nfc - new payment market opening...

2 Tong Yang Securities Inc.

NFC - New payment market opening up!

Contents

Summary — Key charts & tables / 3

I. NFC / 6

What is NFC? / 6

NFC vs RFID / 7

NFC service applications / 8

Industry trends / 12

Reasons for optimism on NFC market growth / 16

II. Telcos / 22

New pie for telcos: mobile payment market / 22

Telcos vs platforms / 23

Card firms to see market shares change / 25

How will card firms’ market shares change? / 27

Outlook: bigger pie on market share expansion / 29

Domestic telcos’ NFC strategy / 31

III. Card companies / 32

Equity research

KT (030200 KS) / 34

SK C&C (034730 KS) / 42

Samsung Card (029780 KS) / 62

KCP (060250 KS) / 71

Tong Yang Securities Inc. 3

Company Report

Sector Report

Summary — Key charts & tables

Diverse NFC service applications

P2P payment Coupons

Parking location

Health care

Ticketing

Authentication

Historic site info

Ordering food

Transactions between NFC devices

Personal info management

Info & ads

Source: Korea Communications Commission, Tong Yang Securities

NFC-enabled mobile device forecast: global NFC-enabled mobile device forecast: Korea

1,2001,300

1,375 1,4251,513

1,5881,663

1,738

0 13 41

817

632

460318

128

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2008 2010 2012E 2014E

(mn units )

TotalNFC -enabled handsets

3.0

13.0

27.0

37.5

44.0

0 .05 .0

10.015.020.025.0

30.035.040.0

45.050.0

2011E 2012E 2013E 2014E 2015E

(mn units )

Source: visiongain, Tong Yang Securities Source: Tong Yang Securities



NFC payment market forecast: global

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2010 2011E 2012E 2013E 2014E

(US$mn)

Source: ETRI

Korea credit purchase growth

0

100

200

300

400

500

600

2000 2002 2004 2006 2008 2010 2012 2014

(Wtn)

CAGR 13%

CAGR 15~20%

Source: Tong Yang Securities


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Sector Report

Laggards to get more chances in NFC payment market

NFCTraditional payment method

Theater Gas Shopping TravelTheater Gas Shopping Travel


NFC-related companies

Current Target Mkt cap Sales NP P/E EV/ P/B ROE Company

(won) (won) (Wbn) (Wbn) (Wbn) EBITDA Comment

KT 36,700 60,000 9,583 20,711 1,534 6.3 3.2 0.9 13.0 To spur entry into card payment, data processing, using affiliate BC Card as leverage

(BUY) Transitioning to value-added service provider, encompassing telecom, media, and finance

SK C&C 133,500 163,000 6,675 1,738 702 9.5 37.1 2.2 28.9 Deserves premium as SK Group’s de-facto holding company

(BUY) To benefit from rising demand for IT convergence, including NFC, cloud computing

Samsung Card 57,100 70,000 7,021 3,225 381 15.1 21.4 1.1 7.61 Spread of NFC to speed growth of credit card payment market, including micro-payment

(BUY) To raise market share by boosting affiliate-based marketing. To see proceeds from sale of Samsung Everland shares

KCP 4,715 6,900 52 109 7 7.1 - 2.4 35.4 Earnings hit record-highs on growing electronic payment market and M&A momentum

(BUY) To generate further growth from NFC payment service

KBT* 12,700 - 108 123 17 6.3 4.2 1.5 22.1 Electronic payment service provider

Not rated To benefit from spreading NFC–USIM

Ubivelox* 17,000 - 94 106 14 6.5 3.4 1.6 28.5 Maker of smart card, mobile phone platform software

Not rated To benefit from growing NFC-USIM, other mobile payment platform markets

Partron* 16,950 - 344 321 33 10.2 7.0 2.3 25.3 Maker of handset antennas and camera modules

Not rated To benefit from growing NFC antenna market

Note: Based on 2011 earnings * Figures for KBT, Ubivelox, and Partron are Fnguide earnings consensus




1. NFC What is NFC?

NFC (near-field communication) refers to a set of short-range wireless technologies, typically operating at a distance of 10cm or so and a frequency of 13.56 MHz.

NFC technology was jointly developed by Sony and Philips, and in 2004, Sony, Philips, and Nokia took the lead in establishing the NFC Forum for global standardization of the technology. NFC did not get much attention initially, but is now starting to attract some interest with the recent surge in popularity of smartphones. Currently, 125 companies, including mobile telcos, handset makers, financial firms, and solution providers, are participating in the NFC Forum to map out a global standard.

NFC-enabled devices allow for simplified transactions, data exchange, and connections with the touch/swipe of the device. Unlike existing wireless technologies (like RFID, which only offered data reading), NFC should gain momentum quickly since an NFC tag includes a reader and writer in an NFC-enabled smartphone.

What defines NFC?

Classification Note

Reader/ writer

NFC-enabled device operates as a reader of passive RFID tags eg, smart card reader, Smartposter

P2P Two NFC devices operate as readers and can transfer data to each other eg, electronic business cards, digital photos

Mode

Card emulation

One NFC device can read another’s NFC tag, even when power is off eg, transportation card, electronic key, mobile payment

Range of communication 10 cm on average (maximum 20cm)

Bit rate 106, 212, 424, 848 Kbit/s

NFC Forum participants

Mobile telcos: AT&T, Sprint, NTT Docomo, China Mobile, SK Telecom, etc Handset makers: Nokia, Samsung Electronics, LG Electronics, Motorola, RIM, etc Financials: Visa, Amex, MasterCard, JCB, Paypal, etc IT: Google, Microsoft Solution providers and others: Intel, Qualcomm, Broadcom, TI, Sony, etc

Potential points of use

Source: Atlas Research, NFC Forum, Tong Yang Securities


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NFC vs RFID

NFC is an extension to RFID (radio-frequency identification) technology, which is already being used for contact-less mobile payment. When it debuted, RFID technology was expected to be widely used as a method for mobile payment, but has not turned out to be very popular. SK Telecom was the first in the world to roll out an RFID-based mobile payment system, “Moneta,” but it did not become popular due to failure to predict demand and disputes between mobile telcos, credit card companies, and VAN (value-added network) providers.

However, NFC is more likely to succeed where RFID failed for the following reasons.

First, NFC offers interactive services, allowing data to be transferred from one mobile device to another. In particular, an RFID reader allows only one-way data transfer and has very limited uses, but an NFC mobile device can itself function as a reader, allowing mutual data transfer. Thus, NFC can offer a range of services such as mobile payment, authentication, and ticketing.

Second, NFC allows for financial transaction services requiring authentication of personal information. If a user pays for something using an NFC-enabled smartphone, the user must enter a PIN number, making transactions more secure. Also, each transaction is encrypted, so that the data is transferred only among paired mobile devices. In a word, NFC beefs up security.

NFC vs other wireless technologies

Classification NFC Credit card RFID Bluetooth

Payment convenience Very high Medium Very high None

Security High High Low None

File transfer convenience Very high None None Low

File transfer security High None None Low

Source: Digieco, Tong Yang Securities

Third, a global NFC standard is expected to be launched. Amid the spread of smartphones featuring NFC, multiple players in diverse industries are proactively working on a global standard for NFC, in contrast to the case for RFID, which failed to find a global standard. On the domestic front, the “Grand NFC Korea Alliance” led by the Korea Communications Commission is conducting discussions on the standardization of Korea-type NFC and establishment of NFC infrastructure.

Fourth, smartphone makers are adding to their smartphone line-ups. As NFC chip prices continue to fall, smartphone makers are vying to release models equipped with NFC to make their products competitive. In addition, all the major mobile OS platform providers—Google, Apple, and Microsoft—are expected to support NFC. Domestic smartphone makers are forecast to roll out 3mn NFC-enabled smartphones in 2011 and 20mn in 2012.



NFC service applications

Most notably, NFC offers a wide range of service applications (vs a limited menu for RFID), as NFC allows data transfer or sharing between mobile devices.

An NFC-enabled smartphone can be used as electronic money, an electronic wallet, or an identification card, and allows the exchange of electronic photos and electronic business cards. Moreover, NFC is compatible with existing RFID infrastructure.

NFC service applications could cover mobile payment, access control, personal information management, product authentication, advertising, and social shopping.

NFC service areas

Service areas Note

Contact-less payment Mobile payment not using a credit card or cash Payment

Online payment Transferring money online from one mobile device to another

Ticketing Film ticketing, digital content (eg, music) purchases

Access control Access control for buildings, computers, and vehicles Access control

Mobile device pairing Simplified transactions between devices

Identification NFC-based door opening and PC-user identification

Social networking File sharing, electronic biz card, electronic money, mobile gaming

Ad/coupon Location-based marketing, coupons, parking location

Personal info mgmt

Medical Medical record management

e-tagging Product info reading, product authentication Authentication

Content download E-book, music, and video content downloads

Demand forecast, by service app

Pote

ntia

l dem

and

Contactless payment

TicketingSocial

networking

Mobile device pairing

Access control

LowMidLow

High

Mid

Low

LBS-based marketing

Embedded tag for consumer electronics

e-tagging(barcode/QR code)

ID

Source: NXP Semiconductors, Atlas Research, Tong Yang Securities


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Electronic payment service

NFC technology will combine financial and telecom services and is expected to replace all payment methods in the long run as an “electronic wallet.” NFC electronic payment services offer not only one-way payment like RFID, but also diverse financial payment services, social commerce, and LBS- (location-based service) advertising, by taking advantage of interactive data transfer and/or data-saving functionality. The NFC electronic payment process is shown in the table below.

NFC electronic payment process

Payment process

Activate NFC and swipe smartphone near reader Enter payment PIN

Transfer transaction info to financial institution via mobile network

Financial institution transmits transaction validity to reader

Transfer electronic receipt and discount coupons to smartphone

Relevant companies

Makers of NFC chip, NFC USIM, NFC device

OS platform providers, mobile telcos, credit card firms

VAN/PG, mobile telcos Credit card firm Google, Apple, mobile telcos, credit card firms


A user can make a payment straight from a smartphone simply by entering a payment PIN (hot key) on an NFC-enabled smartphone and bringing it near a reader (contact payment device). The user can then save receipts and electronic coupons on the smartphone. In a nutshell, an NFC smartphone makes payment a lot easier. If NFC mobile payment services become widespread, consumers will no longer need to carry several cards in a wallet, instead having multiple “mobile cards” on a smartphone that can also keep track of diverse card benefits (coupons, mileage).

In addition to one-way mobile payment service, an NFC-enabled smartphone can operate as a reader, allowing for easy payment and bank account wire transfer between smartphones. A user can do a wire transfer by simply tapping his/her NFC-enabled smartphone to another’s NFC-enabled smartphone. Small merchants or delivery businesses, who may find POS (point of sale) devices pricey, can get payments on their NFC smartphones. Moreover, NFC should simplify the currently complicated online payment method using credit cards and authentication certificates.

NFC-based coupons and marketing

An NFC smartphone user can download and save coupons on the device for later use. Meanwhile, stores can offer coupons several ways, including directly transferring coupons to an NFC smartphone, or allowing an NFC smartphone user to upload the store’s coupon on SNS (social network service) so that other smartphone users can download them on their mobile device for later use.




We expect a wide range of NFC service applications—such as access control, personal information management, and authentication—to become popular. In particular, an NFC smartphone should become an alternative to all the cards in one’s wallet (including transportation cards, social security ID, memberships, discount cards, and business cards) and authenticated certificates will manage personal information. An NFC smartphone will also be able to handle ticketing and storing/managing personal medical records.


P2P payment Coupons

Parking location

Health care

Ticketing

Authentication

Historic site info

Ordering food

Transactions between NFC devices

Personal info management

Info & ads



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NFC-embedded cars

During the 2011 Mobile World Congress, NXP and Continental showcased a technology concept car showing how NFC can provide new ways for people to interact with their cars. For example, a user can use an NFC smartphone instead of a key to open a car door. The NFC-enabled car can give the driver a personal welcome message, set their comfort preferences, and then, by docking the phone in the dashboard, the phone can become part of the on-board entertainment and communication system, presenting a selection of personal music choices, facilitating audio streaming, and setting up hands-free calling. The secure mobile device can be used to start the engine (by disarming the engine immobilizer) and receive important diagnostic data such as fuel consumption, mileage, and service data to be viewed away from the car at a later time. Using GPS, the car’s location can also be matched to the driver’s ID, helping the driver find their car in a new city or large parking lot.

Opening a door Setting up hands-free calling

Source: Tong Yang Securities Source: Tong Yang Securities



Industry trends

Expectations for NFC are mounting and a lot of players are trying to cash in. In particular, many eyes are on Google and Apple given their prowess in the smartphone OS market, and their adoption of NFC should be a great boon to the industry’s growth.

Google partners with MasterCard to tap into mobile commerce

Google is moving the fastest. The company unveiled “Google Wallet” (mobile payment) and “Google Offers” (mobile coupon) on May 26 in collaboration with Sprint, MasterCard, Citi Bank, Macy’s, Subway, and First Data. Currently, the service is limited to Citi MasterCard and Google’s prepaid card holders who use Sprint’s Nexus S 4G, but should soon expand to all Android-based smartphones. Google plans to make the NFC payment system available worldwide as soon as August.

Google Wallet is an app that makes a phone like a wallet by saving the user’s identification, credit card, and membership card information. At checkout, the app automatically redeems offers and earns loyalty points for the user. Google Offers is a coupon service which uses geographic targeting. It is similar in a lot of ways to coupon services offered by Korean social shopping service providers (eg, Groupon, Ticket Monster, etc), the difference being that Google’s includes the services provided by Google Maps, Google Checkout, and Google Places. By utilizing NFC technology, Google plans to expand its advertising revenue base (which accounts for 99% of its total revenue) from fixed-line to mobile.

Many companies teamed up to create Google Wallet

Company Service Google Wallet images

Google Offers Google Wallet for free, no commission; non-NFC-phone users can still use the service by downloading NFC sticker and Google Wallet apps

MasterCard/Citibank

Made Google Wallet compatible with MasterCard’s PayPass devices, which also support Google’s prepaid cards

Sprint Performed field tests on its Nexus S 4G (Did not join Isis, a mobile commerce network created by AT&T, Verizon Wireless, and T-Mobile)

First Data Provides mobile payment solutions



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How to shop using Google Wallet

Buy smartphone with Google Wallet app

> Samsung’s Nexus S 4G provided by Sprint has

Google Wallet

Get Citi Master Card or Google

debit card

> Google’s virtual debit card allows

users to deposit cash online

Find stores that accept Master Card’s PayPass

payment system

> PayPassavailable in

124,000 stores in US and 311,000

worldwide

Place smartphoneon PayPass reader

> NFC facilitates payment without direct contact and

automatically reads coupons or

loyalty points

Get receipt through

smartphone

Source: Dong-A Daily, Tong Yang Securities

Apple’s iPhone 5 rumored to have NFC functions

Apple is also gearing up to take the lead in NFC. In Aug 2010, it hired NFC expert Benjamin Vigier as product manager for mobile commerce. It also has a lot of patents for NFC-based hardware and software. The next “iPhone” is rumored to use NFC.

Apple has many NFC-related patents

Patents Functions

NFC-based mobile payment service Pay using credit card info saved in iTunes or wire transfer

iPay, iBuy, iCoupon Mobile payment, commerce, marketing in iPhones with built-in NFC

Products+ NFC-based product marketing and promotion app

Flight ticketing app Automated flight ticketing, auto airport security check via iTravel app

Grab & Go File sharing/copying between Apple devices (Mac, iPhone, Apple TV, etc)

Various Apple devices based on NFC NFC-based iPod, game controllers, TV, and iPhone

NFC-based tickets (concerts, sports) NFC-based tickets

Source: Near Field Communications World, Tong Yang Securities

Apple aims to launch an innovative mobile commerce universe on the back of the iPhone and iTunes. It may go independently or, as rumor has it, team up with Visa.

Apple has info on over 160mn credit cards saved in iTunes, more than AT&T and Verizon combined. In view of this data and its favorable business model (eg, 30% of app sales going to Apple), we believe Apple, unlike Google, could establish a payment model where it could collect commissions as an intermediary. Of note, Apple has not participated in the NFC Forum. Meanwhile, Apple is rumored to be seeking a partnership with Visa in mobile commerce. Visa recently announced that Apple would be putting NFC chips in the “iPhone5.” Visa aims to create an NFC payment solution compatible with every smartphone. Just how big a percentage of sales Apple will get in this deal should become a benchmark for all players in future.



US mobile carriers partnering with credit card companies

On Nov 16, 2010, top US mobile carriers Verizon, AT&T, and T-Mobile created an NFC-based mobile payment venture called “Isis” in an attempt to take the lead in the NFC space over Apple and Google. These carriers collaborated with Discover Financial Services and Barclays to launch their own mobile payment system. Michael Abbott, head of Isis, says the aim was to create a mobile wallet that would practically replace cash, credit/debit cards, reward cards, coupons, tickets, and bus/subway cards.

More recently, however, the three carriers have changed their initial plan and are seeking ways to partner with credit card firms such as Visa or MasterCard.

Partnerships between carriers and credit card companies now look like a prerequisite in the NFC market. On the one hand, mobile carriers are weak in apps (having been beaten by OS makers and handset makers); on the other, credit card companies clearly need to do something in the NFC market, since the new technology significantly lowers entry barriers to the existing commerce scene.

Visa

Visa plans to establish an NFC payment system in the US and Canada by autumn 2011, and its move will have huge impact on the industry, as the company accounts for over half the credit card payments in the US and has over 1.8bn users worldwide. To build a mobile wallet system, Visa acquired online payment service providers such as Cybersource, Authorize.net, and PlaySpan. Furthermore, it is collaborating with Bank of America, Chase, and Wells Fargo on its NFC mobile payment system.

As noted earlier, Visa is reportedly working with Apple to build a mobile payment system into the next iPhone. It is also working with Isis and has entered a partnership with Samsung Electronics to establish a mobile payment service system.


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Business moves related to NFC

Business Company Comment

Nokia To put NFC chips in all of its smartphones

Samsung Electronics To put NFC chips in most of its smartphones; in Korea, Nexus S and Galaxy S II have built-in NFC Handset maker

RIM, HTC Announced production of smartphones with built-in NFC chips

Google Unveiled Google Wallet, Offers, working with Sprint, Citigroup, MasterCard, First Data, Walgreens Inserted NFC into Android 2.3 Gingerbread platform

Apple Many patents related to NFC; hired NFC expert Benjamin Vigier; iPhone5 rumored to have NFC chip Platform provider

MS To launch Windows Phone 7 with built-in NFC chip at end-2011

NXP Semicon Unveiled Android-based phone development tool supporting NFC Parts maker Broadcom Bought NFC specialist Innovision; committed to wide deployment by offering low-priced products

US Verizon, AT&T, T-mobile Created NFC-based mobile payment venture “Isis”; working with Discover Financial (credit card) and Barclays (UK); to launch NFC service in US in 2012 after test service in 2011

US Sprint Working with Google to create its own NFC-based mobile payment network

Europe T-mobile, Vodafone, KPN Partnering with top banks (eg, ABN AMRO, Rabobank, ING) to build NFC infras in Holland by 2012

Europe Orange UK, DT, FT-Orange, Vodafone, Telecom Italia

Agreed to develop NFC standards

Orange (France) Did NFC pilot svc in Nice (France) for general commerce/transport payment; RFID-based tourist info

Docomo (Japan) To shift its mobile commerce from Felica to NFC

SK Telecom (Korea) Collaborating with Softbank (Japan) and KDDI to develop NFC-based payment system

Carrier

KT (Korea) Partnering with Docomo and China Mobile

Visa Targets commercialization by autumn 2011; partnering with Bank of America, Chase, Wells Fargo

Mastercard Working with Google and Citi Group for Google Wallet and Google pre-paid card

Paypal To launch NFC mobile payment service in 2H11, including P2P payment and commerce

Financial firm

BoA, US Bankcorp Working on NFC-based mobile payment project with Visa

Source: Atlas Research, KT Digieco, companies, Tong Yang Securities



Reasons for optimism on NFC market growth

NFC-enabled handset to become mass-market device

From 2H11, all premium smartphones will likely offer NFC functionality. Samsung Electronics already offers NFC on domestic models of the “Galaxy S II” (released Apr 29) and will continue to do so for key smartphone models. Apple will also launch its own system utilizing NFC by 2012 (the iPhone 5 is rumored to be NFC-enabled). Nokia decided to put NFC chips in all its smartphones from 2011. And Google has supported NFC functionality from Android OS 2.3 Gingerbread.

Previously released models will also be able to use NFC functions via accessories such as cases or strips. For example, the Google Wallet app enables NFC service for phones with an NFC sticker. Japan’s Softbank has also brought NFC function to the iPhone 4 with a sticker on the case. KT also announced plans to launch a case enabling NFC service for the iPhone 4.

Mobile and smartphone makers will likely adopt NFC functions aggressively, given their need to differentiate their handset models and OSs’ support for NFC. As the NFC market is in its infancy, it is too early to predict how fast NFC-enabled devices will spread. Market research firms generally predict that more than half of all smartphones to be NFC-enabled within 4~5 years, but forecasts vary widely.

Outlook for NFC market, by market research firm

Research firm Remark

IE Market Research Global mobile transactions to post CAGR of 94.8% from US$37.4bn (351.4mn users) in 2009 to US$1.13tn (1.06bn). Among these, transactions using NFC to more than double from 14.9% in 2009 to 32.8% in 2014.

Gartner About 50% of smartphones produced in 2015 will likely be NFC-enabled. The number of mobile payments using NFC should climb from 382.0mn in 2010 to 2.05bn in 2015.

HI Business Partners In 2015, 2.7bn mobile phone, or 85.9% of total handsets worldwide, will offer NFC.

iSuppli NFC mobile phones to rise from 93.0mn in 2011 to 280mn in 2013, 540mn in 2015.



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NFC-enabled handset forecast: global

1,2001,300

1,375 1,4251,513

1,5881,663

1,738

0 13 41

817632

460318

128

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2008 2009 2010 2011E 2012E 2013E 2014E 2015E

(mn units )

TotalNFC -enabled handsets

Source: visiongain, Tong Yang Securities

NFC-enabled handset forecast: Korea

3.0

13.0

27.0

37.5

44.0

0.05.0

10.015.0

20.025.0

30.035.0

40.045.0

50.0

2011E 2012E 2013E 2014E 2015E

(mn units )


Wide range of players participating

With mobile payments now using NFC and financial service markets expected to expand significantly, telcos, credit card issuers, banks, solution providers, and handset makers have cooperated to build mobile payment ecosystems by holding forums and forming joint ventures and partnerships.

Diverse players are entering the market, as: 1) commission revenues offer good earnings visibility; 2) they want get first-mover advantage; and 3) they hope to take the lead in the payment market away from card issuers.

Among the many NFC-related business models, the mobile payment service market will be the first to open. Thanks to a concrete profit structure (commission revenue) and business model, the service will be commercialized once security issues related to mobile financial transactions are resolved.



Much like the Internet portal business, players who acquire a large portion of users and subsequently achieve large transaction volume (traffic) early should win in the NFC mobile payment market.

OS makers like Google and Apple are most eager to enter the market, accounting for 53% of the global smartphone OS market. OS makers’ aggressive attitude improves the likelihood of NFC’s spread. Players like Google and Apple with their own payment system have been establishing NFC mobile payment systems by using existing customers’ ID and credit card information. If they offer NFC payment services, they can acquire data about consumption patterns previously enjoyed only by card issuers and banks, and other details about consumer behavior. Google and Apple seem to focus on these types of data, which could serve as the basis for new business models (location-based service, SNS, and local-area marketing).

OS smartphone market share

O ther

2%

Mic rosoft

4% Linux

1%

A ndroid

36%

Symbian

27%

RIM

13%

iO S

17%

Source: Gartner, Tong Yang Securities

Mobile telcos are targeting not just commission revenue from the use of their networks, but also new revenue from payment processing and purchasing information. They are developing strategies to receive commissions for payments and to enter the advertising market by processing payment data.

Card issuers have actively responded to the emergence of the NFC payment market to protect their leadership and maintain their competitive edge in the credit card payment market. The card issuers’ efforts are not an option, but a necessity, as the existing plastic card payment market (credit card payment device card issuer) is likely to be replaced by the mobile payment market using NFC, when the NFC payment market expands.


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Government support

On Mar 29, the Korea Communications Commission (KCC) announced a plan to facilitate NFC-based “Mobile Smart Life Service” and push ahead with offering NFC-based services such as mobile payment. The KCC set out a vision “to lead the world’s NFC-based service” and suggested nine key tasks in three areas: 1) laying the foundation for Mobile Smart Life Service; 2) developing and distributing Mobile Smart Life Service; and 3) leading the next-generation mobile payment and services market.

To lay the foundation for Mobile Smart Life, the KCC created the Grand NFC Korea Alliance, which will establish infrastructure for NFC payment services and develop a variety of related services. The alliance’s members include three telcos, card issuers, handset makers, and paid telecom service providers.

The KCC is recommending that handset makers build NFC chips into new models and will come up with diverse measures to enable NFC functionality on existing models via special battery cases and strips. In addition, it will conduct trial service after developing a payment service model for use between NFC-enabled devices. Furthermore, the KCC will develop diverse applications such as ticketing, user authentication, and door locking, using the NFC chip’s user authentication function; and develop information and targeted advertising services using NFC’s location-based service and reader function. It will make these services available on a trial basis.

On Jun 1, 2011, telcos, credit card issuers, and VAN service providers signed a memorandum of understanding (MOU) led by the KCC, and NFC infrastructure should start being established from this year in Korea. The gist of the MOU is that telcos, credit card issuers, and VAN service providers will cooperate to establish infrastructure enabling payment with NFC mobile cards. Telcos and credit card issuers had been at odds over the division of NFC payment commissions, but have reached agreement under the MOU.

First, three telcos will install about 50,000 comprehensive payment devices (credit card + NFC mobile card) for seven groups of strategic member merchants, including large-scale marts and convenience stores. VAN service providers will replace 70,000~100,000 existing devices with comprehensive devices this year. In addition, about 150,000 payment devices now in use in buses, subways, and taxis will be upgraded to allow NFC payment. According to the MOU, telcos will install the 500,000 devices within this year in cooperation with card issuers, which we believe marks a turning point in NFC mobile payment infrastructure.



Korea Communications Commission’s NFC vision and nine key tasks for three areas

Vision

Goal (by

2015)

Task

To take the lead in the global NFC service market …

Portion of smart mobile payment devices: 70%

Portion of NFC-enabled handsets: 60%

Portion of mobile payment service users:

60%

Lay foundation for “Mobile Smart Life

Service”

Develop and distribute “Mobile Smart Life

Service”

Lead next-gen mobile payment and service

market

1. Build joint infrastructure

2. Promote distribution of NFC handsets

3. Standardize NFC-based services

1. Cross-handset payment services

2. Personal authentication-based services

3. Targeted data offerings and advertising services

1. Develop tech for mobile payment security

2. Develop smart wallet technology

3. Establish test bed


Participants in Grand NFC Korea Alliance

Participants

Mobile telco SK Telecom, KT, LG U+

Card issuer Hana SK Card, BC Card, Shinhan Card, MasterCard, KB Card, Hyundai Card, Lotte Card,Visa Card, Korea Smart Card

Chip maker SEC, LGE, Pantech, UBIVelox, KEBT, MtekVision, 3ALogics

VAN, PG provider KICC, NICE, KS-Net, Danal, Mobilians, KCP, Galaxia

Related agency KSIA, ETRI, TTA, MOIBA, Kinternet


MOU to facilitate NFC service market

Details

MOU signer Telco: SKT, KT, LG U+ Card issuer: Shinhan, Hyundai, KB, Lotte, Hana SK, BC, Visa, Master, Korea Smart VAN service provider: KICC, NICE, KS-Net

Payment device (7 strategic merchant groups)

3 telcos to cooperate in installing ~50,000 comprehensive payment devices (credit card + NFC mobile card) for 7 strategic member groups: large marts, CVSs, SPC franchise, gas station, coffee chain

Payment device (general member merchants)

VAN service providers will replace 70,000~100,000 existing payment devices with comprehensive ones. Card issuers will support VAN service providers’ investment in infrastructure.

Joint use of existing payment devices Starbucks (~600), Lotte Mart (~3,500), convenience stores such as GS 25 (~50,000)

Transport payment device To upgrade 150,000 transport payment devices in buses, subways, and taxis to enable use of NFC.

Distribution of mobile card Card issuers will aggressively issue mobile cards Extra discount rate and “no cardholder verification method” applied (allows payment without signature for small transactions)

Trial business Trial business for payment and other diverse services by establishing NFC infrastructure at about 200 locations in Myeong-dong, Seoul from end-September to December



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Market forecast

According to Gartner, the NFC-based mobile payment market will grow about 10-fold from US$300mn in 2010 to US$3.5bn in 2014 (CAGR of 84.4% from 2010 to 2014).

Meanwhile, market research firm IE Market Research predicts the mobile payment market will reach US$1.13tn by 2014. What is important here is not the estimate of market size, but that most players are pinning their hopes on the rapid growth of the NFC-based mobile payment market.

NFC payment market forecast: global

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2010 2011E 2012E 2013E 2014E

(US$mn)

Source: ETRI



2. Telcos New pie for telcos: mobile payment market

Players in the NFC business are currently focusing on the mobile payment market. In Korea, the market is divided into online and offline. Payment and settlement in the online market involves the card issuer, VAN service provider, payment gateway, shopping mall, and cardholder; while the offline market is simpler, involving the card issuer, VAN service provider, member merchant, and cardholder. Credit card use in Korea posted a CAGR of 13.0% from 2006 to 2010. The portion of credit card payments in total consumption climbed from 40.9% in 2005 to 57% in 2010. The total commission market is now worth as much as W8tn.

Korea’s payment and settlement market

Card issuer

Merchant (member)

Cardholder

VANPayment gateway

(member)

Online shopping mall

Cardholder

VAN

Card issuer

VANOffline VAN

1. Middleman between merchant & card issuer

2. Install payment device

3. Operate secure network

PG’s role1. Authentication and

security for “card-not-present” transactions

2. Transfer funds for card sales from card issuer to shopping mall

3. Maintain online shopping malls

4. Manage risks

Online VAN1. Operate secure network

<Offline payment and settlement> <Online payment and settlement>

Source: KCP

Credit card use Portion of credit card use in total consumption

0

50

100

150

200

250

300

350

400

2000 2002 2004 2006 2008 2010

(Wtn)

0%

10%

20%

30%

40%

50%

60%

2000 2002 2004 2006 2008 2010

Source: Financial Supervisory Service Source: Financial Supervisory Service


Company Report

Sector Report

Telcos vs platforms

Competition between telcos and platform companies looks inevitable, as both aim to jump into the mobile payment market.

Their profit models can be divided into three categories: 1) commissions for infrastructure and participation in the payment system; 2) ad opportunities; and 3) revenue sharing.

Korean telcos are likely to be interested in all three, while platform businesses like Google and Apple will likely to focus on ads or revenue sharing.

Many expect platform businesses to take the lead in the NFC market, since they can draw on their know-how in smartphone platforms, distribute NFC applications through app stores, and offer diverse services at cheap prices with mobile ad platforms.

In Korea, however, telcos may take the lead, at least in payment services, given the following:

First, telcos have control in USIMs (universal subscriber identity module), which are evolving into “smart USIM” with NFC functionality. USIMs contain “secure elements” (SE) that hold user information and data, and, with the help of USIMs, telcos can respond well to the market, even though they are at a disadvantage in terms of OS.

Second, telcos have strong negotiating power against local manufacturers like Samsung and LG. With this power, pre-loading services is also possible.

Third, ties with offline and online franchises are important for successful entry into the NFC market. This is currently managed by VAN (value-added network; or PG (payment gateway)) providers, but in the NFC market, can partly be managed by telcos. In Korea, platform businesses will find it hard to get involved in this business.

Fourth, in Korea, telcos are expected to be very aggressive in setting up payment infrastructure. To succeed in NFC, building payment infrastructure is key, and only telcos and card firms are capable of doing this. In addition, the “Grand NFC Korea Alliance” has already been set up by the government as part of efforts to keep the NFC payment market from being lost to overseas platform businesses. This payment infrastructure will likely support only Korean standards, and the payment systems of Google and Apple may not work in Korea.

Fifth, when Visa or Master Card cards linked to Google are used, commissions will go to Visa or Master Card, reducing the pie for Korean card firms. Thus, Korean card firms will surely cooperate with Korean telcos.



Secure element: a battleground for control

Payment with an NFC smartphone requires not only an NFC chip, but also a “secure element” (SE) that holds encoded authentication information. Given that SEs store personal information, access to SEs will be limited for security reasons, and thus, those controlling the SE will have an easier time controlling the NFC market.

SEs can currently be found in: 1) embedded NFCs; 2) micro SD cards; or 3) USIM chips. Google Wallet puts SEs in embedded NFCs, while telcos use them in USIMs.

Secure element, by placement

Location Embedded NFC Micro SD USIM

Process NFC antenna NFC chip NFC antenna NFC chip micro SD NFC antenna NFC chip USIM

Company Google Visa (expected) Domestic telcos


Given that those who have an edge in SEs are likely to end up getting a bigger piece of the NFC mobile payment pie, telcos, card firms, and OS platform plays (Google and Apple) will compete fiercely for control of SEs. We think the USIM method is likely to be introduced in Korea, where telcos lead the mobile payment market.

Why it’s important to take hold of payment infrastructure

Antenna

NFC Chip

SWP

Antenna

NFC Chip

Micro SD

Antenna

NFC Chip

SWP

Embedded memory

SE

Antenna

NFC Chip

SE

SE

Telcos Financial firms(eg, Visa)

Manufacturers, global firms (eg, Google and Apple)

* : Secure Element SE



Company Report

Sector Report

NFC chipset placement method closely related to NFC market position

NFC chipset composition

Antenna

Secure element

NFC controller

NFC chipset placement method

① Micro SD

② USIM

③ HW

NFC service control

Visa or MasterCard

Telcos

Manufacturers and platform businesses

Source: Atlas

Card firms to see market shares change

We firmly believe that telcos will have stronger positions than platform businesses, at least in Korea’s W8tn mobile payment market.

The opening of the mobile payment market will likely have two effects:

First, the growth of credit card payments should accelerate. Credit card payments in Korea posted a CAGR of 13.0% over 2006~2010 amid the growth of e-commerce, and NFC should boost credit card payments for small transactions. For example, cash payments at convenience stores are likely to change to NFC-based mobile payments. In this regard, we expect credit card payments in Korea to post a CAGR of 15~20% after NFC rolls out.

Korea’s credit card payment growth

0

100

200

300

400

500

600

2000 2002 2004 2006 2008 2010 2012 2014

(Wtn)

CAGR 13%

CAGR 15~20%

Source: National Statistical Office, Tong Yang Securities



Annual sales at convenience stores

0

1

2

3

4

5

6

7

8

2005 2006 2007 2008 2009 2010

(Wtn)

Source: National Statistical Office

Second, the shift from paying with plastic to paying with smartphones will probably be a rude awakening for credit card companies and naturally lead to changes in their market shares. The better their response to the NFC payment environment, the better their results will be. It is worth noting that Samsung Card, Hana SK Card, and BC Card—currently laggards in the plastic card market—are poised to expand their presence, given that Samsung Card is likely to get support from Samsung Electronics, and Hana SK Card and BC Card get support from their telco affiliates.

Credit card payments, by major card firm

Lotte 7%

BC 22%

Samsung 11%Shinhan 22%

Hyundai 12%

Hana SK 3%

O ther 22%

Source: Financial Supervisory Service


Company Report

Sector Report

BC Card ownership structure Hana SK Card ownership structure

Woori Bank

10%

Bogo 31%

Nonghyup

5%KB 5%

KT 39%

IBK 5%

O ther

6%

SK Telecom

49%

Hana Bank

51%

Source: BC Card Source: Hana SK Card

How will card firms’ market shares change?

When people use plastic cards, they generally use the two or three cards that they are most familiar with, but once NFC payment arrives, we believe they will focus more on the cards that provide the best perks, giving new cards more opportunities to enter in the market.

If the NFC market ends up being centered on USIMs, telcos will be able to get payment information (with the consent of users), allowing them to analyze the data and use it for marketing or to provide card services tailored to each individual. This information could also be used by affiliate card companies.

The card companies with telco affiliates have had weak presences in the plastic card market, but should enjoy strong growth potential in the NFC market. We think this is one of the reasons KT acquired BC Card.

NFC and smart payment development should give a boost to credit card companies with telco affiliates. The key point of smart payment is the “multi-credit-card function,” which lets people to use several credit cards with one USIM. In contrast, an NFC-enabled handset will be able to interact with the POS (point of sale) system to suggest the best card to use (highest discount service, applicable coupons, membership benefits, etc). Smart payment should help consumers make the wisest purchase, and thus, the combination of NFC and smart payment will likely lead to greater use of credit cards linked to the telcos.

Mobile payment will likely reduce marketing costs. It would be hard to issue plastic cards to all mobile subscribers, but with NFC, consumers will be able to download cards. Companies will also be able to offer customized marketing and benefits (like points or call discounts). With telcos and card companies struggling to cut marketing costs, joint marketing could create synergies by reducing subscriber acquisition costs.

Combination of NFC and smart payment

Lower marketing costs



Laggards to get more opportunities in NFC market

NFCTraditional payment method

Theater Gas Shopping TravelTheater Gas Shopping Travel


Telcos to have more information

07:00amSubway

10:00amCoffee shop

11:30amRamenCafeteria on a rainy day

06:30pmBarbecue

Coupon

Mobile ad

Encourage use of their card

Information Source: Tong Yang Securities


Company Report

Sector Report

Outlook: bigger pie on market share expansion

To forecast the future earnings of card companies with telco affiliates, we assumed:

1. The credit card market would post a five-year CAGR of 15% (case 1) and 17% (case 2), vs the actual CAGR over the past five years of 13%.

2. Private consumption expenditure would post a five-year CAGR of 6%, vs a CAGR over the past five years of 5.8%.

3. Card firms with telco affiliates will see their 2012~2015 revenues grow: case 1) 100% (CAGR of 15%); case 2) 200% (CAGR 30%); and case 3) 300% (CAGR 45%).

4. We estimated sales, operating profit, and net profit by benchmarking against Samsung Card’s figures per subscriber. Despite differences in business structure, we used Samsung Card (Korea’s only listed card firm) as a benchmark because of the lack of data available for credit card companies’ cost structures.

Samsung Card’s 2010 operating revenue came to W3.3tn and operating profit W1.2tn, with 8.36mn users (based on Samsung cardholders at end-Dec 2010). Samsung Card’s credit card revenue (W1.8tn) accounts for 55% of its total operating revenue. Other revenue comes from financial services (cash advance, card loan, general loan), installment/lease services, and securitization.

Samsung Card earnings trend (Wbn)

Members (‘000) Op rev Credit card business

Total Active (Wbn) New cards Cash advance Card loan

Monthly installment/lease

Other Operating

profit Net profit

2008 7,687 5,126 3,034 1,187 337 350 658 502 323 258

2009 7,741 5,154 2,833 1,260 351 323 500 400 664 604

2010 8,359 5,594 3,373 1,389 319 400 308 957 1,233 1,156


Under these assumptions, we estimate that Hana SK’s operating profit, which came to only 29% of Samsung Card’s in 2010, would grow to W89bn~400bn, a significant level, although still small compared to a telco’s earnings. BC Card, whose largest shareholder is KT, is also likely to expand its market share with the opening of the mobile payment market.



Credit card payment estimates (W tn)

2010 2011E 2012E 2013E 2014E 2015E

Credit card payment

Case 1 350.7 403.3 463.8 533.4 613.4 705.4

Case 2 350.7 410.3 480.1 561.7 657.2 768.9

Credit card commissions

Case 1 7 8.1 9.3 10.7 12.3 14.1

Case 2 7 8.2 9.6 11.2 13.1 15.4

As % of consumption expenditure

Case 1 57.0% 61.8% 67.1% 72.8% 78.9% 85.6%

Case 2 57.0% 62.9% 69.4% 76.6% 84.6% 93.4%

Consumption expenditure 615.4 652.3 691.5 733 776.9 823.5


Hana SK Card earnings estimates (Wbn)

Case 1 Case 2

100% Sales OP NP 100% Sales OP NP

Y+1 381 89 81 Y+1 387 91 83

Y+2 438 103 93 Y+2 453 106 97

Y+3 503 118 107 Y+3 530 124 113

Y+4 579 136 123 Y+4 620 145 132


Y+1 430 101 92 Y+1 443 104 95

Y+2 559 131 119 Y+2 594 139 127

Y+3 727 170 155 Y+3 796 187 170

Y+4 945 222 201 Y+4 1,067 250 227


Y+1 480 112 102 Y+1 500 117 107

Y+2 696 163 148 Y+2 754 177 161

Y+3 1,009 236 215 Y+3 1,139 267 243

Y+4 1,463 343 312 Y+4 1,720 403 367



Company Report

Sector Report

Domestic telcos’ NFC strategy

Domestic telcos—KT and SK Telecom with affiliate card firms, as well as LGU+—will actively help to expand the NFC market. Over 3mn NFC handsets are expected to be supplied in 2011, including the “Galaxy 2,” which has already sold more than 1mn units. NFC handsets supplied are forecast to hit 15mn units in 2012.

Payment infrastructure will be put in place from 2011, with the support of telcos, card firms, and the government. Around 50,000 payment devices will be set up this year.

The NFC market presents a good business opportunity for domestic telcos, which are better positioned to set up payment infrastructure than platform providers, and are set to expand into the card business. Initially, they will focus on commissions, but will then serve as ad platforms. They may even receive commissions from card firms, backed by large subscriber bases after business expansion.

The telcos differ very little in terms of competitiveness in the NFC market. Having an affiliated credit card company should merely provide extra growth opportunities.

Korean telcos: NFC strategy

Telco Details

KT Released NFC feature phone (Samsung Electronics) in Oct 2010

Launched “Show Touch” service (pre-paid traffic card, door lock control, one-touch calling, coupons)

Alliance with GS25, GS Caltex, T-Money, Lotte Mart, SPC franchises

Released Galaxy S2; NFC to work on all smartphones released from 2H11

NFC business alliance with NTT Docomo (#1 in Japan), China Mobile(#1 in China)

SKT Mobile commerce zone, test run in COEX

Alliance with seven stores (eg, Megabox, Coffee Bean, and Bennigans) in COEX

Set up NFC infrastructure in all Home Plus stores in capital area

Released Galaxy S2; NFC to work on all smartphones released from 2H11

Working with Softbank and KDDI to develop NFC service

LGU+ NFC to work on all handsets released from 2012

Alliance with all financial firms

NFC marketing to begin in earnest in October




3. Card companies Credit card market to grow further

The NFC market will likely bring about two changes in the credit card market: a larger mobile payment market and more small-sum credit card payments. Mobile payment was tried in the mid-2000s, but failed to create a meaningful market, as the banks and credit card companies were lukewarm in joining, and consumers had to buy new handsets supporting mobile payments. We believe the spread of NFC-supporting smartphones will create new opportunities for the mobile payment market and that mobile payment will increase card payments for small transactions.

NFC mobile payment market favorable for card companies

The mobile payment market should bring four issues for card companies. First, we believe mobile payments will be positive for the credit card market’s growth. While purchases on plastic will be replaced with mobile payments, beyond this, card companies are set to further expand their market. Second, the impact on marketing costs should be neutral. Although the cost of issuing plastic cards will decline, commissions are unlikely to change much, as they will go from agents to telcos or handset sellers. Third, VAN commissions are likely to rise as small-transaction card payments grow. However, this issue has already been partly addressed by combined payments, and thus, the growth of small-transaction payments is unlikely to put a strain on card companies’ cost structures. Fourth, card companies will likely face additional costs in the struggle for power vs the telcos. With the spread of NFC-enabled smartphones and the growth of mobile payments, we believe telcos will start asking card companies to pay for the use of the telcos’ payment systems. However, we believe card companies will actively adapt to the NFC payment system, creating a win-win for the card companies and telcos. We think the spread of NFC mobile payment will give telcos opportunities to diversify revenue streams, and card firms opportunities to expand their markets. We also expect card firms to cooperate with telcos to boost profitability.


Company Report

KT (030200 KS)

SK C&C (034730 KS)

Samsung Card (029780 KS)

KCP (060250 KS)


KT (030200 KS)

KOREA Fixed-line telecom

KT (030200 KS) BUY (M) / TP: W60,000 (M)

Share price (W Jun 24) 38,850

Paid-in capital (Wbn) 1,564

Market cap (Wbn) 10,144

BPS (W) 41,584

Net debt to equity (%) 59.4

Shares outstanding 261,111,808

Avg daily T/O (2M, Wbn) 33

Avg daily vol. (2M, shrs) 850,833

52-week high (W) 49,200

52-week low (W) 36,350

Foreign ownership (%) 49.00

Major shareholders (%) NPS 8.3

Stock performance (%)

1M 3M 12M

Absolute 2.5 1.7 (15.1)

Relative 1.1 (0.9) (29.3)

Abs (US$) 4.0 5.5 (5.1)

0

10,000

20,000

30,000

40,000

50,000

60,000

Jun-09 Jun-10 Jun-11

0

20

40

60

80

100

120

140

KT(LHS)

Rel. to KOSPI(RHS)

(W) (%)

Source: Datastream

June 28, 2011

Poised to become value-added service provider NFC to spur entry into card payment, data processing market

KT, which has a 38.8% stake in BC Card, is expected to use near-field communication (NFC) technology to expand into the credit card payment processing market. It plans to increase its stake in BC Card to 70%

BC Card wants to be directly engaged in the mobile payment market and to expand its market share in credit card payment processing (including mobile)

KT is actively establishing NFC payment infrastructure to enter the W8tn credit card payment processing market and to create new business models, such as NFC-based advertising and authentication

Transitioning into value-added service provider

KT is in the process of transitioning from a telecom network provider to a value-added service provider, encompassing telecom, media, and finance

Through its subsidiary BC Card, KT should gain a strong foothold in the financial sector

Expectations are rising for a business “shake-up” at KT comparable to when SK Telecom split off its platform division. As KT covers diverse businesses, including network, fixed-line telephony, Internet, media, and property, a shake-up should translate into higher enterprise value

Expansion into finance and media should help KT outperform peers

Forecasts and valuations (K-IFRS, consolidated)

FY to Dec 2009 2010 2011E 2012E 2013E

Sales (Wbn) 19,649.1 21,331.3 20,710.7 20,807.2 21,334.7

Chg (% y-y) 0.0 8.6 -2.9 0.5 2.5

K-GAAP operating profit (Wbn) 966.5 2,175.1 2,347.9 2,413.1 2,591.9

Net profit, controlling interest (Wbn) 494.8 1,168.0 1,533.8 1,547.8 1,713.2

EPS, controlling interest (won) 1,868.7 4,473.2 5,874.3 5,927.7 6,561.3

Chg (% y-y) 14.0 139.4 31.3 0.9 10.7

P/E (x) 20.7 10.2 6.6 6.6 5.9

P/B (x) 1.0 1.1 0.9 0.8 0.8

EV/EBITDA 4.2 3.8 3.3 3.2 3.0

ROA (%) 2.3 4.3 5.4 5.3 5.7

ROE (%) 4.8 10.6 13.0 12.3 12.8


Nam-kon Choi [email protected] +822-3770-3549


Company Report

Govt, telcos at forefront of building NFC payment infrastructure

Under the so-called “Grand NFC Korea Alliance,” the government and telcos are establishing the payment infrastructure for NFC, which should empower domestic telcos to compete with overseas platform providers, such as Apple and Google. NFC technology will allow telcos to launch mobile payment services, enter the W8tn credit card payment processing market, and create new business models, such as NFC-based advertising and authentication. Telecom carriers will be able to obtain credit card payment information, with approval from credit card users, and analyze and use the data for marketing purposes. In addition, they will be able to develop more targeted advertising based on analysis of credit card use.

Since telcos’ services and business models are unlikely to differ much with the introduction of NFC technology, KT’s ownership in financial subsidiaries should garner attention. KT, as a parent company, controls BC Card, and also Smartro, which has an estimated 10% market share in the “value added network” (VAN) market.

Emerging as largest shareholder in BC Card

KT owns 38.86% of BC Card (although this is still subject to approval from financial authorities) and plans to purchase more shares from Vogo Fund and others to expand its stake to 70% or higher.

KT’s BC Card acquisition history

Date Details

Feb 12, 2010 Shinhan Card signs MOU with KT to sell its 14.85% stake in BC Card

Aug 6, 2010 Woori Bank decides to sell its 20% stake in BC Card to KT

Dec 15, 2010 KT subsidiary, KT Capital, decides to acquire 1.98% of BC Card from Citibank Korea

Feb 8, 2011 Woori Bank and KT finalize terms on sale of BC Card shares (W140,000 per share, including call options)

Mar 18, 2011 Signs deal to buy 3.03% stake in BC Card from Busan Bank (which has 4.03% stake), boosting ownership to 38.86%

Mar 28, 2011 Former president of KT Capital, Jong-ho Lee, is appointed new CEO of BC Card


BC Card’s sales come largely from: 1) credit card issuance; and 2) credit card payment processing. Major customers for credit card payment processing are banks which issue credit cards. BC Card manages affiliate stores (eg, restaurants) and member companies (eg, banks). It handles credit card payment processing for member companies, while they are responsible for signing up new credit card customers and collecting payments.

BC Card earnings (Wbn)

2006 2007 2008 2009 2010

Sales 1,265 2,574 3,002 2,962 3,135

Operating profit 37 34 130 78 108

Net profit 24 95 118 60 31



KT (030200 KS)

Operating revenue breakdown: BC Card

(Wbn) 2007 2008 2009 2010

Card issuance revenue 532.3 659.6 492.8 487

Card payment processing revenue 1,948.8 2,167.4 2,329.3 2,483.2

Miscellaneous business revenue 72.5 80.4 117.6 141.8

Other revenue 20.2 94.7 22.6 23

Total 2,573.8 3,002.1 2,962.3 3,135


BC Card commission income breakdown: payment data processing sales share high

4.5%

79.0%

16.1%

0.3%

C ommiss ion from members

C ommiss ion from paymentdata process ing

C ommiss ion from card is sues

O ther commiss ion

Note: Data as of 3Q10 Source: Financial Supervisory Service

We expect BC Card to pursue three growth strategies: 1) direct participation in the mobile payment market; 2) expansion of its payment processing market share; and 3) entering the advertising and marketing business through analysis of credit card payment and settlement data.

First, with commissions from card issuance accounting for just 0.3% of total commission income, BC Card will likely enter the mobile payment market in partnership with KT, as: 1) it cannot generate meaningful results from its existing payment processing business; and 2) with the onset of NFC, the mobile payment market is expected to grow rapidly. Indeed, in April, BC Card upgraded the mobile division into a new mobile convergence department. This new department will encompass the mobile card development division and convergence division, and will be involved in developing next-generation mobile cards, as well as diverse mobile marketing strategies and services. The mobile division was part of the payment and settlement research institute, but became a separate division last year on growing interest in mobile cards. BC Card now has a great opportunity to grow further, as: 1) the mobile card market is expected to post a CAGR of 15% thanks to the introduction of NFC; and 2) it is a subsidiary of a telecom service provider.


Company Report

KT Chairman Suk-chae Lee stated that KT would convert itself from a telecom group into an IT convergence group by expanding the sales share of non-telecom businesses to 45%. In 2010, non-telecom businesses’ sales share at KT group was 27%. By 2015, KT aims to generate W6tn in sales from the IT service and media business, W8tn from the financial business, and W4tn from overseas businesses.

Second, we expect BC Card’s role in payment processing to expand. However, capitalizing on the NFC market will require investment in mobile payment infrastructure, which we estimate will cost about W300.0bn~400.0bn (for 2mn members). Before carrying out such capex, the company needs a concrete business model. Since card companies have an existing credit card infrastructure, they are in no rush to invest in the new NFC network, while most telecom service providers are not confident in the credit card business. However, KT differs from other telcos as it is already a major shareholder in BC Card, which can increase its share in the payment processing market by preemptively investing in mobile payment infrastructure. Once this infrastructure is in place, BC Card will be able to receive commissions from customers, such as Woori Bank, and such investment will be vindicated if BC Card boosts its payment processing market share.

Third, analysis of credit card payment and settlement data will allow BC Card to enter the advertising and marketing business. By analyzing such data, BC Card can more accurately target its advertising, enabling it to expand its customer base in the payment processing market. In this way, BC Card will be able to add a new business—analysis of payment data—to its payment infrastructure, customer and member management, and card payment authorization businesses.

Advertising business model based on e-Commerce

Advertising business model based on e-Commerce

Time and space constraintsUsers lead the whole process

No time and space constraintsBoth active/passive users targeted

SearchLink to

payment method

Link topayment method

Online payment data

On and offlinepayment data

Targeted ad and discount coupon

IntentionCheck

product dataOnline

payment

IntentionCheck/collect product data

Online payment

Offlinepayment

Search

Service provider

data mining

Source: Atlas


KT (030200 KS)

Set to become holdco with telecom, media, and financial affiliates

BC Card, which made a net profit of W30bn in 2010, will not have a huge impact on KT’s earnings even after KT secures a 70% stake. What is more important is the change in business structure it could bring to KT, helping it evolve from a simple telecommunications company into a value-added service provider. Through Skylife, KT has positioned itself as the top name in the media industry, and it is now poised to strengthen its presence in the financial sector with its adoption of NFC technology.

We also believe KT will be able to spin off businesses as SKT has done. KT has a diversified business portfolio encompassing network, PSTN, broadband/IPTV/VoIP, mobile, B2B, cloud computing, and even real estate. If SKT can generate results through business spin-offs, KT may do the same. Moreover, if KT adopts a holding company structure through such spin-offs, it could enhance its enterprise value; some affiliates could have higher foreign ownership caps, while affiliates with strong growth prospects could trade at premiums, as evidenced by Skylife.

KT and affiliates: financials and media

50.0%

38.86%

65.9% 50.3% 48.69%

♣ Sales and OP are based on 2010 annual results

Financial Media

KT

BC Card

Operating revenue: W3.13tnOP: W108.3bn

KTH

Sales: W149.8bnOperating loss: W7.2bn

KT-Skylife

Sales: W431bnOP: W37.3bn

KT Music

Sales: W40.1bnOP: W0.26bn

73.7%

KT CapitalOperating income: W176.3bnOP: W35.4bn

Kumho

Rent-a-car

Sales: W47mnOP: W6mn



Company Report

We believe KT’s value will rise as the market recognizes its competitiveness in each business segment. Moreover, expansion into the finance and media sectors could be a catalyst to boost its current valuation. We expect KT to outperform peers, and maintain BUY and our target price of W60,000.

Global peer valuation

P/E EV/EBITDA P/B

2011E 2012E 2011E 2012E 2011E 2012E

SKT 7.2 6.7 4.0 3.6 1.1 1.0

KT 6.3 6.2 3.2 0.8 0.9 3.1

SKB 25.8 14.2 4.5 4.1 1.2 1.1

LGT 10.8 8.2 3.7 3.4 0.8 0.7

NTT Docomo 11.8 11.0 3.7 3.6 1.2 1.1

KDDI 10.0 9.1 3.8 3.6 1.1 1.0

NTT 9.2 8.6 3.4 3.4 0.6 0.6

China Unicom 64.0 28.8 6.0 5.1 1.5 1.5

China Mobile 9.6 9.3 3.7 3.5 1.8 1.6

China Telecom 17.4 14.7 4.5 4.3 1.3 1.2

AT&T 12.9 12.0 5.7 5.5 1.6 1.5

Verizon 16.1 13.7 5.5 5.1 2.4 2.2

Chunghwa Telecom 16.6 16.3 7.8 7.7 1.9 1.9

Taiwan Mobile 17.0 15.9 N/A N/A 6.2 N/A

Vodafone 9.9 9.1 7.7 7.6 0.9 0.9

Orange 8.7 8.7 4.9 5.0 1.3 1.3

T-Mobile 14.1 13.7 5.0 5.1 1.1 1.0

Telefonica 9.0 8.7 5.6 5.5 3.0 2.9

Telecom Italia 7.6 7.4 4.4 4.4 0.6 0.6

SingTel 12.2 11.4 8.8 8.5 1.9 1.8

Telstra 12.1 11.1 5.1 4.9 3.0 3.1

Average 14.7 11.7 5.0 4.7 1.7 1.5



KT (030200 KS)

KT (030200 KS) pro forma financial statements

Statement of financial position Statement of comprehensive income (K-IFRS)

FY to Dec (Wbn) 2009 2010 2011E 2012E 2013E FY to Dec (Wbn) 2009 2010 2011E 2012E 2013E

Non-current assets 19,086.0 20,004.3 20,127.9 20,195.0 20,216.0 Sales 19,649.1 21,331.3 20,710.7 20,807.2 21,334.7

Investment in affiliates 288.0 429.1 554.5 702.7 755.1 Cost of sales 5,533.1 6,786.5 0.0 0.0 0.0

LT financial assets 880.2 905.1 1,015.1 1,136.1 1,276.2 Gross profit 14,116.0 14,544.8 20,710.7 20,807.2 21,334.7

Tangible assets 14,774.6 15,227.9 15,096.1 14,961.2 14,851.3 SG&A 13,149.5 12,369.7 18,362.8 18,394.0 18,742.8

Intangible assets 1,279.5 1,232.9 888.0 668.1 505.2 Other non-operating profit 0.0 0.0 0.0 0.0 0.0

Other non-current assets 1,863.7 2,209.4 2,574.3 2,726.9 2,828.2 Forex gains 0.0 0.0 0.0 0.0 0.0

Current assets 7,534.3 7,709.1 8,529.8 9,249.9 10,207.3 Equity-method gains 0.0 0.0 0.0 0.0 0.0

Cash & equivalents 1,538.1 1,193.3 1,490.0 1,768.1 2,326.7 Other 0.0 0.0 0.0 0.0 0.0

ST financial assets 1,132.6 1,312.9 1,365.0 1,406.2 1,437.6 Reported operating profit (A) 966.5 2,175.1 2,347.9 2,413.1 2,591.9

Accts receivable & other 3,903.5 4,257.5 4,452.8 4,723.2 5,013.6 K-GAAP operating profit (B) 966.5 2,175.1 2,347.9 2,413.1 2,591.9

Inventory 699.4 655.8 828.4 936.3 960.1 Difference (A)-(B)

Other current assets 260.8 289.6 393.7 416.1 469.4 Non-operating profit -251.4 -613.3 -387.6 -382.7 -344.4

Total assets 26,620.3 27,713.5 28,657.8 29,444.9 30,423.3 Interest income 197.4 143.2 130.8 149.0 165.7

Non-current liabilities 9,011.7 8,790.0 8,542.2 8,453.8 8,362.6 Interest expense 505.9 529.4 527.4 513.9 500.4

LT financial liabilities 7,541.8 7,238.9 7,078.9 6,918.9 6,758.9 FX gains/losses 219.0 31.0 9.0 -17.8 -9.7

Defined benefit obligation 337.5 360.0 370.0 385.0 400.0 Pre-tax profit 715.1 1,561.8 1,960.3 2,030.4 2,247.5

Provisions 103.6 114.5 173.2 245.2 317.2 Income taxes -107.8 -371.8 -411.0 -467.0 -516.9

Current liabilities 6,941.2 7,427.8 7,837.5 7,923.5 8,119.1 Profit from continuing op 607.3 1,189.9 1,549.3 1,563.4 1,730.5

Accts payable & other 3,923.6 3,151.5 3,417.3 3,537.2 3,733.6 Profit from discontinued op 2.4 2.6 0.0 0.0 0.0

ST financial liabilities 2,062.2 2,903.9 2,803.9 2,703.9 2,553.9 Net profit 609.7 1,192.5 1,549.3 1,563.4 1,730.5

Other current liabilities 955.4 1,372.4 1,616.3 1,682.3 1,831.6 Net margin (%) 3.1 5.6 7.5 7.5 8.1

Total liabilities 15,952.9 16,217.8 16,379.7 16,377.3 16,481.8 Other comprehensive income 0.0 0.0 0.0 0.0 0.0

Equity for controlling interest 10,376.6 11,033.8 11,800.7 12,574.6 13,431.3 Total comprehensive income 609.7 1,192.5 1,549.3 1,563.4 1,730.5

Capital stock 1,564.5 1,564.5 1,564.5 1,564.5 1,564.5 TCI/sales (%) 2.5 5.5 7.4 7.4 8.0

Capital surplus 1,448.6 1,449.8 1,449.8 1,449.8 1,449.8 Net profit 609.7 1,192.5 1,549.3 1,563.4 1,730.5

Paid-in capital over PV 1,440.3 1,440.3 0.0 0.0 0.0 NP for controlling interest 494.8 1,168.0 1,533.8 1,547.8 1,713.2

Retained earnings 9,573.8 9,364.7 10,131.6 10,905.5 11,762.2 NP for non-controlling int 114.8 24.5 15.5 15.6 17.3

Equity for non-control int 290.9 461.8 477.3 493.0 510.3 Total comprehensive income 609.7 1,192.5 1,549.3 1,563.4 1,730.5

Total equity 10,667.4 11,495.7 12,278.1 13,067.6 13,941.5 TCI for controlling interest 494.8 1,168.0 1,533.8 1,547.8 1,713.2

Total liabilities + total equity 26,620.3 27,713.5 28,657.8 29,444.9 30,423.3 TCI for non-controlling int 114.8 24.5 15.5 15.6 17.3

Cash flow statement Valuation

FY to Dec (Wbn) 2009 2010 2011E 2012E 2013E FY to Dec 2009 2010 2011E 2012E 2013E

Net profit 609.7 1,192.5 1,549.3 1,563.4 1,730.5 Growth (%)

Adjustment 5,445.4 4,459.7 4,386.8 4,335.3 4,287.8 Sales growth 0.0 8.6 -2.9 0.5 2.5

Depreciation & amortization 3,361.5 3,285.5 3,256.7 3,127.6 3,045.5 OP growth -32.3 125.1 7.9 2.8 7.4

Income taxes 0.0 0.0 411.0 467.0 516.9 EBITDA growth -15.6 26.2 2.6 -1.1 1.7

Interest expense 26.0 34.7 527.4 513.9 500.4 NP growth 18.8 95.6 29.9 0.9 10.7

FC translation gains EPS growth 14.0 139.4 31.3 0.9 10.7

Others -22.1 -46.9 -130.8 -149.0 -165.7 Invested capital growth -3.4 8.6 -0.1 0.1 -0.8

Inc (dec) in asset & debt from op -1,878.1 -1,803.6 -376.9 -284.6 -34.8 Profitability (%)

Inc (dec) in acct rec & other -974.7 -766.5 -195.3 -270.4 -290.4 COGS/sales 28.2 31.8

Inc (dec) in inventory -274.9 36.9 -172.6 -107.9 -23.7 SG&A/sales 66.9 58.0 88.7 88.4 87.9

Inc (dec) in acct pay & other 1,433.1 -157.0 265.8 120.0 196.3 EBITDA margin 22.0 25.6 27.1 26.6 26.4

Inc (dec) in other -2,061.6 -917.0 -274.8 -26.2 83.0 ROIC 5.0 9.3 10.4 10.4 11.2

Income tax 0.0 0.0 -455.0 -511.0 -560.9 ROE 4.8 10.6 13.0 12.3 12.8

Operating cash flow 3,403.7 3,370.1 4,772.7 4,745.1 5,041.6 ROA 2.3 4.3 5.4 5.3 5.7

Investing cash flow -2,876.6 -3,561.6 -2,936.7 -2,934.2 -2,831.0 Stability (%)

Disp (acq) of tangible assets -2,704.5 -3,212.2 -2,780.0 -2,772.8 -2,772.8 EBIT/interest exp (x) 1.9 4.1 4.5 4.7 5.2

Inc (dec) in intangible assets -213.8 -347.8 0.0 0.0 0.0 Debt to equity 90.0 88.2 80.5 73.6 66.8

Inc (dec) in ST financial assets 0.0 0.0 -52.1 -41.2 -31.4 Turnover

Inc (dec) in LT financial assets -22.2 -272.4 -110.0 -121.0 -140.1 Accts rec turnover (x) 5.9 5.7 5.3 5.1 5.0

Interest income 0.0 11.3 130.8 149.0 165.7 Inventory turnover (x) 35.0 31.5 27.9 23.6 22.5

Financing cash flow -930.4 -129.0 -1,539.3 -1,532.8 -1,652.0 WCTP 50.6 49.7 54.4 59.2 62.2

Inc (dec) in ST/LT financial liab 152.2 313.7 -260.0 -260.0 -310.0 Valuation

Inc (dec) in equity -528.1 -0.3 EPS 1,868.7 4,473.2 5,874.3 5,927.7 6,561.3 Dividend payout -229.4 -502.2 -766.9 -773.9 -856.6 BPS 39,739.9 42,257.1 45,194.2 48,158.1 51,438.7 Interest expense 0.0 0.0 -527.4 -513.9 -500.4 CFPS 14,562.5 17,055.8 18,346.5 17,905.8 18,225.1

Cash & equivalents EBITDAPS 16,343.4 20,912.7 21,464.1 21,219.9 21,590.1 Inc (dec) in cash & equiv -352.8 -344.8 296.6 278.1 558.6 P/E 20.7 10.2 6.6 6.6 5.9

Beginning cash & equiv 1,890.9 1,538.1 1,193.3 1,490.0 1,768.1 P/B 1.0 1.1 0.9 0.8 0.8 Ending cash & equiv 1,538.1 1,193.3 1,490.0 1,768.1 2,326.7 EV/EBITDA 4.2 3.8 3.3 3.2 3.0


Company Report

KT (030200 KS) ratings and target price history

(W)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Jun-09 Nov-09 A pr-10 Sep-10 Feb-11

C urrent price

Target price

Date Rating TP (W)

2009/08/10 BUY 48,000

2009/12/28 BUY 53,000

2010/02/01 BUY 60,000

2010/11/22 BUY 60,000


Disclosures & disclaimers

This research report has been prepared for informational purposes only; it does not constitute an offer or a solicitation of an offer to buy or sell any securities or other financial instruments. The information and data contained in this report have been obtained from sources we consider reliable; however, we make no representation that the information provided in this report is accurate or complete, and it should not be relied on as such. The recipient of this report should use his/her independent judgment regarding the sale or purchase of any securities or financial instruments mentioned herein. We disclaim any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is for our clients only. It is copyrighted material and may not be reproduced, transmitted, quoted, or distributed in any manner without the prior written consent of Tong Yang Securities Inc.

As of the publication date of this report, Tong Yang Securities Inc. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by Tong Yang Securities Inc. to any institutional investors or third parties prior to its publication. As of the date of publication of this report Tong Yang Securities Inc. is an issuer and liquidity provider for equity linked warrants backed by the shares of the subject company. The analyst (s) of this report or the analyst (s)’ spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report.

Analyst certification

I/We, as the research analyst/analysts who prepared this research report, do hereby certify that the views expressed in this report accurately reflect my/our personal views about the subject securities discussed in this report.

Stock and sector ratings

Stock ratings include an Investment Rating (Buy, Hold, Sell) as well as a Volatility Risk Rating (High, Low) that are based on the expected absolute return of a stock over the next 6 -12 months.

- Buy: Low Risk if a stock is expected to return 10% or more; High Risk if a stock is expected to return 20% or more

- Hold: Low Risk if a stock is expected to return between -10 and +10%; High Risk if a stock is expected to return between -20 and +20%

- Sell: Low Risk if a stock is expected to decline by 10% or more; High Risk if a stock is expected to fall by 20% or more

Sector ratings suggest 6 to 12 - month forward investment weighting of a given sector compared to its market capitalization weighting.

- Overweight: Investment weighting is higher than the market capitalization weighting - Neutral: Investment weighting is equal to the market capitalization weighting - Underweight: Investment weighting is lower than the market capitalization weighting


SK C&C (034730 KS)

KOREA IT services

SK C&C (034730 KS)

BUY (I) / TP: W163,000 (I)

Share price (W Jun 24) 139,000

Paid-in capital (Wbn) 10


BPS (W) 28,414





52-week high (W) 142,500

52-week low (W) 77,900


Major shareholders (%)

Tae-won Choi and others 59.1


1M 3M 12M

Absolute 17.3 41.7 80.1

Relative 15.7 38.0 49.8

Abs (US$) 18.8 45.5 90.0

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Nov-09 May-10 Nov-10 May-11

0

50

100

150

200

250

300

350

SK C&C(LHS)Rel. to KOSPI(RHS)

(W) (%)

Source: Datastream

Poised to capitalize on IT convergence Strong earnings trend and management control premium

SK C&C has enjoyed robust growth in recent years, with operating profit rising W82.7bn in the last three years vs W30.6bn in the preceding seven. This is mainly thanks to SK Group’s transition into a holding company in 2007, which increased the allocation of group resources to SK C&C. Also, SK C&C is a key overseas business partner for most SK affiliates and should benefit as they expand overseas.

If SK C&C merges with SK Corp, its value will likely surge, as Group Chairman Tae-won Choi will want to raise his stake in the group. We think it is very likely that SK C&C will trade at a premium to the market if it merges with SK Corp.

Ready to capitalize on IT convergence

The spread of smart mobile devices is speeding up global IT convergence, of which NFC and cloud computing are prime examples. SK C&C, with its long experience in mobile IT solutions, is well placed to benefit from this trend as demand for building the necessary infrastructure should be high in the initial stage of IT convergence.

Set to benefit from growing demand overseas

The rapid growth of the global IT solution market also bodes well given the company’s competitiveness in system integration (SI) and IT solutions gained in the tough domestic market, and as a key SK affiliate.


FY to Dec 2009 2010 2011E 2012E 2013E

Sales (Wbn) 82,636.5 91,227.5 1,738.4 1,964.8 2,178.9

Chg (% y-y) -7.5 10.4 -98.1 13.0 10.9

K-GAAP operating profit (Wbn) 3,732.3 5,278.2 193.2 233.8 262.5

Net profit, controlling interest (Wbn) 139.8 265.8 702.1 790.0 858.3

EPS, controlling interest (won) 2,796.3 5,316.6 14,042.2 15,800.4 17,166.1

Chg (% y-y) -3.3 90.1 164.1 12.5 8.6

P/E (x) 15.9 14.6 9.9 8.8 8.1

P/B (x) 1.8 3.2 2.2 1.7 1.3

EV/EBITDA 6.0 5.5 38.4 33.6 30.0

ROA (%) 2.1 3.4 1.7 16.9 15.4

ROE (%) 11.5 22.0 28.9 24.8 21.5


Chang-young Lee [email protected] +822-3770-3537

June 28, 2011


Company Report

1. Valuation

SK C&C enterprise value calculation (Wbn, no. of shares, won)

Value Calculation details

A + B + C Enterprise value 8,143 Stake value (W4.3tn) + operating value (W4.6tn) + net cash (-W0.8tn)

A Stake value 4,325 a + b

a SK Holdings 4,068 SK Hold fair share price based on consensus (W269,300) x shares out (47,471,732) x SK C&C stake (31.82%)

b SK E&S 257 SK E&S controlling interest value W792.6bn as of end-Mar 2011 x SK C&C stake (32.45%)

B Operating value 4,632 d x e

d 12-mo-fwd NOPLAT 183 SK C&C 12mo-fwd OP W234.1bn x (1-22%)

e Target P/E 25.4 Avg P/E of Korea’s top three SI firms (21.1x) x (1+ 20% valuation premium

C Net cash -813 SK C&C net cash as of end-Mar 2011

No of shares 50,000,000

Fair share price 162,869

Current price 133,500 Based on closing price as of Jun 21, 2011

Upside 22%



SK C&C (034730 KS)

Operating value

Operating value = SK C&C 12mo-fwd NOPLAT x average P/E of Korea’s top three SI firms x

{1 + valuation premium (20%)}

= SK C&C 12mo-fwd operating profit x {1 – corporate tax rate (22%)} x

average P/E of Korea’s top three SI firms x {1 + valuation premium (20%)}

= W234.1bn x (1-22%) x 21.1x x (1+ 20%) = W4.63tn

Valuation premium on ownership structure

In 2004, SK Group faced a hostile takeover from Sovereign due to Tae-won Choi’s (largest shareholder) low stake in the group.

In 2007, SK Group adopted a holding company structure, with SK C&C as the group’s de facto holding company. This came about as SK Group CEO Tae-won Choi increased his stake in SK C&C, while SK C&C sharply raised its stake in SK Holdings.

SK C&C is even more significant to the group than SK Holdings (the group’s legal holding company), as Tae-won Choi, the group’s largest shareholder, has a much greater stake in SK C&C than in SK Holdings. Indeed, when his 44.5% stake in SK C&C is combined with the stakes of specially-related persons, it comes to 55%, whereas his stake in SK Holdings amounts to just 0.02%.

We expect SK C&C to eventually merge with SK Holdings, but until then, the group is likely to reallocate group resources towards raising SK C&C’s corporate value.

SK Group ownership structure

Petroleum,energy,

chemicals

Telecom Auto import & sale, marineproduct

processing

Magnetic optical

material production

Marine transportation, ship chartering

Electricity, fuel

trading

Pure holding co

Infrastructure, plant, civil

engineering,housing

Public

Private

55.0%

33.4% 23.2% 39.1% 42.5% 83.1% 100.0%

Holdings

Largest shareholder

31.8%

40.0% 67.6%

32.5%

0.06%

0% 0% 0.2% 5.27% 0.0006% 0% 9.61% 0%

Specially-related persons

Source: Company data


Company Report

A whopping 64% of SK C&C’s sales come from group system integration (SI) sales (eg, IT infrastructure installment, maintenance, and repair). Sales and operating profit have soared since SK C&C became the de facto holding company in 2008.

In particular, operating profit surged by W82.7bn over 2008~2010, almost three times that of 2001~2007 (W30.6bn).

SK C&C: sales and operating profit growth

-50

0

50

100

150

200

2002 2003 2004 2005 2006 2007 2008 2009 2010

.

Y -Y sales growth Y -Y O P growth

(Wbn)


This is why SK C&C has received a surprisingly high valuation premium compared with peers.

Thus, in our operating value calculation, we set SK C&C’s P/E at 25.4x, a 20% premium to the 21.1x average P/E of Korea’s top three SI firms (Samsung SDS, LG C&S, and POSCO ICT).

The average P/E of Korea’s eight listed SI firms is 12.4x, while overseas IT service firms’ average P/E stands at 15.1x.

Samsung SDS and LG C&S are actively traded in the OTC market, so their P/Es are based on OTC share prices.

y-y y-y


SK C&C (034730 KS)

Earnings estimates

Earnings estimates (Wbn)

2009 2010 2011E 2012E 2013E 2014E 2015E

Gross sales 1,312.6 1,475.2 1,738.4 1,964.8 2,178.9 2,407.8 2,501.7

Chg (% y-y) 3 12 18 13 11 11 4

Services 782.8 847.2 904.4 950.5 1,000.5 1,052.1 1,084.2

Government 243.6 295.9 332.2 353.4 378.2 404.2 426.0

Manufacturing 286.2 332.1 368.7 389.3 412.0 432.3 439.7

Consolidated subsidiaries - - 100.0 120.0 144.0 172.8 207.4

NFC - - 18.1 70.8 112.7 170.3 242.1

Material cost 323.7 411.1 479.4 544.7 602.5 666.6 672.0

Outsourcing cost 471.4 494.3 603.4 670.1 749.7 824.8 833.9

Labor cost 250.8 255.6 288.3 310.4 338.2 366.3 398.0

Depreciation cost 30.4 28.7 30.8 42.4 44.7 48.5 51.5

Other 108.6 123.3 144.6 163.4 181.2 200.3 208.1

Total operating costs 1,184.9 1,312.9 1,546.5 1,731.0 1,916.3 2,106.6 2,163.4

Operating profit 127.6 162.3 191.9 233.8 262.5 301.3 338.3

Chg (% y-y) 43 27 18 22 12 15 12

Operating margin (%) 9.7 11.0 11.0 11.9 12.0 12.5 13.5

Source: Company data, Tong Yang Securities


Company Report

Peer group valuation

Peer group valuation

Samsung

SDS

LGCNS SKC&C POSCO

ICT

INFOSYS HCL

Tech

HCL

Infosys

TCS Wipro Mphasis Capgemini Logica Atos Accenture IBM SAP ORACLE SAP

(Ger)

Currency KRW KRW KRW KRW USD INR INR INR INR INR EUR GBP EUR USD USD EUR USD EUR

Share price 118,500 32,250 134,000 6,940 61.64 479.95 92.2 1,109.2 408.85 447 37.925 129.3 36.915 53.98 162.67 42.365 30.8 42.365

Market

cap ($mn) 85,593 24,568 6,203 876 35,391 7,353 458 48,362 22,363 2,091 8,435 3,367 3,688 38,666 197,026 74,248 155,864 74,248

2009 2,494.1 1,838.7 82,636.5 369.2 216.9 102.3 122.5 278.1 257.0 42.6 8.4 3.7 5.1 23.2 95.8 10.7 23.3 10.7

2010 3,626.6 2,057.2 91,227.5 830.1 227.4 121.4 120.5 300.3 272.1 50.4 8.7 3.7 5.0 23.1 99.9 12.5 26.8 12.5

2011 - - 1,738.4 1,150.0 326.9 160.1 124.0 466.2 366.4 51.9 9.6 3.9 6.6 24.6 105.9 14.0 35.8 14.0

Sales

(bn)

2012 - - 1,964.8 1,500.0 386.6 198.7 131.1 557.1 433.1 59.7 10.0 4.0 8.4 26.8 110.5 15.3 39.0 15.3

2009 297.0 156.9 3,732.3 17.2 64.6 16.9 4.0 66.1 45.0 9.3 0.6 0.2 - 2.9 17.0 2.8 8.6 2.8

2010 390.9 142.1 5,278.2 24.5 70.1 15.2 3.3 80.3 52.0 11.0 0.6 0.2 0.2 2.9 18.2 3.6 9.9 3.6

2011 - - 193.2 50.0 90.0 23.1 3.2 128.6 69.2 9.2 0.7 0.3 0.4 3.4 20.9 4.3 15.2 4.3

OP

(bn)

2012 - - 233.8 82.5 106.8 30.4 3.8 153.8 81.4 10.4 0.8 0.3 0.5 3.7 22.4 4.9 17.1 4.9

2009 274.4 119.0 139.8 -71.2 62.7 13.2 2.4 70.0 46.3 9.1 0.2 - - 1.6 13.4 1.7 5.6 1.7

2010 327.6 105.5 265.8 17.5 68.4 12.6 2.4 90.7 53.0 10.9 0.3 0.2 0.1 1.8 14.8 1.8 6.1 1.8

2011 - - 702.1 43.0 75.3 16.3 2.2 102.9 58.6 8.5 0.4 0.2 0.2 2.2 15.9 2.9 8.3 2.9

NP

(bn)

2012 - - 790.0 75.0 88.2 22.0 2.4 123.0 68.8 8.8 0.5 0.2 0.3 2.4 17.0 3.4 9.3 3.4

2009 21.3 15.6 15.9 66.6 24.6 18.8 10.9 28.0 25.4 16.7 26.0 45.5 534.8 15.5 13.1 22.4 18.0 22.4

2010 33.5 27.8 14.6 62.5 31.0 24.4 9.9 32.7 25.8 12.9 19.1 13.7 23.9 18.2 12.7 25.1 23.0 25.1

2011 20.5 25.7 9.5 21.8 21.0 20.1 9.4 21.0 17.1 11.1 15.1 9.7 11.3 16.7 12.3 16.1 14.1 16.1 P/E

2012 8.5 12.7 17.9 15.1 8.3 17.8 14.6 10.7 12.7 8.7 9.1 14.8 11.1 14.2 12.8 14.2

2009 4.2 3.5 1.8 10.3 8.1 5.0 2.3 9.4 7.3 6.5 1.2 1.0 1.4 10.2 7.5 4.8 4.9 4.8

2010 4.2 4.8 3.2 5.3 8.5 4.9 1.4 12.4 6.6 4.3 1.2 1.0 1.7 11.8 7.8 4.6 5.1 4.6

2011 2.2 N/A 4.9 4.0 1.0 6.7 3.6 2.4 1.3 1.0 1.4 10.5 6.5 4.3 4.0 4.3 P/B

2012 1.7 N/A 4.1 3.4 1.0 5.4 3.0 2.0 1.2 1.0 1.3 8.4 5.1 3.6 3.4 3.6

2009 10.7 12.0 6 16.3 17.2 6.4 5.9 16.8 16.5 11.7 4.6 6.4 9.9 5.8 8.3 11.8 9.1 11.8

2010 14.5 20.5 5.5 31.3 19.1 12.6 8.8 20.1 N/A 8.9 5.7 7.2 7.5 6.1 8.6 11.2 9.1 11.2

2011 37.1 N/A 14.3 12.5 7.6 15.2 13.8 9.1 5.5 6.6 4.1 9.0 8.2 10.7 8.7 10.7

EV/

EBITDA

2012 32.4 N/A 12.2 9.6 6.4 12.9 11.7 7.9 4.9 6.1 3.2 8.2 7.8 9.5 7.8 9.5

2009 11.9 8.5 4.5 4.7 30.8 16.6 3.2 26.8 19.1 21.7 7.2 5.0 0.6 12.5 17.8 26.3 36.8 26.3

2010 10.8 6.9 5.8 3.0 29.5 12.6 2.8 28.0 18.5 21.9 6.7 5.8 4.0 12.7 18.2 28.8 36.8 28.8

2011 11.1 0.0 0.3 0.1 0.0 0.3 0.2 0.2 0.1 0.1 0.1 0.1 0.2 0.3 0.4 0.3 OPM

2012 11.9 0.1 0.3 0.2 0.0 0.3 0.2 0.2 0.1 0.1 0.1 0.1 0.2 0.3 0.4 0.3

2009 11.0 6.5 0.2 -19.3 27.6 12.9 2.0 23.3 17.0 21.3 2.1 1.1 0.1 6.9 14.0 16.4 24.1 16.4

2010 9.0 5.1 0.3 2.1 24.9 10.4 2.0 24.3 17.0 21.7 3.2 4.1 2.3 7.7 14.9 14.5 22.9 14.5

2011 40.4 3.7 23.2 10.3 1.7 22.1 16.0 16.2 4.5 5.6 4.0 9.1 15.1 21.8 31.1 21.8

NPM

2012 40.2 5.0 23.1 11.2 1.9 21.9 15.8 14.8 5.1 6.0 4.2 9.1 15.5 22.8 31.6 22.8



SK C&C (034730 KS)

Samsung SDS OTC share price LG C&S OTC share price

Source: 38 Communications

Stake value

Stake value = value of SK C&C’s stake in SK Holdings (based on market consensus

enterprise value) + book value of SK E&S controlling interest

= {SK Holdings market consensus price x shares outstanding x SK C&C stake}

+ {SK E&S controlling interest book value x SK C&C stake}

= {W269,300 x 47,471,732 shares x 31.82%}+ {W792.6bn x 32.45%}

= W4.68tn + W257.2bn

= W4.32tn

We did not apply a valuation discount and calculated SK Holding’s enterprise value based on market consensus, because: 1) thanks to stronger subsidiary earnings, SK Holdings’ net profit from controlling interest amounted to W471.8bn in 1Q11 alone, equivalent to 72% of the 2010 full-year figure of W658.8bn; and 2) SK Holdings’ fair share price, based on market consensus, comes to W269,300, implying a 33.2% gap vs the Jun 21, 2011 closing price of W180,000.


Company Report

2. Industry outlook Domestic SI industry trend

Domestic IT service market growth by sector (2006~2010)

0

2000

4000

6000

IT outsourc ing 4834 4892 4995 5150 5189

SI 3615 3979 4093 4014 4083

IT consulting 440 500 550 475 530

O thers 134 142 151 137 144

2006 2007 2008 2009 2010(e)

C A GR 2.5%

Source: KRG, Electronics Information Center

Over the last five years, Korea’s IT service market has posted a CAGR of just 2.5% due to excessive IT investment in previous years and softening IT-related industry growth.

Demand for domestic IT services comes mainly from finance (25%), manufacturing (24%), and government/public institutions (19%).

We expect demand for IT service in these three sectors to come from the following:

Finance: 1) K-IFRS accounting and ERP systems; 2) next-generation risk management systems; 3) non-banking sector next-generation systems; 4) mobile payment services; 5) financial system change following the enactment of the Capital Markets Consolidation Act.

Public institutions: 1) U-city design/set-up; 2) local government IT infrastructure; 3) e-government and related exports; 4) defense industry IT security amid escalating tension between the two Koreas; 5) establishment of mobile government.

Manufacturing: 1) IT convergence for global management support; 2) environmental regulations; 3) combining traditional manufacturing with IT; 4) grafting mobile services onto general service businesses; 5) next-generation system set-up after mergers of telecom affiliates.

E


SK C&C (034730 KS)

Domestic IT service demand, by industry

0

2

4

6

8

2009 2010 2011E 2012E 2013E 2014E

O thers

Education

Retail/transportation

Gov/public

Manufac turing

Telecom

Financ ial

(Wtn)

Source: National IT Industry Promotion Agency


Company Report

Global SI industry trends

Over the past eight years, the global IT service market posted a CAGR of 5.6%. Over the coming years, it should record a CAGR of 6% thanks to increasing investment in smart device platforms and applications and brisk demand for embedded software used in IT system convergence, which is needed in the auto, defense, aviation, and shipbuilding industries.

Global IT service market forecast (2003~2012)

Source: ATLAS

We believe the global IT service market has high growth potential, in view of the weak global IT infrastructure relative to Korea, rapidly growing mobile device applications, and the expansion cloud computing services.

Moreover, amid slowing recovery in the domestic IT industry and softening IT investment in the financial and public sector, Korean IT service firms have recently been moving into China, India, the US, CIS countries, and the Middle East.

550

650

750

850

950

1,050

2003 2004 2005 2006 2007 2008 2009 2010(e) 2011(e) 2012(e)

C A GR 6 .6%

C A GR 5 .6%

($bn)

E E E

(US$bn)


SK C&C (034730 KS)

3. Key business SK C&C’s key business includes: 1) IT consulting; 2) system integration; and 3) IT outsourcing. It also operates overseas businesses and is developing new growth engines.

It has a captive market in SK Group affiliates which operate in a variety of sectors: SKT and SK Broadband in wireline/wireless telecom; SK Innovation and SK E&S in petrochemicals/chemicals/energy; and SKC in magnetic/optical products. SK C&C’s technological know-how in these fields is largely thanks to experience built through working with SK group affiliates over the past decade.

SK C&C’s captive sales and outlook

66% 67% 67% 67%64%

55%50%

-

200

400

600

800

1,000

1,200

2006 2007 2008 2009 2010 2011E 2012E

0%

10%

20%

30%

40%

50%

60%

70%

80%

C aptive sales C aptive sales portion (%)(Wbn)



Company Report

4. New business outlook

Near-field communication (NFC)

Near-field communication (NFC) is a short-range wireless technology enabling communication and data exchange between devices within 10cm of each other.

To cash in on NFC technology, SK C&C entered the mobile commerce market in North America by partnering with US-based First Data Corporation (FDC), the world’s largest electronic commerce and payment processing service provider, with a 40% market share in the US.

Using FDC, it provides a trusted service manager (TSM) solution for “Google Wallet.” The TSM solution creates and manages data for mobile carriers, card companies, and retailers after receiving requests for mobile card issuance, information modification, or suspension of transactions and termination of contracts.

TSM solution Google Wallet platform

Mobile subscriber information (eg, phone number, SE type, NFC compatibility)

User informationservice application

OTA (over-the-air): method of distributing data updates to cell phones


According to market research firm, Juniper Research, mobile payments are becoming more common in both advanced and emerging countries. The mobile payment market is forecast to amount to US$630bn by 2012 and US$1,130bn by 2014, with a third of it based on NFC.


SK C&C (034730 KS)

Mobile financial services: growth, 2007~2011

($mn)

Source: Juniper Research

Globally, mobile commerce, particularly that based on NFC, is looking increasingly promising thanks to the active participation all players involved, such as mobile carriers (eg, Sprint), credit card firms (MasterCard), e-commerce and payment service providers (FDC), and online portals (Google).

SK C&C is well placed to benefit from this trend since its TSM solution is licensed to FDC on a royalty basis, meaning bigger sales when the market grows (eg, spread of NFC devices, growth of NFC-based payments).

Moreover, when royalties increase the TSM solution incurs minimal additional cost, meaning strong operating leverage.

As such, with the growth of mobile commerce and the rapid adoption of NFC-enabled devices, SK C&C should enjoy robust sales from the new NFC business.

However, due in large part to a lack of specific data, we only factored in likely royalty income from “Google Wallet,” which should reach W90bn by 2012 and more than W100bn in 2013 alone. Our estimate is based on the assumption that each NFC device produces US$1 in royalty sales. This also supports SK C&C’s 2012 sales guidance of W100bn.

SK C&C: sales assumption from NFC (‘000 units)

2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

Total number of devices 1,200,000 1,300,000 1,375,000 1,425,000 1,513,000 1,588,000 1,663,000 1,738,000

NFC devices 0 13,000 41,000 128,000 318,000 460,000 632,000 817,000

Android market share 0.5% 5.1% 8.5% 14.7% 18.0% 20.5% 22.6% 24.8%

SK C&C NFC sales (Wbn) 18.1 70.8 112.7 170.3 242.1

Source: Visiongain, ATLAS, 2010.12, Gartner, Tong Yang Securities

(US$mn)


Company Report

Cloud computing

Cloud computing refers to the use and access of multiple server-based computational resources via a digital network. It is a convenient and economic way of sharing computing resources and access a variety of services.

How cloud computing works

Storage

Server

Software

Pay per use

Web-based outsourcing of servers,storage spaces and software

Pay per use

Source: SK C&C

Today, a huge amount of data is being consumed and demand for computing resources is growing exponentially. Cloud computing allows users to share resources through information infrastructure and utilize services of different platforms. Through the Internet, users can enjoy services regardless of what device they have.

Currently, in Korea, cloud computing services are mostly free of charge. However, we believe lucrative business opportunities will arise in the cloud computing ecosystem, bolstering growth further.

The rise of smartphones and smart TV is also spurring the development of cloud computing. A smooth connection between apps and the Web is expected to bring about the so-called “personal cloud,” where users can access services using a variety of devices, including netbooks, smartphones, TVs, and traditional desktops.


SK C&C (034730 KS)

Cloud computing market outlook: global Cloud computing market outlook: Korea

44 63

90

129

155

207

6 9 12 18 21 28 30 38 50

67 81

108

0

50

100

150

200

250

2009E 2010E 2011E 2012E 2013E 2014E

SaaS

PaaS

IaaS

(US$bn)

84 184

341

614

886

64 105

151 214

245

69 95

133 188 229

218

384

624

1,015

1,360

0

200

400

600

800

1,000

1,200

1,400

1,600

2010E 2011E 2012E 2013E 2014E

Biz applicationGame, search, networkingUtilityTotal

(US$mn)

Source: KISDI, ATLAS Source: ABI research, Ministry of Knowledge Economy, ATLAS

Note: SaaS = software as a service: a software delivery model in which a service host provides software (e-mail, ERP, CRM) on the web

PaaS = platform as a service: delivers a computing platform where users can develop compiled languages, web programs, program tools, DB interface, etc

IaaS = infra as a service: provision model where a host outsources resources (virtual memory, virtual CPU, etc) or storage resources (images, videos, etc) via the Internet

SK C&C is fostering cloud computing technologies as its next growth catalyst, with an eye on the global market.

In 2010, it launched a cloud-based service called “MiCloud.” The company has cloud computing technologies capable of processing huge amounts of data and analyzing cloud networks, and it has hired cloud computing specialists for these purposes.

Though we expect cloud computing to enjoy explosive growth going forward, the industry, at home and abroad, is yet to see a lucrative business model based on cloud computing technology. In Korea, most cloud computing-based services are free of charge, and it will likely take some time before the industry creates bankable business models, or for beneficiaries to emerge.

Nevertheless, we expect an increasing number of companies and industries to use cloud computing services, which should mean higher demand for SI plays like SK C&C, which are responsible for the set-up and maintenance of cloud computing systems. In the long term, SK C&C should be a major beneficiary of cloud computing.


Company Report

Overseas business

SK C&C has set up subsidiaries in China, India and the US, and has partnered with major international tech firms such as IBM, HP, and Huawei.

With years of domestic experience in SI and IT services, SK C&C’s overseas business started bearing fruit from 2008, mainly in emerging markets.

In 2010, overseas sales soared 47% y-y to W98.8bn, lifting overseas businesses’ share of total sales to 6.7% vs 5.1% in 2009.

Mobile solutions

SK C&C is especially strong in mobile solutions. In 2009, it won the “mobile money 2.0 platform” project from US mobile banking service provider Mobile Money Ventures. Moreover, it has established mobile banking services in nine Asian countries, including Singapore, the Philippines, China, Thailand, and Malaysia.

In Sep 2010, it partnered with the world’s largest electronic commerce and payment processing service provider, FDC, to launch the world’s first TSM service and the world’s largest mobile payment system, “m-Wallet,” in the US, Canada, and Mexico.

In Jan 2011, the company further demonstrated its technical competitiveness when it passed MasterCard’s global vendor certification program for the first time.

Business in China

Chinese subsidiary SK C&C Systems won a project to establish an intelligent transport system (ITS) in Shenzhen, China. It also received orders from China Telecom in 2010 for prototype payment service platforms in two of eight selected provinces.

China Telecom plans to launch the payment platform in the remaining 24 provinces if the prototype goes smoothly. SK C&C is one of three companies that participated in the test service and is expected to win an additional eight provinces.

Emerging markets

In emerging markets, including CIS nations, the company is working especially well in social overhead capital (SOC) projects, such as e-government or intelligent transport systems.

It has won major national IT infrastructure projects in Azerbaijan (US$76.5mn), Turkey (US$44.1mn), and in Ulaanbaatar Mongolia (US$11.4mn). In 2009, it received an order from India’s Reliance for a 3G evolution consulting project, which should open up opportunities in the country’s telecommunications industry.


SK C&C (034730 KS)

SK C&C overseas sales

1.5% 1.7%

10%

5.4% 4.9%

7.2%

5.8%

8%

7.6%

0%

2%

4%

6%

8%

10%

12%

-

10,000

20,000

30,000

40,000

50,000

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

Overseas sales % overseas sales(Wmn)



Company Report

5. Investment point Premium for management control

Over the past three years, SK C&C has grown especially rapidly; operating profit increased by W82.7bn over the last three years vs W30.6bn in the preceding seven years. This is mainly thanks to SK Group’s transition to a holding company in 2007, which helped increase the allocation of group resources to SK C&C.

SK C&C also benefits when SK affiliates expand into overseas markets. In particular, it works closely with SK Telecom in mobile technology development.

Moreover, if SK C&C’s merges with SK Corp its value may surge, as Group Chairman Tae-won Choi will want to raise his stake in the group. We think it is very likely that SK C&C will trade at a premium to market.

Beneficiary of IT convergence

The spread of smart mobile devices is rapidly leading to IT convergence worldwide, of which NFC and cloud computing are prime examples. SK C&C, with its long track record in mobile IT solutions, is well set to benefit from this trend since there will be rising demand for building infrastructure in the initial stage of IT convergence.

Beneficiary of growing demand overseas

The growth of the global IT solution market also bodes well for the company. Its competitiveness in SI and IT solutions, gained in the tough domestic market and experience as a key SK affiliate should continue to help the company overseas.


SK C&C (034730 KS)

SK C&C (034730 KS) pro forma financial statements



Non-current assets 44,584.0 44,383.0 3,711.3 4,478.8 5,328.3 Sales 82,636.5 91,227.5 1,738.4 1,964.8 2,178.9

Investment in affiliates 1,570.9 3,033.0 3,322.4 4,112.4 4,962.4 Cost of sales 72,899.6 80,451.5 0.0 0.0 0.0

LT financial assets 5,754.8 4,965.4 9.1 9.1 9.1 Gross profit 9,736.9 10,776.0 1,738.4 1,964.8 2,178.9

Tangible assets 26,648.5 26,703.3 335.2 335.1 355.0 SG&A 6,004.6 5,497.9 1,545.2 1,731.0 1,916.3

Intangible assets 7,565.3 7,142.8 44.6 62.6 82.6 Other non-operating profit 0.0 0.0 0.0 0.0 0.0

Other non-current assets 2,993.9 2,498.2 0.0 0.0 0.0 Forex gains 0.0 0.0 0.0 0.0 0.0

Current assets 31,570.5 35,110.0 546.9 619.8 695.4 Equity-method gains 0.0 0.0 0.0 0.0 0.0

Cash & equivalents 6,664.8 7,341.6 295.9 368.8 444.4 Other 0.0 0.0 0.0 0.0 0.0

ST financial assets 3,631.4 4,460.7 251.0 251.0 251.0 Reported operating profit (A) 0.0 0.0 191.9 233.8 262.5

Accts receivable & other 12,979.2 13,571.9 0.0 0.0 0.0 K-GAAP operating profit (B) 3,732.3 5,278.2 193.2 233.8 262.5

Inventory 6,372.0 7,268.8 0.0 0.0 0.0 Difference (A)-(B) -3,732.3 -5,278.2 -1.3

Other current assets 1,923.1 2,466.9 0.0 0.0 0.0 Non-operating profit -1,532.8 -1,527.4 704.3 779.0 837.9

Total assets 76,154.5 79,493.0 4,258.2 5,098.6 6,023.7 Interest income 432.5 428.6 17.1 0.8 0.9

Non-current liabilities 20,762.2 21,231.6 1,258.5 1,450.1 1,658.1 Interest expense 1,738.8 1,440.0 60.9 2.8 3.0

LT financial liabilities 16,689.0 16,949.3 795.0 1,031.4 1,233.2 FX gains/losses 264.7 -19.5 0.0 1.0 3.0

Defined benefit obligation 277.8 268.7 20.2 25.2 30.2 Pre-tax profit 2,199.6 3,750.7 897.4 1,012.8 1,100.4

Provisions 0.0 0.0 0.0 0.0 0.0 Income taxes -670.8 -1,212.4 -195.3 -222.8 -242.1

Current liabilities 28,588.1 30,846.2 567.4 467.4 367.4 Profit from continuing op 1,528.8 2,538.3 702.1 790.0 858.3

Accts payable & other 9,955.3 10,177.5 0.0 0.0 0.0 Profit from discontinued op 9.4 90.8 0.0 0.0 0.0

ST financial liabilities 12,053.0 13,110.4 567.4 467.4 367.4 Net profit 1,512.6 2,626.4 702.1 790.0 858.3

Other current liabilities 6,579.9 7,558.3 0.0 0.0 0.0 Net margin (%) 1.8 2.9 40.4 40.2 39.4

Total liabilities 49,350.3 52,077.8 1,825.9 1,917.4 2,025.5 Other comprehensive income 0.0 0.0 -41.2 -41.2 -41.2

Equity for controlling interest 1,220.3 1,207.7 2,432.3 3,181.1 3,998.2 Total comprehensive income 1,512.6 2,626.4 660.9 748.8 817.1

Capital stock 10.0 10.0 10.0 10.0 10.0 TCI/sales (%) 0.2 0.3 38.0 38.1 37.5

Capital surplus 25.9 8.5 25.7 25.7 25.7 Net profit 1,512.6 2,626.4 702.1 790.0 858.3

Paid-in capital over PV 0.0 20.0 20.0 20.0 20.0 NP for controlling interest 139.8 265.8 702.1 790.0 858.3

Retained earnings 1,158.2 1,412.6 2,771.0 3,561.0 4,419.3 NP for non-controlling int 1,372.8 2,360.5 0.0 0.0 0.0

Equity for non-control int 25,583.9 26,207.5 0.0 0.0 0.0 Total comprehensive income 1,512.6 2,626.4 660.9 748.8 817.1

Total equity 26,804.2 27,415.2 2,432.3 3,181.1 3,998.2 TCI for controlling interest 139.8 265.8 660.9 748.8 817.1

Total liabilities + total equity 76,154.5 79,493.0 4,258.2 5,098.6 6,023.7 TCI for non-controlling int 1,372.8 2,360.5 0.0 0.0 0.0

Cash flow statement Valuation


Net profit 1,512.6 2,626.4 702.1 790.0 858.3 Growth (%)

Adjustment 9,078.6 6,913.9 1,059.7 1,057.5 1,142.1 Sales growth -7.5 10.4 -98.1 13.0 10.9

Depreciation & amortization 4,331.9 4,131.2 9.4 0.1 0.1 OP growth -17.3 41.4 -96.3 21.1 12.3

Income taxes 0.0 0.0 195.3 222.8 242.1 EBITDA growth -3.4 16.7 -97.9 15.5 12.3

Interest expense 51.8 84.9 60.9 2.8 3.0 NP growth -16.2 73.6 -73.3 12.5 8.6

FC translation gains EPS growth -3.3 90.1 164.1 12.5 8.6

Others 0.0 0.0 -17.1 -0.8 -0.9 Invested capital growth 2.5 0.0 -99.1 4.7 10.0

Inc (dec) in asset & debt from op -1,402.4 -2,678.5 -1.2 5.0 5.0 Profitability (%)

Inc (dec) in acct rec & other -2,678.0 -1,109.1 462.9 0.0 0.0 COGS/sales 88.2 88.2

Inc (dec) in inventory -600.5 -1,091.2 2.4 0.0 0.0 SG&A/sales 7.3 6.0 88.9 88.1 88.0

Inc (dec) in acct pay & other 2,872.8 -146.6 -367.6 0.0 0.0 EBITDA margin 9.8 10.3 11.7 11.9 12.1

Inc (dec) in other -996.7 -331.6 -99.0 5.0 5.0 ROIC 7.0 10.2 39.7 45.9 46.8

Income tax 0.0 0.0 -173.2 -322.8 -292.1 ROE 11.5 22.0 28.9 24.8 21.5

Operating cash flow 5,415.7 4,950.6 35.1 -83.9 -24.4 ROA 2.1 3.4 1.7 16.9 15.4

Investing cash flow -3,320.8 -5,170.1 70.7 23.2 1.3 Stability (%)

Disp (acq) of tangible assets -3,827.7 -3,604.8 -5.7 0.0 -20.0 EBIT/interest exp (x) 2.1 3.7 3.2 84.7 86.5

Inc (dec) in intangible assets -210.8 -188.1 -2.6 -18.0 -20.0 Debt to equity 107.2 109.7 56.0 47.1 40.0

Inc (dec) in ST financial assets -125.4 150.4 1.6 0.0 0.0 Turnover

Inc (dec) in LT financial assets 1,737.7 668.4 26.3 0.0 0.0 Accts rec turnover (x) 10.1 9.5 0.2

Interest income 5.2 40.0 55.0 0.8 0.9 Inventory turnover (x) 13.9 13.4 0.2

Financing cash flow -2,817.6 1,310.9 -452.5 133.6 98.8 WCTP 35.8 34.9 1,810.5

Inc (dec) in ST/LT financial liab -2,150.4 2,291.0 -473.6 -200.0 -200.0 Valuation

Inc (dec) in equity -229.9 4.5 EPS 2,796.3 5,316.6 14,042.2 15,800.4 17,166.1 Dividend payout -65.8 -96.5 -33.3 0.0 0.0 BPS 24,406.1 24,154.3 48,646.5 63,622.8 79,964.8 Interest expense 0.0 0.0 -58.2 -2.8 -3.0 CFPS 89,433.8 87,940.7 14,231.0 15,802.8 17,168.6

Cash & equivalents EBITDAPS 161,284.2 188,187.0 4,052.0 4,678.7 5,253.1 Inc (dec) in cash & equiv -609.6 677.1 -352.9 72.9 75.6 P/E 15.9 14.6 9.9 8.8 8.1

Beginning cash & equiv 7,274.9 6,665.4 7,342.4 6,989.5 7,062.4 P/B 1.8 3.2 2.2 1.7 1.3 Ending cash & equiv 6,665.4 7,342.4 6,989.5 7,062.4 7,138.0 EV/EBITDA 6.0 5.5 38.4 33.6 30.0


Company Report

SK C&C (034730 KS) ratings and target price history

(W)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Nov-09 A pr-10 Sep-10 Feb-11

C urrent price

Target price

Date Rating TP (W)

2011/06/28 BUY 163,000




As of the publication date of this report, Tong Yang Securities Inc. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by Tong Yang Securities Inc. to any institutional investors or third parties prior to its publication. The analyst (s) of this report or the analyst (s)’ spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report.













Bolstering market power Initiate at BUY with W70,000 target price

We initiate coverage at BUY as: 1) credit purchases are growing in the double digits; 2) the company’s credit purchase market share is rising; 3) despite higher SG&A expenses, profitability should not decline much thanks to top-line growth and lower borrowing costs; and 4) its current P/B stands at a mere 1.1x.

Our target price combines the value of earning assets, listed affiliate shares, and Samsung Everland shares. We calculated the value of earning assets at W53,245 per share by applying our target P/B of 1.49x to adjusted BPS of W35,723, while the value of listed affiliate shares at W3,831 per share is based on book value of W469.2bn as of end-Mar 2011. Lastly, based on Samsung Everland’s total market value of W6.4tn, we calculated per share value at W13,304. As such, our target price is set at W70,000.

Pro forma earnings: growth, asset quality improvement

Thanks to robust credit card market growth, Samsung Card’s earning assets are growing steadily, led by credit purchases and card loans.

Since the 2003 credit card crisis, Samsung Card has continued to scale back riskier assets, thus reducing its delinquency rate and NPL ratio. Moreover, with a likely W1.5tn from the looming sale of Samsung Everland shares, Samsung Card should be able to reduce borrowing costs and secure new growth drivers.


FY to Dec 2009 2010 2011E 2012E 2013E

OR (Wbn) 2,833 3,607 3,278 5,116 4,185

OP (Wbn) 664 1,269 503 2,049 818

Chg (% y-y) 105.3 91.3 -60.4 307.6 -60.1

EBT (Wbn) 690 1,269 503 2,049 818

NP (Wbn) 604 1,181 381 1,598 638

EPS (won) 4,931 9,645 3,111 13,050 5,213

Chg (% y-y) 134.3 95.6 -67.7 319.4 -60.1

P/E (x) 11.7 6.5 17.6 4.2 10.5

BPS (won) 36,138 50,443 52,055 53,615 57,078

P/B (x) 1.6 1.2 1.1 1.0 1.0

ROE (%) 14.7 22.3 6.1 24.7 9.4


Byung- soo Sung [email protected] +822-3770-3477

Share price (won, Jun 24) 57,600



BPS (won) 48,812





52-week high (W) 64,400

52-week low (W) 46,400



Samsung Electronics & others 67.7


1M 3M 12M

Absolute 9.9 5.3 14.7

Relative 8.4 2.6 (4.5)

Abs (US$) 11.5 9.1 24.7

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000


0

20

40

60

80

100

120

Samsung Card (LHS)

Rel. to KOSPI (RHS)

(%)(W)

Source: Datastream

KOREA Credit Card

BUY (I) / TP: W70,000 (I)

June 28, 2011


Company Report

I. Valuation Initiate at BUY with W70,000 target price

We initiate coverage with a BUY rating and a six-month target price of W70,000.

The rationale behind our BUY rating is as follows. First, with credit purchases as a percentage of consumer spending rising thanks to the wider range of payments which can now be made with credit cards, Samsung Card’s credit purchases continue to grow in the double-digits. Second, the company’s credit purchase market share is growing as it beefs up affiliate marketing (eg, “S-class” card launch) and aggressively tries to attract new customers. Third, although Samsung Card has recently incurred higher SG&A expenses due to stiff competition, profitability should not decline much thanks to top-line growth from market share gains and lower borrowing costs,. Fourth, we expect the company’s P/B, currently hovering at around 1.1x, to rise on: 1) rising profitability from greater market share; and 2) the proceeds from the sale of Samsung Everland shares being used for growth.

Our target price combines the value of earning assets, listed affiliate shares, and Samsung Everland shares. We calculated the value of earning assets at W53,245 per share by applying our target P/B of 1.49x to adjusted BPS of W35,723. Our target P/B is based on CAPM (target P/B = (adj ROE-g)/(k-g)). Adjusted ROE is 11.2%, our 2012 ROE forecast (does not reflect gains from the sale of Samsung Everland shares).

Of listed affiliate shares held by Samsung Card, we excluded gains/losses from the valuation of available-for-sale securities in calculating total equity (accumulated other comprehensive income). The value of listed affiliate shares at W3,831 per share, is based on the book value of W469.2bn as of end-Mar 2011.

Samsung Card owns 25.64% of Samsung Everland. This stake, after an external evaluation commissioned by Samsung Card, was valued at W1.36tn, or W13,304 per share, which was factored into accumulated other comprehensive income.



Target price calculation breakdown (won, Wbn, x)

Per share value Total value Note

Adjusted BPS 35,723

Target P/B 1.49

Value of earning assets 53,244 6,520.4

Value of listed affiliates 3,831 469.2 Mar 31, 2010 book value

Value of Samsung Everland shares 13,304 1,629.2 Assuming W6.4tn total market value

Target price 70,000 8,618.8

Current price 54,800 6,710.9

Upside 27.7% 28.4%

Target P/B for value of earning assets 1.49

Adjusted ROE 11.2%

Cost of equity (k) 8.1%

Perpetual growth rate (g) 2.0%

Note: Target P/B = (adj ROE-g)/(k-g) Source: Tong Yang Securities

Disposal of Samsung Everland shares

The Samsung Group, controlled through Samsung Everland, has “circular shareholding” among affiliates (company A holds share of B, B holds C, C holds A). However, under the Financial Industry Restructuring Act, Samsung Card must dispose of some of its stake in Samsung Everland by Apr 2012 in excess of the 5% ceiling. The Samsung Group may opt to list Samsung Everland, or allow Samsung Card to sell shares to either private equity funds or affiliates. Listing would require Samsung Group to select an underwriter and file for a preliminary listing review within 3Q, given the Apr 2012 deadline. However, with time limited, Samsung Card is likely to sell its stake, and use the more than W1.5tn in proceeds for growth. When circular shareholding among affiliates ends, Samsung Card will likely try to maximize synergies with affiliates.

Samsung Group corporate governance

60.4%

25.6%

19.3%

26.4%

35.30%

7.5%

Samsung LifeInsurance

SamsungCard

SamsungElectronics

Kun-hee Lee andaffiliated persons

SamsungEverland



Company Report

II. Pro forma earnings

Credit card market growing at breakneck pace

Following the 2003 credit card crisis, which led to a severe credit crunch, the credit card market has been recovering strongly since 2005. Credit purchases continue to increase, buoyed by rising consumer spending. In particular, credit purchases as a percentage of consumer spending climbed from 38.4% in 2004 to 57.0% in 2010. This share should increase steadily thanks to changing consumption patterns (eg, growing popularity of micro-payments) and the wider range of payments which can now be made with credit cards, including taxes and public utility charges. Domestic credit card approval growth (y-y) has mostly held steady at over 15%, except right after the financial crisis, and we expect this trend to continue for the foreseeable future, buoyed by the growth of NFC infrastructure.

Credit purchases as percentage of consumer spending continue to rise

0

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70C redit purchases (LHS)

C redit purchases as % of consumer spending

(Wtn) (%)

Note: Individual credit purchases only Source: Credit Finance Association, National Statistical Office, Tong Yang Securities

Domestic credit approval growth holds steady above 15% y-y

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08.1 4 7 10 09.1 4 7 10 10.1 4 7 10 11.1 4

(%)

Note: Includes pre-paid/check cards, excludes cash advance/card loans/overseas/corporate purchase/card approval cancellations Source: Credit Finance Association, Tong Yang Securities



Credit purchases and card loans fuel earning asset growth

Samsung Card’s total earning assets (credit purchase/card loans/cash advance/ installment financing and leases) came to W11.6tn as of end-Mar 2011, rising 11.0% y-y. After declining in 2009, earning assets have grown solidly thanks to credit purchase and card loan growth. In Mar 2011, credit purchases grew 18.5% y-y and card loans 30.0% y-y, propelling earning asset growth. In 2009, as Samsung Card scaled back low-margin installment financing and leases, total earning assets contracted and profits stagnated. However, in 2010, with leasing and financing cutbacks ending and credit purchases and card loans surging, total earning asset growth recovered to the double-digits. Now, with ample growth potential for credit purchases and Samsung Card likely to enjoy further market share gains, the company’s return on asset (ROA) should improve. In Mar 2011, credit purchases and card loans accounted for 64.6% of operating revenue, due to reduced installment financing and leases, and sluggish cash advances. The greater contribution of credit purchases and card loans to operating revenue should improve asset quality and efficiency, which should boost margins. Also, unlike in 2003, it is more careful about whom it loans money to, and thus does not have significant write-off risk exposure.

Growth of earning assets

0

2

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12

14

1Q 09 3Q 09 1Q 10 3Q 10 1Q 11

C redit purchases C ard loans

C ash advances Ins tallment financ ing and leases

(Wtn)


Operating revenue breakdown

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1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11

35

40

45

50

55

60

65C ard loans C ash advancesIns tallment financ ing and leases C redit purchases (RHS)

(%) (%)



Company Report

Asset quality continues to improve

Since the 2003 credit card crisis, Samsung Card has trimmed riskier earning assets. As of end-2005, cash advances had fallen from W1.8tn to W1.4tn and card loans from W3.8tn to W3.0tn. Moreover, rescheduled loan balance fell from W3.7tn at end-2005 to W300.0bn at end-Mar 2011. As Samsung Card has reduced riskier earning assets, its delinquency rate at end-Mar 2011 fell to 1.7% and NPL ratio to 1.6%.

As the delinquency rate declines, write-offs to total earning assets have been falling. Charge-offs (write-offs) also fell from W1.6tn at end-Sep 2010 to W946.0bn at end-Dec 2010 as Samsung Card sold off a massive amount of charged-off assets to take advantage of tax loss carry forward (after incurring a net loss in 2005, the company was exempt from income tax over the next five years (2006~2010)). With a sharp decline in charged-off assets, gains from recovery of charged-off assets fell from about W30.0bn per quarter to W12.2bn in 1Q11.

Delinquency rate and NPL ratio continue to decline

0%

2%

4%

6%

8%

10%

12%

4Q 05 2Q 06 4Q 06 2Q 07 4Q 07 2Q 08 4Q 08 2Q 09 4Q 09 2Q 10 4Q 10

NP L ratio Delinquency rate

(%)


Gains on recovery of charge-offs shrink on lower write-off ratio, sale of charge-offs

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20

40

60

80

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120

1Q 07 3Q 07 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%Gains on recovery of charged-off assets

Write-off ratio (RHS)

(%) (%)




Operating profit to rise on beefed-up marketing

In 2011, Samsung Card’s operating profit should come to W502.7bn and net profit W381.0bn, slightly below last year’s results, largely because of higher advertising expenses from the S-class card launch and higher marketing costs to sign up new customers. However, thanks to aggressive marketing, coupled with efforts to maximize synergies among affiliates, market share inched up 1%p y-y to 14.4% in 1Q11. Market share gains should translate to top-line growth and stronger earnings, and we expect operating profit growth to accelerate from 2012 as marketing costs stabilize and top-line growth continues.

Assuming Samsung Card disposes of all of its Samsung Everland, it should be able to use the estimated W1.5tn in cash to reduce borrowing costs in the near term and spur efforts to secure new growth drivers in the mid- to long term.

Operating profit to recover from 2012

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2006 2007 2008 2009 2010 2011E 2012E 2013E

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O P /total earning assets

(Wbn) (%)



Company Report

Samsung Card (029780 KS) pro forma financial statements



Earning assets 10,499 11,260 12,800 14,477 16,332 Operating revenue 2,833 3,607 3,278 5,116 4,185

Card business 8,515 10,011 11,630 13,293 15,083 Card business 1,934 2,244 2,610 3,006 3,446

Credit card purchases 4,945 5,634 6,795 7,943 9,222 Credit card purchases 1,260 1,539 1,863 2,200 2,577

Cash advance 1,388 1,358 1,341 1,360 1,377 Cash advance 351 319 299 304 311

Card loan 2,183 3,019 3,494 3,990 4,484 Card loan 323 387 447 502 559

Installment financing & lease 1,984 1,248 1,170 1,184 1,249 Installment financing & lease 500 426 425 437 456

Installment financing 657 410 371 366 386 Installment financing 116 57 51 51 52

Lease 818 642 687 745 810 Lease 282 325 348 370 392

Consumer loan 510 FALSE 113 73 53 Consumer loan 101 44 25 16 12

Trust assets 0 0 0 0 0 Other 400 936 244 1,672 283

Loan loss reserve 341 311 390 412 432 Gains on val & disp of sec 88 629 31 1,447 43

Other assets 3,290 3,298 3,331 2,332 2,355 Forex/derivative gains 37 111 122 134 147

Total assets 13,448 14,247 16,521 17,221 19,119 Dividend income 26 19 20 20 20

Borrowings 7,427 6,488 7,216 6,364 6,928 Other 113 177 71 72 72

General borrowings 1,366 695 702 709 716 Operating expenses 1,930 2,370 2,523 2,767 3,012

Debentures 4,402 4,078 4,718 3,774 4,243 Financial expenses 570 423 405 427 406

Borrowings from ABS 1,659 1,716 1,797 1,881 1,969 SG&A expenses 1,320 1,824 1,985 2,196 2,449

Other liabilities 1,596 1,581 2,930 4,291 5,201 Other operating expenses 39 123 133 144 157

Total liabilities 9,023 8,070 10,146 10,655 12,129 Losses on val & disp of sec 5 0 0 0 0

Paid-in capital 615 615 615 615 615 Forex/derivative losses 34 103 113 124 137

Common stock Other 0 20 20 20 20

Preferred stock Pre-provisioning OP 903 1,237 755 2,349 1,173

Capital surplus 1,938 1,938 1,938 1,938 1,938 Losses on val & disp of loans 240 -32 253 300 354

Retained earnings 1,243 2,405 2,603 4,017 4,441 Operating profit 664 1,269 503 2,049 818

Capital adjustment 630 -4 -4 -4 -4 Pre-tax profit 690 1,269 503 2,049 818

Other cumul comprehensive income 0 1,223 1,223 0 0 Income taxes 87 88 122 451 180

Total equity 4,426 6,177 6,375 6,566 6,990 Net profit 604 1,181 381 1,598 638

Profitability (%)

Growth(%)


ROE 14.7 22.3 6.1 24.7 9.4 Operating revenue -6.6 27.3 -9.1 56.1 -18.2

ROA 4.0 8.5 2.5 9.5 3.5 Pre-previsioning operating profit 11.2 37.0 -39.0 211.0 -50.1

Pre-provisioning ROE 22.0 23.3 12.0 36.3 17.3 Operating profit 105.3 91.3 -60.4 307.6 -60.1

Pre-provisioning ROA 7.9 11.4 6.3 17.2 7.6 Net profit 134.3 95.6 -67.7 319.4 -60.1

Op rev/earning assets 24.7 33.2 27.3 37.5 27.2 Total assets -18.9 5.9 16.0 4.2 11.0

Financial expense/earning assets 5.0 3.9 3.4 3.1 2.6 Earning assets -15.7 7.2 13.7 13.1 12.8

Net interest margin 19.7 29.3 23.9 34.4 24.5 Card -3.3 17.6 16.2 14.3 13.5

Credit purchases 2.6 13.9 20.6 16.9 16.1

Asset quality (%) Cash advances -7.5 -2.2 -1.2 1.4 1.2

FY to Dec (Wbn) 2009 2010 2011E 2012E 2013E Card loans -12.4 38.3 15.7 14.2 12.4

NPL ratio (below precautionary) 5.6 4.4 4.1 3.9 3.7 Installment financing & lease -45.6 -37.1 -6.3 1.2 5.5

NPL ratio (below substandard) 1.8 1.6 1.5 1.5 1.4 Borrowings -33.6 -12.6 11.2 -11.8 8.9

Prov/NPLs below precautionary 55.5 66.6 69.1 70.2 72.5 Equity capital 17.4 39.6 3.2 3.0 6.5

Prov/NPLs below substandard 177.2 184.2 192.4 198.6 203.8

Efficiency (%)

Key metrics FY to Dec 2009 2010 2011E 2012E 2013E

FY to Dec (Wbn) 2009 2010 2011E 2012E 2013E Operating rev/earning assets 24.7 33.2 27.3 37.5 27.2

EPS (won) 4,931 9,645 3,111 13,050 5,213 Operating exp/earning assets 16.8 21.8 21.0 20.3 19.6

EPS growth (%) 134.3 95.6 -67.7 319.4 -60.1 Financial exp/earning assets 5.0 3.9 3.4 3.1 2.6

BVPS (won) 36,138 50,443 52,055 53,615 57,078 Credit cost/earning assets 0.9 -0.3 2.1 2.2 2.3

DPS (won) 1,200 1,500 1,500 1,500 1,500 SG&A exp/earning assets 11.5 16.8 16.5 16.1 15.9

P/E (x) 11.7 6.5 17.6 4.2 10.5 Other exp/earning assets 0.3 1.1 1.1 1.1 1.0

P/B (x) 1.6 1.2 1.1 1.0 1.0 Operating profit/earning assets 5.8 11.7 4.2 15.0 5.3 Dividend payout ratio (%) 24.3 15.6 48.2 11.5 33.6 Pre-pro OP/earning assets 6.7 11.4 6.3 17.2 7.6 Dividend yield (%) 2.1 2.4 2.7 2.7 2.7 Net profit/earning assets 5.3 10.9 3.2 11.7 4.1



Samsung Card (029780 KS) ratings and target price history

(W)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000


C urrent priceTarget price

Date Rating TP (W)

2011/06/28 BUY 70,000




As of the publication date of this report, Tong Yang Securities Inc. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by Tong Yang Securities Inc. to any institutional investors or third parties prior to its publication. As of the date of publication of this report Tong Yang Securities Inc. is an issuer and liquidity provider for equity linked warrants backed by the shares of the subject company. The analyst (s) of this report or the analyst (s)’ spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report.











Company Report

Kyoung-taek Oh [email protected] +822-3770-3583

KOREA SW/SI

KCP (060250 KS)

BUY (I) / TP: W6,900 (I)

Share price (W, Jun 24) 4,685


Market cap (Wbn) 52

BPS (W) 1,414

Net debt to equity (%) -207.5




52-week high (W) 5,000

52-week low (W) 1,851



Yun-ho Song & others 23.1


1M 3M 12M

Absolute (4.6) 7.7 141.6

Relative (4.4) 16.8 154.6

Abs (US$) (3.0) 11.5 151.6

0

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2,000

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4,000

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6,000


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KCP(LHS)

Rel. to KOSDAQ(RHS)

(W) (%)

Source: Datastream

June 28, 2011

A new star in electronic payment services

Initiate coverage at BUY with target price of W6,900

We initiate coverage at BUY with a target price of W6,900.

Our target offers 53% upside, which we believe is achievable given: 1) KCP’s record-high earnings (sales CAGR of 21.8% since listing in 2006); 2) its online and offline businesses benefiting from the electronic payment market’s growth; 3) further expected growth for the electronic payment market on new markets and methods (such as social commerce and NFC (near-field communication)); and 4) rising enterprise value as telcos and card companies attempt to acquire value-added network (VAN) and payment gateway (PG) service providers given the increasing value of the electronic payment market.

To benefit most from electronic payment market’s growth

KCP is an electronic payment service provider, established by five card companies (BC, KB, Samsung, etc) in 1998 and backdoor-listed on the KOSDAQ in Jan 2006 through the acquisition of listed company Sisnet. Key business areas are PG and online/offline VAN services.

The domestic electronic payment market posted a CAGR of 24.0% over the past 10 years and should grow further thanks to new markets and payment methods, such as social commerce and NFC. Thus, KCP will likely keep posting record-high earnings, as the company already has a significant share of the online and offline payment markets. Other positives are interim dividends (W100 in cash) and the growing value of electronic payment service providers (which telcos and card companies want to acquire).

Forecasts and valuations (K-GAAP, non-consolidated)

FY to Dec 2008 2009 2010E 2011E 2012E

Sales (Wbn) 51.1 62.1 83.2 109.2 136.0

Chg (% y-y) 25.8 21.4 33.9 31.2 24.6

OP (Wbn) 0.8 1.5 3.8 6.0 7.7

NP (Wbn) 1.5 2.0 5.0 7.3 8.4

EPS (won) 148.0 190.2 477.2 654.2 749.4

Chg (% y-y) 49.2 28.8 150.9 37.1 14.5

P/E (x) 12.1 11.0 4.4 7.2 6.3

P/B (x) 2.3 2.2 1.5 2.4 1.7

ROE (%) 19.6 21.4 37.2 35.4 28.5

Div yield (%) - - - 2.1 2.1



KCP (060250 KS)

I. Valuation and earnings forecast

1. Valuation

We initiate coverage of KCP (Korea Cyber Payment) at BUY with a target price of W6,900. Our target price was derived by applying our estimate for the KOSDAQ’s average 2011 and 2012 P/E of 10.0x (10.8x and 9.3x, respectively) to our estimate for KCP’s average 2011 and 2012 EPS of W691 (W644 and W738).

Our target offers 53% upside, which we believe is achievable, given: 1) record-high earnings (sales have posted a CAGR of 21.8% since it was listed in 2006); 2) its online and offline businesses benefiting from the electronic payment market’s growth; 3) further growth expected for the electronic payment market with the emergence of new markets and technologies, such as social commerce and NFC; and 4) rising enterprise value as telcos and card companies are making efforts to acquire VAN and PG service providers, given the increasing value of the electronic payment market.

Valuation

2011~2012 EPS average W691

2011 average P/E for Tong Yang KOSDAQ Universe 10.0x

Fair value estimate W6,910

Target price W6,900

Current price W4,500

Upside potential 53%

Note: Reflects full dilution from BW exercise (Sep 29, 2007~Sep 28, 2011 at W2,218, 225,428 shares). Source: Tong Yang Securities


Company Report

2. Earnings forecast

KCP is involved in payment gateways (PG), online and offline value-added networks (VAN), and mobile payment. In the PG business, it provides an electronic payment service, authorizing payments for e-businesses for a cut of the transaction value. In the VAN business, KCP receives commissions for authorizing credit card transactions at online and offline merchants and relaying data. In terms of 1Q11 sales, PG accounted for 81% and VAN for 19%.

Operating margin, which has continued to improve since 2006, is also expected to rise 1.1%p y-y in 2011 to 5.6%. In addition, KCP is generating interest revenue (non-operating revenue) from cash it is in the process of transferring for online payment processing. This year, interest revenue should come to W1.3bn. KCP was backdoor-listed in 2006 with the acquisition of Sisnet, which was listed on the KOSDAQ. Although the company’s income tax exemption period following the backdoor listing will end this year, it should be able to reduce its 2012 income tax by W1.1bn using loss carry forward.

Major businesses (as of 1Q11) (Wbn)

Business area Classification Revenue Sales Proportion (%)

Payment Online PG commission 19.93 79.9

Ad agency 0.28 1.1

Sub-total 20.2 81.0

VAN Offline Offline VAN commission 2.73 10.9

Device sales 0.51 2.0

Online Online VAN commission 1.51 6.0

Sub-total 4.74 18.9

Total 24.95 100


Earnings forecast (Wbn, %)

2008 2009 2010 2011E 2012E

Sales 51.1 62.1 83.1 107.3 133.6

Chg (% y-y) 25.8 21.4 33.9 29.0 25.0

1. PG 40 48.4 63.7 84.5 105.6

2. VAN 9.4 12 15.8 20.8 26

Operating profit 0.8 1.5 3.7 6 7.5

Operating margin (%) 1.6 2.5 4.5 5.6 6.0

Chg (% y-y) 12.9 82.8 145.1 60 25

Non-operating revenue 0.7 0.5 1.2 1.2 1.5

EBT 1.5 2 5 7.3 9.1

Net profit 1.5 2 5 7.2 8.4

Net margin (%) 3.0 3.3 6.0 6.7 7.0

Chg (% y-y) 49.2 28.8 150.9 37.1 16.7



KCP (060250 KS)

Sales and operating profit

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2005 2006 2007 2008 2009 2010 2011E 2012E

-14-12-10

-8-6-4-202

468Sales

O perating margin (RHS)

(Wbn) (%)

Lis ted as Sisnet in Jan 2006



Company Report

II. Overview: electronic payment solution provider

KCP is an electronic payment service provider, established by five card issuers (BC, KB, Samsung, KEB, and LG) in 1998 and backdoor-listed on the KOSDAQ in Jan 2006 through the acquisition of listed company Sisnet. KCP provides PG and online/offline VAN services. In Jan 2008, it entered the mobile payment business by acquiring a 100% stake in mobile payment service provider MoMoCash, and merged with the subsidiary on Jun 13, 2011.

In the PG business, KCP provides an e-commerce application service, which authorizes payments for e-businesses and receives a percentage of transaction value as commission (commissions for delivering funds from the card issuer to the online shopping mall). In the Korean PG market, KCP accounts for 23%, while Inicis has 35% and Dacom 20%. With a combined market share of 80%, these three companies dominate the market.

Meanwhile, KCP’s VAN service relays payment data between card issuers and member merchants via a secure network. VAN service is divided into online and offline services. Online VAN service transmits credit card data via a secure network to e-businesses, PGs, and card issuers. KCP has 45% of the online VAN market. VAN service transmits payment data between the card issuer and member merchant. At present, the market has 11 players, including KICC, KS-Net, FDIK, NICE, Smartro, KFTC, KISVAN, and KOVAN.

As of 1Q11, 81% of KCP’s sales came from PG service and 19% from VAN service. Based on strong brand awareness and reliability, KCP has around 80,000 clients, generating stable sales from PG. Major clients are popular shopping malls (Interpark, Auction, NHN, Daum, Aladdin, Yes 24), content providers (Neowiz, Nexon, NCSoft, CJ Internet, Mgame, Soribada), social commerce operators (Ticketmonster, Dailypick, Daum Social Shopping), e-learning education providers (Samsung SDS Multi Campus, Megastudy, JLS Academy), and government agencies (Seoul Metropolitan Office of Education, National Assembly). For VAN service, KCP has 140,000 member merchants, doing about with 20mn transactions per month.

Korea’s e-commerce market posted a CAGR of 16.8% from W517tn in 2007 to W824tn in 2010, while credit card purchases grew at a CAGR of 7.5% from W398tn in 2007 to W494tn in 2010. In particular, credit card purchases at online shopping malls climbed sharply at a CAGR of 18.9% from W10.4tn in 2007 to W17.5tn in 2010. Backed by the constant growth of downstream business, KCP’s sales posted a CAGR of 26.9% from W40.6bn in 2007 to W83.1bn in 2010. Operating margin also improved from 1.8% in 2007 to 4.5% in 2010.


KCP (060250 KS)

Electronic payment market structure and players’ roles

Card issuer

Merchant (member)

Cardholder

VANPayment gateway

(member)

Online shopping mall

Cardholder

VAN

Card issuer

VANOffline VAN

1. Middleman between merchant & card issuer

2. Install payment device

3. Operate secure network

PG1. Authentication and

security for “card-not-present” transactions

2. Transfer funds for card sales from card issuer to shopping mall

3. Maintain online shopping malls

4. Manage risks

Online VAN1. Operate secure network

<VAN> <PG>


PG business structure VAN business structure

VAN

5. Transaction value minus PGcommission

1. Transaction data

2. Transaction data

3. Transaction data

4. Transaction value minus commission for card issuer

Small- to mid-sized

onlineshopping

mall

PG(member)

Card issuer

1. Transaction data

(device)

4. VAN commission

2. Transaction data

3. Transaction value minus commission for card issuer

Card issuerMerchant

VAN service provider

Source: Company data, Tong Yang Securities Source: Company data, Tong Yang Securities


Company Report

PG market breakdown VAN market breakdown

Dacom

20%

Inic is

35%

KC P

23%

O ther

22%

Smartro

10%

KIC C

19%

KS-Net

11%

NIC E

16%FDIK

11%

O ther 33%

(KC P 3%)

Source: DART, company data, Tong Yang Securities Source: DART, company data, Tong Yang Securities


KCP (060250 KS)

III. Investment points 1. Electronic payment market to grow, backed by social commerce and NFC Korea’s electronic payment market became active in 1999 and grew to W823.6 in 2010 backed by wider use of credit cards. The market expanded 690% from 2001 to 2010, posting a CAGR of 24.0%. During the period, the online shopping market posted a CAGR of 25.1%, growing 750% from W3.3tn in 2001 to W25.2tn in 2010. We expect the electronic payment market to keep growing on: 1) aggressive marketing by online shopping malls and an increase in the number of online marketplaces; and 2) expansion of credit card payments thanks to economic recovery and increasing benefits of credit card use.

Korea’s electronic payment market has expanded further recently thanks to the emergence of new markets and IT devices. In particular, social commerce, introduced in 2010, is expected to explode from W50.0bn in 2010 to W500.0bn~1tn in 2011. Also, new IT devices (such as smartphones, tablet PCs, and smart TVs) feature the ability to do online transactions, and we believe payment via device will eventually exceed payment via traditional plastic.

In particular, NFC-enabled smartphones are now available, which should mark a turning point for the electronic payment market. Samsung Electronics has already added NFC functionality to the domestic model of the “Galaxy S II” (released Apr 29). Apple will also launch its own system that can utilize NFC technology by 2012, and many are wondering whether the “iPhone 5” will be NFC-enabled. Electronic payment using NFC phones should become widespread from 2H11. We predict that NFC will lead to the convergence of financial and telecom services and replace many payment methods. NFC is an extension to radio-frequency identification (RFID) technology, which is already being used for contactless mobile payment, such as point-of-sale (POS) and transportation cards. Notable differences between NFC and RFID are: 1) NFC offers interactive services, so data can be transferred from one mobile device to another; and 2) NFC allows for online and offline electronic payment and financial transactions, as it encrypts data. In particular, NFC allowing data transfer between mobile devices should lead to payment and wire transfers between devices, and thus, a wide array of payment services. NFC-enabled smartphone users will not only be able to pay at stores and restaurants by passing their phones over a POS terminal, but also transfer money to another NFC phone user by simply bringing their phones close together. Meanwhile, mom-and-pop stores and delivery shops who may find it hard to afford a POS terminal will be able to use their NFC-enabled phones for mobile payment. In online shopping, NFC should simplify the payment process, which is currently complicated by having to juggle credit cards and security certificates.

We believe KCP stands ahead of its peers, as it has operated in both the online and offline payment markets (PG, VAN, mobile payment), enjoys synergies between its online and offline businesses, and already has big customers. Thus, we believe KCP will benefit the most from the rapid growth of new payment markets and IT devices.


Company Report

e-commerce and credit card payment market Online shopping mall market

0

100

200

300

400

500

600

700

800

900

2001 2004 2007 2010

0

50

100

150

200

250

300

350

400e-commerce (LHS)

C redit card payment (privateconsumption; RHS)

(Wtn) (Wtn)

0

5

10

15

20

25

30

2001 2004 2007 2010

(Wtn)

Source: KOSTAT, Tong Yang Securities Source: KOSTAT, Tong Yang Securities

Number of PG members and PG sales Number of transactions and VAN members

0

10

20

30

40

50

60

70

80

90

2008 2009 2010

0

10

20

30

40

50

60

70PG sales (RHS)Member merchants (LHS)

('000) (Wbn)

0

20

40

60

80

100

120

140

160

2008 2009 2010

0

1000

2000

3000

4000

5000

6000

7000

8000

9000T ransac tions (RHS)Member merchants (LHS)

('000) ('000)

Source: Company data, Tong Yang Securities Source: Company data, Tong Yang Securities


KCP (060250 KS)

Peer comparison: business area

Business area KCP Inicis KICC NICE Mobilians Danal

Payment infrastructure PG Y Y Y Y

Online VAN Y

Offline VAN Y Y Y

Payment method Credit card Y Y Y Y

Mobile phone Y Y Y

Other (gift certificate, etc) Y Y Y Y


Peer comparison: earnings (2010) (Wbn) Company Market cap Sales Operating profit Op margin (%) Net profit P/E P/B

KCP 50.3 83.2 3.8 4.5 5 6.9 2.3

Inicis 102 159.9 10.1 6.3 7 14.6 1.5

KICC 121.1 131.9 18 13.6 8.3 19.1 3.1

NICE 42.3 122.8 11.8 9.6 9.1 4.6 1.0

Mobilians 81.7 75.6 10 13.2 7.6 12.5 1.3

Danal 138.9 82.8 8.5 10.2 -3.6 - 3.0

Source: DART, Tong Yang Securities

Peer comparison: growth and OP margin

Sales growth (% y-y) Operating margin chg (%p y-y) Company

2008 2009 2010 CAGR 2008 2009 2010

KCP 25.8 21.4 33.9 26.9 -0.2 0.8 2.1

Inicis 35.0 23.2 23.0 26.9 3.6 -0.5 0.8

KICC 13.9 13.6 18.9 15.5 -1.7 -1.2 0.8

NICE 25.5 25.6 24.8 25.3 0.2 0.0 -0.6

Mobilians 11.1 15.4 14.3 13.6 -8.3 6.4 3.0

Danal -0.7 2.4 -1.3 0.1 -1.1 6.8 -1.5

Source: DART, Tong Yang Securities


Company Report

2. M&A momentum to boost value

The mobile payment market looks set for robust growth thanks to the increasing use of electronic payments and rapid adoption of NFC-enabled phones. Meanwhile, telcos are working to vertically integrate mobile payments by acquiring credit card companies and VAN providers. For example, SK Telecom bought Hana Card at end-2009, and in Feb 2011, KT announced it would become the biggest shareholder of BC Card. In May 2010, BC Card bought unlisted VAN provider Smartro (established in 1998, affiliated with Initech and Inisis, paid-in capital of W5.1bn, 2010 sales of W80.3bn and net profit of W11.5bn), and by buying into BC Card, KT has established a telecommunications-card-VAN value chain.

With M&A momentum ripening among telcos and credit card companies, we believe KCP’s value will grow further. KCP has a strong presence in Korea’s online payment market, with a 25% market share in PG and 45% in online VAN. It also currently has about a 3% market share in offline VAN, as it tapped into the market in 2005. With the VAN business expected to grow 31% y-y in 2011, we believe its market share will rise further. In our view, KCP is more attractive than peers since it operates both online and offline. Furthermore, it is an attractive M&A target, as its CEO only has about a 7% stake (though its major shareholder has a respectable 31.3% stake).


KCP (060250 KS)

KCP (060250 KS) pro forma financial statements

Balance sheet Income statement


Current assets 16.7 29.9 41.8 59.4 79.5 Sales 51.1 62.1 83.2 109.2 136.0

Cash & cash equivalents 7.6 17.8 25.4 39.1 55.2 Cost of goods sold 42.6 52.3 70.0 93.3 117.6

Marketable securities 4.4 5.4 7.6 8.2 8.8 Gross profit 8.6 9.8 13.2 15.9 18.4

Accounts receivable 2.0 2.5 3.8 5.1 6.3 SG&A expenses 7.7 8.2 9.4 9.8 10.7

Inventory 0.7 0.5 0.7 0.8 0.9 Operating profit 0.8 1.5 3.8 6.0 7.7

Others 2.1 2.3 3.5 5.1 6.3 Non-operating revenue 1.4 0.9 1.8 1.3 1.6 Non-current assets 11.1 9.7 11.2 10.5 9.8 Financial income 0.7 0.6 1.1 1.3 1.6

Investments 3.2 2.3 2.1 2.8 4.1 FX gains 0.1 0.0 0.1 0.0 0.0

Tangible assets 3.7 3.7 5.4 4.0 2.4 Equity method gains 0.0 0.0 0.4 0.0 0.0

Intangible assets 2.3 2.0 1.7 3.3 2.8 Others 0.6 0.3 0.2 0.0 0.0

Others 1.9 1.8 2.1 0.5 0.6 Non-operating expenses 0.7 0.4 0.6 0.1 0.1

Total assets 27.7 39.7 53.1 69.9 89.3 Financing costs 0.0 0.0 0.1 0.0 0.0

Current liabilities 19.0 27.7 36.9 44.2 55.1 FX losses 0.0 0.0 0.0 0.1 0.1

Accounts payable 0.7 0.8 1.6 2.1 2.6 Equity method losses 0.4 0.2 0.0 0.0 0.0

Short term debt 0.0 0.0 0.0 0.0 0.0 Others 0.3 0.1 0.5 0.0 0.0

Current long term debt 0.0 0.0 0.0 0.0 0.0 Recurring profit 1.5 2.0 5.0 7.3 9.2

Others 18.3 26.9 35.3 42.1 52.5 Extraordinary gains/losses 0.0 0.0 0.0 0.0 0.0

Non-current liabilities 0.8 1.0 0.2 0.6 0.7 Earnings before tax 1.5 2.0 5.0 7.3 9.2

Debentures 0.0 0.0 0.0 0.0 0.0 Income tax 0.0 0.0 0.0 0.0 0.8 Long term debt 0.0 0.0 0.0 0.0 0.0 Earnings from cont. operations 1.5 2.0 5.0 7.3 8.4 Others 0.8 1.0 0.2 0.6 0.7 Earnings from disc. operations 0.0 0.0 0.0 0.0 0.0

Total liabilities 19.8 28.6 37.1 44.8 55.8 Income tax effect 0.0 0.0 0.0 0.0 0.0

Paid-in capital 4.8 4.8 4.6 5.6 5.6 Net profit 1.5 2.0 5.0 7.3 8.4

Capital surplus 5.0 5.0 4.2 6.4 6.4 Gross margin (%) 16.8 15.7 15.9 14.6 13.5

Capital adjustment -4.0 -3.0 -2.2 -2.2 -2.2 EBITDA margin (%) 4.9 5.6 7.1 7.9 7.2

Other accum compreh income -0.3 -0.2 -0.1 -0.2 -0.2 OP margin (%) 1.6 2.5 4.5 5.5 5.6

Retained earnings 2.4 4.5 9.5 15.6 23.9 RP margin (%) 3.0 3.3 6.1 6.7 6.8

Total shareholders’ equity 7.9 11.0 16.0 25.2 33.5 Earnings before tax margin 3.0 3.3 6.1 6.7 6.8

Total debt 0.0 0.0 0.0 0.0 0.0 NP margin (%) 3.0 3.3 6.1 6.7 6.1

Net debt -12.1 -23.4 -33.2 -47.4 -64.1 Adj. NP margin (%) 3.0 3.1 6.0 6.7 6.1

Cash flow Key financial data


Operating cash flow 1.7 10.2 10.2 23.1 18.7 FCF 0.8 8.8 8.4 9.8 15.5

Net profit 1.5 -2.2 5.0 7.3 8.4 EBIT 0.8 1.5 3.8 6.0 7.7

Non-cash revenue/expense 2.2 1.0 2.7 2.7 2.4 EBITDA 2.5 3.5 5.9 8.6 9.8

Depreciation 1.3 1.6 1.8 2.1 1.6 SPS (W) 4,995.6 5,828.0 7,892.0 9,792.1 12,200.8

Amortization 0.3 0.3 0.3 0.4 0.5 EPS (W) 147.7 190.2 477.2 654.2 749.4

Others 0.6 -2.4 0.5 0.1 0.3 DPS (W) 0.0 0.0 0.0 100.0 100.0

Chg in operating assets/liab. -2.1 5.7 2.6 13.1 7.9 BPS (W) 775.9 953.3 1,414.4 1,960.3 2,754.0

Decr. (incr) in accounts receivable -0.5 -0.7 -1.4 -1.6 -1.5 EBITDAPS (W) 242.4 327.3 558.7 770.3 876.2

Decr. (incr) in inventory -0.6 -1.0 -2.8 -0.6 -0.2 Sales growth 25.8 21.4 33.9 31.2 24.6

Incr. (decr) in accounts payable 0.1 0.1 0.8 0.5 0.5 OP growth 12.9 82.8 145.1 60.3 27.0

Others -1.1 7.3 5.9 14.8 9.1 EPS growth 49.2 28.8 150.9 37.1 14.5

Investing cash flows -4.3 -1.0 -2.5 -11.2 -2.7 EBITDA growth 7.0 40.5 68.9 45.8 13.8

Decr. (incr) in tangible assets -0.7 -0.4 -0.9 -0.2 0.0 ROA 5.4 6.0 10.9 11.9 10.5

Decr. (incr) in intangible assets 0.0 0.0 0.0 0.0 0.0 ROE 19.6 21.4 37.2 35.4 28.5

Decr. (incr) in investments -1.3 0.7 0.4 -0.6 -1.3 ROIC Impaired

capital Impaired

capital Impaired

capital Impaired

capital Impaired

capital

Others -2.4 -1.3 -2.0 -10.5 -1.5 Dividend yield - - - 2.1 2.1

Financing cash flows 0.5 1.0 -0.2 1.9 0.1 PSR (x) 0.4 0.4 0.3 0.5 0.4

Incr. (decr) in debentures& debt -0.5 0.0 0.0 0.0 0.0 PER (x) 12.1 11.0 4.4 7.2 6.3

Incr. (decr) in equity 1.0 1.0 -0.2 1.8 0.0 PBR (x) 2.3 2.2 1.5 2.4 1.7

Dividend payout 0.0 0.0 0.0 -1.1 0.0 EV/EBITDA (x) - - - - -

Others 0.0 0.0 0.0 0.1 0.1 Liabilities ratio (%) 250.2 259.2 231.6 178.0 166.5

Increase in cash -2.2 1.5 7.6 13.7 16.1 Net debt/equity ratio (%) 0.0 -212.2 -207.5 -188.3 -191.2

Beginning cash 9.8 7.6 17.8 25.4 39.1 Net financing costs/sales -0.5 -0.7 -1.7 -1.2 -1.1

Ending cash 7.6 17.8 25.4 39.1 55.2 OP/financing costs (x) 42.2 2,790.1 55.0 1,290.1 -

Source: Company data, Tong Yang Securities estimates


Company Report

KCP (060250 KS) ratings and target price history

(W)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


C urrent price

Target price

Date Rating TP (W)

2011/06/28 BUY 6,900




As of the publication date of this report, Tong Yang Securities Inc. does not own a stake in excess of 1%, nor does it have any interest whatsoever, in the subject company (ies). The material contained herein was not disclosed by Tong Yang Securities Inc. to any institutional investors or third parties prior to its publication. The analyst (s) of this report or the analyst (s)’ spouse does not have any financial interest in the securities of the subject company (ies) mentioned herein, nor financial interest of any nature related to the subject company (ies) (including without limitation, whether it consists of any option, right, warrant, future, long or short position), as of the publication date of this report. Analyst certification










KCP (060250 KS)

Seoul

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