Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. Media/Telecom Service The world of pay TV Pay TV: Important to both media and telecom industries As part of the media industry’s value chain, pay-TV operators provide broadcast services and distribute content. Thanks to their monthly (fixed-sum) subscription systems, pay- TV service providers enjoy steady cash flows, just as telecom companies (which use similar fee structures) do. The pay TV business model, therefore, helps ensure stability amid the media industry’s rapid changes. We have noted the growing importance of media businesses within the telecom service industry. Faced with stagnant population growth, domestic media and telecom firms have had to actively diversify their subscriber-based businesses to ensure additional growth. Fortunately, the switch from analog to digital broadcasting has allowed such firms to diversify their sources of revenue, including VOD revenue from pay-TV subscribers, and N-screen subscription and mobile data revenue from wireless subscribers. Time for a turnaround In Korea, pay-TV service providers’ combined net profit has trended down steadily for the past three years, as intense competition for new subscribers amid the transition to digital broadcasting has resulted in lower ARPU and higher costs. However, it is worth remembering that in the US, pay-TV operators—whose ARPU increased only modestly during the digital conversion—saw a sharp increase in ARPU and accelerated cash flow after the digital transition ended and the industry consolidated via M&As. We believe the Korean pay-TV industry has reached a positive inflection point. The digital transition is coming to an end, and corporate M&As and policy support could provide a tailwind for the industry, helping to ease market competition. Moreover, business models are diversifying, and earnings are anticipated to expand YoY on a low base of comparison (due to one-off expenses recognized last year). Maintain Overweight; Key recommendations are SK Telecom and KT Skylife We maintain our Overweight stance on media and telecom services. Our key recommendations are SK Telecom (SKT) and KT Skylife, which stand to benefit, respectively, from growing personalization and improving picture quality in TV broadcasts, and which also offer attractive dividends. Considering SKT’s plan to own SK Broadband in its entirety, mobile momentum is likely to drive its media business. As for KT Skylife, we raise our target price in light of expected positive changes in the business environment after uncertainties lift. We also raise our target price for KTH and Nasmedia, which are aiding the expansion of the pay-TV business. Overweight (Maintain) Industry Report April 23, 2015 Daewoo Securities Co., Ltd. [Telecom Service / Media] Jee-hyun Moon +822-768-3615 [email protected]Market value of pay-TV operators expected to increase, backed by improving domestic pay-TV business environment and earnings recovery Notes: SK Broadband, CJ HelloVision, and KT Skylife combined Source: Company data, KDB Daewoo Securities Research 2,500 3,000 3,500 4,000 4,500 50 100 150 200 250 2011 2012 2013 2014 2015F 2016F (Wbn) (Wbn) Major pay-TV operators' combined net profit (L) Major pay-TV operators' combined market cap (R) - Depreciation on digital conversion - Marketing expenses - Fall in ARPU with expansion of bundled products - KT Skylife: One-off lawsuit cost - CJ HelloVision: Loss on disposable assets - Digital conversion nearing end - Slowing fall in ARPU - Removal of one-off costs - More room for dividends with FCF recovery
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Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Media/Telecom Service The world of pay TV
Pay TV: Important to both media and telecom industries
As part of the media industry’s value chain, pay-TV operators provide broadcast services
and distribute content. Thanks to their monthly (fixed-sum) subscription systems, pay-
TV service providers enjoy steady cash flows, just as telecom companies (which use
similar fee structures) do. The pay TV business model, therefore, helps ensure stability
amid the media industry’s rapid changes.
We have noted the growing importance of media businesses within the telecom service
industry. Faced with stagnant population growth, domestic media and telecom firms
have had to actively diversify their subscriber-based businesses to ensure additional
growth. Fortunately, the switch from analog to digital broadcasting has allowed such
firms to diversify their sources of revenue, including VOD revenue from pay-TV
subscribers, and N-screen subscription and mobile data revenue from wireless
subscribers.
Time for a turnaround
In Korea, pay-TV service providers’ combined net profit has trended down steadily for
the past three years, as intense competition for new subscribers amid the transition to
digital broadcasting has resulted in lower ARPU and higher costs. However, it is worth
remembering that in the US, pay-TV operators—whose ARPU increased only modestly
during the digital conversion—saw a sharp increase in ARPU and accelerated cash flow
after the digital transition ended and the industry consolidated via M&As.
We believe the Korean pay-TV industry has reached a positive inflection point. The
digital transition is coming to an end, and corporate M&As and policy support could
provide a tailwind for the industry, helping to ease market competition. Moreover,
business models are diversifying, and earnings are anticipated to expand YoY on a low
base of comparison (due to one-off expenses recognized last year).
Maintain Overweight; Key recommendations are SK Telecom and KT Skylife
We maintain our Overweight stance on media and telecom services. Our key
recommendations are SK Telecom (SKT) and KT Skylife, which stand to benefit,
respectively, from growing personalization and improving picture quality in TV
broadcasts, and which also offer attractive dividends. Considering SKT’s plan to own SK
Broadband in its entirety, mobile momentum is likely to drive its media business. As for
KT Skylife, we raise our target price in light of expected positive changes in the business
environment after uncertainties lift. We also raise our target price for KTH and
Nasmedia, which are aiding the expansion of the pay-TV business.
Market value of pay-TV operators expected to increase, backed by improving domestic
pay-TV business environment and earnings recovery
Notes: SK Broadband, CJ HelloVision, and KT Skylife combined
Source: Company data, KDB Daewoo Securities Research
2,500
3,000
3,500
4,000
4,500
50
100
150
200
250
2011 2012 2013 2014 2015F 2016F
(Wbn)(Wbn) Major pay-TV operators' combined net profit (L)
Major pay-TV operators' combined market cap (R)
- Depreciation on digital conversion- Marketing expenses - Fall in ARPU with expansion of bundled products- KT Skylife: One-off lawsuit cost- CJ HelloVision: Loss on disposable assets
- Digital conversion nearing end- Slowing fall in ARPU- Removal of one-off costs- More room for dividends with FCF
recovery
Media/Telecom Service
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C O N T E N T S
Pay TV set to turn around 3
1. The most stable business model in the media space 3
2. Investment strategy: Time to consider overweighting pay-TV service providers 5
Industry trends at home and abroad 6
1. Slowly changing market 6
2. Consolidation: Still too many players 8
3. Switch to digital broadcasting nearing completion 11
4. Platform revenue: Leveraging tool 13
5. Regulatory and policy issues 15
Domestic market outlook 17
1. Consolidation: Four conglomerates to be dominant 17
2. Digital broadcasting: Mobile is key 19
3. Business models: Diversification 22
4. Expectations for policy tailwinds 26
5. Potential expansion of foreign capital 27
Valuation 28
1. Valuation gap with global peers narrowing 28
2. Expectations for dividends 29
Key Recommendations 30
SK Telecom (017670 KS) 31
KT Skylife (053210 KS) 39
CJ HelloVision (037560 KS) 44
KT (030200 KS) 48
LG Uplus (032640 KS) 52
KT Hitel (036030 KQ) 56
Nasmedia (089600 KQ) 59
Media/Telecom Service
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Pay TV set to turn around
1. The most stable business model in the media space
(1) Digital conversion bringing new opportunities
Pay TV offers the most stable business model in the media segment. Pay-TV operators use
infrastructure (cable or internet networks) and distribution platforms to deliver content to
viewers. Monthly subscription systems (using fixed-term contracts) allow pay-TV operators to
enjoy stable revenue irrespective of changes in market conditions (a characteristic they share with
telecom service providers).
Currently, most monthly subscribers tend to use their subscriptions in combination with pay-per-
view (PPV). In the analog age, monthly subscriptions were the dominant source of revenue and
business growth, along with fees charged to home-shopping companies and commissions
collected from advertisers.
Now, the transition to digital broadcasting is offering more business opportunities to pay-TV
service providers. Besides monthly subscriptions, VOD revenue is growing (up to 20% of total
broadcast revenue for CJ HelloVision last year). Increasingly, VOD platforms are generating
revenue from related advertising, and there has also been a rise in T-commerce (data
broadcasting–based transactions). Alongside this business diversification, domestic pay-TV stocks
are rebounding gradually after the sluggishness caused by the digital transition and intensified
competition.
Figure 1. Relative share performances of global pay-TV operators: Korea has just joined the trend
Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 2. Domestic pay-TV value chain and business model
Source: KDB Daewoo Securities Research
40
60
80
100
120
140
1/14 3/14 5/14 7/14 9/14 11/14 1/15 3/15
(1/2014=100) CJ HelloVision (KR) KT Skylife (KR)Charter (US) Time Warner Cable (US)Comcast (US) DirecTV (US)Dish Network (US) Sky Perfect JSAT (JP)
Product ion/
programmingDevice
Content provider
- Ter restr ia l
- Program provider
Cost Revenue
Subscr iber
Revenue Revenue
Adver t isers
Home shopping/
T -commerce
operators
Pay TV
- Cable SOs
- Satellite TV operators
- IPTV operators ( telcos)
- OTT operators
Service/distr ibut ion
Program
usage fee
Service
usage fee
T rans-
missionfees
Ad
costs
Media/Telecom Service
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(2) Adapting to rapid changes in the media environment
With regard to consumer behavior and media, two major trends currently driving the industry are
personalized broadcasting services and improvement in TV picture quality.
Regarding personalization, media companies face a growing need to cover demand from both
individuals (using mobile media) and households (using TV). CJ HelloVision is taking the lead in
this area with Tving, an over-the-top (OTT) video service. Telcos that provide IPTV services are
also starting to offer mobile IPTV services.
TV makers that had been focused on hardware innovations such as 3D TV and smart TV are now
turning their attention back to picture quality. According to DisplaySearch, UHD TVs will get on
the path to commoditization, with annual sales volume projected to account for 10% of total TV
sales globally this year. Given the probable launch of UHD broadcasting, the government is
considering allocating licenses in the 700MHz frequency band to both broadcasters and telcos. In
addition, domestic terrestrial channels plan to increase production of UHD content this year, and
CJ E&M and KT Skylife are launching UHD-only channels.
Amid such changes in the business environment, traditional performance measures like market
share are becoming less relevant as boundaries between media segments blur. While cable system
operators (SOs) concentrated on expanding their market shares, telcos penetrated into the IPTV
segment and added mobile services to their portfolios.
Accordingly, media firms and telcos need to pay attention to trends in consumers’ inclinations
and lifestyles. For such companies, even more important than gaining market share from
competition is gaining the “life share” of consumers—i.e., the extent to which consumers are
exposed to a company’s media and content in their day-to-day lives.
In the pay-TV industry, both the quantity and quality of users’ experiences will increase in
significance. To broaden the extent of such experiences, companies may begin to expand their
footholds beyond TV to mobile media. To improve quality, we believe they will have to expand
VOD content offerings and UHD services.
Figure 3. Instead of market share, content producers’ “life share” of consumers now holds the key
Source: KDB Daewoo Securities Research
Firm Firm
Market share “Life share”
Firm
FirmFirm
Firm Firm
FirmFirm
FirmFirm
Media/Telecom Service
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2. Investment strategy: Time to consider overweighting pay-TV service providers
(1) Earnings normalization + benefits from changing industry paradigm
Major domestic pay-TV firms have seen their combined net profit shrink YoY for three straight
years. As the transition to digital TVs accelerated from 50% to 70%, companies increased
investments, which led to a rise in depreciation costs. Amid intensifying competition for
subscribers, companies’ ARPU declined while marketing expenses climbed. Furthermore, one-off
costs in 2014 dragged down pay-TV firms’ net profit to the lowest level in three years.
However, we expect both the market environment and earnings to improve this year. With the
transition to digital TV now in the final stage, pay-TV operators should see additional business
opportunities emerge, while their investment burden should ease going forward. The government
plans to introduce regulations on pay-TV bundled products (pay TV + telecom services), which will
likely help increase Korea’s pay-TV ARPU, which is currently the lowest level in the world.
Earnings are projected to improve this year due to the dissipation of one-off factors, the addition
of new revenue sources, and progress in the consolidation of the pay-TV industry. Furthermore,
as media firms’ free cash flow improves, they will likely be able to pay out larger dividends in a
more stable manner, as telecom plays do.
We advise investors to overweight media and telecom services firms that offer pay-TV services,
and present SKT and KT Skylife as our top picks. SKT is likely to benefit from the growing
personalization in TV broadcast services. With SKT planning to buy out the stake in SK Broadband
it does not currently own, mobile momentum is likely to drive its media business. Meanwhile, KT
Skylife stands to benefit from improving TV picture quality. The introduction of UHD set-top
boxes (scheduled for 1H15), the launch of dish convergence solutions (DCS), and increasing
platform revenue are anticipated to provide newfound momentum for the company. Both
companies are also attractive dividend plays.
We forecast CJ HelloVision to see sharp earnings growth this year on the back of a low base of
comparison (due to one-off costs, including an asset charge, recorded in 2014) and decreasing
MVNO losses. KTH and Nasmedia also merit attention, as they are aiding the expansion of the
pay-TV business.
Figure 4. Major pay-TV companies’ combined net profit and market value trend and forecast
Notes: SK Broadband, CJ HelloVision, and KT Skylife combined; KT Skylife recognized one-off lawsuit cost in 3Q14
Source: Company data, Thomson Reuters, KDB Daewoo Securities Research
Table 1. Domestic pay-TV industry
Production and programing Service and distribution OTT Additional revenue
SK Telecom
IPTV Btv
(subsidiary SK Broadband) B tv Mobile
Subsidiary SK Broadband
(T-commerce)
Hoppin (subsidiary SK Planet)
CJ HelloVision Affiliate CJ E&M Cable SO Tving Parent CJ O Shopping
KT Skylife Subsidiary Skylife TV Satellite
LG Uplus
IPTV tv G Uplus HDTV
KT
IPTV Olleh TV Olleh tv mobile Subsidiary KTH (VOD, T-commerce)
Subsidiary Nasmedia (ad rep)
Source: KDB Daewoo Securities Research
2,500
3,000
3,500
4,000
4,500
50
100
150
200
250
2011 2012 2013 2014 2015F 2016F
(Wbn)(Wbn) Major pay-TV operators' combined net profit (L)
Major pay-TV operators' combined market cap (R)
- Depreciation on digital conversion- Marketing expenses - Fall in ARPU with expansion of bundled products- KT Skylife: One-off lawsuit cost- CJ HelloVision: Loss on disposable assets
- Digital conversion nearing end- Slowing fall in ARPU- Removal of one-off costs- More room for dividends with FCF
recovery
Media/Telecom Service
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KDB Daewoo Securities Research
Industry trends at home and abroad
1. Slowly changing market
(1) Market shakeup: Entry of telcos into pay TV via IPTV
The domestic pay-TV market has experienced two major developments over the past decade:
digital conversion and the entry of telcos.
During the era of analog broadcasting, cable SOs occupied monopolistic positions in their local
operating areas, allowing them to generate stable revenues and profits. As the conversion to
digital broadcasting accelerated, however, cable SOs incurred additional investments and
expenses due to the provision of set-top boxes and the payment of retransmission fees to
terrestrial broadcasters. In the process, cable SOs with weak capital bases were merged together
or acquired by multi-system operators (MSOs).
Changes in the pay-TV market accelerated in 2007, when telcos entered the market via the IPTV
business. This caused the market’s digital conversion to pick up speed, as IPTV services are a form
of digital broadcasting using internet networks. It also caused competition to intensify, as IPTV
services were offered nationwide whereas cable SOs’ operations were restricted to local areas.
When telcos first introduced IPTV, it was in the form of bundled products for existing broadband
internet customers. As such, KT was the first to see its IPTV market share climb, given its higher
fixed-line market share. Now, with the bundling of both fixed-line and wireless products, SK
Broadband and LG Uplus are also gaining market share.
Figure 5. In the domestic market, 8 years was needed to reach 60% pay-TV digital conversion vs. 3
years to reach 60% LTE conversion
Source: MSIP, KCC, KCTA, KISDI, KDB Daewoo Securities Research
Figure 6. Average annual number of subscribers (by technology type) in domestic pay-TV market
Notes: Redundancy caused by OTS (bundling of KT IPTV and KT Skylife) not removed
Source: KDB Daewoo Securities Research
62%
74%
2%
63%
0%
20%
40%
60%
80%
05 06 07 08 09 10 11 12 13 14
Digital conversion rate
LTE conversion rate
0
5
10
15
20
25
30
05 06 07 08 09 10 11 12 13 14
(mn persons)
IPTV (+18% over the past 3 years)
Satellite (+4% over the past 3 years)
Cable SO (-0.5% over the past 3 years)
Media/Telecom Service
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(2) Pay-TV ARPU has grown in overseas markets
With the digital conversion nearly complete, pay-TV ARPU is likely to climb, as the advanced
equipment required for digital broadcasting should enhance service quality. In the domestic pay-
TV market, monthly fixed-rate subscription fees for digital broadcasting range between W9,000
and W15,000, while those for analog broadcasting stand at W4,000-W5,000.
According to Informa data quoted by the Ministry of Science, ICT and Future Planning, Korea has
a monthly average pay-TV ARPU of around US$7, which is far lower than those of the US
(US$87), Australia (US$70), Japan (US$56), and even Indonesia (US$12).
Of note, in the US pay-TV market—which completed the digital conversion before Korea, in
2010—ARPU has been rising since 2011. In the Korean market, digital conversion is still
underway. As of end-2014, the overall conversion ratio reached 74%, while the SO market
conversion ratio stood at only 49%. CJ HelloVision, a major cable SO, saw a drop in average
revenue per subscriber (ARPS) despite the acceleration of digital conversion, as bundling
discounts increased due to higher competition for subscribers. However, we expect ARPU to pick
up going forward, aided by the completion of digital conversion and the government’s policy
support.
Figure 7. Pay-TV monthly ARPU by country: Korea has the lowest level
Source: MSIP, Informa, Bloomberg, KDB Daewoo Securities Research
Figure 8. Time Warner Cable’s pay-TV ARPU and share price Figure 9. CJ HelloVision’s pay-TV ARPS and share price
Source: Bloomberg, Thomson Reuters, KDB Daewoo Securities Research Notes: ARPS (average revenue per subscriber) refers to total service revenue
from one subscriber to CJ HelloVision, including broadband, VoIP, etc.
Source: Company data, Thomson Reuters, KDB Daewoo Securities Research
0
20
40
60
80
100
Korea US Australia Japan Singapore Hong Kong Indonesia
(US$)
10
20
30
40
50
70
72
74
76
78
1Q11 1Q12 1Q13 1Q14
(US$bn)(US$)
Pay-TV ARPU (L)
Market cap (R)
Overall uptrend
400
700
1,000
1,300
1,600
12,000
12,600
13,200
13,800
14,400
1Q11 1Q12 1Q13 1Q14
(Wbn)(W) Pay-TV ARPS (L)Market cap (R)
Digital conversion competition
Media/Telecom Service
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2. Consolidation: Still too many players
(1) There is still room for consolidation in the domestic market
A government license is required to engage in the pay-TV business, as it is an infrastructure-based
service similar to telecom services. Although pay-TV operators are protected by the government,
they cannot easily expand overseas.
As such, to achieve profitability, deregulation and integration are necessary. Regulatory easing is
important in light of the limited size of the domestic market. If pay-TV operators were to become
larger, they would be able to achieve economies of scale from their network investments while
exercising higher bargaining powers in dealing with content providers and home shopping
channels.
The number of domestic pay-TV operators fell from 35 in 2005 to 19 in 2014 due to M&As. During
this period, CJ HelloVision was able to increase its subscriber base thanks to M&As.
The government has already taken some deregulatory measures. Under the revised broadcasting
law (which passed cabinet approval in January 2014), the market share cap for SOs was increased
to one-third of the entire pay-TV market, from one-third of the cable SO market. This revision
should allow for larger-scale M&A deals in the market.
As of now, roughly 10 domestic cable SOs are not affiliated with conglomerates. And among
multiple-system operators (MSOs), C&M is currently available for sale. We believe M&A deals will
boost the enterprise value of buyers.
Figure 10. M&As between cable SOs led to fall in number of domestic pay-TV companies
Source: 2014 Broadcasting Industry Survey, KCTA, KDB Daewoo Securities Research
Figure 11. Acquisition of cable SOs was critical to CJ HelloVision’s growth in subscribers
Source: KDB Daewoo Securities Research
0
1
2
3
4
5
1,500
2,000
2,500
3,000
3,500
4,000
4,500
05 06 07 08 09 10 11 12 13 14
(no.)('000 persons)
Number of SO M&As (R)Broadcast subscribers (L)
2120
25 23 2321
18 19
11 10
0
10
20
30
40
05 06 07 08 09 10 11 12 13 14
(no.) IPTV operators
Satellite TV operators
Cable SOs
Cable MSOs
Media/Telecom Service
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(2) The US pay-TV market: A case of successful consolidation
We believe the US pay-TV market underwent successful consolidation. In that market, cable SOs
are a more dominant presence than IPTV service providers (i.e., telecom companies). Two giants,
Comcast and Time Warner Cable, attempted a merger deal in early 2014, though this deal did not
go through, given the FCC’s worries about monopoly. Nevertheless, M&A moves are still ongoing.
Charter acquired Bright House (and may be weighing additional M&A deals), while AT&T is
working to acquire DirecTV. Other cable service providers are also believed to be considering M&A
deals.
In 2009, Time Warner Cable was split off from Time Warner. Although Time Warner Cable
experienced sluggish earnings shortly after the split, its earnings have been growing since 2011,
mostly driven by M&A deals.
These robust M&A deals are partially attributable to the heavy retransmission fees paid to
broadcasters. Indeed, terrestrial broadcasters (e.g., CBS) and channel operators (e.g., Time
Warner ad Disney) charge pay-TV platforms per-subscriber fees, and the fees are raised often in
spite of slow subscriber growth. For that reason, pay-TV platforms have sought expansion as a
means to increase their negotiating power.
In 2012, Korea’s three terrestrial broadcasters also began charging digital pay-TV platforms
subscriber fees (approximately W280 per subscriber). They plan to renegotiate fees against cable
MSOs and IPTV service providers. In response, we believe pay-TV service providers could seek
M&As, just as US peers did.
Figure 12. M&As, share price, and earnings of US pay-TV operator Time Warner Cable
Source: Thomson Reuters, WSJ, KDB Daewoo Securities Research
Figure 13. Rising content-related costs, including retransmission fees, was one factor leading to
pay-TV consolidation in the US
Source: Bloomberg, KDB Daewoo Securities Research
0
2
4
6
8
0
40
80
120
160
1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
(US$)(US$)
Time Warner Cable EPS (R)
Time Warner Cable share price (L) Acquired Insight
Acquired NaviSite
Announced plan to merge with Comcast
Acquired DukeNet
0
2
4
6
8
10
13 14 15F 16F 17F 18F
(US$bn)Cable SO retransmission fees
Satellite retransmission fees
Telco retransmission fees
Media/Telecom Service
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KDB Daewoo Securities Research
Figure 14. US pay-TV industry’s “Big Four” emerged after 20 years of integration
Source: WSJ, KDB Daewoo Securities Research
Figure 15. Total market value of major US pay-TV stocks
Source: Thomson Reuters, KDB Daewoo Securities Research
Terrestrial broadcasters and cable companies argue over
retransmission fees
IPTV entry
Plan to have three UHD channels
Media/Telecom Service
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(3) Sophistication of subscription models
Pay-TV operators are also seeking to expand revenue by strengthening existing businesses, which
includes efforts to make content subscription models more sophisticated. As broadcasting
services are intangible experience goods, well-designed payment models are required for content
to generate revenue. With Korea’s pay-TV ARPU at very low levels compared to global peers,
domestic broadcasting service providers need to come up with models that lead to less resistance
from consumers and encourage content consumption.
As mentioned previously, in 2013, telcos operating IPTV and cable SOs providing VOD services, at
the request of terrestrial broadcasters, extended the holdback period of VOD and raised content
prices to boost content revenue. Such measures gave rise to resistance from consumers. In an
effort to capture demand from viewers who were hesitant to purchase VOD content and seeking
more cost-efficient ways to consume content, pay-TV firms introduced fixed-rate monthly
subscription schemes, in which subscribers use an unlimited amount of content at fixed
subscription rates. After the extension of the holdback period of VOD in 2013, there was a sharp
rise in subscribers to fixed-rate monthly fee schemes.
Of note, the pattern of digital content consumption is shifting from downloading to streaming—
a shift already witnessed in the music market. In our view, a greater variety of monthly
subscription schemes is necessary for video content to attract more subscribers. Pay-TV
operators have already introduced subscription services for individual channels, as well as various
packages for specific content (e.g., movies, US TV shows, etc.). They have also launched products
targeting certain age groups. Going forward, we might also see products packaged by genre.
Figure 40. Price of VOD (W1,200) vs. monthly subscription (W4,900): Monthly subscriptions
encouraged by showing subscription price next to unit price
Source: Tving, Company data, KDB Daewoo Securities Research
Figure 41. Viewers are increasingly streaming rather than downloading videos
Notes: 2014 figures are based on KDB Daewoo estimates
Source: Company data, Parliament, Nasmedia, KDB Daewoo Securities Research
0
350
700
1,050
1,400
0
30
60
90
120
2011 2012 2013 2014
('000 persons)(Wbn) IPTV monthly plan revenue (L)
IPTV monthly plan subscribers (R)
Watching behavior shifting from download to streaming;Diversification of monthly plan types spurs subscriptions:- Domestic broadcasting channel classification
(terrestrial, CJ E&M, JTBC)- Film-dedicated- US drama-dedicated- Tailored to age, genre, etc.
W4,900 W1,200
Media/Telecom Service
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4. Expectations for policy tailwinds
(1) Regulations on bundled products to accelerate ARPU normalization
The government is currently working to revise regulations on telecom-pay TV product bundling under a framework of comprehensive measures to develop the broadcasting industry. The KCC plans to finalize the rule in 2H. The government believes improvement in ARPU for pay-TV platforms will be key for the broadcasting industry’s development, as any increase in ARPU should flow to content providers (terrestrial broadcasters and PPs).
New regulations on bundled products could include a ban on excessive discounts. Currently, MSIP does not allow discount rates for bundled products to exceed 30% of the price of individual products. A ban on excessive discounts would signal the ministry’s intention to remove downside pressure to ARPU and induce a steady rise in ARPU going forward. Easing price-cut competition would also lead to a decrease in marketing costs for companies.
Table 5. Revision to Notice on Telecommunication Bundled Products
Subject Details
KCC Set forth details on prohibited acts regarding bundled products; Expected to be announced in May-June. Task force teams to be assigned to investigate breaches.
MSIP Task force teams to be assigned to study the strengthening market power of dominant players (to set forth pre-approval conditions)
SK Telecom Oppose new regulations on bundled products (bundling allows the firm to offer products at cheaper prices)
KT, LG Uplus Largely favor the new regulation; SKT’s wireless market power affects the wired segment competition
Cable SOs Favor new regulations
Source: Media press, KDB Daewoo Securities Research
Figure 42. Telco’s IPTV and broadband subscriber trend
Source: Company data, MSIP, KCC, KDB Daewoo Securities Research
Figure 43. CJ HelloVision’s ARPS trend: Decreased amid competition for new subscribers, but likely
to rise if bundled product regulations are introduced
Notes: ARPS (average revenue per subscriber) refers to total service revenue from one subscriber to CJ HelloVision, including broadband, VoIP, etc.
Source: KDB Daewoo Securities Research
20
30
40
50
60
70
11,000
12,000
13,000
14,000
15,000
1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
(%)(W)
Pay-TV ARPS (L)
Broadcasting digital conversion rate (R)
- ARPU fell as digital conversion acceleratedDiscounts on bundled products likely increased due to intensified competition for subscribers
- Positive impact expected if excessive discounts are banned
0
20
40
60
80
0
5
10
15
20
08 09 10 11 12 13 14
(%)(mn persons)
IPTV subscribers (L)
Telco broadband subscribers (L)
IPTV/broadband subscribers (R)
Media/Telecom Service
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5. Potential expansion of foreign capital
(1) Foreign ownership in pay-TV services remains restricted
With firms and private funds from overseas bidding to acquire C&M, the possibility of foreign capital
expanding in the domestic pay-TV market has emerged. In particular, since the US-Korea FTA provisions
related to the media service segment took effect in March, market watchers have paid keen attention to
whether the cap on foreign ownership will increase.
For now, foreign stakes in domestic pay-TV service providers remain capped at 49%. Under the US-Korea
FTA, regulations affecting pay-TV services (including pay-TV offered through cable SOs, satellite TV, and
IPTV) remain unchanged, or have been left for future negotiation. It seems unlikely that a foreign firm will
acquire Kookmin Cable Investment’s (KCI) entire stake (93.81%) in C&M.
Table 6. Foreign capital-related clauses of domestic broadcasting laws
Broadcasting law
Details Impact
Article 14 Investments by foreign capital
Clause 1 Terrestrial broadcasters and public radio broadcasters shall not attract investments
from foreign governments/institutions, foreigners, and entities in which foreign
governments/institutions have a stake exceeding a certain proportion. However,
subject to KCC approval, they may receive investments from foreign entities meant to
promote education, physical activities, religious activities, and charities. <Amended
2/29/2008, 3/23/2013>
Attract foreign capital
Clause 2 Multi-channel operators and relay cable operators shall not attract, respectively, stakes
exceeding 20% and 10% from foreign governments/institutions, foreigners, and
entities in which foreign governments/institutions have a stake exceeding a certain
proportion.
Protect management control from
foreign capital
Clause 3 SOs, satellite broadcasters, program providers, and network operators shall not attract
stakes exceeding 49% from foreign governments/institutions, foreigners, and entities
in which foreign governments/institutions have a stake exceeding a certain proportion.
Protect management control from
foreign capital
Internet multimedia
broadcasting law
Details Impact
Article 9 Restrictions on foreign ownership
Clause 1 Foreign governments/institutions, foreigners, and entities in which foreign
governments/institutions or foreigners have more than a 15% stake shall not own a
stake exceeding 49% in internet multimedia broadcast providers. <Amended,
12/30/2014>
Protect management control from
foreign capital
Source: Korea Ministry of Government Legislation, KDB Daewoo Securities Research
Table 7. US-Korea FTA media-related provisions (took effect on March 15th, 2015)
Domestic services
Details Impact
Terrestrial broadcasters,
satellite broadcasters, cable SOs
No changes in foreign ownership and broadcast quotas Neutral
Telecom/broadcasting
convergence services
No change to convergence (e.g., IPTV) services Neutral
Cable program providers Some regulations will be eased, as follows: PP market competition is likely to
intensify.
Foreign stakes in Korean program providers will still be capped at 49% in the case of
direct investments. However, foreigners that make indirect investments via a Korean
company will be allowed to own up to 100% (currently 50%) of Korean program
providers, excluding news providers, multi-content providers, and home shopping
channel operators.
US global media groups could
expand into Korea.
The ceiling on the proportion of foreign programs carried by program providers will
be eased. Program providers are currently required to have domestic content
account for at least 35% of animated programs and 25% of movies. The required
ratios will be lowered to 30% and 20%, respectively.
The number of foreign programs
could expand.
The quota will be lifted to 80% from 60% for any single country’s programs. The number of US programs
could expand.
Digital content Digital audio-video content services remain unregulated to promote competition.
However, the government might intervene if access to domestic audio-video content
is difficult.
US global media groups could
expand into Korea.
Source: Ministry of Trade, Industry and Energy, KDB Daewoo Securities Research
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Valuation
1. Valuation gap with global peers narrowing
(1) Valuation discount easing
Domestic pay-TV stocks traded at a discount to global peers last year, as they struggled with an
industry slump, one-off negatives, and uncertainties (e.g., regulatory risks).
On the other hand, overseas peers traded at a premium, buoyed by: 1) eased investment burden
following the completion of the digital transition, and 2) expectations for excess profits following
market consolidation. Some stocks are generating a dividend yield of more than 3% thanks to
stable free cash flow.
With domestic stocks picking up, however, the valuation gap has been narrowing. Nevertheless,
CJ HelloVision and KT Skylife still seem undervalued relative to global peers. Factoring in P/E,
ROE, and dividend yield, we believe KT Skylife is the most attractive among pay-TV stocks.
Table 8. Global pay-TV platforms (cable SO, satellite) profitability and valuation (Wbn, %, x)
Note: Skylife and CJ HelloVision figures are KDB Daewoo Securities estimates; Excluded outlying values when calculating average; Dividend yield is based on 2015 KDB
Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests
Source: Company data, KDB Daewoo Securities Research
Table 13. Earning forecast revisions (Wbn, W, %)
Previous Revised % chg.
Notes 15F 16F 15F 16F 15F 16F
Revenue 17,926 18,559 17,942 18,641 0.1 0.4 - Revised up number of LTE subscribers
Operating profit 2,251 2,260 2,129 2,277 -5.4 0.8 - Reflected voluntary retirement costs and later effects
Net profit 2,207 2,221 2,128 2,260 -3.6 1.8 - Reflected dividend income from SK Hynix and KCC penalty
EPS 27,397 27,577 26,244 27,874 -4.2 1.1
OP margin 12.6 12.2 11.9 12.2
Net margin 12.3 12.0 11.8 12.1
Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to accumulation of controlling interests and minority interests;
EPS is based on controlling interests
Source: KDB Daewoo Securities Research
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SK Telecom (017670 KS/Buy/TP: W380,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)
Source: Company data, KDB Daewoo Securities Research estimates
Media/Telecom Service
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Pay-TV business: UHD and DCS to be the focus
Uncertainties over KT Skylife are gradually dissipating. The stock has underperformed on
1) uncertainties arising from the upcoming restriction on combined subscriber market
share, and 2) a slowdown in subscriber growth. However, the combined market share
restriction, in its final form, is unlikely to impact the company significantly, in our view.
In addition, the company will likely stage a recovery in net subscriber growth by
bolstering its technological strengths and making up for its weaknesses.
KT Skylife plans to make full use of the advantages of satellite TV. To take the lead in
picture quality improvement—one of the broadcast industry’s biggest trends at the
moment—the company is expected to release a UHD set-top box (in May), produce its
own UHD content, and increase the number of UHD channels in 1H. With UHD TVs
likely to get on the path to commoditization this year, it will be important to watch
whether the company can differentiate itself among pay-TV operators as a digital
satellite TV provider that is better positioned in terms of bandwidth. The company is
also likely to seek approval for the introduction of dish convergence solutions (DCS).
Furthermore, the company is anticipated to address its lack of VOD features, which is
often cited as one of the major weaknesses of satellite TV. Via its affiliate KTH, the
company plans to make VOD content available through any internet service provider.
We are encouraged by the company’s efforts to bolster its strengths and make up for its
weaknesses, as the essence of the pay-TV business is differentiation based on superior
service competitiveness.
Earnings forecast: Increase in earnings and dividend payout anticipated
This year, platform revenue is likely to increase, contributing to earnings improvement.
Home shopping commission revenue, one of the sources of platform revenue, appears to
be on the rise. In addition, negotiations on a home shopping commission hike are
currently underway. Of note, KT Skylife is expected to increase the number of T-
commerce channels.
Last year, the company’s earnings were dented by one-off expenses arising from 1) the
loss of a lawsuit and 2) mandatory conversion to HD channels for standard definition
(SD) channel subscribers. This year, with the elimination of one-off items, earnings are
expected to pick up, while dividend payout should increase as long as the company’s
payout ratio of 30% remains intact.
Valuation: Upgrade to Buy; Raise TP to W24,000
We upgrade our rating on KT Skylife from Trading Buy to Buy and raise our target price
to W24,000 (from W20,000). We eliminated the discount that we applied to our
previous target P/E, as uncertainties over the company are dissipating. Our target price
represents the average of 1) global peers’ average multiple times 2015F EPS, and 2)
2015F DPS divided by the stock’s 2014 dividend yield (1.9%). Various positive changes in
the pay-TV market are likely to boost the stock.
KT Skylife (053210 KS)
Uncertainties are dissipating
FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F
Revenue (Wbn) 551 600 623 637 661 682
OP (Wbn) 67 102 78 89 94 97
OP margin (%) 12.2 17.0 12.5 14.0 14.2 14.2
NP (Wbn) 56 73 56 66 71 73
EPS (W) 1,178 1,526 1,162 1,384 1,478 1,521
ROE (%) 17.6 19.3 13.2 14.4 13.8 13.0
P/E (x) 28.4 19.4 15.8 13.9 13.0 12.6
P/B (x) 4.6 3.4 2.0 1.9 1.7 1.5
Note: All figures are based on non-consolidated K-IFRS
Source: Company data, KDB Daewoo Securities Research estimates
Media
(Upgrade) Buy
Target Price (12M, W) 24,000
Share Price (04/23/15, W) 19,200
Expected Return 25%
OP (15F, Wbn) 89
Consensus OP (15F, Wbn) 96
EPS Growth (15F, %) 19.2
Market EPS Growth (15F, %) 38.8
P/E (15F, x) 13.9
Market P/E (15F, x) 11.0
KOSPI 2,173.41
Market Cap (Wbn) 918
Shares Outstanding (mn) 48
Free Float (%) 49.3
Foreign Ownership (%) 13.2
Beta (12M) 0.10
52-Week Low 15,150
52-Week High 27,400
(%) 1M 6M 12M
Absolute 23.5 -3.0 -20.8
Relative 15.7 -13.8 -27.1
50
70
90
110
130
4.14 8.14 12.14 4.15
KT Skylife KOSPI
Media/Telecom Service
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Focus on UHD and DCS, once uncertainties dissipate
Once uncertainties dissipate, shares should find revenue momentum from UHD and DCS,
as well as the platform business.
Recently, regulatory risks have been one of the biggest concerns for the company. The
enforcement decree of the Internet Multimedia Broadcasting Business Act (also dubbed
the IPTV act) has been revised to restrict the subscriber market share of a pay-TV
operator—based on the combined number of subscribers to all of its pay-TV services—to
no more than one-third; the regulation is slated to take effect in June. If redundancy is
not removed, KT will be in violation of the new subscriber cap, as the combined
subscriber market share of its parent-based IPTV business and subsidiary KT Skylife
exceeds the new cap.
We think the situation is not necessarily bleak for KT and KT Skylife, however. The
market share restriction has a sunset provision, meaning it will be in effect for only three
years before authorities reassess the rules and decide whether to change them. And it is
unlikely that OTS subscribers will be counted redundantly. Based on the number of set-
top boxes, we estimate that KT’s pay-TV market share will come out to approximately
29%, well below the one-third threshold.
Going forward, we expect KT Skylife to once again seek approval to introduce the DCS
business, while focusing on the UHD business.
Figure 54. Pay-TV value chain
Source: KDB Daewoo Securities Research
Figure 55. Media service subscriber trend
Source: Company data, KDB Daewoo Securities Research
P roduct ion/
programmingDevice
Content
provider
S kylife TV
(subsidiary)
Cost Revenue
Subscriber
S erv ice/dis t ribut ion
Pay TV
K T S kylife, satellite TV operator
Revenue
Home shopping/T-commerce
operators
Programusage fee
Service usagefee
Transmissionfees
49
50
51
52
53
54
55
56
3,800
3,900
4,000
4,100
4,200
4,300
4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15
(%)('000 persons)
KT Skylife subscribers (L)
% of KT-Skylife OTS bundling (R)
Media/Telecom Service
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Aggressive improvement in content lineup and T-commerce business
Lately, KT Skylife has been reinforcing the content business in an effort to widen its
subscriber base. The company suffered a sharp slowdown in net subscriber growth last
year amid intensifying competition and rising regulatory risks. Strengthening the
content business could help secure new sources of revenue, and could also serve as
preemptive action ahead of the expected increase in content costs.
KT Skylife has begun to beef up the content lineup at its channel operating subsidiary,
Skylife TV. In addition, the company rebranded channel names to start with “Sky” to
strengthen its brand identity. Skylife TV increased the number of channels from 7 to 11,
including one—Sky Sports—that has secured broadcasting rights from the Korea
Baseball Organization (KBO). Making full use of the technical advantages of satellite
broadcasting, the company plans to raise the number of UHD channels to three.
In addition, through cooperation with KTH, the company will likely be able to make VOD
services available through all internet service providers. Previously, VOD services were
provided to only bundled product (KT’s IPTV and Skylife TV’s satellite TV) subscribers.
We estimate that commissions paid by home shopping companies (recognized as
platform revenue) have been growing, and negotiations on a hike to existing home
shopping customers’ commissions are currently underway. KT Skylife has been the most
aggressive in the pursuit of T-commerce channel programs, which pay as much
commissions as home shopping companies. Currently, five non-home shopping
companies (including KTH and SK Broadband) and five home shopping companies (i.e.,
GS, CJ, Lotte, Hyundai, and NS) have licenses for T-commerce programs.
Figure 56. KT Skylife plans to increase the number of UHD channels to three by
producing its own UHD content
Source: Company data, KDB Daewoo Securities Research
Figure 57. T-commerce has ample room for growth
Notes: As of 2014 (in 2015, others besides KT Group have started expanding into T-commerce)
Source: Korea On-Line Shopping Association, MSIP, KCTA, KDB Daewoo Securities Research
31,960
41.1
77,728
13,140
40.6 32,396
9,290
29.7 31,305
170
7.82,185
Annual transaction value (Wbn) Platform users and households(mn persons)
Annual transaction value/users(W)
PC internet Mobile
Home shopping (live broadcasting) T-commerce (data broadcasting)
Obtained baseball broadcasting right Plan to have three UHD channels
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Earnings to improve on growing platform revenue and the dissipation of
one-off expenses
This year, platform revenue is likely to increase, contributing to earnings improvement.
Commissions paid by home shopping companies appear to be on the rise. Negotiations
on a home shopping commission hike are currently underway. Of note, KT Skylife is
expected to increase the number of T-commerce channels.
Last year, the company’s earnings were dented by one-off expenses arising from 1) the
loss of a lawsuit and 2) mandatory conversion to HD (from SD channel subscribers). This
year, with the elimination of one-off items, earnings are expected to pick up, while
dividend payout should increase as long as the company’s payout ratio of 30% remains
intact.
Table 14. Annual earnings (Wbn, %)
Notes: All figures are based on non-consolidated K-IFRS. Operating profit data pre-2014 is back-dated and adjusted for changes to accounting standards,
and thus differs from FSS disclosures
Source: Company data, KDB Daewoo Research estimates
Notes: All figures are based on consolidated K-IFRS; Net profit is attributable to controlling interests; TTR, TTB, and RR refer to “turn to red,” “turn to black,” and
“remain red,” respectively; Earnings to be reclassified into discontinued operations and gain on disposal from 2015 due to the sell-off of KT Rental in 2Q15
Source: Company data, KDB Daewoo Securities Research estimates
Table 17. Earnings forecast revisions (Wbn, W, %)
Previous Revised % chg.
Notes 15F 16F 15F 16F 15F 16F
Revenue 23,360 23,435 22,683 22,826 -2.9 -2.6 - Moved to discontinued operations account due to the sale of
KT Rental
Operating profit 1,223 1,236 1,147 1,215 -6.2 -1.7 - Moved to discontinued operations account due to the sale of
KT Rental
Net profit 438 551 1,117 730 155.0 32.5 - Reflected reclassification related to the sale of KT Rental
EPS 1,509 1,921 4,330 2,546 186.9 32.5
OP margin 5.2 5.3 5.1 5.3
Net margin 1.7 2.1 5.0 2.9
Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests
Source: KDB Daewoo Securities Research
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KDB Daewoo Securities Research
KT (030200 KS/Buy/TP: W40,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)
Notes: All figures are based on consolidated K-IFRS; Net profit is attributable to controlling and non-controlling interests; TTB refers to “turn to black”;
Handset revenue recognized on a net basis from 4Q14
Source: Company data, KDB Daewoo Securities Research
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LG Uplus (032640 KS/Buy/TP: W16,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)
Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving
Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes
Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening
Sell : Relative performance of -10%
Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆))
* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.
* Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material
development.
* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of
future earnings.
* The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic
conditions.
0
10,000
20,000
30,000
40,000
50,000
60,000
Apr 13 Apr 14 Apr 15
(W) KT Skylife
0
5,000
10,000
15,000
20,000
Apr 13 Apr 14 Apr 15
(W) KTH
0
10,000
20,000
30,000
40,000
50,000
60,000
Apr 13 Apr 14 Apr 15
(W) KT Skylife
0
5,000
10,000
15,000
20,000
25,000
Apr 13 Apr 14 Apr 15
(W)CJ HelloVision
0
10,000
20,000
30,000
40,000
50,000
Apr 13 Apr 14 Apr 15
(W) Nasmedia
0
10,000
20,000
30,000
40,000
50,000
Apr 13 Apr 14 Apr 15
(W) Nasmedia
0
5,000
10,000
15,000
20,000
Apr 13 Apr 14 Apr 15
(W) LG Uplus
0
100,000
200,000
300,000
400,000
Apr 13 Apr 14 Apr 15
(W) SK Telecom
0
10,000
20,000
30,000
40,000
50,000
60,000
Apr 13 Apr 14 Apr 15
(W) KT
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As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for single stock futures backed by shares of KT as an underlying asset,
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