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Number of subscribers is key to pay-TV stocks’ performance
This week, major domestic/global pay-TV operators announced their net subscriber addition
numbers. KT Skylife (053210) posted net subscriber additions of 10,800 in September, more
than triple that of August (2,904). Meanwhile, Netflix (NFLX US), a US streaming internet TV
provider, reported net subscriber additions of 3.3m for 3Q16, more than double that of
2Q16. In particular, 97% of net additions came from regions other than the US.
We believe subscriber base expansion is positive for pay-TV operators’ earnings, since
monthly fixed-rate service revenue is their basic business model.
Figure 1. Net increase in KT Skylife’s subscribers jumped 3.7x MoM, sending the stock up
Notes: Subscriber data is a lagging indicator; Subscriber data displayed with a time lag of one month to show stock price
response to subscriber addition announcements
Source: KT Skylife, Thomson Reuters, Mirae Asset Daewoo Research
Figure 2. 3Q16 Netflix net subscribers up 2.3x QoQ, sending the stock higher
Notes: Subscriber data is a lagging indicator; Stock price is as of the earnings release date, as that is when quarter-end net
subscriber additions are announced. Source: Netflix, Bloomberg, Mirae Asset Daewoo Research
Media/Pay-TV (Overweight/Maintain)
Focus on fundamentals and industry trends
� Pay-TV operators: Increase in the number of subscribers; Subscriber performance is
driving major domestic/global players’ share price movements
� Industry trends: Time to focus on profitability of IPTV service; Increasing penetration
of technologically advanced services (UHD/DCS)
� Industry leader: Focus on KT Skylife (053210), in light of fundamentals and industry
trends
Issue Comment
October 20, 2016
Mirae Asset Daewoo Co., Ltd.
[Telecom Service / Media]
Jee-hyun Moon
+822-768-3615
Nu-ri Ha
+822-768-4130
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
-15
-10
-5
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1/14 4/14 7/14 10/14 1/15 4/15 7/15 10/15 1/16 4/16 7/16 10/16
(W)('000 people)
Net increase in subscribers over the previous month (L)
KT Skylife's stock price (R)
20
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80
110
140
0
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1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16
(US$)(mn people)
Net increase in quarterly subscribers (L)
Netflix's stock price (R)
Media/Pay-TV
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October 20, 2016
Mirae Asset Daewoo Research
Domestic pay-TV market trend
1) IPTV subscribers soon to exceed those of cable SOs
The most noteworthy trend in the domestic pay-TV market is that the number of
subscribers to telcos’ IPTV services has increased to the level of cable SOs, and is
anticipated to surpass that level next year. As of end-2Q16, the total number of IPTV
subscribers came in at 13mn (vs. 14mn for cable SOs).
In our view, an increasingly important variable for the IPTV business is the IPTV-
broadband internet service bundling rate. Broadband internet subscriptions serve as the
basis for the IPTV business, as broadband networks allow for two-way TV services. The
service bundling rate—i.e., IPTV subscribers divided by broadband internet
subscribers—is projected to reach 83% for KT by the end of this year, with SK Broadband
and LG Uplus exceeding 70% each. The uptrend in the bundling rate should ease
marketing competition going forward.
We believe the rapid quantitative growth in telcos’ IPTV businesses (increase in
subscribers) is expected to peak in the foreseeable future. As telcos’ IPTV margin growth
appears to be accelerating in 2H16, IPTV’s earnings contribution is anticipated to expand
next year.
Figure 3. Gap between cable SO subscribers and telcos’ IPTV subscribers narrowing
Note: 2Q subscribers are based on end-Jun.; Cable SO subscribers are based on end-Apr.
Source: Respective companies’ data, MSIP, KCTA, Mirae Asset Daewoo Research
Figure 4. Rate of bundling of telcos’ IPTV and broadband internet approaching 80% recently;
Now time to turn focus to profitability rather than quantitative growth
Note: IPTV is a two-way TV service provided by broadband internet networks; Broadband internet subscriptions are the basis
for IPTV subscriptions; Rate of bundling is calculated as IPTV subscribers divided by broadband internet subscribers
Source: Respective companies’ data, Mirae Asset Daewoo Research
14,932 14,905 14,846 14,780 14,424 14,459
4,919
6,529
8,614 10,637
12,282 13,000
3,262 3,791 4,181 4,261 4,310 4,338
0
2,500
5,000
7,500
10,000
12,500
15,000
17,500
11 12 13 14 15 2Q16
('000 persons) Cable SO IPTV Satellite
39.3
83.0
23.4
76.0
30.7
71.8
0
20
40
60
80
100
11 12 13 14 15 16F
(%)
KT
SK Broadband
LG Uplus
Media/Pay-TV
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October 20, 2016
Mirae Asset Daewoo Research
2) Retransmission fee negotiations imminent
Currently, terrestrial TV networks charge pay-TV operators a retransmission fee of W280
per digital TV subscriber per month. The fee, or cost per subscriber (CPS), is negotiated
once a year. In the current negotiations, terrestrial networks are pushing for the fee to
be increased to up to W430.
For pay-TV operators, fees paid to terrestrial TV networks for carrying their content
(channels and programs) are major cost drivers. While pay-TV operators can increase
monthly subscription revenue and ancillary revenue (from VOD and shopping channel
fees) by expanding their subscriber base, leverage effect and profit growth will be
limited if content fees rise in tandem.
The government has organized a retransmission council to draw up CPS guidelines; the
Korea Communications Commission will release the guidelines on October 20th. While
the guidelines are advisory, not mandatory, we still think they are noteworthy
considering that they are the first such guidelines issued by the government and could
affect CPS negotiations, which must be finalized by year-end.
3) UHD broadcasting imminent
Terrestrial broadcasters are anticipated to start ultra-high-definition (UHD; resolution of
3840×2160) broadcasting in February 2017. Current plans call for UHD broadcasting to
be phased in beginning in Seoul and neighboring areas in February and being extended
into other metropolitan and smaller cities/districts through 2021. UHD broadcasting as a
percentage of overall broadcasting is slated to start at 5% in 2017, and increase to 25%
in 2020, 50% in 2023, and 100% in 2027.
When HD broadcasting (1920×1080) was first introduced, terrestrial broadcasters played
a key role in its spread; HD broadcasting was begun in 2001, and analog broadcasting
was completely phased out by end-2012. With terrestrial broadcasters moving to HD
broadcasting, pay-TV operators have accelerated the digital conversion. The digital
conversion rate stands at 78% for pay-TV operators and 53% for cable system operators.
Considering terrestrial broadcasters’ plans to start UHD broadcasting starting next year,
we believe that pay-TV operators with UHD infrastructure and content will gain traction.
Figure 5. Terrestrial networks to start UHD broadcasting around capital area in Feb. 2017;
UHD programming to be phased in starting at 5%, with target of 100% by 2027
Source: MSIP, KCC, Mirae Asset Daewoo Research
Media/Pay-TV
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October 20, 2016
Mirae Asset Daewoo Research
Focus on KT Skylife in light of fundamentals and industry trend
Among domestic pay-TV operators, we believe KT Skylife deserves attention in light of 1)
net subscriber growth and 2) the industry trend of rising penetration of technologically
advanced services, including UHD and dish convergence solutions (DCS).
From a short-term perspective, the company delivered net subscriber growth MoM in
September despite a lower number of operating days. In addition, the company has
been displaying rapid platform revenue growth this year, aided by increasing fee
revenue from home shopping channels. In the medium to long term, the company is
likely to benefit from 1) the upcoming era of UHD broadcasting thanks to its ability to
launch UHD broadcasting services with relatively small investment and 2) improvements
in the business environment stemming from the government’s recent approval of DCS.
Table 1. Monthly subscribers: Net increase in Sep. 2016 is noteworthy in the short-term (‘000 people)
2015 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Number of total subscribers 4,262 4,260 4,262 4,269 4,280 4,292 4,301 4,307 4,312 4,314 4,314 4,310
SkyLife 1,930 1,933 1,941 1,953 1,971 1,988 2,008 2,023 2,041 2,058 2,075 2,093 OTS 2,332 2,327 2,321 2,316 2,310 2,305 2,292 2,283 2,271 2,256 2,240 2,216 Net increase (persons) 644 -1,288 1,428 7,145 11,083 12,242 8,126 6,030 5,181 2,288 764 -4,996
2016 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
Number of total subscribers 4,310 4,310 4,311 4,317 4,325 4,338 4,345 4,348 4,359 SkyLife 2,111 2,128 2,147 2,169 2,193 2,219 2,244 2,262 2,283 OTS 2,199 2,182 2,164 2,148 2,131 2,119 2,101 2,086 2,075 Net increase (persons) 434 248 596 5,998 7,257 13,824 6,677 2,904 10,800
Note: SkyLife is satellite only; OTS stands for Olleh TV Skylife, which is bundled with KT IPTV
Source: Company data, Mirae Asset Daewoo Research
Table 2. Earnings trend and forecast (Wbn, %)
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16F 4Q16F 2014 2015 2016F
Revenue 147 154 161 164 150 161 165 170 623 626 646 Service 90 89 89 88 87 86 86 88 378 356 346 Platform 34 39 43 46 41 50 51 53 130 162 195 Cost-related 11 11 13 12 11 11 11 10 53 47 42 Other 13 14 17 18 12 15 17 18 62 62 62
OP 30 31 14 23 23 29 17 24 78 98 93 OP margin 20.6 20.1 8.5 13.8 15.4 18.0 10.6 14.0 12.5 15.6 14.4
Net profit 22 26 9 18 18 22 13 18 56 74 71 Net margin 14.7 16.7 5.6 11.0 12.0 13.7 8.0 10.5 8.9 11.9 11.0
Note: Based on non-consolidated K-IFRS; OP expected to recover on return of commission fees paid in 1Q15-2Q15;
Assuming expenses related to Broadcasting Development Fund to be incurred in 3Q16
Source: Company data, Mirae Asset Daewoo Research
Figure 6. Concept map of DCS service, officially approved by
MSIP in Oct. 2016
Figure 7. KT Skylife has provided the largest number of UHD
exclusive channels in Korea (5 channels)
Note: DCS (dish convergence solution) business expected to be introduced in
capital area in Dec. and nationwide next year
Source: MSIP, Mirae Asset Daewoo Research
Source: Company data, Mirae Asset Daewoo Research
Media/Pay-TV
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October 20, 2016
Mirae Asset Daewoo Research
APPENDIX 1
Important Disclosures & Disclaimers
2-Year Rating and Target Price History
Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price
KT Skylife(053210) 07/27/2016 Trading Buy 21,000 04/24/2015 Buy 24,000
04/26/2016 Trading Buy 18,000 01/28/2015 Trading Buy 20,000
01/26/2016 Trading Buy 17,000 10/30/2014 Trading Buy 23,000
10/27/2015 Buy 25,000 10/06/2014 Trading Buy 25,000
07/28/2015 Buy 29,000
Equity Ratings Distribution
Buy Trading Buy Hold Sell
69.27% 17.07% 13.66% 0.00%
* Based on recommendations in the last 12-months (as of September 30, 2016)
Disclosures
As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject company and do not own 1%
or more of the subject company's shares outstanding.
Analyst Certification
The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to
Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations
thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts
primarily responsible for this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their
households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or
advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any
other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of
the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report
but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is impacted by overall firm profitability, which includes
revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the
time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or
Mirae Asset Daewoo except as otherwise stated herein.
Disclaimers
This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange.
Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has
not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness,
accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean
language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been
made available to investors in advance of this report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not
accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be
construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of
this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws
Stock Ratings Industry Ratings
Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving
Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes
Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening
Sell : Relative performance of -10%
Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆))
* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.
* Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term
material development.
* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of
future earnings.
* The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic
conditions.
0
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Oct 14 Oct 15 Oct 16
(W) KT Skylife
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October 20, 2016
Mirae Asset Daewoo Research
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