John GenoveseEdward Mui

Ram NarayananMitesh PatelSachin Patel

Aric Schachner

AgendaBoth 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

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

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.

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…”

Asian Financial Crisis

Exposed weaknesses in South Korea’s developmental model including

High 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

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

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.

4 Tigers CPI RANKSingapore 5Taiwan 14Hong Kong 30South Korea 43

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”

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

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

LG Telecom Brands

Ez-i Khai Khai Holeman Btob IMT (International Mobile

Telecommunication) 2000

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.

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.

Khai Holeman

Incorporates teenage interests: Invitations to various events and

discounts Animated characters

Highly diverse marketing techniques

High demand among teenagers

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

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.

Competition

SK Telecom

Korea Telecom Freetel

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

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

South Korean Mobile Phone Market

2001 South Korea 1st 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

Market Share 2002

Subscribers Net Adds Activiations Deactivations Market Share (%)SKT 17,329,252 145,000 315,155 120,278 53.60%KTF 10,277,333 (55,437) 160,273 215,710 31.72%LGT 4,755,155 (15,006) 55,128 70,134 14.68%Total 32,342,040 74,557 530,556 406,122 100.00%

53%32%

15%

SKT KTF LGT

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

Cell Tech Evolution

3rd Generation Wireless Technology Capabilities

3G Network Standards

cdma2000 1X EV-DO cdma2000 1X EV-DV W-CDMA

Wireless access method

Synchronous Synchronous Asynchronous

Speed of data transmission

2.4Mpbs (high)307Kbps (average)

5.2Mpbs (high)1.2Mbps (average)

2Mpbs (high)384Kpbs (average)

Applications MMS, VOD, mobile broadcasting MMS, VOD, mobile broadcasting, visual telephone

Cases SKT, KTF N/A NTT 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

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

Mobile Phone Industry

Declining ARPU (Average Revenue per User)

Decrease in Service Revenue Market Saturation

Increase in Subscriber Base 3G Technology

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%

A New Focus

High Customer Growth

-Voice Centric

Customer Focus-Portfolio of voice and data services

THE TRANSITION

New Growth Drivers The Industry’s Solution

Decrease in Prices for Voice Calls New Focus on VAS and Data Services

Issues Relating to Growth

Target new demographics Corporate clients Youth

3G technology New applications What to market

Expensive development Infrastructure Engineering

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

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

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

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

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

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

NO 3G!

LG TELECOM DID NOT INVEST IN 3G…

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

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

Ratio Analysis

Activity Ratios 2002 2001 2000 2001 2000 2001 2000 A/R Turnover 7.86 8.24 8.83 7.46 7.76 5.66 6.9 Net Fixed Asset Turnover 1.39 1.40 1.32 1.92 2.13 1.38 1.46 Asset Year Change 12.49 22.41 3.52 20.66 76.32 95.87 33.08 Total Cap Exp Growth 4.26 -18.17 7.52 -38.33 99.41 21.95 52.58 Depreciation Change 21.52 -30.00 113.83 19.45 91.28 115.99 39.06Profitability Ratios Sales Yearly Change 6.82 14.65 28.66 12.78 67.11 61.66 23.08 Operating margin 7.84 17.43 -14.53 27.77 20.15 16.59 9.01 Pretax margin 4.56 10.51 -20.34 23.61 17.35 12.48 6.06 Profit margin 3.2 7.28 -23.90 13.69 13.1 9.63 4.17 Return on assets 2.47 6.14 -19.91 9.41 11.23 8.83 3.99 Return on cap. 6.13 13.76 -13.83 13.02 15.01 14.94 7.29 Return on equity 8.59 30.42 -94.40 20.19 20.08 27.59 11.05 Interest burden 58.14 60.32 139.97 85.04 86.11 75.25 67.24

LG SKT KTF

Ratio Analysis Cont’d

Per Share Data 2002 2001 2000 2001 2000 2001 2000 Op income per share 850.16 1,770.43 -1,410.22 26859.01 17144.63 4420.35 1756.1 Book value/share 3159.32 2,936.39 1,052.86 64916.67 66937 11089.5 7762.34 P/E 16.6 11.15 NA 17.82 22.84 11.26 20.33Liquidity Ratios Current ratio 0.46 0.50 0.33 1.16 0.87 0.69 0.48Debt Factors T debt/Com equity 188.72 169.63 735.85 84.02 50.02 171.63 140.73 Total debt 1,653.20 1,381.14 1,477.43 4,526.73 2,982.37 3487.6 1558.24Leverage Analysis Assets/Equity 3.55 3.40 11.26 2.19 1.81 3.2 3 Debt to assets 53.13 49.93 65.38 33.97 27.00 53.69 46.98

KTFSKTLG

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

Re = Rf + SYS + B(Rm – Rf) = 19.13% Weighted average return of debt of 10.5%

WACC / DCF

WACC = 12.13% E/V*RE + D/V*RD*(1-TC) Debt = 1,181,582m Equity = 876,009m TC = 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

DCF Calculations

Terminal EBITDA MultipleDiscount Rate 2x 3x 4x 5x 6x 7x 8x

8% 2826 4834 6842 8850 10857 12865 148739% 2553 4471 6388 8305 10223 12140 1405710% 2294 4126 5957 7789 9621 11453 1328411% 2047 3798 5549 7299 9050 10801 1255212% 1812 3486 5160 6834 8508 10182 1185613% 1589 3190 4792 6393 7994 9595 1119614% 1377 2909 4441 5973 7505 9038 1057015% 1174 2641 4108 5574 7041 8508 997416% 981 2386 3790 5195 6599 8004 9409

LG Telecom Discounted Cash Flow Analysis ( KRW Billions)

2002 2003E 2004E 2005E 2006E 2007EEBIT 230 276 368 412 444 472Net Income 161 194 258 289 312 332 + Depreciation & Amortiztion 314 322 324 332 332 314 + (Inc) / Dec in net working capital (99) (16) (26) (9) (11) (13) - Capex 359 321 391 350 359 347Free Cash Flow 17 178 165 262 264 286

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!

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

Scenario 2Implement 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!!!”

Scenario 3

“Do Nothing” Pros

Second mover advantage No Capex required

Cons Loss of Subscribers to new

technology Obsolete technology

X

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”

Q&A