john genovese edward mui ram narayanan mitesh patel sachin patel aric schachner
Download
Skip this Video
Download Presentation
John Genovese Edward Mui Ram Narayanan Mitesh Patel Sachin Patel Aric Schachner

Loading in 2 Seconds...

play fullscreen
1 / 52

John Genovese Edward Mui Ram Narayanan Mitesh Patel Sachin Patel Aric Schachner - PowerPoint PPT Presentation


  • 266 Views
  • Uploaded on

John Genovese Edward Mui Ram Narayanan Mitesh Patel Sachin Patel Aric Schachner Agenda Both a quantitative and qualitative analysis will be conducted. These analyses will be composed of: Social Conditions within South Korea Macroeconomic Landscape Political Environment

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'John Genovese Edward Mui Ram Narayanan Mitesh Patel Sachin Patel Aric Schachner' - ostinmannual


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
john genovese edward mui ram narayanan mitesh patel sachin patel aric schachner
John Genovese

Edward Mui

Ram Narayanan

Mitesh Patel

Sachin Patel

Aric Schachner

agenda
Agenda

Both a quantitative and qualitative analysis will be conducted. These analyses will be composed of:

  • Social Conditions within South Korea
  • Macroeconomic Landscape
  • Political Environment
  • Telecommunications Sector
  • LG Telecom’s Business
  • Current Market Situation
  • Investment Outlook
  • Financial Analysis
  • Final Recommendation
case insights
Case Insights
  • As students make the transition from school to the business world, we must be aware of international markets, and how they affect the world economy.
  • Able to use our valuation techniques to evaluate foreign markets in regards to exchange rates, DCF computations, and sovereign risk adjustments.
  • Learn about Emerging Markets (South Korea) and how the volatility in these markets can destroy, or exponentially grow an individuals wealth
social conditions
Social Conditions

Population

  • Population of 48,324,000
  • Ethnically homogeneous country- Korean decent.
  • Biggest minority group - Chinese
  • ¼ of population located in Seoul and more than ½ of all South Koreans live in big cities
  • Growth rate dropped from 3% in late 1950s to 0.85% in 2002
  • 297 institutions of higher learning with 2.5mill annual enrollment
  • 99.8% literacy

Population affects LG Telecom positively because South Korea is a nationalistic, homogenous, urbanized countries. Thus a large concentrated consumer market that is loyal to home country brands.

macroeconomic conditions
Macroeconomic Conditions

Background

  • High growth in 1980’s due to a system of close government/business ties, including directed credit, import restrictions, sponsorship of specific industries, and a strong labor effort
  • Government promoted import of raw materials and technology at the expense of consumer goods
  • Encouraged savings and investment over consumption

“The Luck would soon run out…”

asian financial crisis
Asian Financial Crisis
  • Exposed weaknesses in South Korea’s developmental model including
    • High debt/equity ratios
    • Massive foreign borrowing
    • Undisciplined financial sector
  • Growth fell 6.6% in 1998
  • Rebounded in 1999 to 10%
  • Rebounded again in 2000 to 9%
  • Growth fell back to 3.3% in 2001
    • Slowing Global Economy
    • Falling Exports
    • Corporate and Financial reforms had become stagnant
current and future macroeconomics
Current and Future Macroeconomics

Current Economic Situation

  • Showed great resilience in 2001 with strong GDP growth
  • 2002 GDP grew by 5.9%

Future Economic Outlook

  • Forecasted South Korea’s real GDP to expand by 4.6% in 2003, to 5.3% in 2004
  • Export volume will slow in 2004, to 9.5% because of won appreciation
  • Will result in smaller foreign trade balance contributions
  • Stable inflation forecast of 2002-2004
south korea
South Korea
  • 1948- Republic of Korea declared below the 38th parallel on the Korean peninsula
  • #43 on Transparency International Corruption Perceptions Index 2002 with a 4.5 CPI score
  • Roh Moo-hyun current president will carry on “sunshine policy”
  • Military Threat from North Korea
      • North Korea’s aggression towards the South is strong
      • Large stockpile of chemical weapons
      • One million strong army
      • Ever present terrorism from North Korea
        • Assassination of four members of SK’s cabinet
        • Bombings Korean Airlines plane
        • 3 Naval disputes

Corruption leads to abnormal market returns, and negatively impacts country risk profile.

lg telecom
LG Telecom
  • LGT is a subsidiary of the LG Group (Diverse Conglomerate)
  • Provider Personal Communications Services (CDMA)
  • First to commercialize CDMA technology through cellular services
  • Holdings include Dacom Corporation and Hanaro Telecom (Broadband provider)
  • Customer base of 4.8 million wireless subscribers

“Say hello to my little friend”

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

2001

  • Breakthrough year financially
  • Recorded net income of W154 billion compared to loss of W442 billion (2000)
    • Due to ban on handset subsidies and steady ARPU and subscriber growth
  • Raised W343.6 billion in equity to shore up balance sheet
  • Paid over W200 billion in debt by cutting Capital Expenditures
lg telecom brands
LG Telecom Brands
  • Ez-i
  • Khai
  • Khai Holeman
  • Btob
  • IMT (International Mobile Telecommunication) 2000
slide14
Ez-i
  • LG TeleCom’s first Korean wireless Internet service (1999)
  • Over 8,000 options
  • Commercialized the world’s 1st Java Station through a strategic alliance with BT Genie.
slide15
Khai
  • Launched February 2000 for the 19-24 age group
  • Access to diverse cultural aspects
    • Fashion, sports, music, performances, and dancing
  • Discount benefits added through their phones.
khai holeman
Khai Holeman
  • Incorporates teenage interests:
    • Invitations to various events and discounts
    • Animated characters
  • Highly diverse marketing techniques
  • High demand among teenagers
slide17
Btob
  • For effective communication, work, and optimum resource management
  • 1st Korean mobile communication service exclusively for business
  • LG TeleCom has the largest market share in the mobile office market
  • Services include mobile consulting specializing in data solutions
slide18
IMT
  • International Mobile Telecommunication 2000
  • Mobile communication linked up to wire/wireless and global satellite networks
    • Includes Internet, data, fax, video, video communication/conference, TV viewing, and motion picture in real time.
competition
Competition
  • SK Telecom
  • Korea Telecom Freetel
korea telecom freetel
Korea Telecom Freetel
  • Established in January 1997 and successfully launched commercial service in October 1997
  • One million subscribers within first six months of operations
  • 1 year later they had more than 3 million subscribers.
  • As of April 2000 there are over 4.7 million subscribers generating $4.3 billion in revenues
  • 1st cellular operator to launch IS-95B wireless Internet service nationwide in February 2002
  • Concluded merger contract with KTICOM in 2002
  • Ranked No.1 in mobile Service on the Business Week's IT 100 in the world
  • Provides 3G services based on W-CDMA
sk telecom
SK Telecom
  • South Korea’s #1 wireless telecommunication services provider
  • Revenues totaled $6.37 billion in 2001
  • Part of the SK Group which is made up of 60 member companies
    • Includes seven companies listed on the Korean Stock Exchange
  • SK Telecom has a presence on six continents
  • Provides 3G services based on W-CDMA
south korean mobile phone market
South Korean Mobile Phone Market
  • 2001 South Korea 1st to provide CDMA 2000 service
  • LG 0.05 million net subscribers in 2002
  • Wireless internet market as the most successful growth driver
  • Technologically adept culture
  • Importance of the Korean youth
market share 2002
Market Share 2002

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

slide27
3G
  • Benefits of 3G
    • Additional capacity
    • More efficient spectrum management techniques
    • Faster data rates
    • Enhances 2.5G applications
    • Facilitates new applications
    • Continued substitution from fixed to mobile
    • Ensures optimal capital efficiency
mobile phone industry
Mobile Phone Industry
  • Declining ARPU (Average Revenue per User)
    • Decrease in Service Revenue
  • Market Saturation
    • Increase in Subscriber Base
  • 3G Technology
arpu and mou
ARPU and MOU
  • ARPU declined 9.5% and was W33.25million in 2002
  • MOU was at 121 minutes for outbound traffic while inbound traffic was 107 minutes, an increase of 2.7%
a new focus
High Customer Growth

-Voice Centric

Customer Focus

-Portfolio of voice and data services

A New Focus

THE TRANSITION

new growth drivers
New Growth Drivers
  • The Industry’s Solution
    • Decrease in Prices for Voice Calls
    • New Focus on VAS and Data Services
issues relating to growth
Issues Relating to Growth
  • Target new demographics
    • Corporate clients
    • Youth
  • 3G technology
    • New applications
    • What to market
  • Expensive development
    • Infrastructure
    • Engineering
increasing arpu
Increasing ARPU
  • Modest but REAL ARPU movement
  • Improvements arise generally from
    • Increase in data revenues
      • Sustained growth in SMS
      • New applications (e.g. picture messaging)
    • Competitive gain on high spending customers
    • Further increases in active customers
    • Greater usage of new voice services
regulatory environment
Regulatory Environment
  • Ministry of Information and Communication (MIC)
    • Accelerate information
    • Promote the IT industry
    • Facilitate market
    • Deregulation and liberalization
    • Promote venture capital along with R&D within the communications sector
tariff s
Tariff’s
  • MIC regulates tariff rates for SKT
  • Regulation of tariff causes ripple effect in industry
  • Tariff’s cut by 8.3% in January 2002 and 7.3% in January 2003
  • Can hinder free market competition
mobile number portability
Mobile Number Portability
  • Wireless subscribers can switch operators without having to change their mobile phone numbers
  • LG customers granted MNP in 2005
  • No need for a new handset
  • Promote competitive environment
handset subsidy marketing
Handset Subsidy & Marketing
  • Handsets are subsidized through customers signing up for contracts
  • MIC limited subsidies to 10-20% of retail handset price
  • MIC imposed limits on marketing activities via membership or royalty programs
  • Reduce marketing costs
so what s the deal
So What’s the Deal…
  • WHAT’S THE BIG PROBLEM?
    • Why not focus on:
      • New types of customers
      • Promoting data and VAS usage
      • Providing new voice services
      • Increasing user spending
no 3g
NO 3G!
  • LG TELECOM DID NOT INVEST IN 3G…
current market situation
Current Market Situation
  • SK Telecom - KTF - LG Telecom – S&P500
lgt revenue breakdown
LGT Revenue Breakdown
  • Moderate growth in PCS service due to tariff rate cuts and lower interconnection rate adjustments in 2002
  • High marketing, customer acquisition costs leading to slower growth in PCS Voice
return on equity
Return on Equity
  • Risk Free Rate of 4.75%
  • Company Beta of 1.5
  • Market Risk Premium of 6.25%
  • SYS = 5%
    • 10-Year US yield 3.875
    • 10-Year Korean yield of 8.875
  • Re = Rf + SYS + B(Rm – Rf) = 19.13%
  • Weighted average return of debt of 10.5%
wacc dcf
WACC / DCF
  • WACC = 12.13%
    • E/V*RE + D/V*RD*(1-TC)
    • Debt = 1,181,582m
    • Equity = 876,009m
    • TC = 29%
  • Assumptions
    • 5 years cash flow projections
    • Perpetual growth rate of 4%
    • Terminal EBITDA multiple of 4x
    • 72% of DCF value resides in the terminal value
dcf analysis
DCF Analysis
  • Trading at W4,200
  • 52 week range 3,370 - 5,050
  • DCF Target Price = W5,000
    • 12% Discount Rate
    • 4x Terminal EBITDA Multiple
  • Trading 18.4% below our DCF calculation
  • Investors may feel that LG Group will not increase spending for LG Telecom
  • Exposed to downside risk relative to competitors due to LGT’s lower:
    • ROIC
    • Earnings Growth Rate
    • Premium P/E multiple

“LGT Phone Home”

Needs help to survive!

scenario 1
XScenario 1

Divest LG Telecom

  • Pros
    • Cash generated could be used towards more profitable projects
    • Concentrate on other businesses
  • Cons
    • Lost opportunity in 3G technology
scenario 2
XScenario 2

Implement 3G

  • Pros
    • Increase subscriber base
    • Offer superior service
  • Cons
    • Too expensive for LGT to do alone
    • Not enough cash flow to cover capex

“Show me the money!!!”

scenario 3
XScenario 3

“Do Nothing”

  • Pros
    • Second mover advantage
    • No Capex required
  • Cons
    • Loss of Subscribers to new technology
    • Obsolete technology
our recommendation
Our Recommendation

Strategic Alliance with KTF

  • Pros
    • Risk and cost of implementation are split
    • Synergies with customer bases and existing technologies
    • Increase in available resources
  • Cons
    • Regulations over mergers
    • Loss of LGT’s trade secrets
    • Sharing of profits

“If you can’t beat ‘em, join ‘em”

ad