Telecom Services - file.truefriend.com
Transcript of Telecom Services - file.truefriend.com
Looking to unleash data explosion momentum
Smartphone growth sets off data explosion The number of smartphone subscribers is forecast to grow from 7.18mn in
2010 to 20mn in 2011 and to 31.8mn in 2012. The telecom services
market has seen a phenomenal increase in mobile data traffic driven by
the surge in smartphone users and the introduction of unlimited data
service. Korea’s mobile data jumped 15.3x in the past 14 months and is
projected to expand 8.7x over the next two years.
Three carriers taking different paths in dealing with data growth In June, the Korea Communications Commission (KCC) will announce
guidelines for the allotment of 1.8GHz and 2.1GHz spectrums. Telcos’
networks have four strategies to deal with the data explosion 1) additional
spectrum acquisition, 2) LTE network rollout, 3) alternative networks such
as WiFi and femtocell, and 4) existing network upgrade through HSPA+,
cell splitting and cloud service. SK Telecom (SKT) is upgrading its 3G
network (HSPA+, cell splitting) and is also preparing to launch LTE. KT
plans to enlist the help of WiFi/WiBro networks and cloud services. KT lags
behind peers in its LTE rollout plan. LGU+ aims to roll out a nationwide
LTE network by July 2012 and build a nationwide WiFi network by drawing
on its pool of household WiFi access points.
Profitability to remain healthy despite capex increase Growing mobile traffic brings with it concerns over increased capex
requirement for infrastructure improvement and over additional frequency
band acquisition costs. However, we expect telcos’ profitability to remain
firm. Traffic growth will boost carriers’ revenue significantly and per-bit data
transmission cost will be minimized through the use of alternative networks.
Also, tariff plans are likely to be restructured in the direction of scrapping or
revamping the unlimited data plans and bringing usage-based pricing into
the market. We do not expect the infrastructure investment and frequency
acquisition costs to eat into profitability.
OVERWEIGHT, SKT and KT our top picks Korean telcos have been underperforming the market year-to-date, while
overseas peers have seen substantial gains in share price. We maintain
OVERWEIGHT on the telecom services sector due to its compelling
valuations, attractive dividend prospects, and profitability improvement
from increased smartphone exposure. Our top picks are SKT and KT.
Explosive mobile data traffic growth is reshaping the competitive
landscape of the telecom services industry around network and voice call
quality as well as service (competitive content) quality, as opposed to the
previous marketing focus of handset subsidies. We find SKT best
positioned to benefit from the mobile data explosion thanks to its edge in
subscriber base, frequency band, financial capacity, and content (T-map,
mobile music portal service Melon, etc). We also like KT for its competitive
fixed-line network and deep pockets.
Sector Report / Telecom Services
Telecom Services
May 20, 2011
Overweight (Maintain)
Company Rating TP (won)
� SK Telecom BUY (-) 222,000 (-)
� KT BUY (-) 54,000 (-)
� LG Uplus Hold (-) 7,900 (-)
Contents
I. Oversold, OVERWEIGHT ..........................................1
II. Mobile data explosion .................................................5
1. Unprecedented growth of smartphones and
tablet PCs
2. Wireless data traffic up tenfold in two years
III. Data traffic strategies differ by carrier .............7
1. Additional frequency allocation and network
neutrality issue
2. Taking different paths on network issue
IV. Is data explosion a threat? ..................................11
1. Opportunity: ARPC hike, usage-based
pricing and network neutrality exception
2. Threats: Added capex burden, frequency
acquisition costs, and wVoIP
V. Profitability to remain at a healthy level ....16
VI. The strong get stronger as competition surrounds network capacity..............................19
Company.........................................................................................21
Telecom Services
1
I. Oversold, OVERWEIGHT
Korean telcos have underperformed the broader market by 16.1%p year-to-date,
while overseas peers have rallied, remaining in step with overall market
performance. Korean telcos have seen profitability improvement in 1Q11 but also
came under increased regulatory pressure, as the government stepped up tariff-
cut pressure. Concerns over possible capex increase to deal with the exponential
growth in data traffic further weighed down on telcos’ share prices.
We maintain OVERWEIGHT on the telecom services sector which we find way
oversold. First, valuations has become compelling due to excessive share price
declines and improved profitability. Second, downside risk from tariff-cut pressure
appears limited, as we believe such concerns are mostly priced in. Third,
marketing costs will probably drop as subscriber acquisition drives eased off in
2011. Fourth, the increasing number of smartphone subscribers will lead to
revenue growth and profitability improvement.
First, mobile operators’ valuations are at historical lows. SKT’s and KT’s ADR
(American depository receipts) premiums are about 16% and 14%, respectively,
clear evidence of how these shares have been sidelined by domestic investors.
SKT, KT, and LG Uplus (LGU+) trade at 2011 PERs of 5.7x, 5.8x, 5.3x vs. the
Kospi average of 10.3x and the global peer average of 15.4x. Telcos are also
attractive dividend stocks. We expect the total 2011 dividend yield (cash dividend +
treasury stock buyback) to be 7.6% for SKT, 6.5% for KT and 6.0% for LGU+.
Second, tariff-cut risk has been factored in share prices to a great extent, as the
issue has been up for discussion over the past four months. We expect finalized
tariff cuts to be announced in May with details about module-type plans (the
combination of free voice call, data and SMS at users’ disposal), the introduction of
the IMEI blacklist system (separating handset purchase from activation) and a
gradual reduction in monthly base fees and signup fees. Telco shares tend to take
a hit from tariff-cut pressure but rebound when tariff cuts are announced and
implemented. We see downside risk from the actual tariff-cut announcement as
quite limited.
Third, telcos will save on marketing costs as the tension on the subscriber tug-of-
war eases off in 2011. First, telcos need to reduce marketing costs to meet their
elevated earnings guidance. SKT guides for operating profit to increase 10% (K-
GAAP) and LGU+ is aiming at a 16.8% jump in EBITDA. Second, competition will
ease with telcos now playing on a more level field in terms of smartphone lineup,
as carriers launch the latest high-end smartphone models in lockstep. With the
removal of the handset lineup disadvantage, marketing costs will decline and
profitability will improve.
Fourth, mobile Internet growth will accelerate with the increasing penetration of
smartphones and tablet PCs. The number of smartphone users vaulted from
750,000 in 2009 to 7.18mn in 2010 (14.1% of total mobile subscribers) and is
forecast to jump to 20mn (38.4%) in 2011. Average revenue per user (ARPU)
growth will be minor due to an increase in subscribers with two or more handsets
and discount-rate tariff plans. However, average revenue per customer (ARPC) will
increase sharply. Smartphone growth will drive telcos’ revenue and profitability
upward.
We present SKT and KT as our top picks. Mobile carriers with competitive network
and content will benefit the most from the explosion in data traffic growth, and
those without will be increasingly stymied. SKT is best positioned in this
competitive landscape followed by KT.
Telcos are way oversold
Oversold,
OVERWEIGHT
Attractive valuation and
dividend payout
Tariff-cut pressure
already priced in
Marketing costs to
decline in 2011
The surge in
smartphone
subscribers to translate
into higher ARPC and
profitability
Top picks – SKT and KT
Telecom Services
2
SKT, a pure mobile service provider, is likely to enjoy the most notable revenue
and profitability improvement from increasing smartphone users. SKT is also the
most attractively valued among the three domestic carriers.
KT has the largest exposure to smartphone subscribers among the three mobile
carriers and has a superior fixed-line/wireless integrated network. Also, real estate
development will make an increasing contribution to profit, and the IPTV business
is expected to turn to the black in early 2012 on subscriber growth.
Capex and rate-cut pressure are the biggest risk factors that telcos currently face.
As wireless data traffic swells, capex and frequency band acquisition costs are
expected to shoot up. However, profitability will remain healthy barring excessive
tariff cuts and capex should be controlled and affordable. Mobile tariff cuts will be
announced in May and the presidential and general elections to be held next year
may bring additional tariff cut decisions.
Domestic and overseas telecom sector indexes over the past 12 months
70
80
90
100
110
120
130
140
Jan-10 Apr-10 Jun-10 Sep-10 Dec-10 Mar-11
KOSPI Domestic telecom
MSCI MSCI telecom
(2010.01=100)(pt)
Source: Quantiwise, Korea Investment & Securities
12-month share performance of domestic telcos relative to Kospi
60
70
80
90
100
110
120
130
140
Jan-10 Apr-10 Jun-10 Sep-10 Dec-10 Mar-11
KT LGU+ SKT
SKB KOSPI(2010.01=100)
(pt)
Source: Quantiwise, Korea Investment & Securities
Capex and rate-cut
pressure
Telecom Services
3
Overseas telecom shares on the rise
60
80
100
120
140
160
180
May -10 Jun-10 Aug-10 Sep-10 Nov -10 Dec-10 Jan-11 Mar-11 Apr-11
AT&T Sprint Nextel
Sof tbank Verizon
BT
(pt)
Source: Korea Investment & Securities
Telecom sector’s 12MF PER and discount rate: Discounted to the market
0
5
10
15
20
25
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
-40
-20
0
20
40
60
80Market premium/discount (RHS)
KIS telecom univ erse 12MF PER (LHS)
(x) (%)
Source: Korea Investment & Securities
Telecom Services
4
Deep discount to domestic market average and global peers
PER (x) EV/EBITDA (x) FCF yield (%) Div. yield (%)
FY11 FY12 FY11 FY12 FY11 FY12 FY11 FY12
SPRINT NEXTEL NA NA 5.4 5.2 1.0 2.1 - -
VODAFONE 10.5 9.8 6.8 6.6 7.5 8.4 5.8 6.4
TAIWAN MOBILE 15.7 14.7 9.4 9.0 6.0 6.3 5.8 6.2
NTT DOCOMO 11.8 11.1 3.5 3.2 8.8 9.2 3.8 3.9
SOFTBANK 13.0 11.6 5.5 5.0 6.1 7.2 0.2 0.2
KDDI 9.6 8.8 3.2 2.9 9.2 10.8 2.6 2.8
CHINA MOBILE 9.6 9.4 3.7 3.5 7.7 8.6 4.6 4.8
CHINA UNICOM 59.1 26.0 6.0 5.2 (3.7) (0.3) 0.9 1.5
Mobile average 18.4 13.0 5.4 5.1 5.3 6.5 3.0 3.2
AT&T 13.2 12.3 5.5 5.2 7.4 8.4 5.5 5.7
VERIZON 16.7 14.1 5.1 4.6 5.4 7.0 5.3 5.4
DEUTSCHE 13.7 13.2 5.1 5.1 11.8 11.6 6.9 6.9
BT GROUP 9.2 8.8 4.7 4.5 13.3 13.3 4.3 4.9
FRANCE TELECOM 9.1 9.1 4.8 4.7 12.0 12.3 9.1 9.1
CHINA TELECOM 16.3 14.0 4.4 4.3 40.9 44.0 2.1 2.3
SINGAPORE TELECOM 12.5 11.6 8.6 8.2 7.7 8.6 5.9 5.7
PCCW 11.2 9.2 6.1 5.8 16.9 18.3 5.7 7.0
NIPPON T&T 9.3 8.6 2.9 2.6 12.4 13.4 3.4 3.6
Fixed-line average 12.4 11.2 5.2 5.0 14.2 15.2 5.4 5.6
SK Telecom 5.7 5.4 3.2 2.8 12.9 15.5 5.7 5.7
KT 5.8 6.1 3.3 3.3 12.2 11.9 6.3 6.3
LG Uplus 9.3 8.1 3.1 2.8 (5.9) 4.3 6.2 6.2
SK Broadband 61.2 16.3 4.8 4.4 3.8 9.1 - -
Domestic market avg. 10.3 9.2 7.2 6.3 - - - -
Domestic telecom avg. 7.1 6.9 3.4 3.2 - - - -
Note: Domestic market avg. is based on KIS Universe. Source: I/B/E/S, Korea Investment & Securities
Telecom Services
5
II. Mobile data explosion
1. Unprecedented growth of smartphones and tablet PCs
The number of smartphone users is growing at a blistering rate. KT introduced
iPhone in Korea in late November 2009, setting off what turned out to be a period
of explosive smartphone growth. The number of smartphone users rocketed from
750,000 at end-2009 to 7.18mn by end-2010. We expect the number to reach
20mn in 2011 and 31.8mn in 2012 driven by the power of smartphones’ strong
marketability and telcos’ aggressive marketing. Smartphones represented just
1.6% of total mobile handsets in 2009 but the portion ballooned to 14.1% in 2010
and is expected to jump to 38.4%.
Smartphones will continue to penetrate deeper into the mass market, accounting
for more than 60% of total mobile handsets in 2011, up from 30% in 2010.
Smartphone handset lineups will expand, ranging from high-end to mass market
models.
Smartphone subscriber trend
0
5,000
10,000
15,000
20,000
25,000
4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11F 3Q11F 4Q11F
SKT KT LGU+
('000 subs)
Source: Company data, Korea Investment & Securities
Smartphone subscriber estimates (‘000, %)
2009 2010F 2011F 2012F 2013F 2014F
Subscribers
SK Telecom 24,270 25,705 26,323 26,643 26,893 27,143
KT 15,016 16,041 16,542 16,752 16,932 17,112
LG U+ 8,658 9,022 9,207 9,347 9,477 9,607
Total 47,944 50,768 52,072 52,742 53,302 53,862
Smartphone subscribers 0 0 0 0 0 0
SK Telecom 460 3,910 10,000 16,100 20,000 22,500
KT 280 2,737 6,500 10,200 12,500 14,500
LG U+ 8 531 3,500 5,500 6,900 7,900
Total 748 7,178 20,000 31,800 39,400 44,900
Smartphone portion 0 0 0 0 0 0
SK Telecom 1.9 15.2 38.0 60.4 74.4 82.9
KT 1.9 17.1 39.3 60.9 73.8 84.7
LG U+ 0.1 5.9 38.0 58.8 72.8 82.2
Total 1.6 14.1 38.4 60.3 73.9 83.4
Smartphone subscriber net additions 0 0 0 0 0 0
SK Telecom 460 3,450 6,090 6,100 3,900 2,500
KT 280 2,457 3,763 3,700 2,300 2,000
LG U+ 8 523 2,969 2,000 1,400 1,000
Total 748 6,430 12,822 11,800 7,600 5,500
Source: Company data, Korea Investment & Securities
Smartphone
subscribers to reach
20mn in 2011 and
31.8mn in 2012
Smartphone penetration
to soar to over 60%
Telecom Services
6
2. Wireless data traffic up tenfold in two years
Mobile data traffic has been surging on the proliferation of smartphones and tablet
PCs. The introduction of a flat-rate unlimited data service in August 2010 further
fueled the traffic growth. The number of subscribers on unlimited data service
plans totaled 5.74mn (SKT 3.15mn, KT 1.95mn, and LGU+ 640,000) as of March
2011, representing 55.8% of total smartphone subscribers or 11.2% of total mobile
subscribers.
Domestic mobile traffic surged 15.3x from 400TB in December 2009 to 6,112TB in
February 2011. The number of smartphone subscribers swelled 12.3x, while total
mobile subscribers increased 6.7%.
Domestic mobile data traffic trend (TB)
Oct-09 Dec Jan-10 Mar May Jun Sep Nov Feb-11
SK Telecom 128 140 156 165 196 323 794 1,659 3,411
KT 117 185 218 268 379 465 611 1,271 2,177
LG Uplus 70 75 81 81 102 128 164 252 524
Total 315 400 455 514 677 916 1,569 3,182 6,112
Note: Adopted iPhone in October 2009. Started unlimited data service in July 2010. Source: Korea Communication Commission, Korea Information Society Development Institute
Mobile traffic will continue to rise, driven by the increasing penetration of smart
devices and upgraded content services such as broadcasting and streaming video.
Exponential mobile data demand growth will continue for the foreseeable future.
Mobile industry watchers forecast domestic mobile data traffic to increase 8.7-fold
over January 2011 - December 2012.
Mobile data traffic forecast
5,4967,458
11,025
14,576
18,785
24,199
31,422
39,285
47,913
0
10,000
20,000
30,000
40,000
50,000
60,000
Jan-11 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12
Total traf f ic
(TB)
Source: Korea Information Society Development Institute
Mobile data traffic
increased 15.3x over 14
months from December
2009 to February 2011
Mobile traffic demand to
grow 8.7x over the next
two years
Telecom Services
7
III. Data traffic strategies differ by carrier
1. Additional frequency allocation and network neutrality issue
1) Government to allocate more spectrum to decongest network
The policy of the KCC to deal with growing mobile traffic is based on frequency band redistribution, reassessment of the network neutrality principle, and revamping the current unlimited data service. The KCC plans to put up for auction 20MHz of spectrum in the 2.1GHz and 1.8GHz band each, in June 2011. Later, the redistribution of 108MHz in the 700MHz band should be on the table as well. If the government permits it, the 700MHz frequency band should be used for telecommunications from 2013 when analog broadcasting is no longer available. However, broadcasters argue that the 700MHz spectrum must be used for 3D broadcasting while digital broadcasting is aired through 470-698MHz. The total bandwidth that can be redistributed from the three frequency bands - 2.1GHz, 1.8GHz and 700MHz - amounts to 148MHz. Telecom service researchers believe Korea’s mobile carriers will need at least 240MHz of additional spectrum by 2015 and 390MHz by 2020. Frequency bands to be allocated in major overseas mobile service markets in the next five to ten years amount to roughly 2-3x the frequency bands currently used by carriers. Increased frequency bands equal more traffic capacity.
Frequency band redistribution plans
Band Bandwidth Redistribution period
2.1GHz 20MHz 11.6 - 20MHz of spectrum immediately available. Golden band globally used for 3G and offer advantages in smartphone lineup and global roaming.
1.8GHz 20MHz 11.6 - 20MHz of spectrum to be available when KT’s 2G is terminated in July. - Some European companies are deploying LTE on 1.8GHz band. - However, domestic carriers may risk handset lineup disadvantage compared to 2.1GHz and 700MHz.
700MHz 108MHz ? - Available from 2013 after the switch to digital TV broadcasting is completed. Prime LTE band.
Total 148MHz - Notably short of minimum 240MHz needed by 2015. A pressing need for policies to secure additional frequency bands.
Source: KISDI policy open forum, Professor Kang, Choon-gu of Korea University
2) Revisiting network neutrality issue
Voice over IP over wireless (wVoIP) network and instant messaging services that allow users to bypass paying mobile networks are seeing rapid growth. Google Voice and Skype are the leading wVoIP services offered overseas. Domestic mobile users using flat-rate tariff plans of over W55,000 a month are allowed to use wVoIP services. The market has seen an increase in demand for free or low-cost mobile messenger services - such as KakaoTalk, MeToday, Twitter, Facebook, and Cyworld - as alternatives for voice calls and SNS. However, mobile instant messaging volume growth has come to crowd the mobile network, resulting in the deterioration of voice call quality. Telcos are increasing network capex to deal with rising traffic, but the free wVoIP and messaging services put mobile operators in a tough spot as they have an adverse effect on revenue. Usage-based pricing for mobile data traffic is gaining support in major mobile markets including the US, UK, Japan, France, Spain, Italy, and Norway. Usage-based pricing supporters argue that the mobile network should be an exception to network neutrality (unlimited access). The Korean government is expected to bring this issue to the public in 2H11.
Additional frequency bands to be auctioned
out
Mobile carriers need an additional 240-390MHz
by 2015
Telcos and Internet portals at odds over
wVoIP and SNS
Government to weigh ‘usage-based pricing’ for mobile networks
from 2H11
Telecom Services
8
2. Taking different paths on network issue
The three mobile carriers are taking differing approaches in dealing with the data
explosion. Their network strategies are 1) additional spectrum acquisition, 2) LTE
network rollout, 3) alternative networks such as WiFi and femtocell, and 4) existing
network upgrade through HSPA+, cell splitting and cloud service.
1) High-stakes competition over frequency bands
Mobile operators are bent on securing additional frequency bandwidth. The 20MHz
spectrum on the 2.1GHz and 1.8GHz band set to be redistributed is the most
coveted spectrum. Competition will also be intense for the golden low-frequency
700MHz band although the band will not be freed up by analog broadcasters until
end-2012 and the redistribution of the band has not been fixed yet.
If the government decides to auction off 2.1GHz, 1.8GHz, and 700MHz bands at
the same time, mobile carriers will have some flexibility in their network strategy.
Considering LGU+’s weak financial capacity, we do not believe mobile carriers will
end up bleeding too much over frequencies.
Frequency band assigned by company (as of 2010)
800MHz 900 1800 2100 2300
SK Telecom 2G(50) 3G(40) WiBro(27)
KT 2G(40) 3G(40) WiBro(27)
LG Uplus 2G(20)
Source: Korea Investment & Securities
Spectrums for possible use by mobile operators after reallocation (July 2011) and the forecast of future
spectrum allocation
700MHz 800 900 1800 2100 2300
SK Telecom 3G or LTE (108) 2G(20) LTE(10) 3G or LTE (20) 3G(40) 3G(20) 3G(20) WiBro(27)
KTPossible spectrum
reallocation LTE(20) LTE(20)
To be
reallocated3G(40)
To be
reallocatedWiBro(27)
LG UplusAvailable for use
after 2013LTE(20) 2G(20)
KT to terminate 2G
service
Note: 1. Figures in parenthesis indicates channel bandwidth. 2. As of April 2011. Source: Korea Investment & Securities
2) Next-generation networks: LTE
The long-term evolution (LTE) is a core part of telcos’ traffic growth strategy. LTE,
also called a 3.9G system, provides a maximum downlink speed of 40Mbps vs.
14.4Mbps of the current 3G (HSUPA) network and 100Mbps of the 4G LTE
advanced. About 17 carriers around the world have already launched LTE service
and the number is expected to rise to 64 by end-2012.
Over the long term, mobile carriers will have to move up to 4G. However, the LTE
commercialization decision hinges on the issues of 1) 3G investment payback
period, 2) voice revenue decline, and 3) slower data revenue growth vs. explosive
traffic growth. For now, domestic carriers’ traffic growth strategies are primarily
based on 3G upgrades and alternative networks.
Telcos to compete
for the golden
2.1GHz, 1.8GHz
Looking to LTE to cope
with rising data demand
Telecom Services
9
KT plans to make best use of alternative networks such as WiFi and WiBro. Its
planned migration to LTE lags behind competitors’ timelines. In the meantime, KT
plans to fall back on the High Speed Packet Access+ (HSPA+) services. SKT
intends to channel data traffic over to alternative networks such as WiFi and
femtocell, while moving up its scheduled migration of 3G network to HSPA+ and
LTE. SKT plans to complete its nationwide LTE network by 2013. SKT is expected
to maintain a dual network strategy of using LTE for data and 3G for voice for a
while. LGU+ does not have a 3G network but upgraded its CDMA network to EV-
DO Rev.B in April 2011. The third-ranked carrier plans to kick off LTE service for
the capital region in July 2011 and complete a nationwide network by July 2012.
Mobile technology evolution process: SKT, KT (HSPA+); LGU+ (EV-DO r.B); eventually migrating towards 4G
technology
2G 3G 4G
1995 1999 2000 2002 2006 2007 2009 2010 2011 2013
CDMA IS-95A/B CDMA 1X EV-DO r.0 EV-DO r.A EV-DO r.B
(14.4~56kbps) (144kbps) (2.4/0.154Mbps) (3.1/1.8Mbps) (9.3/5.4Mbps)
GSM GSM GPRS W-CDMA HSDPA HSUPA HSPA+ 3G LTE LTE Advanced
(10kbps) (171kbps) (2.3Mbps) (14.4/2.3Mbps) (14.4/5.8Mbps) (28Mbps) (30~100Mbps) (100Mbps)
Wireless LAN WLAN WiBro
(24.8/5.2Mbps)
Note: 1. (Upload/download rates). 2. LTE (long-term evolution): The long-term evolution of mobile technology that offers upgrade path from 3G networks. Source: Korea Investment & Securities
Comparison of 3G, 4G mobile technologies
3G 4G
Technology WCDMA HSPA+ LTE Rel.8/Rel.9 LTE Advanced
Generic technology CDMA OFDMA
Speed ~2Mbps ~28Mbps 40Mbps~ 100Mbps~
Bandwidth 10MHz 10MHz 10/20/40MHz 10/20/40MHz
Note: CDMA technology evolution was closed after the development of CDMA EVDO REV.A/B. There are only few mobile operators that selected WiMAX as the key technology, so we only consider evolution towards LTE in the table.
Source: Korea Investment & Securities
LTE in the US
AT&T Verizon T-Mobile Clearwire/Sprint MetroPCS
Technology LTE LTE HSPA+ WiMAX LTE
Speed 7-10 Mbps 5-12 Mbps 4-7 Mbps 3-6 Mbps 2-8 Mbps
Avg. MHz spectrum in top 100 markets 100 88 54 160(CLWR), 54(Sprint) 20
Spectrum band for 4G 700 MHz, AWS 700 MHz AWS 2.5GHz PCS, AWS
Commercial launch 2,011 4Q10 4Q10 3Q09 3Q10
Source: Company data, Korea Investment & Securities
Average MHz of spectrum (US mobile operators)
AT&T Verizon Sprint T-Mobile Clearwire Other
700 MHz, 698-758; 776-787 MHz 29 30 0 0 0 11
Cellular/SMR, 809-849; 854-894; 896-901; 935-940MHz 25 25 18 0 0 6
AWS, 1710-1755; 2110-2155 MHz 12 13 0 27 0 38
PCS, 1850-1910; 1930-1990 MHz 35 20 36 27 0 2
EBS/BRS, 2500-2690 MHz 0 0 0 0 160 34
Total 100 88 51 54 160 91
Source: Company data, Korea Investment & Securities
LGU+ eager for LTE, KT
lukewarm
Telecom Services
10
3) Alternative data network: Microcells (WiFi, data femtocells)
Since the step-up from 3G to LTE will only increase network capacity by two- to
three-fold and indoor mobile traffic accounts for 60-70% of total mobile traffic,
operators are building microcells such as WiFi and femtocells as alternative data
paths for increasing data traffic. According to the carriers’ plans, the combined
number of WiFi spots will mushroom from 62,600 in 2010 to 212,000 in 2011. KT
has been leading in WiFi coverage. LGU+ launched its ‘U+zone’ service by
connecting household WiFi APs and public WiFi hotspots. Along with the
investment in LTE, telcos will build more femtocells. SKT plans to set up 10,000
data femtocells in 2011. Femtocells allow data traffic to make a detour around 3G
base stations to the fixed-line network. While femtocells cost more to build
compared to WiFi zones, femtocells have an edge in handover performance.
4) Existing network upgrade: HSPA+, cell splitting, cloud services
SKT and KT are upgrading their 3G network to HSPA+. SKT is moving toward
HSPA+ and LTE at the same time. It is also carrying out cell splitting for congested
areas. KT is putting a heavier emphasis on WiFi and WiBro (backhaul) over
HSPA+ upgrade and has been less enthusiastic toward LTE than its peers. KT will
also utilize a ‘Cloud Communication Center’ to further distribute data traffic. LGU+
upgraded to EV-DO Revision B (average downlink data rate of 9.3Mbps) in April
2011.
Subscriber breakdown by communication type ('000 subs, %)
SKT KT LGU+
3G 16,525 15,289 0
2G 9,463 1,010 9,077
Smartphones 5,300 4,840 1,150
Feature phones 20,689 11,459 7,927
Total mobile subscribers 25,989 16,299 9,077
Mobile portion 50.6 31.7 17.7
Smartphone portion 20.4 29.7 12.7
Note: As of March 2011. Source: Company data, Korea Investment & Securities
To disperse traffic over
WiFi and data
femtocells
SKT and LGU+ upgrade
network using HSPA+
and EV-DO Rev.B,
respectively
Telecom Services
11
IV. Is data explosion a threat?
Increasing mobile data traffic presents an opportunity of a rejuvenated growth
driver for mobile carriers, but it also poses a threat of added capex burden.
1. Opportunity: ARPC hike, usage-based pricing and network neutrality exception
Explosive data growth present telcos with opportunities - 1) growth in smartphone
subscribers and ARPU, 2) possible introduction of usage-based pricing, 3) network
neutrality exception, and 4) convergence services in partnership with other
industries.
First, increasing smartphone subscribers will stimulate revenue growth by pushing
up ARPU. Despite the discounted tariff plans (smartphones sold at reduced
subsidy but tariff discounts) and multiple devices-per-person trend, smartphones
are more lucrative for carriers than feature phones. ARPU growth (revenue per
handset) could be minor if more consumers opt for multiple devices, but ARPC
(revenue per customer) will still increase markedly.
Smartphones will also boost ARPU, as an increased portion of smartphone users
selected a flat-rate monthly plan of more than W55,000 since the introduction of
unlimited data service in August 2010. In the US, where smartphones were made
available earlier than in Korea, overall mobile ARPU has been steadily rising with
the increase in carriers’ exposure to smartphone users.
Second, even with network upgrades to LTE and 4G, snowballing data traffic will
make it difficult for telcos to maintain unlimited data service as it is now. We believe
the unlimited data service will be discontinued or overhauled, and the idea of
introducing usage-based pricing will gain traction. Usage-based pricing will allow
carriers to directly channel data explosion into revenue growth.
Third, ‘network neutrality’ will likely be revisited. The wireless network in particular
will probably become an exception to network neutrality. Paying for network usage
in proportion to actual traffic will boost carriers’ sales and help shorten their capex
payback period. Unlike fixed-line communication, a number of users share limited
frequency bandwidth for wireless communication, which we believe makes the
mobile network a reasonable exception to network neutrality that advocates
unlimited access. If network neutrality is sustained, a small number of bandwidth
hogs can inconvenience other users.
Fourth, smartphones are penetrating into the mass market and new business
opportunities will arise as a result. For example, mobile payment services using
‘near field communication’ will become more widely available. We also expect to
see an increase in convergence services in a tie-up with other businesses such as
education and medical services.
Smartphone subscriber
growth to lead to higher
ARPC
Usage-based pricing,
exception to network
neutrality, and
convergence services
Telecom Services
12
US mobile carrier postpaid ARPU
0.5%
0.2%
0.7%
0.1%
1.0%
1.4%1.3%
2.1%
2.4%
40
42
44
46
48
50
52
54
56
58
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%Postpaid ARPU (LHS)
Postpaid ARPU YoY change (RHS)
(USD)
Note: Average of postpaid subscribers. Source: Company data, Korea Investment & Securities
2. Threats: Added capex burden, frequency acquisition costs, and wVoIP
The surge in data traffic entails the risks of: 1) capex increase; 2) cost burden to
secure more frequencies; 3) tariff-cut pressure; and 4) proliferation of wVoIP and
SNS.
1) Added capex burden
Exploding data demand is heightening concerns over the heavier burden of capex
laid on mobile carriers. The combined capex of Korea’s four telcos is expected to
expand 18.6% to W7.595trn in 2011 from W6.405trn in 2010. However, we believe
the extent of the capex increase will be manageable by telcos. Pre-investments
are concentrated in 2011, indicating capex will slightly decline in 2012 compared to
2011. The ratio of capex to sales in 2011 and 2012 will remain within the range of
15-17%. This is because capex will not be limited to establishing the next-
generation LTE network, but will be dispersed to areas such as the upgrade of
previous 2G and 3G networks (HSPA+, CDMA Rev.B) and investments in
alternative networks such as WiFi and femtocells to offload data traffic.
LGU+, the most eager to invest in LTE, is expected to spend W1.2trn in building a
nationwide network from 2011 to June 2012. LTE equipment prices have declined
to a mere two thirds of previous 3G equipment prices. Telcos are also working on
improving existing networks, as investments in LTE to boost the capacity of
existing networks by only two to threefold. Infrastructure investment for HSPA+ and
CDMA Rev.B involve minimal capex. SKT is enthusiastically investing in HSPA+,
as capex on HSPA+ stands at a mere one third of that on LTE. LGU+ also
completed building a CDMA Rev.B network (replaced software) in April by
investing W5bn. As for WiFi and femtocells, these alternative networks require
minimal capex.
Capex to increase, but
at a manageable pace
Building LTE networks,
upgrading existing
networks, and investing
in alternative networks
require less capex than
did previous 3G
networks
Telecom Services
13
Capex outlook for four telcos
16.1
14.8
17.0
15.9
5,500
6,000
6,500
7,000
7,500
8,000
2009 2010 2011F 2012F
13
14
15
16
17
18Combined capex of f our telcos (LHS)
Combined capex-to-sales of f our telcos (RHS)
(W bn) (%)
Source: Company data, Korea Investment & Securities
Capex-to-sales ratio (W bn, %)
2,009 2,010 2011F 2012F
Capex
SK Telecom 1,769 1,865 2,300 2,250
KT 2,959 3,057 3,250 3,200
LG Uplus 1,248 1,148 1,700 1,500
SK Broadband 540 334 345 345
Total 6,516 6,405 7,595 7,295
Capex-to-sales
SK Telecom 14.6 15.0 17.4 16.2
KT 15.6 15.1 15.8 15.5
LG Uplus 16.5 13.5 19.8 16.8
SK Broadband 28.5 15.8 15.1 14.2
Total 16.1 14.8 17.0 15.9
Source: Company data, Korea Investment & Securities
2) Cost burden to secure additional frequencies
Along with capacity expansion through infrastructure investments, acquisition of
additional frequency bands is a prerequisite for accommodating the surging data
traffic. Adding the cost for obtaining frequency bands, the overall cost to deal with
the explosion in data traffic could be a burden on wireless carriers.
The bidding costs could increase if the Korean government simultaneously puts up
for auction each 20MHz of the 2.1GHz and 1.8GHz band and then 108MHz of the
700MHz band additionally. The costs fluctuates depending on the frequency
bandwidth, whether it is a high or low frequency (value of frequency below 1GHz is
higher due to greater efficiency), usage period, and competitive landscape.
The 20MHz spectrum in the 2.1GHz band will be offered until 2016. As for other
bandwidths, the government has yet to determine whether to reassign the bands
and under what conditions. In 2010, SKT was allocated 20MHz of the 2.1GHz
band at a price of W230bn (W106.4bn in 2010 + 1.6% of revenue for the next 6.5
years) until 2016.
The need to secure
more frequencies raises
concerns over bidding
costs
Telecom Services
14
The preference of bandwidth is in the order of 2.1GHz, 700MHz, and 1.8GHz
taking into consideration the purpose of usage and available period. Applying the
revenue calculation criteria used when reallocating frequency in 2010 and
assuming a usage period of five, eight, and nine years for 20MHz of the 2.1GHz
frequency band, 108MHz of the 700MHz frequency band, and 20MHz of the
1.8GHz frequency band, respectively, the acquisition price comes down to
W175.4bn, W2.3272trn, and W315.7bn, respectively. The combined amount is
estimated at W2.8183trn. In addition to financing costs, three telcos will annually
incur amortization expenses on intangible assets (frequency allocation cost/usage
period) totaling W361.1bn. On average, amortization expenses of W128.1bn will
be added to each wireless carrier annually. Compared to the expenses from
infrastructure investments, this amount appears nominal.
Spectrum allocation fees per service (W bn)
SKT KT LGT
License fee (W bn)
CDMA 80 in 1994 110 110
200 from 1994 to 2002 +0.5% of sales +0.5% of sales
+0.75% of sales
WCDMA (2001) 650 in 2002 650 in 2002 220
650 from 2007 to 2011 650 from 2007 to 2011 Returned in 2006
WCDMA or LTE 106.4 in 2010 251.4 in 2011 251.4 in 2011
(Allocated in 2010 ) +1.6% of sales from 2010 to 2016 +1.6% of sales from 2011 to 2021 +1.6% of sales from 2011 to 2021
WiBro 117 117 -
License period (start date-end date)
CDMA (allocated in 1994, 1996) 34,639 96~11 96~11
WCDMA (allocated in 2001) 01~16 01~16 01~06
WCDMA or LTE (allocated in 2010) 10~16 11~21 11~21
WiBro 05~12 05~12 -
Source: Korea Investment & Securities
Spectrum acquisition cost estimates (W bn)
Band Bandwidth Service period Service life 20MHz spectrum acq. cost Spectrum Annual depreciation cost
(MHz) for using 1 year (A) acq. cost (acq. cost/service life)
700MHz 108 8 2013~2021 53.9 2,327.2 290.9
1800MHz 20 9 2012~2021 35.1 315.7 35.1
2100MHz 20 5 2012~2016 35.1 175.4 35.1
Total 148 2,818.3 361.1
Note: 1. We assume the service life of 700MHz and 1800MHz is until 2021, which is the closing period of LTE. 2. 700MHz is high priced due to the efficiency of low spectrum.
3. Spectrum acquisition cost = A *bandwidth* service life.
Source: Korea Investment & Securities
Spectrum acquisition cost and depreciation cost of three domestic mobile
operators (W bn)
SKT KT LGU+ Total
Spectrum acq. cost
2009 2,340 1,342 0 3,682
2010 2,340 1,342 0 3,682
Depreciation cost
2009 129 115 0 245
2010 129 115 0 245
Note: CDMA pays for spectrum license fees. Source: Company data, Korea Investment & Securities
Total costs to acquire
148MHz bandwidth
estimated at W2.3272trn,
smaller in scale
compared to
infrastructure
investments
Telecom Services
15
3) Rate-cut pressure
The Korean government recently shifted the direction of its telecom services policy
from promoting the industry to benefiting consumers. The government plans to
induce telcos to lower rates by slashing marketing expenses. Soaring data
demand from the usage of smartphones is burdening consumers with hefty mobile
phone bills, leaving the government no choice but to press telcos to cut rates.
If mobile rates are lowered while capex is increased to handle rising wireless data
demand, telcos will see marginal revenue growth and stagnant profit growth. After
the government’s scheduled announcement of a rate-cut plan in May 2011,
another round of rate cuts could follow as the general and presidential elections
are slated for June and December 2012, respectively.
4) Replacement of voice calls and text messages by wVoIP and SNS
The emergence of the social network service (SNS)―i.e., me2day, KakaoTalk,
Twitter, and Facebook―and the proliferation of wVoIP,―i.e., Google Voice, Viber,
and Skype― threaten to supplant mobile carriers’ voice call and text message
services.
The evolution of technologies is raising concerns that the ‘dumb pipe’ (simply
transmitting voice and data) fate could befall mobile operators, impairing their
ability to create value from their telecom networks, as it did in the case of fixed-line
operators. In Korea, only mobile phone users that pay more than W55,000 per
month are allowed access to wVoIP services.
If the wireless network is excluded from the network neutrality policy―a policy that
is opposed by telcos as it opens networks to all users and guarantees the same
speed and quality to all Internet websites― telecom service providers will be able
to charge users for using their networks by the amount of usage, which will
compensate for the eroded revenue to some extent.
Rate-cut pressure
lingers
Concerns over the
possible erosion of
telcos’ revenue by SNS
and wVoIP services
Charging users of
mobile networks by the
amount of usage would
be positive for revenue
Telecom Services
16
V. Profitability to remain at a healthy level
The surge in mobile data traffic due to the growing number of smartphone
subscribers is boosting revenue as well as costs. The key here is how the
increasing traffic will impact the profitability of telcos. Optimists argue the revenue
growth of smartphones will outpace cost growth. On the other hand, pessimists
predict revenue growth will be slower than data traffic growth while capex on
networks and management costs will swell in line with soaring data demand.
We believe telcos will be able to maintain profitability at a moderate level based on
the following: 1) exploding data traffic will sharply boost revenue; 2) alternative
networks will reduce per-bit transmission costs; 3) value-added services (i.e.,
content) will be reinforced; and 4) tariff plans are likely to be restructured in the
direction of abolishing unlimited data plans and introducing usage-based pricing
plans.
Market concerns about data traffic growth
0
5
10
15
20
25
Y Y+1 Y+2 Y+3 Y+4 Y+5 Y+6
Capex growth Sales growth
OP growth
(%)
Source: Korea Investment & Securities
KIS data traffic growth estimates
2
4
6
8
10
12
Y Y+1 Y+2 Y+3 Y+4 Y+5 Y+6
Capex growth Sales growth
OP growth
(%)
Source: Korea Investment & Securities
Optimists and
pessimists clash over
the impact of heavier
traffic on profitability
Profitability to remain at
a healthy level
Telecom Services
17
1) Establishment of next-generation networks such as LTE and usage of WiBro
and ethernet backhaul will curtail the per-bit cost of data transmission. LTE
equipment prices are on the decline, and alternative data paths such as WiFi and
femtocell will be effective in dispersing data traffic.
2) Instead of turning into ‘dumb pipes’, mobile telecom operators will maintain their
role as ‘smart pipes’ by creating added value via competitive content, as they hold
sway over services offered in handsets and control mobile tariffs. The case will be
different from that of fixed-line operators whose networks became ‘dumb pipes’ as
they failed to link their telecommunication services to the terminals.
3) In the incipient phase of the smartphone business, the current flat-rate pricing
system is more beneficial to telcos because the growth rate of data usage is high
but the absolute volume of data usage is low. Mobile carriers will be able to offset
the adverse effects of free riders such as SNS by providing handset subsidies
related to rate plans and offering a certain amount of free voice calls and text
messages through flat-rate plans. Under the current flat-rate pricing system, only
subscribers who exceed their allotted minutes of voice calls are allowed to use
SNS and VoIP services such as Skype and Facebook. Moreover, VoIP is still
inferior to mobile phone calls in terms of call quality and user interface.
4) In the long term, a shift to a usage-based pricing system, under which
subscribers have to pay for the amount of data used, will give a boost to revenue
growth, considering that mobile data usage volume is expected to surge. The
usage-based pricing plan will heighten the correlation between voice call usage
volume and revenue. We expect mobile carriers to adopt the usage-based pricing
system starting with LTE services.
5) Telcos will discontinue or revamp their unlimited data plans. While AT&T of the
US and TeliaSonera of Sweden scrapped their unlimited data plans in June and
July 2010, respectively, Korean counterparts introduced the plan in August 2010 as
a strategy to win the race. The abolishment of such a plan will hinder the small
number of heavy data users from generating excessive traffic and lift the cap on
mobile tariffs, ultimately increasing data revenue.
6) If the Korean government excludes mobile telecom networks from the network
neutrality debate, users will have to pay for the data that they use. This will
diminish the negative effects from free riders offering wVoIP and free texting
services.
7) The Korean government will not be able to force telcos to radically cut rates, as
it needs to encourage the telcos to build telecom networks, invest in R&D, and
offer new services.
8) The smartphone business will contribute to improving profitability as surging
data usage will boost ARPU and decrease the churn rate. This has already been
proven in the US where smartphones were introduced earlier than in Korea.
Data transmission costs
to decline; telcos to
remain ‘smart pipes’
creating added value
Current flat-rate pricing
system is more
beneficial in the initial
phase of the
smartphone business
In the long term, a shift
to usage-based pricing
system will spur
revenue growth
Scrapping of unlimited
data plans to boost
revenue
Korean government will
come up with a policy
that guarantees the
profits of telcos to some
extent
Higher ARPU and lower
churn rate
Telecom Services
18
US mobile carriers’ subscriber churn rate
1.45%
1.30%
1.50% 1.49% 1.49%
1.36%
1.47%
1.44%
1.38%
1.27%
1.40%1.38%
1.36%
1.1%
1.2%
1.3%
1.4%
1.5%
1.6%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
Weighted av erage postpaid churn
Note: Average of postpaid subscribers. Source: Company data, Korea Investment & Securities
US mobile carriers’ EBITDA margins
38.4%
35.6%
37.2%
37.8% 37.7%
37.0%
36.4%
38.2%38.5%
36.0% 36.0%
35.0%
39.0%
33%
34%
35%
36%
37%
38%
39%
40%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
Weighted av erage EBITDA margins
Note: 1. Average of mobile operators. 2. 1Q11 EBITDA decreased due to greater loss from T-Mobile and subscriber growth. Source: Company data, Korea Investment & Securities
Telecom Services
19
VI. The strong get stronger as competition
surrounds network capacity
Explosive mobile data traffic is reshaping the competitive landscape of the telecom
services industry around network and voice call quality as well as service
(competitive content) quality, as opposed to the previous marketing focus of
handset subsidy. Determinants of the competitiveness of network and service
quality are: 1) subscriber base; 2) allocated frequency bands (including networks
by frequency band); 3) backup by fixed-line network; 4) financial capacity; and 5)
content. Economies of scale and the synergy effect generated by these five
elements are also important factors. As Korean wireless carriers show a large
disparity in each of the five elements, the gap between the frontrunner and
latecomer will further widen down the road.
SKT appears to have the upper hand over peers in the era of soaring mobile data
traffic, given: 1) its broad subscriber base; 2) greater number of frequency bands;
3) strong financial capacity; and 4) abundant content (i.e., T-map and Melon).
Provided, SK group needs to beef up its fixed-line networks which are relatively
weak compared to KT and LGU+.
KT is armed with a strong fixed-line network base and ample cash flow. Its
subscriber base is smaller than that of SKT, but larger than that of LGU+. How the
frequency bands are reallocated is especially important for KT. The company’s
content is weaker than its counterparts’ offerings.
LGU+ stands on par with KT in the fixed-line network area, but is inferior to rivals in
the wireless network field as the mobile carrier does not have a 3G network. The
carrier also lags behind peers in terms of subscriber base, financial capacity and
content. It plans to compensate for its weakness by moving faster than
counterparts to establish a nationwide LTE network in July 2012.
Competitiveness by carrier
SKT KT LGU+ Note
No. of subscribers 5 3 2 Larger subscriber base means lower capex per subscriber -> economies of scale
Frequency bands 5 4 2 More frequency bands place telcos in an advantageous position in offering data service
Fixed-line networks 3 5 4 Fixed-line networks, a backup for wireless networks, play an important role in supplying data
Financial capacity 5 5 2 Strong financial capacity place telcos in an advantageous position in making new investments and developing services
Content 5 4 2 Self-developed content contribute to revenue growth and marketing activities
Total 23 21 12
Note: Imposed 1-5 points by each factor. Source: Korea Investment & Securities
Subscriber base,
frequency bands, fixed-
line networks, and
content are key
determinants of
competitiveness in the
era of data explosion
SKT in a favorable
position
KT is on par with SKT in
terms of infrastructure
LGU+ to gain
competitiveness via
LTE rollout
Telecom Services
20
Subscribers, frequency and network by carrier
SKT KT LGU+
Mobile 25,989 16,299 9,077 1. Subscribers ('000)
Smartphone 5,300 4,840 1,150
2G 20 20 20
3G 60 40 0
LTE 10 20 20
WiBro 27 27 0
2.Spectrum allocation (MHz)
Total 117 107 40
3. Network plans -Data highway -Mobile wonderland AP centric network
-July 2011: Initiate service in Seoul -1Q12F: Initiate service -July 2011: Seoul, capital region 1) New generation network
LTE -2013: Expand to 82 cities -2013: Expand to 82 cities
-July 2012: Establish nationwide network
-17,000 in 2010 -42,000 in 2010 -7,000 in 2010
-62,000 in 2011 -100,000 in 2011 -50,000 in 2011
-Covering the capital region subway lines by utilizing WiBro
WiFi zone (home-AP interconnection)
-320,000 in 2010
WiFi
-1,050,000 in 2011
Femtocell 10,000 in 2011
-Covering 82 cities -Covering 82 cities
-Subways -Major highways
2) Alternative network
WiBro
-Subways
CDMA -Providing service until June 2011 -Evolved to Rev.B in April 2011
3G -Evolved to HSPA+ -Evolved to HSPA+ 3) Current network upgrade
Others -Divide base-stations to six sectors -Disperse traffic by utilizing cloud center
Application Melon, Cyworld, Nateon, Tmap KT music, Olleh navi 4. Content
Media TU media, IPTV Sky life, IPTV TU media, IPTV
Source: Korea Investment & Securities
SK Telecom (017670).......................................................................................................................................................................22
KT (030200) ..................................................................................................................................................................................................25
LG Uplus (032640) ..............................................................................................................................................................................28
Company
Telecom Services
22
SK Telecom (017670) BUY (Maintain), TP: W222,000 (Maintain)
Armed with high growth potential and solid profitability
Maintain BUY with a target price of W222,000: We reiterate BUY and our target
price of W222,000. We derived our price by applying a target PER of 7.5x to the
12-month-forward EPS (K-IFRS consolidated basis). The target PER is 20%
discounted to the past two-year average PER of 9.4x. We maintain BUY on the
following. 1) The valuation is attractive. The stock currently trades at a 12-month-
forward PER of 5.6x (K-IFRS consolidated basis), which is a low level. Even based
on the past K-GAAP standard, the PER stands at a mere 7.0x. 2) The proliferation
of smartphones and expansion of corporate (B2B) business have stepped up the
mobile operator's growth potential. We expect top-line growth to reach 6% for the
first time in four years, while the bottom line should also pick up. 3) The improving
bottom line should lead to greater shareholders’ return. We expect the total
dividend yield (dividend + stock buyback) to exceed 7% in 2011.
Top-line growth to reach 6% for the first time in four years: In 2011, SKT
should enjoy recovery in both the top and bottom lines for the first time in four
years. The growing popularity of smartphones and expansion of corporate (B2B)
business should recuperate the carrier’s growth potential. Top-line growth should
reach 6% in 2011, doubling the CAGR of 3.3% during 2008-2010. The number of
smartphone subscribers should expand from 3.91mn in 2010 to 10mn in 2011.
Moreover, B2B sales should surge from W900bn in 2010 to W1.2trn in 2011 as the
business explores new areas such as mobile offices, mobile payments, distribution
(i.e., online shopping mall ‘11st’), education, and ubiquitous healthcare services.
Bottom line to improve from 2011: Profitability deteriorated in 2010 as the carrier
introduced a rate system that charges for calls on a second-by-second basis, but
should pick up in 2011 buttressed by the earnings contribution by smartphones
and lower marketing expenses. The EBITDA margin should rise from 28.6% in
2010 to 30.3% in 2011 and to 31.0% in 2012. SKT’s bottom line will improve on the
growing number of smartphone subscribers, while its subsidiaries such as SK
Broadband should see faster recovery in profitability. In 1Q11, SKT reported net
profit growth of 35.7% YoY on a standalone basis and 56.5% YoY on a
consolidated basis. Meanwhile, the carrier is enjoying explosive growth in its
platform business including T Store (application market) and 11st (online shopping
mall). The platform business is inherently favorable to a dominant mobile carrier.
Larger capex and rate-cut pressure: Risk factors include increased capex and
rate-cut pressure. SKT revised up its capex guidance for 2011 from W2trn to
W2.3trn to reflect surging mobile data demand. While investment in next-
generation networks is inevitable down the road, the Korean government is
pressuring telcos to cut rates. If rates are lowered dramatically, profitability will be
hurt despite rising data demand.
May 18, 2011 / W165,000 / Mkt cap: USD12,256.7mn, KRW13,323.0bn
Yr to Sales OP EBT NP EPS % chg. EBITDA P/E EV/EBITDA PBR ROE
Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%)
2009A 14,555 1,879 1,400 1,056 17,239 3.2 4,611 9.8 3.9 1.0 11.4
2010A 15,435 1,942 1,674 1,297 19,177 11.2 4,811 9.0 3.6 1.0 12.3
2011F 16,384 2,468 2,578 1,940 29,014 NM 4,958 5.7 3.2 0.9 17.2
2012F 17,317 2,721 2,723 2,042 30,549 5.3 5,373 5.4 2.8 0.8 16.1
2013F 18,311 3,027 3,067 2,300 34,412 12.6 5,764 4.8 2.5 0.7 16.2
Note: K-GAAP consolidated from 2009 to 2010. K-IFRS consolidated after 2011F.
Jong In Yang 82-2-3276-6153/6154
Telecom Services
23
Changes in the number and portion of smartphone subscribers
0
2000
4000
6000
8000
10000
12000
4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11F 3Q11F 4Q11F
0
5
10
15
20
25
30
35
40
45Smartphone subscribers (LHS)
Portion of smartphone subscribers (RHS)
('000 subs) (%)
Source: SKT, Korea Investment & Securities
Earnings trend (K-IFRS consolidated) (W bn, ‘000 subs, %)
2010 2011 Growth
1Q 2Q 3Q 4Q 1QP 2QF 3QF 4QF QoQ YoY
Subscriber
Activations 2,422 2,321 2,638 2,271 2,237 2,410 2,420 2,390 (1.5) (7.6)
Net adds 555 322 299 260 283 140 130 120 9.1 (48.9)
End of period 24,825 25,146 25,445 25,705 25,989 26,129 26,259 26,379 1.1 4.7
Average 24,547 24,985 25,296 25,575 25,847 26,059 26,194 26,319 1.1 5.3
Sales 3,764.4 3,823.6 3,988.0 4,023.3 3,908.9 4,049.0 4,116.2 4,310.1 (2.8) 3.8
Operating expenses 3,288.2 3,176.7 3,346.0 3,511.0 3,294.5 3,304.7 3,461.1 3,856.3 (6.2) 0.2
Labor cost 298.1 196.1 289.2 286.6 313.6 203.9 300.7 298.1 9.4 5.2
Marketing expenses 992.1 1,050.3 995.0 996.0 942.9 1,040.7 1,026.9 1,039.1 (5.3) (5.0)
Depreciation 582.0 524.5 538.6 534.6 586.1 610.0 625.0 668.9 9.6 0.7
Interconnection fees 335.2 340.0 375.7 265.3 318.7 328.4 330.1 331.6 20.1 (4.9)
Operating profit 476.2 646.9 642.0 512.2 614.3 744.3 655.1 453.9 19.9 29.0
EBT 451.6 607.8 628.6 621.5 768.9 727.3 651.1 430.9 23.7 70.3
Net profit 343.3 448.9 470.7 503.9 537.3 563.7 504.6 334.0 6.6 56.5
EBITDA 1,058.2 1,171.4 1,180.5 1,046.8 1,200.4 1,354.3 1,280.1 1,122.7 14.7 13.4
EBITDA margin 28.1 30.6 29.6 26.0 30.7 33.4 31.1 26.0
OP margin 12.6 16.9 16.1 12.7 15.7 18.4 15.9 10.5
Marketing expense-to-sales 26.4 27.5 24.9 24.8 24.1 25.7 24.9 24.1
Note: K-IFRS consolidated basis Source: SKT, Korea Investment & Securities
Earnings trend (K-IFRS non-consolidated) (W bn)
2010 2011 Growth
1Q 2Q 3Q 4Q 1Q11F QoQ YoY
Sales 3,049.9 3,078.4 3,211.0 3,211.2 3,132.1 (2.5) 2.7
Operating profit 515.3 645.3 643.7 550.7 598.0 8.6 16.0
Pretax profit 527.0 619.3 671.8 685.5 789.0 15.1 49.7
Net profit 413.1 461.9 513.9 558.1 560.7 0.5 35.7
EBITDA 954.3 1,029.4 1,038.1 981.7 1,046.2 6.6 9.6
Note: K-IFRS non-consolidated basis Source: SKT, Korea Investment & Securities
Telecom Services
24
Key financial data
FY-ending Dec. 2009A 2010A 2011F 2012F 2013F
per share data (KRW)
EPS 17,239 19,177 29,014 30,549 34,412
BPS 162,818 167,539 184,809 203,430 225,452
DPS 9,400 9,400 9,400 9,400 9,400
Growth (%)
Sales growth 3.8 6.0 NM 5.7 5.7
OP growth 7.2 3.4 NM 10.3 11.3
NP growth 2.6 10.6 NM 5.3 12.6
EPS growth 3.2 11.2 NM 5.3 12.6
EBITDA growth 2.2 4.3 NM 8.4 7.3
Profitability (%)
OP margin 12.9 12.6 15.1 15.7 16.5
NP margin 8.6 8.9 12.6 12.5 13.4
EBITDA margin 31.7 31.2 30.3 31.0 31.5
ROA 4.6 5.7 8.4 8.5 9.2
ROE 11.4 12.3 17.2 16.1 16.2
Dividend yield 5.5 5.4 5.7 5.7 5.7
Stability
Net debt (W bn) 4,989 4,175 3,586 3,014 2,435
Debt/equity ratio (%) 54.7 48.3 40.3 33.6 27.6
Valuation (X)
PER 9.8 9.0 5.7 5.4 4.8
PBR 1.0 1.0 0.9 0.8 0.7
PSR 0.9 0.9 0.8 0.8 0.7
EV/EBITDA 3.9 3.6 3.2 2.8 2.5
Cash flow
FY-ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
C/F from operating 2,933 4,021 4,345 4,244 4,411
Net profit 1,056 1,297 1,940 2,042 2,300
Depreciation 2,733 2,869 2,490 2,653 2,737
Net incr. in W/C (1,232) (299) (107) (475) (654)
Others 376 154 22 24 28
C/F from investing (1,828) (2,359) (3,154) (3,069) (3,232)
CAPEX (2,162) (2,145) (2,700) (2,620) (2,750)
Decr. in fixed assets 68 95 50 50 50
Incr. in investment 1,364 (149) (210) (209) (224)
Net incr. in intangible assets (116) (120) (230) (226) (241)
Others (982) (40) (64) (64) (67)
C/F from financing (1,205) (1,818) (1,144) (1,128) (1,128)
Incr. in equity 77 0 0 0 0
Incr. in debts (555) (958) (475) (460) (460)
Dividends (682) (680) (668) (668) (668)
Others (45) (180) (1) 0 0
C/F from others 42 (19) 0 0 0
Increase in cash (58) (175) 48 47 50
Note: K-GAAP consolidated from 2009 to 2010. K-IFRS consolidated after 2011F.
Income statement
FY-ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Sales 14,555 15,435 16,384 17,317 18,311
Operating profit 1,879 1,942 2,468 2,721 3,027
Financial income 513 244 638 511 529
Interest income 187 236 210 222 235
Financial expense 761 416 528 509 490
Interest expense 440 397 301 266 243
Other non-operating profit (213) (66) (71) (75) (79)
Earnings before tax 1,400 1,674 2,578 2,723 3,067
Income taxes 356 404 623 658 741
Net profit 1,056 1,297 1,940 2,042 2,300
Net profit of controlling interest 1,247 1,380 2,063 2,172 2,447
EBITDA 4,611 4,811 4,958 5,373 5,764
Balance sheet
FY-ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Current assets 6,371 6,973 7,402 7,823 8,272
Cash & cash equivalent 954 779 826 873 924
Accounts & other receivables 4,084 4,519 4,797 5,070 5,361
Inventory 120 150 159 168 178
Non-current assets 16,836 15,679 16,319 16,709 17,176
Investment assets 3,374 3,108 3,299 3,487 3,687
Tangible assets 8,166 7,865 8,025 7,943 7,906
Intangible assets 3,992 3,741 3,971 4,197 4,438
Total assets 23,206 22,652 23,721 24,533 25,448
Current liabilities 4,895 5,915 6,020 5,765 5,354
Accounts & other payables 2,872 3,381 3,589 3,794 4,011
ST debt & bond 677 530 480 430 380
Current portion of LT debt 806 1,601 1,521 1,441 1,361
Non-current liabilities 5,967 4,258 3,951 3,644 3,339
Debentures 4,280 3,566 3,266 2,966 2,666
LT debt & financial liabilities 957 311 281 251 221
Total liabilities 10,862 10,173 9,971 9,409 8,692
Controlling interest 11,155 11,326 12,720 14,224 16,002
Capital stock 45 45 45 45 45
Capital surplus 3,032 3,032 3,032 3,032 3,032
Capital adjustments (2,747) (2,994) (2,994) (2,994) (2,994)
Retained earnings 9,910 10,603 11,998 13,501 15,280
Minority interest 1,190 1,153 1,030 900 754
Shareholders' equity 12,345 12,479 13,750 15,124 16,756
Telecom Services
25
KT (030200) BUY (Maintain), TP: W54,000 (Maintain)
Strong competitiveness in fixed-line/mobile integrated networks
Maintain BUY with a target price of W54,000: We reiterate BUY and our target price of W54,000. We derived our price by applying a target PER of 9.6x to the 12-month-forward EPS (K-IFRS consolidated basis). The target PER is 13% discounted to the past five-year average PER. We maintain BUY on the following grounds: 1) The valuation is attractive. The stock currently trades at a 12-month-forward PER of 6.0x, EV/EBITDA of 3.3x, and PBR of 0.7x. 2) The growing number of smartphone subscribers is expected to spur top- and bottom-line growth. ARPU should turn to positive growth in 2Q11. Bottom line to stagnate in 1Q11 before recovering in 2Q11: In 1Q11, K-IFRS-based operating revenue (consolidated basis) gained 6.1% YoY as merchandise sales ballooned 45.8% YoY thanks to greater sales of high-end smartphones. Net profit jumped 84.7% YoY due to a decrease in depreciation costs and reflection of gains from the sale of stocks. However, barring the effect from the changes in accounting methods, profitability stagnated in 1Q11 due to reduced revenue from fixed-line services and the introduction of a per-second voice call billing system. K-IFRS-based adjusted EBITDA (standalone basis; and excluding earnings from real estate) dropped 4.4% YoY. We expect profitability to improve from 2Q11 thanks to: 1) higher ARPU from the increase in smartphone subscribers; and 2) lower marketing costs. The smartphone and IPTV businesses should drive the carrier’s top- and bottom-line growth. The number of smartphone subscribers totaled 3.84mn (2.42mn iPhone subscribers) in March 2011, a whopping 40.1% growth from December 2010. We expect the number to further expand to 6.5mn at end-2011 and 10.2mn at end-2012. We also expect the IPTV business to turn to the black in early 2012, as the release of bundled services with its subsidiary, KT Skylife, is spurring new subscriptions. The number of IPTV subscribers surged from 1.17mn in 2009 to 2.09mn in 2010 and should further rise to 3mn by 2011. Earnings contribution of real estate business to gain traction: The real estate business should begin to contribute to KT’s top- and bottom-line growth. Property development, including pre-sale, rental, and sale activities, generates high profitability due to low labor costs and cheap land purchase costs. As for the company’s land holdings, the total book value reaches W1.4trn (buildings total W3.2trn), officially assessed land price amounts to W5.4trn, and the market price is valued at W7trn. Of its land holdings, about 30% is deemed developable. The evolution of technologies should help the company reduce the number of telephone central office buildings from the current 400 to 50 by 2018; thus, KT is aggressive in property development. Fixed-line networks crucial for maintaining fixed-line/mobile integrated networks, but efficiency is waning: Along with WiFi and WiBro, fixed-line networks serve as the foundation for maintaining fixed-line/mobile integrated networks. However, their efficiency is waning, as the declining number of fixed-line telephone subscribers are dragging down telephony revenue. The pressure to lower rates is also a risk factor.
May 18, 2011 / W38,200 / Mkt cap: USD9,175.7mn, KRW9,974.0bn
Yr to Sales OP EBT NP EPS % chg. EBITDA P/E EV/EBITDA PBR ROE
Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%)
2009A 19,649 966 715 610 2,286 3.1 4,328 17.1 3.9 0.9 5.2
2010A 21,331 2,175 1,562 1,193 4,803 110.1 5,461 9.6 3.7 1.0 10.9
2011F 21,293 2,478 2,092 1,638 6,598 NM 5,406 5.8 3.3 0.8 13.9
2012F 21,224 2,381 2,058 1,543 6,215 (5.8) 5,374 6.1 3.3 0.7 12.1
2013F 21,553 2,498 2,192 1,644 6,620 6.5 5,539 5.7 3.2 0.7 11.9
Note: K-GAAP consolidated from 2009 to 2010. K-IFRS consolidated after 2011F.
Jong In Yang 82-2-3276-6153/6154
Telecom Services
26
Changes in portion and number of smartphone subscribers
240
6801,090
1,650
2,737
3,840
4,727
5,613
6,500
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11F 3Q11F 4Q11F
0
5
10
15
20
25
30
35
40
45Smartphone subscribers (LHS)
Portion of smartphone subscribers (RHS)
(%)('000 subscribers)
Source: KT, Korea Investment & Securities
Earnings trend (K-IFRS consolidated) (W bn, '000 subs, %)
2010 2011 1Q11F
1Q 2Q 3Q 4Q 1QP 2QF 3QF 4QF QoQ YoY
KT subscribers
Broadband 7,090 7,189 7,315 7,424 7,552 7,587 7,612 7,622 1.7 6.5
Voice 19,586 19,477 19,432 19,359 19,386 19,386 19,396 19,386 0.1 (1.0)
Wireless 15,368 15,594 15,831 16,041 16,299 16,419 16,509 16,559 1.6 6.1
WiBro 311 334 348 377 427 482 532 582 13.2 37.0
IPTV 1,312 1,569 1,790 2,085 2,393 2,643 2,863 3,013 14.8 82.4
Sales 4,998.3 4,968.7 5,353.2 5,148.1 5,303.7 5,475.7 5,257.9 5,255.3 3.0 6.1
Wireless 1,734.6 1,809.6 1,818.6 1,784.1 1,760.0 1,798.8 1,824.7 1,851.6 (1.4) 1.5
Telephone 1,115.4 1,121.6 1,075.6 1,044.8 986.1 970.8 955.6 940.9 (5.6) (11.6)
Internet 608.2 629.3 633.3 650.6 640.8 655.2 661.1 664.9 (1.5) 5.4
Data 323.6 328.6 322.3 323.4 307.7 308.0 308.3 308.6 (4.9) (4.9)
Other service 404.9 234.9 293.5 283.0 304.6 362.7 371.8 381.2 7.6 (24.8)
Sales of merchandise 735.5 762.5 1,105.1 995.8 1,072.0 1,090.2 1,046.4 1,017.2 7.7 45.8
Other operating revenue 76.2 82.4 104.8 66.4 232.5 290.0 90.0 90.9 250.2 205.1
Operating expenses 4,549.0 4,285.4 4,752.6 4,794.5 4,577.4 4,705.3 4,667.0 4,864.5 (4.5) 0.6
Depreciation 1,065.9 684.6 675.1 697.3 726.1 725.0 725.0 751.4 4.1 (31.9)
Labor cost 657.2 654.7 638.0 656.9 687.0 661.2 644.4 663.5 4.6 4.5
Marketing costs 512.4 518.7 591.9 481.6 548.2 580.6 582.9 581.6 13.8 7.0
Operating profit 449.3 683.3 600.6 353.6 726.3 770.4 590.9 390.8 105.4 61.7
Pretax profit 379.6 566.8 559.4 258.1 666.2 650.8 483.0 291.7 158.1 75.5
Net profit 300.6 419.5 430.9 189.3 555.2 494.6 367.0 221.7 193.3 84.7
EBITDA 1,515.2 1,367.9 1,275.7 1,050.9 1,452.4 1,495.4 1,315.9 1,142.1 38.2 (4.1)
Note: Source: KT, Korea Investment & Securities
Earnings trend (K-IFRS non-consolidated) (W bn, %)
2010 2011 Growth
1Q 2Q 3Q 4Q 1Q11P QoQ YoY
Sales 4,894.8 4,833.6 5,109.3 5,080.7 4,863.5 (4.3) (0.6)
Operating profit 428.7 678.1 572.1 354.6 525.1 48.1 22.5
Pretax profit 354.5 538.7 512.1 264.7 459.8 73.7 29.7
Net profit 280.4 407.7 392.8 193.5 354.3 83.1 26.4
EBITDA 1,464.4 1,351.8 1,226.1 1,030.5 1,217.9 18.2 (16.8)
Telecom Services
27
Key financial data
FY-ending Dec. 2009A 2010A 2011F 2012F 2013F
per share data (KRW)
EPS 2,286 4,803 6,598 6,215 6,620
BPS 43,402 45,915 49,816 53,360 57,282
DPS 2,000 2,410 2,410 2,410 2,410
Growth (%)
Sales growth 0.0 8.6 NM (0.3) 1.5
OP growth (32.3) 125.1 NM (3.9) 4.9
NP growth 10.0 136.0 NM (5.8) 6.5
EPS growth 3.1 110.1 NM (5.8) 6.5
EBITDA growth (15.6) 26.2 NM (0.6) 3.1
Profitability (%)
OP margin 4.9 10.2 11.6 11.2 11.6
NP margin 2.5 5.5 7.5 7.1 7.5
EBITDA margin 22.0 25.6 25.4 25.3 25.7
ROA 2.3 4.4 5.8 5.4 5.6
ROE 5.2 10.9 13.9 12.1 11.9
Dividend yield 5.1 5.2 6.0 6.0 6.0
Stability
Net debt (W bn) 7,418 8,392 8,329 8,268 8,176
Debt/equity ratio (%) 90.0 88.2 80.3 74.1 68.3
Valuation (X)
PER 17.1 9.6 5.8 6.1 5.7
PBR 0.9 1.0 0.8 0.7 0.7
PSR 0.5 0.6 0.5 0.5 0.5
EV/EBITDA 3.9 3.7 3.3 3.3 3.2
Cash flow
FY-ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
C/F from operating 3,398 3,245 4,267 4,259 4,303
Net profit 610 1,193 1,638 1,543 1,644
Depreciation 2,935 2,895 2,545 2,612 2,654
Amortization 426 390 382 381 387
Net incr. in W/C (1,884) (1,929) (267) (244) (357)
Others 1,311 696 (31) (33) (25)
C/F from investing (2,870) (3,436) (3,617) (3,611) (3,632)
CAPEX (2,774) (3,239) (3,300) (3,300) (3,250)
Decr. in fixed assets 70 27 27 27 27
Incr. in investment 35 121 33 34 18
Net incr. in intangible assets (214) (348) (380) (377) (406)
Others 13 3 3 5 (21)
C/F from financing (930) (129) (652) (652) (652)
Incr. in equity 4 10 0 0 0
Incr. in debts 152 351 (66) (66) (66)
Dividends (229) (502) (586) (586) (586)
Others (857) 12 0 0 0
C/F from others 51 (24) 0 0 0
Increase in cash (353) (345) (2) (4) 18
Note: K-GAAP consolidated from 2009 to 2010. K-IFRS consolidated after 2011F.
Income statement
FY-ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Sales 19,649 21,331 21,293 21,224 21,553
Operating profit 966 2,175 2,478 2,381 2,498
Financial income 229 184 186 186 186
Interest income 197 143 145 145 146
Financial expense 709 579 505 482 479
Interest expense 506 529 455 432 429
Other non-operating profit 180 (244) (244) (243) (247)
Earnings before tax 715 1,562 2,092 2,058 2,192
Income taxes 108 372 498 490 522
Net profit 610 1,193 1,638 1,543 1,644
Net profit of controlling interest 495 1,168 1,605 1,512 1,610
EBITDA 4,328 5,461 5,406 5,374 5,539
Balance sheet
FY-ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Current assets 7,972 8,073 8,058 8,032 8,156
Cash & cash equivalent 1,538 1,193 1,191 1,187 1,206
Accounts & other receivables 4,388 5,032 5,023 5,006 5,084
Inventory 699 656 655 653 663
Non-current assets 18,648 19,641 20,360 21,007 21,643
Investment assets 856 880 879 876 889
Tangible assets 14,775 15,228 15,955 16,616 17,185
Intangible assets 1,280 1,233 1,231 1,227 1,246
Total assets 26,620 27,713 28,418 29,039 29,800
Current liabilities 6,941 7,430 7,171 6,925 6,690
Accounts & other payables 3,924 3,977 3,969 3,957 4,018
ST debt & bond 368 469 479 489 499
Current portion of LT debt 1,690 2,435 2,445 2,455 2,465
Non-current liabilities 9,012 8,788 8,699 8,609 8,546
Debentures 7,337 6,746 6,546 6,346 6,146
LT debt & financial liabilities 204 493 607 721 836
Total liabilities 15,953 16,218 15,870 15,534 15,237
Controlling interest 10,377 11,034 12,052 12,978 14,002
Capital stock 1,564 1,564 1,564 1,564 1,564
Capital surplus 1,449 1,450 1,450 1,450 1,450
Capital adjustments (2,166) (1,263) (1,263) (1,263) (1,263)
Retained earnings 9,574 9,365 10,383 11,309 12,333
Minority interest 291 462 496 527 561
Shareholders' equity 10,667 11,496 12,548 13,505 14,563
Telecom Services
28
LG Uplus (032640) Hold (Maintain), TP: W7,900 (Maintain)
Smartphones to improve profitability
Maintain Hold with a target price of W7,900: We reiterate Hold and our target
price of W7,900 on LGU+. We derived our price by applying a target PER of 7.5x,
18% discounted to the past four-year average, to the 12-month-forward EPS. We
maintain Hold due to the following reasons. 1) The stock currently trades at a 12-
month-forward PER of 5.3x and EV/EBITDA of 3.1x (based on adjusted earnings
excluding the merger effect), which are nearly on par with dominant players, SKT
and KT. 2) SKT started to supply iPhones following KT, hampering LGU+’s handset
competitiveness. LGU+ should be able to narrow its gap with 3G service providers
when it establishes a nationwide LTE network in July 2012. 3) Higher earnings
volatility is expected, as capex will expand from W1.15trn in 2010 to W1.7trn in
2011 and mobile rates will be lowered. 4) The planned sale of a 3.7% stake by
KEPCO raises an overhang issue.
Smartphone subscriptions on the rise: The number of smartphone subscribers
has skyrocketed entering 2011. The number ballooned 117% from December 2010
to reach 1.15mn in March 2011 and should total 3.5mn by end-2011. The portion of
smartphone subscribers in newly added mobile phone subscribers rose from 33%
in 4Q10 to 61% in 1Q11.
Bottom line turning around from end-4Q10: Based on company guidance
(excluding merger effect), service sales (excluding handset sales) edged up a
mere 0.1% YoY in 1Q11. Fixed-line service sales gained 6.9% YoY driven by VoIP
and e-biz (Internet application business), while mobile telecom service sales
dropped 5.1% YoY due to the implementation of a per-second voice call billing
system and adjustment of interconnection fees. Sluggish mobile telecom service
sales resulted in a 10.5% YoY decline in operating profit.
However, on a QoQ comparison, the bottom line turned around in 1Q11 after
hitting the bottom in 4Q10. The increase in smartphone subscribers in 2011 is
driving the turnaround of profitability. Based on the company guidance, OP margin
rose from 2.0% in 4Q10 to 6.8% in 1Q11 and should reach 8% during 2Q-3Q11 on
marketing cost savings. Considering the growing number of smartphone
subscribers, LGU+ should be able to achieve its annual EBITDA guidance of
W1.65trn in 2011, up 16.8% YoY. As smartphone subscribers who require fewer
handset subsidies account for a larger portion of the newly added mobile phone
subscriptions, marking costs should plunge 12.6% YoY.
May 18, 2011 / W5,670 / Mkt cap: USD2,685.4mn, KRW2,919.0bn
Yr to Sales OP EBT NP EPS % chg. EBITDA P/E EV/EBITDA PBR ROE
Dec (W bn) (W bn) (W bn) (W bn) (won) (YoY) (W bn) (x) (x) (x) (%)
2009A 4,949 387 359 308 1,111 8.7 836 7.6 3.6 1.1 15.4
2010A 8,501 655 568 570 1,318 18.6 1,909 5.4 3.0 0.9 19.0
2011F 8,561 409 332 264 611 (53.6) 1,646 8.9 3.0 0.7 6.6
2012F 8,860 466 389 304 702 14.8 1,788 7.7 2.7 0.6 7.3
2013F 9,263 556 482 366 846 20.6 1,909 6.4 2.5 0.6 8.5
Note: K-GAAP consolidated basis (LG Telecom, 2009), K-IFRS consolidated basis (LG Uplus, 2010)
Jong In Yang 82-2-3276-6153/6154
Telecom Services
29
OP margin rose to 6.8% in 1Q due to marketing cost cut (W bn, %)
2010 2011 1Q11F
1Q 2Q 3Q 4Q 1QP 2QF 3QF 4QF QoQ YoY
K-IFRS
Sales 2,424.1 1,977.2 2,066.0 2,033.3 2,116.5 2,133.6 2,160.4 2,150.7 4.1 (12.7)
Marketing costs 409.3 391.5 440.6 449.4 358.0 368.1 378.7 373.5 (20.3) (12.5)
Operating profit 582.7 97.4 23.8 (48.6) 89.9 116.2 119.8 82.7 NA (84.6)
Net profit 543.2 68.9 7.2 (49.2) 57.0 77.6 79.6 50.2 NA (89.5)
EBITDA 885.1 407.5 339.7 276.5 370.0 417.2 427.8 430.6 33.8 (58.2)
Based on guidance (excluding the effect of merger)
Sales 1,927.6 1,977.2 2,066.0 2,033.3 2,116.5 2,133.6 2,160.4 2,150.7 4.1 9.8
Marketing costs 409.3 391.5 440.6 449.4 358.0 368.1 378.7 373.5 (20.3) (12.5)
Operating profit 160.8 175.5 116.7 40.3 143.8 170.2 173.8 136.7 256.8 (10.6)
Net profit 121.2 147.0 100.1 39.7 111.0 120.2 122.3 92.9 179.6 (8.4)
EBITDA 388.6 407.5 339.7 276.5 370.0 417.2 427.8 430.6 33.8 (4.8)
Note: 1Q11 consensus (sales W2.066trn, OP W103.3bn, NP W63.1bn). Source: LGU+, Korea Investment & Securities
Capex changes
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2009 2010 2011F 2012F
8
10
12
14
16
18
20Capex (LHS)
Capex-to-sales ratio (RHS)
(W bn) (%)
Source: LGU+, Korea Investment & Securities
LGU+: Number and portion of smartphone subscribers (‘000 subs, % )
1Q10 2Q10 3Q10 4Q10 Jan-11 Feb Mar
Total subscribers 8,786 8,868 8,933 9,018 9,031 9,042 9,077
Total subscriber market share 17.9 17.9 17.8 17.8 17.7 17.7
Smartphone subscribers 32 93 226 530 727 925 1,150
Smartphone subscriber market share 2.2 3.8 5.2 7.4 8.8 10.0 11.2
Smartphone subscriber net additions 28 61 133 304 197 198 225
Smartphone subscriber net additions market share 3.7 6.3 6.8 10.8 18.4 20.5 21.1
Smartphone/new mobile subscribers 2.8 6.3 12.1 29.2 57.0 60.0 66.0
Source: LGU+, Korea Investment & Securities
Telecom Services
30
Key financial data
FY-ending Dec. 2009A 2010A 2011F 2012F 2013F
per share data (KRW)
EPS 1,111 1,318 611 702 846
BPS 7,995 8,011 8,225 8,516 8,928
DPS 350 350 350 350 350
Growth (%)
Sales growth 3.2 NM 0.7 3.5 4.5
OP growth 2.1 NM (37.7) 14.1 19.3
NP growth 8.7 NM (53.6) 14.8 20.6
EPS growth 8.7 NM (53.6) 14.8 20.6
EBITDA growth 7.3 NM (13.8) 8.7 6.8
Profitability (%)
OP margin 7.8 7.7 4.8 5.3 6.0
NP margin 6.2 6.7 3.1 3.4 4.0
EBITDA margin 16.9 22.5 19.2 20.2 20.6
ROA 7.8 9.1 3.0 3.2 3.6
ROE 15.4 19.0 6.6 7.3 8.5
Dividend yield 4.1 4.9 5.4 5.4 5.4
Stability
Net debt (W bn) 839 2,197 2,247 2,226 2,198
Debt/equity ratio (%) 48.6 70.6 70.0 67.5 64.2
Valuation (X)
PER 7.6 5.4 8.9 7.7 6.4
PBR 1.1 0.9 0.7 0.6 0.6
PSR 0.5 0.4 0.3 0.3 0.3
EV/EBITDA 3.6 3.0 3.0 2.7 2.5
Cash flow
FY-ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
C/F from operating 611 1,262 2,021 2,093 1,852
Net profit 308 570 264 304 366
Depreciation 440 1,008 1,001 1,053 1,108
Amortization 9 245 236 269 245
Net incr. in W/C (197) (103) 522 469 133
Others 51 (458) (2) (2) 0
C/F from investing (397) (1,071) (1,920) (1,923) (1,675)
CAPEX (480) (1,161) (1,700) (1,480) (1,410)
Decr. in fixed assets 1 21 21 21 21
Incr. in investment 93 (1) 0 (3) (4)
Net incr. in intangible assets (11) (746) (240) (457) (277)
Others 0 816 (1) (4) (5)
C/F from financing (126) 199 (97) (151) (151)
Incr. in equity 0 0 0 0 0
Incr. in debts 88 345 54 0 0
Dividends (55) (120) (151) (151) (151)
Others (159) (26) 0 0 0
C/F from others 0 (0) 0 0 0
Increase in cash 88 389 4 19 25
Note: K-GAAP consolidated basis (LG Telecom, 2009), K-IFRS consolidated basis (LG Uplus, 2010)
Income statement
FY-ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Sales 4,949 8,501 8,561 8,860 9,263
Operating profit 387 655 409 466 556
Financial income 48 46 61 62 64
Interest income 39 41 59 60 62
Financial expense 87 129 137 139 139
Interest expense 62 125 129 131 131
Other non-operating profit 10 (6) (6) (6) (6)
Earnings before tax 359 568 332 389 482
Income taxes 51 (2) 67 86 116
Net profit 308 570 264 304 366
Net profit of controlling interest 308 570 264 304 366
EBITDA 836 1,909 1,646 1,788 1,909
Balance sheet
FY-ending Dec. (W bn) 2009A 2010A 2011F 2012F 2013F
Current assets 1,310 2,160 2,175 2,251 2,354
Cash & cash equivalent 138 538 541 560 586
Accounts & other receivables 873 1,313 1,323 1,369 1,431
Inventory 155 190 191 198 207
Non-current assets 2,717 6,365 7,054 7,683 8,043
Investment assets 30 93 94 97 102
Tangible assets 2,228 4,870 5,548 5,955 6,236
Intangible assets 17 517 521 709 741
Total assets 4,028 8,525 9,229 9,934 10,396
Current liabilities 1,369 2,612 3,190 3,742 3,987
Accounts & other payables 882 1,541 1,551 1,606 1,679
ST debt & bond 186 225 264 264 264
Current portion of LT debt 205 691 691 691 691
Non-current liabilities 619 1,965 1,981 1,984 1,989
Debentures 389 1,530 1,530 1,530 1,530
LT debt & financial liabilities 192 340 355 355 355
Total liabilities 1,988 4,577 5,170 5,726 5,975
Controlling interest 2,040 3,947 4,057 4,207 4,419
Capital stock 1,386 2,574 2,574 2,574 2,574
Capital surplus 12 837 837 837 837
Capital adjustments (177) (704) (704) (704) (704)
Retained earnings 823 1,240 1,353 1,505 1,720
Minority interest 0 2 2 2 2
Shareholders' equity 2,040 3,948 4,059 4,209 4,421
Telecom Services
31
Changes to recommendation and price target
Company (Code) Date Recommendation Price target Company (Code) Date Recommendation Price target
SK Telecom (017670) 05-20-09 BUY W241,000 LG Uplus (032640) 07-04-09 BUY W11,800
10-09-09 BUY W233,000 07-31-09 BUY W11,100
04-15-11 BUY W222,000 10-09-09 BUY W11,700
KT (030200) 06-03-09 BUY W46,500 01-05-10 BUY W11,200
10-09-09 BUY W50,000 02-10-10 BUY W10,600
12-28-09 BUY W52,000 05-08-10 BUY W10,000
01-29-10 BUY W59,000 11-08-10 Hold W8,700
04-12-11 BUY W54,000 01-31-11 Hold W7,900
SK Telecom(017670) KT(030200)
0
50,000
100,000
150,000
200,000
250,000
300,000
M ay-09 Sep-09 Jan-10 M ay-10 Sep-10 Jan-11 M ay-11
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
M ay-09 Sep-09 Jan-10 M ay-10 Sep-10 Jan-11
LG Uplus(032640)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
M ay-09 Sep-09 Jan-10 M ay-10 Sep-10 Jan-11
■ Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance
� BUY: Expected to give a return of +15% or more
� Hold: Expected to give a return between -15% and +15%
� Underweight: Expected to give a return of -15% or less
■ Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months
� Overweight: Recommend increasing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market
capitalization.
� Neutral: Recommend maintaining the sector’s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization.
� Underweight: Recommend reducing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market
capitalization.
■ Analyst Certification
I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal
views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or
indirectly related to the specific recommendations or views contained in this research report.
■ Important Disclosures
As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent
month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does
not own 1% or more of any class of common equity securities of the companies mentioned in this report.
There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication
of the research report or at the time of the public appearance.
Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for the companies mentioned in this report
in the past 12 months;
Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from the companies mentioned in this
report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment
banking services from the companies mentioned in this report in the next 3 months.
Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in securities of the companies mentioned in this report at the time that the research
report was published.
Prepared by: Jong In Yang
This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied,
redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment &
Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to
buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct
or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client’s judgment, and this report cannot be used
as evidence in any legal dispute related to investment decisions.
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