere two thirds of previous 3G equipment prices. Telcos are also working on

improving existing networks, as investments in LTE to boost the capacity of

existing networks by only two to threefold. Infrastructure investment for HSPA+ and

CDMA Rev.B involve minimal capex. SKT is enthusiastically investing in HSPA+,

as capex on HSPA+ stands at a mere one third of that on LTE. LGU+ also

completed building a CDMA Rev.B network (replaced software) in April by

investing W5bn. As for WiFi and femtocells, these alternative networks require

minimal capex.

Capex to increase, but

at a manageable pace

Building LTE networks,

upgrading existing

networks, and investing

in alternative networks

require less capex than

did previous 3G

networks

Telecom Services

13

Capex outlook for four telcos

16.1

14.8

17.0

15.9

5,500

6,000

6,500

7,000

7,500

8,000

2009 2010 2011F 2012F

13

14

15

16

17

18Combined capex of f our telcos (LHS)

Combined capex-to-sales of f our telcos (RHS)

(W bn) (%)


Capex-to-sales ratio (W bn, %)

2,009 2,010 2011F 2012F

Capex

SK Telecom 1,769 1,865 2,300 2,250

KT 2,959 3,057 3,250 3,200

LG Uplus 1,248 1,148 1,700 1,500

SK Broadband 540 334 345 345

Total 6,516 6,405 7,595 7,295

Capex-to-sales

SK Telecom 14.6 15.0 17.4 16.2

KT 15.6 15.1 15.8 15.5

LG Uplus 16.5 13.5 19.8 16.8

SK Broadband 28.5 15.8 15.1 14.2

Total 16.1 14.8 17.0 15.9


2) Cost burden to secure additional frequencies

Along with capacity expansion through infrastructure investments, acquisition of

additional frequency bands is a prerequisite for accommodating the surging data

traffic. Adding the cost for obtaining frequency bands, the overall cost to deal with

the explosion in data traffic could be a burden on wireless carriers.

The bidding costs could increase if the Korean government simultaneously puts up

for auction each 20MHz of the 2.1GHz and 1.8GHz band and then 108MHz of the

700MHz band additionally. The costs fluctuates depending on the frequency

bandwidth, whether it is a high or low frequency (value of frequency below 1GHz is

higher due to greater efficiency), usage period, and competitive landscape.

The 20MHz spectrum in the 2.1GHz band will be offered until 2016. As for other

bandwidths, the government has yet to determine whether to reassign the bands

and under what conditions. In 2010, SKT was allocated 20MHz of the 2.1GHz

band at a price of W230bn (W106.4bn in 2010 + 1.6% of revenue for the next 6.5

years) until 2016.

The need to secure

more frequencies raises

concerns over bidding

costs

Telecom Services

14

The preference of bandwidth is in the order of 2.1GHz, 700MHz, and 1.8GHz

taking into consideration the purpose of usage and available period. Applying the

revenue calculation criteria used when reallocating frequency in 2010 and

assuming a usage period of five, eight, and nine years for 20MHz of the 2.1GHz

frequency band, 108MHz of the 700MHz frequency band, and 20MHz of the

1.8GHz frequency band, respectively, the acquisition price comes down to

W175.4bn, W2.3272trn, and W315.7bn, respectively. The combined amount is

estimated at W2.8183trn. In addition to financing costs, three telcos will annually

incur amortization expenses on intangible assets (frequency allocation cost/usage

period) totaling W361.1bn. On average, amortization expenses of W128.1bn will

be added to each wireless carrier annually. Compared to the expenses from

infrastructure investments, this amount appears nominal.

Spectrum allocation fees per service (W bn)

SKT KT LGT

License fee (W bn)

CDMA 80 in 1994 110 110

200 from 1994 to 2002 +0.5% of sales +0.5% of sales

+0.75% of sales

WCDMA (2001) 650 in 2002 650 in 2002 220

650 from 2007 to 2011 650 from 2007 to 2011 Returned in 2006

WCDMA or LTE 106.4 in 2010 251.4 in 2011 251.4 in 2011

(Allocated in 2010 ) +1.6% of sales from 2010 to 2016 +1.6% of sales from 2011 to 2021 +1.6% of sales from 2011 to 2021

WiBro 117 117 -

License period (start date-end date)

CDMA (allocated in 1994, 1996) 34,639 96~11 96~11

WCDMA (allocated in 2001) 01~16 01~16 01~06

WCDMA or LTE (allocated in 2010) 10~16 11~21 11~21

WiBro 05~12 05~12 -


Spectrum acquisition cost estimates (W bn)

Band Bandwidth Service period Service life 20MHz spectrum acq. cost Spectrum Annual depreciation cost

(MHz) for using 1 year (A) acq. cost (acq. cost/service life)

700MHz 108 8 2013~2021 53.9 2,327.2 290.9

1800MHz 20 9 2012~2021 35.1 315.7 35.1

2100MHz 20 5 2012~2016 35.1 175.4 35.1

Total 148 2,818.3 361.1

Note: 1. We assume the service life of 700MHz and 1800MHz is until 2021, which is the closing period of LTE. 2. 700MHz is high priced due to the efficiency of low spectrum.

3. Spectrum acquisition cost = A *bandwidth* service life.


Spectrum acquisition cost and depreciation cost of three domestic mobile

operators (W bn)

SKT KT LGU+ Total

Spectrum acq. cost

2009 2,340 1,342 0 3,682

2010 2,340 1,342 0 3,682

Depreciation cost

2009 129 115 0 245

2010 129 115 0 245

Note: CDMA pays for spectrum license fees. Source: Company data, Korea Investment & Securities

Total costs to acquire

148MHz bandwidth

estimated at W2.3272trn,

smaller in scale

compared to

infrastructure

investments

Telecom Services

15

3) Rate-cut pressure

The Korean government recently shifted the direction of its telecom services policy

from promoting the industry to benefiting consumers. The government plans to

induce telcos to lower rates by slashing marketing expenses. Soaring data

demand from the usage of smartphones is burdening consumers with hefty mobile

phone bills, leaving the government no choice but to press telcos to cut rates.

If mobile rates are lowered while capex is increased to handle rising wireless data

demand, telcos will see marginal revenue growth and stagnant profit growth. After

the government’s scheduled announcement of a rate-cut plan in May 2011,

another round of rate cuts could follow as the general and presidential elections

are slated for June and December 2012, respectively.

4) Replacement of voice calls and text messages by wVoIP and SNS

The emergence of the social network service (SNS)―i.e., me2day, KakaoTalk,

Twitter, and Facebook―and the proliferation of wVoIP,―i.e., Google Voice, Viber,

and Skype― threaten to supplant mobile carriers’ voice call and text message

services.

The evolution of technologies is raising concerns that the ‘dumb pipe’ (simply

transmitting voice and data) fate could befall mobile operators, impairing their

ability to create value from their telecom networks, as it did in the case of fixed-line

operators. In Korea, only mobile phone users that pay more than W55,000 per

month are allowed access to wVoIP services.

If the wireless network is excluded from the network neutrality policy―a policy that

is opposed by telcos as it opens networks to all users and guarantees the same

speed and quality to all Internet websites― telecom service providers will be able

to charge users for using their networks by the amount of usage, which will

compensate for the eroded revenue to some extent.

Rate-cut pressure

lingers

Concerns over the

possible erosion of

telcos’ revenue by SNS

and wVoIP services

Charging users of

mobile networks by the

amount of usage would

be positive for revenue

Telecom Services

16

V. Profitability to remain at a healthy level

The surge in mobile data traffic due to the growing number of smartphone

subscribers is boosting revenue as well as costs. The key here is how the

increasing traffic will impact the profitability of telcos. Optimists argue the revenue

growth of smartphones will outpace cost growth. On the other hand, pessimists

predict revenue growth will be slower than data traffic growth while capex on

networks and management costs will swell in line with soaring data demand.

We believe telcos will be able to maintain profitability at a moderate level based on

the following: 1) exploding data traffic will sharply boost revenue; 2) alternative

networks will reduce per-bit transmission costs; 3) value-added services (i.e.,

content) will be reinforced; and 4) tariff plans are likely to be restructured in the

direction of abolishing unlimited data plans and introducing usage-based pricing

plans.

Market concerns about data traffic growth

0

5

10

15

20

25

Y Y+1 Y+2 Y+3 Y+4 Y+5 Y+6

Capex growth Sales growth

OP growth

(%)


KIS data traffic growth estimates

2

4

6

8

10

12

Y Y+1 Y+2 Y+3 Y+4 Y+5 Y+6

Capex growth Sales growth

OP growth

(%)


Optimists and

pessimists clash over

the impact of heavier

traffic on profitability

Profitability to remain at

a healthy level

Telecom Services

17

1) Establishment of next-generation networks such as LTE and usage of WiBro

and ethernet backhaul will curtail the per-bit cost of data transmission. LTE

equipment prices are on the decline, and alternative data paths such as WiFi and

femtocell will be effective in dispersing data traffic.

2) Instead of turning into ‘dumb pipes’, mobile telecom operators will maintain their

role as ‘smart pipes’ by creating added value via competitive content, as they hold

sway over services offered in handsets and control mobile tariffs. The case will be

different from that of fixed-line operators whose networks became ‘dumb pipes’ as

they failed to link their telecommunication services to the terminals.

3) In the incipient phase of the smartphone business, the current flat-rate pricing

system is more beneficial to telcos because the growth rate of data usage is high

but the absolute volume of data usage is low. Mobile carriers will be able to offset

the adverse effects of free riders such as SNS by providing handset subsidies

related to rate plans and offering a certain amount of free voice calls and text

messages through flat-rate plans. Under the current flat-rate pricing system, only

subscribers who exceed their allotted minutes of voice calls are allowed to use

SNS and VoIP services such as Skype and Facebook. Moreover, VoIP is still

inferior to mobile phone calls in terms of call quality and user interface.

4) In the long term, a shift to a usage-based pricing system, under which

subscribers have to pay for the amount of data used, will give a boost to revenue

growth, considering that mobile data usage volume is expected to surge. The

usage-based pricing plan will heighten the correlation between voice call usage

volume and revenue. We expect mobile carriers to adopt the usage-based pricing

system starting with LTE services.

5) Telcos will discontinue or revamp their unlimited data plans. While AT&T of the

US and TeliaSonera of Sweden scrapped their unlimited data plans in June and

July 2010, respectively, Korean counterparts introduced the plan in August 2010 as

a strategy to win the race. The abolishment of such a plan will hinder the small

number of heavy data users from generating excessive traffic and lift the cap on

mobile tariffs, ultimately increasing data revenue.

6) If the Korean government excludes mobile telecom networks from the network

neutrality debate, users will have to pay for the data that they use. This will

diminish the negative effects from free riders offering wVoIP and free texting

services.

7) The Korean government will not be able to force telcos to radically cut rates, as

it needs to encourage the telcos to build telecom networks, invest in R&D, and

offer new services.

8) The smartphone business will contribute to improving profitability as surging

data usage will boost ARPU and decrease the churn rate. This has already been

proven in the US where smartphones were introduced earlier than in Korea.

Data transmission costs

to decline; telcos to

remain ‘smart pipes’

creating added value

Current flat-rate pricing

system is more

beneficial in the initial

phase of the

smartphone business

In the long term, a shift

to usage-based pricing

system will spur

revenue growth

Scrapping of unlimited

data plans to boost

revenue

Korean government will

come up with a policy

that guarantees the

profits of telcos to some

extent

Higher ARPU and lower

churn rate

Telecom Services

18

US mobile carriers’ subscriber churn rate

1.45%

1.30%

1.50% 1.49% 1.49%

1.36%

1.47%

1.44%

1.38%

1.27%

1.40%1.38%

1.36%

1.1%

1.2%

1.3%

1.4%

1.5%

1.6%

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

Weighted av erage postpaid churn

Note: Average of postpaid subscribers. Source: Company data, Korea Investment & Securities

US mobile carriers’ EBITDA margins

38.4%

35.6%

37.2%

37.8% 37.7%

37.0%

36.4%

38.2%38.5%

36.0% 36.0%

35.0%

39.0%

33%

34%

35%

36%

37%

38%

39%

40%

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

Weighted av erage EBITDA margins

Note: 1. Average of mobile operators. 2. 1Q11 EBITDA decreased due to greater loss from T-Mobile and subscriber growth. Source: Company data, Korea Investment & Securities

Telecom Services

19

VI. The strong get stronger as competition

surrounds network capacity

Explosive mobile data traffic is reshaping the competitive landscape of the telecom

services industry around network and voice call quality as well as service

(competitive content) quality, as opposed to the previous marketing focus of

handset subsidy. Determinants of the competitiveness of network and service

quality are: 1) subscriber base; 2) allocated frequency bands (including networks

by frequency band); 3) backup by fixed-line network; 4) financial capacity; and 5)

content. Economies of scale and the synergy effect generated by these five

elements are also important factors. As Korean wireless carriers show a large

disparity in each of the five elements, the gap between the frontrunner and

latecomer will further widen down the road.

SKT appears to have the upper hand over peers in the era of soaring mobile data

traffic, given: 1) its broad subscriber base; 2) greater number of frequency bands;

3) strong financial capacity; and 4) abundant content (i.e., T-map and Melon).

Provided, SK group needs to beef up its fixed-line networks which are relatively

weak compared to KT and LGU+.

KT is armed with a strong fixed-line network base and ample cash flow. Its

subscriber base is smaller than that of SKT, but larger than that of LGU+. How the

frequency bands are reallocated is especially important for KT. The company’s

content is weaker than its counterparts’ offerings.

LGU+ stands on par with KT in the fixed-line network area, but is inferior to rivals in

the wireless network field as the mobile carrier does not have a 3G network. The

carrier also lags behind peers in terms of subscriber base, financial capacity and

content. It plans to compensate for its weakness by moving faster than

counterparts to establish a nationwide LTE network in July 2012.

Competitiveness by carrier

SKT KT LGU+ Note

No. of subscribers 5 3 2 Larger subscriber base means lower capex per subscriber -> economies of scale

Frequency bands 5 4 2 More frequency bands place telcos in an advantageous position in offering data service

Fixed-line networks 3 5 4 Fixed-line networks, a backup for wireless networks, play an important role in supplying data

Financial capacity 5 5 2 Strong financial capacity place telcos in an advantageous position in making new investments and developing services

Content 5 4 2 Self-developed content contribute to revenue growth and marketing activities

Total 23 21 12

Note: Imposed 1-5 points by each factor. Source: Korea Investment & Securities

Subscriber base,

frequency bands, fixed-

line networks, and

content are key

determinants of

competitiveness in the

era of data explosion

SKT in a favorable

position

KT is on par with SKT in

terms of infrastructure

LGU+ to gain

competitiveness via

LTE rollout

Telecom Services

20

Subscribers, frequency and network by carrier

SKT KT LGU+

Mobile 25,989 16,299 9,077 1. Subscribers ('000)

Smartphone 5,300 4,840 1,150

2G 20 20 20

3G 60 40 0

LTE 10 20 20

WiBro 27 27 0

2.Spectrum allocation (MHz)

Total 117 107 40

3. Network plans -Data highway -Mobile wonderland AP centric network

-July 2011: Initiate service in Seoul -1Q12F: Initiate service -July 2011: Seoul, capital region 1) New generation network

LTE -2013: Expand to 82 cities -2013: Expand to 82 cities

-July 2012: Establish nationwide network

-17,000 in 2010 -42,000 in 2010 -7,000 in 2010

-62,000 in 2011 -100,000 in 2011 -50,000 in 2011

-Covering the capital region subway lines by utilizing WiBro

WiFi zone (home-AP interconnection)

-320,000 in 2010

WiFi

-1,050,000 in 2011

Femtocell 10,000 in 2011

-Covering 82 cities -Covering 82 cities

-Subways -Major highways

2) Alternative network

WiBro

-Subways

CDMA -Providing service until June 2011 -Evolved to Rev.B in April 2011

3G -Evolved to HSPA+ -Evolved to HSPA+ 3) Current network upgrade

Others -Divide base-stations to six sectors -Disperse traffic by utilizing cloud center

Application Melon, Cyworld, Nateon, Tmap KT music, Olleh navi 4. Content

Media TU media, IPTV Sky life, IPTV TU media, IPTV


SK Telecom (017670).......................................................................................................................................................................22

KT (030200) ..................................................................................................................................................................................................25

LG Uplus (032640) ..............................................................................................................................................................................28

Company

Telecom Services

22

SK Telecom (017670) BUY (Maintain), TP: W222,000 (Maintain)

Armed with high growth potential and solid profitability

Maintain BUY with a target price of W222,000: We reiterate BUY and our target

price of W222,000. We derived our price by applying a target PER of 7.5x to the

12-month-forward EPS (K-IFRS consolidated basis). The target PER is 20%

discounted to the past two-year average PER of 9.4x. We maintain BUY on the

following. 1) The valuation is attractive. The stock currently trades at a 12-month-

forward PER of 5.6x (K-IFRS consolidated basis), which is a low level. Even based

on the past K-GAAP standard, the PER stands at a mere 7.0x. 2) The proliferation

of smartphones and expansion of corporate (B2B) business have stepped up the

mobile operator's growth potential. We expect top-line growth to reach 6% for the

first time in four years, while the bottom line should also pick up. 3) The improving

bottom line should lead to greater shareholders’ return. We expect the total

dividend yield (dividend + stock buyback) to exceed 7% in 2011.

Top-line growth to reach 6% for the first time in four years: In 2011, SKT

should enjoy recovery in both the top and bottom lines for the first time in four

years. The growing popularity of smartphones and expansion of corporate (B2B)

business should recuperate the carrier’s growth potential. Top-line growth should

reach 6% in 2011, doubling the CAGR of 3.3% during 2008-2010. The number of

smartphone subscribers should expand from 3.91mn in 2010 to 10mn in 2011.

Moreover, B2B sales should surge from W900bn in 2010 to W1.2trn in 2011 as the

business explores new areas such as mobile offices, mobile payments, distribution

(i.e., online shopping mall ‘11st’), education, and ubiquitous healthcare services.

Bottom line to improve from 2011: Profitability deteriorated in 2010 as the carrier

introduced a rate system that charges for calls on a second-by-second basis, but

should pick up in 2011 buttressed by the earnings contribution by smartphones

and lower marketing expenses. The EBITDA margin should rise from 28.6% in

2010 to 30.3% in 2011 and to 31.0% in 2012. SKT’s bottom line will improve on the

growing number of smartphone subscribers, while its subsidiaries such as SK

Broadband should see faster recovery in profitability. In 1Q11, SKT reported net

profit growth of 35.7% YoY on a standalone basis and 56.5% YoY on a

consolidated basis. Meanwhile, the carrier is enjoying explosive growth in its

platform business including T Store (application market) and 11st (online shopping

mall). The platform business is inherently favorable to a dominant mobile carrier.

Larger capex and rate-cut pressure: Risk factors include increased capex and

rate-cut pressure. SKT revised up its capex guidance for 2011 from W2trn to

W2.3trn to reflect surging mobile data demand. While investment in next-

generation networks is inevitable down the road, the Korean government is

pressuring telcos to cut rates. If rates are lowered dramatically, profitability will be

hurt despite rising data demand.

May 18, 2011 / W165,000 / Mkt cap: USD12,256.7mn, KRW13,323.0bn

Yr to Sales OP EBT NP EPS % chg. EBITDA P/E EV/EBITDA PBR ROE

Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%)

2009A 14,555 1,879 1,400 1,056 17,239 3.2 4,611 9.8 3.9 1.0 11.4

2010A 15,435 1,942 1,674 1,297 19,177 11.2 4,811 9.0 3.6 1.0 12.3

2011F 16,384 2,468 2,578 1,940 29,014 NM 4,958 5.7 3.2 0.9 17.2

2012F 17,317 2,721 2,723 2,042 30,549 5.3 5,373 5.4 2.8 0.8 16.1

2013F 18,311 3,027 3,067 2,300 34,412 12.6 5,764 4.8 2.5 0.7 16.2

Note: K-GAAP consolidated from 2009 to 2010. K-IFRS consolidated after 2011F.

Jong In Yang 82-2-3276-6153/6154

[email protected]

Telecom Services

23

Changes in the number and portion of smartphone subscribers

0

2000

4000

6000

8000

10000

12000

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11F 3Q11F 4Q11F

0

5

10

15

20

25

30

35

40

45Smartphone subscribers (LHS)

Portion of smartphone subscribers (RHS)

('000 subs) (%)

Source: SKT, Korea Investment & Securities

Earnings trend (K-IFRS consolidated) (W bn, ‘000 subs, %)

2010 2011 Growth

1Q 2Q 3Q 4Q 1QP 2QF 3QF 4QF QoQ YoY

Subscriber

Activations 2,422 2,321 2,638 2,271 2,237 2,410 2,420 2,390 (1.5) (7.6)

Net adds 555 322 299 260 283 140 130 120 9.1 (48.9)

End of period 24,825 25,146 25,445 25,705 25,989 26,129 26,259 26,379 1.1 4.7

Average 24,547 24,985 25,296 25,575 25,847 26,059 26,194 26,319 1.1 5.3

Sales 3,764.4 3,823.6 3,988.0 4,023.3 3,908.9 4,049.0 4,116.2 4,310.1 (2.8) 3.8

Operating expenses 3,288.2 3,176.7 3,346.0 3,511.0 3,294.5 3,304.7 3,461.1 3,856.3 (6.2) 0.2

Labor cost 298.1 196.1 289.2 286.6 313.6 203.9 300.7 298.1 9.4 5.2

Marketing expenses 992.1 1,050.3 995.0 996.0 942.9 1,040.7 1,026.9 1,039.1 (5.3) (5.0)

Depreciation 582.0 524.5 538.6 534.6 586.1 610.0 625.0 668.9 9.6 0.7

Interconnection fees 335.2 340.0 375.7 265.3 318.7 328.4 330.1 331.6 20.1 (4.9)

Operating profit 476.2 646.9 642.0 512.2 614.3 744.3 655.1 453.9 19.9 29.0

EBT 451.6 607.8 628.6 621.5 768.9 727.3 651.1 430.9 23.7 70.3

Net profit 343.3 448.9 470.7 503.9 537.3 563.7 504.6 334.0 6.6 56.5

EBITDA 1,058.2 1,171.4 1,180.5 1,046.8 1,200.4 1,354.3 1,280.1 1,122.7 14.7 13.4

EBITDA margin 28.1 30.6 29.6 26.0 30.7 33.4 31.1 26.0

OP margin 12.6 16.9 16.1 12.7 15.7 18.4 15.9 10.5

Marketing expense-to-sales 26.4 27.5 24.9 24.8 24.1 25.7 24.9 24.1

Note: K-IFRS consolidated basis Source: SKT, Korea Investment & Securities

Earnings trend (K-IFRS non-consolidated) (W bn)

2010 2011 Growth

1Q 2Q 3Q 4Q 1Q11F QoQ YoY

Sales 3,049.9 3,078.4 3,211.0 3,211.2 3,132.1 (2.5) 2.7

Operating profit 515.3 645.3 643.7 550.7 598.0 8.6 16.0

Pretax profit 527.0 619.3 671.8 685.5 789.0 15.1 49.7

Net profit 413.1 461.9 513.9 558.1 560.7 0.5 35.7

EBITDA 954.3 1,029.4 1,038.1 981.7 1,046.2 6.6 9.6

Note: K-IFRS non-consolidated basis Source: SKT, Korea Investment & Securities

Telecom Services

24

Key financial data

FY-ending Dec. 2009A 2010A 2011F 2012F 2013F

per share data (KRW)

EPS 17,239 19,177 29,014 30,549 34,412

BPS 162,818 167,539 184,809 203,430 225,452

DPS 9,400 9,400 9,400 9,400 9,400

Growth (%)

Sales growth 3.8 6.0 NM 5.7 5.7

OP growth 7.2 3.4 NM 10.3 11.3

NP growth 2.6 10.6 NM 5.3 12.6

EPS growth 3.2 11.2 NM 5.3 12.6

EBITDA growth 2.2 4.3 NM 8.4 7.3

Profitability (%)

OP margin 12.9 12.6 15.1 15.7 16.5

NP margin 8.6 8.9 12.6 12.5 13.4

EBITDA margin 31.7 31.2 30.3 31.0 31.5

ROA 4.6 5.7 8.4 8.5 9.2

ROE 11.4 12.3 17.2 16.1 16.2

Dividend yield 5.5 5.4 5.7 5.7 5.7

Stability

Net debt (W bn) 4,989 4,175 3,586 3,014 2,435

Debt/equity ratio (%) 54.7 48.3 40.3 33.6 27.6

Valuation (X)

PER 9.8 9.0 5.7 5.4 4.8

PBR 1.0 1.0 0.9 0.8 0.7

PSR 0.9 0.9 0.8 0.8 0.7

EV/EBITDA 3.9 3.6 3.2 2.8 2.5

Cash flow

FY-ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F

C/F from operating 2,933 4,021 4,345 4,244 4,411

Net profit 1,056 1,297 1,940 2,042 2,300

Depreciation 2,733 2,869 2,490 2,653 2,737

Net incr. in W/C (1,232) (299) (107) (475) (654)

Others 376 154 22 24 28

C/F from investing (1,828) (2,359) (3,154) (3,069) (3,232)

CAPEX (2,162) (2,145) (2,700) (2,620) (2,750)

Decr. in fixed assets 68 95 50 50 50

Incr. in investment 1,364 (149) (210) (209) (224)

Net incr. in intangible assets (116) (120) (230) (226) (241)

Others (982) (40) (64) (64) (67)

C/F from financing (1,205) (1,818) (1,144) (1,128) (1,128)

Incr. in equity 77 0 0 0 0

Incr. in debts (555) (958) (475) (460) (460)

Dividends (682) (680) (668) (668) (668)

Others (45) (180) (1) 0 0

C/F from others 42 (19) 0 0 0

Increase in cash (58) (175) 48 47 50


Income statement


Sales 14,555 15,435 16,384 17,317 18,311

Operating profit 1,879 1,942 2,468 2,721 3,027

Financial income 513 244 638 511 529

Interest income 187 236 210 222 235

Financial expense 761 416 528 509 490

Interest expense 440 397 301 266 243

Other non-operating profit (213) (66) (71) (75) (79)

Earnings before tax 1,400 1,674 2,578 2,723 3,067

Income taxes 356 404 623 658 741

Net profit 1,056 1,297 1,940 2,042 2,300

Net profit of controlling interest 1,247 1,380 2,063 2,172 2,447

EBITDA 4,611 4,811 4,958 5,373 5,764

Balance sheet


Current assets 6,371 6,973 7,402 7,823 8,272

Cash & cash equivalent 954 779 826 873 924

Accounts & other receivables 4,084 4,519 4,797 5,070 5,361

Inventory 120 150 159 168 178

Non-current assets 16,836 15,679 16,319 16,709 17,176

Investment assets 3,374 3,108 3,299 3,487 3,687

Tangible assets 8,166 7,865 8,025 7,943 7,906

Intangible assets 3,992 3,741 3,971 4,197 4,438

Total assets 23,206 22,652 23,721 24,533 25,448

Current liabilities 4,895 5,915 6,020 5,765 5,354

Accounts & other payables 2,872 3,381 3,589 3,794 4,011

ST debt & bond 677 530 480 430 380

Current portion of LT debt 806 1,601 1,521 1,441 1,361

Non-current liabilities 5,967 4,258 3,951 3,644 3,339

Debentures 4,280 3,566 3,266 2,966 2,666

LT debt & financial liabilities 957 311 281 251 221

Total liabilities 10,862 10,173 9,971 9,409 8,692

Controlling interest 11,155 11,326 12,720 14,224 16,002

Capital stock 45 45 45 45 45

Capital surplus 3,032 3,032 3,032 3,032 3,032

Capital adjustments (2,747) (2,994) (2,994) (2,994) (2,994)

Retained earnings 9,910 10,603 11,998 13,501 15,280

Minority interest 1,190 1,153 1,030 900 754

Shareholders' equity 12,345 12,479 13,750 15,124 16,756

Telecom Services

25

KT (030200) BUY (Maintain), TP: W54,000 (Maintain)

Strong competitiveness in fixed-line/mobile integrated networks

Maintain BUY with a target price of W54,000: We reiterate BUY and our target price of W54,000. We derived our price by applying a target PER of 9.6x to the 12-month-forward EPS (K-IFRS consolidated basis). The target PER is 13% discounted to the past five-year average PER. We maintain BUY on the following grounds: 1) The valuation is attractive. The stock currently trades at a 12-month-forward PER of 6.0x, EV/EBITDA of 3.3x, and PBR of 0.7x. 2) The growing number of smartphone subscribers is expected to spur top- and bottom-line growth. ARPU should turn to positive growth in 2Q11. Bottom line to stagnate in 1Q11 before recovering in 2Q11: In 1Q11, K-IFRS-based operating revenue (consolidated basis) gained 6.1% YoY as merchandise sales ballooned 45.8% YoY thanks to greater sales of high-end smartphones. Net profit jumped 84.7% YoY due to a decrease in depreciation costs and reflection of gains from the sale of stocks. However, barring the effect from the changes in accounting methods, profitability stagnated in 1Q11 due to reduced revenue from fixed-line services and the introduction of a per-second voice call billing system. K-IFRS-based adjusted EBITDA (standalone basis; and excluding earnings from real estate) dropped 4.4% YoY. We expect profitability to improve from 2Q11 thanks to: 1) higher ARPU from the increase in smartphone subscribers; and 2) lower marketing costs. The smartphone and IPTV businesses should drive the carrier’s top- and bottom-line growth. The number of smartphone subscribers totaled 3.84mn (2.42mn iPhone subscribers) in March 2011, a whopping 40.1% growth from December 2010. We expect the number to further expand to 6.5mn at end-2011 and 10.2mn at end-2012. We also expect the IPTV business to turn to the black in early 2012, as the release of bundled services with its subsidiary, KT Skylife, is spurring new subscriptions. The number of IPTV subscribers surged from 1.17mn in 2009 to 2.09mn in 2010 and should further rise to 3mn by 2011. Earnings contribution of real estate business to gain traction: The real estate business should begin to contribute to KT’s top- and bottom-line growth. Property development, including pre-sale, rental, and sale activities, generates high profitability due to low labor costs and cheap land purchase costs. As for the company’s land holdings, the total book value reaches W1.4trn (buildings total W3.2trn), officially assessed land price amounts to W5.4trn, and the market price is valued at W7trn. Of its land holdings, about 30% is deemed developable. The evolution of technologies should help the company reduce the number of telephone central office buildings from the current 400 to 50 by 2018; thus, KT is aggressive in property development. Fixed-line networks crucial for maintaining fixed-line/mobile integrated networks, but efficiency is waning: Along with WiFi and WiBro, fixed-line networks serve as the foundation for maintaining fixed-line/mobile integrated networks. However, their efficiency is waning, as the declining number of fixed-line telephone subscribers are dragging down telephony revenue. The pressure to lower rates is also a risk factor.




2009A 19,649 966 715 610 2,286 3.1 4,328 17.1 3.9 0.9 5.2

2010A 21,331 2,175 1,562 1,193 4,803 110.1 5,461 9.6 3.7 1.0 10.9

2011F 21,293 2,478 2,092 1,638 6,598 NM 5,406 5.8 3.3 0.8 13.9

2012F 21,224 2,381 2,058 1,543 6,215 (5.8) 5,374 6.1 3.3 0.7 12.1

2013F 21,553 2,498 2,192 1,644 6,620 6.5 5,539 5.7 3.2 0.7 11.9


Jong In Yang 82-2-3276-6153/6154

[email protected]

Telecom Services

26

Changes in portion and number of smartphone subscribers

240

6801,090

1,650

2,737

3,840

4,727

5,613

6,500

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11F 3Q11F 4Q11F

0

5

10

15

20

25

30

35

40

45Smartphone subscribers (LHS)

Portion of smartphone subscribers (RHS)

(%)('000 subscribers)

Source: KT, Korea Investment & Securities

Earnings trend (K-IFRS consolidated) (W bn, '000 subs, %)

2010 2011 1Q11F


KT subscribers

Broadband 7,090 7,189 7,315 7,424 7,552 7,587 7,612 7,622 1.7 6.5

Voice 19,586 19,477 19,432 19,359 19,386 19,386 19,396 19,386 0.1 (1.0)

Wireless 15,368 15,594 15,831 16,041 16,299 16,419 16,509 16,559 1.6 6.1

WiBro 311 334 348 377 427 482 532 582 13.2 37.0

IPTV 1,312 1,569 1,790 2,085 2,393 2,643 2,863 3,013 14.8 82.4

Sales 4,998.3 4,968.7 5,353.2 5,148.1 5,303.7 5,475.7 5,257.9 5,255.3 3.0 6.1

Wireless 1,734.6 1,809.6 1,818.6 1,784.1 1,760.0 1,798.8 1,824.7 1,851.6 (1.4) 1.5

Telephone 1,115.4 1,121.6 1,075.6 1,044.8 986.1 970.8 955.6 940.9 (5.6) (11.6)

Internet 608.2 629.3 633.3 650.6 640.8 655.2 661.1 664.9 (1.5) 5.4

Data 323.6 328.6 322.3 323.4 307.7 308.0 308.3 308.6 (4.9) (4.9)

Other service 404.9 234.9 293.5 283.0 304.6 362.7 371.8 381.2 7.6 (24.8)

Sales of merchandise 735.5 762.5 1,105.1 995.8 1,072.0 1,090.2 1,046.4 1,017.2 7.7 45.8

Other operating revenue 76.2 82.4 104.8 66.4 232.5 290.0 90.0 90.9 250.2 205.1

Operating expenses 4,549.0 4,285.4 4,752.6 4,794.5 4,577.4 4,705.3 4,667.0 4,864.5 (4.5) 0.6

Depreciation 1,065.9 684.6 675.1 697.3 726.1 725.0 725.0 751.4 4.1 (31.9)

Labor cost 657.2 654.7 638.0 656.9 687.0 661.2 644.4 663.5 4.6 4.5

Marketing costs 512.4 518.7 591.9 481.6 548.2 580.6 582.9 581.6 13.8 7.0

Operating profit 449.3 683.3 600.6 353.6 726.3 770.4 590.9 390.8 105.4 61.7

Pretax profit 379.6 566.8 559.4 258.1 666.2 650.8 483.0 291.7 158.1 75.5

Net profit 300.6 419.5 430.9 189.3 555.2 494.6 367.0 221.7 193.3 84.7

EBITDA 1,515.2 1,367.9 1,275.7 1,050.9 1,452.4 1,495.4 1,315.9 1,142.1 38.2 (4.1)

Note: Source: KT, Korea Investment & Securities

Earnings trend (K-IFRS non-consolidated) (W bn, %)

2010 2011 Growth

1Q 2Q 3Q 4Q 1Q11P QoQ YoY

Sales 4,894.8 4,833.6 5,109.3 5,080.7 4,863.5 (4.3) (0.6)

Operating profit 428.7 678.1 572.1 354.6 525.1 48.1 22.5

Pretax profit 354.5 538.7 512.1 264.7 459.8 73.7 29.7

Net profit 280.4 407.7 392.8 193.5 354.3 83.1 26.4

EBITDA 1,464.4 1,351.8 1,226.1 1,030.5 1,217.9 18.2 (16.8)

Telecom Services

27

Key financial data



EPS 2,286 4,803 6,598 6,215 6,620

BPS 43,402 45,915 49,816 53,360 57,282

DPS 2,000 2,410 2,410 2,410 2,410

Growth (%)

Sales growth 0.0 8.6 NM (0.3) 1.5

OP growth (32.3) 125.1 NM (3.9) 4.9

NP growth 10.0 136.0 NM (5.8) 6.5

EPS growth 3.1 110.1 NM (5.8) 6.5

EBITDA growth (15.6) 26.2 NM (0.6) 3.1

Profitability (%)

OP margin 4.9 10.2 11.6 11.2 11.6

NP margin 2.5 5.5 7.5 7.1 7.5

EBITDA margin 22.0 25.6 25.4 25.3 25.7

ROA 2.3 4.4 5.8 5.4 5.6

ROE 5.2 10.9 13.9 12.1 11.9

Dividend yield 5.1 5.2 6.0 6.0 6.0

Stability

Net debt (W bn) 7,418 8,392 8,329 8,268 8,176


Valuation (X)

PER 17.1 9.6 5.8 6.1 5.7

PBR 0.9 1.0 0.8 0.7 0.7

PSR 0.5 0.6 0.5 0.5 0.5

EV/EBITDA 3.9 3.7 3.3 3.3 3.2

Cash flow


C/F from operating 3,398 3,245 4,267 4,259 4,303

Net profit 610 1,193 1,638 1,543 1,644

Depreciation 2,935 2,895 2,545 2,612 2,654

Amortization 426 390 382 381 387

Net incr. in W/C (1,884) (1,929) (267) (244) (357)

Others 1,311 696 (31) (33) (25)

C/F from investing (2,870) (3,436) (3,617) (3,611) (3,632)

CAPEX (2,774) (3,239) (3,300) (3,300) (3,250)


Incr. in investment 35 121 33 34 18


Others 13 3 3 5 (21)

C/F from financing (930) (129) (652) (652) (652)


Incr. in debts 152 351 (66) (66) (66)

Dividends (229) (502) (586) (586) (586)

Others (857) 12 0 0 0


Increase in cash (353) (345) (2) (4) 18


Income statement


Sales 19,649 21,331 21,293 21,224 21,553

Operating profit 966 2,175 2,478 2,381 2,498





Other non-operating profit 180 (244) (244) (243) (247)

Earnings before tax 715 1,562 2,092 2,058 2,192

Income taxes 108 372 498 490 522

Net profit 610 1,193 1,638 1,543 1,644

Net profit of controlling interest 495 1,168 1,605 1,512 1,610

EBITDA 4,328 5,461 5,406 5,374 5,539

Balance sheet


Current assets 7,972 8,073 8,058 8,032 8,156

Cash & cash equivalent 1,538 1,193 1,191 1,187 1,206

Accounts & other receivables 4,388 5,032 5,023 5,006 5,084

Inventory 699 656 655 653 663


Investment assets 856 880 879 876 889

Tangible assets 14,775 15,228 15,955 16,616 17,185

Intangible assets 1,280 1,233 1,231 1,227 1,246

Total assets 26,620 27,713 28,418 29,039 29,800


Accounts & other payables 3,924 3,977 3,969 3,957 4,018

ST debt & bond 368 469 479 489 499

Current portion of LT debt 1,690 2,435 2,445 2,455 2,465

Non-current liabilities 9,012 8,788 8,699 8,609 8,546

Debentures 7,337 6,746 6,546 6,346 6,146




Capital stock 1,564 1,564 1,564 1,564 1,564

Capital surplus 1,449 1,450 1,450 1,450 1,450

Capital adjustments (2,166) (1,263) (1,263) (1,263) (1,263)

Retained earnings 9,574 9,365 10,383 11,309 12,333

Minority interest 291 462 496 527 561


Telecom Services

28

LG Uplus (032640) Hold (Maintain), TP: W7,900 (Maintain)

Smartphones to improve profitability

Maintain Hold with a target price of W7,900: We reiterate Hold and our target

price of W7,900 on LGU+. We derived our price by applying a target PER of 7.5x,

18% discounted to the past four-year average, to the 12-month-forward EPS. We

maintain Hold due to the following reasons. 1) The stock currently trades at a 12-

month-forward PER of 5.3x and EV/EBITDA of 3.1x (based on adjusted earnings

excluding the merger effect), which are nearly on par with dominant players, SKT

and KT. 2) SKT started to supply iPhones following KT, hampering LGU+’s handset

competitiveness. LGU+ should be able to narrow its gap with 3G service providers

when it establishes a nationwide LTE network in July 2012. 3) Higher earnings

volatility is expected, as capex will expand from W1.15trn in 2010 to W1.7trn in

2011 and mobile rates will be lowered. 4) The planned sale of a 3.7% stake by

KEPCO raises an overhang issue.

Smartphone subscriptions on the rise: The number of smartphone subscribers

has skyrocketed entering 2011. The number ballooned 117% from December 2010

to reach 1.15mn in March 2011 and should total 3.5mn by end-2011. The portion of

smartphone subscribers in newly added mobile phone subscribers rose from 33%

in 4Q10 to 61% in 1Q11.

Bottom line turning around from end-4Q10: Based on company guidance

(excluding merger effect), service sales (excluding handset sales) edged up a

mere 0.1% YoY in 1Q11. Fixed-line service sales gained 6.9% YoY driven by VoIP

and e-biz (Internet application business), while mobile telecom service sales

dropped 5.1% YoY due to the implementation of a per-second voice call billing

system and adjustment of interconnection fees. Sluggish mobile telecom service

sales resulted in a 10.5% YoY decline in operating profit.

However, on a QoQ comparison, the bottom line turned around in 1Q11 after

hitting the bottom in 4Q10. The increase in smartphone subscribers in 2011 is

driving the turnaround of profitability. Based on the company guidance, OP margin

rose from 2.0% in 4Q10 to 6.8% in 1Q11 and should reach 8% during 2Q-3Q11 on

marketing cost savings. Considering the growing number of smartphone

subscribers, LGU+ should be able to achieve its annual EBITDA guidance of

W1.65trn in 2011, up 16.8% YoY. As smartphone subscribers who require fewer

handset subsidies account for a larger portion of the newly added mobile phone

subscriptions, marking costs should plunge 12.6% YoY.




2009A 4,949 387 359 308 1,111 8.7 836 7.6 3.6 1.1 15.4

2010A 8,501 655 568 570 1,318 18.6 1,909 5.4 3.0 0.9 19.0

2011F 8,561 409 332 264 611 (53.6) 1,646 8.9 3.0 0.7 6.6

2012F 8,860 466 389 304 702 14.8 1,788 7.7 2.7 0.6 7.3

2013F 9,263 556 482 366 846 20.6 1,909 6.4 2.5 0.6 8.5

Note: K-GAAP consolidated basis (LG Telecom, 2009), K-IFRS consolidated basis (LG Uplus, 2010)

Jong In Yang 82-2-3276-6153/6154

[email protected]

Telecom Services

29

OP margin rose to 6.8% in 1Q due to marketing cost cut (W bn, %)

2010 2011 1Q11F


K-IFRS

Sales 2,424.1 1,977.2 2,066.0 2,033.3 2,116.5 2,133.6 2,160.4 2,150.7 4.1 (12.7)

Marketing costs 409.3 391.5 440.6 449.4 358.0 368.1 378.7 373.5 (20.3) (12.5)

Operating profit 582.7 97.4 23.8 (48.6) 89.9 116.2 119.8 82.7 NA (84.6)

Net profit 543.2 68.9 7.2 (49.2) 57.0 77.6 79.6 50.2 NA (89.5)

EBITDA 885.1 407.5 339.7 276.5 370.0 417.2 427.8 430.6 33.8 (58.2)

Based on guidance (excluding the effect of merger)

Sales 1,927.6 1,977.2 2,066.0 2,033.3 2,116.5 2,133.6 2,160.4 2,150.7 4.1 9.8

Marketing costs 409.3 391.5 440.6 449.4 358.0 368.1 378.7 373.5 (20.3) (12.5)

Operating profit 160.8 175.5 116.7 40.3 143.8 170.2 173.8 136.7 256.8 (10.6)

Net profit 121.2 147.0 100.1 39.7 111.0 120.2 122.3 92.9 179.6 (8.4)

EBITDA 388.6 407.5 339.7 276.5 370.0 417.2 427.8 430.6 33.8 (4.8)

Note: 1Q11 consensus (sales W2.066trn, OP W103.3bn, NP W63.1bn). Source: LGU+, Korea Investment & Securities

Capex changes

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2009 2010 2011F 2012F

8

10

12

14

16

18

20Capex (LHS)

Capex-to-sales ratio (RHS)

(W bn) (%)

Source: LGU+, Korea Investment & Securities

LGU+: Number and portion of smartphone subscribers (‘000 subs, % )

1Q10 2Q10 3Q10 4Q10 Jan-11 Feb Mar

Total subscribers 8,786 8,868 8,933 9,018 9,031 9,042 9,077

Total subscriber market share 17.9 17.9 17.8 17.8 17.7 17.7

Smartphone subscribers 32 93 226 530 727 925 1,150

Smartphone subscriber market share 2.2 3.8 5.2 7.4 8.8 10.0 11.2

Smartphone subscriber net additions 28 61 133 304 197 198 225

Smartphone subscriber net additions market share 3.7 6.3 6.8 10.8 18.4 20.5 21.1

Smartphone/new mobile subscribers 2.8 6.3 12.1 29.2 57.0 60.0 66.0

Source: LGU+, Korea Investment & Securities

Telecom Services

30

Key financial data



EPS 1,111 1,318 611 702 846

BPS 7,995 8,011 8,225 8,516 8,928

DPS 350 350 350 350 350

Growth (%)

Sales growth 3.2 NM 0.7 3.5 4.5

OP growth 2.1 NM (37.7) 14.1 19.3

NP growth 8.7 NM (53.6) 14.8 20.6

EPS growth 8.7 NM (53.6) 14.8 20.6

EBITDA growth 7.3 NM (13.8) 8.7 6.8

Profitability (%)

OP margin 7.8 7.7 4.8 5.3 6.0

NP margin 6.2 6.7 3.1 3.4 4.0

EBITDA margin 16.9 22.5 19.2 20.2 20.6

ROA 7.8 9.1 3.0 3.2 3.6

ROE 15.4 19.0 6.6 7.3 8.5

Dividend yield 4.1 4.9 5.4 5.4 5.4

Stability

Net debt (W bn) 839 2,197 2,247 2,226 2,198


Valuation (X)

PER 7.6 5.4 8.9 7.7 6.4

PBR 1.1 0.9 0.7 0.6 0.6

PSR 0.5 0.4 0.3 0.3 0.3

EV/EBITDA 3.6 3.0 3.0 2.7 2.5

Cash flow


C/F from operating 611 1,262 2,021 2,093 1,852

Net profit 308 570 264 304 366

Depreciation 440 1,008 1,001 1,053 1,108

Amortization 9 245 236 269 245

Net incr. in W/C (197) (103) 522 469 133

Others 51 (458) (2) (2) 0

C/F from investing (397) (1,071) (1,920) (1,923) (1,675)

CAPEX (480) (1,161) (1,700) (1,480) (1,410)


Incr. in investment 93 (1) 0 (3) (4)


Others 0 816 (1) (4) (5)

C/F from financing (126) 199 (97) (151) (151)


Incr. in debts 88 345 54 0 0

Dividends (55) (120) (151) (151) (151)

Others (159) (26) 0 0 0


Increase in cash 88 389 4 19 25

Note: K-GAAP consolidated basis (LG Telecom, 2009), K-IFRS consolidated basis (LG Uplus, 2010)

Income statement


Sales 4,949 8,501 8,561 8,860 9,263

Operating profit 387 655 409 466 556





Other non-operating profit 10 (6) (6) (6) (6)

Earnings before tax 359 568 332 389 482

Income taxes 51 (2) 67 86 116

Net profit 308 570 264 304 366

Net profit of controlling interest 308 570 264 304 366

EBITDA 836 1,909 1,646 1,788 1,909

Balance sheet


Current assets 1,310 2,160 2,175 2,251 2,354

Cash & cash equivalent 138 538 541 560 586

Accounts & other receivables 873 1,313 1,323 1,369 1,431

Inventory 155 190 191 198 207


Investment assets 30 93 94 97 102

Tangible assets 2,228 4,870 5,548 5,955 6,236

Intangible assets 17 517 521 709 741

Total assets 4,028 8,525 9,229 9,934 10,396


Accounts & other payables 882 1,541 1,551 1,606 1,679

ST debt & bond 186 225 264 264 264

Current portion of LT debt 205 691 691 691 691

Non-current liabilities 619 1,965 1,981 1,984 1,989

Debentures 389 1,530 1,530 1,530 1,530




Capital stock 1,386 2,574 2,574 2,574 2,574

Capital surplus 12 837 837 837 837

Capital adjustments (177) (704) (704) (704) (704)

Retained earnings 823 1,240 1,353 1,505 1,720

Minority interest 0 2 2 2 2


Telecom Services

31

Changes to recommendation and price target

Company (Code) Date Recommendation Price target Company (Code) Date Recommendation Price target

SK Telecom (017670) 05-20-09 BUY W241,000 LG Uplus (032640) 07-04-09 BUY W11,800

10-09-09 BUY W233,000 07-31-09 BUY W11,100

04-15-11 BUY W222,000 10-09-09 BUY W11,700

KT (030200) 06-03-09 BUY W46,500 01-05-10 BUY W11,200

10-09-09 BUY W50,000 02-10-10 BUY W10,600

12-28-09 BUY W52,000 05-08-10 BUY W10,000

01-29-10 BUY W59,000 11-08-10 Hold W8,700

04-12-11 BUY W54,000 01-31-11 Hold W7,900

SK Telecom(017670) KT(030200)

0

50,000

100,000

150,000

200,000

250,000

300,000

M ay-09 Sep-09 Jan-10 M ay-10 Sep-10 Jan-11 M ay-11

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

M ay-09 Sep-09 Jan-10 M ay-10 Sep-10 Jan-11

LG Uplus(032640)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

M ay-09 Sep-09 Jan-10 M ay-10 Sep-10 Jan-11

■ Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance

� BUY: Expected to give a return of +15% or more

� Hold: Expected to give a return between -15% and +15%

� Underweight: Expected to give a return of -15% or less

■ Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months

� Overweight: Recommend increasing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market

capitalization.

� Neutral: Recommend maintaining the sector’s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization.

� Underweight: Recommend reducing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market

capitalization.

■ Analyst Certification

I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal

views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or

indirectly related to the specific recommendations or views contained in this research report.

■ Important Disclosures

As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent

month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does

not own 1% or more of any class of common equity securities of the companies mentioned in this report.

There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication

of the research report or at the time of the public appearance.

Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for the companies mentioned in this report

in the past 12 months;

Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from the companies mentioned in this

report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment

banking services from the companies mentioned in this report in the next 3 months.

Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in securities of the companies mentioned in this report at the time that the research

report was published.

Prepared by: Jong In Yang

This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied,

redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment &

Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to

buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct

or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client’s judgment, and this report cannot be used

as evidence in any legal dispute related to investment decisions.

HEAD OFFICE

WON-JAE RHEE, Executive Managing Director ([email protected] +822 3276 5660)

PAUL CHUNG, Sales Trading ([email protected] +822 3276 5843)

27-1 Yoido-dong, Youngdeungpo-ku, Seoul 150-745, Korea

Toll free: US 1 866 258 2552 HK 800 964 464 SG 800 8211 320

Fax: 822 3276 5681~3

Telex: K2296

NEW YORK

DONG KIM, Managing Director ([email protected] +1 212 314 0681)

ELAINE LIM, Head of Sales ([email protected] +1 212 314 0686)

JU KIM, Sales ([email protected] +1 212 314 0683)

Korea Investment & Securities America, Inc.

1350 Avenue of the Americas, Suite 1110

New York, NY 10019

Fax: 1 201 592 1409

HONG KONG

STEVE KIM, Managing Director ([email protected] +852 2530 8900)

SANGME LEE, Managing Director, Head of Asia Sales ([email protected] +852 2530 8910)

DAN SONG, Sales ([email protected], +852-2530-8900)

JUN HWAN KIM, Sales ([email protected], +852-2530-8912)

Korea Investment & Securities Asia, Ltd.

Suite 2201-2, Jardine House

1 Connaught Place, Central, Hong Kong

Fax: 852-2530-1516

SINGAPORE

SUNG NAMGOONG, Managing Director ([email protected] +65 6501 5601)

TERRY SHIN, Sales ([email protected] +65 6501 5602)

Korea Investment & Securities Singapore Pte Ltd

1 Raffles Place, #43-04, OUB Center

048616 Singapore

Fax: 65 6501 5617

LONDON

JJ MOON, Managing Director ([email protected] +44 207 065 2765)

BRANDON JUNE, Sales ([email protected] +44 207 065 2767)

MINGOO KANG, Sales ([email protected], +44 207 065 2760)

Korea Investment & Securities Europe, Ltd.

2nd Floor, 35 Moorgate

London EC2R 6AR

Fax: 44-207-236-4811

Telex: 8812237

This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or

considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue

or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided

solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on this report and the company

accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is not intended for the use of private

investors.

2011. All rights reserved. No part of this report may be reproduced or distributed in any manner without permission of Korea Investment & Securities Co.,Ltd.

Telecom Services - file.truefriend.com

Documents