2015 2h outlook: korean telecom service industry

2H15Outlook Report

June 10, 2015

2

4

16

40

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60

[Summary] Getting over the hump

I. 2H15 outlook: Getting over the hump

II. Key themes and issues: O.V.E.R.

III. Valuation & investment strategy

IV. Top pick & stocks to watch SK Telecom KTLG Uplus

[Conclusion] Look to earnings improvements and dividend payout

Telecom Service Getting over the hump

Jee-hyun [email protected]

Overweight(Maintain)

2H15 Outlook 2

Domestic telcos are positioned for a rebound in 2H15

Notes: ARPU stands for average revenue per user Source: Company data, Thomson Reuters, KDB Daewoo Securities Research


25

30

35

40

45

50

55

60

28,000

30,000

32,000

34,000

36,000

38,000

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

(p)(W)

ARPU of 3 major telcos (L) FTSE Korea Telecom Index (R)

LTE penetration

- Earnings recovery- Shareholder-friendly policies- Reflection of value of new businesses

- Slow ARPU growth- Concerns over new service plans- More pressure from government

2H15 Outlook 3

Positioned for a rebound in 2H15

• Stocks to look for a rebound after pullback in 1H

• Increasing worries over policy headwinds

• Strong need for new business strategies to overcome reckless competition and regulations

Keys to recovery:1) Looking beyond subscribers

• Focus shifting from expanding subscriber share to increasing usage

• Ongoing efforts to boost ARPU and IoT accounts

2) Looking beyond telecom

• Focusing on non-telecom businesses that can benefit the existing telecom business

• Media and platform are taking the lead

3) Looking beyond profit

• Capex and expenses declining due to LTE saturation and handset distribution law

• Improved FCF points to more room for shareholder returns

• All three telcos to hand out dividends this year; SK Telecom to buy back shares

Key themes and issues:

• Sector keyword: O.V.E.R.

O) Opportunity: New opportunities in mobile-only era

• Emergence of B2B data market and platform business expansion

• IoT initiatives to pick up pace (e.g., telcos to be allowed to make devices themselves)

V) Velocity: The battle for speed continues

• Spectrum allocation and auctions on the horizon

• Gearing up for the 5G era

E) Encouragement: Encouraging data usage

• Continued efforts to improve ARPU

• Segmentation of data plans based on usage and time/place/occasion

R) Regulations: Regulations/policy direction are key

• Pullbacks triggered by policy worries: Buying opportunity

• Key issues: 1) Creation of fourth telco, 2) improvements to tariff approval scheme, and 3) potential revisions to handset distribution law


Telecom Service

2H15 Outlook 4

Notes: Average number of PC and mobile searches for “phone bill” and “fourth telco” based on a maximum of 100 Source: Naver Trend, Thomson Reuters, KDB Daewoo Securities Research

Policy issues and telco index

The greater an issue household telecom costs become, the more downside pressure arises on telco stocks

A number of government efforts are underway to ease telecommunication costs, including the potential creation of a fourth telco

Telecom service sector poised for recovery

• Telco stocks are poised for a rebound in 2H after correcting in 1H• Attention is turning from earnings to shareholder returns (i.e., dividends and buybacks)

• Telcos need to come up with business strategies and momentum to overcome competition and regulatory risks


TIP

0

20

40

60

80

100

37

39

41

43

45

47

49

51

6/14 9/14 12/14 3/15 6/15 9/15 12/15 3/16

(max=100)(p)

FTSE Korea Telecom (L)

'Phone bill' search frequency (inverted, R)

'Fourth telco' search frequency (inverted, R)

Prices fell as searchqueries for "phone bill"and "fourth telco" increased

Telcos likely to bottom around 3Q;solid fundamentals(i.e., earnings, dividends) to drawattention thereafter

Telecom Service

2H15 Outlook 5

Source: SK Telecom, KDB Daewoo Securities Research

Competition has shifted from subsidies to products/services: Where will the next battle be?

Competition in data plans is vitalizing telco products and services

Excessive competition is penalized with regulations

• Subsidies-driven marketing was a classic example of the industry’s reckless competition

• The introduction of the handset distribution law has cooled subsidy competition

• Now, competition is oriented towards products and services, as illustrated by the recent release of new data plans

• Where will competition be focused next?


TIP

Subsidies

Switchphone

New(MNP)

Products/services Subsidies

Products/services

- Monthly plans- Bundled products

- Membership- Contents/platform

Telecom Service

2H15 Outlook 6

Source: KDB Daewoo Securities Research

Telcos need to broaden their target group to all types of users

The number of users accessing telecom networks without a subscription is increasing (MVNO, sponsored data, WiFi, etc.)

1) Looking beyond subscribers: The concept of “users”

• The concept of “users” is coming into focus• To enhance ARPU, an effective strategy is to charge any person or entity (including service

providers and indirect users, in addition to postpaid subscribers) for network access


TIP

SubscriberIndividually contracted direct users

Decrease

Increase

Diluted economies of scale, decrease in ARPU

Subscriber basis + improving ARPU

UserService providers;

Indirect users

Telecom Service

2H15 Outlook 7

Notes: US$20 per month for unlimited voice and text; US$10 for one gigabyte of data; Available only for Nexus 6 users Source: Google, KDB Daewoo Securities Research

Google’s Project Fi taps the networks of two major US carriers

Internet companies are venturing into telecom services in an effort to increase their own traffic by providing seamless connectivity

1) Looking beyond subscribers: The concept of “users”

• Network access by non-subscribers is growing; Key example is mobile virtual network operator (MVNO)

• MVNOs are mobile service providers that lack their own infrastructure and therefore lease wireless capacity from major carriers

• Google’s Project Fi, a type of MVNO service launched in April, uses the networks of both Sprint and T-Mobile


TIP

Telecom Service

2H15 Outlook 8

Source: KTOA, MSIP, KCC, company data, KDB Daewoo Securities Research

Wireless service revenue: Subscribers vs. ARPU

In a market with a stagnant population, it is critical to increase ARPU

1) Looking beyond subscribers: ARPU > volume

• Industry’s marketing war may end once companies let go of their fixation on subscriber share

• Since mobile subscriber penetration reached 100% in 2011, companies have made numerous efforts to raise ARPU

• The first such effort was the deployment of LTE; the second was service diversification


TIP

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

10

15

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25

30

07 08 09 10 11 12 13 14

('000 persons, W)(Wtr) Service revenue (L)No. of subscribers (R)ARPU of 3 major telcos (R)

Subscriber growth (+5% on average)brought about increase in revenue

Increase in ARPU (+8% on average) brought about increase in revenue

Pene-tration above 100%

Telecom Service

2H15 Outlook 9

Source: Gartner, KDB Daewoo Securities Research

Increasing number of internet-connected devices

Expanding the customer base from people to “things”

1) Looking beyond subscribers: IoT

• The advent of Internet of Things (IoT) has increased the number of device accounts • Service plans dedicated to wearables are being introduced in a bid to further lift ARPU

• Device-to-device connection (via Bluetooth) does not generate network revenue

• The development of more convenient devices and services is essential to encourage wireless network usage


TIP

0

5

10

15

20

11 13 15F 17F 19F 21F

IoT devices

CAGR: 22%

(bn units)

Consumer electronics

6.3bn

Buildings 4.9bn

Auto2bn

Utilities2.2bn

Healthcare1.1bn

Other1.6bn

2022F18bn devices

Telecom Service

2H15 Outlook 10


Selection and concentration in non-telecom businesses

A key priority for business diversification should be synergies with existing businesses

2) Looking beyond telecom: Synergy effects from non-telecom services

• Companies should take a selection and concentration approach, focusing on non-telecom services that can benefit their existing telecom business

• Fixed-line: Pressing need to address weaknesses and increase network utilization

• Wireless: Diversification into areas that can contribute to maintaining subscribers and improving ARPU


Initial period

Stabilization period

Transitional period

Businesses that can pull on

existing subscribers

Businesses that help

retain wireless subscribers

& increase ARPU

Businesses that can increase

size of revenue

Non-telecom?

TIP

Telecom Service

2H15 Outlook 11

Source: Company data, KDB Daewoo Securities Research

Telcos’ platform businesses are moving towards media and e-commerce

Beneficial to growth and re-rating

2) Looking beyond telecom: Media and platform

• Within non-telecom, media and platforms are taking center stage • Media: Telcos’ media operations complement their fixed-line and wireless businesses, and have

strong upside to ARPU

• Platform: Telcos’ platform operations are focused on expanding the mobile space, and have the potential to become global; In particular, the development of the internet market has moved towards the communications and e-commerce segments


TIP

Portal, music download – App store, communication – Video streaming – Commerce, fintech

Olleh market

U+ App market

Telecom Service

2H15 Outlook 12

Source: Softbank, KDB Daewoo Securities Research

Softbank’s enterprise value scenario

In M&As, Softbank believes it is important to gradually move up the value chain

2) Looking beyond telecom: Softbank’s example

• Softbank’s M&A deals have been geared towards platforms • The Japanese company is turning its eye to platforms that can be built upon its network infrastructure.

• Major platform deals include the acquisition of e-commerce sites and service apps

• One major advantage of the platform business is its global scalability


Aiming to become the goose that lays golden eggs

- Premium for successful acquisitions - Diversification within ICT industry - Enhancing enterprise value from a

long-term perspective

TIP

Telecom Service

2H15 Outlook 13

Notes: Based on consolidated K-IFRS; Combined figures of SK Telecom, KT, and LG Uplus Source: Company data, KDB Daewoo Securities Research

Combined operating profit and FCF of the three domestic telcos

Operating profit is normalizing from last year’s sluggishness

3) Looking beyond profit: Earnings already normalizing

• Operating profit is normalizing this year, supported by low base of comparison • Capex declining due to LTE market saturation

• Disciplined marketing spend following introduction of handset distribution law


TIP

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0

1,000

2,000

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5,000

10 11 12 13 14 15F 16F

(Wbn) Operating profit FCFOperating profit: +81%

FCF turned positive

Telecom Service

2H15 Outlook 14Source: KDB Daewoo Securities Research

Correlation between SK Telecom’s dividend yield and foreign buying

Dividend stocks to make a comeback

3) Looking beyond profit: Shareholder returns

• During times of volatility, dividend stocks offer a reliable bet• In the case of SK Telecom, foreign buying tends to increase when the stock’s expected dividend

yield rises

• The steeper the pullback, the greater the dividend appeal


TIP

3.0

3.2

3.4

3.6

3.8

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4.2

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

6/14 8/14 10/14 12/14 2/15 4/15 6/15

(%)(%p) Daily change in foreign ownership percentage (L)

Expected dividend yield (R)

Telecom Service

2H15 Outlook 15

Notes: 2015F dividend yield is based on our DPS estimates and the most recent closing price Source: Company data, KDB Daewoo Securities Research

Dividend yield trend of the three domestic telcos

A consistent dividend policy should narrow valuation discounts

On a P/E basis, telcos with a 3-5% dividend yield and those with a yield over 5% are trading at 10% and 33% premiums, respectively, vs. telcos with a yield lower than 3%

3) Looking beyond profit: All three telcos to hand out dividends this year

• SK Telecom is likely to increase its interim and full-year dividends and plans to repurchase shares

• KT, which suspended dividends last year, could resume payments this year

• LG Uplus maintains a 30% payout policy


TIP

4.0%

2.7%2.6%

0

1

2

3

4

5

6

7

2011 2012 2013 2014 2015F

(%) SK Telecom dividend yield KT dividend yield LG Uplus dividend yield

All three providers expected to pay

dividends in 2015

No dividendsNo dividends

Telecom Service

2H15 Outlook 16

OpportunityNew opportunities in the mobile-only age

VelocityBattle for speed continues

EncouragementEncouraging more data usage

RegulationRegulations/policy direction are keyR

VO

E


Keyword for 2H15: O.V.E.R.

II. Key themes and issues: O.V.E.R.

Sector keyword: O.V.E.R.

• Telecom sector keyword for 2H15: O.V.E.R. • O: Opportunity – New opportunities in the mobile-only age

• V: Velocity – The battle for speed continues with 5G

• E: Encouragement – Encouraging consumers to use more data to improve ARPU

• R: Regulation – The importance of regulations and policy direction

The opportunities and threats of the mobile-only age

T IP

Telecom Service

2H15 Outlook 17

Source: Bassendean Means Business, KDB Daewoo Securities Research

In the mobile-only age, new charging schemes are emerging

II. Key themes and issues: Opportunity

1) Opportunity: Charging schemes are diversifying

• Opportunity: New opportunities in the mobile-only age • Age of connectedness (via mobile devices) has brought more monetization opportunities to telcos

• B2B: Charging service providers, not users, for data

• B2C: Through platform business, telcos can charge for both network and service use

Network value is maximizing Charging service

providers (i.e., companies), not

service users, for data

Platform business: Charging for

network + service usagesimultaneously

TIP

Telecom Service

2H15 Outlook 18

Source: SK Telecom, KDB Daewoo Securities Research

Telcos’ IoT-related revenue sources to diversify from network to platform/solution/devices


1) Opportunity: IoT • Telcos need to diversify IoT-related businesses • Currently, hardware accounts for 93% of the IoT market, while mobile network revenue is

insignificant

• After 10 years, hardware, system, and service/applications are projected to account for 37%, 30%, and 30% of the IoT market, respectively; Mobile network is projected to take up just 3% due to the development of device-to-device (D2D) technology

Mobile network accounts for just a minor proportion of the IoT market

Hardware, system, and service/applications segments will expand further

T IP

Connectivity

Convergence

Intelligence

Network + Device

Open Platform

Market cultivation Solutions-based business transformation

Valuable, intelligent business

Sensing + Big Data

Traditional telecom service

Expansion

Telecom Service

2H15 Outlook 19Source: Media reports, company data, KDB Daewoo Securities Research

Major telcos’ IoT-based smart home services


1) Opportunity: IoT partners are expanding

• Telcos are expanding partnerships with consumer goods companies for the IoT business• SK Telecom: Cooperating with home appliance SMEs for its IoT platform Mobius

• KT: Focusing on healthcare services targeting middle-aged and older customers; GIGA Internet

• LG Uplus: Specializing in home appliance control services through cooperation with LG Electronics

Telcos are expanding the IoT business through partnerships

TIP

SK Telecom KT LG Uplus

Launched

- Door locks (iRevo)- Dehumidifier (Winix)- Boiler (KyungDong Navien) - Gas shut-off device (Time Valve)- Pet services (Petfit, T-Pet)

- Giga Home Fitness- Yodac (adult disease screening)- Safe Zone (children/elderly)

MomCa 2 (home CCTV)Uplus GasLock

To be launched

- Boiler (Rinnai, Daesung Celtic,Altoen Daewoo)

- Air purifier (Winia, Winix, Tongyang Magic)

- Lighting(Kumho Electric, GE Lighting)

- Smart outlet(DS Tech, Powervoice)

- Smart switch (Bandi Tongsin)- Range hood (Haatz)- Water purifier (Kyowon Wells)- Security services

- Smart air care (Coway)- Open home IoT platform- Time Valve Smart

(Time Valve)- U-Safe Alarm(for the elderly)

- Uplus Switch- Uplus Plug- Uplus Energy Meter- Uplus Doorlock- Uplus Thermostat(Kiturami Boiler)

- Uplus Open Sensor- Home Chat

EmphasisBased on SK TelecomÊs IoT platform Mobius

Targeting middle-aged and older customers; Focus on healthcare

Cooperating with LGE;Home appliance control services

Telecom Service

2H15 Outlook 20Source: MISP, KDB Daewoo Securities Research

Telcos’ device manufacturing to strengthen competitiveness of new and base industries


1) Opportunity: Telcos’ handset production

• The Ministry of Science, ICT, and Future Planning (MSIP) plans to allow telcos to manufacture telecom devices without needing approval

• The plan was among the major ICT-related regulatory tasks formulated by the Information and Communication Strategy Committee in May

• SK Telecom invested an additional W30bn (CB and rights offering) in subsidiary iRiver last Dec.

• SK C&C established an IT service JV with Hon Hai Group and plans to continue the cooperation

MSIP will revise Article 17 of the Telecommunications Business Act, which mandates that telcos receive ministry approval to manufacture telecom devices

Such regulations do not exist overseas and are thought to disadvantage telcos

Growth

Competitiveness

Target niche marketsNew business

Strengthen competitive advantage

Ensure next-generation competitiveness

New business

Foundation business Foundation businessMaintain competitive advantage

Big data

Cloud service

Wearable deviceGame (mobile)

Mobile phone(Smart phone)

Display

MemoryPC

(inc. tablet PC)

Broadcasting device (TV)

Telecom serviceIT service

Sensor

Non-memory

Infra SW

Network equipment

Broadcasting service Applied SW

Productionconvergence

Medical convergence

Educational convergence

Financial convergence

Digital content

IoT service

Information protection

Printer

TIP

Broadcasting equipment

Server 1

Telecom Service

2H15 Outlook 21

Government’s frequency policy: Mobile Gwanggaeto Plan 2.0

II. Key themes and issues: Velocity

2) Velocity: Frequency, a requirement for higher speed

91KCC’s tax revenue is projected to decrease W157.2bn YoY to W1.044tr in 2016 due to 1) a decline in penalty income after the implementation of the Handset Distribution Act, and 2) a drop in frequency fees (frequency auction was delayed from 2H15 to 1H16)

• Frequency is the most important requirement for higher speed • 700MHz: Broadcasters vs. telcos

• 2.1GHz: SK Telecom vs. KT; Used for 3G; Licenses are set to expire in 2016

• 2.5GHz and 2.6GHz: Government to allocate the spectrum to a fourth telecom operator; FDD as well as LTE-TDD to be allowed

Notes: FDD and TDD refer to frequency division duplex and time division duplex, respectively; WRC refers to World Radiocommunication Conference; ‘a’ in the 1st phase for 700MHz is the spectrum that could be additionally allocated for mobile communication after consultation with the KCCSource: MSIP, KDB Daewoo Securities Research

T IP

Category

Potential ranges to be secured (MHz)

TotalSecured(allocated in

2013)

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

Addition Refarming Addition Refarming Addition Refarming Addition

FDD

700MHz 40 a 40+a

1.8GHz 60 (30) 20 100 (30)

2.1GHz 60 60 120

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

TDD

2.0GHz 40 40

2.3GHz 30 40 70

2.5GHz 40 40

FDD/TDD 3.5GHz 160 160

WRC additionaldistribution

range

Below 6GHz Min 200 Min 200

Above 7GHz Min 500 Min 500

Total180 (70) 60+a 290 220 510

Addition1260MHz+a

60 40 20Refarming120MHz

Telecom Service

2H15 Outlook 22

Government’s frequency auction (delayed to 1H16): Four spectrum packages


2) Velocity: Frequency auction plan

Frequency auction:- Revenue for the government- Reallocation according to usage- ICT growth to be affected

• Frequency auction is scheduled for early 2016; SK Telecom and KT likely to participate • So-called “golden frequency” to be auctioned; Four spectrum packages below 3GHz

• Total allocation of 60MHz in the 2.6GHz band, 100MHz in the 2.1GHz (SK Telecom and KT) band, and 20MHz in the 1.8GHz band

• Auction for 40MHz in the 700MHz band to be delayed due to the National Assembly’s slow progress on the issue

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

T IP

Telecom Service

2H15 Outlook 23

Notes: Upstream frequency ranges for communication (740-752MHz) are currently used by wireless microphones and will be available after 2021; “Spare” entries marked with an asterisk indicate ranges that have been prepared for broadcasters to use Source: MSIP, news reports, KDB Daewoo Securities Research

Government’s 700MHz allocation plan: 20MHz for disaster communication network, 40MHz for mobile communication, 24MHz for broadcasting


2) Velocity: Competition for frequency

Broadcasters and telcos need additional frequency spectrum for UHD broadcasting and growing mobile data traffic, respectively

In foreign countries, telcos had an upper hand in the 700MHz allocation

Recently, Germany preemptively auctioned off 700MHz for mobile communication to prepare for the launch of 5G technology

• 700MHz: Broadcasters and telcos are competing • Broadcasters: Asking for entire remaining spectrum for terrestrial UHD broadcasting

• Telcos: Asking for at least 40MHz in preparation for a surge in mobile data traffic

• Competition has intensified after the government allocated 20MHz for national disaster safety communication network; Concerns about spectrum fragmentation

TIP

Current:

Government proposal:

Spare range (108MHz)

For telcos For telcos

Spare* Spare*

2 terrestrial channels 2 terrestrial channels National disaster safetycomm. network

National disaster safetycomm. network(MHz)

Spare*

Temporary bandfor DTV conversion

Telecom Service

2H15 Outlook 24

Notes: Numbers in parentheses in the 2.1GHz row indicate spectrums refarmed to LTE servicesSource: MSIP, KDB Daewoo Securities Research

Frequency licenses of three telcos


2) Velocity: Note frequency usage periods

2.1GHz band to be reallocated via auctions

• 2.1GHz: SK Telecom vs. KT; Licenses to expire in 2016• In September 2014, the government approved 2.1GHz refarming for LTE.

• As such, SK Telecom and KT currently use 20MHz (in the 2.1GHz band) for LTE services

• MSIP plans to withdraw a total of 100MHz in the 2.1GHz band, and then reallocate 40MHz-wide spectrums

TIP

Category SK Telecom KT LGU TotalExpiry

(Period of utilization)

2G800 10

30June 2021(10 years)1.8GHz 20

3G 2.1GHz60

(40)40

(20) 100December 2016

(15 years)

LTE

800 20 10 20

200June/December

2021(8-10 years)

900 20

1.8GHz 35 35

2.1GHz (20) (20) 20

2.6GHz 40

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

Amount of frequency held 155 135 100 390

Telecom Service

2H15 Outlook 25

2.3GHz range: Existing WiBro (2,300-2,390MHz)

2.5GHz range: New WiBro (2,575-2,615MHz)

SK TelecomNot allocated

WLAN

Source: KISDI, KDB Daewoo Securities Research

Breakdown of frequency bands; Fourth carrier to be able to choose between WiBro and LTE-TDD in 2.5GHz


2) Velocity: Entrance of fourth carrier

The fourth carrier will be able to utilize available frequency band for LTE-TDD, etc. in addition toWiBro

LTE-TDD (time division duplex): The same frequency band is used for data transmission and receipt

LTE-FDD (frequency division duplex): Separate frequency bands are used on the transmitter and receiver sides; Korean telcos use this technique

• 2.5GHz and 2.6GHz to be allocated to the fourth carrier (both LTE-TDD and FDD allowed)

• Originally, only 2.5GHz (40MHz-width) was approved for WiBro (LTE-TDD to be added)

• 2.6GHz (40MHz-width) will also be approved this year (LTE-FDD technique to be allowed)

• The broadening of the spectrum seems intended to facilitate the entrance of a new carrier

LTE-TDD 40MHz LTE-FDD 40MHz

TIP

Telecom Service

2H15 Outlook 26

Aggregating carriers within similar

operating frequency(LTE range)

Aggregating carriers operating in different frequencies(licensed & non-licensed ranges)

Broadband LTE

Source: SK Telecom, Qualcomm, 5G Forum, KDB Daewoo Securities Research

LTE-Advanced: CA enhances data speed


2) Velocity: Carrier Aggregation

Advancement of CA technology:

Aggregating component carriers helps increase peak data rate

Before CA, MC (multi-carrier) technology was in the spotlight; this technology enables one to find a faster network, but does not increase the peak data rate

• LTE-Advanced: Steady increase in carrier aggregation (CA)

• CA technology aims to increase network speeds by aggregating two or more frequency bands

• Currently, the CA technology used in LTE-Advanced can aggregate two bands

• Going forward, a technology combining three or more bands, or combining LTE and Wi-Fi frequency bands, is anticipated to be commercialized

TIP

Telecom Service

2H15 Outlook 27

5G vision


2) Velocity: Bracing for 5G mobile networks

5G preparations:

Domestic: 5G Forum, in which three telcos as well as Samsung Electronics and LG Electronics participate

Japan: NTT Docomo R&D Center

China: IMT-2020 (5G) promotion group

UK: 5G Innovation Centre

• 5G technology targets in Korea: Demonstration in 2018, commercialization by 2020

• Vision: 1Gbps, hyper-connectivity, and immersive experiences

• Standardization not yet completed Network investments (capex) not yet begun

Source: 5G Forum, KDB Daewoo Securities Research

T IP

Telecom Service

2H15 Outlook 28

Notes: Media reports; Details released on May 27thSource: MSIP, KDB Daewoo Securities Research

MSIP’s vision for the PyeongChang 2018 Olympics


2) Velocity: Year 2018

MSIP plans to build the K-ICT Olympics Export Strategy Complex to test/verify ICT services to be provided during the Olympics (funding by 2018: W109.5bn from the government, and W76.8bn from the private sector)

• MSIP has presented its ICT Olympics vision for 2018 (PyeongChang Olympics)

• Provide ICT services and products for the successful hosting of the Olympics

• Demonstrate 5G, IoT, UHD, etc. to help increase exports

• Capex likely to increase around 2018 due to 5G network demonstration

K-ICT Olympics: Demonstrate speed and convenience

5G network IoT services UHD broadcast

• 5G network demonstration

• 5G-based immersive media

• Gigabyte Wi-Fi zone

• Personalized services

• Intelligent traffic system and disaster prevention

• Games support

• 4K, 8K UHD broadcast

• Personal, social media, etc.

• Multiplanar image system demonstration

Export ICT services/products to other hosting countries

TIP

Telecom Service

2H15 Outlook 29

Source: Dentsu, Creative Multiplier, KDB Daewoo Securities Research

Business trend leaders: Those with the ability to drive lifestyle changes

II. Key themes and issues: Encouragement

3) Encouragement: Evolution of customer management strategies

• Encouragement: Detailed strategies are required to manage customers, who are sensitive to telecommunications expenses

• In modern times, companies that are able to transform people’s lifestyles (on top of developing innovative technologies) drive business trends

• Advertising, products, sales capacity, branding, businesses, and strategic promotions are increasingly geared toward influencing customers’ environments

• Telecom services require comprehensive and well-balanced strategies, given the importance of both customer acquisition and retention

Strategic moves to handle sensitive consumers

TIP

광고부 상품기획부 사업부 브랜드 경영실 경영기획부 IR실 CSR 추진실

Advertisingpower Product

power

Totalsales

capacity Brandpower

Businessplanning

Power Strategic marketing/

publicrelations

power

Company environment

power

1980s 1990s 2000s 2010s

Advertising Product planning

Sales Brand management

Planning IR CSR

Telecom Service

2H15 Outlook 30

Source: Connecting Lab, company data, KDB Daewoo Securities Research

Data plan diversification


3) Encouragement: A push for higher ARPU

• New monthly plans have been launched in 2Q every year since the introduction of LTE• New monthly plans focus on providing greater convenience to customers (and raising ARPU)

• Data plans are increasingly differentiated by service and smartphone model

• Differentiation by time, place, and occasion is also evident

Data plan diversification apart from volume: 1) Differentiated by service and smartphone model; 2) Optimized for time, place, and occasion;3) Able to charge more parties (indirect users, businesses, etc.)

Charging party: Sponsors (shopping, games, cab apps, etc.)

Age: Kids, youth, etc.Time: Unlimited data for specific time zone, etc.Place: Subway, etc.

Data plans (mostly volume-based)

By time

By service

By volume

By smartphone

Charging party

Cloud

Multi-tier

TIP

By data volume

By service

By device

Telecom Service

2H15 Outlook 31

Note: A survey of more than 1,000 CIOs, COOs, and CMOs conducted by Accenture; A game changer is a newly introduced element or factor that changes an existing situation or activity in a significant way Source: Accenture, CIO Insight, Google, KDB Daewoo Securities Research

Efficient data collection opportunity is a game changer


3) Encouragement:Data on customer behavior

• Staying connected to customers Game changer• Telcos can identify consumers’ mobile life patterns

• Note opportunities that big data can create

• SK Telecom utilized the data usage patterns of its subscribers to launch a new plan, Band Timefree

Ample potential for application of big data

Areas in which big data will have a significant impact within 5 years, according to survey respondents:- Transforming customer relationships: 63%- Redefining product development: 58%- Overhauling organizations’ operations: 56%

59%

Big data is a big asset

79%

Big data is important to

competitiveness

89%

Big data will play a role as a game changer

83%

Big data is used for corporate

competitiveness

TIP

Telecom Service

2H15 Outlook 32

II. Key themes and issues: Regulations

4) Regulations: Pressure has persisted

• Regulations: Regulations and policy direction are key• Reduction in household telecom bills is a top priority for government

• In line with the president’s campaign pledge, the government has repealed the sign-up fee, while implementing MVNO promotion policies

• In addition, the government has increased policies to facilitate competition since the introduction of the handset distribution act

Source: Statistics Korea, BOK, KDB Daewoo Securities Research

Government efforts to reduce mobile service chargesProportion of telecom expenses in grossnational consumer expenditure

Source: Media reports, KDB Daewoo Securities Research

0

1

2

4

5

6

0

150

300

450

600

750

70 75 80 85 90 95 00 05 10 15F

(%)(Wtr)Domestic household final consumption expenditure (L)

Proportion of telecom expenses (R)

Date Details

May 2013- MSIP announced plan to reduce household spending on communication services and to vitalize the MVNO market

August 2013 - 40% decrease in sign-up fee (W26,000 →W21,600)

August 2014 - 50% decrease sign-up fee (W21,600 →W10,800)

October 2014

- Eliminated sign-up fee (W10,800→free)

- Handset distribution law went into effect; Applied discount rate of 12% onmonthly charge for customers not receiving subsidies

April 2015 - KCC increased the discount rate to 20% for customers not receiving subsidies

May 2015- GovernmentÊs cut to network wholesale prices; Revitalization of the MVNO market;

- Announcement of plans to cut household telecom expenses

June 2015

- Public hearing on the promotion of competition in the mobile telecom market

- Efforts to overhaul strict government oversight of rate plan adjustments

- Seeking to introduce a fourth mobile operator

Telecom Service

2H15 Outlook 33

Source: MSIP, KDB Daewoo Securities Research

Timeline of plan to allow a fourth mobile service provider


4) Regulations: Allowing a fourth mobile service provider

• The MSIP has announced a basic plan for issuing a license to a facilities-based telecommunication business operator according to the revised TelecommunicationsBusiness Act

• As such, a regulatory environment for allowing a fourth mobile service provider has been created

• Bandwidths available to a new player: TDD 2.5GHz and FDD 2.6GHz (40MHz each)

• A public hearing will be held on June 9th and public opinions gathered until June 11th; License applications will be accepted starting end-August

The aim of the plan is to benefit subscribers and promote investments by facilitating competition

TIP

June 2015End-Aug.

to end-Sept. 2015Oct. 2015 Nov. to Dec. 2015 Mar. 2016 2017

Announcement of

basic plan for

licensing a facilities-

based telecom

business operator

Frequency allocation

notice; Business

license applications

(including frequency

application)

Review of applicantsÊ

qualifications;

Notification of results

Review of business

plans;

Selection of fourth

operator

(including frequency

allocation review)

Payment for frequency

allocation; Issuance of

business license

Launch of fourth

telcoÊs services

Telecom Service

2H15 Outlook 34

Source: Media reports, KDB Daewoo Securities Research

Past applications for a fourth mobile service license: KMI applied and failed each time



• Applications for a fourth mobile service license were submitted on six past occasions• KMI applied each time, and IST applied twice

• All applicants were unqualified, mainly due to non-transparent financing plans and inadequate business plans

• Introduction of new technologies, including LTE-TDD, was an important part of the evaluation criteria recently

All past applicants have not been qualified

TIP

1st

June 20102nd

Nov. 20103rd

Aug. 20114th

Oct. 20125th

Nov. 20136th

Mar. 20147th

Aug. 2015

Applicant: KMI

Result: Unqualified

Reasons: Inadequatefinancial/

technological capabilities

Applicant: KMI

Result: Unqualified

Reasons: Non-transparent financing plan;Too-optimistic

demand forecast

Applicants:KMI, IST

Result: Unqualified

Reasons: Weak shareholding structuring;Inadequate

financial capability; Non-transparent financing plan

Applicants:KMI, IST

Result: Unqualified

Reasons: Inadequate

business plan

Applicant:KMI

Result: Withdrew voluntarily

Reasons: Inadequate plan for

payment for frequency allocation

Applicant:KMI

Result: Unqualified

Reasons: Non-transparent financing/

business plan

Applicant(s):TBD

Result: (to be announced

at year-end)

Telecom Service

2H15 Outlook 35



• The government’s move to allow a fourth mobile service provider is aimed at overhauling the market structure by increasing competition

• Current market structure (three mobile operators) will likely provide no incentive for competition and increase household telecom expenses

• The government has rationalized regulations to lay the foundation for a new player to enter the market

• The government appears to be benchmarking France’s telecom policies: MVNO and a fourth mobile service provider

Notes: As of early JuneSource: Media reports, KDB Daewoo Securities Research

Subscriber base and market share of Free Mobile, the fourthmobile operator to receive a license in FrancePotential applicants for fourth mobile service license

Notes: Market share is in parentheses Source: Free Mobile, KDB Daewoo Securities Research

0

5

8

1011

0

2

4

6

8

10

12

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

(mn persons)

No. of subscribers

(Introduction)

(8%)

(12%)

(15%)(15.5%)

Consortium Representative

KMIJong-nyeol Gong

(Former director of MOIC)

ISTSeung-taek Yang

(Former minister of MOIC)

Woori TelecomYun-sik Jang

(Former president of the MVNO association)

Quantum MobileSeong-do Park

(Former vice-president of Hyundai Mobis)

K ConsortiumDang-yeong Lee

(from Samsung Electronics)

Telecom Service

2H15 Outlook 36

Notes: Mobile charges are based on mobile network operators (MNOs) with a market share of more than 5%, excluding MVNOsSource: GSMA Intelligence, KDB Daewoo Securities Research

EU: Mobile charge comparison of three-MNO vs. four-MNO markets


4) Regulations: Overseas cases of a fourth mobile service provider

• Effects of a fourth mobile service provider need further monitoring• France: Free Mobile entered the market with a 12-year rate plan, triggering industry restructuring

amid intense competition

• Japan: Y!mobile had a market share of less than 3% for six years after launching its services; Company was acquired by Softbank this year

• EU: Minimal mobile charge differences between three-player vs. four-player market structures

France’s Free Mobile saw its market share rise up to 15% after its entry into the market. However, intensified competition led to decreased revenue and profits at mobile operators, triggering industry restructuring. MVNOs’ market shares also contracted

Japan’s Y!mobile recorded a market share of 2.8% for seven years after its market entry. As the company was acquired by Softbank this year, the Japanese market has returned to a three-player structure

T IP

0.22

0.21

0.07

0.00

0.05

0.10

0.15

0.20

0.25

0.30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(EUR/min.)3-player markets4-player markets

Telecom Service

2H15 Outlook 37

Note: The “regulatory guillotine” approach refers to efforts to revamp inefficient and unpractical regulations all at once.Source: Prime Minister's Office, KDB Daewoo Securities Research

Repeal of rate plan approval system: Part of the “regulatory guillotine” approach discussed at a public-private meeting in end-2014


4) Regulations: Repeal of rate plan approval system

• Rate plan approval system: Currently, rate plan adjustments by dominant telcos are subject to approval; the purpose is to ensure steady revenue for second-tier firms by preventing dominant players from pushing through excessive rate cuts

• The proposed repeal could promote rate cut competition, better protecting consumer rights

• The Ministry of Science, ICT and Future Planning plans to hold a public hearing in June to come up with non-legislative solutions

Proposed repeal is intended to reduce cost of telecom plans by promoting rate competition

Since 2010, all telcos have been subject to a reporting system for rate cuts; for rate hikes, the rate plan approval system still applies

T IP

Agenda number Agenda Details

81Repeal of rate plan

approval system

▪ For SK TelecomÊs mobile services and KTÊs local call services, rate hikes or new plans are subject to approval

Need to ease competition-stifling regulations (such as by repealing rate plan approval system)

Authorities Details

Non-legislativeMinistry of Science,

ICT and Future Planning

[Solution]▪ Comprehensive measures to facilitate market competition to be

presented (not only scrapping the rate plan approval system, but also stimulating telecom market competition, revamping wholesale systems, and improving MVNO competitiveness; public hearing slated for June).

* Discussions among legislators, government officials, and private professionals being held

Telecom Service

2H15 Outlook 38

Source: National Assembly, KDB Daewoo Securities Research

Major proposals related to MCTDSIA revisions


4) Regulations: Mobile Communications Terminal Distribution Structure Improvement Act (MCTDSIA)

• Telecom-related bills, including MCTDSIA, will be discussed by the National Assembly in June

• Both the ruling and opposition parties moved to repeal the ceiling and floor for handset subsidies

• The opposition party proposed to completely separate mobile phone sales and service plans

• However, there are many pending issues facing the National Assembly, including a confirmation hearing for a prime minister nominee and revisions to the National Assembly Act

Matters under discussion related to MCTDSIA revisions: Repeal of ceiling for handset subsidies, complete separation of mobile phone sales from service plans, etc.

T IP

Date Author of proposal Bill details

8/19/2014 Byung-heon Jeon (NPAD) Repeal of strict government oversight of rate plan adjustments

10/14/2014 Min-hee Choi (NPAD)Introduction of a scheme requiring separate disclosure from telcosand handset makers concerning subsidies and sales incentives

10/17/2014 Deok-gwang Bae (Saenuri)Scrapping of subsidy cap; Introduction of a scheme requiring separate disclosure from telcos and handset makers concerning subsidies and sales incentives

11/7/2014 Myeong-suk Han (NPAD)Scrapping of subsidy cap; Introduction of a scheme requiring separate disclosure from telcos and handset makers concerning subsidies and sales incentives; Differentiating subsidy payment by subscription type

11/10/2014 Jae-cheol Shim (Saenuri) Scrapping of subsidy cap; Report to the KCC before changing disclosures

3/12/2015 Byung-heon Jeon (NPAD)Repeal of the handset distribution law; Complete separation of mobile phone sales and service plans under the revised telecommunications business act

Telecom Service

2H15 Outlook 39

Source: KPCB, KDB Daewoo Securities Research

Currently, regulatory pressures are too strong; Business structure needs to evolve through innovation


4) Regulations: Business structure needs to evolve

• Conventional business structure: Tight tensions between regulations and innovations

• Currently, regulatory pressures are strong, and companies and consumers are sensitive to policy direction

• In the future, companies will pursue innovation through active interactions with consumers, who are savvy about mobile devices and social media; Authorities’ main role will be support and monitoring

Currently, both companies and consumers are sensitive to policy direction

Companies are moving toward innovation through active interactions with consumers, who are savvy about mobile devices and social media

TIP

Regulation

(Past)Incumbent Innovation

Regulation

(Present)Incumbent

Innovation

CompanyConsumer

CompanyConsumer

(Evolving direction)Incumbent

Innovation

Regulation

CompanyConsumer

Telecom Service

2H15 Outlook 40


2015: Regulations will likely be the most influential factor affecting telecom shares


Determinants of telecom shares: Regulations, capex, earnings, and dividends

• Telecom share prices are affected by regulations, capex, earnings, and dividends

• The telecom industry requires investments in both tangible and intangible infrastructure; Less capex tends to lead to profit growth

• Earnings are linked to regulations and capex: Earnings likely to normalize through 2015

• Dividends are linked to earnings; Expect dividend payout ratio to grow this year

• 2015: While capex, earnings, and dividends are favorable, the regulatory environment is not

Not all share determinants likely to be favorable in 2015

T IP

Regulations

Capex Earnings

Dividends

Telecom Service

2H15 Outlook 41


Overblown concerns to provide investment opportunities

• Telecom stocks tend to recover after pulling back on regulatory risks

• Before the MCTDSIA took effect, the subsidies issue drove down shares

• With the handset distribution environment changing, issues such as phone bills and the emergence of a fourth telco are sending shares down

• Once a clearer picture of the policy landscape emerges in 3Q, downward pressures should ease

Notes: Average of PC and mobile search frequencies for keyword “subsidy”Source: Naver Trend, Thomson Reuters, KDB Daewoo Securities Research

After MCTDSIA: Shares being affected by issues such as telecom expenses and potential fourth telcoBefore MCTDSIA: Shares affected by subsidy competition

Notes: Average of PC and mobile search frequencies for keywords “phone bill” and “fourth telco”Source: Naver Trend, Thomson Reuters, KDB Daewoo Securities Research

0

20

40

60

80

100

37

39

41

43

45

47

49

51

6/14 9/14 12/14 3/15 6/15

(max=100)(p)

FTSE Korea Telecom Index (L)'Phone bill' search frequency (inverted, R)'Fourth telco' search frequency (inverted, R)

0

20

40

60

80

100

35

37

39

41

43

45

47

49

51

1/14 4/14 7/14 10/14 1/15

(max=100)(p) FTSE Korea Telecom Index (L)

'Subsidy' search frequency (inverted, R)

Telecom Service

2H15 Outlook 42


Regulatory risks to be offset by time and dividends; New businesses to boost enterprise value


Time, dividends, and new businesses

• Regulatory risks could be offset by the following factors:

• Time: It will likely take time to review potential effects of new policies before actual implementation

• New businesses: Overseas exports and expansion of jobs should boost enterprise value

• Dividends: High dividend yields are likely to provide downside support

Once regulatory risks ease, shares should reflect fundamentals

Regulatory risks

Fundamentals + improved enterprise value• Better margins of existing

businesses• New businesses to boost

growth potential

TIP

Telecom Service

2H15 Outlook 43

SK Telecom’s 12-month forward P/B

Earnings outlook and valuation of major telcos (Wbn, %, x)

KT’s 12-month forward P/B

Note: Based on our estimates for Korean firms and the consensus for the others, Source: Bloomberg, KDB Daewoo Securities Research

III. Valuation & investment strategy: Global peer group

Company Revenue (Wbn) OP (Wbn) NP (Wbn) OP margin (%) P/E (x) P/B (x) ROE (%)14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F

SK Telecom 17,164 17,752 18,361 1,825 1,967 2,188 1,801 1,972 2,159 10.6 11.1 11.9 12.0 10.3 9.4 1.3 1.1 1.0 12.9 13.0 13.1

KT 23,422 22,021 22,015 -292 1,158 1,192 -1,055 1,127 647 -1.2 5.3 5.4 - 6.8 11.9 0.7 0.6 0.6 -9.5 10.3 5.5

LG Uplus 11,000 10,545 10,700 576 692 709 228 368 394 5.2 6.6 6.6 22.0 11.2 10.5 1.2 0.9 0.9 5.6 8.5 8.5

NTT Docomo (Japan) 42,429 40,318 41,785 6,186 6,061 6,678 3,969 4,103 4,558 14.6 15.0 16.0 22.9 19.6 17.3 1.7 1.6 1.6 7.4 8.3 8.8

Softbank 83,923 80,162 83,174 9,512 9,390 10,623 6,469 4,533 5,860 11.3 11.7 12.8 13.0 17.0 13.2 3.0 2.6 2.2 27.8 16.2 17.4

China Mobile (China) 109,678 121,149 127,310 20,693 21,705 23,181 18,685 19,806 21,134 18.9 17.9 18.2 15.0 15.1 14.0 1.9 1.8 1.7 13.3 12.4 12.3

China Unicom 48,676 52,199 54,318 3,580 3,801 4,381 2,061 2,466 2,849 7.4 7.3 8.1 21.6 18.7 16.1 1.1 1.1 1.0 5.3 5.9 6.7

PCCW (HK) 4,520 5,550 5,844 548 771 857 450 365 423 12.1 13.9 14.7 10.5 13.4 12.0 3.5 3.0 2.8 34.2 22.4 23.3

Singtel (Singapore) 14,183 14,403 14,837 2,405 2,466 2,590 3,114 3,265 3,497 17.0 17.1 17.5 17.3 16.6 15.5 2.6 2.5 2.4 15.6 15.5 16.0

AT&T (US) 139,510 149,607 154,161 12,372 25,620 26,424 6,556 14,609 15,205 8.9 17.1 17.1 14.2 13.7 13.3 2.1 2.1 2.0 6.5 15.2 16.4

Verizon 133,856 145,985 147,688 20,644 32,683 33,350 10,138 17,249 17,782 15.4 22.4 22.6 13.4 12.3 11.9 20.6 12.7 8.6 89.8 122.5 82.5

Deutsche Telekom (EU) 87,625 84,610 86,176 10,135 9,587 10,613 4,089 4,131 4,770 11.6 11.3 12.3 37.2 21.8 18.5 2.5 2.5 2.4 7.2 10.8 12.8

Orange 55,162 48,842 48,963 7,150 7,393 7,479 1,294 3,077 3,291 13.0 15.1 15.3 34.5 14.8 13.8 1.2 1.3 1.2 3.4 9.0 9.3

Average 11.1 13.2 13.7 19.5 14.7 13.6 1.9 1.8 1.6 10.8 12.3 12.5

20,000

25,000

30,000

35,000

40,000

45,000

50,000

10 11 12 13 14 15 16 17

(W) Adj. stock price1.1x

0.9x

0.8x

0.7x

0.6x

100,000

150,000

200,000

250,000

300,000

350,000

10 11 12 13 14 15 16 17

(W)

Adj. stock price 1.3x

1.2x

1.0x

0.8x

0.7x

Telecom Service

2H15 Outlook 44


IV. Top pick & stocks to watch

Telecom Service(Overweight) KT (Buy)

LG Uplus (Buy)

Earnings recovery, dividend payout, stock buyback

2H point: Shareholder-friendly measures to come

Value of subsidiaries: SK Planet, SK Broadband,SK Hynix, etc.

Earnings normalizing thanks to cost decline following massive restructuring in 2014

2H point: Potential dividend payout

High ARPU: High contribution of LTE subscribers

2H point: Steady subscriber acquisition

Dividend payout ratio of 30%

Operations normalizing: Swung to a net subscriber addition in 2Q;First telco to release data-oriented plans

Telecom Service

2H15 Outlook 45

SK Telecom (017670 KS)Top pick

Shareholder returns to increase

Investment points• Strong shareholder return policy: Plans for both dividend payment and treasury share purchase

• Earnings recovery: Weak in 1H due to restructuring; Recovery to come in 2H

• EV: Earnings growth and EV improvement at major subsidiaries, including SK Planet, SKBroadband, and SK Hynix

• Platform business: Businesses with high growth potential (media, commerce, and IoT) to be emphasized

Risks• As the market leader, sensitive to regulatory and policy environment; Need to defend subscriber

base

• Uncertainties related to ownership structure changes in SK Group

Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests; Based on June 9th closing priceSource: KDB Daewoo Securities Research

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

Revenue (Wbn) 16,141 16,602 17,164 17,752 18,361 18,934

OP (Wbn) 1,730 2,011 1,825 1,967 2,188 2,242

OP margin (%) 10.7 12.1 10.6 11.1 11.9 11.8

NP (Wbn) 1,152 1,639 1,801 1,972 2,159 2,201

EPS (W) 14,263 20,298 22,307 24,427 26,739 27,263

ROE (%) 9.8 13.0 12.9 13.0 13.1 12.2

P/E (x) 10.7 11.3 12.0 10.3 9.4 9.2

P/B (x) 0.9 1.2 1.3 1.1 1.0 1.0

(Maintain) Buy

Target Price (12M, W) 360,000

Share Price (6/9/15, W) 251,500

Expected Return 43%

OP (15F, Wbn) 1,967

Consensus OP (15F, Wbn) 1,940

EPS Growth (15F, %) 9.5

Market EPS Growth (15F, %) 36.9

P/E (15F, x) 10.3

Market P/E (15F, x) 10.5

KOSPI 2,064.03

Market Cap (Wbn) 20,308

Shares Outstanding (mn) 377

Free Float (%) 62.6

Foreign Ownership (%) 44.5

Beta (12M) 0.77

52-Week Low 219,000

52-Week High 301,000

(%) 1M 6M 12M

Absolute -1.9 -10.5 14.8Relative -0.9 -14.5 10.7

80

90

100

110

120

130

14.6 14.10 15.2 15.6

SK Telecom KOSPI

Telecom Service

2H15 Outlook 46


SK Telecom’s plans related to shareholder returns

• Both dividend payment and treasury share purchase expected

• Interim dividend: Announcement expected in June; Payment in July

• Annual dividend: If interim dividend plans are changed, an announcement on the annual dividend plan can also be expected

• Treasury share purchase: SK Telecom is likely to buy back shares used in the acquisition of SKBroadband and allocate a separate budget for shareholder returns

Shareholder-friendly policies to be strongest in 4Q following dividend payment and treasury share purchase

Notes: KDB Daewoo estimatesSource: KDB Daewoo Securities Research

Dividend and treasury shares

Dividend

Plan to pay out year-end

dividend

Treasury stock

Start to buyback shares

Dividend

Plan to pay out interim dividend

July September Year-end1H:- Restructuring- Decrease in earnings- Concerns about

regulations

2H:- Earnings recovery- Increase in dividend- Share buyback

TIP

Telecom Service

2H15 Outlook 47


SK Group’s ownership structure after merger of SK C&C and SK Holdings

• SK C&C and SK Holdings to merge on August 1st

• SK Telecom leads SK Group’s ICT businesses

• Under SK Group’s growth strategy, SK Telecom is included in the portfolio of traditional businesses; SK Group to strengthen the management of the company

• SK Telecom’s subsidiary SK Hynix belongs to the portfolio of new growth businesses; Group’s investment in SK Hynix to increase

Investors need to pay close attention to changes in ownership structure


Group ownership structure and growth strategy

TIP

SK Holdings

SK C&C

SK Holdings

SK Innovation SK Telecom SK Networks

SK E&C

SK Shipping

SK Securities

SK Biopharm

Infosec

ESSENCORE

SK E&S

SKC

SK Planet

SK Broadband

SK Hynix

SK Energy

SK Global Chemical

Energy/Chemicals ICT/Semiconductor Marketing/Services

SK Group holds:

KoreaÊs top oil refinery

KoreaÊs top mobile service provider

WorldÊs no. 2 DRAM producer

SK Lubricants

SK IncheonPetrochemical

Before merger

Telecom Service

2H15 Outlook 48


SK Telecom likely to restructure its businesses

• The group's growth strategy should boost SK Telecom’s enterprise value; In particular, SK Group will:

• Strengthen management over existing SK subsidiaries (including SK Telecom)

• Build a growth-oriented portfolio via larger investments in high-growth areas and businesses with promising futures (platform, etc.)

• Encourage innovation in existing businesses and increase efficiency in businesses with deteriorating profits (wired network, etc.)

SK Telecom businesses to undergo restructuring in line with SK Group’s growth strategy

Source: SK, KDB Daewoo Securities Research

Governance and growth strategies

Building growth-oriented portfolio and innovating existing businesses

Increasing investments in growth areas

Rebuilding portfolio to shift focus to high-growth areas and promising businesses

Strengthen portfolio value management

Portfolio restructuring and proactive efforts toward management improvement

TIP

Slow growth and falling profitability

Telecom Service

2H15 Outlook 49


SK Group to strengthen integrated ICT solutions business

• SK Group to strengthen growth in integrated ICT solutions (SK Telecom’s subsidiary NEOS Networks)

• SK Telecom increased investments in NSOK via rights offering on April 29th (roughly W40bn)

• NSOK posted revenue of W33.3bn last year (high growth of +18% YoY)

Integrated ICT solutions: IT services, integrated security, smart logistics, etc.

Source: SK, KDB Daewoo Securities Research

Governance and growth strategies

TIP

Information security Physical security

Convergence security solutions

Control center

Emergencysecurityservices

Temperature sensor

NWsecurity

Systemsecurity

Applicationservice

Telecom Service

2H15 Outlook 50Source: SK, KDB Daewoo Securities Research


Corporate governance

10.0%

100%

100%

100%

100%

100%

100%

100%

100%

67.3%

100%

TelevisionMedia Korea

SK C&C(034730 KS)

M & Service

SK E&S

Infosec43.5%

100%

SK Telink

SK Wyverns

SK TradingInternational

SK Lubricants

DaehanOil Pipeline

33.4%

UB Care(032620 KQ)

SK Hynix(000660 KS)

SK E&CSK Telecom(017670 KS)

Daejeon Clean Water

GwangjuClean Water

SK Gas(018670 KS)

Happy Narae

SK-W

SK Telesys

SKC Solmics(057500 KQ)

SKC(011790 KS)

SKC Lighting

PS & Marketing

F&UCredit Information

Iriver

SK Broadband(033630 KQ)

SKC Airgas

SK Pinx

SK NetworksService

SK Networks(001740 KS)

Busan City Gas(015350 KS)

WiryeEnergy Service

ChonnamCity Gas

KangwonCity Gas

ChungcheongEnergy Service

YeongnamEnergy Service

JeonbukEnergy Service

PyeongtaekEnergy Service

SK ShippingSK Biopharm

SK Chemical(006120 KS)

SK Energy

SK Global Chemical

SK Innovation(096770 KS)

94.1%

83.1%

44.5%25.2% 42.3%

0.06%

SK Securities(001510 KS)

SK Encarsales.com

5.9%

50.0%

100%

31.8%

17.0%

45.5%

44.0%

100%

5.0%

28.3%

32.0%

42.0%

10.0%100%

100%

41.0%

86.5%

39.1%

100%

80.0%

40.9%

50.0%

90.0%

20.1%

83.5%

100%

50.6%

100%

50.0%

51.0%

100%

100%

100%

100%

Service Top100%

100%

Ko-oneEnergy Service

89.5%

SK Communications(066270 KQ)

Choi Chang-won & affiliates

Commerce Planet100%

64.5%

SK E&S

49.0%

Service Ace

SK Planet

Network ONS100%

100%

Bizen 99.0%

PMP

Boryeong LNG Terminal

80.0%

SK Forest

100%

SK Hyeng

SK Hystec

Silicon File Tech.

100%

100%

Choi Tae-won &affiliates

SK MobileEnergy

Happy Narae

100%

SK IncheonPetrochemical

100%

42.5%

Ulsan Aromatics50.0%

Speed Motors

Entis

Initz66.0%

50.0%

SK Advanced65.0%

HanamEnergy Service

100%

KimcheonEnergy Service

50.0%

100%

SK ContinentalEmotion Korea

100%

42.5%

NEOS Networks66.7%

100%Jeonbuk

Mass Energy

SK D&D

G Hub

SK Petrochemical100%

43.5%

100%

SK(003600 KS)

SK Syntec

Notes: As of end-1Q15; SK C&C-SK Holdings merger to be completed Aug. 1st 2015; As SK Telecom participated in the rights offering of NEOS Networks, its ownership increased to 83.93% on Apr. 29th, 2015; As SK Telecom’s ownership in SK Broadband increased to 100% through a share exchange on June 9th, 2015, SK Broadband has been de-listed; SK Planet plans to spin off cloud streaming business on July 1st, 2015.

Telecom Service

2H15 Outlook 51


Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F

Revenue 17,164 17,752 18,361 18,934 Current Assets 5,083 6,232 6,694 8,189 P/E (x) 12.0 10.3 9.4 9.2

Cost of Sales 0 0 0 0 Cash and Cash Equivalents 834 1,609 1,927 3,227 P/CF (x) 4.5 4.1 3.9 3.8

Gross Profit 17,164 17,752 18,361 18,934 AR & Other Receivables 3,083 3,354 3,438 3,545 P/B (x) 1.3 1.1 1.0 1.0

SG&A Expenses 15,339 15,785 16,173 16,692 Inventories 268 291 301 311 EV/EBITDA (x) 5.9 5.2 4.7 4.3

Operating Profit (Adj) 1,825 1,967 2,188 2,242 Other Current Assets 898 978 1,028 1,106 EPS (W) 22,307 24,427 26,739 27,263

Operating Profit 1,825 1,967 2,188 2,242 Non-Current Assets 22,858 23,517 23,940 24,143 CFPS (W) 59,177 60,816 64,380 65,767

Non-Operating Profit 429 537 553 553 Investments in Associates 6,298 6,550 6,775 6,986 BPS (W) 206,159 222,328 240,282 258,760

Net Financial Income -264 -250 -214 -169 Property, Plant and Equipment 10,568 10,730 10,737 10,541 DPS (W) 9,400 10,000 10,000 10,000

Net Gain from Inv in Associates 906 830 850 850 Intangible Assets 4,402 4,552 4,702 4,852 Payout ratio (%) 37.1 35.8 32.7 32.1

Pretax Profit 2,254 2,504 2,741 2,795 Total Assets 27,941 29,749 30,634 32,332 Dividend Yield (%) 3.5 4.0 4.0 4.0

Income Tax 455 523 573 584 Current Liabilities 5,420 5,796 5,172 5,322 Revenue Growth (%) 3.4 3.4 3.4 3.1

Profit from Continuing Operations 1,799 1,981 2,168 2,211 AP & Other Payables 1,657 1,803 1,865 1,923 EBITDA Growth (%) -2.6 5.0 6.6 3.0

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,151 1,151 367 367 Operating Profit Growth (%) -9.2 7.8 11.2 2.5

Net Profit 1,799 1,981 2,168 2,211 Other Current Liabilities 2,612 2,842 2,940 3,032 EPS Growth (%) 9.9 9.5 9.5 2.0

Controlling Interests 1,801 1,972 2,159 2,201 Non-Current Liabilities 7,273 7,391 7,441 7,488 Accounts Receivable Turnover (x) 7.4 7.1 6.9 6.9

Non-Controlling Interests -2 8 9 9 Long-Term Financial Liabilities 5,930 5,930 5,930 5,930 Inventory Turnover (x) 77.2 63.5 62.0 61.9

Total Comprehensive Profit 1,771 1,981 2,168 2,211 Other Non-Current Liabilities 1,343 1,461 1,511 1,558 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Controlling Interests 1,778 1,977 2,165 2,207 Total Liabilities 12,693 13,187 12,613 12,810 ROA (%) 6.6 6.9 7.2 7.0

Non-Controlling Interests -7 3 3 4 Controlling Interests 14,506 15,812 17,262 18,754 ROE (%) 12.9 13.0 13.1 12.2

EBITDA 4,717 4,955 5,281 5,438 Capital Stock 45 45 45 45 ROIC (%) 10.2 10.4 11.5 11.7

FCF (Free Cash Flow) 669 1,195 1,430 1,608 Capital Surplus 2,916 2,916 2,916 2,916 Liability to Equity Ratio (%) 83.2 79.6 70.0 65.6

EBITDA Margin (%) 27.5 27.9 28.8 28.7 Retained Earnings 14,189 15,494 16,944 18,436 Current Ratio (%) 93.8 107.5 129.4 153.9

Operating Profit Margin (%) 10.6 11.1 11.9 11.8 Non-Controlling Interests 742 750 759 768 Net Debt to Equity Ratio (%) 36.6 28.6 20.1 11.8

Net Profit Margin (%) 10.5 11.1 11.8 11.6 Stockholders' Equity 15,248 16,562 18,021 19,522 Interest Coverage Ratio (x) 5.6 6.3 7.4 8.0

Source: SK Telecom, KDB Daewoo Securities Research estimates

Telecom Service

2H15 Outlook 52

KT (030200 KS)Stocks to watch

Focus on normalization of earnings, dividends, and share price

Investment points • Earnings normalizing: Quarterly operating profit recovered to the W300bn level this year thanks

to a cost decline (following last year’s restructuring)

• Operation normalizing: Swung to a net subscriber addition in 2Q15; At the forefront of releasing data-oriented plans

• Likely to resume dividend payout this year after suspending its dividend last year; Long-term dividend investors likely to return

• Valuation merits: P/B of just 0.6x; Valuation should look increasingly attractive alongside improvement in fundamentals

Risks • Fixed-line revenue is on the decline

• With subscribers increasingly moving to MVNOs, rise in ARPU might be slow


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

Revenue (Wbn) 23,856 23,811 23,422 22,021 22,015 22,152

OP (Wbn) 1,209 839 -292 1,158 1,192 1,221

OP margin (%) 5.1 3.5 -1.2 5.3 5.4 5.5

NP (Wbn) 1,046 -162 -1,055 1,127 647 695

EPS (W) 4,006 -622 -4,040 4,318 2,479 2,663

ROE (%) 8.7 -1.4 -9.5 10.3 5.5 5.7

P/E (x) 8.9 - - 6.8 11.9 11.1

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

(Maintain) Buy


Share Price (6/9/15, W) 29,500

Expected Return 36%

OP (15F, Wbn) 1,158

Consensus OP (15F, Wbn) 1,120

EPS Growth (15F, %) -


P/E (15F, x) 6.8


KOSPI 2,064.03



Free Float (%) 84.9


Beta (12M) 0.72

52-Week Low 28,500

52-Week High 36,800

(%) 1M 6M 12M

Absolute -4.1 -7.7 -1.8Relative -3.1 -11.8 -5.3

80

90

100

110

120

130

14.6 14.10 15.2 15.6

KT KOSPI

Telecom Service

2H15 Outlook 53

KT (030200 KS)

Turnaround in progress

Stocks to watch

• KT to normalize in 2015

• Earnings and FCF are likely to turn positive thanks to a low base effect resulting from restructuring-related one-off expenses

• Likely to resume dividend payout after suspending its dividend last year; Sale of subsidiaries to boost cash flow and earnings recovery


Likely to resume dividend payoutOperating profit and FCF to turn positive this year


-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

11 12 13 14 15F 16F

(Wbn)Consolidated operating profit

Consolidated FCF

Swung to positive

0

500

1,000

1,500

2,000

2,500

11 12 13 14 15F 16F

(W)

DPS

Resumptionof dividend payments

Telecom Service

2H15 Outlook 54


Governance

Notes: As of end-1Q15; KT Media Hub merged with KT on Mar. 31st; Sale of KT Rental was completed on June 3rd; KT’s stake in KT Innoedu changed to 79.54% on June 4th; Sale of KT Capital was delayed


100%

100%

57.0%

100%

KT Skylife(053210 KS)

WIC

Sofnics

KT Estate

KT Rental

H&C Network

69.5%

99.0%

1.0%

VP50.9%

InitechSmartro HoldingsSmartro

100%

61.2%

Initech(053350 KQ)

Skylife TV

50.0%

52.3%

77.7%

0.1%

AnimaxBroadcasting Korea

48.0%

100%

19.9%

KTH(036030 KQ)

KT Commerce

63.7%KT Capital

KTcs(058850 KS)

50.0%

36.9%

45.4%

93.8%

100%

51.0%

65.0%

82.8%

51.0%

83.6%

7.4%

100%

35.5%

100%

100%

86.8%

95.3%

100%

51.0% KT Sports

Best Partners

48.4%

14.8%

26.2%

77.4%

100%

58.0%

60.0%

100% KT RentalAutocare

KT Autolease

Green Car

KT(030200 KS)

KT AMC

KD Living51.0%

18.0%6.0%

4.0%

6.0%

BC Card

29.3%

KTWiBro Infra

26.2%KT Powertel

44.8%

19.0%

16.4%

81.0%

11.6%

11.3%

KT Sports

6.0%

3.4%

KT NexR

100%

KT Media HubNasmedia(089600 KQ)

CentiosKT Sat

T-on Telecom KT Mhows

Smart Channel KT Innoedu

U-stream Korea KT Autopion

KTDS KT-SB Data Service

KT Linkus KT Telecop

KT Submarine(060370 KQ) KT M&S

KT Music(043610 KQ) KT ENS

KTIS(058860 KS) EnswersSold

Sold

Liquidated

Liquidated

Merged

Telecom Service

2H15 Outlook 55




Revenue 23,422 22,021 22,015 22,152 Current Assets 8,751 10,894 10,618 12,168 P/E (x) - 6.8 11.9 11.1

Cost of Sales 0 0 0 0 Cash and Cash Equivalents 1,889 4,131 3,555 4,605 P/CF (x) 1.9 1.5 1.6 1.5



Operating Profit (Adj) -292 1,158 1,192 1,221 Other Current Assets 3,346 3,297 3,599 4,076 EPS (W) -4,040 4,318 2,479 2,663

Operating Profit -292 1,158 1,192 1,221 Non-Current Assets 25,025 24,027 23,251 22,266 CFPS (W) 16,859 19,654 19,030 19,160

Non-Operating Profit -945 279 -280 -252 Investments in Associates 339 334 334 336 BPS (W) 42,921 47,239 48,968 50,694

Net Financial Income -420 -431 -381 -343 Property, Plant and Equipment 16,468 15,885 15,433 14,704 DPS (W) 0 800 1,000 1,000

Net Gain from Inv in Associates 18 613 0 0 Intangible Assets 3,544 3,144 2,821 2,558 Payout ratio (%) 0.0 17.6 34.4 32.4

Pretax Profit -1,237 1,437 912 969 Total Assets 33,776 34,921 33,869 34,434 Dividend Yield (%) 0.0 2.7 3.4 3.4

Income Tax -271 320 201 213 Current Liabilities 9,992 9,601 8,034 8,077 Revenue Growth (%) -1.6 -6.0 0.0 0.6

Profit from Continuing Operations -966 1,117 711 756 AP & Other Payables 1,200 1,183 1,182 1,190 EBITDA Growth (%) -20.1 41.5 -3.4 0.9

Profit from Discontinued Operations 0 -3 0 0 Short-Term Financial Liabilities 3,000 2,709 1,144 1,144 Operating Profit Growth (%) - - 2.9 2.4

Net Profit -966 1,114 711 756 Other Current Liabilities 5,792 5,709 5,708 5,743 EPS Growth (%) - - -42.6 7.4

Controlling Interests -1,055 1,127 647 695 Non-Current Liabilities 11,993 12,415 12,415 12,427 Accounts Receivable Turnover (x) 7.4 7.1 7.2 7.2

Non-Controlling Interests 89 -13 64 60 Long-Term Financial Liabilities 10,085 10,535 10,535 10,535 Inventory Turnover (x) 46.5 56.4 56.8 57.0

Total Comprehensive Profit -1,201 1,114 711 756 Other Non-Current Liabilities 1,908 1,880 1,880 1,892 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Controlling Interests -1,277 1,111 708 753 Total Liabilities 21,985 22,016 20,448 20,503 ROA (%) -2.8 3.2 2.1 2.2

Non-Controlling Interests 76 3 3 3 Controlling Interests 10,341 11,469 11,920 12,370 ROE (%) -9.5 10.3 5.5 5.7

EBITDA 3,563 5,041 4,868 4,912 Capital Stock 1,564 1,564 1,564 1,564 ROIC (%) -1.1 4.3 4.6 4.9

FCF (Free Cash Flow) -936 1,646 1,414 1,532 Capital Surplus 1,440 1,440 1,440 1,440 Liability to Equity Ratio (%) 186.5 170.6 152.4 147.2

EBITDA Margin (%) 15.2 22.9 22.1 22.2 Retained Earnings 8,571 9,699 10,150 10,601 Current Ratio (%) 87.6 113.5 132.2 150.7

Operating Profit Margin (%) -1.2 5.3 5.4 5.5 Non-Controlling Interests 1,449 1,436 1,500 1,561 Net Debt to Equity Ratio (%) 89.9 66.1 56.0 46.2

Net Profit Margin (%) -4.5 5.1 2.9 3.1 Stockholders' Equity 11,790 12,905 13,420 13,931 Interest Coverage Ratio (x) -0.6 2.2 2.4 2.6

Source: KT, KDB Daewoo Securities Research estimates

Telecom Service

2H15 Outlook 56

LG Uplus (032640 KS)

Investment points

• Continued net subscriber growth: Net subscriber growth has continued in the MNP market, proving the company has solid business capabilities that are immune to the changing market environment

• Fundamental changes in the subscriber base: Focus has been on high-ARPU subscribers since the introduction of LTE services; Percentage of MVNO subscribers is the lowest

• Consistent dividend policy: Payout ratio of 30%; Improving free cash flow to provide more room for dividend payout this year

• Benefits from the proliferation of simplified payment: The company is beefing up its own simplified payment service, Paynow, backed by its dominance in the domestic payment gateway market

Risks

• Growth could slow, as the proportion of LTE subscribers in the total subscriber base is higher than the market average

• The company, which ranks third in market share, is the most sensitive to the entry of a fourth player


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

Revenue (Wbn) 10,905 11,450 11,000 10,545 10,700 10,764

OP (Wbn) 127 542 576 692 709 715

OP margin (%) 1.2 4.7 5.2 6.6 6.6 6.6

NP (Wbn) -60 279 228 368 394 410

EPS (W) -122 640 523 844 903 940

ROE (%) -1.6 7.2 5.6 8.5 8.5 8.4

P/E (x) - 16.8 22.0 11.2 10.5 10.1

P/B (x) 0.9 1.2 1.2 0.9 0.9 0.8

(Maintain) Buy


Share Price (6/9/15, W) 9,470

Expected Return 48%

OP (15F, Wbn) 692

Consensus OP (15F, Wbn) 674

EPS Growth (15F, %) 61.4


P/E (15F, x) 11.2


KOSPI 2,064.03



Free Float (%) 63.9


Beta (12M) 0.68

52-Week Low 8,890

52-Week High 12,850

(%) 1M 6M 12M

Absolute -3.4 -14.3 1.1Relative -2.4 -18.2 -2.6

Solid business capabilities

80

100

120

140

160

14.6 14.10 15.2 15.6

LG Uplus KOSPI

Stocks to watch

Telecom Service

2H15 Outlook 57

LG Uplus (032640 KS)Stocks to watch

• Virtuous cycle of steady earnings improvement backed by solid business capabilities, leading to improved dividend payment

• Steady net subscriber growth in the MNP market, despite implementation of the handset distribution act, iPhone launches, data-oriented rate plans, etc.

• Dividend payout ratio to reach 30%; Divided per share to rise; Dividend yield also likely to rise with recent share price correction

Source: KTOA, KDB Daewoo Securities Research

LG Uplus’ dividend yield to riseLG Uplus achieving steady net subscriber growth in the MNP market

Note: 2015F and 2016F dividend yields are based on Daewoo Securities’ estimatesSource: LG Uplus, KDB Daewoo Securities Research

Rising earnings and dividend payout demonstrate improved fundamentals

2.6%

2.9%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

11 12 13 14 15F 16F

(%)

Dividend yield

-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

6/14 8/14 10/14 12/14 2/15 4/15

(persons)

SKT KT LG Uplus

Telecom Service

2H15 Outlook 58

LG Uplus (032640 KS)Stocks to watch

Corporate governance

Source: LG, KDB Daewoo Securities Research

100%

100%

64.8%

100%

51.0%

50.0%

100%

100%

61.3%

93.1%

LG Life Science(068870 KS)

LG Solar Energy

Media Log

Dacom Crossing

CS Leader

A-in Teleservice

LG CNS

Ucess Partners

Serveone

LG Sports

33.5%

50.0%

34.0%

30.4%

37.9%

48.6%

33.7%

85.0%

100%

100%

Ji Heung100% 27.9%

Koo Bon-moo & affiliates

LG(003550 KS)

LG UPlus(032640 KS)

100%

36.0%

Korea Elecom

BNE

The Face Shop

Lusem

LG Siltron

HS Ad

L Best100%

Global DynastyNatural Resource PEF

Sal de Vida Korea33.3%

7.5%

50.0%

35.0%

Fuser100%

33.5%

TOSTEM BM50.0%

Hausys ENG100%

100%

98.4%

51.0%LG Hausys

(108670 KS)

LG H&H(051900 KS)

100%

Haitai Beverage

Hiplaza

HiBusiness Logistics

40.8%

100%

100%

LG Innotek(011070 KS)

Himsolutek

100%HiTeleservice

100%

Hausys Interpane80.0%

LG MMA

LG Pure Cell Systems

LG MDI

Coca-Cola Korea

CleanSoul

100%

90.0%

100%

Ace R&A

Hientech

100%

100%

LG N-Sys100%

LG-Toyo Engineering

Konjiam Yewon90.0%

70.0%

LG International(001120 KS)

Hankook Beverage

LG Chem(051910 KS)

G2R(035000 KS)

Nanumnuri100%

Innowid100%

LG-HitachiWater Solutions

51.0%

75.0%

100%

Silicon Works(108320 KQ)

28.2%

Hanuri100%

Haengboknuri100%

CS ONE Partner

WithU100%

EverON

See Tec

Oneseen Skytech90.8%

LG Electronics(066570 KS)

LG Display(034220 KS)

Telecom Service

2H15 Outlook 59

Stocks to watch LG Uplus (032640 KS)



Revenue 11,000 10,545 10,700 10,764 Current Assets 2,490 2,626 3,023 3,476 P/E (x) 22.0 11.2 10.5 10.1

Cost of Sales 0 0 0 0 Cash and Cash Equivalents 416 475 813 1,215 P/CF (x) 2.2 1.8 1.8 1.9



Operating Profit (Adj) 576 692 709 715 Other Current Assets 165 202 235 274 EPS (W) 523 844 903 940

Operating Profit 576 692 709 715 Non-Current Assets 9,523 9,711 9,639 9,496 CFPS (W) 5,163 5,158 5,175 5,086

Non-Operating Profit -256 -201 -184 -168 Investments in Associates 9 0 0 0 BPS (W) 9,567 10,261 10,914 11,583

Net Financial Income -171 -176 -162 -130 Property, Plant and Equipment 7,254 7,533 7,516 7,419 DPS (W) 150 250 270 280

Net Gain from Inv in Associates 1 0 0 0 Intangible Assets 1,116 1,033 978 930 Payout ratio (%) 28.8 29.7 29.9 29.8

Pretax Profit 320 491 525 547 Total Assets 12,013 12,337 12,663 12,972 Dividend Yield (%) 1.3 2.6 2.9 3.0

Income Tax 92 123 131 137 Current Liabilities 3,486 2,896 2,929 2,942 Revenue Growth (%) -3.9 -4.1 1.5 0.6

Profit from Continuing Operations 228 368 394 410 AP & Other Payables 1,427 1,456 1,477 1,486 EBITDA Growth (%) 12.1 9.4 0.2 -1.0

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,129 649 649 649 Operating Profit Growth (%) 6.3 20.1 2.5 0.8

Net Profit 228 368 394 410 Other Current Liabilities 930 791 803 807 EPS Growth (%) -18.3 61.4 7.0 4.1

Controlling Interests 228 368 394 410 Non-Current Liabilities 4,349 4,961 4,969 4,973 Accounts Receivable Turnover (x) 7.3 7.2 7.2 7.2

Non-Controlling Interests 0 0 0 -1 Long-Term Financial Liabilities 3,787 4,387 4,387 4,387 Inventory Turnover (x) 32.8 37.8 37.7 37.5

Total Comprehensive Profit 221 368 394 410 Other Non-Current Liabilities 562 574 582 586 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Controlling Interests 221 368 394 410 Total Liabilities 7,835 7,856 7,898 7,915 ROA (%) 1.9 3.0 3.1 3.2

Non-Controlling Interests 0 -1 -1 -1 Controlling Interests 4,177 4,480 4,765 5,058 ROE (%) 5.6 8.5 8.5 8.4

EBITDA 2,082 2,277 2,282 2,259 Capital Stock 2,574 2,574 2,574 2,574 ROIC (%) 4.9 5.8 5.9 6.0

FCF (Free Cash Flow) -129 78 549 621 Capital Surplus 837 837 837 837 Liability to Equity Ratio (%) 187.5 175.4 165.8 156.5

EBITDA Margin (%) 18.9 21.6 21.3 21.0 Retained Earnings 764 1,067 1,352 1,645 Current Ratio (%) 71.4 90.7 103.2 118.1

Operating Profit Margin (%) 5.2 6.6 6.6 6.6 Non-Controlling Interests 1 0 0 -1 Net Debt to Equity Ratio (%) 106.7 100.8 87.7 74.7

Net Profit Margin (%) 2.1 3.5 3.7 3.8 Stockholders' Equity 4,178 4,480 4,765 5,057 Interest Coverage Ratio (x) 2.7 3.2 3.2 3.2

Source: LG Uplus, KDB Daewoo Securities Research estimates

Telecom Service

2H15 Outlook 60

Telecom service sector: Take note of telcos likely to deliver differentiated performance


[Conclusion] Look to earnings improvements and dividend payout

Stocks to watch

1) Resumption of dividend payout: KT

2) Net subscriber growth: LG Uplus

Top pickLikely to recover on high dividend yield and new

business value in the event regulatory risks ease

SK Telecom

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price

SK Telecom(017670) 05/06/2015 Buy 360,000 07/19/2013 Buy 45,000

10/01/2014 Buy 380,000 06/11/2013 Buy 50,000

08/03/2014 Buy 310,000 No Coverage

10/29/2013 Buy 290,000 LG Uplus(032640) 04/28/2015 Buy 14,000

07/19/2013 Buy 280,000 01/25/2015 Buy 16,000

06/11/2013 Buy 270,000 10/01/2014 Buy 15,000

No Coverage 07/31/2014 Buy 11,500

KT(030200) 01/20/2015 Buy 40,000 04/28/2014 Buy 13,000

10/01/2014 Buy 42,000 01/20/2014 Buy 15,000

05/01/2014 Buy 40,000 07/19/2013 Buy 16,000

01/20/2014 Trading Buy 36,000 06/11/2013 Buy 15,000

11/03/2013 Trading Buy 38,000 No Coverage

08/04/2013 Buy 44,000

Stock Ratings Industry Ratings

Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving

Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes

Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening

Sell : Relative performance of -10%

Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

0

100,000

200,000

300,000

400,000

Jun 13 Jun 14 Jun 15

(W) SK Telecom

0

10,000

20,000

30,000

40,000

50,000

60,000


(W) KT

0

5,000

10,000

15,000

20,000


(W) LG Uplus

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. 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The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. 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Equity Ratings Distribution

Buy Trading Buy Hold Sell

71.9% 13.8% 14.3% 0%

* Based on recommendations in the last 12-months (as of March 31, 2015)

Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for single stock futures backed by shares of KT as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.

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