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

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

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

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

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

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

7. Asian Financial Crisis • Exposed weaknesses in South Korea’s developmental model including • 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

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

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

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

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

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

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

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

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

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

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

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

19. Competition • SK Telecom • Korea Telecom Freetel

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

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

22. South Korean Mobile Phone Market • 2001 South Korea 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

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

24. Cell Tech Evolution

25. 3rd Generation Wireless Technology Capabilities

26. 3G Network Standards

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

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

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

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

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

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

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

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

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

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

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

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

39. NO 3G! • LG TELECOM DID NOT INVEST IN 3G…

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

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

42. Ratio Analysis

43. Ratio Analysis Cont’d

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

45. 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

46. DCF Calculations

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

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

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

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