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John Genovese Edward Mui Ram Narayanan Mitesh Patel Sachin Patel Aric Schachner.

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Presentation on theme: "John Genovese Edward Mui Ram Narayanan Mitesh Patel Sachin Patel Aric Schachner."— Presentation transcript:

1 John Genovese Edward Mui Ram Narayanan Mitesh Patel Sachin Patel Aric Schachner

2 Agenda Both a quantitative and qualitative analysis will be conducted. These analyses will be composed of: Social Conditions within South Korea Macroeconomic Landscape Political Environment Telecommunications Sector LG Telecom’s Business Current Market Situation Investment Outlook Financial Analysis Final Recommendation


4 Case Insights As students make the transition from school to the business world, we must be aware of international markets, and how they affect the world economy. Able to use our valuation techniques to evaluate foreign markets in regards to exchange rates, DCF computations, and sovereign risk adjustments. Learn about Emerging Markets (South Korea) and how the volatility in these markets can destroy, or exponentially grow an individuals wealth

5 Social Conditions Population Population of 48,324,000 Ethnically homogeneous country- Korean decent. Biggest minority group - Chinese ¼ of population located in Seoul and more than ½ of all South Koreans live in big cities Growth rate dropped from 3% in late 1950s to 0.85% in 2002 297 institutions of higher learning with 2.5mill annual enrollment 99.8% literacy Population affects LG Telecom positively because South Korea is a nationalistic, homogenous, urbanized countries. Thus a large concentrated consumer market that is loyal to home country brands.

6 Macroeconomic Conditions Background High growth in 1980’s due to a system of close government/business ties, including directed credit, import restrictions, sponsorship of specific industries, and a strong labor effort Government promoted import of raw materials and technology at the expense of consumer goods Encouraged savings and investment over consumption “The Luck would soon run out…”

7 Asian Financial Crisis Exposed weaknesses in South Korea’s developmental model including H igh debt/equity ratios Massive foreign borrowing Undisciplined financial sector Growth fell 6.6% in 1998 Rebounded in 1999 to 10% Rebounded again in 2000 to 9% Growth fell back to 3.3% in 2001 Slowing Global Economy Falling Exports Corporate and Financial reforms had become stagnant

8 Current and Future Macroeconomics Current Economic Situation Showed great resilience in 2001 with strong GDP growth 2002 GDP grew by 5.9% Future Economic Outlook Forecasted South Korea’s real GDP to expand by 4.6% in 2003, to 5.3% in 2004 Export volume will slow in 2004, to 9.5% because of won appreciation Will result in smaller foreign trade balance contributions Stable inflation forecast of 2002-2004

9 South Korea 1948- Republic of Korea declared below the 38th parallel on the Korean peninsula #43 on Transparency International Corruption Perceptions Index 2002 with a 4.5 CPI score Roh Moo-hyun current president will carry on “sunshine policy” Military Threat from North Korea North Korea’s aggression towards the South is strong Large stockpile of chemical weapons One million strong army Ever present terrorism from North Korea Assassination of four members of SK’s cabinet Bombings Korean Airlines plane 3 Naval disputes Corruption leads to abnormal market returns, and negatively impacts country risk profile.

10 LG Telecom LGT is a subsidiary of the LG Group (Diverse Conglomerate) Provider Personal Communications Services (CDMA) First to commercialize CDMA technology through cellular services Holdings include Dacom Corporation and Hanaro Telecom (Broadband provider) Customer base of 4.8 million wireless subscribers “Say hello to my little friend”

11 History 1996 - LG Telecom established (Opened Main Switching Center) 1997 - Korean Government makes their R&D a national center for industrial research Network Management Center (NMC) established Customer Services Center opens 1998 – Launched PCS service using CDMA Merged with Venezuelan PCS Consortium for better CDMA capabilities Formed Strategic partnership with BT (BT bought 23% stake) 1999 – Launched world’s first broadcasting service for mobile phone 2000 – Launched Btob, first mobile service designed for business Launched EZ-Java, a PCS eMoney service

12 History Cont’d 2001 Breakthrough year financially Recorded net income of W154 billion compared to loss of W442 billion (2000) Due to ban on handset subsidies and steady ARPU and subscriber growth Raised W343.6 billion in equity to shore up balance sheet Paid over W200 billion in debt by cutting Capital Expenditures

13 LG Telecom Brands Ez-i Khai Khai Holeman Btob IMT (International Mobile Telecommunication) 2000

14 Ez-i LG TeleCom’s first Korean wireless Internet service (1999) Over 8,000 options Commercialized the world’s 1st Java Station through a strategic alliance with BT Genie.

15 Khai Launched February 2000 for the 19-24 age group Access to diverse cultural aspects Fashion, sports, music, performances, and dancing Discount benefits added through their phones.

16 Khai Holeman Incorporates teenage interests: Invitations to various events and discounts Animated characters Highly diverse marketing techniques High demand among teenagers

17 Btob For effective communication, work, and optimum resource management 1st Korean mobile communication service exclusively for business LG TeleCom has the largest market share in the mobile office market Services include mobile consulting specializing in data solutions

18 IMT International Mobile Telecommunication 2000 Mobile communication linked up to wire/wireless and global satellite networks Includes Internet, data, fax, video, video communication/conference, TV viewing, and motion picture in real time.

19 Competition  SK Telecom  Korea Telecom Freetel

20 Korea Telecom Freetel Established in January 1997 and successfully launched commercial service in October 1997 One million subscribers within first six months of operations 1 year later they had more than 3 million subscribers. As of April 2000 there are over 4.7 million subscribers generating $4.3 billion in revenues 1st cellular operator to launch IS-95B wireless Internet service nationwide in February 2002 Concluded merger contract with KTICOM in 2002 Ranked No.1 in mobile Service on the Business Week's IT 100 in the world Provides 3G services based on W-CDMA

21 SK Telecom South Korea’s #1 wireless telecommunication services provider Revenues totaled $6.37 billion in 2001 Part of the SK Group which is made up of 60 member companies Includes seven companies listed on the Korean Stock Exchange SK Telecom has a presence on six continents Provides 3G services based on W-CDMA

22 South Korean Mobile Phone Market 2001 South Korea 1 st to provide CDMA 2000 service LG 0.05 million net subscribers in 2002 Wireless internet market as the most successful growth driver Technologically adept culture Importance of the Korean youth

23 Market Share 2002 2002 Korean mobile sector ended with 32.34 million subscribers up 11.4% from 2001 and a penetration rate of 67.7%

24 Cell Tech Evolution

25 3rd Generation Wireless Technology Capabilities

26 3G Network Standards cdma2000 1X EV-DOcdma2000 1X EV-DVW-CDMA Wireless access method Synchronous Asynchronous Speed of data transmission 2.4Mpbs (high) 307Kbps (average) 5.2Mpbs (high) 1.2Mbps (average) 2Mpbs (high) 384Kpbs (average) ApplicationsMMS, VOD, mobile broadcastingMMS, VOD, mobile broadcasting, visual telephone CasesSKT, KTFN/ANTT DoCoMo of Japan Features  Dedicated data services  Commercialized in frequency band of 2G  Channels can be dominated by users that have high capacity date transmission  Compatible with existing network  Unlike EV-DO, provides both data and voice services, high efficiency of networks  Not commercialized  Compatible with existing networks under synchronous method  No difference with EV- DO, if excluding visual telephone services  Stability with speed of 384Kbps  Incompatible with existing networks; massive CAPEX required, problems related to handoff  High growth potential relative to cdma2000

27 3G Benefits of 3G Additional capacity More efficient spectrum management techniques Faster data rates Enhances 2.5G applications Facilitates new applications Continued substitution from fixed to mobile Ensures optimal capital efficiency

28 Mobile Phone Industry Declining ARPU (Average Revenue per User) Decrease in Service Revenue Market Saturation Increase in Subscriber Base 3G Technology

29 ARPU and MOU ARPU declined 9.5% and was W33.25million in 2002 MOU was at 121 minutes for outbound traffic while inbound traffic was 107 minutes, an increase of 2.7%

30 A New Focus High Customer Growth -Voice Centric Customer Focus -Portfolio of voice and data services THE TRANSITION

31 New Growth Drivers The Industry’s Solution Decrease in Prices for Voice Calls New Focus on VAS and Data Services

32 Issues Relating to Growth Target new demographics Corporate clients Youth 3G technology New applications What to market Expensive development Infrastructure Engineering

33 Increasing ARPU Modest but REAL ARPU movement Improvements arise generally from Increase in data revenues Sustained growth in SMS New applications (e.g. picture messaging) Competitive gain on high spending customers Further increases in active customers Greater usage of new voice services

34 Regulatory Environment Ministry of Information and Communication (MIC) Accelerate information Promote the IT industry Facilitate market Deregulation and liberalization Promote venture capital along with R&D within the communications sector

35 Tariff’s MIC regulates tariff rates for SKT Regulation of tariff causes ripple effect in industry Tariff’s cut by 8.3% in January 2002 and 7.3% in January 2003 Can hinder free market competition

36 Mobile Number Portability Wireless subscribers can switch operators without having to change their mobile phone numbers LG customers granted MNP in 2005 No need for a new handset Promote competitive environment

37 Handset Subsidy & Marketing Handsets are subsidized through customers signing up for contracts MIC limited subsidies to 10-20% of retail handset price MIC imposed limits on marketing activities via membership or royalty programs Reduce marketing costs

38 So What’s the Deal… WHAT’S THE BIG PROBLEM? Why not focus on: New types of customers Promoting data and VAS usage Providing new voice services Increasing user spending


40 Current Market Situation SK Telecom - KTF - LG Telecom – S&P500

41 LGT Revenue Breakdown Moderate growth in PCS service due to tariff rate cuts and lower interconnection rate adjustments in 2002 High marketing, customer acquisition costs leading to slower growth in PCS Voice

42 Ratio Analysis

43 Ratio Analysis Cont’d

44 Return on Equity Risk Free Rate of 4.75% Company Beta of 1.5 Market Risk Premium of 6.25% SYS = 5% 10-Year US yield 3.875 10-Year Korean yield of 8.875 R e = R f + SYS + B(R m – R f ) = 19.13% Weighted average return of debt of 10.5%

45 WACC / DCF WACC = 12.13% E/V*R E + D/V*R D *(1-T C ) Debt = 1,181,582m Equity = 876,009m T C = 29% Assumptions 5 years cash flow projections Perpetual growth rate of 4% Terminal EBITDA multiple of 4x 72% of DCF value resides in the terminal value

46 DCF Calculations

47 DCF Analysis Trading at W4,200 52 week range 3,370 - 5,050 DCF Target Price = W5,000 12% Discount Rate 4x Terminal EBITDA Multiple Trading 18.4% below our DCF calculation Investors may feel that LG Group will not increase spending for LG Telecom Exposed to downside risk relative to competitors due to LGT’s lower: ROIC Earnings Growth Rate Premium P/E multiple “LGT Phone Home” Needs help to survive!

48 Scenario 1 Divest LG Telecom Pros Cash generated could be used towards more profitable projects Concentrate on other businesses Cons Lost opportunity in 3G technology X

49 Scenario 2 Implement 3G Pros Increase subscriber base Offer superior service Cons Too expensive for LGT to do alone Not enough cash flow to cover capex X “Show me the money!!!”

50 Scenario 3 “Do Nothing” Pros Second mover advantage No Capex required Cons Loss of Subscribers to new technology Obsolete technology X

51 Our Recommendation Strategic Alliance with KTF Pros Risk and cost of implementation are split Synergies with customer bases and existing technologies Increase in available resources Cons Regulations over mergers Loss of LGT’s trade secrets Sharing of profits “If you can’t beat ‘em, join ‘em”

52 Q&A

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