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Sector Note

April 17, 2013

Telecom Services
Overweight
Company SK Telecom KT LG Telecom Rating BUY BUY BUY TP (KRW) 220,000 48,000 10,800

Is MVNO market share growth a threat?


MVNO not a threat, and should ease pricing pressure
Concerns are growing that the rising market share of MVNO will emerge as a threat to mobile telecom service providers. However, we believe MVNO market share growth will be limited by mVoIP and unlimited intra- and inter-carrier voice calling plans. Furthermore, MVNO ARPU is low and MVNO substantially reduces pricing pressure on telcos and, as such, we believe market share could double from the current 2.9% and still be favorable for mobile telcos. We maintain Overweight on telecom given rising ARPU, easing marketing competition from midMar and solid 2Q13 outlooks.

MVNO accounts for 93.9% of net addition market share and LGU+ 53.0% since 2012
MVNO and LGU+ have led mobile net additions since 2012. From Jan 2012 to Feb 2013, mobile subscribers increased 1.24mn, and LGU+ accounted for 68.3% (846,000 subscribers) of net additions (including MVNO subscribers), SKT 26.7% (331,000 subscribers) and KT 5.0% (63,000 subscribers). But if we calculate MVNO subscribers separately, MVNO accounted for 93.9% (1,164,000 subscribers) and LGU+ (656,000 subscribers), while SKT lost 12.0% (-149,00 subscribers) and KT shed 34.8% (-432,000 subscribers), suggesting LGU+ is the biggest winner.

MVNO grows on regulatory support, LGU+ on early LTE services


MVNO has expanded on aggressive support from regulators, such as lower network usage fees and mobile number portability services with the three mobile telcos (2012). MVNO mobile subscriber market share has increased from 0.8% in Dec 2011 to 2.4% in Dec 2012 and 2.9% in Feb 2013. Meanwhile, LGU+ bolstered its brand image with its early LTE network buildup, securing a favorable position in the LTE market. Mobile subscriber market share grew from 17.9% in Dec 2011 to 19.0% in Feb 2013.

MVNO eases pricing pressure


MVNO has become increasingly important in the mobile telecom market. At end2012, there were 26 MVNOs, led by telecom subsidiaries, such as SK Telink, KT Powertel, KCT and CJ Hello Vision. The telcos can benefit from MVNOs using their networks, in terms of: 1) network usage fees (SKT offers 31-47% discounts and additional 1-6% discounts for volume usage), and 2) easing pricing pressure.

mVoIP and unlimited calling plans to erode MVNO competitiveness


Jong In Yang
822-3276-6153/6154 jiyang@truefriend.com

Inhyuk Hwang
822-3276-6245 inhyuk.hwang@truefriend.com

While subscribers have grown, MVNOs are unlikely to gain additional market share given weak handset lineups, poor marketing and subsidy-based competition. Furthermore, price merit has eroded as the three telecoms allow mVoIP and launched unlimited intra- and inter-carrier calling plans. Given the relatively high weighting of low-ARPU prepaid subscribers (53.3%, 3.0% of total prepaid mobile subscribers), MVNO ARPU is only 10-60% that of the mobile telcos. According to KISDI, four MVNOs, namely KCT, SK Telink, CJ Hello Vision and Onse Telecom, posted sales of W5.9bn and an operating loss of W26.3bn from 1H11 to 1H12.

Telecom Services

Table 1. MNO and MVNO list


MNO SKT (8) KT (9) LGU+ (8) MVNO Eye's Vision(11.7), KCT (11.7), KICC (11.7), Unicoms (12.1), SK Telink (12.6), S1 (12.11), GHS (12.12), Smartel (12.12) Annex Telecom (04.2), Evergreen Mobile (08.4), KT Powertel (09.1), Free Telecom (10.8), CNC (10.9), Winnerstel (11.4), S Roaming (11.7), CJ HV (12.1), Onse Telecom (12.5) Montista (05.7), C&M (05.8), B&S Solution (04.7), EDD (07.2), FItel(01.6), Leader's Telecom (03.3), Interpark (10.5), Spacenet (12.3), Merchant Korea (12.5)

Note: as of Oct, 2012 Source: MSIP, Korea Investment & Securities

Table 2. Telcos' mobile subscriber trends


Accumulated subscribers Dec-11 (A) MNO SKT MVNO Sub-total MNO KT MVNO Sub-total MNO LGU+ MVNO Sub-total MNO Total MVNO Sub-total 26,497 55 26,553 16,249 314 16,563 9,358 33 9,391 52,104 403 52,507 Dec-12 26,555 406 26,961 15,848 654 16,502 9,945 217 10,162 52,348 1,276 53,624 Feb-13 (B) 26,348 535 26,883 15,818 808 16,626 10,014 223 10,237 52,180 1,567 53,746 Net additions Dec-11~Feb-13 (B-A) (149) 480 331 (432) 494 63 656 190 846 76 1,164 1,240 Net addition M/S Dec-11~Feb-13 (12.0) 38.7 26.7 (34.8) 39.9 5.0 53.0 15.3 68.3 6.1 93.9 100.0

(000 subs, %)

MVNO portion Feb-13 2.0

4.9

2.2

2.9

Note: Net addition M/S = each telcos net additions / total net additions Source: MSIP, Korea Investment & Securities

Table 3. Telcos accumulated mobile subscriber market share trends


Accumulated subscriber M/S Dec-11 MNO SKT MVNO Sub-total MNO KT MVNO Sub-total MNO LGU+ MVNO Sub-total MNO Total MVNO Sub-total
Source: MSIP, Korea Investment & Securities

(%)

Dec-12 49.5 0.8 50.3 29.6 1.2 30.8 18.5 0.4 18.9 97.6 2.4 100.0

Feb-13 49.0 1.0 50.0 29.4 1.5 30.9 18.6 0.4 19.0 97.1 2.9 100.0

50.5 0.1 50.6 30.9 0.6 31.5 17.8 0.1 17.9 99.2 0.8 100.0

Telecom Services

Figure 1. Mobile telcos' net additions (Including MVNO)


('000 subs) 1,000 800 600 400 200 0 SKT (200) (400) (600) KT LGU+ 331 MNO MNO + MVNO MVNO 846

Figure 2. Mobile telcos' net additions (Separating MVNO)


('000 subs) 1,400 1,200 1,000 800 600

63

400 200 0 (200) (400) (600) SKT KT LGU+ MVNO

Note: Based on Jan, 2012 to Feb, 2013 Source: Company data, MSIP, Korea Investment & Securities

Note: Based on Jan, 2012 to Feb, 2013 Source: Company data, MSIP, Korea Investment & Securities

Figure 3. MVNO subscriber trend breakdown


('000 subs) 1,600 1,400 1,200 1,000 800 600 400 200 0 Jan-12 Mar-12 May -12 Jul-12 Sep-12 Nov -12 Jan-13 Prepaid Postpaid

Source: MSIP, Korea Investment & Securities

Figure 4. Telcos' ARPU comparison


40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 SKT KT LGU+ CJHV KCT SK Telink Onse (KRW)

Note: Based on 4Q12, KCT, SK Telink and Onse based on 1H12 Source: Company data, MSIP, Korea Investment & Securities

Telecom Services

Table 4. Coverage valuation


Recommendation & TP Company SK Telecom (017670) Recommendation TP (KRW) Price (16 Apr, KRW) Market cap. (W bn) KT (030200) Recommendation TP (KRW) Price (16 Apr, KRW) Market cap. (W bn) LG Telecom (032640) Recommendation TP (KRW) Price (16 Apr, KRW) Market cap. (W bn)
Source: Korea Investment & Securities

Earnings & Valuation Sales (W bn) BUY 220,000 184,000 14,857 BUY 48,000 35,750 9,334 BUY 10,800 8,910 3,890 2011A 2012A 2013F 2014F 2015F 2011A 2012A 2013F 2014F 2015F 2011A 2012A 2013F 2014F 2015F 15,926 16,300 17,192 17,906 18,476 21,272 23,790 25,356 26,004 26,423 9,186 10,905 11,771 12,239 12,514 OP (W bn) 2,296 1,760 2,125 2,474 2,672 1,748 1,214 1,405 1,680 1,895 279 127 545 749 832 NP (W bn) 1,613 1,152 1,683 1,915 2,446 1,447 1,057 1,139 1,351 1,464 85 (60) 366 522 541 EPS (KRW) BPS (KRW) PE (X) 6.2 9.2 7.6 6.7 5.2 6.0 8.2 7.6 6.4 6.0 37.8 NM 10.6 7.4 7.2 PB (X) 0.8 0.9 1.0 0.9 0.8 0.7 0.7 0.7 0.6 0.6 0.9 0.9 1.0 0.9 0.8 ROE (%) 14.0 9.8 13.6 14.2 16.3 12.7 8.8 9.1 10.3 10.5 2.2 (1.6) 9.5 12.6 12.0 EV/EBITDA (X) 2.7 3.7 3.6 3.2 2.9 3.9 4.0 3.8 3.6 3.4 5.0 4.8 4.2 3.8 3.5

22,848 174,280 16,525 176,669 24,147 189,397 27,483 205,006 35,099 227,188 5,946 4,341 4,674 5,544 6,007 196 (136) 839 1,197 1,239 48,477 50,707 52,667 55,416 58,585 7,837 8,582 9,130 9,937 10,786

Glossary

LTE: A 3.9G technology evolved from WCDMA MVNO (Mobile Virtual Network Operator): a wireless communications services provider by leasing MNOs mobile network infrastructure

Telecom Services

Changes to recommendation and price target


Company (Code) SK Telecom (017670) Date 05-19-11 01-13-12 06-26-12 10-24-12 01-25-13 KT (030200) 05-19-11 11-07-11 01-11-12 11-05-12 SK Telecom(017670)
250,000

Recommendation BUY BUY BUY BUY BUY BUY BUY BUY BUY

Price target W222,000 W200,000 W180,000 W200,000 W220,000 W54,000 W48,500 W43,500 W48,000

Company (Code) LG Uplus (032640)

Date 05-19-11 06-02-11 10-27-11 12-20-11 01-30-12 08-31-12 01-30-13 03-18-13

Recommendation Hold Hold BUY BUY BUY BUY BUY BUY

Price target W7,900 W6,800 W8,100 W9,000 W8,100 W8,900 W9,800 W10,800

KT(030200)
60,000 50,000 40,000 150,000 30,000 100,000 20,000 50,000 10,000 0 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12

LG Uplus(032640)
12,000 10,000 8,000 6,000 4,000 2,000 0 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12

200,000

0 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12

Telecom Services

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 Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings.

Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sectors weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sectors weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sectors 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 SK Telecom. 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 SK Telecom in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from SK Telecom 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 SK Telecom in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in SK Telecoms securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of SK Telecom,KT,LG Uplus shares as of April 16, 2013. Korea Investment & Securities Co., Ltd. has provided this report to various third parties. Neither the analysts covering these companies nor their associates own any shares of as of April 16, 2013. Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of SK Telecom,KT and is the liquidity provider. 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 clients judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions.