Korea Invest - 2013 OUTLOOK

November 22, 2012
2013 OUTLOOK
Exploring growth opportunities in slow times

Investment Strategy Energy Oil Refining
Economy Materials Metals, Chemicals
Industrials Construction, Shipbuilding, Machinery, Transportation
Consumer Discretionary Autos, Textiles/Apparel, Media & Ad, Retail
Consumer Staples/Health Care Food, Beverages & Tobacco, Pharmaceuticals
Financials Banks, Securities, Insurance
Information Technology Internet/Games, Electric/Electronics/Telecom equipment,
Display, Semiconductors, LED
Telecom Services/Utilities Telecom Services, Utilities
2013 Outlook
Contents
Stock market & Investment Strategy 3
Economic outlook 2013 KIS Top Picks 41
Economy 93
Sector Outlook
<Tables & Charts> Summary 114
Energy Oil Refining - Change in regional landscape for supply-demand;

supplies still tight 120
Materials Metals - Small and mid-caps merit more attention 128

Chemicals - Don’t rush, look far ahead 136
Industrials Construction - From market share game to quality competition 146

Shipbuilding - An inconvenient truth:
Offshore plants will not be enough in 2013 156
Machinery - Take note of companies that can achieve structural
growth regardless of economic conditions 164
Transportation - Structural demand change for air transport 170
Consumer Discretionary Autos - Global market share growth to continue 176

Textiles/Apparel - Rebalancing act 182
Media & Ad. - Intensifying platform competition and growing
demand for content 190
Retail - Finding growth drivers outside macro variables 200
Consumer Staples / Food, Beverages & Tobacco - Time for re-rating as growth plays 210
Health Care Pharmaceuticals - Re-rating just begun, unafraid of low-growth era 218
Financials Banks - Focus on asset quality and valuation merit 228

Securities - Earnings and shares bottom, but no rebound momentum 238
Insurance - Policy changes under a new administration 246
Information Technology Internet/Games - Inevitable slowdown of domestic market growth 254

Electric/Electronics/Telecom equipment
- Sharper competitive edge despite slow demand 262
Display - TV demand needs to recover 268
Semiconductors - Paradigm shift 274
LED - LED lighting needs more time to shine 282
Telecom Services / Telecom Services - Competition to ease and ARPU to rise in 2013 290
Utilities Utilities - Anticipate lighter cost burden and deregulation 298
Appendix Korea Investment & Securities Research Center 306

Executive Summary
We have come through 2012 that was mixed with hope and disappointment.
The Kospi is moving sensitively to global uncertainty, forming a “double top”
pattern between 1,800-2,000pt. In 2013, we believe the global economy will
recover only at a moderate pace as conditions in advanced countries remain
sluggish. But as a low interest rate environment persists, extreme risk aversion
should gradually ease. We view the Kospi’s fair level at 2,075pt, below the
previous high of 2,231pt but offering 10% upside from now. Our Kospi target
equals 11.75x PE based on the KIS 2013F NP, which is ~20% down from the
current consensus.
Unlike what we expected a year ago, the shift to an Asian demand growth
paradigm has gone very slow. Economic recovery in advanced countries has
been delayed and China’s demand has yet to gain enough strength to drive the
global economy. In 2013, the world will not be able to break away from the low
growth paradigm, where all countries are struggling to reduce uncertainty and
find growth drivers. Korea’s economy will inevitably face slow growth (GDP
forecast of 2.3% for 2012 and 3.3% for 2013) considering the delayed recovery
of exports and the risk of flagging domestic demand triggered by household
debt problems. We expect monetary policy to favor low interest rates (policy
rate 2.0%) and the policy stance tilted toward households rather than
corporations to keep the FX rate at a low level (W1,020/USD at end-2013).
At present, investors are too keen on averting risks despite reduced volatility
and stable risk indicators. That is because the deleveraging cycle is still
underway while global uncertainty remains unresolved. Though the consensus
forecasts corporate NP to grow 10% YoY in 2012 and 22% YoY in 2013, our
top-down analysis model suggests a downward revision of 8.4% and 20.5% for
the respective 2012-2013 consensus. With the revision, corporate NP would
rise only ~6% YoY in 2013. However, the stock market should be able to move
away from excessive risk aversion backed by low interest rates, earnings
stability and reduced market volatility as seen in recent years.
Our portfolio strategy for 2013 is geared toward “growth”. We compose our
portfolio by focusing more on regions, industries and companies with growth
opportunities. In line with an aging population, IT advances and social
paradigm shifts, demand is structurally growing for healthcare, mobile device
components/services and digital content. For companies engaged in those
sectors, we expect further share upside in 2013 and sustainable market growth
over the next several years. We also recommend consumer goods providers
that have production bases in China and Southeast Asia or are gaining
recognition and market share in the regions. We see valuation appeal in
Samsung Electronics and the automotive sector.
Head of Research
Jun J. Lee
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2013 Outlook
Investment Strategy

I. Market diagnosis: Disparity between risk indicators and investor sentiment
1. Risk aversion parameter
2. Mistrust? Paradigm shift? Delayed adaptation to changes?
II. Key issues and macro assumptions

1. Deleveraging and slow global growth
2. Will Europe help a low base effect materialize?
3. US fiscal cliff and dollar economics
4. Korea’s household debt issue
5. New administration and economic democracy
6. Key macro assumptions
III. 2013 NP outlook via top-down analysis

1. 2013F NP has 20.5% downside from the current consensus
2. 2012F NP has 8.4% downside from the current consensus
3. 2013 NP growth forecast – polarization between super-large-caps and
non-super-large-caps
IV. Kospi outlook and portfolio strategy

1. Stock market outlook: Kospi fair at 2,075pt
2. Ideas for promising sectors and stocks
3. Portfolio strategy: Seeking growth in tough times
2013 Outlook Exploring growth opportunities in slow times
Investment Strategy
Market diagnosis: Disparity between risk indicators and investor

sentiment
Market risk indicators, including the EMBI+ spread, have stabilized and the
stock market’s volatility is at the lower end of the historical range. Nonetheless,
the Kospi shows little signs of rebound, which can be attributed to investors’
concerns about slow growth, profound distrust of analyst estimates for
corporate earnings and/or their strong inclination toward risk aversion.
Key issues and macro assumptions: Modest recovery but slow

growth
Uncertainty lingers about the global economy. The start of a deleveraging cycle
is a factor that drives down global economic growth and valuation multiples. We
believe Europe’s debt crisis and the US’ fiscal cliff will ease to some extent but
sluggish conditions in advanced economies will continue into 2013. The global
economy will likely see only a modest recovery. The slow growth and low
interest rate trends should remain in Korea given sluggish exports, heavy
household debt and a new administration’s policy to promote an economic
democracy.
KIS top-down analysis suggests 2013 NP consensus has 20.5%

downside
The consensus forecast for NP growth is 10% for 2012F and 22% for 2013F,
which we view as unrealistic. We did a top-down analysis by considering weak
seasonal factors in 4Q and the correlation between GDP and corporate
earnings growth. The study suggests that NP has 8.4% and 20.5% downside
for 2012 and 2013, respectively, from the current consensus.
2013F stock market: Kospi fair at 2,075pt, range 1,780-2,400pt

A share price is a function of fundamentals (corporate earnings) and investor
sentiment (multiples). While we cast a more conservative outlook for 2013
corporate earnings than the consensus, our view is a bit rosier for investor
sentiment than the pessimistic market. Our Kospi outlook is based on a figure
that is 20% less than the current 2013 corporate earnings consensus. While
global economic uncertainty and household debt are weighing down on
valuation multiples, we believe the current investor sentiment is too keen on
Keun-hwan Noh
avoiding risks, given the low interest rate policy, stable corporate earnings and
822-3276-6226
khnoh@truefriend.com
the less volatile market. Thus, we expect multiples to slowly pick up in 2013. We
present a fair 2013F Kospi at 2,075pt and range of 1,780-2,400pt.
Soyeon Park
822-3276-6176 2013 portfolio strategy: Seeking growth in tough times
sypark@truefriend.com “Growth” plays a more valuable role when the economy is stuck in a slump. As
such, our portfolio strategy for 2013 is focused more on regions, industries and
JJ Park companies that are poised to grow. We expect further sustained growth for
822-3276-6560 companies related to healthcare, mobile components and digital content that
jj.park@truefriend.com are enjoying greater demand due to the aging population, IT technology
advancements and trend shifts in a low-growth environment. We also draw
Ray Ahn attention to consumer goods firms that either are gaining recognition and
822-3276-6272 market share in China and Southeast Asia or have production bases in those
ray.ahn@truefriend.com regions. We recommend Overweight on the automotive sector and Samsung
Electronics given their attractive valuations. For companies in materials,
Chul Jung Kim
822-3276-6247
industrial goods and financial sectors, we minimized their presence in the
cjkim@truefriend.com portfolio.
4
I. Market diagnosis: Disparity between risk

indicators and investor sentiment
1. Risk aversion parameter

Despite stabilizing risk Risk is often used as a synonym for uncertainty in the financial market. And there
indicators, the Kospi are tools to visualize the degree of uncertainty for analysis purpose: volatility and
stays flat spread of asset prices.
Global stock markets were in a lull throughout 2012 with China’s economy slowing
and Europe’s debt crisis showing few signs of abating. But risk indicators have
stabilized recently. The EMBI+ spread, the yield difference between emerging
market bonds over US Treasuries, was 400bp at the beginning of 2012 but it
recently narrowed to 270bp. The respective CDS premiums for Spain and Italy, the
current twin epicenters of the eurozone crisis, stood at respective 450bp and 530bp
in early 2012 but dropped to ~300bp as of early Nov. Nonetheless, the Kospi stayed
pretty much flat at the level seen in early 2012.
Figure 1. EMBI+ spread and the Kospi
(pt) (bp)
2,300 200
EMBI+ spread (R)
2,200
Kospi 250
2,100
300
2,000
1,900 350
1,800
400
1,700
450
1,600
1,500 500
10 11 12
Source: Bloomberg
Figure 2. CDS premiums for Spain and Italy
(bp)
700
Spain Italy
600
500
400
300
200
100
0
08 09 10 11 12
Source: Bloomberg
5
Korean stock market’s Global stock market volatility, another risk measure, eased to ~15%, the level seen
volatility at historical low before the global financial crisis. In particular, the Korean stock market’s volatility is
at the lower end of the past range. It was an agonizing period for investors and the
media fussed over the stock market’s great uncertainty and volatility throughout the
year. But historical data suggest the Korean stock market had its most stable year
in 2012. The Kospi’s coefficient of variation (CV) 1, a measure of the variation
around the mean, was 7.8%, the lowest level since it opened in 1980.
Figure 3. Stock market volatility
60%
Korea Global
50%
40%
30%
20%
10%
0%
00 01 02 03 04 05 06 07 08 09 10 11 12
Note: 36-month window; Annualized

Source: Thomson, Korea Investment & Securities
Figure 4. Kospi’s coefficient of variation (CV)
45%
40%
35% 20-y ear av erage: 23.4%
30%
25%
20%
15%
10%
5%
0%
90 92 94 96 98 00 02 04 06 08 10 12
Note: CV=(yearly high-yearly low)/(mean*2)

Source: Korea Investment & Securities
Risk aversion parameter The yield gap, the equity market risk premium (EMRP) measured by the difference
is an important concept between expected rate of return on stocks and expected bond yield, stood at the
reflecting equity risk 9% level. Meanwhile, there is an important concept that helps us understand the
premium and volatility EMRP in relation to volatility of stock market returns: risk aversion parameter (λ).
Global public funds use the risk aversion parameter as a top priority tool when
setting up an asset allocation strategy between various asset classes such as
stocks, bonds (or cash) and alternative assets.
1
CV=(yearly high-yearly low)/(mean*2)
6
The risk aversion parameter is EMRP divided by the variance of the stock market
return (λ= EMRP/σm2). In a graph showing the variance return on the x-axis and
the expected rate of return on the y-axis, the risk aversion parameter is represented
by the slope of the capital market line (CML) which starts on the y-axis at the
risk-free rate (F) and is tangent to where the market portfolio (M) sits on Markowitz’s
efficient frontier. While each investor has a different risk aversion parameter, the
societal risk aversion parameter, a factor that is considered almost constant, is
widely adopted for strategic asset allocation.
Figure 5. Capital market line and risk aversion parameter
2. Mistrust? Paradigm shift? Delayed adaptation to

changes?
Market’s questions The risk aversion parameter was assumed as a constant factor in an asset
1) Is the corporate allocation strategy but its recent trend has strayed a long way from the past.
earnings consensus Historically, the risk aversion parameter calculated backward from the MSCI index
reliable? and corporate earnings estimates stayed relatively stable at 1 (except the global
2) Will investor sentiment financial crisis year of 2008). Despite eased volatility, the risk aversion parameter
recover? for the Korean stock market has risen to an unprecedented 3.98 as investors
flocked to safe, fixed-income assets. And the risk premium is ~9%, more than ever
except during the early 2000s when it was extremely undervalued.
The messages implied in the extraordinary figures could be one or all of the
following.
 Mistrust: Investors do not trust analysts’ estimates of corporate earnings.
Investors believe that actual earnings figures would be far less than the consensus
estimate and earnings growth would be much slower as well.
 Paradigm shift: Investors are now more inclined toward risk aversion than in the
past due to the globally aging population, or for whatever other reasons.
 Delayed adaptation to changes: While risk aversion heightened after the
traumatic global financial crisis in 2008, investors have not come to realize the
changing environment, i.e., eased volatility.
7
Figure 6. Risk aversion parameter
5
Korea Global
4
-1
-2
00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Thomson, Datastream, Korea Investment & Securities
Figure 7. Equity market risk premium (EMRP)
15%
Korea Global
10%
5%
0%
-5%
00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Thomson, Datastream, Korea Investment & Securities
A stock price is a function of EPS and PE and the PE is a function of interest rate,
profit growth and investor sentiment. Thus, forecasting the stock market for 2013
will involve work of reviewing the above messages, and that will also lead us to offer
answers to two market participant questions:
 Are the consensus earnings estimates trustworthy?

 Will investor sentiment (as represented by risk aversion parameter) return to
normal (i.e., can PE be lifted)?
8
II. Key issues and macro assumptions
1. Deleveraging and slow global growth

Deleveraging is about Deleveraging is about slower economic growth and lower stock market valuation.
slower economic growth The US went through deleveraging cycles during the periods of 1934-58, 1974-91
and low valuation and since 2008 (still ongoing). The respective real GDP growth in those periods
was 3.61%, 2.91% and 0.25%. For comparison, real GDP growth averaged 4.54%
and 3.25%, respectively, during the leveraging periods of 1959-73 and 1992-2007.
The US stock market’s valuation was considerably lower during the deleveraging
cycle than during the leveraging period.
But interestingly, there was little difference in nominal GDP growth no matter if it
was a deleveraging or leveraging cycle. The nominal GDP growth was even
stronger during the deleveraging periods of 1934-58 (8.78%) and 1974-91 (8.52%)
compared to the leveraging periods of 1959-73 (7.52%) and 1992-2007 (5.47%).
In addition, the average return on stock investment showed little difference between
the deleveraging and leveraging periods. Given that the PE tends to fall sharply in
the deleveraging cycle, the rather constant stock market return may imply that the
volatility of stock returns is considerably greater when deleveraging is underway.
Table 1. Economy and stock market indicators during deleveraging/leveraging cycles

Real GDP (%) Shiller PE (x) Nominal GDP (%) S&P500 (%) Russell2000 (%)
1934-58 ↓ 3.61 13.52 8.78 7.65
1959-73 ↑ 4.54 19.59 7.52 7.90
1974-91 ↓ 2.91 11.49 8.52 7.08 14.43
1992-2007 ↑ 3.25 27.64 5.47 10.78 10.19
2008- ↓ 0.25 20.68 1.88 0.53 2.57
Source: Federal Reserve, FDIC, Robert Shiller, Korea Investment & Securities
Monetary policy is What would be an implication of relatively stronger nominal GDP growth during the
important when deleveraging periods? The aggressive monetary policies of the central bank have
deleveraging is in full some bearing. When deleveraging is in full force, central banks cut interest rates to
force ease its negative consequences. Unconventional monetary policies are also tools
at their disposal when it is difficult to cut the rate. Central banks take the actions
because they realize how painful the repercussions of deleveraging can be.
During the deleveraging phase, it is monetary policy rather than real demand that is
more critical to support asset prices. Aggressive monetary policy actions by global
central banks, such as quantitative easing by the US Fed and the Outright
Monetary Transactions (OMT) by the European Central Bank (ECB) will remain the
most important variables for the stock markets in 2013.
A winning strategy for a Slow growth will likely continue in terms of real demand. At this point when a
deleveraging period lengthy deleveraging cycle is underway, it is important to get ready for a secular
change rather than take a short-term, transitory approach. In 2013, a year of slow
growth, it will be rewarding to pick the sectors that can adapt to the changing
environment.
9
2. Will Europe help a low base effect materialize?

Global fiscal tightening to Systemic risk coming from the debt crisis in Europe should ease significantly. The
continue into 2013 reason is that in 2013, the EU will move closer to a full-fledged banking union by
starting a single supervisory system to ensure common and more integrated
banking supervision and protect taxpayers’ money and deposits. Furthermore,
Spain’s Asset Management Co., or bad bank, that will take on bad loans will be
operational from Dec 1, 2012. The bad bank will help alleviate the country’s credit
crunch and domestic demand constraints.
1) EU taking first step toward banking union

Basically, northern European countries led by Germany and their southern
counterparts led by France are clearly divided on how to cure the crisis. But it
appears they are reaching agreement on some critical issues, albeit slowly. In
particular, EU leaders decided to create a single banking supervisor for the
eurozone starting Jan 2013. They took this one important step toward a banking
union during the first day of the EU summit in Oct 2012. Regarding the introduction
of the European Deposit Insurance and Resolution Authority, the talks will gradually
make headway.
Direct bank recapitalization from the European Stability Mechanism (ESM) is only a
matter of time as it was agreed by EU leaders at the eurozone summit in Jun 2012.
While Germany wants approval for it to take effect from 2014, France maintains to
use the ESM for direct bank recapitalization upon its creation.
A risk is that Germany may take a firm line due to the coming general election in
Sep 2013. But at the same time, German politicians may feel pressure to take
action to tackle the eurozone’s economic downturn and the systemic risk because
slowing demand in troubled neighbors will lead to its own manufacturing malaise.
2) Spanish bad bank and butterfly effects

The US Treasury established the Troubled Asset Relief Program (TARP) to clean
up the mess immediately after Lehman Brothers collapsed in Oct 2008. The TARP
helped provide liquidity to financial institutions by absorbing troubled assets such
as residential/commercial mortgage-backed securities and collateralized debt
obligations.
Spain has a similar program and the so-called “bad bank” will commence operation
on Dec 1. Spain’s Fondo de Reestructuración Ordenada Bancaria (FROB, a bank
rescue fund) will inject capital to Sareb, the bad bank, which will help recapitalize
the troubled banking sector by siphoning off their toxic real estate assets. In the first
round of the asset purchase program, the Group 1 banks (Bankia, Catalunya Caixa,
Novacaixagalicia and Banco de Valencia) will transfer EUR45bn in assets by
end-Dec 2012.
Although there is skepticism, this bad bank will tackle Spain’s extreme credit crunch
and deleveraging situations. Recently, Spain’s bank deposits grew MoM, albeit
slightly. In addition, the financial institutions of Spain, Portugal and Italy successfully
resumed bank debenture offerings. The EU leaders’ gradual agreement on
measures to resolve its debt crisis may work to build a low base effect in 2013.
10
3. US fiscal cliff and dollar economics

US fiscal cliff: Extreme US President Barack Obama won a second term in the White House. While it was
will be avoided believed that a victory by Mitt Romney would lead to the Fed shifting to a hawkish
stance, consequent strength of the USD and a revival of the gold standard, the
issues are now swept away since the election. Now, two major issues are left for
discussion in the US.
The expiry of various tax cuts and across-the-board spending cuts scheduled at
end-2012 is expected to have a net fiscal impact of USD720bn, or 4.5% of GDP for
2013. The fiscal cliff negotiations should succeed as both Democratic and
Republican legislators share a view on the expiry of more than half the components
at issue. Members of Congress face public pressure to make concessions because
the fallout of failed negotiations will be USD100bn of automatic spending cuts every
year. A gradual agreement on the fiscal cliff items will help minimize the impact on
the financial system and the economy.
The biggest divide is whether or not to extend tax cuts for those making more than
USD250,000 a year. The so-called “Obamacare” (health care reform) tax is also a
matter of white-hot debate. Although the fiscal impact is insignificant, an impasse
on the two issues may delay an agreement on other items.
If fiscal cliff is averted, US Our base-case scenario is that President Obama and congressional Republican
GDP would grow 1.7% in leaders agree on a temporary extension for the tax credits to the end of the
2013 lame-duck session and reach a compromise on raising the federal debt ceiling and
the remaining components of the fiscal cliff around Mar 2013. If the fiscal cliff is
avoided (our base scenario), the US’ Congressional Budget Office (CBO) predicts
GDP would grow by 1.7% and the unemployment rate would be 8.0% in 2013,
meaning a significant economic downturn would be averted. If the country is
allowed to go over the fiscal cliff, it would bring 2013 GDP growth to -0.5% and
push up unemployment to 9.1%. But this unattractive scenario is very unlikely to
materialize.
Table 2. US economic and financial indicators under CBO’s fiscal cliff and
alternative scenarios
Fiscal cliff scenario Alternative scenario (fiscal cliff avoided)
2013 GDP growth -0.5% 1.7%
Unemployment rate 9.1% 8.0%
3-month Treasury yield 0.2% 0.2%
10-year Treasury yield 2.0% 2.1%
Note: The alternative scenario incorporates the assumptions that payroll tax cuts and unemployment benefit extension expire; Most
of the tax cuts and spending programs are extended; Subsidies including Medicare’s payment rates for physician services are
held constant at their current levels; The automatic spending cuts do not take place
Source: CBO, Korea Investment & Securities
US fiscal cliff is important The fiscal cliff battle between Democrats and Republicans shows the US is taking
more with regard to the the painful steps to improve its fiscal soundness. After years of stimulus efforts,
USD’s direction rather such as greater spending and increasing the money supply to weaken the USD, the
than the global economy US started recognizing the ill-effects of the moves. Whether Ben Bernanke will stay
on as Fed chairman was an issue that caused the US stock market to fluctuate
during the presidential election campaign. This suggests the direction of the USD
will be a major item to watch for years to come.
11
Given the economic recovery is not yet solid, the US’ fiscal spending and monetary
easing will remain in place for some time but the magnitude of the measures will
become smaller going forward. Taking this into account, we believe the fiscal cliff is
an important issue more with regard to its implication for the USD’s value, rather the
stock markets and the global economy.
4. Korea’s household debt issue

Spread of household debt On Oct 15, Chulho Lee (insurance/securities), Min Kyoo Jun (economy) and
problems into a system Joanne Lee (banks) at Korea Investment & Securities published an in-depth
crisis is unlikely but analysis report of Korea’s household debt titled Systemic risk unlikely but there is a
economic effects would price to pay and concluded the possibility of a systemic crisis materializing is
be significant remote. They pointed out that 1) government regulations since the mid-2000s
helped improve the soundness of financial institutions, 2) the recent government
policy response has been appropriate and above all 3) the downturn of real estate
prices is not yet serious. Nonetheless, a changing perception among economic
entities, affected by the excessive debt level, could have a meaningful effect on the
economy and financial sectors. Of note, it is inevitable to see a slowdown of
consumption growth in line with the debt adjustment. Among major issues for the
2013 Korean stock market, our perspective of the household debt issue is based on
the abovementioned report.
1) Korea’s household debt burden: Heavy or not?

Judging from quantitative Generally, household debt is a concern if 1) the total amount exceeds 75% of a
yardsticks, Korea’s nation’s GDP or 2) the debt service ratio (DSR, the principal and interest payments’
household debt burden is percentage of disposable income) surpasses 20%. According to the criteria,
substantial Korea’s household debt burden is quite onerous. As of end-2011, the nation’s
household debt stood at W1,103trn and equaled 89% of GDP. Although the DSR
was at 18.3%, below the 20% threshold, it would jump to 25.5% if the statistical
base is narrowed to indebted households. Broken down by income bracket, the
DSR exceeds 20% for all quintiles except the highest (fifth). Of note, debt compared
to disposable income levels is seriously large in Korea at 164%, which is
substantially more than in the US and major European countries.
Figure 8. Household debt-to-disposable income in Korea, US, UK, Germany and

Japan
(%)
200
Germany Japan UK
180 US Korea
160
140
120
100
80
60
40
1999 2001 2003 2005 2007 2009
Source: OECD, BoK, Korea Investment & Securities
12
2) What are risks related to household debt?

Korea’s household We are cautious about six aspects of the household debt issue unfolding in Korea.
debt-related risks First, there is a refinancing burden from the large weighting of bullet loans (entire
loan amount paid at maturity). More than 70% of Korean household debt features
the bullet schedule, or lump-sum payment after a set duration, and 23% of the due
dates are concentrated in 2H12. Second, excessive borrowing by owners of
expensive homes or multiple homes is a worry. Third, due to the aging population, debt
payment capacity can shrink, which gives a bearish outlook for real estate prices.
Aging population is one of the structural variables that affect real estate prices, and
its importance has already been proven in other countries such as Japan and the
US. As major debtors (heads of indebted households) are people in their 40s and
early 50s in Korea, their coming retirement over the long-term can have side effects.
Fourth, demand for loans to support livelihood is spreading across most income
brackets. Fifth, Korea has a heavier weighting of self-employed than the OECD
average and loans to the group are riskier. As of 2012, the self-employed
accounted for 23% of all employed, well above the OECD average of 16.8%. The
delinquency rate for self-employed debtors, who are fast rising in number, is much
higher than for general individuals. Sixth, given the Korean economy’s sensitivity to
external economic variables, it would have limited tools to respond if crisis
materializes.
3) Household debt with little systemic risk

Despite the abovementioned risk factors, we believe Korea’s household debt will
not lead to a serious financial or systemic crisis. Above all, the worst-case scenario
of a 20-30% further decline in real estate prices is remote.
Further downside for real Incorporating multifaceted variables, we believe concerns about the soundness of
estate prices looks mortgages given the recent real-estate market downturn are overblown and a soft
limited landing for Korea’s household debt is possible. There are several reasons that
support our belief. First, apartments in Seoul are being auctioned at 78% of the
appraisal price or 85% of the market price. As the loan-to-value (LTV) is less than
70% for most mortgages from commercial banks, a decline in real estate prices is
unlikely to have serious side effects on the financial sector.
Measures from various Second, government-wide household debt measures should yield results. Such
authorities to prove measures can be summarized as 1) protection of collateral value by stabilizing real
effective estate prices and 2) maturity extensions for bullet loans via cooperation among
financial institutions. Over the long-term, the government hopes to ease the
problems stemming from an aging population and income disparity. Third, raising
external debt has become increasingly stable with growing long-term debt and
Korea’s sovereign rating being recently upgraded.
For these reasons, we believe the household debt problems are unlikely to trigger a
systemic crisis that can deal a blow to the banking sector. But some side effects,
such as lower disposable income spending capacity at households and slowing
consumption growth, will be unavoidable in the process of adjusting the excessive
debt level.
Household debt a risk for Korea’s household debt could have a lingering effect on the stock market in 2013.
the 2013 stock market Even if the debt issue is unlikely to develop into a serious systemic crisis, the
housing market slump would weigh on consumer spending. Accordingly,
consumers should continue to adjust their spending to be more efficient in 2013. In
such circumstances, defensive sectors such as pharmaceuticals would remain
attractive. The debt adjustment can reduce the capacity of households to invest and
have a negative effect on the stock market’s liquidity.
13
While deleveraging has been ongoing in the US and Europe since 2008, Korea’s
debt level increased during the period. In particular, the upswing in household debt
has been the largest, sending a disturbing warning sign. As deleveraging can
unfold simultaneously around the world, Korea’s household debt issue is certainly a
serious concern. If the debt upside is limited, how to ensure a soft landing for the
problems would be critical for Korea’s economy.
5. New administration and economic democracy

Pledges of all candidates Korea’s 18th presidential election will take place Dec 19. While we cannot state the
focus on economic winner, no matter who wins, one thing is clear. The president-elect will be busy from
democracy the get-go to keep an across-platforms promise of building an economic
democracy.
Difference lies in the The three main candidates – Park Geun-hye from the ruling Saenuri Party
intensity and scope of (Saenuri), Moon Jae-in from the opposition Democratic United Party (DUP) and
reform in detail liberal independent Ahn Cheol-soo – all agree on the need of tighter regulations on
conglomerates and promoting mutual growth and prosperity among economic
participants. But they differ in their interpretation of what is an economic democracy
and the intensity and scope of necessary reform in detail. The DUP and Mr. Ahn’s
camp made it a pledge to establish committees (the Economic Democracy
Committee under the Prime Minister’s Office by Mr. Moon and the Conglomerate
Reform Committee directly under the President by Mr. Ahn). However, Saenuri has
maintained a negative stance on the setup of a separate authority to deal with the
issues.
In addition, the three candidates have a small or large disparity over some hot
issues such as circular shareholding, ceiling on total equity investment and the
financial-industrial separation of capital.
On circular shareholding, they all agree on banning new investment but their views
differ on existing investment. Mr. Moon presented a rather concrete and stricter
guideline of denying voting rights and imposing charges on inaction after a
three-year grace period. Mr. Ahn said he would encourage voluntary compliance
and then judge whether compulsory action is needed. Ms. Park’s stance is not
defined.
To end conglomerate circular shareholding, disposal of non-core affiliates or

massive private capital is required
According to the Economic Reform Research Institute (ERRI), Hyundai Motor
Group would need the largest W6,166.5bn (current prices) stake disposal to
eliminate its circular shareholdings, followed by Hyundai Heavy Industries Group’s
W1,576.3bn and Samsung Group’s W1,218.5bn.
Whoever becomes president, regulations on circular shareholdings will be

unavoidable and thus, major conglomerates will likely opt to sell stakes in non-core
affiliates to protect their core affiliates, or inject the owners’ private capital.
14
Figure 9. Major conglomerates’ circular shareholdings and elimination costs
(W bn)
7,000
6,167 (3)
Costs f or unwinding cross-shareholding
6,000
5,000
4,000
3,000
1,576 (1)
2,000
1,219 (17)
1,000
200 (7) 154 (3) 111 (1) 96 (5) 50 (1) 46 (7) 16 (4) 13 (1)
0
Samsung
Lotte
Hanjin
Halla
Industries
Department
Daelim
Hyundai
Hyundai
Young Poong
Development
Hyundai
Motor
Hyundai
Heavy
Hyundai
Store
Note: No. of circular shareholdings in parentheses
Source: News reports, ERRI, Korea Investment & Securities
On the revival of a ceiling on total equity investment, Ms. Park is opposed but Mr.
Moon promised to bring back the system and limit total equity investment for the top
10 companies to 30% of their net assets. But Mr. Ahn said he thinks there is no
urgent need to revive the system.
Both parties to pursue The finance-industry separation issue is also mentioned by all three candidates as
greater finance-industry one of the goals to achieve economic democracy. They agree on the need for
separation; Samsung stronger financial-industrial separation of capital. As such, both ruling and
Group governance issue opposition parties are likely to promote the measure to reduce industry capital’s
to emerge acquisition of voting rights on finance capital from the current ceiling of 9% to 4%.
Measures for greater separation include 1) bringing down the ceiling for financial
affiliates’ voting rights on conglomerates’ other affiliates (15% → 5%), drawn up by
Saenuri’s advisory body for economic democracy realization, and 2) a forceful
separation of group affiliates proposed by Mr. Ahn. If they are put in force, the
effects would be considerable.
If the ceiling for financial affiliates’ voting rights on other affiliates is brought down,
the largest change would be made to the governance structure of Samsung Group.
With the lower ceiling of 5%, financial affiliates would lose voting rights for any
excess stakes in other affiliates (e.g., Life Insurance/Fire & Marine’s stakes in
Electronics, and Life Insurance/Securities/Card’s stakes in Hotel Shilla).
At present, Life Insurance/Fire & Marine’s stake in Electronics is 8.78%. To protect

the voting rights of 3.78%, the excess over the 5% threshold, either other affiliates
or the owner’s family would have to finance ~W7.5trn.
15
Figure 10. Samsung financial affiliates’ ownership of non-financial affiliates
Source: FnGuide, Korea Investment & Securities
But even in Saenuri, there are pros and cons regarding the proposal. It is still
uncertain whether the suggestion will be the party’s platform or Ms. Park’s final
campaign pledge. Meanwhile, Mr. Ahn’s proposal is aimed at easing the possibility
of a systemic risk via the separation of financial affiliates from conglomerates. But
there would be significant obstacles before the proposal is enacted given a large
number of conglomerates can be directly affected.
Table 3. Tax-related campaign pledges by presidential candidate

Park Geun-hye Moon Jae-in Ahn Cheol-soo
- Restore the tax burden-to-GDP to the
- Lift the tax/social contribution-to-GDP - If tax increase for greater social welfare is
Tax increase: level prior to the Lee Myung-bak
over the mid to long-term by reaching inevitable, timeline or extent will be
Principle & scale administration’s tax cut for the rich
a public consensus determined via consensus building
- Lift the tax burden-to-GDP by ~2%p
- Introduce taxation on current
tax-exempt income or reduce tax
- Give priority to reduce tax exemptions for
breaks
high-income earners
- Tighten comprehensive financial - Lower the tax base ranges for the highest
Income tax - Promote adjusting tax base ranges and
income taxes income tax rate
rates for earned income taxes, if
- Seek a fundamental solution for tax
necessary
base ranges and rates for earned
income taxes
- Reduce tax breaks
- Reduce tax breaks - Reduce tax breaks for large companies
- Raise the lowest tax rate
Corporate tax - Lift tax base ranges and rates - Exclude the possibility of tax rate
- Exclude the possibility of tax rate
simultaneously adjustments
adjustments
- Extend the range of small business - Extend the range of small business
Value-added tax - Keep the current system
owners qualified for simplified taxation owners qualified for simplified taxation
- Tighten taxation on capital gains by
Capital gains for - Strengthen taxation on majority - Impose taxes on massive equity transfer
extending the taxable range for
equity investment shareholders for equity transfer gains gains
transfer gains
- Tighten taxation on unjustified
- Tighten taxation on giving unfair favor - Tighten taxation on unjustified inheritance
Transfer/gift tax inheritance, giving unfair favor to
to subsidiaries and giving unfair favor to subsidiaries
subsidiaries and donations
Comprehensive real - Strengthen comprehensive real estate
estate holding - Keep the current system holding tax (gradual tightening for owners - Exclude consideration at present
tax/wealth tax of high-priced, multiple homes)
Source: Hankook Ilbo, Korea Investment & Securities
16
Saenuri retains majority: The issue of building an economic democracy will be unavoidable in the coming
Passage of extreme election. It is very meaningful that a social consensus has been reached to promote
proposals unlikely the balance of growth and distribution in Korea. The intensity and range of policies
toward economic democracy differ by candidate depending on their interpretation of
the concept. We believe it is unlikely to see the passage of extreme proposals at
the National Assembly with Saenuri retaining majority. We do not expect a unilateral
policy-making approach by a winner but the expansion of a forum to collect public
opinion about building an economic democracy. As such, the issue is unlikely to
deal any blow to the market.
6. Key macro assumptions

The macro assumptions for our analysis include the 2013 economic outlook by the
KIS economy team and global variables from the IMF’s Oct 2012 report.
Slow growth, low interest Slow growth will be inevitable for Korea’s economy in 2013 given 1) sluggish export
rates, low consumer conditions affected by the delayed recovery for advanced economies and 2)
prices and strong KRW lackluster domestic demand weighed down by household debt. The monetary
authorities should weather the slow growth trend by keeping interest rates low. As
policy stance should be more favored toward households than corporations, we
forecast the KRW to stay strong. The consumer price index should also remain low
at 2% due to the slow global growth and a strong KRW.
Global economic After recording downward growth for two straight years, the global economy should
recovery to be only see a slight recovery in 2013. Europe should return to positive growth while
insignificant; Robust China reports a minimal recovery. But the US’ growth is likely to remain in the
growth of Southeast doldrums given various issues including the fiscal cliff. The most noteworthy region
Asian economies to would be Southeast Asia (ASEAN), whose growth should be on a rising slope in
stand out 2012 and into 2013 despite the slow global conditions. Africa should also post
relatively robust growth.
Table 4. Outlook for the Korean economy (% YoY, KRW)
2013F
2012F 2013F
1Q 2Q 3Q 4Q
GDP growth 2.4 2.9 3.8 3.9 2.3 3.3
Total consumption growth 2.5 2.7 2.5 2.4 2.4 2.5
Private consumption 2.4 2.5 2.6 2.7 1.8 2.6
Government spending 3.1 3.6 2.6 1.3 4.5 2.6
Total investment growth -0.6 0.9 6.1 7.8 -1.0 3.7
Exports growth 2.1 3.7 7.0 4.1 -0.7 4.2
Imports growth 0.3 6.3 12.8 8.0 -0.2 6.7
Consumer price index 1.8 2.2 2.7 2.8 2.2 2.4
Producer price index -0.8 0.6 2.7 3.9 1.3 1.6
KRW/USD (year-end) 1,060 1,048 1,035 1,020 1,075 1,020
KRW/USD (avg.) 1,088 1,065 1,048 1,030 1,130 1,058
KRW/JPY100 (year-end) 1,277 1,245 1,192 1,159 1,319 1,159
KRW/JPY100 (avg.) 1,333 1,275 1,224 1,187 1,420 1,255
3-yr gov’t bond (year-end) 2.50 2.60 2.75 2.60 2.78 2.60
3-yr gov’t bond (avg.) 2.60 2.50 2.80 2.65 3.13 2.65
3-yr corporate AA- (year-end) 2.85 2.85 3.10 2.85 3.30 2.85
3-yr corporate AA- (avg.) 2.90 2.75 3.15 2.90 3.76 2.95
17
Table 5. Outlook for the global economy (% YoY)
2005 2006 2007 2008 2009 2010 2011 2012F 2013F

Worldwide 4.6 5.3 5.4 2.8 -0.6 5.1 3.8 3.3 3.6
Advanced 2.6 3.0 2.8 0.1 -3.5 3.0 1.6 1.3 1.5
Developing 7.3 8.2 8.7 6.1 2.7 7.4 6.2 5.3 5.6
US 3.1 2.7 1.9 -0.3 -3.1 2.4 1.8 2.2 2.1
Eurozone 1.7 3.2 3.0 0.4 -4.4 2.0 1.4 -0.4 0.2
Japan 1.3 1.7 2.2 -1.0 -5.5 4.5 -0.8 2.2 1.2
Asia’s NICs 4.8 5.8 5.9 1.8 -0.7 8.5 4.0 2.1 3.6
China 11.3 12.7 14.2 9.6 9.2 10.4 9.2 7.8 8.2
East Europe 5.9 6.4 5.4 3.2 -3.6 4.6 5.3 2.0 2.6
ASEAN 5.5 5.7 6.3 4.8 1.7 7.0 4.5 5.4 5.8
Central/South Amer. 4.7 5.7 5.8 4.2 -1.6 6.2 4.5 3.2 3.9
Middle East 5.3 6.3 5.7 4.5 2.6 5.0 3.3 5.3 3.6
Africa 6.2 6.4 7.1 5.6 2.8 5.3 5.1 5.0 5.7
Source: IMF, Korea Investment & Securities
18
III. 2013 NP outlook via top-down analysis
1. 2013F NP has 20.5% downside from the current

consensus
Is it possible for Korean Over the past two decades, Korean companies have achieved remarkable profit
companies’ NP to exceed growth both in terms of quantity and quality. The NP of listed companies jumped
W100trn in 2013? above the W50trn mark in 2004 and touched a record high of W94trn in 2010 when
profit momentum was restored after the global financial crisis. The current NP
consensus for 2013 is W115trn, above W100trn for the first time in Korea’s stock
markets. Is it possible for Korean firms’ NP to exceed W100trn as expected, even if
uncertainty lingers about the global economy and signs of recovery are still distant?
2013F NP based on our However, the analysis based on our quantitative model tells a different story (200
quantitative model is stocks selected in market cap order and with more than three consensus figures).
W92.1trn Our NP estimate for Korean listed companies in 2013 is W92.1trn, 20.5% less than
the current consensus. To derive the 2013 estimate, we adjusted the 2012 estimate
and then reflected profit growth potential anticipated next year.
1) For the 2012F NP adjustment, we reflected the ongoing downward revisions and
4Q seasonality. Accordingly, we set the 2012F NP at W86.8trn, 8.4% less than the
current consensus.
2) As for growth potential in 2013, we assumed the widened profit gap that occurred
in 2012 between super-large-caps (top 10 NP firms) and non-super-large-caps
would continue in 2013. As such, we expect the NP of non-super-large-caps, which
tends to be significantly affected by macro variables, will inch up a mere 0.9%,
whereas that of super-large-caps will grow 11%.
Figure 11. 2012F and 2013F NP adjustments
2. 2012F NP has 8.4% downside from the current

consensus
Downward NP revisions We now examine some factors necessary to forecast the 2013 NP. Given that the
continue 2012 NP will be an important basis to accurately estimate the 2013 NP, we must
first size up this year’s figure. Although the closing date for 2012 is less than two
months away, it would take four to five months before actual profits are released
given the announcement schedule. As such, chances are sufficient that there would
be a significant gap between the current consensus and actual results for 2012 NP.
19
We set 2012F NP at We estimate the end-year 2012 NP2 by considering the trend-following effect of
W86.8trn, 8.4% less than profit consensus changes and weak seasonal factors in 4Q. The consensus NP
the consensus should be lowered to W86.8trn, 8.4% down from the current. Reflecting the
trend-following effect (-2.6%) and 4Q seasonality (-5.8%), the revised figure would
be a mere 0.9% gain from 2011’s W86.1trn. Rather than the current consensus
growth estimate of 11%, we predict close to zero growth.
Figure 12. Estimated 2012 NP adjustments by effect Figure 13. Annual Kospi NP growth
(%)
(W trn) Estimated NP 80 69.9
100 adjustment
(-8.4%) 55.8
60
95
40 Near zero growth
90 Trend- 18.7
following 20
(-2.6%) 3.4 0.9
4Q
85
seasonality 0
94.7 (-5.8%)
92.2 -7.2 -5.9
80 -20
86.8
75 -40
-44.6
-60
70
05 06 07 08 09 10 11 12(F)
Oct 2012 (current) End-2012 (est.)
Source: WiseFn, Korea Investment & Securities Source: WiseFn, Korea Investment & Securities
NP consensus is trending Corporate NP estimates for 2012 should be lowered given the trend-following
lower nature of consensus outlooks and weak seasonality of 4Q. First, we will review the
trend-following aspect of analysts’ earnings forecasts. The Korean stock market’s
2012F NP consensus has been lowered in earnest since Jun, and there was a 12%
downward revision over the past four months. And, the downward adjustments will
likely continue. We tallied up NP at end-2012F, which stands at 2.6% less than the
current consensus.
Figure 14. 2012F NP consensus trend and forecast
(W trn)
115
110
105
100
95
90
Down 2.6%
85
80
Nov -11 Feb-12 May -12 Aug-12 Nov -12
Source: WiseFn, Korea Investment & Securities
2
For a detailed analysis of 2012F NP, see our Quant Lab report Earnings and valuations in conflict, chapter 2, In-depth quantitative
analysis, published Oct 25, 2012.
20
Table 6. 2012F NP consensus revisions by sector (adjusted by trend-following effects)

Sector 2012F NP (W bn) Adj. Adj.
Nov 2012 Dec 2012F (W bn) (%)
Total 94,711 92,213 -2,498 -2.6
Energy 3,523 3,074 -449 -12.7
Chemicals 3,402 3,176 -226 -6.6
Metals 4,634 4,185 -449 -9.7
Construction 2,602 2,564 -38 -1.5
Ind. conglomerates 3,407 3,227 -180 -5.3
Machinery 415 373 -42 -10.1
Shipbuilding 3,080 2,980 -100 -3.2
Commercial services 276 247 -29 -10.6
Transportation -457 -363 94 NM
Autos 18,528 18,461 -67 -0.4
Textiles & apparel 836 824 -12 -1.5
Consumer services 941 946 5 0.6
Media 380 385 5 1.3
Retail 2,571 2,510 -61 -2.4
F&B, tobacco 1,938 1,863 -75 -3.9
Household goods 710 702 -8 -1.2
Pharm. & biotech. 466 441 -25 -5.3
Banks 10,835 484 -10,351 -95.5
Insurance 4,257 4,330 73 1.7
Securities 1,054 941 -113 -10.7
Software 1,368 1,316 -52 -3.8
Hardware 2,779 3,200 421 15.2
Semiconductors 23,041 23,375 334 1.5
Displays 380 357 -23 -6.0
Telecom services 2,245 1,812 -433 -19.3
Utilities -1,026 -1,704 -678 NM
Others 2,527 2,507 -20 -0.8
Weak seasonality in 4Q to Second, weak 4Q seasonality will also affect 2012F profit estimates. Korean
be in play companies’ 4Q NP tends to be weaker than other quarters. We assume the profit
seasonality is attributed to the accounting practice of reflecting various losses
throughout the year in 4Q earnings. We examined the listed companies’ quarterly
NP contribution to annual NP since 2004, and found 4Q accounts for 19.2% of
annual NP, 5.8%p less than the mathematical balance of 25.0% (equal contribution
per quarter). Seasonality should be in play in 2012 as well, pulling down actual
2012F NP below the current market consensus levels.
Figure 15. Contribution to full-year NP by quarter
(%)
30 28.3
27.0
25.5 4Q seasonality
25
19.2
20
15
10
0
1Q 2Q 3Q 4Q
Note: Average quarterly NP as % of full-year NP from 2004 through 2011 (2008 data excluded as earnings were beaten down by the
global financial crisis).
21
3. 2013 NP growth forecast – polarization between

super-large-caps and non-super-large-caps
Monitor NP polarization We believe the polarization between super-large-caps and non-super-large-caps is
between the underlying theme of our NP forecast for 2013. Polarization is one of the trends
super-large-caps and triggered by the 2008 global financial crisis. While overcoming the crisis,
non-super-large-caps super-large-caps, including Samsung Electronics, benefitted from quantitative
easing by advanced countries, and started moving in a different direction from other
firms. Accordingly, a profit growth disparity between super-large-caps and
non-super-large-caps emerged in 2011.
Macro variables have a This phenomenon is attributed to super-large-caps generating more NP via market
major effect on share expansion backed by improving competitiveness in the global market, while
non-super-large-caps non-super-large-caps continued to suffer profitability erosion as they were directly
affected by the slowing economy. If we analyze the relationship between GDP and
NP growth, non-super-large-cap NP is far more sensitive to GDP growth than
super-large-cap NP. If we draw a regression line after excluding 1Q10-3Q10, when
NP jumped more than 200% YoY due to base effect, every 1%p increase in GDP
growth led to roughly a 16%p gain in NP growth for non-super-large-caps. As such,
we believe it is suitable to estimate non-super-large-cap NP based on macro
variables in 2013 as well.
Figure 16. NP trend: Super-large-caps vs. non-super-large-caps
(W trn) NP f or non-super-large-caps (% Y oY )
60 NP f or super-large-caps 10.0
GDP growth (RHS) 8.0
50
6.0
40
4.0
30 2.0
0.0
20
-2.0
10
-4.0
0 -6.0
05 06 07 08 09 10 11 12
Note: Based on all listed firms in the Kospi; Combined NP from the past four quarters.
22
Figure 17. GDP growth vs. non-super-large-cap NP Figure 18. GDP growth vs. super-large-cap NP growth
growth (post-2005) (post-2005)
200 Non-super-large-cap 200 Super-large-cap

NP growth (% YoY) NP growth (% YoY)
150 150
100 100
50 50
GDP growth (% YoY)
GDP growth (% YoY)
0 0
-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0
-50 -50
y = 15.65 x - 51.17
-100 -100 y = 6.33 x - 12.32
R2 = 0.57
R2 = 0.38
-150 -150
-200 -200
Note: Based on YoY growth of combined NP from the past four quarters; Excludes outliers Note: Based on YoY growth of combined NP from the past four quarters
Source: Bank of Korea, Korea Investment & Securities Source: Bank of Korea, Korea Investment & Securities
With 3.3% economic In 2013F, Korea should face 2012-like macro conditions and post 3.3% YoY
growth in 2013F, economic growth. With this in mind, non-super-large-caps’ NP should rise 0.9% YoY,
non-super-large-cap NP which means the near zero growth in 2012 will continue in 2013.
to edge up 0.9%
Super-large-caps to gain Meanwhile, super-large-caps’ NP for 2012-2013 got on a downward trend from
11% YoY 2Q12 but the largest adjustment was made for the 2012 estimates. As a result, the
2013 NP growth has steadily risen from 11% in early 2012 to ~20% now. We
attribute the lifted NP growth to a passive adjustment of 2013 profits. Thus, we
believe our earlier forecast of 11% is the actual NP growth in 2013F for
super-large-caps.
Figure 19. NP revisions for super-large-caps Figure 20. 2013 NP growth for super-large-caps
(W trn) (%)
60 25
2012F With no adjustment yet,
2013F 2013F NP on a constant rise
20
55
15
50
10 Actual NP growth of 11% for 2013F
45
Large adjustment for
5
2012 estimates
40 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Source: WiseFn, Korea Investment & Securities Source: WiseFn, Korea Investment & Securities
2013F NP growth: 6.1% In summary, the KIS estimates are that NP for non-super-large-caps will grow 0.9%
YoY and super-large-caps 11% YoY in 2013F. The combined NP of all listed
companies should climb 6.1% YoY to W92.1trn, missing the previously expected
W100trn. Still, the positive combined growth in 2013 seems possible thanks to the
super-large-caps’ steady performance. This is small but meaningful growth
compared to near zero growth in 2012. With the consensus 2013 NP growth
currently pegged at 21.6%, it seems inevitable that the figure will be lowered.
23
Figure 21. 2013F NP estimate components
24
IV. Kospi outlook and portfolio strategy
1. Stock market outlook: Kospi fair at 2,075pt

1) Economic growth and Kospi
Global economy grew Stock market forecasts based on macro variables often turn out to be off the mark.
4%+ YoY or at least YoY The stock market seem to react more sensitively to media reports, events or
growth in years when liquidity flow than macro variables (e.g., GDP growth) that are seemingly far related
Kospi climbed YoY with the market. Such an impression seems to be even more correct for short-term
projections. However, if the analytical view is widened to an annual basis, it is easy
to find the stock market is closely related to macro fundamentals.
Over the past decade, the global economy grew 4%+ YoY or at least positive YoY
growth in years when the Kospi rose YoY. An exception was 2009 when the world’s
economy recorded -0.9% YoY, the worst since the 1974 oil crisis, and the Kospi
surged. However, 2009 was an extraordinary case as the global economy’s robust
2010 growth was predicted nearly as a fait accompli given the developed countries’
quantitative easing policies.
Figure22. Global economic growth and Kospi
(%) Kospi perf ormance (L) Global GDP growth (R) (%)
60 4% GDP growth (R) 6
40 5
4
20
3
0
2
-20
1
-40 0
-60 -1
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F
The IMF sets 2013 global economic growth at 3.6%. While it is less than 4%, it is
still better than the 2012 forecast of 3.3%. Of course, the figure requires
preconditions like the US not falling over the fiscal cliff and the eurozone’s debt
issue does not trigger anything extreme such as currency collapse. Fortunately,
Europe’s debt crisis seems to be slowly subsiding as EU leaders have agreed to set
up a single eurozone banking supervisor and Spain has formed a “bad bank”. The
IMF’s forecast satisfies the least macro requirements for the Kospi’s rise.
2) Corporate earnings consensus

Based on WiseFN’s WiseFN offers the following consensus earnings estimates. Corporate earnings
earnings consensus (NP of controlling interest for the KIS Q 200, the KIS Q Universe of 200 stocks)
excluding optimism should grow 10.0% YoY to W94.7trn in 2012F and 21.6% YoY to W115.2trn in
2013F. However, analyst earnings forecasts are almost always optimistically
biased.
25
According to a team of KIS quantitative analysts, 8.4% for the 2012 estimate is
optimistic and so is 20.5% for 2013. Thus, we decided to use estimates adjusted by
the KIS quantitative analysis team to base our 2013 stock market forecasts.
3) Low interest rate, earnings stability and multiples

In the long-term, low In the stock market, a low interest rate trend is a double-edged sword. The fact that
interest rates help interest rates have stayed at a record low level for a long period implies Korea’s
valuation re-rating economy is entering a long-term, low-growth period. Meanwhile, low interest rates
that also mean bullish bond prices lift the relative appeal of equity investment and
lowers equity investors’ expected rate of return. Assuming all other conditions are
the same, the lower interest rates, the higher the multiple (PE).
The low interest rate trend is souring investors’ appetite for equity by slowing
corporate growth and earnings. However, once Corporate Korea’s earnings are
more solid than widely assumed, valuations should re-rate.
Since the global financial crisis, Korea’s corporate earnings have achieved a
remarkable recovery and now far exceed the pre-global bubble in Oct 2007. As of
Oct 2012, Korea’s MSCI 12MF EPS has climbed 55.5% since Oct 2007. But the
MSCI Index has edged up a mere 2.2%. Among major countries, Korea’s share
prices growth is the third slowest compared to earnings, following China and India
whose 2007 PEs were excessively overvalued at more than 20x.
Figure 23. MSCI 12MF EPS Figure 24. MSCI Index
200 200
Korea World EM Korea World EM
150 150
100 100
50 50
Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11
Source: Thomson, Korea Investment & Securities Source: Thomson, Korea Investment & Securities
26
Table 7. MSCI Index and corporate earnings: Oct 2012 vs. Oct 2007
12MF EPS MSCI Index Compared to Oct 2007 PE
12MF EPS MSCI Index Gap
Oct 2012 Oct 2007 Oct 2012 Oct 2007 Oct 2012 Oct 2007
(A) (B) (A-B)
World 27.96 28.85 335.57 417.61 -3.1% -19.6% 16.6% 12.00 14.47
Emerging economies 98.57 87.65 1,003.35 1,274.63 12.5% -21.3% 33.7% 10.18 14.54
Emerging Asian economies 40.05 33.17 420.64 548.16 20.7% -23.3% 44.0% 10.50 16.52
China 6.24 4.04 57.39 98.34 54.5% -41.6% 96.1% 9.20 24.34
India 53.63 35.16 724.03 774.43 52.6% -6.5% 59.1% 13.50 22.03
Korea 65.91 42.38 555.30 543.27 55.5% 2.2% 53.3% 8.43 12.82
Hong Kong 804.35 664.65 11,730.91 13,312.10 21.0% -11.9% 32.9% 14.58 20.03
Indonesia 377.73 229.71 5,246.39 3,698.18 64.4% 41.9% 22.6% 13.89 16.10
Singapore 26.39 28.13 349.06 467.77 -6.2% -25.4% 19.2% 13.23 16.63
Japan 39.65 63.90 449.74 1,036.00 -38.0% -56.6% 18.6% 11.34 16.21
Germany 65.29 70.47 681.62 916.58 -7.4% -25.6% 18.3% 10.44 13.01
US 105.77 95.27 1,387.36 1,455.43 11.0% -4.7% 15.7% 13.12 15.28
UK 164.00 159.72 1,738.08 1,977.74 2.7% -12.1% 14.8% 10.60 12.38
Brazil 20.93 20.99 211.77 248.86 -0.3% -14.9% 14.6% 10.12 11.86
Taiwan 18.45 27.38 266.35 372.48 -32.6% -28.5% -4.1% 14.44 13.60
Note: MSCI consensus
Solid earnings stability In 2009, Korea had already recovered the 2007-level corporate earnings and saw a
positive for better considerable increase in 2010. While earnings growth began to slow from 2011,
valuations their stability has immensely improved from the past. Such solid earnings stability is
positive for better valuations.
Household debt, new A negative for 2013 investor sentiment is the nation’s household debt and policies
administration’s to be formed by a new administration. While household debt will not likely develop
economic democracy into a systemic risk, it should harm the households’ cash flow and in turn dent
likely to be negative for spending and the stock market’s liquidity. All three presidential candidates are
the stock market emphasizing economic democracy, better corporate governance and mutual
existence/fair trade, albeit with slight differences. Concerns about shifts in the
chaebols’ governance structure and corporate earnings erosion are factors for
lower multiples. However, any radical changes are unlikely as any form of
legislative reform requires cooperation by the Saenuri Party that has a majority in
the National Assembly.
4) 2013F Kospi fair at 2,075pt and to range 1,780-2,400pt

KIS forecasts 20% less In the introduction, we said the risk avoidance coefficient is way too high for the
corporate earnings than global and Korean markets. Provided analyst estimates are reliable, the current
the consensus and interest rate (2.77%) remains unchanged and investor sentiment (risk aversion
assumes slightly better parameter) recovers the previous level (~1.0 for the Korean market) in 2013, then
investor sentiment the stock market has 135% upside. If the parameter returns to ~3.0, then share
prices have 23% upside potential.
However, instead of such a radical projection, we decided to present a more

realistic outlook for corporate earnings and valuation recovery. The WiseFN
analysts consensus estimates 2012 (FY1) PE at 10.5x and 2013 (FY2) at 8.5x
(based on Kospi 1,870.72pt on Nov 15). However, adjusting the 2012 figure for the
8.4% optimistic bias, corporate earnings should amount to W86.8trn (+0.9% YoY)
and the actual FY1 PE stand at 11.24x. Likewise, we adjusted 2013 corporate
earnings by lowering it 20% to W92.1trn and used the figure as the basis for our
Kospi outlook.
27
Valuation multiples should slightly improve in 2013. Negative factors are uncertainty
regarding the US’ fiscal cliff and a new administration’s policies. Positive factors are
global economic recovery, sustained low interest rates and Europe’s subsiding debt
crisis. As mentioned in the introduction, share prices are a function of fundamentals
(corporate earnings) and investor sentiment (multiples). While our corporate
earnings forecasts are much more conservative than the consensus, we are more
upbeat about investor sentiment than the market’s pessimistic view. Based on FY1
earnings, we revise up our target PE from the current 11.24x to 11.75x. Under such
assumptions, we present a fair 2013F Kospi at 2,075pt and a range of
1,780-2,400pt.
Table 8. Risk avoidance coefficient, fair 12MF PE and upside potential

<Risk avoidance coefficient and fair 12MF PE>
Risk-free rate of return
2.50% 2.75% 2.77% 3.00% 3.25% 3.50%
Risk avoidance coefficient 1.0 20.9 19.9 19.8 18.9 18.1 17.3
1.5 16.9 16.2 16.1 15.6 15.0 14.4
2.0 14.1 13.7 13.6 13.2 12.8 12.4
2.5 12.2 11.8 11.8 11.5 11.2 10.9
3.0 10.7 10.4 10.4 10.1 9.9 9.7
3.5 9.5 9.3 9.3 9.1 8.9 8.7
4.0 8.6 8.4 8.4 8.2 8.1 7.9
4.5 7.8 7.7 7.7 7.5 7.4 7.3
< Risk avoidance coefficient and Kospi upside potential>

Risk-free rate of return
2.50% 2.75% 2.77% 3.00% 3.25% 3.50%
Risk avoidance coefficient 1.0 148% 136% 135% 125% 114% 105%
1.5 100% 92% 92% 85% 78% 71%
2.0 68% 62% 62% 57% 52% 47%
2.5 45% 40% 40% 36% 32% 29%
3.0 27% 24% 23% 20% 17% 15%
3.5 13% 10% 10% 8% 6% 3%
4.0 2% 0% 0% -2% -4% -6%
4.5 -7% -9% -9% -11% -12% -14%
Table 9. Corporate earnings estimates and target Kospi

12F earnings estimate (W bn) 94,711 13F earnings estimate (W bn) 115,163
12F earnings estimate drop assumption 8.4% 13F earnings estimate drop assumption 20.0%
12F adj. earnings (W bn) 86,794 13F adj. earnings (W bn) 92,130
adj. PER (FY1) 11.24 Target PE (FY1) 11.75
mkt. cap. (W bn) 975,928 Target mkt. cap. (W bn) 1,082,533
Current Kospi (Nov 15) 1,871 Target Kospi 2,075
Assumptions for 2013F earnings drop

10% 15% 20% 25% 30%
PE (x) 10.75 2,136 2,017 1,898 1,780 1,661
11.00 2,185 2,064 1,943 1,821 1,700
11.50 2,285 2,158 2,031 1,904 1,777
11.75 2,334 2,205 2,075 1,945 1,816
12.00 2,384 2,252 2,119 1,987 1,854
12.50 2,483 2,345 2,208 2,070 1,932
12.75 2,533 2,392 2,252 2,111 1,970
Source: WiseFN, Korea Investment & Securities
28
2. Ideas for promising sectors and stocks

1) Online shopping grows during a downturn
Online shopping sales are growing on a shifting IT trend. Online malls have become
more accessible with the widespread penetration of mobile gadgets such as
smartphones and tablets and they are growing their loyal customers with reinforced
content (e.g., digital music, film, TV programs, e-books, etc.) The online stores are
also trying to meet wide-ranging consumer wants via big data analysis.
According to Boston Consulting Group, the US online shopping market should

expand from USD800bn in 2010 to USD2trn in 2016. The weighting of online
shopping in retail sales would then jump from 4.1% to 7.1% and continue the
upswing onward. In Korea, the market should grow from USD23bn in 2010 to
USD39bn in 2016 and the weighting gain from 6.6% to 8.1%.
The Korean online shopping market should steadily add market share in 2013
fueled by slowing income growth and the new IT trend. In particular, in line with its
emphasis on building an economic democracy, the government will likely continue
to regulate offline retail channels in 2013, including discount stores, but not online
retailers.
Mounting online We believe the online shopping market growth would primarily benefit online malls
shopping to primarily and mobile ad firms. Interpark plans to sell lucrative products online by leveraging a
benefit 1) online malls consumer base secured with its concert and flight ticket divisions. Among mobile
and 2) mobile ad firms messengers, NHN’s Line and Kakao’s KakaoTalk should grow their mobile profits
via already secured mobile traffic.
Secondary beneficiaries: Secondary beneficiaries would be payment service providers and big data
1) payment settlers and companies. Mobile payment settlers (Danal and KGMobilians) and credit card
2) big data companies payment service providers’ (KG Inicis, KCP, etc.) saw their shares surge in a
short-term driven by expectations for larger settlement amounts. Thus, although
their valuations may be heavy, their earnings should steadily improve as well in
2013. From 2013, big data should be more widely used in Korea than the currently
limited uses such as to improve retailer efficiency (e.g., E-Mart) and collect traffic
information, rather than improve manufacturing productivity. For example, spending
can be more efficiently induced with product information catered to individual
shoppers’ location and taste based on an analysis of their purchases and global
positioning system-based information, and predictions of consumer behavior and
market changes. The wider use of big data and in-memory computing should boost
server demand, which in turn is a positive factor for sales expansion at SK Hynix
and Isupetasys.
29
Table 10. 2013 IT trend outlook

Samsung SDS Gartner Electronics and Telecommunications Research Institute
Value creation via big data Mobile devices battles High-resolution hologram display
Development of cloud services Mobile applications and HTML5 Brain wave cognition-based interface
Integrated IT business Personal cloud Green IT: Printable solar cells
Advanced persistent security threat Enterprise app store Low-electricity server
Aggressive patent strategy Internet of Things Bio/healthcare: Context-aware robots for individual genome
Context-aware devices and services Hybrid IT and cloud computing analysis and personalized medicine
Smart devices for autos Strategic big data Information processing: Big data analysis
Progress in green IT Actionable analytics High-capacity in-memory computing
Fast corporate growth via open ecosystem Mainstream in-memory computing Cloud computing
Integrated ecosystems Education: Emotion exchange-based smart learning
2) Growing demand for digital content

Legitimate digital content With the rising penetration of smartphones, tablets and other mobile devices,
spending to increase changes are taking place in the way digital content is consumed. In the past, digital
versions of music, films, TV programs, e-books, etc. were often pirated. For
convenience, more people now subscribe to digital music streaming or N-screen
services via mobile gadgets. A negative perception is increasingly shared regarding
illegal file sharing via shared folders or torrent download sites. Legitimate access to
digital content is expanding via the Apple App Store, iTunes, Google Play, SK’s
Melon, KT’s Dosirak, Naver’s N Store, etc. Despite the economic downturn, leisure
spending, including digital content, should steadily increase compared to other
consumption.
Higher digital music In Korea, digital music prices range between W60-600 per song and are much less
prices in Korea than JPY250 at Apple’s music store in Japan and USD1.29 in the US. Thus, a lift for
digital music prices in 2013 according to new rules for online music download
pricing should not turn away a significant number of lead consumers. Once Apple
opens its iTunes store in Korea, digital music prices may rise more sharply than
anticipated. When Apple opened a game category for its App Store in Korea, JCE’s
Rule the Sky and Gamevil’s Tiny Farm enjoyed huge success and game stocks
jumped. Likewise, digital music stocks may soar on higher digital music prices in
2013 and Apple opening iTunes in Korea.
More tablet content Along with elevated competition among tablet makers, demand is mounting for
demand and legitimate related content. While digital music was the key content for smartphones with small
stores screens, larger-screen tablet users tend to go for films, TV programs and e-books.
Korean tablet content providers that carry all three content types (films, TV shows
and e-books) are the telcos’ content stores, Naver’s N Store and Google Play.
Leading N-screen service providers are SBS Contents Hub’s POOQ and CJ
HelloVision’s tving.
Digital content Now digital content is not only consumed via mobile gadgets but in living rooms via
penetrating living rooms N-screen and IPTV. According to the Korea Communications Commission’s 2012
Broadcast Survey conducted on Nov 8, 94 comprehensive analog broadcasters
saw market share erosion, while digital broadcasters including IPTV, enjoyed a fast
growing market weighting. Three conglomerate IPTV providers are adding
subscribers via bundled packages (land and mobile lines), N-screen and Google
TV.
30
Backed by better Backed by the wide penetration of mobile devices and better graphics, mobile
performing mobile games pose a threat to the market share of games played on other platforms such
devices, mobile games as consoles and online. Along with the rising penetration of mobile gadgets,
are threatening consoles Koreans are spending more time playing mobile games and less for online games.
NVIDIA has forecast mobile application processors in 2014 would outperform
consoles such as Sony’s PlayStation and Nintendo’s Wii.
In 2013, the global games market should see mobile encroach on the stagnant
market shares of console, arcade and PC games. Korea too should witness faster
mobile games growth than those played on other platforms such as online.
Table 11. Games sales by platform in Korea (W 100mn)
2009 2010 2011 2012F 2013F

Online games 37,087 47,673 57,208 71,510 85,811
Console games 5,257 4,268 5,335 6,402 7,042
Mobile games 2,608 3,167 3,800 4,636 5,796
PC games 150 120 112 106 104
Arcade games 618 715 758 815 872
PC rooms 19,342 17,601 16,545 15,221 14,156
Source: Korea Creative Contents Agency
3) Policies set to change

Main opposition There is a greater likelihood of electricity rate hikes with Korea’s presidential
candidates in the 2012 election in Dec and the establishment of the UN’s Green Climate Fund (GCF)
presidential election are headquarters in Songdo, Incheon. The two main opposition candidates – Moon
for nuclear power Jae-in (Democratic United Party) and Ahn Cheol-soo (independent) – support the
phase-out; Electricity rate phase-out of nuclear power, while Park Geun-hye (ruling Saenuri Party) is
hikes are very likely maintaining “conditional disapproval” to build additional nuclear plants. Moreover,
Korea recently beat out advanced countries such as Germany to host the
secretariat of the GCF. As such, the government would need to adopt policies to
expand renewable energy sources instead of nuclear power. Moreover, it is
becoming harder to build nuclear plants due to heightened safety concerns after the
2011 Fukushima nuclear disaster, the Gori-1 nuclear plant (near Busan, Korea)
shutdowns and the latest scandal involving plant replacement parts supplied on
forged quality control certificates. If projects for additional nuclear plants are
suspended due to the aforementioned reasons, it would lead to greater gas-fired
and renewable power generation and electricity rates would need to be raised. As
such, the electricity pricing system that was geared toward supporting corporate
activities by selling electricity at below cost may be changed.
Higher electricity rates would increase the preference for energy-efficient products.
For example, there may be more demand for LEDs that can bring down electricity
consumption or for energy-saving building renovations. Renewable energy sectors
such as solar PV with uncertain margin recovery prospects due to a supply glut are
expected to benefit as well.
Table 12. Electricity purchase cost by energy source (KRW/kWh)
Year Nuclear Bituminous coal Anthracite Oil LNG Combined-cycle Hydro Others
2010 40 61 110 185 147 127 171 104
2011 39 67 99 226 187 141 154 102
Jun 2012 46 75 122 255 214 173 430 282
Source: KEPCO
31
In light of economic “Economic democracy” has emerged as a major issue in the presidential campaign.
democracy, MRO and The government will likely introduce policies to support small/midsize enterprises
other businesses would (SME) that offer job openings. In particular, the government may strictly follow the
be suitable for SMEs scope or regulations on business suitable for SMEs. Accordingly, there would be
fewer holding companies involved in systems integration (SI) and maintenance,
repair and operation (MRO), while more SMEs would handle outsourcing for those
businesses. We believe MRO companies (e.g., iMarketKorea) and SI companies
(e.g., Daou Technology and Hancom) will gain more market share in the public and
private sectors.
Lowering healthcare US President Barack Obama and his administration introduced a healthcare
costs via generic drugs in program dubbed Obamacare in an attempt to expand Medicaid eligibility and lower
an aging society healthcare costs. We believe Korea will also try to lighten the healthcare cost
burden as the population ages. According to Statistics Korea, the working-age
population is expected to peak in 2016. As the government will attempt to reduce
healthcare costs, pharmaceutical firms that make generic drugs (equivalents of
original drugs with expired patents) should demonstrate noticeable growth. Similar
to Japan’s pharmaceutical industry in the 1990s when the sector index was re-rated
backed by restructuring, new drug development and oversea market entry, we also
expect a re-rating for Korea’s pharmaceutical sector.
4) Southeast Asia to grow even in a slow-growth global environment

Southeast Asia’s growth In 2012, stock markets around the world stayed in a narrow range due to Europe’s
to continue economic downturn and debt crisis and other issues. But the markets in Southeast
Asia and Mexico posted record growth. The reason is they enjoyed an economic
boom on greater foreign direct investment thanks to higher wages in China and
their economies are geared toward domestic demand that has little correlation to
the eurozone debt problem. According to the IMF’s World Economic Outlook as of
Oct 2012, growth should remain solid in Southeast Asia, Mexico and the Middle
East (incl. Saudi Arabia) in 2013.
Despite slow global economic conditions in 2013, we expect higher valuations for
companies that have production bases or provide services in Southeast Asia where
manufacturing is brisk and domestic services are achieving fast growth.
Manufacturers in the region should deliver greater sales as the sector shifts focus
from China to Southeast Asia. Moreover, the young population structure for
countries in the region such as Indonesia is providing a favorable environment for
domestic demand growth.
Figure 25. GDP growth by main region/country
(%)
10 2011 2012F 2013F
8
6
4
2
0
-2
Eurozone
Mid & South
Middle east
DM
EM
US
Japan
China
Eastern
Asia's NICs
ASEAN
Europe
Africa
America
Note: Asia’s NICs includes Korea, Hong Kong, Taiwan and Singapore
32
Table 13. Listed companies with operations in ASEAN markets

Company Current status
Hansae Co., Youngone Corp. Greater apparel OEM orders in Vietnam due to higher wages in China
Overseas movie theater subsidiary in China and Vietnam
CJ CGV
(biggest player in Vietnam’s nascent multiplex market with nine multiplexes)
Bio plant in Indonesia expanding production capacity for amino acids used in animal feed
CJCJ
as well as food seasonings
Lotte Shopping 30 Lotte Marts in Indonesia and two in Vietnam; Sales to continue growth
LG Household & Health Care Biggest player in Vietnam’s cosmetics market with 37 TheFaceShop outlets
Biggest player in Indonesia’s food seasonings market;
Daesang Corp.
Entered the Philippines’ starch sugar market
Kolao Holdings Imports and sells Hyundai/Kia cars in Laos; Sells used cars and provides rental services
Source: KOTRA, news reports
3. Portfolio strategy: Seeking growth in tough times

1) 2012 returns by sector
Gainers: IT, consumer The Kospi gained a mere 2.5% YoY in 2012F (as of Nov 15 closing prices). IT,
goods, utilities consumer goods and utilities sectors performed very well, while materials, industrial
Losers: Materials, goods and financial sectors were quite weak.
industrial goods,
financial
Figure 26. 2012 returns by sector
40%
30%
20%
10%
0%
-10%
-20%
-30%
IT Hardware
Media
Transportation
Trading Companies
Software
Hotels & Leisure
Food, Beverage & Tobacco
Health Care
Insurance
Retailing
Shipbuilding
Construction
Steel
Securities
KOSPI
Household Products
Semiconductors
Utilities
Nonferrous Metals
Autos
Chemicals
Machinary
Consumer Durables
Telecom Services
Industrial Conglomerates
Banks
Energy
Displays
Education Services
2) Q&A on key issues

In 2013, investors will likely focus on the following issues regarding portfolio
strategies. Can materials and industrial goods that struggled in 2012 pick up in
2013? Is it too late to add some of the companies from F&B, household goods and
healthcare sectors that trade at more than 20x PE, even though they posted strong
returns in 2012 and secured growth stories? What should be done about the
automotive sector and Samsung Electronics whose shares retreated in 2H12? We
addressed these issues in a simple Q&A format below.
33
 Can materials and industrial goods pick up in 2013?

China needs upper-8% The weakness for materials and industrial goods was not just limited to 2012. The
growth for materials and two sectors also struggled in 2011 with returns of -17.0% and -25.4%, respectively,
industrial goods to turn the poorest along with the financial and telecom sectors. One of the main reasons
around behind the poor returns is the decrease in China demand. Materials and industrial
goods were major beneficiaries of China demand when its economy was fast
recovering on the back of quantitative easing by advanced countries after the 2008
global financial crisis. But with China’s growth slowing and product supply-demand
conditions restoring balance, materials and industrial goods have been hit the
hardest. Although China welcomed a new administration led by Xi Jinping, the
country’s economic outlook for 2013 is not very bright. The IMF set its forecast for
China’s growth at the low-8% level, which is slightly better than 2012. For Korea’s
materials and industrial goods sectors to bask in the sunshine, China’s growth must
reach at least the upper-8% level.
Figure 27. Chemical sector’s MSCI 12MF EPS
500
Korea Global China
400
300
200
100
0
07 08 09 10 11 12
 How do you justify the high PE for some of the companies in F&B and
healthcare sectors?
Growth duration is a Companies that trade at more than 20x PE can be largely divided into two types.
useful tool for evaluating First, companies whose shares are very sensitive to the outcome of events such as
growth companies exploration and production (E&P) projects and new drug developments. It is difficult
to approach these firms using conventional valuations tools. Instead, the real
options valuation3 is more reasonable when evaluating these companies.
The second type is companies that have growth stories and deliver results in the
form of earnings. In emerging markets, the price/earnings to growth (PEG) model
has traditionally been used as an evaluation indicator for these companies. For
example, a 30% profit CAGR over the next several years would yield 30x PE and
20% CAGR would yield 20x PE. But given that the PEG model itself tacitly assumes
nominal growth of about 10%, it is not suitable to use in low-growth countries and its
approach is overly simplistic.
3
For concepts and applications of real options valuation, please refer to the following two KIS reports 1) Value assessment using
the real options model (1) – basic understanding of the model (published Jun 14, 2005) and 2) Value assessment using the real
options model (2) – case studies (Aug 23, 2005)
34
In contrast, the growth duration model is more refined and flexible than PEG when
evaluating growth companies. In the following example, if the Kospi trades at 9.0x
PE and has expected nominal growth of 6% and dividend yield of 2%, and if the
growth company we are evaluating trades at 20.0x PE and has expected growth of
20% and dividend yield of 2%, how long must the 20% growth be sustained for the
PE level to be justified? Based on the given equation, the answer is 6.55 years.
Thus, if growth remains at 20% for more than seven years, the company is
undervalued despite the high PE. But if the 20% growth is sustained for less than
six years, the company is overvalued. Although it would be difficult for the 20%
growth to be sustained over the long-term, if annual profits more than double during
the company’s growth phase, it could considerably shorten the growth duration.
Thus, investors should be able to make a rational decision when evaluating a
growth company by keeping the above concepts in mind.
Table 14. Inducing and calculating growth duration
<Inducing growth duration>
E’(t) = E’(0)(1+G)t
N(t) = N(0)(1+D)t
E(t) = E’(t)N(t) = E(0){(1+G)(1+D)}t
E(t) ≒ E(0)(1+G+D)t
E’(0): Current EPS

E’(t): EPS for the implied time
N: Number of shares
E: Corporate profit
G: Annual EPS growth
D: Dividend yield (assuming stock dividends)
If the same level of risk is assumed for the growth company (g) and the market (m),
investors would see a value that is proportional to the expected profit growth of the
market and the growth company at the implied time (t) when the company stops
growing (or when it equals the market’s rise). In other words, current prices relative
to the market would be in direct proportion to the expected future earnings ratio at
the implied time.
Pg (0) E g (0)(1  Gg  Dg )t

Pm (0) Em (0)(1  Gm  Dm )t
Pg (0) E g (0) (1  G g  D g )
ln  t  ln
Pm (0) E m (0) (1  Gm  Dm )
<Calculating growth duration>
Growth company and market data Growth duration

Growth company Market
Current PE 20.0 9.0 Relative PE multiple 2.22
Growth 20% 6% Relative growth multiple 1.13
Dividend yield 2% 2% Growth duration 6.55
35
 What is your perception of FX-related issues (strong KRW) and the

automotive industry?
Strong KRW could hurt In the FX market, the KRW has gained sharply against the USD since 2H12.
the automotive sector but Meanwhile, the automotive sector has fallen considerably since Sep due partly to
market concerns are the perception that Korea’s auto industry that had been gaining a firm position
overblown globally reached its peak in terms of earnings. But we believe the bigger reason is
the concern about the automotive sector potentially losing competitiveness in light
of the KRW’s sharp rise in the FX market, especially against the JPY.
Figure 28. KRW/JPY100 vs. automotive sector
(p) (KRW/JPY 100)

12,000 1,600
Autos KRW/JPY 100 (R)
11,000
1,500
10,000
9,000
1,400
8,000
7,000
1,300
6,000
5,000 1,200
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12
Analyzing the effect of FX rate changes on corporate profits and shares is not an
easy task. As we already stated in previous reports, corporate profits and shares
usually went up when the KRW was strong, contrary to popular belief. The reason
is there were many instances when a strong KRW allowed domestic firms to gain a
sharper competitive edge in the industrial sector and foreign investors to make net
purchases in the financial sector.
But the ongoing KRW appreciation is part of the normalization of the KRW that was
excessively undervalued compared to other currencies after the global financial
crisis, and not because the Korean economy and companies are fundamentally
strong. Even when the new administration takes office, the authorities will likely let
the currency appreciate to adjust resources and income distribution. This may have
an adverse effect on corporate profits, especially earnings at automotive and IT
component players whose products are in direct competition with Japanese firms.
Moreover, the automotive industry even suffered extreme profit erosion in 2006
when the KRW was strong against the JPY. But even when the KRW was similarly
strong in 2005, the automotive sector actually enjoyed profit growth. In particular,
given that the weighting of overseas auto production has grown considerably due to
aggressive foreign direct investment since the mid-2000s, we believe the market
concerns are overblown.
36
3) Portfolio strategy
Profit estimates for As of end-Oct 2012, the PE for KIS quant Universe 200 stocks stood at 8.5x based
materials and industrial on the 2013F consensus. In terms of PE multiples, we can divide companies largely
goods may be into three groups: 7.0x (automotive and Samsung Electronics), 10.0x (materials,
exaggerated industrial goods and companies in general) and 20.0x (some companies in
healthcare, household goods, media and F&B). But based on expected profit
growth for each group, the automotive sector stands at 8%, Samsung Electronics at
20% and the materials, industrial goods, media, healthcare and household goods
sectors at 20-30%. Overall, the automotive sector’s profit estimates take a very
conservative tone, while media, healthcare and household goods maintain their
growth from 2012. In addition, materials and industrial goods look to make up the
profit losses from 2012.
We do not expect a fast recovery for materials and industrial goods. Unless China
can grow at a rapid pace, Korea’s materials and industrial goods sectors will deliver
a slow profit recovery. Although there is some concern about automotive and
Samsung Electronics’ profits, we believe there is a greater chance that profit
estimates for materials and industrial goods are exaggerated. If their profits do not
recover to the levels projected by analysts (i.e., profits remain similar to 2012 or rise
less than 10%), the materials and industrial goods sectors would trade at 12.0x PE,
higher than the consensus.
Table 15. Profit estimates and valuations by sector

Market
Contribution (%) NP growth (%) PE (x) PB (x) ROE (%)
cap
Sector Companies
Market NP
(W bn) 2011 2012F 2013F 2012F 2013F 2012F 2013F 2012F 2013F
cap (2013F)
Total 200 975,928 100.0 100.0 -9.9 10.0 21.6 10.3 8.5 1.1 1.0 11.8 12.9
Energy 6 42,229 4.3 4.3 36.7 -44.0 40.2 12.0 8.5 1.2 1.0 10.2 13.1
Chemicals 13 44,098 4.5 4.0 3.6 -34.6 35.8 13.0 9.5 1.3 1.2 10.5 13.3
Metals & Mining 8 48,888 5.0 5.1 -8.4 -19.6 26.6 10.6 8.3 0.8 0.7 7.8 9.3
Construction &
7 31,337 3.2 2.8 104.6 -5.0 22.9 12.0 9.8 1.0 0.9 8.9 10.0
Engineering
Industrial Conglomerates 6 29,121 3.0 3.7 -34.3 6.7 25.8 8.5 6.8 0.7 0.7 15.2 18.4
Machinery 4 4,202 0.4 0.4 42.7 16.1 6.9 10.1 9.5 1.4 1.2 15.4 14.1
Trading Companies 3 6,937 0.7 0.5 6.2 1.3 14.2 13.6 11.9 1.6 1.4 13.1 13.2
Shipbuilding 5 29,527 3.0 2.9 -33.8 -26.7 7.5 9.6 8.9 0.9 0.8 9.8 9.7
Commercial Services 2 5,505 0.6 0.3 2.1 -22.3 30.5 19.9 15.3 2.2 2.0 11.7 13.8
Transportation 7 20,394 2.1 0.9 -160.2 NA NA NA 18.8 1.6 1.5 -3.7 8.6
Autos 11 106,896 11.0 17.5 25.0 20.6 8.6 5.8 5.3 1.2 1.0 23.3 20.7
Consumer Durables 9 9,279 1.0 0.8 2.9 18.4 15.0 11.1 9.6 1.9 1.6 21.0 20.5
Consumer Services 9 15,366 1.6 0.9 -9.9 16.7 12.9 16.3 14.5 2.3 2.0 14.5 14.9
Media 6 7,518 0.8 0.4 38.9 37.1 30.7 19.8 15.1 2.2 1.9 11.6 13.5
Retailing 9 29,584 3.0 2.5 62.5 -55.6 11.9 11.5 10.3 1.0 0.9 9.1 9.4
Food Beverage &
10 33,487 3.4 2.1 -21.7 -2.7 25.3 17.3 13.8 1.6 1.5 11.9 13.7
Tobacco
Household &
5 18,773 1.9 0.7 15.3 9.3 20.8 26.4 21.9 4.7 3.9 19.3 19.7
Personal Products
Health Care 10 13,349 1.4 0.6 -0.6 -9.4 46.2 28.7 19.6 2.7 2.4 9.5 12.9
Banks 8 60,362 6.2 8.8 57.0 -13.6 -6.6 5.6 6.0 0.5 0.5 10.2 8.9
Insurance 9 47,140 4.8 4.1 2.8 18.5 10.0 11.1 10.1 1.0 0.9 9.8 9.7
Securities 7 14,710 1.5 1.3 -11.2 -7.7 39.9 14.0 10.0 0.7 0.7 5.6 7.4
Software 9 23,747 2.4 1.6 9.6 10.3 31.4 17.4 13.2 3.4 2.7 21.1 22.7
IT Hardware 9 31,683 3.2 2.4 -92.5 1,368.7 1.1 11.4 11.3 1.1 1.0 11.0 10.1
Semiconductors 10 217,629 22.3 25.1 -27.5 70.4 25.3 9.4 7.5 1.7 1.4 19.8 20.3
Displays 4 14,756 1.5 1.2 -146.4 NA 260.1 38.9 10.8 1.3 1.1 3.3 11.2
Telecom Services 4 27,166 2.8 2.8 -12.8 -28.3 41.9 12.1 8.5 0.9 0.9 7.7 10.6
Utilities 4 27,489 2.8 1.3 -1,060.6 NA NA NA 19.0 0.4 0.4 -1.6 2.4
Others 6 14,757 1.5 1.1 -54.6 115.9 -38.9 7.3 12.0 0.9 0.9 13.2 7.9
Note: KIS quant Universe 200 stocks as of Nov 15 closing prices
37
Increase exposure to “Growth” plays a more valuable role when the economy is stuck in a slump. As such,
companies with strong our portfolio strategy for 2013 is focused more on regions, industries and
growth potential despite companies that are poised to grow.
economic downturn
In 2013, we expect further sustained growth for companies related to healthcare,
mobile components and digital content that are enjoying greater demand due to the
aging population, IT technology advancements and trend shifts in a low-growth
environment. We also draw attention to consumer goods firms that either are
gaining recognition and market share in China and Southeast Asia or have
production bases in those regions. We recommend Overweight on the automotive
sector and Samsung Electronics given their attractive valuations. For companies in
the materials, industrial goods and financial sectors, we minimized their presence in
the portfolio unless they had distinctively favorable traits.
Table 16. 2013 portfolio recommendations

Weight (%) PE (x) PB (x) ROE (%)
Sector Market Added Weight (%)
NP (2013F) 2012F 2013F 2012F 2013F 2012F 2013F
cap
Energy 4.3 4.3 12.0 8.5 1.2 1.0 10.2 13.1 SK Innovation (096770) 5.0
LG Chem (051910) 5.0
Materials 9.9 9.4 10.9 8.9 0.9 0.9 9.0 10.5
Korea Zinc (010130) 4.0
Samsung C&T (000830) 2.0

Industrials 13.5 11.9 12.9 9.6 1.0 0.9 10.2 12.8 SK (003600) 3.0
Samsung Heavy Ind. (010140) 2.0
Hyundai Mobis (012330) 7.0

Kia Motors (000270) 6.0
Consumer LG Fashion (093050) 2.0
17.3 22.2 7.3 6.6 1.2 1.0 19.1 17.8
Discretionary KT Skylife (053210) 3.0
Hotel Shilla (008770) 3.0
Himart (071840) 2.0
Consumer KT&G (033780) 5.0

5.5 2.9 19.7 15.9 2.1 1.9 13.0 14.6
Staples LG H&H (051900) 5.0
Health Care 1.4 0.6 28.7 19.6 2.7 2.4 9.5 12.9 Green Cross (006280) 4.0
Financials 13.1 14.4 7.5 7.7 0.7 0.6 9.7 8.8
NHN (035420) 5.0

IT 29.5 30.3 10.4 8.3 1.6 1.4 17.3 18.3 Samsung Electronics (005930) 25.0
Samsung SDI (006400) 4.0
Telecom
2.8 2.8 12.1 8.5 0.9 0.9 7.7 10.6 SK Telecom (017670) 4.0
Services
Utilities 2.8 1.3 NA 19.0 0.4 0.4 -1.6 2.4 Korea Gas (036460) 4.0
Total 100.0 100.0 10.3 8.5 1.1 1.0 11.8 12.9 100.0
Patron (091700)
Daeduck GDS (004130)
Small-caps Osstem Implant (048260)
Muhak (033920)
Daou Technology (023590)
Note: Nov 15 closing prices

38
Table 17. 2013 portfolio stocks: Earnings and valuations

Stock price
Valuation
Company Target price Investment points
Upside FY PE PB EPS ROE
156,000 2012F 9.0 0.9 17,359 10.6 - Earnings improvements likely with stabilization of crude oil price and refining
market conditions
SK Innovation - SK Energy has second largest capacity on a single complex basis, which should
210,000 2013F 7.0 0.8 22,441 12.2
(096770) bolster economies of scale as Asian refining market recovers
- Growth drivers secured with Inchon refinery's PX capex, lube base oil capacity
34.6% 2014F 6.1 0.7 25,531 12.4 additions and I&E materials
296,000 2012F 14.1 2.0 21,050 15.2 - Earnings improvement expected in petrochemical recovery and long-term growth
via new businesses
LG Chem - Profitability improvement by reinforcing diversified, value-added petrochemical
370,000 2013F 12.5 1.8 23,666 15.1
(051910) portfolio
- Sustained sales growth with I&E material capacity additions, M/S growth and
25.0% 2014F 11.2 1.6 26,383 14.8 earnings visibility of 3D FPR, EV battery and glass substrates
418,000 2012F 12.7 2.1 35,249 17.0 - Zinc TC to rise to USD230 per tonne in 2013 (+USD39 YoY)
- Smelters become more vocal in treatment charge negotiations with miners
Korea Zinc
590,000 2013F 9.2 1.8 48,951 19.9 - Expand silver capacity from current 2,000 tonnes to 4,000 tonnes (schedule is
(010130)
unknown), likely purchase of mines given ample cash holdings and
41.1% 2014F 7.8 1.5 57,799 19.6 cash-generating ability
56,500 2012F 17.6 0.9 3,206 4.9 - Forte lies in abundance of projects progressed in non-competitive bids
Samsung C&T - Dividend income from Parallel Petroleum should increase from W19bn in 2012F
97,000 2013F 17.8 0.8 3,175 4.5
(000830) to W35bn in 2013F and to W45bn in 2015F
71.7% 2014F 17.0 0.7 3,315 4.3 - One of the few construction players posting profitability and top-line growth
169,000 2012F 4.9 0.6 34,691 12.5 - NAV and share price to rise on improving profitability and refining margins at SK
Innovation
SK Holdings
212,000 2013F 3.4 0.5 49,070 15.2 - Earnings momentum to be solid on sound earnings from SK E&S as nuclear plant
(003600)
problems coming to the fore·
25.4% 2014F 3.1 0.5 55,213 14.6 - Shares undervalued and now offer valuation merit
Samsung Heavy 33,400 2012F 8.2 1.3 4,050 17.5 - Strong competitiveness in offshore plant orders backed by leading technologies
Ind. 57,000 2013F 8.6 1.1 3,864 14.5 - Improving engineering skills via JVs (with AMEC in UK) and M&As
(010140) 70.7% 2014F 7.6 1.0 4,369 14.4 - Higher and steadier profitability compared to rivals
268,500 2012F 7.8 1.5 34,275 21.7 - Excellent growth potential and stability
Hyundai Mobis - Will join top five in 'Top 100 Global Suppliers' OEM rankings by Automotive News
400,000 2013F 7.0 1.3 38,293 19.9
(012330) soon
49.0% 2014F 6.4 1.1 41,865 18.2 - Production globalization and aggressive R&D investments to accelerate growth
54,900 2012F 5.7 1.2 9,699 25.9 - Highest volume sales growth can be sustained
Kia Motors - Outstanding design competitiveness and better quality & brand recognition
105,000 2013F 5.0 1.0 11,016 23.0
(000270) improvement
91.3% 2014F 4.5 0.8 12,222 20.8 - Completion of China no. 3 plant in Apr 2014 to bolster China momentum
31,500 2012F 10.2 1.0 3,098 10.5 - Sustained growth and higher margins
LG Fashion - Fashion bellwether, sustained brand launches and growth
44,000 2013F 7.9 0.9 3,981 12.2
(093050) - Earnings to grow in 2013 on moderate consumer spending recovery and better
39.7% 2014F 6.8 0.8 4,614 12.7 COGS-to-sales
31,500 2012F 27.3 4.4 1,155 17.5 - Growth momentum to continue on subscriber growth from digital conversions,
KT Skylife higher apartment penetration rate and joint marketing with KT
40,000 2013F 14.8 3.4 2,130 25.8
(A053210) - Operating leverage effects on subscriber growth to emerge from 2013
27.0% 2014F 10.6 2.6 2,970 27.5 - 2013 sales and OP to grow 21.2% YoY and 83.1% YoY, respectively
49,450 2012F 17.1 2.9 2,893 17.7 - Strong growth of duty-free shops to continue on increasing inbound and
outbound tourism
Hotel Shilla - Overseas business, including overseas airport duty-free shops and Sweetmay, to
73,000 2013F 14.9 2.5 3,315 17.6
(008770) take off from 2013
- Business hotel operations from end-2013, to emerge as mid- to long-term growth
47.6% 2014F 11.1 2.1 4,461 20.2 driver
72,300 2012F 17.1 1.1 4,221 6.8 - Highest EPS growth in 2013 in retail industry
Himart - Economies of scale to emerge as Lotte Shopping home appliance channel
95,000 2013F 11.4 1.0 6,365 9.6
(071840) converts to Himart
31.4% 2014F 8.4 0.9 8,585 11.7 - Additional growth if Himart store converts to hyper-marts or overseas expansion
82,300 2012F 12.5 2.0 6,583 16.6 - Likely tobacco tax hike in early 2013, KT&G may also lift prices accordingly
KT&G - Expect exports recovery, and product mix improvement from KGC, and growth
92,000 2013F 11.2 1.9 7,375 16.9
(033780) from cosmetics
11.8% 2014F 10.2 1.7 8,030 16.7 - Stable tobacco M/S and ASP hike should narrow valuation gap with global peers
633,000 2012F 32.8 8.4 19,284 28.3 - Record PE can be fully justified on earnings stability and overseas momentum,
despite slower growth than smaller players
LG Household &
- Strong long-term earnings stability diversified distribution channels and brand
Health Care 790,000 2013F 25.7 6.6 24,621 28.3
portfolio
(051900)
- Successful overseas market entry of TheFaceshop, high margin and solid growth
24.8% 2014F 20.9 5.2 30,252 27.1 momentum at overseas business positive
39
Stock price
Valuation
- Strongest potential among Korean players to enter overseas markets
153,500 2012F 22.9 2.3 6,711 10.5
backed by new drug development
Green Cross - Secured global top-10 level capacity and technology in globally marketable
191,000 2013F 15.7 2.1 9,806 13.9
(006280) and lucrative plasma derivatives and vaccines market
- Visible overseas momentum, such as albumin and flu vaccines exports and
24.4% 2014F 12.3 1.8 12,439 15.6
completion of US clinical trials for two plasma derivatives
241,000 2012F 21.0 4.0 11,496 28.6 - Strong earnings growth thanks to continuing Line subscriber growth and
start of Line mobile game services in earnest
NHN
330,000 2013F 18.3 3.4 13,205 26.1 - Mobile ad growth and Japanese display ad sales growth
(035420)
- Game sales to grow from new titles, including Winning Eleven Online,
36.9% 2014F 14.2 2.8 16,956 26.1 Metro Conflict and mobile games
1,331,000 2012F 8.7 1.8 153,798 21.4 - Valuations remain compelling as earnings continue to improve in 2013
Samsung
- Earnings improvement in components (semiconductor and LCD) to
Electronics 1,850,000 2013F 7.2 1.5 184,578 21.0
accelerate
(005930)
39.0% 2014F 6.7 1.2 198,226 18.7 - System LSI and OLED businesses to strengthen synergy in mobile devices
- 2013 sales should grow 8.5% YoY thanks to strong rechargeable battery
149,000 2012F 4.3 0.9 34,898 22.8
growth
Samsung SDI - Polymer growth story should continue backed by major polymer battery
190,000 2013F 11.3 0.8 13,221 7.5
(006400) capacity expansion in 2013
- Automotive rechargeable battery business efficiency and speed of
27.5% 2014F 8.7 0.8 17,037 9.0
investment should improve thanks to merger of SBLiMotive
151,500 2012F 9.5 0.8 16,011 9.4 - ARPU should increase 4.2% YoY on LTE effects
SK Telecom
200,000 2013F 6.7 0.8 22,534 12.5 - Subsidiaries’ EV to increase on better profitability at SK Planet, SK
(017670)
32.0% 2014F 5.4 0.7 28,039 14.3 Broadband and SK Hynix
82,900 2012F 20.0 0.8 4,143 3.8 - Korea's energy policy will likely shift from nuclear power to gas, and
government should support KOGAS financially and politically
Korea Gas
110,000 2013F 15.1 0.8 5,480 5.0 - Government likely to enter shale gas business with KOGAS, increasing its
(036460)
role further
32.7% 2014F 11.2 0.7 7,405 6.4 - Valuations are attractive and dividend merit is also high
Table 18. 2013 small cap picks: Earnings and valuations

Stock price
Valuation
17,550 2012F 9.8 3.0 1,800 36.6 - Samsung continues to perform well in global smartphone market
Partron - Antenna sales increase on rising market share at Samsung
25,000 2013F 7.7 2.1 2,265 32.0
(091700) - Earnings should increase with release of a major client’s new flagship
42.5% 2014F 6.6 1.6 2,671 27.6 smartphone
14,500 2012F 7.7 0.9 1,889 12.2 - Sales expansion of mobile mainboard-use PCB (HDI) at major clients via
cooperation with Daeduck Electronics
Daeduck GDS
21,000 2013F 6.8 0.8 2,124 12.9 - Stable profit growth through FPCB capacity additions
(004130)
- Overall margin improvement likely as product portfolio shifts from home
44.8% 2014F 6.1 0.7 2,372 13.4 appliances to mobile devices
28,700 2012F 21.9 5.0 1,374 27.6 - Marketing via education effect gaining traction in emerging markets and
brand awareness improving in advanced markets
Osstem Implant
37,000 2013F 15.2 3.8 1,974 30.4 - From mid- to long-term perspective, subsidiaries in India, Vietnam,
(048260)
Philippines, Kazakhstan and Bangladesh to emerge as equally important
28.9% 2014F 12.1 2.9 2,488 28.5 regional subsidiaries as the China subsidiary
12,900 2012F 8.7 1.2 1,499 15.3 - Soju prices to finally be lifted in early-2013 (price deregulation)
- Request to change one manufacturing license per company policy
Muhak
18,000 2013F 7.6 1.1 1,713 15.3 (traditional regulations)
(033920)
- Coming to fore amid austerity; Muhak is only company to post more than
39.5% 2014F 6.5 0.9 1,969 15.0 10% growth in stagnant soju market
15,000 2012F 7.8 0.9 1,935 12.2 - Growth momentum to continue on Kiwoom contracts, internet service sales
Daou and public contracts
Technology 22,000 2013F 7.3 0.8 2,063 11.8 - In 2013, value of investment securities, such as Kiwoom Securities and
(023590) Saramin HR, will come to the fore
46.7% 2014F 6.4 0.7 2,355 12.0 - Shares still attractive, trading at 42% discount to NAV

40
2013 Outlook
2013 KIS Top Picks
SK Innovation (096770) ................................................................................................................................. 42

LG Chem (051910) ................................................................................................................................................44
Korea Zinc (010130) ............................................................................................................................................46
Samsung C&T (000830) ................................................................................................................................48
SK Holdings (003600) .......................................................................................................................................50
Samsung Heavy Ind. (010140)............................................................................................................52
Hyundai Mobis (012330) ...............................................................................................................................54
Kia Motors (000270) ............................................................................................................................................56
LG Fashion (093050) .........................................................................................................................................58
KT Skylife (053210) ..............................................................................................................................................60
Hotel Shilla (008770) ..........................................................................................................................................62
Himart (071840)..........................................................................................................................................................64
KT&G (033780) ...........................................................................................................................................................66
LG Household & Health Care (051900) .................................................................................68
Green Cross (006280) ......................................................................................................................................70
NHN (035420) ...............................................................................................................................................................72
Samsung Electronics (005930) ...........................................................................................................74
Samsung SDI (006400) ..................................................................................................................................76
SK Telecom (017670) ........................................................................................................................................78
Korea Gas (036460) ............................................................................................................................................80
<Small cap>
Partron (091700) .......................................................................................................................................................82
Daeduck GDS (004130).................................................................................................................................84
Osstem Implant (048260) ............................................................................................................................86
Muhak (033920) .........................................................................................................................................................88
Daou Tech. (023590) ..........................................................................................................................................90
SK Innovation (096770)
BUY / TP: W210,000
Sales OP EBT NP EPS % chg. EBITDA PE EV/EBITDA PB ROE
Stock price (Nov 15, KRW) 156,000
Market cap (USD mn) 13,319 (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%)
Shares outstanding (mn) 92 2010A 53,722 1,891 1,502 1,139 12,241 70.0 2,532 15.8 10.1 1.6 11.9
52W High/Low (KRW) 194,000/125,500 2011A 68,371 2,842 4,309 3,169 34,004 177.8 3,448 4.2 5.1 0.9 24.4
6M avg. daily turnover (USD mn) 61,842 2012F 75,453 2,220 2,204 1,621 17,359 (49.0) 2,782 9.0 6.9 0.9 10.6
Free float (%) 65.6 2013F 78,267 2,873 2,843 2,091 22,441 29.3 3,407 7.0 5.7 0.8 12.2
Foreign ownership (%) 36.5
2014F 78,800 3,264 3,235 2,379 25,531 13.8 3,820 6.1 4.9 0.7 12.4
Note: NP and EPS based on controlling interest
Innovation steadily underway

Performance Many cards to play despite tough market conditions: SK Innovation is not a
1M 6M 12M simple refining company. Contribution by business is forecast at 32% from refining,
Absolute (%) 3.3 12.2 (12.6) 34% chemicals and 22% lubricants for 2012F total OP of W2.9trn. Moreover, new
Rel. to Kospi (%p) 6.2 13.7 (11.8) businesses, rechargeable batteries and electronic materials, are now on a solid
track upon the completion of mass production facilities in 2012. The company’s
12MF PE trend
chemicals business plans to build paraxylene (PX) facilities at the Incheon complex
12.0
(x) (W'000)
250
and SK Lubricants is scheduled to list in 2013. Backed by the robust business
10.0 200 growth outlook for both, investments should be funded by financial investors and
8.0
6.0
150 the IPO of SK Lubricants. Earnings improving over the short term on a possible
4.0 12MF PER (LHS)
100
rebound in economic conditions are a key variable, but SK Innovation already
50
2.0
0.0
price (RHS)
0
appears attractive as it secured economies of scale and short- and long-term
Jun-10 Jun-11 Jun-12 growth potential across all divisions.
With stabilizing supply-demand, SK Energy’s earnings volatility to wane: As

petroleum demand tends to be closely related to global economic growth, the
refining industry is repeating slumps and rebounds that are short-lived. Due to oil
price fluctuations, the refining business experienced extreme volatility, including
massive losses. But we believe volatility will decline going forward. Political turmoil
in the Middle East led to a surge in oil prices although the sharp decline in US and
European demand caused oversupply. But currently, supply capacity is declining at
a faster pace than demand as uncompetitive refineries are closing down amid the
slump. Industry restructuring has wound down and there are signs of an economic
recovery and stable prices for crude and petroleum. As we expect prices and
margins to stabilize, SK Innovation’s earnings volatility caused by refining earnings
fluctuations should ease.
2013 earnings outlook: Given the stabilizing market conditions for the refining
business, SK Energy’s 2013F sales and OP should grow 4% YoY and 36% YoY,
which would contribute most to SK Innovation’s consolidated earnings improvement.
SK Energy has the world’s second-largest production capacity based on a single
facility and the largest capacity in Asia. Economic conditions are unlikely to make a
V-shaped recovery in 2013. Unless demand recovers rapidly, cost advantage would
Kiyong Park be determined by the competitiveness and efficiency of facilities. We believe
822-3276-6177 refining market conditions in Asia will respond to the regional supply-demand
kypark@truefriend.com changes more sensitively than supply variables outside the region. Non-refining
growth potential also looks large given capex for PX in the Incheon complex and
Nakyung Lee
822-3276-6241
capacity expansion at SK Lubricants. OP of SK Global Chemical and SK Lubricants
nklee@truefriend.com should grow 22% YoY and 53% YoY in 2013F, respectively.
42
Balance sheet Income statement

FY-ending Dec. (W bn) 2010A 2011A 2012F 2013F 2014F FY-ending Dec. (W bn) 2010A 2011A 2012F 2013F 2014F
Current assets 15,496 19,887 20,566 22,903 23,847 Sales 53,722 68,371 75,453 78,267 78,800
Cash & cash equivalents 2,949 4,380 4,603 5,087 5,516
Gross profit 3,973 4,820 3,780 4,751 5,116
Accounts & other receivables 5,086 6,755 7,168 7,827 7,880
SG&A expenses 1,705 1,860 1,817 1,957 1,970
Inventory 5,863 7,482 7,394 8,218 8,668
Non-current assets 13,910 15,140 16,030 17,129 18,664 Other operating gains (377) (117) 256 78 118
Investment assets 1,720 2,353 2,596 2,693 2,897 Operating profit 1,891 2,842 2,220 2,873 3,264
Tangible assets 10,850 11,377 11,877 12,821 14,142
Financial income 856 1,183 1,206 1,221 1,237
Intangible assets 1,138 1,206 1,330 1,380 1,389
Interest incomes 66 106 130 144 160
Total assets 29,406 35,027 36,596 40,031 42,510
Current liabilities 11,745 14,305 14,946 15,996 16,300 Financial expenses 1,266 1,321 1,298 1,328 1,346
Accounts & other payables 6,171 9,934 9,432 9,783 9,850 Interest expenses 450 388 365 395 413
ST debt & bonds 3,306 2,782 3,282 3,382 3,582
Other non-operating profit 22 1,605 75 78 79
Current portion of LT debt 1,991 1,101 1,801 2,201 2,151
Gains (Losses) in associates,
Non-current liabilities 6,109 5,890 5,289 5,673 5,559 0 0 0 0 0
subsidiaries and JV
Debentures 3,899 3,669 3,369 3,819 3,719 Earnings before tax 1,502 4,309 2,204 2,843 3,235
LT debt & financial liabilities 1,604 1,315 1,115 1,019 999 Income taxes 353 1,133 579 748 850
Total liabilities 17,854 20,195 20,235 21,669 21,859
Net profit 1,149 3,176 1,624 2,096 2,384
Controlling interest 11,451 14,577 16,103 18,099 20,383
Capital stock 469 469 469 469 469 Net profit of controlling interest 1,139 3,169 1,621 2,091 2,379
Capital surplus 5,878 5,886 5,886 5,886 5,886 Other comprehensive profit (3) 166 166 166 166
Capital adjustments (143) (144) (144) (144) (144) Total comprehensive profit 1,146 3,342 1,791 2,262 2,551
Retained earnings 5,266 8,203 9,562 11,393 13,511 Total comprehensive profit of
1,137 3,323 1,787 2,257 2,545
Minority interest 100 254 258 263 269 controlling interest
Shareholders' equity 11,552 14,832 16,361 18,362 20,652 EBITDA 2,532 3,448 2,782 3,407 3,820
Cash flow Key financial data

FY-ending Dec. (W bn) 2010A 2011A 2012F 2013F 2014F FY-ending Dec. 2010A 2011A 2012F 2013F 2014F
C/F from operations 311 2,722 1,101 1,689 2,590 Per-share data (KRW)
EPS 12,241 34,004 17,359 22,441 25,531
Net profit 1,149 3,176 1,624 2,096 2,384
BPS 123,724 157,089 173,368 194,669 219,043
Depreciation 512 521 467 435 456 DPS 2,100 2,800 2,800 2,800 2,800
Amortization 129 84 96 99 100 Growth (%)
Sales growth 22.5 27.3 10.4 3.7 0.7
Net incr. in W/C (1,679) (13) (1,090) (944) (352)
OP growth 54.3 50.3 (21.9) 29.4 13.6
Others 200 (1,046) 4 3 2 NP growth 70.1 178.3 (48.9) 29.0 13.8
C/F from investing (755) 814 (1,317) (1,797) (1,930) EPS growth 70.0 177.8 (49.0) 29.3 13.8
EBITDA growth 30.5 36.2 (19.3) 22.5 12.1
Capex (444) (1,192) (1,053) (1,466) (1,864)
Profitability (%)
Decr. in fixed assets 128 87 87 87 87 OP margin 3.5 4.2 2.9 3.7 4.1
Incr. in investment (103) (187) (78) 69 (38) NP margin 2.1 4.6 2.1 2.7 3.0
EBITDA margin 4.7 5.0 3.7 4.4 4.8
Net incr. in intangible assets (337) (182) (220) (149) (109)
ROA 4.3 9.9 4.5 5.5 5.8
Others 1 2,288 (53) (338) (6) ROE 11.9 24.4 10.6 12.2 12.4
C/F from financing 690 (2,085) 439 593 (231) Dividend yield 1.1 2.0 1.8 1.8 1.8
Stability
Incr. in equity 35 0 0 0 0
Net debt (W bn) 7,651 4,226 4,661 4,697 4,293
Incr. in debt 852 (1,880) 700 854 30
Debt/equity ratio (%) 94.3 60.8 59.4 57.5 51.3
Dividends (198) (199) (261) (261) (261) Valuation (x)
Others 1 (6) 0 0 0 PE 15.8 4.2 9.0 7.0 6.1

PB 1.6 0.9 0.9 0.8 0.7
C/F from others (0) (4) 0 0 0
PS 0.3 0.2 0.2 0.2 0.2
Increase in cash 246 1,447 222 485 429 EV/EBITDA 10.1 5.1 6.9 5.7 4.9
Note: K-IFRS (consolidated)
43
LG Chem (051910)
BUY / TP: W370,000
Sales OP EBT NP EPS % chg. EBITDA PE EV/EBITDA PB ROE
Market cap (USD mn) 18,111 (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%)
52W High/Low (KRW) 434,000/265,500 2011A 22,676 2,835 2,797 2,138 29,069 (0.9) 3,592 10.9 6.4 2.5 24.8
6M avg. daily turnover (USD mn) 92.5 2012F 23,084 2,062 2,014 1,548 21,050 (27.6) 2,832 14.1 7.8 2.0 15.2
Free float (%) 65.9 2013F 24,430 2,321 2,264 1,740 23,666 12.4 3,136 12.5 7.1 1.8 15.1
2014F 26,378 2,585 2,524 1,940 26,383 11.5 3,465 11.2 6.4 1.6 14.8
Long-term growth ahead

Performance Short-term benefits from economic recovery and long-term growth potential:
1M 6M 12M A number of factors support our view that business conditions will improve in 2013
Absolute (%) (5.7) 10.0 (17.8) – accelerating efforts in the US to avert the fiscal cliff after the presidential election,
Rel. to Kospi (%p) (2.9) 11.5 (17.0) the upcoming power change in China and the easing debt crisis in Europe. Each
region/country that constitutes an important pillar of the global economy in terms of
12MF PE trend production, consumption and trade will likely be under pressure to come up with
(X) (W'000)
measures to support global economic recovery. The corresponding demand growth
15.0 600
for chemicals will provide an opportunity for Korean firms, which have maintained
10.0
500
400
higher facility operating rates than regional competitors. The demand growth will be
300 first felt for general-purpose products, such as polyolefin with a light inventory
5.0 12MF PE (LHS) 200 burden, and PVC used in infrastructure projects (building and civil engineering). A
0.0
price (RHS) 100
0
big price rebound is expected until China pushes up capacity utilization in earnest,
Jun-10 Jun-11 Jun-12 and the benefits will be felt across the chemicals arena. But on the downside, the
boom may not last long if demand growth is limited in a complex and very
competitive environment. Considering all the factors, we believe the safest
chemicals choice for investors will be LG Chem with healthy mid to long-term
growth potential from a wide-ranging product portfolio of technology-intensive
downstream products and information & electronic (I&E) materials.
Don’t rush, look far ahead: Demand for chemicals has fast grown since 2009,
fueled by China’s economic stimulus. Strong demand continued until 1H11 as
expectations for a sustainable robust business environment pushed up the prices
for chemicals, which led to demand for stockpiling. In turn, the speculative buying
put upward pressure on product prices and accordingly, Asian chemicals firms
enjoyed soaring sales and profits. But in future, demand growth will be only gradual
unless there is a large-scale stimulus program to boost production and
consumption. We forecast demand will be limited to a “real” level that absorbs the
inventory piled up through 1H12. Demand growth was brisk for the past three years
but should be rather moderate in the coming year. But it does not mean there will
be “sluggish” demand considering 10.2% YoY growth for real demand in 2013F
compared to 5.6% in 2012.
Earnings growth to continue into 2015: By division, chemicals OP jumped 105%

from 2008 to 2011. I&E materials/battery OP rose a mere 4% over the same period.
Chemicals OP should drop 36% YoY hit by the sluggish industry environment in
Kiyong Park 2012F but after passing a trough, LG Chem should post OP CAGR of 44% for the
822-3276-6177 next three years. Chemicals OP should gain 21% and I&E materials/battery OP
kypark@truefriend.com surge 107% through 2015F. The robust OP growth will be led by glass substrate
and mid/large-size batteries. Although short-term earnings improvement has been
Nakyung Lee quite modest, the new products will drive LG Chem’s longer-term growth. LG Chem
822-3276-6241 has a successful track record with polarizer and small-size batteries used in IT
nklee@truefriend.com products, which occupy the same areas as new products. The outlook is bright for
new business.
44

Gross profit 3,999 4,081 3,399 3,884 4,405
SG&A expenses 1,159 1,264 1,365 1,588 1,846
Inventory 2,182 2,475 2,520 2,667 2,879
Non-current assets 6,382 8,029 9,601 10,940 12,396 Other operating gains (19) 19 28 24 26
Investment assets 219 335 341 361 390 Operating profit 2,821 2,835 2,062 2,321 2,585
Tangible assets 5,872 7,376 8,936 10,236 11,636
Financial income 137 195 195 196 198
Intangible assets 180 207 211 223 241
Total assets 12,673 15,286 16,969 18,737 20,815
Current liabilities 4,277 4,724 4,760 5,029 5,201 Financial expenses 183 218 230 239 244
ST debt & bonds 1,260 1,452 1,552 1,702 1,702
Other non-operating profit (13) (31) (32) (33) (36)
Current portion of LT debt 361 386 386 386 386
Non-current liabilities 552 854 1,207 1,217 1,431 55 15 19 19 21
subsidiaries and JV
Debentures 150 299 649 649 849 Earnings before tax 2,818 2,797 2,014 2,264 2,524
LT debt & financial liabilities 333 390 390 390 390
Income taxes 619 627 443 498 555
Net profit 2,200 2,170 1,571 1,766 1,968
Capital surplus 1,158 1,158 1,158 1,158 1,158 Other comprehensive profit (3) 18 18 18 18
Capital adjustments (16) (16) (16) (16) (16)
Total comprehensive profit 2,197 2,188 1,589 1,784 1,987
Retained earnings 6,254 8,053 9,306 10,752 12,397
Total comprehensive profit of
Minority interest 140 154 177 204 233 2,155 2,148 1,565 1,758 1,957
controlling interest

C/F from operations 2,507 2,240 2,155 2,339 2,505 Per-share data (KRW)
EPS 29,345 29,069 21,050 23,666 26,383
Net profit 2,200 2,170 1,571 1,766 1,968
BPS 104,451 129,485 146,683 166,483 188,985
Sales growth 25.5 16.5 1.8 5.8 8.0
Net incr. in W/C (528) (656) (169) (227) (329)
OP growth 34.5 0.5 (27.3) 12.6 11.4
Others 163 (31) (17) (15) (15) NP growth 43.1 (0.9) (27.6) 12.4 11.5
C/F from investing (1,622) (2,280) (2,305) (2,114) (2,293) EPS growth 47.9 (0.9) (27.6) 12.4 11.5
EBITDA growth 30.2 2.8 (21.2) 10.7 10.5
Capex (1,617) (2,195) (2,318) (2,102) (2,266)
Profitability (%)
Incr. in investment (14) (43) 30 17 10 NP margin 11.1 9.4 6.7 7.1 7.4
EBITDA margin 17.9 15.8 12.3 12.8 13.1
ROA 19.0 15.5 9.7 9.9 10.0
Others 28 (20) (1) (4) (5) ROE 31.9 24.8 15.2 15.1 14.8
C/F from financing (624) 63 155 (145) (95) Dividend yield 1.0 1.3 1.2 1.2 1.2
Stability
Net debt (W bn) 747 1,136 1,580 1,648 1,730
Incr. in debt (348) 389 450 150 200
Others 1 (7) 0 0 0 PE 13.3 10.9 14.1 12.5 11.2

PB 3.7 2.5 2.0 1.8 1.6
C/F from others 1 (12) 0 0 0
PS 1.5 1.0 0.9 0.9 0.8
Increase in cash 261 11 6 81 117 EV/EBITDA 8.0 6.4 7.8 7.1 6.4
45
Korea Zinc (010130)

BUY / TP: W590,000
Stock price (Nov 15, KRW) 418,000 Yr to Sales OP EBT NP EPS % chg EBITDA PE EV/EBITDA PB ROE
Market cap (USD mn) 7,203 Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%)
Shares outstanding (mn) 19 2010A 3,838 684 726 555 31,054 32.2 773 8.9 6.5 1.9 22.4
52W High/Low (KRW) 490,000/291,000 2011A 5,556 964 975 714 39,868 28.4 1,076 7.6 4.7 1.7 23.1
6M avg. daily turnover (USD mn) 23.7 2012F 5,553 864 830 631 35,249 (11.6) 973 12.7 7.6 2.1 17.0
Free float (%) 42.5 2013F 6,317 1,140 1,153 876 48,951 38.9 1,262 9.2 5.6 1.8 19.9
Foreign ownership (%) 15.5 2014F 6,598 1,308 1,362 1,035 57,799 18.1 1,445 7.8 4.6 1.5 19.6
Three favorable factors in 2013

Performance Re-rating on improving fundamentals: There are favorable factors for Korea Zinc
1M 6M 12M in 2013 such as higher TC, greater silver capacity and additional investment for
Absolute (%) (8.4) 29.7 26.5
mines. The zinc TC will go up as smelters become more vocal in treatment charge
Rel. to Kospi (%p) (6.1) 31.1 25.1
negotiations between smelters and miners on 1) rising self-sufficiency of zinc
12MF PE trend
concentrate in China and 2) mounting zinc concentrates inventory. We maintain our
TP of W590,000 (12x 2013F EPS W48,951).
(x) (W'000)
12.0 600
10.0 500
Zinc TC to go up in 2013: The zinc TC fell from USD270 per tonne in 2010 to
8.0 400
6.0 300 USD250 in 2011 and USD191 in 2012. Zinc retreated due to a sustained inventory
4.0
12MF PE (LHS)
200 pileup. Furthermore, the TC fell on a shortage of concentrates given a rising
2.0 100
0.0
price (RHS)
0
number of smelters in China. However, we believe the zinc TC will go up in 2013.
Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 China’s zinc concentrate imports are falling steadily and inventory has increased to
reach 500,000 tonnes. We expect smelters to gain an advantage over miners in TC
negotiations due to the rising self-sufficiency in China.
TC up USD10 lifts OP W11.6bn: If the zinc TC goes up, Korea Zinc’s purchasing
costs for concentrate fall, lifting the smelter’s OP on less COGS. If the zinc TC goes
up USD10 per tonne, Korea Zinc’s 2013 consolidated OP increases W11.6bn (or
USD11mn at 2013F KRW1,058/USD) to W1.126trn as the company consumes
1.1mn tonnes of zinc annually (OP sensitivity 1%).
Expanding silver capacity and mine purchase: We expect Korea Zinc to expand
its silver capacity from the current 2,000 tonnes to 4,000. However, the expansion
schedule is unknown. 2,000 tonnes of silver is worth W2.4trn, or 38% of 2013F
consolidated sales of W6.3trn. We also believe Korea Zinc will likely purchase
mines with ample cash holdings and its cash-generating ability. Not only favorable
metal prices but better fundamentals are an investment point.
Moonsun Choi
822-3276-6182
moonsun@truefriend.com
46

Cash & cash equivalents 351 803 833 948 990
Gross profit 763 1,098 974 1,255 1,435
Accounts & other receivables 261 260 472 632 660
SG&A expenses 115 130 134 143 153
Inventory 955 882 888 1,200 1,320
Non-current assets 1,930 2,168 2,309 2,508 2,924 Other operating gains 36 (4) 24 28 27
Investment assets 420 492 511 581 805 Operating profit 684 964 864 1,140 1,308
Tangible assets 1,408 1,553 1,684 1,796 1,983
Total assets 3,974 4,606 5,234 6,245 7,092
Current liabilities 575 686 820 970 843 Financial expenses 47 48 97 49 15
Accounts & other payables 316 212 278 316 330 Interest expenses 17 15 14 16 7
ST debt & bonds 152 61 82 67 42
Other non-operating profit 0 0 0 0 0
Non-current liabilities 588 409 346 385 407 (5) (4) (3) 0 0
subsidiaries and JV
Debentures 170 115 120 100 110 Earnings before tax 726 975 830 1,153 1,362
LT debt & financial liabilities 231 63 4 0 0 Income taxes 172 261 199 277 327
Consolidated net profit 555 714 631 876 1,035
Capital stock 94 94 94 94 94 Net profit of controlling interest 549 705 623 865 1,022
Capital surplus 57 58 58 58 58 Other comprehensive profit 43 32 15 35 5
Total comprehensive profit 597 746 646 911 1,040
Comprehensive profit of con. Int. 572 720 638 900 1,026
Minority interest 97 120 129 140 153
Shareholders' equity 2,811 3,510 4,068 4,891 5,842 EBITDA 773 1,076 973 1,262 1,445

C/F from operations 608 909 689 734 1,004 Per-share data (KRW)
EPS 31,054 39,868 35,249 48,951 57,799
Net profit 555 714 631 876 1,035
BPS 146,631 182,490 211,607 254,605 304,319
Sales growth 20.5 44.8 (0.1) 13.8 4.5
Net incr. in W/C (119) (51) (56) (268) (169)
OP growth 63.3 41.0 (10.5) 32.0 14.7
Others 83 134 4 4 0 NP growth 32.2 28.4 (11.6) 38.9 18.1
C/F from investing (508) (326) (485) (509) (789) EPS growth 32.2 28.4 (11.6) 38.9 18.1
EBITDA growth 36.1 39.2 (9.5) 29.6 14.5
Capex (328) (252) (248) (239) (334)
Profitability (%)
Incr. in investment (197) (61) (7) (36) (219) NP margin 14.3 12.7 11.2 13.7 15.5
EBITDA margin 20.1 19.4 17.5 20.0 21.9
Net incr. in intangible assets (3) (12) 1 (12) (5)
ROA 15.4 16.6 12.8 15.3 15.5
Others 0 (1) (239) (228) (241) ROE 22.4 23.1 17.0 19.9 19.6
C/F from financing 34 (134) (175) (110) (173) Dividend yield 0.9 1.6 1.1 1.1 1.1
Stability
Net debt (W bn) (253) (799) (1,154) (1,516) (1,883)
Incr. in debt 75 (89) (86) (22) (85) Debt/equity ratio (%) 20.3 13.9 9.9 7.8 5.0

PE 8.9 7.6 12.7 9.2 7.8
Others 0 1 (1) 0 0
PB 1.9 1.7 2.1 1.8 1.5
C/F from others (1) 3 0 0 0 PS 1.4 1.0 1.5 1.3 1.3
Note: K-IFRS (Consolidated)
47
Samsung C&T (000830)

BUY / TP: W97,000
Yr to Sales OP EBT NP EPS % chg. EBITDA PE EV/EBITDA PB ROE
52W High/Low (KRW) 82,200/55,900 2011A 21,546 597 610 402 2,722 (17.5) 719 25.0 18.9 1.1 4.5
6M avg. daily turnover (USD mn) 36.2 2012F 25,296 747 661 486 3,206 17.8 872 17.6 9.9 0.9 4.9
Free float (%) 79.9 2013F 27,474 684 673 481 3,175 (1.0) 811 17.8 9.9 0.8 4.5
2014F 28,242 693 702 502 3,315 4.4 822 17.0 9.7 0.7 4.3
Note: NP and EPS of controlling interest
Stood firm in 2012, time to reap in 2013

Performance To perform better in 2013: Samsung C&T should almost reach its global annual
1M 6M 12M target order of W16trn this year as affiliate orders should top W4trn (initial
Absolute (%) (8.4) (19.6) (16.9) expectation W2trn) although overseas orders should reach only W5trn, short of its
Rel. to Kospi (%p) (5.6) (18.1) (16.1) initial target of W8.5trn. While the company should miss expectations due to the
failed attempt to win the Jeddah South power plant (Saudi Arabia) and a delay in
12MF PE trend
the coal port terminal project (Australia), conditions should be better in 2013 given
30.0
(X) (KRW)
100,000 the progress of projects already awarded in non-competitive bids. Samsung C&T
25.0 80,000 secured EPC contracts for coal port terminal (Australia, USD2bn) and Tanjung Jati
20.0
15.0
60,000 IPP power plant (Indonesia, USD1.5bn), and groundbreaking for the projects is
10.0 12MF PER (LHS)
40,000
anticipated in 2013. The company’s forte lies in the abundance of projects
5.0 price (RHS)
20,000
progressed in non-competitive bids, which fades the risk of engaging in excessive
0.0 0
Jun-10 Jun-11 Jun-12 competition and profitability erosion. This advantage helped the company defend
profitability better than rivals in 2012.
Trading division’s profits to materialize: In 2013, the trading division’s two major
profit drivers should be development fees from the renewable energy project in
Ontario, Canada (W15bn at end-2012F and W15bn in 2013F) and dividend income
from Parallel Petroleum that should soon reach peak oil. Dividend income from
Parallel Petroleum should increase from W19bn in 2012F to W35bn in 2013F and
to W45bn in 2015F. As such, the division’s adjusted OP, which has remained below
W100bn, should reach W103bn in 2013F.
SEC stake accounts for 90% of market cap: At present, Samsung C&T’s stake in
Samsung Electronics (SEC) is valued at 90% of its market cap. Even if the value is
discounted to reflect applicable taxes during disposal, it would still equal 68% of
market cap. Excluding the SEC stake (discounted equivalent to tax amount
assuming disposal), shares trade at only 6.1x implied PE. Given that Samsung C&T
is one of the few construction players posting profitability and top-line growth, the
valuation discount on operating value should fade.
Maintain TP of W97,000 and top pick: The trading division’s profits are growing at
a slower pace than expected due to the weak economy. Meanwhile, the lingering
SG&A cost burden attributed to workforce expansion is a risk factor. In addition, it is
Kyungja Lee
still uncertain when production at the Ambatovy nickel mine will begin, so we
822-3276-6155 excluded the project value of W382bn, which had been reflected, from our valuation.
kyungja.lee@truefriend.com But considering Samsung C&T faces lower earnings volatility than peers and the
company should get off to a relatively better start in 2013 as it has already secured
Hyungjun Ahn a number of overseas projects, we continue to mark Samsung C&T as our top pick.
822-3276-4460
hyungjoon@truefriend.com
48
Cash & cash equivalents 858 1,002 1,138 1,236 1,271
Gross profit 1,561 1,702 2,021 2,374 2,493
SG&A expenses 1,106 1,351 1,631 1,760 1,870
Inventory 603 727 1,265 1,374 1,412
Non-current assets 10,708 12,776 13,763 15,295 16,281 Other operating gains 177 246 358 70 70
Investment assets 8,728 9,823 10,599 11,923 12,821 Operating profit 632 597 747 684 693
Tangible assets 952 1,009 1,033 1,057 1,080
Intangible assets 274 1,205 1,265 1,374 1,412
Total assets 17,501 20,922 24,416 26,822 28,175 Interest income 49 40 96 146 155
ST debt & bonds 862 1,991 1,981 1,978 1,975
Other non-operating profit 0 0 (52) (62) (59)
subsidiaries and JV
Debentures 406 1,005 1,255 955 805 Earnings before tax 679 610 661 673 702
LT debt & financial liabilities 573 1,027 972 901 896
Income taxes 182 201 165 182 190
Controlling interest 8,546 9,385 10,282 11,174 12,088 Net profit 497 409 496 491 513
Capital stock 804 804 804 804 804 Net profit of controlling interest 486 402 486 481 502
Capital surplus 1,022 1,022 1,022 1,022 1,022 Other comprehensive profit 757 497 497 497 497
Total comprehensive profit 1,254 906 993 988 1,010
Minority interest 33 100 120 140 160 1,243 895 973 968 989
Shareholders' equity 8,578 9,485 10,402 11,314 12,248 EBITDA 739 719 872 811 822

C/F from operations (300) (312) 3,685 1,785 788 Per-share data (KRW)
EPS 3,298 2,722 3,206 3,175 3,315
Net profit 497 409 496 491 513
BPS 55,025 60,181 65,757 71,304 76,984
Depreciation 107 122 124 127 129 DPS 500 500 500 500 500
Sales growth (4.0) 21.3 17.4 8.6 2.8
Net incr. in W/C (895) (776) 3,053 1,181 180
OP growth (20.4) (5.5) 25.2 (8.5) 1.3
Others (9) (67) 12 (14) (34) NP growth 57.8 (17.2) 20.8 (0.9) 4.4
C/F from investing 55 (763) (3,820) (1,387) (669) EPS growth 57.9 (17.5) 17.8 (1.0) 4.4
EBITDA growth (30.6) (2.7) 21.3 (7.0) 1.4
Capex (186) (135) (156) (159) (161)
Profitability (%)
Decr. in fixed assets 13 8 8 8 8
OP margin 3.6 2.8 3.0 2.5 2.5
Incr. in investment 248 (723) (248) (790) (358) NP margin 2.7 1.9 1.9 1.8 1.8
EBITDA margin 4.2 3.3 3.4 3.0 2.9
ROA 2.8 2.1 2.2 1.9 1.9
Others (9) 139 (3,364) (337) (120)
ROE 6.1 4.5 4.9 4.5 4.3
C/F from financing 113 1,232 271 (300) (85) Dividend yield 0.6 0.7 0.8 0.8 0.8
Incr. in equity 4 3 0 0 0 Stability

Net debt (W bn) 1,425 3,040 (56) (683) (834)
Incr. in debt 193 1,339 347 (224) (9)
Others (8) (33) 0 0 0 PE 23.9 25.0 17.6 17.8 17.0

PB 1.4 1.1 0.9 0.8 0.7
PS 0.7 0.5 0.4 0.3 0.3
Increase in cash (140) 144 136 98 35 EV/EBITDA 18.5 18.9 9.9 9.9 9.7
49
SK Holdings (003600)
BUY / TP: W212,000
Stock price (Nov 15, KRW) 169,000 Yr to Sales OP EBT NP EPS % chg. EBITDA PE EV/EBITDA PB ROE
52W High/Low (KRW) 173,000/115,000 2011A 111,218 8,346 7,339 5,103 41,315 81.1 11,857 2.9 3.7 0.5 16.9
Free float (%) 54.2 2013F 128,267 9,292 8,448 6,210 49,070 41.5 13,230 3.4 4.4 0.5 15.2
Focus on attractive valuations of SK E&S
Performance Attractive valuations: We maintain BUY and a TP of W212,000 on SK Holdings

1M 6M 12M (SK), as: 1) SK Innovation, a core subsidiary, should post a gradual profitability
Absolute (%) 15.4 43.8 25.7 recovery, backed by rebounding refining margins. Industry conditions should turn
Rel. to Kospi (%p) 18.2 45.3 26.5 around soon, pushing up SK’s NAV and share price. 2) SK E&S, an unlisted
subsidiary, should continue recording earnings growth as it benefits from emerging
12MF PB trend
nuclear power problems, which would bolster momentum at SK. 3) SK is still
1.0
(X) 12MF PBR (LHS) (W'000)
250
attractively valued, trading at a 43% discount to NAV.
price (RHS)
0.8 200
0.6 150 Appeal of SK E&S steadily growing: SK E&S is benefiting from power shortage
0.4 100 concerns due to several accidents at nuclear power plants recently. As SK E&S is
0.2 50
already operating at full utilization, growth should be limited in terms of volume.
0.0
Jun-10 Jun-11 Jun-12
0
However, profitability momentum is firming as power generation costs are rising on
tight supply. Of note, SK E&S can be considered SK’s in-house business unit, as
SK has a stake of 94%.
Positive outlook for core subsidiaries: As SK Innovation is a core subsidiary, the

share price correlation coefficient reaches 0.8-0.9. And, we believe SK Innovation
will break from the industry-wide slump and post sizeable profit growth. This should
bolster SK’s EV and propel shares upward.
Hoon Lee, CFA

822-3276-6158
hoon.lee@truefriend.com
Sunyoung Park
822-3276-6195
sunyoung.park@truefriend.com
50

Current assets 36,839 41,759 44,207 46,310 47,688 Sales 90,533111,218123,542128,267129,384
Gross profit 10,974 11,754 12,531 15,351 16,717
SG&A expenses 4,880 5,238 5,737 5,774 6,161
Inventory 8,369 9,656 10,726 11,137 11,234
Non-current assets 46,825 50,655 53,627 57,205 61,355 Other operating gains (448) 1,831 29 285 298
Tangible assets 28,717 31,013 33,039 35,033 37,260
Financial income 2,960 3,841 3,916 4,159 4,377
Total assets 83,664 92,414 97,833103,514109,043
Accounts & other payables 13,755 18,804 16,802 17,444 17,596 Interest expenses 1,453 1,254 1,227 1,210 1,173
ST debt & bonds 8,088 8,169 12,703 12,341 11,946
subsidiaries and JV
Debentures 12,678 12,472 0 0 0 Earnings before tax 4,491 7,339 5,770 8,448 9,442
LT debt & financial liabilities 4,675 3,925 16,022 15,560 15,056 Income taxes 1,157 2,140 1,687 2,239 2,455
Net profit 3,194 5,103 3,939 6,210 6,987
Capital stock 239 239 239 239 239 Net profit of controlling interest 925 1,673 1,427 2,018 2,271
Capital surplus 5,865 6,134 2,794 2,794 2,794 Other comprehensive profit (439) (351) (518) (549) (585)
Capital adjustments (418) (418) 3,185 3,185 3,185 Total comprehensive profit 2,755 4,752 3,421 5,660 6,402
Retained earnings 3,384 4,951 6,285 8,208 10,384 Total comprehensive profit of
774 1,554 1,262 1,832 2,073
Minority interest 21,156 23,272 25,431 29,259 33,588 controlling interest

C/F from Operating 4,723 9,644 8,648 10,592 11,318 Per-share data (KRW)
EPS 22,812 41,315 34,691 49,070 55,213
Net Income (Consolidated) 3,194 5,103 3,939 6,210 6,987
BPS 198,292 235,266 263,368 312,683 358,517
Depreciation 2,615 2,731 2,836 3,053 3,257 DPS 1,950 1,950 1,950 1,950 1,950

Sales growth 10.2 22.8 11.1 3.8 0.9
Net incr. in W/C (2,237) 1,367 (1,128) (469) (158)
OP growth 51.4 47.8 (19.5) 38.2 10.4
Others 440 (337) 2,165 914 285 NP growth 243.9 80.9 (14.7) 41.5 12.5
EPS growth 244.6 81.1 (16.0) 41.5 12.5
C/F from investing (5,481) (5,685) (8,615) (9,001) (9,589)
EBITDA growth 13.3 32.1 (12.3) 27.3 9.3
Capex (4,133) (5,564) (5,428) (5,520) (5,625)
Profitability (%)
Decr. In fixed assets 485 217 223 232 240 OP margin 6.2 7.5 5.4 7.2 7.9
NP margin 1.0 1.5 1.2 1.6 1.8
Incr. in investment (873) (1,338) (12) (13) (13)
EBITDA margin 9.9 10.7 8.4 10.3 11.2
ROA 4.1 5.8 4.1 6.2 6.6
Others (436) 1,849 (2,564) (2,815) (3,245) ROE 11.5 16.9 12.5 15.2 14.6
Dividend yield 1.4 1.6 1.2 1.2 1.2
C/F from financing 1,207 (1,420) (60) (918) (994)
Stability
Incr. in equity 203 150 0 0 0 Net debt (W bn) 19,303 14,934 23,437 21,294 19,069
Incr. in debt 1,836 (964) 33 (823) (899) Debt/equity ratio (%) 102.1 86.0 87.4 71.7 59.4
Valuation (x)
Dividends (80) (80) (93) (95) (95)
PE 6.1 2.9 4.9 3.4 3.1
Others (752) (525) (0) (0) (0) PB 0.7 0.5 0.6 0.5 0.5
C/F from others (8) 94 0 0 0 PS 0.1 0.1 0.1 0.1 0.1
EV/EBITDA 5.2 3.7 5.4 4.4 4.2
Increase in cash 441 2,633 (26) 673 735
51
Samsung Heavy Ind. (010140)

BUY / TP: W57,000
52W High/Low (KRW) 41,900/27,250 2011A 13,392 1,160 1,150 851 3,930 (15.1) 1,532 7.1 4.6 1.2 19.4
6M avg. daily turnover (USD mn) 36.0 2012F 14,702 1,197 1,140 878 4,050 3.1 1,556 8.2 5.9 1.3 17.5
Free float (%) 69.5 2013F 15,185 1,161 1,088 838 3,864 (4.6) 1,525 8.6 5.4 1.1 14.5
2014F 15,628 1,280 1,230 947 4,369 13.1 1,647 7.6 4.9 1.0 14.4
One step ahead of the competition in expanding offshore

plant value chain
Performance Top sector pick with a bargain hunting opportunity: We maintain BUY on
1M 6M 12M Samsung Heavy Industries (SHI) and a TP of W57,000, equivalent to 2.0x 12MF
Absolute (%) 0.6 (4.8) 10.0 PB (2011 peak). We believe SHI is trading at the most attractive valuations among
Rel. to Kospi (%p) 3.5 (3.4) 10.9 peers as the recent pullback on macro issues has pushed 2012 and 2013 PE down
to 8.2x and 8.6x, respectively. Considering the shipbuilder’s higher and steadier
12MF PE trend profitability compared to rivals, we believe this is a bargain buying opportunity.
(X) (KRW) Moreover, stable order flows should continue backed by a sharp competitive edge
14.0 60,000
12.0 50,000
in the offshore plant industry, including drillships and floating production storage
10.0
40,000 and offloading (FPSO) units. We maintain SHI as our top shipbuilding pick.
8.0
30,000
6.0
4.0 12MF PER (LHS)
20,000
Drillship sales to drive OPM recovery from 2H13: We estimate 2013F sales at
10,000
2.0
0.0
price (RHS)
0
W15,185bn (+3.3% YoY) and OP at W1,161bn (-3.0% YoY), similar to 2012 results.
Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 But on a quarterly basis, OPM should remain in a tight range through 2Q13 due to
increased construction of less-profitable containerships and LNG carriers. Earnings
should pick up from 2H13 as high-margin offshore plants start to be booked. Of
note, SHI’s drillship OPM is ~10%, higher than peers. Given that 11 and 10
drillships are scheduled for delivery in 2013 and 2014, respectively, (vs. five in
2012), greater drillship sales should drive the OPM recovery. In addition, the Shell
floating LNG (FLNG) project and the Ichthys central processing facility (CPF)
project should be booked as sales in earnest from 2H13, and this should help
improve profitability as well. Moreover, as SHI have been recognizing sales from
thin-margin ships secured post-2008 earlier than competitors, the company should
be the first to see earnings recover.
Leading player in offshore plants: SHI has secured USD8.5bn in orders YTD,
68.1% of its full-year target of USD12.5bn. We believe orders will reach at least
USD11bn before end-2012 via two to three drillships and five LNG carrier orders. If
SHI secures some of the FPSO orders that it is currently bidding on, the company
may meet its full-year target. Of note, SHI has shown strong competitiveness in
offshore plants by securing 85% of orders YTD from related projects (eight drillships
USD4.5bn and one CPF USD2.7bn). Accordingly, the relatively lucrative drillships
and FPSO units account for 64% of SHI’s backlog as of end-3Q12, and the portion
has risen from 60% in 1Q12 and 62% in 2Q12.
Improving engineering skills via JVs and M&As: SHI announced it will form a JV
Richard Park, CFA with Samsung Eng. and UK-based AMEC specializing in marine engineering. By
82-2-3276-6175 joining forces with AMEC, a world-renowned plant design engineering firm, SHI
richard.park@truefriend.com
looks to secure engineering, procurement and construction (EPC) capability for
Chulhee Cho large offshore production facilities to carry out topside (upper part of a plant) design
82-2-3276-6189 engineering. Over the mid to long term, SHI is also working to strengthen its
chulhee.cho@truefriend.com engineering capability to advance in the subsea market by reviewing buyout
options for related companies.
52

Cash & cash equivalent 447 806 1,029 1,063 1,094
Gross profit 1,689 1,763 1,929 1,918 2,058
SG&A expense 489 681 747 772 794
Inventory 607 540 662 683 703
Tangible assets 5,432 5,408 5,460 5,447 5,431
Current liabilities 12,716 10,539 14,176 14,385 13,711 Financial expense 219 182 121 143 121
Accounts & other payables 4,773 4,982 5,470 5,649 5,814 Interest expense 175 20 97 120 97
ST debt & bond 1,541 585 766 185 29
Current portion of LT debt 316 1,099 1,299 1,145 1,145
Non-current liabilities 2,002 1,231 2,172 2,059 2,066 0 (32) 0 0 0
subsidiaries and JV
LT debt & financial liabilities 1,180 1,031 1,051 931 931
Income taxes 297 299 262 250 283
Controlling interest 4,132 4,644 5,413 6,143 6,981 Net profit 1,001 851 878 838 947
Capital stock 1,155 1,155 1,155 1,155 1,155 Net profit of controlling interest 1,000 851 878 838 947
Capital surplus 423 423 423 423 423
Other comprehensive profit 173 (235) 0 0 0
Total comprehensive profit 1,174 616 878 838 947
Minority interest 1 0 0 0 (0) 1,174 616 878 838 947

C/F from operating 1,035 1,440 1,017 1,518 804 per share data (KRW)
EPS 4,626 3,930 4,050 3,864 4,369
Net profit 1,001 851 878 838 947
BPS 20,755 22,956 26,288 29,445 33,076
Sales growth (0.0) 1.9 9.8 3.3 2.9
Net incr. in W/C (401) 541 (237) 311 (517)
OP growth 66.0 (19.0) 3.2 (3.0) 10.2
Others 132 (324) 17 6 6 NP growth 42.5 (14.9) 3.2 (4.6) 13.1
C/F from investing (735) 115 (1,987) (521) (508) EPS growth 42.2 (15.1) 3.1 (4.6) 13.1
EBITDA growth 45.6 (11.7) 1.6 (2.0) 8.0
CAPEX (406) (306) (352) (289) (289)
Profitability (%)
OP margin 10.9 8.7 8.1 7.6 8.2
Incr. in investment (315) 303 (112) (41) (38) NP margin 7.6 6.4 6.0 5.5 6.1
EBITDA margin 13.2 11.4 10.6 10.0 10.5
ROA 5.1 4.8 4.6 3.8 4.2
Others 5 55 (1,455) (127) (115)
ROE 28.7 19.4 17.5 14.5 14.4
C/F from financing (430) (1,188) 1,194 (963) (264) Dividend yield 1.2 1.8 1.5 1.5 1.5

Net debt (W bn) 2,713 1,221 2,057 1,168 981
Incr. in debts (326) (1,081) 1,302 (855) (156)
Dividends (107) (108) (108) (108) (108) Valuation (X)
Others 0 0 0 0 0 PER 8.9 7.1 8.2 8.6 7.6

PBR 2.0 1.2 1.3 1.1 1.0
PSR 0.7 0.5 0.5 0.5 0.5
Note: Based on K-IFRS (consolidated)
53
Hyundai Mobis (012330)

BUY / TP: W400,000
Shares outstanding (mn) 97 2010A 22,143.5 2,507.1 3,482.6 2,712.9 27,862 59.8 2,838.7 9.6 9.2 2.4 28.9
52W High/Low (KRW) 328,000/258,000 2011A 26,294.6 2,674.9 4,063.0 3,023.0 31,046 11.4 3,026.2 8.6 8.9 1.9 24.5
6M avg. daily turnover (USD mn) 62.0 2012F 30,084.7 2,844.5 4,455.5 3,337.4 34,275 10.4 3,247.4 7.8 8.1 1.5 21.7
Free float (%) 68.0 2013F 33,165.3 3,266.2 4,977.8 3,728.6 38,293 11.7 3,686.1 7.0 6.8 1.3 19.9
2014F 35,945.4 3,629.2 5,442.1 4,076.3 41,865 9.3 4,055.5 6.4 5.9 1.1 18.2
Excellent growth potential and stability

Performance Maintain BUY: We believe Hyundai Mobis (Mobis) will continue to post strong
1M 6M 12M growth thanks to the solid performance by Hyundai Motor (Hyundai) and Kia Motors
Absolute (%) (9.6) (7.4) (15.6) (Kia) in the global auto market and greater overseas original equipment (OE) sales.
Rel. to Kospi (%p) (6.7) (5.9) (14.7) Of note, the rise of units in operation at the two automakers climbed from 7.3% in
2009 to 8.5% in 2010 and to 12.2% in 2011 backed by strong overseas sales. As
12MF PE trend
this bodes well for replacement parts sales, Mobis should gain a sharper defensive
14.0
(X) 12MF PE (LHS)
price (RHS)
(W'000)
500 edge during economic downturns. Moreover, the company achieved sharper price
12.0
10.0
400 competitiveness after the EU lifted a 3.2% tariff from Jul 2011 and the KORUS FTA
8.0 300 removed a 2.5% tariff in Mar 2012. Meanwhile, Mobis would benefit from the
6.0
4.0
200
restructuring of the global automotive supply chain. Accordingly, we maintain BUY
100
2.0
0.0 0
and TP of W400,000 at 12x 12MF PE, a 10% discount to the past high.
Top 8 in the world: After joined the ranks of the world’s top-10 OEM club in 2010,
its global rank in Automotive News’ top 100 global suppliers list climbed to 8th in
2011 from 27th in 2007, 19th in 2008 and 12th in 2009. Its global OEM automotive
parts sales jumped 30.7% YoY to USD18.9bn in 2011 after a 26.7% YoY gain in
2009 and 28.8% YoY in 2010. Such remarkable growth is attributed to 1) strong and
sustainable performance by Hyundai and Kia and 2) mounting orders from global
automakers. Mobis’ overseas OE sales account for 8-9% of its module sales. The
company obtained orders worth USD1.07bn in Jan from GM (integrated center stack)
and Chrysler (LED rear lamp). Its overseas order target for 2012 is USD1.7bn.
Top 5 soon: We forecast Hyundai and Kia’s combined global market share to rise
from 8.7% in 2011 to 10% in 2015F, which means they are poised to join the ranks
of leading global automakers within 4 years. We also believe Mobis will continue to
win large orders from major global automakers thanks to 1) a sharper competitive
edge with overseas production bases, 2) the restructuring of the global automotive
supply chain after the Mar 2011 earthquake in Japan, 3) the ongoing strong JPY
and 4) the FTA with EU and US. Considering the 5th ranked Aisin Seiki posted sales of
USD27.2bn, we believe Mobis is close to joining the world’s top-5 group.
Production globalization and aggressive R&D investment: Mobis has

Sung Moon Suh established an extensive network of global production bases (14 overseas plants: 7
822-3276-6152 in China, 3 in the US and 1 each in India, Slovakia, Czech Rep. and Russia)
sungmoon.suh@truefriend.com alongside its 18 domestic plants. Considering Mobis is stepping up R&D investment,
its in-house technology is rapidly advancing. After setting up a battery JV with LG
Daniel Lee
822-3276-6279
Chem, Mobis has been focusing on in-vehicle electronics. The company plans to
daniel.lee@truefriend.com develop proprietary in-vehicle electronics by 2012 or 2013 and strengthen the
model lineup from 2013 to 2015.
54
Balance Sheet Income Statement
Fiscal year ending Dec. (W bn) 2010A 2011A 2012F 2013F 2014F Fiscal year ending Dec. (W bn) 2010A 2011A 2012F 2013F 2014F
Cash & cash equivalent 2,448 2,059 2,920 3,852 4,872
Gross profit 3,764 4,039 4,410 4,941 5,425
Accounts receivable 4,082 4,774 5,256 5,778 6,264
Inventory 1,564 1,837 1,752 1,929 2,088 SG&A expenses 1,244 1,401 1,608 1,721 1,847
Fixed assets 9,543 12,233 15,798 19,243 22,391 Other operating gains (13) 37 42 47 51
Investments 5,708 8,053 11,300 14,445 17,400
Operating profit 2,507 2,675 2,844 3,266 3,629
Tangible assets 2,946 3,319 3,532 3,738 3,843
Intangible assets 889 861 965 1,059 1,148 Financial income 233 282 265 300 308
Current liabilities 5,788 7,027 7,589 8,022 8,041
Financial expenses 222 295 230 248 241
Accounts payable 3,357 3,925 4,259 4,682 5,076
Interest expenses 76 66 54 48 37
Short-term borrowing 1,806 2,453 2,625 2,565 2,125
Current portion of LT debt 0 0 0 0 0 Gains in asso., sub. and JV 965 1,401 1,576 1,660 1,746
Long-term debt 1,550 1,755 2,044 2,247 2,436 Earnings before tax 3,483 4,063 4,456 4,978 5,442
Debentures 539 327 350 353 348
Income taxes 767 1,036 1,114 1,244 1,361
Long-term borrowings 0 0 0 0 0
Total liabilities 7,338 8,781 9,633 10,269 10,477 Net profit 2,715 3,027 3,342 3,733 4,082
Paid-in capital 491 491 491 491 491 NP of controlling interest 2,713 3,023 3,337 3,729 4,076
Capital surplus 1,359 1,386 1,386 1,386 1,386
Retained earnings 9,488 12,312 15,487 19,050 22,961 2,713 3,023 3,337 3,729 4,076
Cash Flow Key Financial Data
Fiscal year ending Dec. (W bn) 2010A 2011A 2012F 2013F 2014F Fiscal year ending Dec. 2010A 2011A 2012F 2013F 2014F
C/F from operating 2,267 2,159 4,255 4,824 5,017 per share data (won)
EPS 27,862 31,046 34,275 38,293 41,865
Net profits 2,715 3,027 3,342 3,733 4,082 BPS 112,566 141,673 174,274 210,867 251,035
SPS 227,418 270,050 308,975 340,614 369,166
Net incr. in W/C (1,628) (1,403) 510 670 510 Sales growth 108.3 18.7 14.4 10.2 8.4
OP growth 76.3 6.7 6.3 14.8 11.1
Others 849 184 0 0 0 NP growth 68.1 11.5 10.4 11.7 9.3
C/F from investing (657) (2,852) (3,422) (3,664) (3,382) EPS growth 59.8 11.4 10.4 11.7 9.3
EBITDA growth 71.8 6.6 7.3 13.5 10.0
Capex (415) (716) (600) (600) (500) Profitability (%)

NP margin 12.3 11.5 11.1 11.3 11.4
Net incr. in current assets 4,777 1,607 740 755 969 EBITDA margin 12.8 11.5 10.8 11.1 11.3
Incr. in investment 631 (944) (1,672) (1,485) (1,209) ROA 18.4 14.8 13.6 13.0 12.4
ROE 28.9 24.5 21.7 19.9 18.2
Others (5,699) (2,825) (1,891) (2,333) (2,642) Dividend yield 0.5 0.6 0.6 0.6 0.6
C/F from financing (252) 279 28 (228) (616) Stability

Net debt (W bn) (102.6) 720.6 55.5 (934.1) (2,399.5)
Incr. in equity 17 26 0 0 0 Int. coverage (x) 91.6 (114.0) (51.7) (44.2) (40.8)
Incr. in debts 1,596 646 173 (60) (440) D/E ratio (%) 21.4 20.2 17.5 14.2 10.1
Valuation (x)
Dividends (120) (145) (167) (170) (170) PER 9.6 8.6 7.8 7.0 6.4
Others (1,746) (249) 23 3 (5) PBR 2.4 1.9 1.5 1.3 1.1
PSR 1.2 1.0 0.9 0.8 0.7
Increase in cash 1,333 (389) 861 932 1,020 EV/EBITDA 9.2 8.9 8.1 6.8 5.9
Note: IFRS (consolidated)
55
Kia Motors (000270)

BUY / TP: W105,000
Shares outstanding (mn) 405 2010A 35,827.0 2,490.0 3,323.0 2,682.1 6,616 79.3 3,418.4 8.3 7.5 2.2 30.6
52W High/Low (KRW) 84,800/54,000 2011A 43,190.9 3,525.1 4,721.7 3,415.6 8,426 27.3 4,515.9 6.5 5.3 1.6 29.6
6M avg. daily turnover (USD mn) 95.8 2012F 48,222.4 4,100.9 5,437.5 3,931.6 9,699 15.1 5,233.8 5.7 4.2 1.2 25.9
Free float (%) 64.0 2013F 51,977.6 4,742.2 6,175.9 4,465.5 11,016 13.6 5,647.5 5.0 3.8 1.0 23.0
2014F 57,320.2 5,330.1 6,852.3 4,954.6 12,222 11.0 6,342.2 4.5 3.2 0.8 20.8
Biggest volume sales growth sustainable

Performance Maintain BUY: We believe Kia Motors (Kia) will continue to deliver the biggest
1M 6M 12M volume sales growth among major automakers backed by 1) new models with more
Absolute (%) (16.9) (32.1) (25.3) sleek designs, 2) rapidly improving quality and brand recognition/image and 3)
Rel. to Kospi (%p) (14.1) (30.6) (24.5) greater production capacity. In addition, given that Kia has a lighter weighting of
platform integration than Hyundai Motor, its profitability should improve at a faster
12MF PE trend
pace. Accordingly, we maintain BUY and TP of W105,000 at 10x 12MF PE, the auto
12.0
(X) (KRW)
100,000 sector’s average.
10.0 80,000
8.0
6.0
60,000 Outstanding design competitiveness: We believe Kia was able to transform its
4.0 12MF PE (LHS)
40,000
competitive profile through design. Since 2009, Soul, Venga and Sportage R have
price (RHS) 20,000
2.0
0.0 0
swept several prestigious international design awards. Of note, the K5 became the
Jun-10 Jun-11 Jun-12 first Korean-built car to be named “Best of the Best” at the Red Dot Design Award in
Mar 2011, while the TA Morning and the UB Pride also took honors in 2012. When
the redesigned Carens (RP) is unveiled in Jan 2013, 13 of 14 models at Kia would
be developed by the chief design officer Peter Schreyer. The remaining model, the
redesigned Carnival (YP), is scheduled for release in 1Q14. Considering quality
and performance gaps between global automakers have narrowed substantially,
Kia should continue to deliver strong growth backed by outstanding designs.
Better quality and brand recognition: In addition to design, Kia is making fast
improvements in quality and brand recognition/image. According to the 2012 initial
quality survey by J.D. Power and Associates, Kia scored above the industry
average growth for a second straight year. In the vehicle dependability study, Kia
was better than the industry average growth for three straight years from 2009 to
2011. Moreover, Kia has been showing considerable improvements in the customer
retention study since 2008 and surpassed Toyota and Chevrolet in this category for
the first time in 2011. As a result, Kia posted a significant increase in residual values
(K5 improved from 32% to 53%). In addition to recent advancements in design that
meet world-class standards, quality has also been fast improving. Although Kia’s
advertising spending jumped from 1.8% of sales in 2008 to 2.8% in 2011, it should
provide a great boost to its brand recognition and contribute to sales growth.
Sung Moon Suh China no. 3 plant in 2014: The completion of the China no. 3 plant in Apr 2014
822-3276-6152 should 1) bolster growth as annual production capacity will reach 730,000 through
sungmoon.suh@truefriend.com 2015 in China where there is huge potential for growth, 2) increase the weighting of
overseas production and 3) ease concern about the lack of current capacity. With
Daniel Lee
822-3276-6279
the addition of the China no. 3 plant, Kia’s annual capacity should climb from
daniel.lee@truefriend.com 2.52mn in 2011 to 3.17mn in 2015F (CAGR 5.9%). As such, Kia should continue to
post solid volume sales growth.
56
Balance Sheet Income Statement
Fiscal year ending Dec. (W bn) 2010A 2011A 2012F 2013F 2014F Fiscal year ending Dec. (W bn) 2010A 2011A 2012F 2013F 2014F
Cash & cash equivalent 2,914 3,934 5,000 5,775 6,600
Gross profit 7,922 10,052 11,403 12,482 13,974
Accounts receivable 2,279 2,179 2,000 2,200 2,400
Inventory 3,581 4,303 4,750 4,950 5,100 SG&A expenses 5,552 6,553 7,331 7,771 8,678
Fixed assets 13,399 19,180 19,000 20,938 23,042 Other operating gains 120 26 29 31 35
Investments 5,559 6,809 10,000 11,039 12,242
Operating profit 2,490 3,525 4,101 4,742 5,330
Tangible assets 8,564 9,184 7,250 7,975 8,700
Intangible assets 1,362 1,517 1,750 1,925 2,100 Financial income 198 180 345 376 393
Financial expenses 346 320 340 307 269
Accounts payable 4,775 4,826 4,529 4,395 4,327
Short-term borrowing 2,157 1,588 965 859 822
Current portion of LT debt 1,429 1,510 1,417 1,375 1,354 Gains in asso., sub. and JV 982 1,337 1,331 1,365 1,399
Long-term debt 4,399 5,324 5,000 4,400 3,600 Earnings before tax 3,323 4,722 5,438 6,176 6,852
Debentures 1,413 1,696 1,750 1,650 1,680
Income taxes 625 1,202 1,387 1,575 1,747
Long-term borrowings 1,343 784 800 825 840
Total liabilities 16,027 16,745 15,193 14,214 13,238 Net profit 2,698 3,519 4,051 4,601 5,105
Paid-in capital 2,102 2,132 2,132 2,132 2,132 NP of controlling interest 2,682 3,416 3,932 4,465 4,955
Capital surplus 1,547 1,558 1,558 1,558 1,558
Capital adjustments 487 595 1,084 1,084 1,084
Retained earnings 6,113 9,225 13,032 17,350 22,130 2,682 3,416 3,932 4,465 4,955
Cash Flow Key Financial Data
Fiscal year ending Dec. (W bn) 2010A 2011A 2012F 2013F 2014F Fiscal year ending Dec. 2010A 2011A 2012F 2013F 2014F
C/F from operating 5,273 4,745 3,058 4,964 5,476 per share data (won)
EPS 6,616 8,426 9,699 11,016 12,222
Net profits 2,698 3,519 4,051 4,601 5,105 BPS 25,281 33,327 43,927 54,577 66,370
SPS 88,381 106,547 118,959 128,223 141,402
Net incr. in W/C NM (261) (2,464) (898) (1,014) Sales growth NM 20.6 11.6 7.8 10.3
OP growth NM 41.6 16.3 15.6 12.4
Others NM 496 338 355 373 NP growth NM 30.4 15.1 13.6 11.0
C/F from investing (2,296) (2,604) (1,102) (3,682) (4,313) EPS growth NM 27.3 15.1 13.6 11.0
EBITDA growth NM 32.1 15.9 7.9 12.3
Capex (907) (1,456) (1,250) (1,100) (1,000) Profitability (%)
NP margin 7.5 8.1 8.4 8.9 8.9
Net incr. in current assets NM 1,312 2,925 1,400 1,700 EBITDA margin 9.5 10.5 10.9 10.9 11.1
Incr. in investment NM (1,251) (3,191) (1,039) (1,204) ROA 12.5 12.5 12.8 13.3 13.3
ROE 30.6 29.6 25.9 23.0 20.8
Others NM (1,329) 394 (2,943) (3,829) Dividend yield 0.7 0.9 1.0 1.2 1.3
C/F from financing (3,343) (1,441) (890) (507) (338) Stability

Net debt (W bn) 3,426.5 1,644.3 (68.1) (1,065.9) (1,904.4)
Incr. in equity NM 42 0 0 0 Int. coverage (x) 11.7 44.8 448.7 (103.4) (61.0)
Incr. in debts NM (1,269) (700) (123) (43) D/E ratio (%) 61.9 41.3 27.7 21.3 17.5
Valuation (x)
Dividends (97) (199) (243) (284) (324) PER 8.3 6.5 5.7 5.0 4.5
Others NM (15) 54 (100) 30 PBR 2.2 1.6 1.2 1.0 0.8

PSR 0.6 0.5 0.5 0.4 0.4
Increase in cash (385) 688 1,066 775 825 EV/EBITDA 7.5 5.3 4.2 3.8 3.2
Note: IFRS (consolidated)
57
LG Fashion (093050)
BUY / TP: W44,000
Mkt. cap (USD mn) 845 Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%)
Paid-in capital (USD mn) 29 2010A 1,109 127 131 99 3,155 28.9 162 9.9 5.2 1.4 15.4
52W High/Low (KRW) 50,500/25,850 2011A 1,411 143 147 108 3,294 4.4 183 12.3 6.9 1.4 13.2
Free float (%) 61.4 2013F 1,619 150 154 116 3,981 28.5 193 7.9 4.0 0.9 12.2
2014F 1,776 171 178 135 4,614 15.9 215 6.8 3.3 0.8 12.7
Better margins and growth in 2013

Performance Top pick on sustained growth and higher margins: We maintain BUY and a TP
1M 6M 12M of W44,000, based on 11x 2013 PE (EPS W3,981). Concerns linger over lower
Absolute (%) 1.6 (12.9) (35.8) margins due to weak apparel buying since 2H11, but we believe these worries have
Rel. to Kospi (%p) 4.5 (11.4) (35.0) already been priced into shares, which currently trade at 7.9x 2013 PE. We forecast
top-line growth in 2013 on lower discount rates thanks to increased portion of new
12MF PE trend products and increased production. In addition, margins should firm on improving
(X) (KRW) COGS-to-sales and tight SG&A controls.
12.0 60,000
10.0 50,000
8.0 40,000 Fashion bellwether, sustained brand launches and growth: We believe LG
6.0 30,000
4.0 20,000
Fashion has grown into the sector leader backed by strengths that have been in
12MF PER (LHS)
2.0 price (RHS) 10,000 place since its listing. LG Fashion was spun off from LG International in 2006, and
0.0
0
sales have surged 2.5x over the past five years. The company has diversified from
men’s wear to casual wear, sportswear and women’s clothing. And, the number of
stores has grown evenly in terms of department store outlets and street shops.
Sales and the apparel portfolio have expanded as management reinforced its
imported good distribution business. But more importantly, Hazzys, TNGT and Jill
Stuart have been solid contributors, and this indicates LG Fashion has successfully
diversified its own brands and license business that require strong planning, design
and marketing capabilities. Backed by various premium and designer brands, LG
Fashion is growing its presence at department stores. Furthermore, mid-price
brands, such as TNGT and TOWNGENT, are also popular, backed by the rapid
opening of more street shops and shop-in-shops.
Earnings to grow in 2013 on moderate consumer spending recovery and

better COGS-to-sales: We attribute poor 2012 earnings to: 1) sluggish sales on
the slumping industry, and 2) a higher COGS-to-sales ratio on lower full retail price
sales and inventory valuation losses. We forecast sales will grow 10.5% YoY in
2013, on: 1) higher growth potential by securing women’s and sportswear growth
brands, 2) a turnaround in men’s wear on rebounding consumer spending (after
poor 2012 sale), and 3) an increasing weighting of new products amid production
expansion. Margins should also climb, as: 1) inventory valuation losses that eroded
COGS-to-sales wound down from 4Q12, 2) full retail price sales rating should
increase backed by a gradual pickup in consumer spending in 2013, and 3) SG&A
costs controls should tighten. Of note, inventory assets, which fueled
COGS-to-sales problems, fell to W350bn in 3Q12 from W450bn in 3Q11. As such,
we forecast 2013 OP will grow 28% YoY.
Eun Chae Na
822-3276-6160
ec.na@truefriend.com
58

Current assets 449 570 637 765 853 Sales 1,109 1,411 1,463 1,619 1,776
Cash & cash equivalents 32 7 117 81 124
Gross profit 712 877 882 992 1,092
SG&A expenses 589 732 764 840 918
Inventory 250 413 329 360 373
Non-current assets 521 582 584 601 626 Other operating gains 4 (2) (2) (2) (3)
Investment assets 22 52 54 59 65 Operating profit 127 143 116 150 171
Tangible assets 320 342 342 342 342
Total assets 970 1,152 1,220 1,367 1,479 Interest incomes 7 7 7 8 11

Accounts & other payables 150 166 168 186 204
ST debt & bonds 0 2 2 2 2
Non-current liabilities 44 81 82 84 86 0 0 0 0 0
subsidiaries and JV
Debentures 30 50 50 50 50 Earnings before tax 131 147 119 154 178
Income taxes 31 39 29 37 43
Total liabilities 229 316 307 354 349
Capital stock 146 146 146 146 146 Net profit 99 108 91 116 135
Capital surplus 213 213 213 213 213 Other comprehensive profit 0 (2) (2) (2) (2)
Capital adjustments 0 0 0 0 0
Total comprehensive profit 99 106 89 115 133
Retained earnings 382 477 556 657 776
EBITDA 162 183 159 193 215
Shareholders' equity 742 836 913 1,013 1,130
Adj. shareholders' equity 639 822 900 1,003 1,122 Adj. net profit 92 96 91 116 135

C/F from operations 143 (38) 206 143 131 Per-share data (KRW)
EPS 3,155 3,294 3,098 3,981 4,614
Net profit 99 108 91 116 135
BPS 21,861 28,101 30,796 34,306 38,361
Sales growth 20.2 27.3 3.7 10.7 9.7
Net incr. in W/C (4) (201) 74 (16) (47)
OP growth 37.2 12.2 (18.7) 28.8 14.4
Others 14 15 (2) 0 0 NP growth 28.9 4.4 (5.9) 28.5 15.9
C/F from investing (109) (38) (84) (167) (73) EPS growth 28.9 4.4 (6.0) 28.5 15.9
EBITDA growth 32.2 13.4 (13.1) 21.2 11.4
Capex (44) (60) (39) (39) (39)
Profitability (%)
EBITDA margin 14.6 13.0 10.9 11.9 12.1
ROA 11.5 10.2 7.6 9.0 9.5
Others (27) (13) (44) (120) (18) ROE 15.4 13.2 10.5 12.2 12.7
C/F from financing (29) 51 (12) (12) (15) Dividend yield 1.3 1.0 1.3 1.6 1.7
Stability
Net debt (W bn) (70) 85 (69) (151) (210)
Incr. in debt 0 0 0 0 0 Debt/equity ratio (%) 4.1 11.0 10.1 9.1 8.2

PE 9.9 12.3 10.2 7.9 6.8
Others (17) 63 0 0 0
PB 1.4 1.4 1.0 0.9 0.8
C/F from others 0 0 0 0 0 PS 0.8 0.8 0.6 0.6 0.5
Increase in cash 5 (25) 110 (36) 43 EV/EBITDA 5.2 6.9 5.4 4.0 3.3
Note: 1. Based on K-IFRS (non-consolidated)

2. EPS and BPS are calculated using adjusted net profit and shareholders’ equity
that includes equity-method gains/losses
59
KT Skylife (053210)
BUY / TP: W40,000
Shares outstanding (mn) 48 2010A 427 45 28 34 1,188 67.3 83 0.0 1.6 0.0 32.4
52W High/Low (KRW) 34,300/17,400 2011A 464 42 39 31 606 (49.0) 89 45.2 14.5 4.5 12.5
6M avg. daily turnover (USD mn) 6.1 2012F 547 68 71 55 1,155 90.7 123 27.3 11.0 4.4 17.5
Free float (%) 48.7 2013F 662 124 130 102 2,130 84.4 187 14.8 7.1 3.4 25.8
2014F 732 174 182 142 2,970 39.5 247 10.6 5.3 2.6 27.5
Note: NP, EPS based on controlling interest
Operating leverage on subscriber growth

Performance Subscriber growth momentum to continue in 2013: Subscriber growth
1M 6M 12M momentum should continue in 2013. We expect total and net additions at 4.5mn
Absolute (%) 1.6 61.5 14.5 and 700,000, respectively, in 2013 on higher promotions and joint marketing with
Rel. to Kospi (%p) 4.5 63.0 15.4 KT. We remain bullish on subscriber growth for the following reasons. 1) Pay TV
digital conversions should expand after completion of digital conversion on
12MF PE trend
terrestrial TV. KT Skylife (Skylife) should be able to attract analog cable TV
30.0
(X) (KRW)
35,000 subscribers during digital conversions. 2) Apartment penetration rate (10% as of
25.0 30,000
25,000
Sep 2012) should soar on IF constructions related to reconstruction of KBS master
20.0
15.0
20,000 TV antenna. On average, 25% have subscribed to Skylife in areas where IF
15,000
10.0 12MF PE (LHS) 10,000
constructions have been conducted, fueling subscriber growth.
5.0 Share price (RHS) 5,000
0.0 0
Jul-09 Jun-11 Jun-12 We maintain BUY and maintain our TP of W40,000 derived through DCF (1.5%
perpetual growth, 9.9% WACC, 1.2 beta). We maintain BUY as 1) subscriber
growth continues on digital conversions and higher penetration rate. 2) Subscriber
growth, platform revenue jump and cost control should lead OP to improve 60.9%
three-year CAGR. 3) Synergy with KT Group should occur on additional platform
businesses, increasing ARPU, such as T-commerce (new business) and N-screen.
Skylife’s value should also rise on intense competition within the pay TV market as
the only satellite TV in the domestic market.
Operating leverage to start in 2013: Earnings should start to grow in 2013 on

rapid subscriber growth. Transmission revenue should rise 16.3% YoY on
subscriber growth. ARPU may drop 1% annually on higher weight of OTS
subscribers but subscriber growth effects outweigh ARPU decrease. Platform
revenues should surge on higher home-shopping transmission revenue, a high
margin business. Home-shopping revenue growth should continue close to that of
cable SOs (cable: W45,000 per subscriber, Skylife: W25,000 per subscriber
expected in 2013) on higher bargaining power of Skylife backed by subscriber
growth. We expect home-shopping transmission revenue to rise 72.0% YoY. Higher
marketing expense may be a burden but lower set-top box purchase costs should
lower costs and depreciation expense. We forecast 2013 sales and OP to grow
21.2% and 83.1% YoY, respectively.
Shiwoo Kim
822-3276-6240
swkim@truefriend.com
60

Current assets 266 220 325 376 430 Sales 427 464 547 662 732
Cash & cash equivalent 77 41 98 119 139
Gross profit 427 464 547 662 732
Inventory 6 2 4 5 5 SG&A expense 381 423 479 538 558
Non-current assets 258 303 397 508 608 Other operating gains 0 0 0 0 0
Total assets 524 523 721 884 1,038 Interest income 8 8 9 12 14
Current liabilities 193 224 286 343 354 Financial expense 26 12 6 7 7
Interest expense 19 10 5 6 6
ST debt & bond 0 0 0 0 0
subsidiaries and JV
Income taxes (6) 7 16 29 40
Paid-in capital 85 119 119 119 119 Net profit 34 31 55 102 142
Capital surplus 26 158 158 158 158 Other comprehensive profit (0) 1 1 1 1
Retained earnings (20) 10 65 166 308
EBITDA 83 89 123 187 247
Shareholders' equity 91 290 347 449 592
Adj. shareholders' equity 145 288 343 444 586 Adj. net profit 40 27 55 102 142

C/F from operating 100 90 163 191 190 per share data (KRW)
EPS 1,188 606 1,155 2,130 2,970
Net profit 34 31 55 102 142
BPS 3,667 6,038 7,193 9,323 12,293
Sales growth 7.4 8.8 17.7 21.2 10.5
Net incr. in W/C 16 (2) 52 27 (25)
OP growth 40.6 (7.9) 62.7 83.1 39.9
Others 12 13 1 0 (1) NP growth 62.7 (33.2) 104.2 84.4 39.5
C/F from investing (90) (107) (162) (170) (170) EPS growth 67.3 (49.0) 90.7 84.4 39.5
EBITDA growth 55.5 7.9 37.7 51.4 32.6
CAPEX (91) (98) (130) (134) (143)
Profitability (%)
OP margin 10.6 9.0 12.4 18.8 23.8
EBITDA margin 19.4 19.3 22.5 28.2 33.8
ROA 7.0 6.0 8.9 12.7 14.7
Others 0 0 (29) (9) (10)
ROE 32.4 12.5 17.5 25.8 27.5
C/F from financing 2 (19) 57 (0) (0) Dividend yield 0.0 0.0 0.0 0.0 0.0

Net debt (W bn) 130 (10) (36) (67) (98)
Incr. in debts 2 (60) 57 (0) (0)
Dividends 0 0 0 0 0 Valuation (X)
Others 0 0 0 0 0 PER NM 45.2 27.3 14.8 10.6

PBR 0.0 4.5 4.4 3.4 2.6
C/F from others 0 0 0 0 0
PSR 0.0 2.7 2.7 2.3 2.1
Increase in cash 12 (36) 58 21 20 EV/EBITDA 1.6 14.6 11.9 7.7 5.7
61
Hotel Shilla (008770)

BUY / TP: W73,000
52W High/Low (KRW) 58,100/35,800 2011A 1,764 96 74 56 1,427 12.4 130 27.0 14.6 2.5 9.5
Free float (%) 81.1 2013F 2,427 182 172 131 3,315 14.6 227 14.9 10.7 2.5 17.6
2014F 2,821 250 231 176 4,461 34.6 299 11.1 8.1 2.1 20.2
Note: NP and EPS based on adj. NP that includes equity-method gains/losses
2013, a year of leap for overseas duty free business
Performance Strong growth of duty-free shop to continue, maintain BUY: We maintain BUY
1M 6M 12M and a TP of W73,000 (21.5x 12MF EPS). 1) Duty-free shops sales should maintain
Absolute (%) (5.4) (8.8) 32.2 solid growth thanks to increasing inbound and outbound tourists. 2) From 2013,
Rel. to Kospi (%p) (2.6) (7.3) 33.0 overseas business including overseas airport duty-free shops, cosmetic retail shop
named as ‘Sweetmay’ should expand to take off. 3) Business hotels should operate
12MF PE trend
from end-2013 and be a mid-to-long term key growth driver.
(x) (KRW)
25.0 60,000
20.0 50,000 2013 duty-free shop’s OP to jump 27% YoY: We expect 2013F duty-free shops
15.0
40,000
sales to jump 13.5% YoY thanks to growing inbound and outbound tourists. 1)
30,000
10.0
20,000 Government is aggressively pursuing streaming the visa process for Chinese
12MF PER (LHS)
5.0
price (RHS)
10,000 tourists and visa waiver program for in- transit foreign tourists to attract foreign
0.0 0
travelers. Of note, Hotel Shilla’s Chinese tourists’ sales contribution should expand
to 37% as 20% YoY of Chinese visitors in 2013. 2) Thanks to strong KRW currency,
domestic customers’ overseas travel should increase and Koreans’ duty-free shop
sales should grow 12.9% YoY. 2013F duty-free shops OP should increase 27.4%
YoY despite a 10% rent increase for Incheon International airport duty-free shop in
2013.
Overseas business to take off: From 2013, its overseas business should expand
in earnest. Hotel Shilla acquired the rights to operate four overseas airport duty-free
shops including two duty-free shops at Singapore Changi Airport and two duty-free
shops at Malaysia Kuala Lumpur airport, and start their operations from 2013. Hotel
Shilla has raised its potential success to get bids for global airport duty-free shops
thanks to rising status and operating knowhow. The company plans to open more
cosmetic retails shops names as Sweetmay (which are operating in Macau nad
Hong Kong). As overseas business sales amounts are not large yet, its impact on
earnings should be insignificant in the short term. However, Hotel Shilla will
aggressively enter overseas market and it should be mid-to long term key drivers.
Start to operate business hotel from end-2013: Hotel Shilla plans to renovate the
Shilla Seoul in 1H13 and stop its operation during renovation. Of note, 2013F Hotel
sales should fall 25.5% YoY. However, we expect renovation effects including
higher per-capita and higher occupancy from 2H13. Hotel Shilla plans to operate
Jonggil Hong
business hotels from end-2013. As the company finalized five business hotel sites,
822-3276-6168 business hotels should be mid-to long term growth drivers for Hotel business.
jonggil@truefriend.com
Minha Choi
822-3276-6260
mhchoi@truefriend.com
62

Gross profit 645 790 967 1,061 1,241
SG&A expense 564 694 818 880 991
Inventory 216 335 423 461 535
Non-current assets 761 805 888 976 1,081 Other operating gains 0 0 0 0 0
Interest income 10 13 14 15 15
Total assets 1,179 1,376 1,646 1,783 2,006
Accounts & other payables 132 185 201 218 254 Interest expense 22 26 26 30 31
Other non-operating profit (3) (9) 12 5 (3)
subsidiaries and JV
Debentures 0 289 389 249 389
Earnings before tax 66 74 150 172 231
Total liabilities 612 778 948 970 1,033 Income taxes 16 17 36 41 55
Paid-in capital 200 200 200 200 200 Net profit 49 56 114 131 176
Capital surplus 197 196 196 196 196 Other comprehensive profit 12 (12) 0 0 0
Shareholders' Equity 567 598 698 813 973 EBITDA 112 130 191 227 299


EPS 1,270 1,427 2,893 3,315 4,461
Net profit 49 56 114 131 176
BPS 14,695 15,141 17,281 19,935 23,676
Sales growth 18.7 22.6 26.3 8.9 16.3
Net incr. in W/C (34) (94) (67) (88) (53)
OP growth 50.1 18.2 54.8 22.3 37.6
Others 29 21 1 2 2 NP growth 57.8 12.9 102.8 14.6 34.6
C/F from investing (70) (71) (143) (140) (155) EPS growth 57.6 12.4 102.7 14.6 34.6
EBITDA growth 32.1 16.3 46.4 18.9 31.6
CAPEX (40) (66) (56) (61) (70)
Profitability (%)
OP margin 5.6 5.4 6.7 7.5 8.9
EBITDA margin 7.8 7.4 8.6 9.4 10.6
Net incr. in intangible assets (0) (1) (8) (11) 0
ROA 4.4 4.4 7.5 7.6 9.3
Others 0 2 (19) (7) (2)
ROE 9.0 9.5 17.7 17.6 20.2
C/F from financing (14) 82 97 36 (6) Dividend yield 1.1 0.8 0.7 0.8 0.8

Net debt (W bn) 272 386 430 488 483
Incr. in debts 15 114 109 50 10
Others (20) (20) 0 0 0 PER 21.9 27.0 17.1 14.9 11.1

PBR 1.9 2.5 2.9 2.5 2.1
PSR 0.8 0.9 0.9 0.8 0.7
Increase in cash (9) 28 45 (14) 14 EV/EBITDA 12.2 14.6 12.4 10.7 8.1
63
Himart (071840)
BUY / TP: W95,000
Mkt. cap (USD mn) 1,490 Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%)
Shares outstanding (mn) 24 2010A 3,052 215 143 107 10,225 69.1 252 NM 4.6 0.0 13.0
52W High/Low (KRW) 92,500/47,000 2011A 3,411 259 187 141 6,855 (33.0) 300 11.8 8.8 1.3 11.6
Free float (%) 28.7 2013F 4,142 253 200 150 6,365 50.8 302 11.4 7.8 1.0 9.6
Foreign ownership (%) 5.8 2014F 4,889 316 269 203 8,585 34.9 372 8.4 5.9 0.9 11.7
Most promising retailer in 2013

Performance Purchasing integration underway after FTC approves acquisition: Although
1M 6M 12M the outlook for the domestic home appliance market is poor, Himart has high growth
Absolute (%) (3.2) 16.6 (21.8) potential. After being acquired by Lotte Shopping, the company is integrating
Rel. to Kospi (%p) (0.4) 18.1 (21.0) various purchasing parts. Starting with Lotte Mart in 2013, home appliance
purchases by all of Lotte Shopping’s channels should be concentrated on Himart.
12MF PE trend
Lotte Shopping expects commission income to grow by changing its home
14.0
(X) (KRW)
100,000 appliance stores into Himart, while Himart can expect profit growth via stronger
12.0
10.0
80,000 bargaining power and an easing fixed cost burden from bigger purchasing volume.
8.0 60,000
Furthermore, we also expect the company to try to shift Himart’s home appliance
6.0
4.0 12MF PER (LHS)
40,000
stores to hyper-marts with portfolio bases diversified to apparel and foods.
20,000
2.0
0.0
price (RHS)
0
Management will likely choose the type of store based on the commercial viability
Jun-09 Jun-11 Jun-12 of each location.
Highest EPS growth among retailers, structurally better profit: Himart’s 2013F
EPS is expected to grow 50% and continue posting rapid 18-35% growth going
forward. Growth should be fueled by: 1) OP expansion backed by transferring all of
Lotte Shopping’s channels into Himarts, 2) a lower funding rate after being merged
into Lotte Shopping, and 3) better non-operating items via debt reduction. We have
yet to reflect per square meter sales growth effect from store shifts and better
earnings by entering overseas markets in our earnings estimates. We plan to revise
our estimates once the plans become more feasible.
Figure 1. Quarterly OP trend
(W bn) OP %Y oY (%)
100 80
75 60
50 40
25 20
0 0
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12F
1Q13F
2Q13F
3Q13F
4Q13F
1Q14F
2Q14F
3Q14F
4Q14F
Yeongsang Yeo
(25) (20)
822-3276-6159
yeongsang.yeo@truefriend.com (50) (40)
Mikyung Chung (75) (60)

822-3276-6248
mkchung@truefriend.com
Source: Company data, Korea Investment & Securities
64

Gross profit 759 859 831 1,039 1,234
SG&A expense 542 602 640 784 917
Inventory 202 226 290 352 381
Non-current assets 2,169 2,195 2,210 2,250 2,298 Other operating gains (2) 2 (1) (1) (1)

Other non-operating profit (1) (0) 0 0 0
Non-current liabilities 1,183 1,039 948 895 742 0 0 0 0 0
subsidiaries and JV
LT debt & financial liabilities 1,157 1,010 920 860 700
Controlling interest 999 1,428 1,507 1,636 1,818 Net profit 107 141 100 150 203
Capital surplus 787 1,056 1,056 1,056 1,056
Other comprehensive profit (1) (3) 0 0 0
Minority interest 0 0 0 0 0 106 138 100 150 203
Shareholders' equity 999 1,428 1,507 1,636 1,818 EBITDA 252 300 233 302 372

EPS 10,225 6,855 4,221 6,365 8,585
Net profit 107 141 100 150 203
BPS 52,289 60,485 63,826 69,311 77,016
Sales growth 14.6 11.7 (2.3) 24.3 18.0
Net incr. in W/C (82) 32 (75) (16) 21
OP growth 18.4 20.2 (26.8) 33.7 24.6
Others 107 85 1 3 2 NP growth 70.0 31.7 (29.2) 50.8 34.9
C/F from investing (70) (51) (73) (96) (111) EPS growth 69.1 (33.0) (38.4) 50.8 34.9
EBITDA growth 15.9 18.8 (22.1) 29.4 23.1
CAPEX (53) (60) (60) (80) (100)
Profitability (%)
OP margin 7.1 7.6 5.7 6.1 6.5
Incr. in investment (12) 9 2 (7) (3) NP margin 3.5 4.1 3.0 3.6 4.1
EBITDA margin 8.3 8.8 7.0 7.3 7.6
Net incr. in intangible assets (1) (1) (2) 0 (1)
ROA 4.1 5.2 3.6 5.1 6.6
Others (4) 1 (13) (9) (7)
ROE 13.0 11.6 6.8 9.6 11.7
C/F from financing (51) (182) (21) (31) (141) Dividend yield 0.0 1.1 1.4 1.4 1.4

Net debt (W bn) 1,157 718 730 652 493
Incr. in debts (218) (489) 0 (10) (120)
Dividends 0 0 (21) (21) (21) Valuation (X)
Others (77) 46 0 0 0 PER NM 11.8 17.1 11.4 8.4

PBR 0.0 1.3 1.1 1.0 0.9
PSR 0.0 0.5 0.5 0.4 0.3
Increase in cash 47 65 (25) 59 30 EV/EBITDA 4.6 8.8 10.5 7.8 5.9
65
KT&G (033780)
BUY / TP: W92,000
52W High/Low (KRW) 92,000/71,000 2011A 3,723 1,121 1,161 817 6,451 (20.4) 1,278 12.6 8.0 2.2 17.5
6M avg. daily turnover (USD mn) 21.3 2012F 4,029 1,165 1,187 836 6,583 2.0 1,304 12.5 7.7 2.0 16.6
Free float (%) 82.4 2013F 4,313 1,293 1,323 937 7,375 12.0 1,436 11.2 6.8 1.9 16.9
Tobacco ASP is waking up!
Performance Tobacco tax hike may lead to ASP rise: There is a strong likelihood that the tax
1M 6M 12M on tobacco, which has stayed flat since end-2004, will be raised in early 2013 given
Absolute (%) (9.8) 3.9 12.0 relative public enthusiasm during the early stages of the new presidency. If the tax
Rel. to Kospi (%p) (6.9) 5.4 12.8 is raised, KT&G’s tobacco ASP will very likely be lifted as well. If the tax increase is
not rounded off to end in “0”, KT&G could raise the ASP to bring the retail price up
12MF PE trend to an even number. But even if the tax rise is rounded off, KT&G can still up the
(X) (KRW)
ASP as seen in 2004. Unlike competitors, KT&G has not yet lifted its tobacco ASP
14.0
12.0
100,000
and price rises coinciding with a tax hike tend to escape a public backlash.
10.0
80,000
Although it would be a one-off, inventory held by selling agents before the ASP rise
60,000
8.0
6.0
would ensure a greater margin for KT&G.
40,000
12MF PER (LHS)
4.0
price (RHS) 20,000
2.0
0.0 0
May attempt to independently lift ASP: Even if the tobacco tax is left untouched,
Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 KT&G may attempt to independently lift its ASP. Given that market share gains
made without lifting prices have wound down and KT&G would be the last company
in the industry to raise prices, it should face limited sales resistance. Accordingly,
KT&G will likely up the ASP to improve earnings. If ASP goes up W10/pack,
consolidated EPS would rise 2.1%. And if the retail price rises W200/pack (same as
competitors), EPS would spike 33.4%. With a lesser price rise (ASP up W50/pack),
EPS would rise 10.2%.
Subsidiary earnings to improve, including red ginseng cosmetics: In 2012F,

OP for red ginseng should slide 19.8% YoY on a high base effect and soft domestic
performance. However, the figure should rise 9.3% YoY in 2013F. Exports would
get back to normal as inventory in circulation is depleted and the domestic
performance improves on a better product mix. Sales of red ginseng products
launched in China should be a breakthrough for limited sales due to high tariffs. The
cosmetics business should post better earnings along with the completion of
Somang Cosmetics’ restructuring and sales expansion, and completion of initial
investment for new brands such as Donginbi. The Indonesian subsidiary should
recover from a sales slump triggered by a tax hike.
Undervalued to global peers: The stock trades at 2012F PE 12.7x and 2013F PE
11.4x, 17% undervalued to the global peer respective year averages of 15.2x and
13.7x. However, the global peers’ YoY growth for 2013F EPS stands at 10.2%,
slightly below the stock’s 12.0%. If KT&G can raise product prices, its
undervaluation should deepen on the upside for earnings estimates. Global
Kyoung Ju Lee
822-3276-6269
tobacco companies are receiving a premium in each market thanks to the stability
kjlee@truefriend.com of the business. We believe KT&G can enjoy not only the stability merit but the
growth potential as a sharp fall in its market share, a major concern for the
Eunkyung Lee company, is no longer present and the ASP upside is larger than ever due to price
822-3276-6194 rises by competitors. As KT&G should pursue at least a small price rise in 2013, we
ek.lee@truefrien.com anticipate a long-term upward slope for the shares.
66

Cash & cash equivalent 981 808 1,116 1,445 1,643
Gross profit 2,015 2,115 2,297 2,508 2,676
SG&A expense 934 1,023 1,119 1,195 1,271
Inventory 1,497 1,572 1,608 1,656 1,711
Non-current assets 2,415 2,761 2,864 3,077 3,271 Other operating gains 59 29 (13) (20) 2
Investment assets 367 325 331 437 446 Operating profit 1,140 1,121 1,165 1,293 1,407
Tangible assets 1,511 1,584 1,652 1,696 1,744
Current liabilities 925 999 1,052 1,149 1,154 Financial expense 4 8 36 37 38

ST debt & bond 67 83 79 76 76
Non-current liabilities 253 392 421 449 479 (0) 1 1 1 1
subsidiaries and JV
Income taxes 375 344 351 387 424
Controlling interest 4,556 4,788 5,213 5,738 6,346 Net profit 1,031 817 836 937 1,020
Capital stock 955 955 955 955 955 Net profit of controlling interest 1,032 816 828 927 1,010
Other comprehensive profit (125) (79) 0 0 0
Total comprehensive profit 906 738 836 937 1,020
Minority interest 42 97 105 115 125 907 738 828 927 1,010

C/F from operating 845 757 953 1,073 1,006 per share data (KRW)
EPS 8,109 6,451 6,583 7,375 8,030
Net profit 1,031 817 836 937 1,020
BPS 34,765 37,378 40,476 44,300 48,724
Sales growth (4.5) 7.6 8.2 7.1 7.3
Net incr. in W/C (194) (171) (28) (13) (170)
OP growth (1.4) (1.7) 4.0 10.9 8.8
Others (141) (46) 6 6 6 NP growth 21.2 (20.9) 1.4 12.0 8.9
C/F from investing 154 (429) (239) (338) (406) EPS growth 22.3 (20.4) 2.0 12.0 8.9
EBITDA growth (1.5) (0.9) 2.1 10.1 8.4
CAPEX (212) (289) (199) (181) (189)
Profitability (%)
OP margin 32.9 30.1 28.9 30.0 30.4
EBITDA margin 37.2 34.3 32.4 33.3 33.6
Net incr. in intangible assets (13) 7 (29) (28) (31)
ROA 18.8 13.6 12.8 13.2 13.1
Others 100 30 (7) (25) (179)
ROE 24.2 17.5 16.6 16.9 16.7

Net debt (W bn) (949) (711) (1,025) (1,359) (1,687)
Incr. in debts (18) 4 (3) (3) 0
Others (4) (130) (1) (1) 0 PER 8.0 12.6 12.5 11.2 10.2
PBR 1.9 2.2 2.0 1.9 1.7
PSR 2.6 3.0 2.8 2.6 2.4
67
LG Household & Health Care (051900)

BUY / TP: W790,000
52W High/Low (KRW) 666,000/462,000 2011A 3,452 401 372 265 15,792 14.9 494 30.9 16.9 8.1 29.7
Free float (%) 59.6 2013F 4,502 597 561 410 24,621 27.7 752 25.7 12.6 6.6 28.3
Korea’s P&G, still has a lot to show; shining as a leading

stock during cosmetics boom
Performance
Maintain Overweight in 2013: The entire sector including small- to mid- sized
1M 6M 12M
companies underwent a sudden re-rating in 2012 on a boom in low-end brands and hit
products. We have a positive outlook for sector price performance despite the valuation
Absolute (%) (5.0) 9.9 16.4
burden from the recent overshooting and the yearend profit-taking risk. Structural
Rel. to Kospi (%p) (2.1) 11.4 17.2
growth potential in the domestic market and the expansion of overseas momentum,
12MF PE trend
including the Chinese market, should drive shares up further. Japan’s example
suggests a hopeful note for the ongoing growth of Korea’s cosmetics and household
35.0
(X) (W'000)
700
goods markets. Cosmetics consumption per capita in Japan steadily increased even
30.0 600 during the low-growth era (started to decline from GDP per capita of USD34,000 in
25.0 500
20.0 400
2008). In addition, Unicharm (household goods business), which is a peer company of
15.0 300 LG H&H, recorded the second highest price performance among all Japanese
10.0
5.0
12MF PER (LHS)
Price (RHS)
200
100
companies for the last twenty years (1989-2012) based on domestic sales growth and
0.0 0 overseas momentum.
Growing merit as a leading stock during cosmetics boom, maintain as top pick:
We maintain BUY and a TP of W 790,000 (SotP, 2013F intrinsic PE 32x, historical high for
average of 2013F small- to mid-ODM PE 26.4x). We believe a record PE can be fully
justified in 2013 despite lower growth compared to smaller players, as LG H&H boasts
long-term earnings stability even amid changing consumer trends backed by diversified
distribution channels and brand portfolio, overseas expansion momentum and potential
M&A catalysts. Also, as interest from domestic and overseas investors on cosmetics stocks,
which were excluded from the recent rally due to the valuation burden, pick up, investors
are likely to include the leading player in terms of market cap and earnings stability.
Solid growth to continue across all divisions: Total growth should slow down due to
the weak economy and high base effect, but LG H&H should continue posting sales
growth in the mid-10% range and average OP growth of 20% over the next three years.
LG H&H still has high growth potential considering that a number of industries facing a
crisis post growth of only 5-10%. In 2013, LG H&H should post growth over 10% in all
divisions. In particular, the cosmetics division can achieve over 15% growth on
sustained acquisition effects and the high growth at TheFaceshop. Also, as Haitai
Beverage recorded an OP surplus for two straight quarters, operating synergies
between Haitai Beverage and Coca-Cola Beverage should catalyze another growth
phase at the beverage division.
Successful overseas market entry of TheFaceshop: LG H&H pushed aggressively

Jung-In Lee for an overseas market re-entry from 2011 after three years of restructuring
822-3276-6239 (reorganization of brands and distribution strategy). In particular, overseas
jilee@truefriend.com TheFaceshop shops should reach 1,074 (including points of sales at specialty stores),
and 2012F sales of W77.2bn (72% YoY, 21% of total TheFaceshop sales) after a year
Sangeun Lee of business in China and Japan. The overseas contribution of TheFaceshop sales to
822-3276-6196
total cosmetics sales is still low (5% sales, 11% OP). However, it should positively
sangeun.lee@truefriend.com
contribute to further share upside, given: 1) a new overseas catalyst, and 2) high
margins (30% OPM) and solid growth momentum.
68

Current assets 579 767 919 1,049 1,266 Sales 2,826 3,452 3,944 4,502 5,104
Gross profit 1,493 1,716 2,012 2,320 2,646
SG&A expense 1,165 1,356 1,583 1,796 2,022
Inventory 233 306 323 369 419
Tangible assets 607 832 949 1,062 1,170

ST debt & bond 155 133 113 33 33
subsidiaries and JV
Income taxes 82 101 110 140 172
Controlling interest 788 997 1,270 1,632 2,087 Net profit 237 272 329 420 516
Other comprehensive profit (4) (11) (4) (4) (4)
Retained earnings 675 884 1,160 1,526 1,985
Shareholders' equity 845 1,061 1,341 1,713 2,181 EBITDA 427 494 611 752 895

EPS 13,743 15,792 19,284 24,621 30,252
Net profit 237 272 329 420 516
BPS 48,483 60,295 75,689 96,091 121,780
Sales growth 27.5 22.1 14.2 14.1 13.4
Net incr. in W/C (57) (99) (197) 43 (51)
OP growth 52.0 15.6 19.9 24.2 20.0
Others 59 24 5 6 6 NP growth 50.4 14.8 21.3 27.6 22.8
C/F from investing (529) (135) (349) (382) (410) EPS growth 50.4 14.9 22.1 27.7 22.9
EBITDA growth 42.4 15.7 23.8 23.0 19.1
CAPEX (149) (155) (258) (277) (295)
Profitability (%)
OP margin 12.3 11.6 12.2 13.3 14.0
EBITDA margin 15.1 14.3 15.5 16.7 17.5
Net incr. in intangible assets (4) 1 (102) (115) (125)
ROA 14.6 12.6 12.9 14.3 15.4
Others (380) 1 (4) (5) (5)
ROE 33.1 29.7 28.3 28.3 27.1
C/F from financing 219 (108) 128 (222) (142) Dividend yield 0.7 0.5 0.4 0.4 0.4

Net debt (W bn) 457 470 595 397 201
Incr. in debts 262 (62) 172 (178) (98)
Debt/equity ratio (%) 59.8 53.2 54.9 33 21
Others (0) (1) 0 (0) (0) PER 28.4 30.9 32.8 25.7 20.9
PBR 8.0 8.1 8.4 6.6 5.2
PSR 2.4 2.5 2.8 2.5 2.2
69
Green Cross (006280)

BUY / TP: W191,000
52W High/Low (KRW) 175,000/115,000 2011A 768 88 86 55 5,544 (50.0) 101 26.3 14.2 2.4 9.6
Free float (%) 46.2 2013F 960 140 137 100 9,806 46.1 159 15.7 7.9 2.1 13.9
Global specialty drug maker should leap forward despite

short-term earnings shock
Performance Ample re-rating potential in the long-term despite short-term earnings shock:
1M 6M 12M Although the stock plunged on poor 3Q12 flu vaccine earnings, the WHO’s PQ
Absolute (%) (10.0) 19.0 (11.0) approval for the company’s multi-dose flu vaccine has reaffirmed its solid overseas
Rel. to Kospi (%p) (7.1) 20.5 (10.2) potential and ensuing re-rating. Although poor earnings should continue through 4Q12,
the company will definitely perform better from 2013 on the base effect and lucrative
12MF PE trend exports (albumin and flu vaccines). There is also ample re-rating potential since phase 3
(X) (W'000)
clinical trials for two plasma derivatives are progressing smoothly. We maintain Green
25.0 200 Cross as our top pick given the most visible overseas market entry among Korean top-tier
20.0
150 firms. We also keep our TP intact at W191,000 (DCF method at 2012-13F inherent PE
15.0
100
28.5x and 19.5x and mid-cycle PE level for global plasma derivatives makers).
10.0
12MF PER (LHS)
50
5.0 Price (RHS) Solid plasma derivatives-based re-rating scenario; Delayed overseas M&A deal unlikely
0.0 0
to disrupt supply: Expectations are high for the stock to re-rate on the start of US phase
3 clinical trials for intravenous immunoglobulin (IVIG) and GreenGene F, a recombinant
hemophilia treatment, and the export of a plasma derivative plant to Thailand. The US
IVIG market (W3.4trn, targeting 5% share) is 229x larger than Korea’s and the
recombinant treatment for hemophilia market (W2trn, targeting 6% share) is 45x
greater. Thanks to a large prescription rate, unit prices for biopharmaceuticals are high.
For IVIG, the unit price in the US is 5x more than in Korea. Since plasma derivatives are
specialty items, competition is limited. Green Cross has a sufficient competitive edge in
terms of quality, production capacity and prices against its American peers excluding
the top five such as CSL and Baxter based on more than 40 years of operation.
Hidden beneficiary of China’s market, 10th-largest share and strong sales growth
(CAGR 39% in 2010-2016): Although China’s pharmaceuticals market (W1trn) is in its
infancy, it is 4x larger than Korea’s and has big growth potential (+15% YoY). The
driving forces are 1) growing preference for safer imported goods, 2) mounting plasma
derivatives prescriptions thanks to overseas trained doctors and 3) the inclusion of
recombinant hemophilia therapy in medical insurance coverage. Established by Green
Cross Holdings in 1995, GC China now has the 10th-largest share of China’s plasma
derivatives market (2010 sales W18bn). Green Cross started albumin exports to GC
China in 2012 and the subsidiary should soon release products such as GreenGene F
(peak sales W50bn) and Hepabig-Gene that is indicated for liver transplant patients
(peak sales W23bn). That in turn would contribute to GC China’s market share growth
(from 1.8% in 2010 to 5.1% in 2015F) and expand Green Cross’ sales, especially with a
bigger weighting of direct exports to GC China.
Jung-In Lee
822-3276-6239 Most likely candidate to expand sales and create synergy via M&A: As the
jilee@truefriend.com
company carries no overlapping products with smaller drug makers, an M&A with any
Sangeun Lee
one could be a top-line growth opportunity, unlike top-tier firms whose synergy effect via
822-3276-6196 such M&A should be limited. Unlike chemicals-based top players, Green Cross can tap
sangeun.lee@truefriend.com its time-honored biopharmaceuticals know-how to identify the biotech ventures’
innovative pipeline and dominate the related markets in advance, which is another plus.
For example, the company acquired Innocell and engineered a turnaround.
70

Current assets 478 508 539 643 746 Sales 791 768 817 960 1,114
Gross profit 315 259 259 323 386
SG&A expense 169 173 160 186 215
Inventory 190 198 211 248 287
Non-current assets 264 352 408 472 536 Other operating gains 0 3 (2) 3 3
Total assets 741 860 947 1,115 1,282 Interest income 2 3 2 3 3

ST debt & bond 6 28 51 74 97
Other non-operating profit (3) 0 0 0 0
Non-current liabilities 52 39 37 43 49 (4) (1) (1) (1) (1)
subsidiaries and JV
Controlling interest 538 618 676 757 864 Net profit 105 58 72 107 135
Other comprehensive profit 0 (1) (1) (1) (1)
Shareholders' equity 542 630 692 780 896 EBITDA 165 101 114 159 197


EPS 11,087 5,544 6,711 9,806 12,439
Net profit 105 58 72 107 135
BPS 55,008 61,071 66,279 74,189 84,727
Sales growth 23.0 (2.9) 6.4 17.4 16.1
Net incr. in W/C (57) (25) (24) (26) (64)
OP growth 22.0 (39.3) 10.3 43.2 25.2
Others 17 9 2 3 5 NP growth 30.0 (47.1) 22.6 47.2 26.8
EBITDA growth 21.1 (38.5) 12.7 39.1 23.8
CAPEX (27) (44) (65) (64) (63)
Profitability (%)
OP margin 18.4 11.5 11.9 14.5 15.7
EBITDA margin 20.8 13.2 14.0 16.6 17.7
Net incr. in intangible assets 2 (11) (5) (9) (10)
ROA 14.4 7.2 8.0 10.3 11.3
Others 0 (1) (3) (10) (10)
ROE 23.3 9.6 10.5 13.9 15.6
C/F from financing 14 (15) 10 5 5 Dividend yield 1.3 1.2 1.1 1.1 1.1

Net debt (W bn) (70) (48) (33) (36) (32)
Incr. in debts (45) (31) 19 23 23
Others 7 1 0 0 0 PER 12.5 26.3 22.9 15.7 12.3

PBR 2.5 2.4 2.3 2.1 1.8
PSR 1.6 1.9 1.9 1.6 1.4
71
NHN (035420)
BUY / TP: W330,000
52W High/Low (KRW) 290,500/202,000 2010A 2,121 620 632 450 10,134 (4.0) 709 20.8 11.9 4.2 31.0
Free float (%) 82.2 2012F 2,694 728 775 581 13,205 14.9 850 18.3 11.1 3.4 26.1
2013F 3,099 931 995 746 16,956 28.4 1,050 14.2 8.6 2.8 26.1
Line profit contribution to start in earnest

Performance Upside in growth potential and profitability for 2013: We maintain BUY with a
1M 6M 12M TP of W330,000 at 2013F PE 23.7x. Investment points are: 1) domestic online ad
Absolute (%) (12.7) 3.9 (2.6) sales should continue robust growth backed by its firm presence as a PC and
Rel. to Kospi (%p) (9.8) 5.4 (1.8) mobile search engine. 2) Line, an internally-developed mobile instant messenger,
should contribute to earnings more on the full implementation of a revenue model
12MF PE trend
(incl. mobile games). 3) Game earnings should improve on the release of new titles
25.0
(x) (W'000)
350 (Winning Eleven Online, Metro Conflict) and mobile games. 4) With the start of
20.0
300
250
earnings contributions by new businesses and new titles, which have increased
15.0 200 costs for the company, OPM should inch up 0.3%p YoY to 26.9% in 2013F.
10.0 150
12MF PER (LHS) 100
5.0
0.0
price (RHS) 50
0
Line to start mobile game services in earnest: Line subscribers have exceeded
Jun-10 Jun-11 Jun-12 73mn, and should reach 130mn at end-2013. With 44% of subscribers in Japan,
subscriber growth is fueled by the wide penetration of smartphones. Mobile game
services should contribute to earnings growth in addition to the current revenue
drivers such as stickers (animated characters) shop sales and Official Accounts
(B2B ad platform services). NHN is releasing diverse-genre, Line-based mobile
games from 4Q12. We expect Line sales to reach W191.1bn in 2013F. NHN plans
to expand Line marketing beyond Japan and Southeast Asia to the US and China
and establish it as a global messaging platform.
Mobile ad growth and Japanese display ad sales growth: We forecast NHN’s

2013F search and display ad sales will grow 9.1% YoY and 16.8% YoY, respectively.
Despite the stumbling economy, search ad sales should be robust on NHN’s strong
market presence and mobile ad growth. Naver, NHN’s portal service, controls
almost 68% of the mobile search market. Mobile queries on Naver have grown
rapidly to comprise 47% of total queries in Oct. Mobile search ad sales are
estimated at W178.9bn in 2013F. Japanese online ad sales via Naver Japan and
Livedoor should also grow steadily. The main contributor is rapidly growing display
ad sales by Naver Japan’s Matome page (organizing information on a single
subject), which started in Mar 2012.
Sales from new titles and mobile games to grow: 2013F games sales are
forecast to slip 1.9% YoY to W594.4bn. Although sales from new titles (Winning
Jonggil Hong Eleven Online, Metro Conflict) and mobile games should expand, web-board game
822-3276-6168 sales should fall 21.9% YoY on stricter regulations. Meanwhile, Japanese game
jonggil@truefriend.com sales should grow on new games, such as Dungeon Striker.
Minha Choi
822-3276-6260
72

Cash & cash equivalents 555 466 296 795 1,239
Gross profit 1,785 2,121 2,368 2,694 3,099
SG&A expenses 1,169 1,465 1,687 1,916 2,113
Inventory 0 0 0 0 0
Non-current assets 841 942 1,381 1,434 1,693 Other operating gains (26) (36) (48) (51) (54)
Total assets 1,967 2,373 2,678 3,280 4,044
Accounts & other payables 212 277 309 352 405 Interest expenses 8 12 12 12 12
ST debt & bonds 32 74 74 74 74
subsidiaries and JV
Net profit 469 452 506 581 746
Capital surplus 194 195 195 195 195 Other comprehensive profit (3) (14) 0 0 0
Capital adjustments (671) (841) (942) (942) (942) Total comprehensive profit 465 438 506 581 746
470 436 506 581 746
Minority interest (2) 0 0 0 0 controlling interest
Shareholders' equity 1,322 1,578 1,955 2,501 3,207 EBITDA 684 709 735 850 1,050

C/F from operations 534 418 482 684 835 Per-share data (KRW)
EPS 10,553 10,134 11,496 13,205 16,956
Net profit 469 452 506 581 746
BPS 40,696 49,703 59,621 70,986 85,638

Sales growth 11.7 18.8 11.7 13.8 15.0
Net incr. in W/C (79) (169) (9) (13) (25)
OP growth 2.0 5.1 2.2 14.9 27.9
Others 51 47 (116) (5) (5) NP growth 12.4 (4.9) 12.4 14.9 28.4
EBITDA growth 5.4 3.7 3.7 15.6 23.6
Capex (124) (122) (206) (73) (257)
Profitability (%)
EBITDA margin 38.3 33.4 31.0 31.5 33.9
ROA 26.3 20.8 20.0 19.5 20.4
Others 6 (21) (234) (23) (26) ROE 41.0 31.0 28.6 26.1 26.1
Stability
Net debt (W bn) (650) (886) (716) (1,214) (1,659)
Incr. in debt 95 (7) 0 0 0 Debt/equity ratio (%) 17.0 14.1 11.4 8.9 6.9
Dividends 0 0 (24) (28) (34) Valuation (x)

PE 21.5 20.8 21.0 18.3 14.2
Others (181) (195) (100) 0 0
PB 5.6 4.2 4.0 3.4 2.8
C/F from others 0 (0) 0 0 0 PS 6.1 4.8 4.9 4.3 3.7
Increase in cash 47 (89) (170) 499 445 EV/EBITDA 14.1 11.9 13.6 11.1 8.6
73
Samsung Electronics (005930)

BUY / TP: W1,850,000
Stock price (Nov 15, KRW) 1,331,000
52W High/Low (KRW) 1,410,000/935,000 2011A 165,002 16,250 17,159 13,359 89,073 (16.0) 29,842 11.9 5.2 1.7 14.6
6M avg. daily turnover (USD mn) 357.7 2012F 204,079 29,148 30,182 23,177 153,798 72.7 47,370 8.7 4.1 1.8 21.4
Free float (%) 71.1 2013F 230,152 34,701 35,873 27,841 184,578 20.0 55,055 7.2 3.3 1.5 21.0
2014F 243,792 37,451 38,526 29,900 198,226 7.4 61,034 6.7 2.8 1.2 18.7
Battle of the Big Four

Performance Growing system LSI brings competition with semicon giants: The
1M 6M 12M semiconductor industry landscape is changing from separate leadership by Intel in
Absolute (%) 2.4 1.5 33.6 CPU, Samsung in memory chips, TSMC in foundry and Qualcomm in baseband
Rel. to Kospi (%p) 5.2 3.0 34.5 chips to a head-on competition between Samsung and others in each segment with
the Korean player’s application processor (AP) expansion and entry into foundry
12MF PB trend business. These rivalries among global top-tiers should bolster the industry’s
(x) (W' 000) development, and Samsung should emerge as a comprehensive semiconductor
2.0 1,500
company, diversifying beyond the scope of memory.
1.5
1,000
1.0
Vs. TSMC: Reduced AP supply to Apple a foundry opportunity: As Samsung and
12MF PBR (LHS) 500
0.5
Share price (RHS)
Apple are pushing to ease their dependence on each other, Samsung’s AP supply
0.0 0 share at Apple would gradually shrink from end-2013 when the contract expires.
Jun-10 Dec-10 Jun-11 Dec-11 Jun-12
However, the downside should be limited considering Apple’s lack of in-house AP
R&D capabilities and shortage in TSMC’s newest process capacity. If Samsung’s
foundry operations become available in the 20nm node from 2H13 (in line with
TSMC), this should create an opportunity for Samsung to expand its foundry to
current TSMC customers that are concerned about shortages.
Vs. Intel and Qualcomm: Entering AP computing market and securing baseband
technology: Samsung will engage in an all-out battle with Intel in the AP and CPU
markets with the launch of Windows 8. It will also go up against TSMC in AP supply
to Apple and other foundry markets. Its rivalry with Qualcomm for AP supremacy
should intensify with the emergence of AP technology that includes baseband and
communication functions.
No. 1 Semiconductor player via system LSI competition: Samsung should

reach a major turning point in 2013 for its system LSI business, which has been
growing rapidly since 2007. Apple’s likely reduction of Samsung’s APs from 2014
would considerably weaken the business, and pull down utilization of its up-to-date
12-inch wafer process. However, we expect Samsung to secure a fresh growth
driver in the AP and foundry businesses from 2014 by making a timely entry into the
competitive 20nm node. Direct competition with Intel, TSMC and Qualcomm should
drive Samsung to the world’s top semiconductor spot.
Won Seo
822-3276-6162 Maintain BUY with TP W1,850,000: Despite concerns for slowing smartphone
wonseo@truefriend.com growth, we expect 2013 OP to reach W34.7trn, as: 1) the handset business now
serves as a cash cow with quarterly W5trn+ OP, and 2) earnings growth at the
Kiheung Park semiconductor business accelerates. In addition, there is growing interest in the
822-3276-4130 potential of system LSI and tablets. We maintain BUY and our TP of W1,850,000
kiheung.park@truefriend.com
(SoTP valuation applying global peers’ 2013F EV/EBITDA multiples). Our TP
equates to 10.0x 2013F PE and 2.1x PB.
74

Gross profit 51,964 52,857 74,317 84,630 90,161
SG&A expenses 35,342 37,402 45,844 49,928 52,710
Inventory 13,365 15,717 19,796 22,325 23,648
Tangible assets 52,965 62,044 68,332 69,602 69,702
Financial income 7,465 7,404 8,667 8,805 8,645
Total assets 134,289 155,631 180,915 205,775 222,478
ST debt & bonds 8,430 9,654 9,659 9,664 9,669
Current portion of LT debt 1,124 30 25 20 15
Non-current liabilities 4,995 9,467 10,273 10,965 11,334 2,267 1,399 881 749 869
subsidiaries and JV
Debentures 587 1,280 1,275 1,270 1,265 Earnings before tax 19,329 17,159 30,182 35,873 38,526
LT debt & financial liabilities 635 3,683 3,703 3,724 3,744 Income taxes 3,182 3,425 6,354 7,251 7,787
Net profit 16,147 13,734 23,828 28,622 30,739
Capital surplus 4,404 4,404 4,404 4,404 4,404 Other comprehensive profit 1,141 (502) (502) (502) (502)
Capital adjustments (6,562) (6,522) (6,522) (6,522) (6,522) Total comprehensive profit 17,288 13,232 23,325 28,120 30,236
16,901 12,802 22,689 27,352 29,411
Minority interest 3,760 4,246 4,882 5,650 6,475 controlling interest

C/F from operating 23,827 22,918 36,727 38,803 37,077 Per-share data (KRW)
EPS 105,992 89,073 153,798 184,578 198,226
Net profit 16,147 13,734 23,828 28,622 30,739
BPS 548,698 617,984 746,468 902,364 1,070,361
Amortization 547 658 890 1,004 1,063 Growth (%)
Sales growth 13.4 6.7 23.7 12.8 5.9
Net incr. in W/C (5,668) (4,057) (4,613) (9,534) (16,427)
OP growth 58.3 (6.1) 79.4 19.1 7.9
Others 1,954 (351) (710) (639) (818)
NP growth 65.1 (15.4) 73.5 20.1 7.4
C/F from investing (23,985) (21,113) (26,117) (25,654) (25,548) EPS growth 63.1 (16.0) 72.7 20.0 7.4
CAPEX (21,619) (21,966) (24,000) (21,000) (23,000) EBITDA growth 30.0 4.0 58.7 16.2 10.9
Profitability (%)
Decr. in fixed assets 1,228 380 380 380 380
OP margin 11.2 9.8 14.3 15.1 15.4
Incr. in investment (2,138) 493 (2,550) (1,703) (647) NP margin 10.2 8.1 11.4 12.1 12.3
Net incr. in intangible assets (1,243) (654) (1,685) (1,534) (1,340) EBITDA margin 18.6 18.1 23.2 23.9 25.0
ROA 13.1 9.5 14.2 14.8 14.4
Others (213) 634 1,738 (1,797) (941)
ROE 20.4 14.6 21.4 21.0 18.7
C/F from financing (152) 3,110 (812) (814) (814) Dividend yield 1.1 0.5 0.4 0.4 0.4
Net debt (W bn) (11,705) (12,231) (19,419) (32,964) (44,305)
Incr. in debts 1,702 3,758 15 15 15
Dividends (1,918) (875) (828) (829) (829)
Valuation (x)
Others (120) 66 1 0 0 PE 9.0 11.9 8.7 7.2 6.7
C/F from others (48) (15) 0 0 0 PB 1.7 1.7 1.8 1.5 1.2
PS 1.0 1.1 1.1 1.0 0.9
Increase in cash (359) 4,900 9,798 12,335 10,715
EV/EBITDA 4.8 5.2 4.1 3.3 2.8
75
Samsung SDI (006400)

BUY / TP: W190,000
52W High/Low (KRW) 168,000/119,500 2011A 5,444 204 478 320 7,341 (10.5) 642 18.2 9.6 1.0 5.3
6M avg. daily turnover (USD mn) 32.3 2012F 5,908 1,728 2,148 1,567 34,898 375.4 2,160 4.3 3.2 0.9 22.8
Free float (%) 74.6 2013F 7,142 329 814 594 13,221 (62.1) 774 11.3 8.8 0.8 7.5
2014F 9,077 595 1,049 765 17,037 28.9 1,041 8.7 6.4 0.8 9.0
Rechargeable battery growth story to continue

Performance Gap between rechargeable battery makers to widen: We maintain BUY and a
1M 6M 12M TP of W190,000 on Samsung SDI (SDI). Our TP is the sum of operating values
Absolute (%) 2.4 (10.8) 17.3 (EV/EBITDA for SDI (CRT, PDP, rechargeable battery) and Samsung Display, and
Rel. to Kospi (%p) 5.3 (9.3) 18.1 RIM for SBLiMotive and solar PV business). Our investment points are 1) SDI is the
no. 1 global rechargeable battery maker in terms of market share and
12MF PB trend
competitiveness, 2) the competitive gap between rechargeable battery makers
2.0
(X) 12MF PBR (LHS) (W'000)
250 should widen going forward, and 3) synergies are likely among the energy storage
price (RHS)
1.5
200 system (ESS), IT rechargeable battery and automotive rechargeable battery
1.0
150 businesses following the merger of SBLiMotive.
100
0.5
50
Major polymer battery capacity expansion confirms confidence in polymer
0.0 0
Jun-10 Jun-11 Jun-12 business: We believe it is favorable that SDI has confirmed its confidence in
winning polymer battery orders by announcing a major polymer capacity expansion
plan. There were concerns over the growth of polymer batteries due to SDI’s failed
supply for the iPhone 5 and iPad Mini. But we believe polymer battery’s growth
story will remain intact in 2013, in tandem with capacity expansion, as SDI is
adopting a profitability-focused strategy and supplying polymer batteries to tablet
PCs generating rapid growth. Moreover, demand for prismatic batteries is emerging
from laptop PCs as well as smartphones. And, given the sharp decline in PDP
depreciation from 3Q12, PDP profitability should improve. In addition, SDI should
enhance investment efficiency in SBLiMotive and the solar PV business, for which
uncertainty over market demand is growing, by adopting a more selective approach.
The merger of SBLiMotive, a subsidiary that produces automotive rechargeable
batteries, should generate synergies with existing businesses.
2013 earnings outlook: We expect 2013F sales to grow 8.5% YoY to W7.1trn on
strong sales growth of IT rechargeable battery (mainly prismatic and polymer
batteries) and considerable sales expansion at ESS. Automotive rechargeable
battery sales, which will begin in 4Q12, should gain traction from 2013 on the
introduction of a mass-production model. 2013F OP should reach W329bn, similar
to the 2012 level. Meanwhile, we forecast OPM to dip 1%p to 4.6% despite
rechargeable battery profit growth, due to SBLiMotive’s operating losses, which will
be recognized as SDI’s from 4Q12. Despite larger costs in the early phase of the
Kevin Lee
merger, we still believe the consolidation is favorable to SDI given synergies going
822-3276-4589
kevin.lee@truefriend.com forward.
Inhyuk Hwang
822-3276-6245
inhyuk.hwang@truefriend.com
76

Cash & cash equivalents 1,066 758 827 1,000 1,089
Gross profit 790 683 916 973 1,413
SG&A expenses 556 573 676 755 960
Inventory 484 584 591 571 635
Non-current assets 5,482 6,163 8,240 8,856 9,802 Other operating gains 53 94 1,488 111 141
Investment assets 3,457 3,999 6,103 6,663 7,470 Operating profit 287 204 1,728 329 595
Tangible assets 1,727 1,827 1,770 1,750 1,770
Total assets 7,934 8,527 10,457 11,323 12,573
Accounts & other payables 755 830 901 1,089 1,384 Interest expenses 27 20 26 25 23
ST debt & bonds 32 533 583 683 583
subsidiaries and JV
Debentures 200 0 0 0 0 Earnings before tax 423 478 2,148 814 1,049
Net profit 385 351 1,718 651 839
Capital stock 241 241 241 241 241 Net profit of controlling interest 356 320 1,567 594 765
Capital surplus 1,256 1,258 1,258 1,258 1,258 Other comprehensive profit 721 (194) 0 0 0
Capital adjustments (170) (165) (165) (165) (165) Total comprehensive profit 1,106 157 1,718 651 839
1,070 125 1,567 594 765
Minority interest 180 196 348 405 479 controlling interest
Shareholders' equity 6,231 6,315 7,965 8,549 9,321 EBITDA 662 642 2,160 774 1,041

C/F from operations 489 300 2,261 796 1,199 Per-share data (KRW)
EPS 8,203 7,341 34,898 13,221 17,037
Net profit 385 351 1,718 651 839
BPS 132,039 133,305 165,086 176,242 191,029
Growth (%)
Amortization 17 22 30 37 47
Sales growth 3.5 6.2 8.5 20.9 27.1
Net incr. in W/C (135) (275) 538 188 364 OP growth 6.9 (29.0) 748.2 (81.0) 80.7
Others (137) (215) (427) (488) (451) NP growth 63.6 (10.1) 389.4 (62.1) 28.9
EPS growth 62.1 (10.5) 375.4 (62.1) 28.9
C/F from investing (252) (879) (2,074) (556) (914)
EBITDA growth (11.2) (3.0) 236.3 (64.2) 34.6
Capex (399) (436) (374) (417) (449) Profitability (%)

NP margin 6.9 5.9 26.5 8.3 8.4
Incr. in investment 12 (346) (1,672) (61) (338)
EBITDA margin 12.9 11.8 36.6 10.8 11.5
Net incr. in intangible assets (1) (23) (42) (68) (96) ROA 5.1 4.3 18.1 6.0 7.0
ROE 6.5 5.3 22.8 7.5 9.0
Others 84 (103) (15) (39) (60)
Dividend yield 1.0 1.1 1.0 1.0 1.0
C/F from financing (623) 269 (117) (67) (196) Stability
Incr. in equity 24 6 0 0 0 Net debt (W bn) (780) (25) (147) (327) (555)
Incr. in debt (586) 355 (50) 0 (129)
Valuation (x)
Dividends (60) (77) (67) (67) (67) PE 20.5 18.2 4.3 11.3 8.7
PB 1.3 1.0 0.9 0.8 0.8
Others (1) (15) 0 0 0
PS 1.5 1.2 1.2 1.0 0.8
C/F from others 19 2 0 0 0 EV/EBITDA 10.6 9.6 3.2 8.8 6.4
Increase in cash (367) (309) 69 173 89
77
SK Telecom (017670)
BUY / TP: W200,000
52W High/Low (KRW) 159,500/120,500 2011A 15,988 2,131 2,183 1,613 22,848 (10.7) 4,614 6.2 2.8 0.8 14.0
Free float (%) 60.7 2013F 17,137 1,933 2,060 1,570 22,534 40.7 4,599 6.7 3.3 0.8 12.5
2014F 17,644 2,038 2,597 1,954 28,039 24.4 4,708 5.4 3.1 0.7 14.3
Valuable investment assets on top of lucrative LTE
Performance Undervalued and dividend merits: We maintain BUY with a TP of W200,000 at

1M 6M 12M 9.3x 12MF PE, a 7% discount to the past four-year avg. of 10.0x. We remain bullish
Absolute (%) (0.3) 11.0 3.1 on SKT. 1) A rising weighting of LTE subscribers would boost ARPU and profitability.
Rel. to Kospi (%p) 2.5 12.5 3.9 2) Subsidiaries’ EV should increase on better profitability at SK Planet, SK
Broadband (SKB) and SK Hynix, etc. The value of investment assets is gaining
12MF PE trend attention upon the sale in Oct of a 1.4% stake in POSCO. 3) The valuation has
(x) (W '000) appeal with 12MF PE 7.1x and PB 0.8x. 4) Dividend merit is also high with the cash
10.0 200
8.0
dividend per share at W9,400 for 2012F and 2013F with a 6.2% yield. The stock
150
6.0 trades at a 20-40% discount to overseas peers and the domestic stock market
100
4.0
12MF PE (LHS)
average.
2.0 50
Price (RHS)
0.0
Jun-10 Dec-10 Jun-11 Dec-11 Jun-12
0
Greater ARPU from 2H12 on LTE effect: LTE subscribers swelled from 650,000
at end-2011 to 5.67mn in Sep 2012. We expect the number to rapidly go up and
reach 7mn (26.1% of total) at end-2012F and 13mn (47.7%) at end-2013F. Thanks
to the rising portion of LTE subscribers, ARPU would see an upswing in 4Q12 and
gain 4.2% YoY in 2013F.
Rising EV of subsidiaries such as SK Hynix: Following SKB’s turnaround in

2012, other subsidiaries such as SK Planet and SK Hynix should deliver better
profitability in 2013. SK Planet, a new growth engine that operates several
platforms, should post sales CAGR of 34% over the next three years. We are
closely monitoring SK Planet’s growth potential and SK Hynix’s and SKB’s
profitability improvement.
2013F NP to grow 40.7% YoY on subsidiary and LTE effects: Sales should
increase 2.5% YoY in 2012F and 4.6% YoY in 2013F thanks to more subscribers
and the addition of high-ARPU LTE customers. OP should fall 26.7% YoY in 2012F
due to greater marketing costs and depreciation but jump 23.7% YoY in 2013F.
Thanks to better earnings at SK Hynix, equity-method gains would turn around from
a W60.2bn loss in 2012F to a W191.9bn profit in 2013F. As such, NP growth
(+40.7% YoY) would outstrip the OP increase (+23.7% YoY) in 2013F.
Jong In Yang Adj. PE only 5.2x after deducting major investment assets from market cap:
822-3276-6153/6154 The value of investment assets is being neglected. The assets are worth W8.7trn
jiyang@truefriend.com and account for 83% of SKT’s market cap. The 12MF PE is low at 7.1x and
adjusted PE stands at a mere 5.2x after subtracting major investment assets from
Dongyeon Lee the market cap. The proceeds from the POSCO stake sale in Oct amounted to
822-3276-6276
dongyeon@truefriend.com
W460bn. New light should be shed on the value of investment assets.
78

Current assets 6,654 6,117 6,072 6,352 6,540
Sales 15,599 15,988 16,383 17,137 17,644
Cash & cash equivalent 659 1,651 1,474 1,542 1,588
Inventory 149 220 229 240 247 Operating profit 2,286 2,131 1,562 1,933 2,038
Non-current assets 16,478 18,249 21,193 21,697 21,981
Investment assets 3,173 3,132 5,816 6,083 6,264 Financial income 477 442 560 450 814
Tangible assets 8,153 9,031 9,141 9,091 9,001
Intangible assets 3,622 4,746 4,863 5,087 5,237 Interest income 237 168 145 159 165
Total assets 23,132 24,366 27,265 28,049 28,521
Financial expense 442 344 494 516 557
Accounts & other payables 2,716 2,945 3,017 3,156 3,250
ST debt & bond 524 701 651 601 551
Non-current liabilities 4,522 4,960 7,183 6,838 6,571
Debentures 3,659 3,229 4,229 3,929 3,729 Earnings before tax 2,318 2,183 1,529 2,060 2,597
LT debt & financial liabilities 311 366 1,556 1,446 1,336
Total liabilities 10,724 11,633 14,213 14,198 13,490 Income taxes 545 599 331 505 662
Capital stock 45 45 45 45 45 Net profit 1,767 1,582 1,074 1,555 1,935
Capital surplus 2,916 2,916 2,916 2,916 2,916
Capital adjustments (2,995) (3,201) (3,201) (3,201) (3,201)
Net profit of controlling interest 1,842 1,613 1,116 1,570 1,954
Minority interest 1,078 1,071 929 814 694
EBITDA 4,588 4,614 4,137 4,599 4,708
Shareholders' equity 12,408 12,733 13,052 13,852 15,031

C/F from operating 4,343 6,306 4,134 4,376 3,916 per share data (KRW)
EPS 25,599 22,848 16,011 22,534 28,039
Net profit 1,767 1,582 1,074 1,555 1,935
BPS 167,593 174,280 179,986 191,322 207,410
Growth (%)
Net incr. in W/C 277 2,180 405 328 (400)
Sales growth 7.2 2.5 2.5 4.6 3.0
Others (3) 61 81 (173) (290) OP growth 21.7 (6.8) (26.7) 23.7 5.4
C/F from investing (2,339) (4,239) (5,711) (3,113) (2,775) NP growth 47.7 (12.4) (30.8) 40.7 24.4
EPS growth 48.5 (10.7) (29.9) 40.7 24.4
CAPEX (2,142) (2,961) (2,734) (2,666) (2,591)
EBITDA growth (0.5) 0.6 (10.4) 11.2 2.4
Decr. in fixed assets 94 35 50 50 10 Profitability (%)
Incr. in investment (25) (294) (2,859) (184) 16 OP margin 14.7 13.3 9.5 11.3 11.5
NP margin 11.8 10.1 6.8 9.2 11.1
EBITDA margin 29.4 28.9 25.2 26.8 26.7
Others (145) (424) (51) (89) (59) ROA 7.6 6.7 4.2 5.6 6.8
ROE 16.4 14.0 9.4 12.5 14.3
C/F from financing (2,246) (1,079) 1,400 (1,195) (1,095)
Dividend yield 5.4 6.6 6.2 6.2 6.2
Incr. in debts (1,318) (183) 2,055 (540) (440) Net debt (W bn) 4,388 2,989 5,184 4,514 3,986
Dividends (682) (668) (655) (655) (655)
Valuation (X)
Others (252) (234) 0 0 0 PER 6.8 6.2 9.5 6.7 5.4
PBR 1.0 0.8 0.8 0.8 0.7
C/F from others (4) 3 0 0 0
PSR 0.9 0.7 0.7 0.7 0.7
Increase in cash (246) 991 (176) 68 46 EV/EBITDA 3.8 2.8 4.0 3.4 3.2
79
Korea Gas (036460)

BUY / TP: W110,000
Shares outstanding (mn) 77 2010A 22,740 970 367 277 3,813 15.6 1,775 12.7 12.5 0.5 4.3
52W High/Low (KRW) 86,000/35,750 2011A 28,494 1,018 389 181 2,499 (34.5) 1,864 16.7 14.0 0.4 2.3
6M avg. daily turnover (USD mn) 16.6 2012F 35,252 1,131 393 301 4,143 65.8 2,050 20.0 17.2 0.8 3.8
Free float (%) 38.7 2013F 34,652 1,344 522 398 5,480 32.3 2,305 15.1 14.9 0.8 5.0
2014F 36,071 1,498 706 538 7,405 35.1 2,497 11.2 13.5 0.7 6.4
Note: NP, EPS are controlling interest
Prerequisites for additional share upside
Performance TP W110,000: We maintain BUY and a TP of W110,000, derived by adding 1)

1M 6M 12M W55,913, 0.52x 12MF PB, and 2) W55,201, the E&P business value (projects in
Absolute (%) 8.8 93.7 117.6 Oman, Qatar, Surgil, Myanmar and Mozambique) not reflected in PB valuation. As
Rel. to Kospi (%p) 11.6 95.2 118.4 negative sentiment on nuclear power plants grow, gas-fired power generation has
emerged as an alternative. In addition, the government is likely to enter the shale
12MF PB trend gas business with KOGAS, while the company’s aggressive investments in E&P
(X) (KRW)
projects since the mid-2000s should contribute to earnings from 2013. While
0.8 12MF PBR (LHS) 100,000
investors have mostly shunned KOGAS from 2008 to 1H12 due to regulatory risks
price (RHS)
0.6
80,000
and piling accounts receivable, operating conditions are improving rapidly as the
60,000
0.4 company’s role becomes increasingly important. As such, the government’s stance
40,000
0.2 towards KOGAS is becoming more favorable. Shares have rallied to reflect these
20,000
0.0 0
expectations, and we believe positive momentum will continue, on: 1) a stable
Jun-10 Jun-11 Jun-12 earnings outlook, 2) a gradual decline in accounts receivable and 3) political and
financial support from the government.
Most important factor in 2013: Changing government policies: With a new

administration taking office in 2013, we believe the government’s energy focus will
shift from nuclear power to gas. This should not matter on who is elected as
president, but rather the growing income levels. If gas emerges as the focal energy
source, KOGAS will become increasingly important given the growing demand to
import LNG at competitive prices and KOGAS’ LNG capex (storage tanks and
pipelines) will have to increase. As such, KOGAS will have to secure a solid
financial position. But, the company currently has limited flexibility to add
investments given the high debt ratio (2012 estimate 431%) and outstanding
accounts receivable (about W5trn). While the government was pushing for
increased nuclear generation, KOGAS’ deteriorating financial structure was not an
issue. But, the government will have to adjust its policy focus, and we expect
policies including: 1) revising the generation mix in The 6th Basic Plan for Power
Supply, i.e., increasing gas and lowering nuclear weightings, 2) issuing asset
backed securities with accounts receivable as underlying assets, 3) lifting rates to
collect accounts receivable, 4) normalizing the cost-linked pricing system, 5)
executing a rights offering and 6) implementing debt-to-equity swaps without
repaying money from the government. These policies should not bolster the
near-term forecasts, but reinforce the company’s long-term outlook.
Strong rally in 2012 is a risk: Shares have doubled in 2H12, and this is the
Heedo Yun
822-3276-6165
company’s fastest short-term rally. As such, investments should be based on a mid-
heedo@truefriend.com to long-term horizon, as a near-term pullback is possible.
80

Gross profit 1,303 1,315 1,449 1,672 1,836
SG&A expense 255 292 312 322 332
Inventory 2,157 3,360 4,157 4,087 4,254
Non-current assets 21,221 24,028 27,751 27,660 27,800 Other operating gains (78) (5) (6) (6) (6)
Investment assets 1,076 1,685 2,084 2,049 2,133 Operating profit 970 1,018 1,131 1,344 1,498
Tangible assets 16,237 17,493 18,387 19,070 19,736
Intangible assets 424 1,749 2,164 2,127 2,214
Current liabilities 6,378 8,140 9,490 9,373 9,546 Financial expense 1,314 1,262 1,470 1,531 1,526
Accounts & other payables 1,946 3,003 3,715 3,652 3,801 Interest expense 635 724 900 987 962
ST debt & bond 1,946 3,360 3,944 3,893 3,874
subsidiaries and JV
Debentures 10,873 14,711 18,563 17,758 17,343 Earnings before tax 367 389 393 522 706
LT debt & financial liabilities 3,626 3,369 4,864 4,762 4,722
Income taxes 92 215 95 126 171
Controlling interest 7,729 8,049 7,865 8,208 8,690 Net profit 275 175 298 395 535
Capital surplus 1,385 1,385 1,385 1,385 1,385
Other comprehensive profit (2) 184 0 0 0
Minority interest 1 (6) (8) (11) (13) 275 366 301 398 538

C/F from operating 982 (470) (2,957) 2,433 2,208 per share data (KRW)
EPS 3,813 2,499 4,143 5,480 7,405
Net profit 275 175 298 395 535
BPS 101,328 105,478 103,090 107,525 113,768
Sales growth 16.4 25.3 23.7 (1.7) 4.1
Net incr. in W/C (157) (1,689) (4,071) 1,228 816
OP growth 3.9 5.0 11.1 18.9 11.5
Others 59 199 (103) (150) (142) NP growth 15.6 (34.4) 65.8 32.3 35.1
C/F from investing (1,770) (3,663) (2,927) (1,423) (1,688) EPS growth 15.6 (34.5) 65.8 32.3 35.1
EBITDA growth 14.7 5.0 10.0 12.4 8.4
CAPEX (1,619) (2,097) (1,813) (1,644) (1,665)
Profitability (%)
OP margin 4.3 3.6 3.2 3.9 4.2
Incr. in investment (8) (316) (685) 183 67 NP margin 1.2 0.6 0.9 1.1 1.5
EBITDA margin 7.8 6.5 5.8 6.7 6.9
Net incr. in intangible assets (183) (1,287) (415) 37 (87)
ROA 1.0 0.5 0.8 0.9 1.3
Others 37 34 (14) 1 (3)
ROE 4.3 2.3 3.8 5.0 6.4
C/F from financing 776 4,117 5,920 (1,013) (512) Dividend yield 1.3 1.8 0.9 0.9 0.9

Net debt (W bn) 18,621 22,998 28,934 27,979 27,514
Incr. in debts 832 4,162 5,975 (958) (457)
Others 0 0 0 0 0 PER 12.7 16.7 20.0 15.1 11.2

PBR 0.5 0.4 0.8 0.8 0.7
PSR 0.2 0.1 0.2 0.2 0.2
Increase in cash (8) (55) 36 (3) 7 EV/EBITDA 12.5 14.0 17.2 14.9 13.5
81
Partron (091700)
BUY / TP: W25,000
Market cap (USD mn) 594 Dec (W bn) (W bn) (W bn) (W bn) (KRW) (YoY) (W bn) (x) (x) (x) (%)
52W High/Low (KRW) 18,250/10,350 2011A 360 38 37 32 1,090 (33.8) 41 10.2 11.2 2.2 23.3
Free float (%) 73.9 2013F 1,071 121 115 87 2,265 25.8 132 7.7 4.7 2.1 32.0
2014F 1,231 134 133 103 2,671 17.9 150 6.6 3.6 1.6 27.6
W1.1tn sales, W120bn OP and W1bn mkt. cap in 2013

Performance Maintain as top pick: We recommend Partron as our top component pick, as: 1)
1M 6M 12M Samsung continues to perform well in the global smartphone market, 2) antenna
Absolute (%) 17.8 59.9 69.4 market share at Samsung is rising, and 3) earnings should increase with the
Rel. to Kospi (%p) 20.6 (3.0) 2.1 release of a major client’s new flagship smartphone. We maintain ‘BUY’ and a TP of
W25,000. Our TP suggests a 42% upside, and equates to 11x 2013F PE, the
12MF PE trend
average multiple that handset component shares traded at during the 2003-2005
12.0
(X) (KRW)
20,000 boom in Samsung Electronics’ mobile business.
10.0
15,000
8.0
6.0 10,000
4Q12 inventory adjustment to be relatively mild: Partron should post solid sales
4.0
5,000
of W230.0bn (-3.0% QoQ, +89.8% YoY) and OP of W24.2bn (-9.7% QoQ, +139.1%
12MF PER (LHS)
2.0
0.0
price (RHS)
0
YoY) in 4Q12, despite off-seasonality. The usual inventory adjustment in Dec
Jun-10 Jun-11 Jun-12 should be relatively mild, on: 1) the start of production of a new flagship model by a
major customer, and 2) higher antenna market share with a major customer. Of
note, Partron is rapidly gaining market share at its biggest buyer due to the increase
in LTE models. Unlike the 3G network, the LTE network has 40 bandwidths. As
such, Partron should dominate the market given the company’s strength in
customization compared to overseas companies.
2013 sales of W1.1trn and OP of W120bn: Partron should post fresh record sales
of W1.1tn (+36.7% YoY) and OP of W120.7bn (+43.0% YoY) as camera module
and antenna for smartphone increase 33% and 56%, respectively. Partron is
supplying more models at the camera module business based on its dominance in
the low-resolution market (below 2MP), where Partron has a 90% share due to its
excellent cost competitiveness. In addition, the antenna business is posting stable
growth, winning market share from global makers. Of note, antenna’s high OPM
(20%) should raise the company’s overall profitability.
Pricing pressure continues to ease: We believe recent concerns over pricing

pressure for component suppliers should ease going forward. Partron has already
completed price contracts for 4Q12 volume at last year’s levels. Furthermore,
quality control via stable supply from a few proven vendors is now more important
to Samsung as the high-end Galaxy series (S3, Note) comprises more than 41% of
total smartphone shipments. Accordingly, the margin spread between Samsung’s
Matthew Yang wireless division and major handset component names should fade from 12%p in
822-3276-6174 2Q12 to 7%p in 3Q12.
Matthew.yang@truefriend.com
Kevin Lee
822-3276-4589
kevin.lee@truefriend.com
82

Current assets 78 116 279 407 526 Sales 233 360 783 1,071 1,231
Gross profit 62 69 129 171 197
Inventory 21 33 71 97 111 SG&A expense 25 31 85 55 63
Investment assets 69 112 112 112 112
Operating profit 38 38 83 117 134
Intangible assets 2 2 2 2 2 Financial income 1 1 0 0 0
Total assets 173 264 409 557 696 Interest income 1 1 0 0 0

Current liabilities 43 102 181 236 267
Financial expense 0 1 1 2 2
ST debt & bond 7 32 32 32 32
Current portion of LT debt 1 2 0 0 0 Other non-operating profit 0 0 (1) 0 0
Non-current liabilities 6 8 3 3 3 Gains (Losses) in associates,
0 0 0 0 0
Debentures 0 0 0 0 0 subsidiaries and JV
LT debt & financial liabilities 2 3 3 3 3 Earnings before tax 38 37 82 115 133
Total liabilities 49 111 183 239 269 Income taxes 6 5 13 28 30

Paid-in capital 10 15 19 19 19
Net profit 32 32 69 87 103
Capital adjustments (1) (1) (1) (1) (1) Other comprehensive profit (0) 1 1 1 1
Retained earnings 89 116 191 284 392 Total comprehensive profit 32 34 69 87 103
Shareholders' Equity 125 153 226 319 427 EBITDA 40 41 98 132 150

EPS 1,645 1,090 1,800 2,265 2,671
Net profit 32 32 69 87 103
BPS 6,306 5,170 5,867 8,257 11,051
Sales growth 21.1 54.7 117.6 36.7 15.0
Net incr. in W/C (12) (9) (39) (27) (15)
OP growth 13.5 (0.8) 120.4 40.9 15.0
Others 2 0 0 0 (1) NP growth 32.6 1.0 114.7 25.8 17.9
EBITDA growth 8.0 1.6 138.9 34.4 13.2
CAPEX (21) (38) (15) (20) (20)
Profitability (%)
OP margin 16.3 10.4 10.6 10.9 10.9
Incr. in investment (13) (17) 6 (16) (16) NP margin 13.7 9.0 8.8 8.1 8.4
EBITDA margin 17.4 11.4 12.5 12.3 12.1
Net incr. in intangible assets (0) (0) 0 0 0
ROA 21.9 14.8 20.6 18.0 16.4
Others (1) 0 0 0 0
ROE 29.8 23.3 36.6 32.0 27.6
C/F from financing 8 20 5 5 5 Dividend yield 2.4 1.8 1.1 1.1 1.1

Net debt (W bn) (8) 27 (18) (63) (136)
Incr. in debts 4 25 0 0 0
Dividends (5) (5) 5 5 5 Valuation (X)
Others 0 0 0 0 0 PER 6.9 10.2 9.8 7.7 6.6
PBR 1.8 2.2 3.0 2.1 1.6
PSR 1.0 0.9 0.9 0.6 0.6
Note: Based on K-IFRS (non-consolidated)
83
Daeduck GDS (004130)

BUY / TP: W21,000
Shares outstanding (mn) 21 2010A 360 15 49 31 1,358 (4.9) 23 6.8 3.4 0.6 9.7
52W High/Low (KRW) 14,900/9,360 2011A 417 25 31 16 770 (43.3) 40 12.7 2.8 0.6 4.8
Free float (%) 74.6 2013F 549 57 61 48 2,124 12.4 82 6.8 3.1 0.8 12.9
2014F 631 65 69 54 2,372 11.7 90 6.1 2.8 0.7 13.4
2013 product lineup centered on mobile

Performance Attractive at 6.8x 2013F PE: We maintain BUY with a TP of W21,000 (11x 2012
1M 6M 12M PE). Of note, our target PE is equivalent to the handset components sector average
Absolute (%) 5.1 5.1 54.3 for 2003-2005 when Samsung Electronics’ handset OP M/S expanded. We are
Rel. to Kospi (%p) 7.9 6.6 55.1 positive on Daeduck GDS, given: 1) sales expansion of mobile mainboard-use PCB
(HDI) at major clients via cooperation with Daeduck Electronics, and 2) stable profit
12MF PE trend
growth through FPCB capacity additions. Of note, we believe shares are attractive,
10.0
(X) (KRW)
20,000 currently trading at 7.7x 2012F and 6.8x 2013F PE.
8.0
15,000
6.0
10,000
4Q12 inventory correction to be milder than expected: Despite off-peak
4.0
seasonality, 4Q12 earnings should be robust, with sales of W122bn (-1.5% QoQ,
12MF PER (LHS) 5,000
2.0
price (RHS)
+12.7% YoY) and OP of W12.2bn (-3.8% QoQ, +459.2% YoY). We expect solid
0.0 0
Jun-10 Jun-11 Jun-12 results on solid downstream demand for R/F FPCB, on: 1) the start of production of
new strategic phones, and 2) the expanded adoption of high-pixel camera modules.
In particular, as the company boasts the best high-pixel camera module-use R/F
FPCB technology in the industry, we believe the company will be the biggest
beneficiary of the recent camera pixel competition among handset makers.
2013F sales forecast W549bn, OP W56.9bn: We forecast 2013 sales will grow
16.5% YoY to W549bn and OP 19.7% YoY to W56.9bn, fresh record highs. Sales of
mobile mainboard-use PCB (HDI) should continue to expand (+19.1% YoY) from
4Q12, and high-margin FPCB sales should increase (+41.5%) backed by FPCB
capacity additions in 1H12. In particular, we believe it is positive that the company’s
product portfolio is shifting from home appliances to mobile devices. We expect a
rising weighting of high-margin HDI and FPCB sales will bolster overall margins.
Component pricing pressure to continue easing: Concerns over component

pricing pressure should be minimal. We believe Samsung Electronics will focus
more on product quality via stable supplies from a few qualified vendors than
pricing. As for FPCB, a few vendors, including Daeduck GDS, are currently
supplying more than 60% of Samsung Electronics’ total demand. And, unlike other
handset components, the core components supplied, SEMCO’s influence is
minimal. Accordingly, the margin spread between Samsung Electronics’ mobile
division and major handset components vendors has trended down to 7%p in 3Q12
Matthew Yang from 12%p in 2Q12.
822-3276-6174
matthew.yang@truefriend.com
Kevin Lee
822-3276-4589
84

Gross profit 28 40 65 82 95
SG&A expense 15 17 19 26 29
Inventory 51 45 50 59 67
Total assets 410 428 465 516 574
subsidiaries and JV
Net profit 39 24 43 48 54
Capital surplus 42 42 42 42 42 Other comprehensive profit (0) (0) (0) (0) (0)
Capital adjustments (0) (9) (9) (9) (9) Total comprehensive profit 38 24 43 48 54
EBITDA 23 40 72 82 90


EPS 1,358 770 1,889 2,124 2,372
Net profit 39 24 43 48 54
BPS 14,932 15,461 16,755 19,009 21,581
Sales growth (1.4) 15.8 12.9 16.5 15.0
Net incr. in W/C (2) (10) (13) (15) (15)
OP growth (65.3) 75.1 87.3 19.7 15.0
Others 3 5 0 (0) (0) NP growth (4.9) (47.9) 167.1 12.4 11.7
C/F from investing (44) (3) (48) (25) (55) EPS growth (4.9) (43.3) 145.2 12.4 11.7
EBITDA growth (51.8) 76.6 78.9 13.0 10.5
CAPEX (47) (34) (25) (50) (30)
Profitability (%)
Incr. in investment 2 31 (23) (25) (35) NP margin 8.6 3.9 9.1 8.8 8.5
EBITDA margin 6.3 9.7 15.3 14.9 14.3
Net incr. in intangible assets 0 0 (0) (0) (0)
ROA 9.9 5.7 9.6 9.8 9.9
Others (0) 0 0 50 10 ROE 9.7 4.8 12.2 12.9 13.4
Stability
Incr. in equity 0 0 (0) 0 0
Net debt (W bn) (123) (92) (20) (46) (48)
Incr. in debts 0 0 0 0 0 Debt/equity ratio (%) 0.4 0.4 0.0 0.0 0.0
PER 6.8 12.7 7.7 6.8 6.1
Others 0 (9) 0 0 0
PBR 0.6 0.6 0.9 0.8 0.7
C/F from others (0) (0) 0 0 0 PSR 0.6 0.5 0.7 0.6 0.5
Increase in cash (4) 15 (0) 26 2 EV/EBITDA 3.4 2.8 3.9 3.1 2.8

85
Osstem Implant (048260)

BUY / TP: W37,000
Shares outstanding (mn) 14 2010A 121 20 10 3 218 (14.5) 24 69.3 9.8 2.5 3.7
52W High/Low (KRW) 33,000/9,970 2011F 132 21 18 5 397 82.0 25 31.4 7.6 2.7 7.6
Free float (%) 74.6 2013F 165 31 29 28 1,974 43.6 35 15.2 12.4 3.8 30.4
2014F 182 34 33 35 2,488 26.1 39 12.1 10.9 2.9 28.5
Note: NP and EPS based on adj. NP that includes equity-method gains/losses
Sound earnings to continue in 2013
Performance Overseas subsidiaries’ earnings gain traction: We maintain BUY and a TP of

1M 6M 12M W37,000, based on 18.9x PE (10% premium to global peers’ 2013F PE 17.2x) and
Absolute (%) (11.7) 131.5 127.8 2013F EPS of W1,975. We believe a premium is warranted given Osteem Implant
Rel. to Kospi (%p) (8.8) 132.9 128.6 (Osstem)’s early advance into emerging markets via ‘marketing via education’. And,
we are bullish on the potential of key markets, China and the US. China is important
12MF PE trend in terms of growth potential and the US is significant regarding the size of the
(X) (KRW) market. In addition, China and the US represent emerging and advanced markets,
25.0 12MF PER (LHS)
price (RHS)
35,000
30,000
respectively. We estimate sales at the 19 oveseas subsidiaries at W100bn (+46%
20.0
15.0
25,000 YoY); China (W25.0bn, +58% YoY) and the US (W27.0bn +27% YoY) accounting
20,000
10.0 15,000 for more than 50% of sales. 1) ‘Marketing via education’ should yield results in
5.0
10,000
5,000
emerging markets, and 2) brand recognition is improving in advanced markets.
0.0 0 Furthermore, earnings at subsidiaries in Japan, Germany (covering all of Europe)
and Taiwan should improve from 2013, and total overseas subsidiary sales should
reach W130bn.
First mover’s advantage in China; secondary subsidiaries likely to grow to

similar scale: Subsidiaries in China have grown rapidly thanks to the so-called
“marketing via education” strategy. Even Straumann and Nobel, the global no.1 and
no. 2 players, have been unsuccessful, and have adopted Osstem’s strategy in
emerging markets recently. Osstem provides differentiated education programs to
dentists in terms of instructors, various curriculum by achievement level and region.
In addition, the number of skilled dentists, around 10% of 4,000 dentists who
completed Osstem’s education program is increasing and it is positive as the 10%
account for 80% of total implant purchases. As such, the company should benefit
from the expansion of China as it has already secured 70% of the market. From a
mid- to long-term perspective, we expect subsidiaries in India, Vietnam, Philippines,
Kazakhstan and Bangladesh will emerge as equally important regional subsidiaries
like the Chinese subsidiary.
Earnings forecast: We estimate 2012 IFRS separate basis sales of W150bn

(+14% YoY) and OP of W27bn (+28% YoY). Exports to subsidiaries in China, the
US, Germany and other regions should fuel growth and an 18% OPM should be
reached as the high-margin TS series has been replacing existing products
Ji-hyung Han
overseas and domestically. We estimate 2012 adj. NP including equity method
822-3276-6236 gains at W19bn (+246% YoY) as the 19 overseas subsidiaries’ total sales and NP
Jhh6@truefriend.com should reach W100bn and W1.0bn respectively. In 2013, We forecast sales, OP
and adj. NP will grow to W165bn (+10% YoY), W30.5bn (+13% YoY) and W28bn
Jin, Man (W48% YoY), respectively, thanks to the ‘marketing via education’ effect in
822-3276-6582 emerging markets and improving brand awareness in advanced markets. Of note,
jinman05@truefriend.com
this forecast is based on the projection that the 19 overseas subsidiaries sales and
NP should reach W130bn and W5.5bn, respectively, in 2013.
86

SG&A expense 40 47 51 56 61
Inventory 40 37 42 48 51
Total assets 197 211 230 250 272
ST debt & bond 50 45 48 46 44
subsidiaries and JV
Net profit 8 10 18 23 26
Capital surplus 52 52 52 52 52 Other comprehensive profit (1) (1) (1) (1) (1)
Capital adjustments 0 (7) (7) (7) (7) Total comprehensive profit 7 9 17 22 26
EBITDA 24 25 31 35 39


EPS 218 397 1,374 1,974 2,488
Net profit 8 10 18 23 26
BPS 6,011 4,649 5,984 7,958 10,446
Sales growth (3.1) 9.3 13.8 10.0 10.0
Net incr. in W/C (11) (10) (13) (14) (18)
OP growth 24.8 3.6 28.2 13.0 12.9
Others 11 4 0 (1) 0 NP growth (14.7) 77.0 246.2 47.9 26.1
C/F from investing 6 2 (4) (9) (10) EPS growth (14.5) 82.0 246.2 43.6 26.1
EBITDA growth 15.9 3.0 24.4 12.1 12.1
CAPEX (1) (3) (4) (4) (5)
Profitability (%)
EBITDA margin 20.1 18.9 20.7 21.1 21.5
ROA 4.1 5.0 8.1 9.4 10.1
Others 0 (1) 4 (2) (2) ROE 3.7 7.6 27.6 30.4 28.5
C/F from financing (19) (10) 1 (2) (2) Dividend yield 0.0 0.0 0.0 0.0 0.0
Stability
Net debt (W bn) 21 20 19 14 9
Incr. in debts (19) (3) 1 (2) (2) Debt/equity ratio (%) 71.8 64.4 52.9 40.8 31.7
Dividends 0 0 0 0 0 Valuation (X)
PER 69.3 31.4 21.9 15.2 12.1
Others 0 (7) 0 0 0
PBR 2.5 2.7 5.0 3.8 2.9
C/F from others 0 0 0 0 0 PSR 1.8 1.3 2.8 2.6 2.4

87
Muhak (033920)
BUY / TP: W18,000
Shares outstanding (mn) 27 2010A 159 41 41 31 1,245 (30.9) 51 5.7 3.4 0.9 17.0
52W High/Low (KRW) 14,150/10,400 2011F 196 55 55 42 1,639 31.7 67 6.8 3.8 1.2 19.4
6M avg. daily turnover (USD mn) 0.9 2012F 213 51 51 38 1,499 (8.6) 57 8.7 5.4 1.2 15.3
Free float (%) 48.5 2013F 248 59 60 45 1,713 14.3 67 7.6 4.5 1.1 15.3
2014F 270 67 69 52 1,969 14.9 80 6.5 4.0 0.9 15.0
Dergulation to begin from 2013
Performance Time to raise soju prices (price deregulation): As the representative drink of the
1M 6M 12M working class and a component of the consumer price index, soju prices are difficult
Absolute (%) (4.4) 4.0 19.4 to raise. In fact, soju prices have been raised only 5.9% since 4Q08, leading to
Rel. to Kospi (%p) (1.6) 5.5 17.0 difficulties at major soju makers. We believe soju prices will finally be lifted in
early-2013, given: 1) the accumulated cost burden (grain prices and logitical costs)
12MF PE trend over the past three years, 2) discussions for higher prices since early-2011, and 3)
(x) (KRW) the precedent of raising prices before a presidential election in 2008. Of note,
10.0 15,000
8.0
ethanol prices were raised 5.6% in Jul, while beer prices were raised 5.9% after the
6.0
10,000 ethanol hike. Overall, the ethanol hike and the preemptive beer price increase
4.0
5,000
justify higher soju prices.
12MF PBR (LHS)
2.0
price (RHS)
0.0
Feb-10 Jun-11 Jun-12
0
Request to change on manufacturing license per company policy (traditional
regulations): Under current regulations, a soju maker can retain only one
manufacturing license which in turn causes excess logistics costs at Hite-Jinro,
Lotte Chilsung Beverage and Muhak as they must produce soju at a single plant.
From an economic perspective, it is natural to manufacture soju at the plant nearest
to the market to reduce logistics cost, but under current regulations, soju makers
bear more logistics costs given the distance from plant to market, causing
inefficiency. Considering that the one license policy was highlighted as an outdated
policy adding to logistics cost at a recent parliamentary inspection is very positive.
Once the policy is revised, there should be much less risk for administrative
processing at the Ulsan plant and a potential advance into the capital region
Coming to the fore amid austerity: Muhak is the only company to post growth in
the stagnant soju market. The company is expected to achieve a 75% market share
in Busan this year, expanding its market power thanks to an early-mover’s
advantage in the low-alcohol beverage market, securing consumer’s drinking tastes.
Alcoholic beverage sales increased an estimated 10.4% YoY to W138.3bn. Muhak
has sold more than 100mn bottles of soju per quarter since 1Q12 and sold 103.6mn
in 2Q12. Despite unfavorable seasonality, the company sold 100.09mn bottles in
3Q12. We expect that the company’s sales and NP should grow by 16% and 18%,
respectively, thanks to the growing early-mover’s advantage in Busan and
recognition as a regional soju maker. In particular, soju consumption is likely to
Park Ga-Young
822-3276-5979
grow regardless of austerity or recession, and shares are attractive amid the
parkga00@truefriend.com austere conditions. We maintain a TP of W18,000, based on 10.9x PE (20%
discount to the average F&B sector) on 12MF EPS of W1,657.
88

Gross profit 72 90 95 105 122
SG&A expense 34 45 48 53 60
Inventory 43 46 50 58 64
Total assets 272 324 369 419 482
subsidiaries and JV
Net profit 31 42 38 45 52
Capital surplus 2 6 6 6 6 Other comprehensive profit 4 (12) 9 9 9
Capital adjustments 9 7 7 7 7 Total comprehensive profit 34 0 48 54 61
EBITDA 51 67 57 67 80
Shareholders' Equity 202 230 272 320 375


EPS 1,245 1,639 1,499 1,713 1,969
Net profit 31 42 38 45 52
BPS 7,607 8,983 10,400 12,220 14,294
Sales growth 17.6 22.8 9.1 16.0 9.3
Net incr. in W/C 9 18 (17) (7) (26)
OP growth 47.0 35.8 (8.2) 17.3 13.6
Others 7 (7) 9 9 9 NP growth (31.7) 33.6 (7.0) 17.5 14.9
C/F from investing (72) (44) (30) (35) (60) EPS growth (30.9) 31.7 (8.6) 14.3 14.9
EBITDA growth 39.6 32.4 (14.7) 17.3 18.6
CAPEX (14) (35) (33) (16) (15)
Profitability (%)
Incr. in investment (58) (9) 6 (14) (23) NP margin 19.4 21.2 18.0 18.3 19.2
EBITDA margin 31.8 34.3 26.9 27.2 29.5
Net incr. in intangible assets 0 (0) (1) (1) (1)
ROA 12.4 14.0 11.1 11.5 11.5
Others 0 0 (2) (4) (21) ROE 17.0 19.4 15.3 15.3 15.0
Stability
Net debt (W bn) (15) (31) (39) (56) (40)
Incr. in debts (0) (0) 0 0 0
Others 0 (3) 5 0 0 PER 5.7 6.8 8.6 7.6 6.5

PBR 0.9 1.2 1.2 1.1 0.9
PSR 1.2 1.5 1.6 1.4 1.3
Increase in cash (17) 20 5 15 (18) EV/EBITDA 3.4 3.8 5.4 4.5 4.0

89
Daou Tech. (023590)

BUY / TP: W22,000
Yr to Sales Adj. OP EBT Adj. NP EPS % chg. EBITDA PE EV/EBITDA PB ROE
52W High/Low (KRW) 17,450/10,050 2011A 168 17 36 61 1,433 (14.3) 40 7.2 12.0 0.7 10.6
Free float (%) 55.2 2013F 217 27 40 89 2,063 6.6 45 7.3 15.8 0.8 11.8
2014F 241 31 46 102 2,355 14.1 51 6.4 13.7 0.7 12.0
Focus on ongoing growth momentum

Performance Earnings momentum to continue: Stronger momentum via firming intrinsic
1M 6M 12M operating results has heavily influenced Daou Technology (Daou) shares, as much
Absolute (%) (6.8) 17.2 36.4 as investment securities value, including Kiwoom Securities (Kiwoom) and Saramin
Rel. to Kospi (%p) (4.0) 18.7 37.2 HR. Until two or three years ago, Kiwoom’s stake value accounted for 65-70% of
NAV, and the correlation coefficient between Daou and Kiwoom shares reached
12MF PB trend
0.8-0.9. However, intrinsic OP contribution to NAV has climbed to 18-20%, as OP
2.0
(X) 12MF PBR (LHS) (KRW)
20,000 has grown at a five-year trailing CAGR of 25%, while the value of the Kiwoom stake
1.5
price (RHS)
15,000 has ebbed to the 50% level. While the in-house contribution to NAV is still relatively
1.0 10,000
low, intrinsic OP has pushed shares upward as intrinsic OP is considered internal
0.5 5,000
momentum rather than Kiwoom’s. Meanwhile, large SI companies are banned from
participating in public tenders worth less than W8bn in 2013, which should benefit
0.0 0
May-10 May-11 Jun-12 Daou. While we have yet to reflect this in our earnings forecast, we believe the
contract restrictions may emerge as a new share catalyst as the company is likely
to reinforce its market share backed by technological and financial strength.
Stake value to also emerge: We also need to closely monitor the value of
investment securities, in addition to the operating growth momentum in 2013. First,
Saramin HR is rapidly closing ground on Jobkorea, the leading online job portal.
Second, despite concerns over Kiwoom’s earnings due to the lackluster overall
stock market and weaker trading value, we believe Kiwoom will reinforce its
position as the leading online brokerage going forward, backed by: 1) an expanding
market dominance on a firm client base, and 2) new mobile service growth
momentum.
Cheap valuations: Shares traded at W11,000-14,000 in 2Q12, before surging to

W17,850 on growth momentum and appealing valuations, before retreating to
W15,900 on profit-taking. We believe this rally has ended the absolute
undervaluation phase. In 2Q12, the company’s market cap accounted for only
70-80% of its stake value in Kiwoom and Saramin HR, but is now slightly higher
than the investments. However, we believe Daou is still undervalued given the
growth momentum in operating value this year and the value of property and other
investment stakes. In particular, the NAV discount is still 43%, suggesting further
upside, despite being an operating holding company, which does not merit
discounting internal operations and property holdings.
Hoon Lee, CFA
822-3276-6158
hoon.lee@truefriend.com
Sunyoung Park
822-3276-6195
sunyoung.park@truefriend.com
90

SG&A expenses 17 16 18 23 25
Inventory 12 12 13 13 14
Investment assets 168 182 184 190 200 Adj. operating profit 15 17 23 27 31
Operating profit 65 36 36 40 46
Total assets 602 581 605 625 651
Current liabilities 151 113 158 154 151 Interest incomes 1 1 4 2 2
Accounts & other payables 28 32 30 33 37 Financial expenses 1 3 3 3 2
ST debt & bond 106 67 58 48 35
Non-current liabilities 50 46 45 46 46
Debentures 0 0 0 0 0 0 0 0 0 0
subsidiaries and JV
LT debt & financial liabilities 19 15 13 10 8 Earnings before tax 66 34 37 39 45
Capital surplus 175 175 175 175 175 Net profit 51 26 30 31 35
Capital adjustments (12) (12) (12) (12) (12) Other comprehensive profit 0 (0) (0) 0 0
Retained earnings 217 237 262 287 316 Total comprehensive profit 51 26 30 31 35
EBITDA 68 40 41 45 51
Adj. shareholders' equity 513 640 717 801 896
Adj, net profit 71 61 83 89 102

C/F from operating 10 17 20 22 27 Per-share data (KRW)
EPS 1,672 1,433 1,935 2,063 2,355
Net profit 51 26 28 29 33
BPS 11,718 14,547 16,266 18,122 20,250
Sales growth 29.1 8.0 16.9 11.0 10.7
Net incr. in W/C (9) (3) (10) (11) (12)
OP growth 416.5 (44.8) 1.1 11.2 12.9
Others (35) (10) (2) (1) 1
NP growth 61.5 (14.3) 35.2 8.0 14.1
CAPEX (12) (9) (3) (3) (4) EBITDA growth 379.6 (41.6) 2.5 10.7 12.2
Profitability (%)
OP margin 42.1 21.5 18.6 18.6 19.0
Incr. in investment (15) (25) 0 0 0 NP margin 46.0 36.5 42.2 41.0 42.3
Net incr. in intangible assets (3) (1) (1) (1) (1) EBITDA margin 44.0 23.8 20.9 20.8 21.1
ROA 8.7 4.4 5.1 5.0 5.6
Others (17) (15) (8) (10) (13)
ROE 15.0 10.6 12.2 11.8 12.0
C/F from financing 49 (53) (6) (6) (6) Dividend yield 1.5 1.3 0.9 0.9 0.9
Net debt (W bn) 8 31 35 16 (6)
Incr. in debts 55 (44) 0 0 0
Dividends (4) (6) (6) (6) (6)
Valuation (x)
Others (2) (3) 0 0 0 PE 5.1 7.2 7.8 7.3 6.4
PB 0.7 0.7 0.9 0.8 0.7
PS 2.5 2.8 3.4 3.1 2.8
Increase in cash 22 (86) 2 3 3
EV/EBITDA 5.6 12.0 17.0 14.9 12.9
91
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2013 Outlook
Economy
Disorderly shift to a new paradigm

I. 2013 economic outlook
1. Paradigm shift in the global economy
2. Legacy of the Asian financial crisis
3. Directions for the world’s economies
4. Possible effects on domestic economy
5. Outlook in detail
II. Key economic indicators outlook

Economy
Disorderly shift to a new paradigm
Global paradigm shift much slower than hoped

At about this time a year ago, we forecast the global economy’s transition to a
new paradigm: demand growth in Asia. We believed we had a solid rationale.
First, after the Asian financial crisis, the developed countries drove global
economic growth by consuming more but their current account positions
reached a level that could not sustain wider deficits. Second, considering
severe income disparity, Asian governments would be pressed to switch policy
priority from boosting exports to shoring up household incomes. As a year has
passed we must admit things are changing much slower than we anticipated.
We thought Asian demand growth would materialize in earnest by 2H12 but it is
still in a burgeoning stage. It appears the global economy’s paradigm shift to
Asian demand growth is going at less than a fifth of the pace we expected.
2013 economy outlook: Steady transition to a new paradigm

From 2000 through 2008, a global trade structure was centered on China’s
imports of raw materials, parts and materials from emerging economies to
export finished consumer goods to developed countries. However, less demand
from developed countries has slowed China’s exports, which in turn decreased
the emerging markets’ China-bound exports. In other words, the old trade
structure no longer holds. With a delayed economic recovery in developed
countries, the structure is unlikely to regain strength. Given China’s excess
capacity, it would be difficult for the nation to create new demand for the global
economy. In conclusion, the world’s economy in 2013 will likely continue the
rumble-tumble in its search for a new paradigm.
Growth, interest rate, FX rates and consumer prices to stay low

Korea’s economy will inevitably face slow growth considering the delayed
recovery of export conditions and the risk of flagging domestic demand
triggered by household debt problems. The monetary authorities will likely
attempt to overcome the low-growth environment by keeping interest rates
down. Given that policies may shift toward households rather than companies, FX
rates should stay low (strong KRW). Moreover, consumer prices should stabilize at
the mid-2% level due to slow global economic growth and low FX rates.
Figure 1. 2013F Korean economic growth

(% Y oY )
4.5
4.0 3.8 3.9
3.5
Minkyoo Jun, Ph. D. 3.5 3.6
2.8 2.9
3.0
822-3276-6229 2.5
2.5 2.3 2.4
min.jun@truefriend.com
2.4
2.0 1.6 KIS
Eunjung Jin 1.5
822-3276-6231 Consensus
1.0
eunjung.jin@truefriend.com
0.5
Chaewon Lee 0.0

822-3276-5150 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
chaewon.lee@truefriend.com
94
I. 2013 economic outlook
1. Paradigm shift in the global economy
Heightening risk of Slow growth, sluggish exports, consumption constraints, income disparity and
economic downturn household debt. None of the terms describing Korea’s economy are positive.
External conditions are not any better. While the only comfort is found in gradually
improving indicators for the US economy, there seems to be no relief in sight:
Europe is still struggling to resolve its debt crisis and Asian countries such as China
and Japan are also facing the risk of economic downturn. What could offer a
breakthrough in this predicament?
Global economy facing a The global economy is now passing through a turbulent phase on its transition from
paradigm shift old paradigm to new. We may be able to get a picture of the new paradigm and see
how fast it will emerge if we can understand what constituted the old. It was in 1997
when the old paradigm that prevailed over the past decade first stepped on the
scene.
Old paradigm born in The year 1997 featured the Asian financial crisis. After opening capital markets to
1997 foreign investor participation during the early to mid-1990s, Asian countries saw
foreign capital flow into their systems, which led to the appreciation of respective
Asian currencies against the USD. But at the same time, Asian countries, which
vigorously pursued quantitative growth, ended up facing mounting current account
deficits as their currencies appreciated. That is, the Asian financial crisis was in
essence caused by reckless capital market opening by Asian countries with
incompetent industry structures. It was the Asian financial crisis when the seeds
were sown for what would later become the global financial crisis.
Figure 2. Asian currencies’ appreciation against the USD during 1994-1H95
(%)
35 32.2
30
25
20
15.2
15 10.4
10 7.9 7.0
3.6 3.2
5 0.3
0
-5
-5.6
-10
JPY SGD MY R PHP KRW THB TWD INR IDR
Source: Bloomberg, Korea Investment & Securities
95
Table 1. Asian current account balances during 1990-1996 (% of GDP)
Country 1990 1991 1992 1993 1994 1995 1996 1997

Hong Kong 6.2 4.3 3.0 4.8 -0.8 -6.3 -2.5 -4.4
Korea -0.5 -2.4 -0.7 0.8 -0.8 -1.5 -4.0 -1.5
China 3.1 3.2 1.3 -1.9 1.4 0.2 0.8 3.9
Indonesia -2.8 -3.5 -2.2 -1.5 -1.7 -3.4 -3.2 -1.8
Malaysia -2.1 -8.6 -3.7 -4.6 -7.6 -9.7 -4.4 -5.9
Philippines -5.5 -1.9 -1.7 -5.0 -4.0 -2.4 -4.2 -4.7
Thailand -8.3 -7.5 -5.5 -5.0 -5.4 -7.9 -7.9 -2.1
Source: IMF
2. Legacy of the Asian financial crisis
1) Asian countries’ Let us go back to 1997 to find what caused the global economy to take its current
all-out efforts to boost shape. We can identify the major changes brought on by the Asian financial crisis
exports as follows.
First, the crisis situation prompted Asian countries to make an all-out effort to boost
exports. The Asian financial crisis raised a basic but critical question: What was the
trigger? What can be done to prevent a reoccurrence? The answer to both was
simple: current account surplus. That is, as a cause of the crisis was accumulated
current account deficits, Asian countries endeavored to boost exports to switch to
surplus. To that end, the countries needed to strengthen competitiveness in the
export market with some focusing on price by bringing more flexibility to the labor
market and introducing low-wage policies. The countries pursued more free-trade
agreements (FTA) to advance on oversea markets and prevent their currencies
from appreciating too much. Since then, the Asian countries have had profitability
as their top priority by putting an end to the old habits of pursuing growth in scale.
Table 2. Asian FTAs

Country Partners
Korea Chile (2004), Singapore (2006), EFTA (2006), ASEAN (2007), India (2010), US (2007)
Thailand (2003), Hong Kong (2004), Macau (2004), ASEAN (2005), Chile (2006), Pakistan
China
(2007), New Zealand (2009), Peru (scheduled to take effect)
ASEAN (1993), New Zealand (2001), Japan (2002), EFTA (2003), Australia (2003), US (2004),
Singapore India (2005), Jordan (2005), China (2005), Korea (2006), Transpacific (2006), Panama (2006),
Peru (2009), Gulf Cooperation Council (2008)
Laos (1991), ASEAN (1993), China (2003), Australia (2005), New Zealand (2005), Japan
Thailand
(2007), Korea (2009), India (2010)
ASEAN (1993), China (2005), Korea (2007), Japan (2008), India (2009), Australia /New
Philippines
Zealand (2010)
Source: ADB
2) Real estate bubble Second, the Asian financial crisis played a role in putting the low rate environment
formation in the US in place in the US. The Asian crisis and the Russian debt moratorium in 1998
prompted the world’s investment capital to flee from risky emerging markets and
seek safer harbors, i.e., the US. The increased supply of liquidity drove down the
interest rate in the US. As such, coupled with the Fed’s rate cuts in the early 2000s,
the capital gravitating toward the US worked to inflate the real estate bubble and
triggered the economic downturn around the globe.
96
Figure 3. Korea’s economic development post-Asian financial crisis
3) Global trade imbalance Third, a global trade imbalance emerged with China as an intermediary. Asian
countries’ efforts to boost exports and the US’ greater consumption backed by the
real estate bubble led to widening current account deficits in the US and an overly
export-dependent economy in Asia. The consequence was an outright imbalance:
the financial industry’s meteoric rise versus shrinking manufacturing in the US, and
fast-rising exports versus sluggish domestic demand in Asia. In the meantime, by
taking advantage of its low-cost manufacturing, China imported parts and materials
from the technologically advanced emerging markets and exported the finished
goods to the US and Europe. As China acted as a global trade middleman, the US
and Europe ran huge trade deficits with the country while China also had a trade
deficit with the emerging countries.
Figure 4. Global stock market performances during 2003-2007
(%)
1,400
1,143
1,200 1,071
1,000
800 708
600 439
365 333
400 276 268 257 227 196 188 188 174 139
200 102
0
Taiwan
Thailand
Indonesia
India
China
Korea
Hong Kong
Malaysia
France
Japan
Singapore
UK
US
Philippines
Vietnam
Germany
Source: Thomson Reuters
97
Figure 5. China’s trade balances by partner (2011)
(USD bn)
250
200
150
100
50
-50
-100
-150
North EU Latin Af rica ASEAN Middle Oceania Asia
America America East
Source: CEIC
4) Income disparity Fourth, income disparity deepened in the Asian countries. Flexible labor and rigid,
low wages benefited corporations but the policies were obviously disadvantageous
to households. In addition, the FTAs are in essence more favorable to large
companies rather than to SMEs. This idea is supported by the Asian Development
Bank’s (ADB) report Asia’s Free-Trade Agreements, How is Business Responding?
A weak currency policy (that is, preventing their currencies from appreciating) was
to help shore up exporters’ profitability at the expense of households’ opportunity to
enjoy the benefits of lower import prices. With this favorable environment,
companies stepped up labor-saving investment and jobs creation at large
corporations declined. As such, the post-crisis policy changes helped businesses to
expand profits but it ended up undermining household income.
Table 3. Korea’s disposable income

(% of total) 1990 1995 2000 2005 2010 2011
Business 5.7 5.9 4.2 8.0 13.5 13.7
Individual 74.0 72.9 70.3 66.8 63.0 62.6
Government 20.3 21.3 25.5 25.2 23.4 23.7
Source: Bank of Korea
Figure 6. Recent changes to global trade structure
98
5) China-bound exports As the imbalance was getting severe, the global economy faced mounting pressure
by emerging markets for a paradigm shift and its transition to a new paradigm has been accompanied by
shrink due to falling slow growth. During their own crises, the US and Europe reduced imports from
demand in China’s export China and accordingly, the emerging markets’ exports of parts and materials to
destinations China diminished as well. The China-bound exports of parts and materials will not
likely rise unless China’s exports of finished goods rebound.
Asia’s structural The post-crisis situations gave rise to two key structural problems: a dependence
problems: Reliance on on exports and extreme income disparity. The Asian economies became overly
exports and deepening reliant on exports and thus sluggish shipments would deal a very huge blow. The
income disparity income disparity has worsened to a level that calls for urgent political action.
Table 4. Asia’s export dependence (%)
1990 1995 2000 2005 2011

Korea 27.6 28.5 38.6 39.3 56.2
Taiwan 45.7 47.0 52.9 62.5 75.8
Malaysia 77.8 94.1 119.8 112.9 91.6
Thailand - 41.8 66.8 73.6 76.9
Note: Export dependence = total exports/GDP*100
Source: Datastream
3. Directions for the world’s economies

Need recovery in The dilemma can be resolved with either one of two solutions. One is reviving
developed countries or demand in the US or Europe and the other is China playing a new role on the
healthy growth in China demand side. Unfortunately, neither is likely to materialize in the near future. The
US and Europe would not want to go back to the model where the global economy
grew on their current account deficits. Although China’s domestic demand still
achieves near double-digit growth, the nation will likely harness its surplus
production capacity built when exports peaked in the mid-2000s rather than procure
from overseas. The world’s major economies are situated as described below.
1) Europe: Even so far favorable Germany hit by the slow eurozone

Reignited concerns about Concerns about the sluggish eurozone economy had been allayed by a rally for
European economy industrial production in Aug but they resurfaced in Sep. While production
rebounded in most countries (e.g., Greece, Italy, Spain, etc.) in Aug, related growth
considerably narrowed in Sep. The eurozone’s 3Q12 economic growth fell 0.1%
QoQ and the downturn should continue into 4Q12. Ever since bailouts were
provided to debt-stricken countries, slow growth has worsened further. That is
because the bailouts require a massive fiscal budget reduction and such austerity
has not been smoothly implemented due to deep public opposition.
Table 5. Eurozone members’ economic growth

(% QoQ) 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12
Eurozone 0.4 0.3 0.6 0.2 0.1 -0.3 0.0 -0.2 -0.1
Germany 0.7 0.6 1.2 0.5 0.4 -0.1 0.5 0.3 0.2
France 0.4 0.4 0.9 0.1 0.2 0.0 0.0 -0.1 0.2
Spain -0.1 0.1 0.3 0.2 0.0 -0.5 -0.3 -0.3 -0.3
Italy 0.4 0.2 0.1 0.3 -0.2 -0.7 -0.8 -0.7 -0.2
(% YoY)
Greece -4.6 -8.6 -8.0 -7.3 -5.0 -7.5 -6.5 -6.3 -7.2
Portugal 1.3 1.0 -0.6 -1.1 -2.0 -3.0 -2.3 -3.2 -3.4
Source: Eurostat
99
Eurozone suffering from For the eurozone, the economy is more slowed by poor domestic demand than
stagnant economies exports. An exports slowdown has been limited thanks to the steady growth of
shipments to non-eurozone regions with relatively favorable economies. However,
the economies of the member countries have been directly hit by the budget
constraints and general strikes to protest austerity measures. The eurozone’s retail
sales have fallen constantly YoY since May 2011 and so has consumer sentiment.
Figure 7. Eurozone retail sales growth Figure 8. Eurozone consumer confidence index
(% YoY) 03 04 05 06 07 08 09 10 11 12
4 0
3
-5
2
-10
1
-15
0
-20
-1
-25
-2
-3 -30
-4 -35
-5 -40
03 04 05 06 07 08 09 10 11 12 (net balance)
Source: Eurostat Source: Markit
German manufacturing Although Germany’s economy avoided a growth drop in 3Q12, there is insufficient
deteriorated since Sep momentum to propel an upswing in 4Q12. While the eurozone’s perceived
economy fast deteriorated for consumers and manufacturers, the region has
managed a relatively moderate slowing thanks to Germany’s steady growth.
However, as the nation’s economy is fast worsening, especially for manufacturing,
since Sep, the eurozone’s recovery will likely be pushed further back.
Heavy intra-regional trade Despite the weak EUR trend, Germany’s exports have not yet rebounded. One
weighting has become a reason of course is the laggardly recovery of the global economy that is holding
poison back a demand rally. However, a bigger reason is the sustained downturn of the
intra-regional economy with a 40% trade weighting has offset the external price
competitiveness sharpened by EUR depreciation. Serving its purpose, the single
currency has stimulated intra-regional trade but Germany’s dependence on
regional trade is now poisoning the country. In Sep, Germany’s EU-bound
shipments fell 7% MoM and pulled down total exports 2.5% MoM. Manufacturing
orders that have shrunk YoY since Nov 2011 dwindled 3.3% MoM in Sep. That too
is triggered by the eurozone’s orders falling 9.6% MoM. Since slow orders herald a
delayed production rally, Germany’s industrial output, which saw a big cut in Sep, is
unlikely to expand in the short-term.
100
Figure 9. Eurozone exports
(% Y oY )
40
Non-eurozone-bound exports
30
Eurozone-bound exports
20
10
-10
-20
-30
01 02 03 04 05 06 07 08 09 10 11 12
Source: Eurostat
2) US: Will not resume its past role even after recovery
US economy with a The global economy is unlikely to return to the old structure where the US spends
housing market recovery and Asia exports. Still, given recent signs of recovery for the US, it should prevent
the global economy from entering a downward spiral and buy some time until a shift
is made to a new global growth paradigm. The US economy is reviving because its
housing market is finally getting out of a lengthy retreat.
Housing market recovery The US housing market saw a decline in transactions since the summer of 2005.
leads to more spending Beginning in 2006, housing starts began to fall and prices peaked in the summer of
the same year. It has been at least six years since the market started to retreat and
a considerable correction has been made. These are the two factors that seemed
to have triggered the recent market recovery. The US housing market has
sufficiently retreated in terms of both period and extent and begun to show gradual
signs of recovery since 2011. Now the recovery is accelerating. As such, the revival
is leading to more spending. Individual spending shrank in May and Jun despite
income growth but then fast picked up after Jul. Retail sales too have been on an
upswing since Jul.
Figure 10. US existing home sales Figure 11. US new home sales
('000 units) ('000 units)

8,000 1,400
1,200
7,000
1,000
6,000
800
600
5,000
400
4,000
200
3,000 0
00 01 02 03 04 05 06 07 08 09 10 11 12 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: US National Association of Realtors Source: US Department of Commerce
101
Figure 12. US housing starts Figure 13. US housing price index
('000 units) (1Q91=100)

2,500 240
220
2,000
200
1,500
180
1,000
160
500
140
0 120
00 01 02 03 04 05 06 07 08 09 10 11 12 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: US Department of Commerce Source: FHFA
Sluggish US In contrast, US manufacturing indicators are slow thanks to the global trade
manufacturing indicators contraction. Although US exports picked up in Sep after a sharp slide in Jul-Aug,
growth has not been apparent since 2H11. Poor exports had much bearing on
industrial output that has also been stagnant. Slow production is well illustrated by
ever dwindling manufacturing orders received in 2012.
Figure 14. US exports Figure 15. US manufacturing orders
(USD bn) (USD bn)

190 500
180
170 450
160
150 400
140
130 350
120
110 300
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Source: BEA Source: US Department of Commerce
Even if US spending Even if US spending rebounds on mounting housing construction, it should not spur
picks up, its impact on China’s exports and drive a bullish Asian economy. Although more spending leads
Asia’s exports expansion to more imports, the imports rise has become much smaller than before. As of
should be limited 3Q12, the US’ domestic demand (consumption + investment) has grown
USD546.8bn YoY and imports added a mere USD34.3bn. In other words, only 6.3%
of domestic demand growth led to expanded imports. The figure is even more stark
when compared to pre-financial crisis. Compared to 2Q08, immediately before the
crisis took hold, 3Q12 domestic demand grew USD1.8trn and imports USD48.2bn
(4.4% of domestic demand growth). And that is a much lesser figure than earlier.
From 2000 through 2Q08, 25.0% of domestic demand growth led to expanded
imports. As such, mounting domestic demand in the US will have trouble resuming
its old role and offer Asian countries an opportunity to expand their exports.
102
Table 6. Imports induced by US domestic demand

2000s -
1960s 1970s 1980s 1990s Pre-financial Post-financial
crisis crisis
Imports inducement (%) 6.3 13.5 10.7 17.5 25.0 4.4
Note: Imports inducement = increased imports amount / increased domestic demand amount x 100
Source: US Department of Commerce’s Bureau of Economic Analysis, Korea Investment & Securities
US growth strategy focus The expansion of the US economy no longer means opportunity for Asia’s exports
shifting from finance to due to a change in the US’s growth strategy. Until the 1990s, the US aggressively
manufacturing supported its manufacturing as illustrated by its placement of trade pressure on
Asian countries. However, as the Asian currency crisis struck at the end-1990s, the
US economy grew on the nation’s housing bubble, led by the financial sector and
home builders.
At that time, the US housing market was overheated for three reasons. 1) Liquidity
abounded as capital was concentrated in the US after an emerging market
investment risk was highlighted by the Asian currency crisis. 2) The Fed adopted a
super-low interest rate policy to respond to the IT bubble burst and terrorism fears
fueled by the 9/11 attacks. 3) As the atmosphere for deregulation built up, the
Glass-Steagall Act, which separated investment banking and commercial banking,
was scrapped in 1999; And the Gramm-Leach-Blily Act was passed that allowed a
bank to take both roles. As a result, an enormous amount of capital that had been
accrued by investment banks flew to the property market.
The housing bubble augmented Americans’ income from assets and their spending.
As US manufacturing’s production capacity could not keep up with the sudden
domestic demand surge, the nation became the world’s biggest consumer market
by the mid-2000s. Now, the US must be fully aware of how housing bubble-induced
excessive spending brings about a crisis if it is coupled with a mounting import
dependency instead of growing its own manufacturing. That is why we should not
expect the US to play the role of global consumer. As the nation wants to revive its
jobs market, it should exert trade pressure and promote USD depreciation to sell
more of its products overseas.
US recovery would Thus, the US housing market recovery and subsequent spending pickup would
provide only slight relief offer a breather for the struggling global economy and sustain it until new significant
demand appears, rather than resuming the pre-crisis global trade structure. In the
short-term, since the European economy is stuck in the doldrums, China’s
Europe-bound exports should drop and partially offset a positive effect of US
economic recovery. The good news from the US may not be a decisive factor but
could at least ignite a positive flow of fundamentals for one or two quarters. That is
because even a slight improvement in China’s US-bound exports would trigger
other countries’ exports (parts, materials, raw materials, etc.) to China.
3) Possibility of China’s demand improvement

Global economy in dire As mentioned above, it seems nearly impossible for the global economy to resume
need of China’s demand the past growth paradigm with reignited demand in developed countries. Thus,
expansion unless China’s demand improves in the near future, the global economy is bound to
struggle in the slough of anemic demand. If so, extreme slow growth that has
recently appeared in Brazil and Taiwan will likely continue.
103
Figure 16. Brazil’s GDP growth Figure 17. Taiwan’s GDP growth
(% YoY) (% YoY)
10 20
8 15
6 10
4 5
2 0
0 -5
-2 -10
-4 -15
00 01 02 03 04 05 06 07 08 09 10 11 12 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: CEIC Source: CEIC
Would China’s spending That is because only China could create significant demand that is big enough to
expansion augment affect the global economy, while developed countries address their excess debt and
consumer goods formulate a new growth strategy. A dominant opinion is China’s economy would see
imports? stronger domestic demand and achieve ~8% growth in 2013F. But we wonder how
helpful China’s demand growth in 2013 could be for other countries. China’s
imports of raw materials and intermediary goods tend to depend on their exports
performance and the nation rarely imports finished consumer goods. Of course,
with even bigger domestic demand, China should import more raw materials and
intermediary goods to manufacture domestic market-targeted consumer goods.
However, that phase has yet to come. China’s consumer goods imports should also
increase but the current level is still negligible. Based on the top 20 items in the
four-digit harmonized system (HS) codes, consumer goods account for 44.3% of
US imports while 16.6% for China. In 2000, the figure for China was 12.6%. This
shows that while China’s spending is having a greater affect on other countries’
exports, its absolute impact is still weak.
Figure 18. Consumer goods weighting in the US and China’s imports
(%)
50 China US
44.3
42.8
40
30
20 16.6
12.6
10
0
2000 2012
Note: Top 20 items in the order of the four-digit HS codes

Source: The Korea International Trade Association
104
4. Possible effects on domestic economy

Slow growth inevitable On the global economic front, we expect the US and China to provide buffers in
2013. But slow growth will be inevitable overall given the advanced economies’
strategic focus on production rather than consumption and China’s still weak buying
of overseas products. Such a global economic landscape would certainly hit the
domestic economy.
Unfavorable for Korea’s The negative effect should be felt first by exports. Even if the US economy recovers
economy with a heavier and China’s domestic demand grows in 2013, the catalysts would be insufficient to
dependence on exports improve the overall economy and Korea’s exports are unlikely to recover much from
the current level. Given that Korea’s dependence on exports has increased
substantially over the past decade, the effect of economic growth slowdown from
the exports slump should be harsher than in the past. The weighting of exports in
GDP stood at 27.7% in 1996, prior to the 1997 Asian currency crisis, but spiked
more than double to 56.2% in 2011 and showed the rapid increase in exports
dependence. The weighting gained further to 57.7% in 1H12.
Figure 19. Korea’s export weighting in nominal GDP
(% of GDP)
70
60
50
40
30
20
10
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: BoK
Change in Korea’s Despite brisk exports since the mid-2000s, consumer spending remained sluggish
economic fundamentals: due to the structural problem in Korea’s economy. That is, the link was absent for
Sluggish employment the benefits of exports growth to connect with domestic consumption. Amid a
despite growing exports growing focus on efficiency since the Asian currency crisis, investment led more to
employment replacement than to jobs creation. The weak employment growth
despite brisk exports and production can be confirmed in the following aspects.
First, since 2004, employment has shrunk in the manufacturing and wholesale/retail
sectors that typically account for the largest portion in the number of workers. In
2011, manufacturing workers numbered 4.09mn, down 90,000 from 4.18mn in 2004,
while production jumped 53.1% during the same period. Likewise, the
wholesale/retail sectors saw workers shrink from 3.8mn in 2004 to 3.64mn in 2011
despite the sectors’ growth of 30.9% during the same stretch. Second, the jobs
creation effect of facility investment has been cut more than half than in the past.
From 1990 to 2005, facility investment of W1bn increased employment by almost
120 but since 2010, the same investment added only 29 jobs.
105
Figure 20. Growth by sector vs. employment Figure 21. Jobs creation effect by facility investment
(%) (Jobs/W1bn)
60 53.1 160
50
Production growth Employment growth 140
38.9
40
30.9
120
30
20 16.3 100
14.8
9.1 8.8
10
80
0
-2.1 60
-10 -4.3 -3.6 -3.7
-9.9
-20 40
Wholesale/retail
Education
Construction
Financials incl.
Manufacturing
Food/lodging
insurance
20
0
1990-1999 2000-2005 2006-2009 2010-2011
Source: BoK, Statistics Korea, Korea Investment & Securities Source: Korea Investment & Securities
Household debt also bad Given the large exports growth had only a limited effect on domestic demand in the
for domestic demand past, chances are high domestic demand will slow further in the deteriorating
exports environment. This illustrates that the domestic demand slump will not be
easily resolved in 2013. In addition, heavy household debt would further drag on
the recovery of domestic demand. Korea’s household debt-related issues include
mortgages, up significantly until early 2007, business funds for self-employed small
business owners and debt to cover living expenses, which surged since the global
financial crisis. As of end-Jun 2012, debt for real estate purchase totaled W397.4trn
(W312.4trn at banks and W85trn at non-bank depository institutions). If including
some loans from insurance companies (W75.6trn) and most loans from public
financial institutions (W31.4trn), the total real estate-related debt would be
~W450trn. If property prices drop, the debt-linked risk may increase as collateral
loses value. But we do not think the risk will materialize in the near future. Given the
relatively low loan-to-value (LTV), there would be some buffer even if real estate
prices shed ~20% from the current level. As extensions/rollovers are likely for debts
that are about to reach maturity or have a set duration, a risk for real estate-related
debt is unlikely to emerge. But for loans to support livelihood, government measures
must be employed. Even if the household debt problems are unlikely to trigger a
systemic crisis, a slowdown in consumption looks unavoidable.
Figure 22. Household debt growth
(% Y oY ) Bank mortgages
20
Bank general loans
Non-bank loans
15
10
-5
05 06 07 08 09 10 11 12
Source: BoK
106
Slowing debt growth Consumer spending largely depends on economic growth but also tends to shrink
heralds a contraction in when debt growth slows sharply or debt falls. The latter cases take place when
consumer spending debtors are under payment pressure from financial institutions. Korea’s household
debt growth stood at 5.6% at end-2Q12, similar to the level in 2Q09. This means
financial institutions started adjusting household debt and households are under
pressure to pay to some extent. As conditions should not improve in the near-term,
consumption is unlikely to recover from the slump for the time being.
Figure 23. Household spending and debt Figure 24. Household income and spending
(%) Debt Spending (%)

30 30
Income Spending
25 25
20
20
15
15
10
10
5
5
0
0
-5
-10 -5
-15 -10
90 92 94 96 98 00 02 04 06 08 10 90 92 94 96 98 00 02 04 06 08 10
Source: BoK, Statistics Korea Source: BoK, Statistics Korea
Strong stimulus for The new administration should forward a strong stimulus package for domestic
domestic demand in demand in 2013 due to the following. 1) Given limited tools to expand exports,
2013 domestic demand growth would be the only way to offset sluggish exports. A real
estate market recovery in the US could send a positive signal but the nation is
changing to an economy that favors exports more than consumption. 2) While brisk
exports since the currency crisis have increased corporate profits, households
voiced growing political and economic discontent with fewer jobs, more irregular
workers and the collapse of the self-employed. Accordingly, there is a growing need
for the government’s intervention. 3) To resolve the household debt issue,
measures are necessary to stabilize property prices and lift household incomes.
Campaign pledges This year’s campaign pledges by leading presidential candidates commonly include
also focus on domestic building an economic democracy, greater social welfare, jobs creation, better
demand growth conditions for irregular workers and resolving income disparity. But it is hard to find
promises to expand exports. This shows the focus of domestic economic policy
from 2013 and onward should be on how to boost domestic demand.
107
5. Outlook in detail
2013F GDP growth: 3.3% We estimate GDP growth will drop to the low-2% level for 2012F as economic
conditions in 3Q12 were weaker than expected and the global recovery has been
delayed. We believe Korea’s economy reached the trough in 3Q12 and its GDP
should pick up in 4Q12 as global trade improves on better economic conditions in
the US and China. But a strong rebound is unlikely due to the aforementioned
constraints. Considering the economic conditions at home and abroad, we project
GDP growth at 3.3% for 2013F, up 1%p over 2012.
Stronger growth over The full-year growth of 3.3% is not very much compared to previous economic
2012 but still weak recovery periods. Excluding the occasions when growth fell below the 3% level in
momentum 2003 (2.8%, credit-card crisis), 2008 and 2009 (2.3% and 0.3%, respectively,
US-inspired global financial crisis) and 2012 (2.3% projected, Europe’s debt crisis),
Korea’s full-year GDP growth has exceeded 5% for all other years since 2000.
Although GDP growth should be stronger than in 2012, it will be difficult to find
notable growth momentum in a low-growth environment.
Hard to find leading Further exports erosion should be limited but shipments to Europe are expected to
issues other than base remain sluggish. In contrast, exports to China, the US and emerging countries will
effect likely see a modest recovery. Accordingly, we anticipate export growth will inch up
YoY to 4.2% for 2013F. Despite government efforts such as extending household
debt maturities and supporting the conversion to low-interest loans, consumption is
unlikely to fast rise due to the heavy household debt burden. A sustained low
interest rate environment and housing market stimulus may provide a bit of a boost
for incomes but they will not be enough to drive an economic recovery. In contrast,
investments are very likely to rebound due to a low base of comparison from 2012.
Rather than a strong recovery, we expect overall economic conditions will “regain”
the lost ground as the economic participants that slumped in 2012 start to recover.
1) Growth to stay low

It will take some time for The economy will likely remain in a low-growth environment due to the slow rise for
the new government to incomes and a large household debt burden, with export conditions showing no
see the effects of marked improvement. The government is expected to introduce various measures
economic stimulus to stimulate domestic demand but the associated decision-making and execution
will take time. As it is uncertain whether the measures will take effect in 2013, we
leave open the possibility that their effects may appear in 2014. Moreover, policies
to boost household debt-driven consumption such as the domestic demand
stimulus plan used in 2002 are not feasible. Even if they were, the government is
unlikely to use policies that may 1) lead to financial institutions failing on
deteriorating loan quality and 2) weaken consumption. As such, the government will
have very little room to maneuver. The economic democracy would be more helpful
for somewhat vulnerable households rather than companies. However, the interests
of various economic entities would become tangled in a complex web. Moreover,
even if economic democracy is aggressively promoted through policies, its effect on
consumption would take additional time to materialize.
108
Figure 25. 2013F GDP growth
(% YoY)
4.5
3.9
4.0 3.8
3.5
3.5 3.6
2.8 2.9
3.0
2.4 2.5
2.5 2.3
2.4
2.0
1.6
KIS
1.5
Consensus
1.0
0.5
0.0
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
2) Interest rates to stay low

Key policy rate to be We believe the government will introduce various measures given the excessive
lowered to 2.0% household debt levels and the likelihood that the low-growth environment will not be
addressed in the near-term. The government should encourage the extension of
household debt maturities, support the conversion of high-interest loans to
low-interest; And it will continue to adopt measures to stimulate the housing market.
One of these policies may include a measure to sustain the low interest rate
environment. Korea’s household debt is estimated at W922trn. If debts held by
nonprofit organizations and owner-operators are included, the figure would climb to
W1,121trn. In simple arithmetic terms, a 1%p drop in lending rates would ease the
household interest burden by more than W11trn. Although lower lending rates
would lead to less interest income, households with financial assets would not fall
into the threshold situation where they have to cut spending even if they collect less
interest income. For households that are deep in debt, they will likely take
advantage of the lighter interest burden to pay off the loan principal or focus on
consumption. Given that external conditions are unlikely to fast improve and
inflation should remain stable at the 2% level, the Bank of Korea (BoK) would not
have much trouble keeping the low interest rate policy. The BoK lowered its key
interest rate by 0.25%p in both Jul and Oct, and the central bank is expected to hold
the rate steady at 2.75% for the remainder of 2012. Our forecast is the policy rate
will be lowered to 2.0% in 1H13.
3) KRW to stay strong

KRW/USD to fall to as low Although Asian currencies should remain strong on the whole, we believe the KRW
as W1,020 at end-2013 in particular will gain more strength than others in 2013. We forecast the KRW/USD
will slide to W1,075 at end-2012 and fall to as low as W1,020 at end-2013. On the
external front, the US’ weak USD policy should trigger the KRW’s appreciation. The
US will wish to strengthen the competitiveness of its manufacturing sector by
weakening the USD. Of course, the weak USD policy will not be the only effort to
ramp up US manufacturing. The US could build up strong trade pressure as seen in
the 1980s and 1990s by urging Asian countries to appreciate their currencies and
facilitate market opening. But its effectiveness looks doubtful as the US has few
markets in Asia where its products can immediately increase their presence. In
addition, we expect Korea to shift its policy stance on the FX rate from maintaining it
at a high level to promote exports since the Asian currency crisis to allowing a
strong KRW to boost domestic demand. Of course, this approach is based on the
109
perception that even if a weak KRW is encouraged, export growth has limited
upside due to sluggish global demand.
Figure 26. 2013F KRW/USD (avg.)
(KRW)
1,160
1,152
KIS
1,140
1,131 1,133 Consensus
1,120
1,104
1,100 1,092
1,102 1,080
1,080 1,074 1,067
1,088
1,060
1,065
1,040 1,048
1,020 1,030
1,000
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
KRW to gain much We expect KRW appreciation to be sharper due to the following. First, the JPY,
against the JPY which received a premium as a safe asset since the financial crises in the US and
Europe, is more likely to remain weak as the premium unwinds. Accordingly,
chances are great that the current rate of more than W1,300/JPY100 will fall to
~W1,150/JPY100 at end-2013. Second, RMB appreciation should not happen fast
as the government controls currency rates in China. Third, even if the KRW quickly
gains strength, it is still weak compared to other Asian currencies’ appreciation
since the pre-crisis level (US-inspired global financial crisis). The only currencies
that lost more ground than the KRW against the USD are the Vietnamese dong
(VND) and Indian rupee (INR). Both countries have severe current account deficits.
Figure 27. Major currencies’ appreciation against the USD

(compared to end-2007)
(%)
50 42.3
40
30
17.6 17.1
20 11.7 9.9 8.0
10 2.0 0.6 0.5
0
-10 -2.4
-20 -13.5 -13.9

-30 -23.1
-28.0
-40
JPY SGD CNY NTD THB MY R AUD HKD PHP IDR EUR KRW VND INR
Source: Thomson Reuters
110
4) Consumer prices to stay low

Consumer prices to stay The low consumer prices trend in 2H12 should continue into 2013. A rise in
low amid sluggish consumer prices comes either from cost-push or demand-pull factors. Cost-push
demand and a strong inflation is caused by substantial increases in the prices for commodities and
KRW domestic agricultural produce. Demand-pull inflation arises when aggregate
demand for goods exceeds their supply. Consumer price rises in Korea since 2003
have all been caused by cost-push factors and demand-pull inflation was last seen
here driven by brisk consumption in 2002 prior to the credit-card crisis. We expect
consumer prices to stabilize at the mid-2% level in 2013 as commodity prices
remain stable amid the slow growth of the global economy (cost side) and domestic
consumption remains weak (demand side).
Figure 28. 2013F consumer prices
(% Y oY )
5.0
4.5 KIS
4.0 Consensus
3.5
3.0 2.9
3.0 3.0 2.7
2.5 2.3 2.8
2.4 2.2 2.7
2.0 1.6 2.2
1.5 1.8
1.6
1.0
0.5
0.0
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
Figure 29. Consumer prices
(% Y oY )
12
Bullish housing
market KRW plunged
10
Brisk
Bullish
8 spending
semiconductors Crops Oil prices Crops
Oil prices damaged by soared damaged by
6 soared f loods f loods
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Statistics Korea
111
II. Key economic indicators outlook

2012F 2013F 2012F 2013F
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
1-1. National income accounts
(% YoY)
GDP 2.8 2.3 1.6 2.4 2.4 2.9 3.8 3.9 2.3 3.3
Total consumption 2.2 1.7 1.9 3.6 2.5 2.7 2.5 2.4 2.4 2.5
Private consumption 1.6 1.1 1.5 2.8 2.4 2.5 2.6 2.7 1.8 2.6
Public consumption 4.7 3.6 3.3 6.4 3.1 3.6 2.6 1.3 4.5 2.6
Total investment 4.0 -1.6 -2.3 -3.1 -0.6 0.9 6.1 7.8 -1.0 3.7
Fixed investment 4.6 -2.1 -2.0 1.0 -0.4 3.2 6.2 6.1 0.2 4.0
Construction investment 1.5 -2.1 -0.1 1.6 2.9 3.5 3.8 3.4 0.2 3.4
Facility investment 8.6 -3.5 -6.0 -0.8 -7.2 2.3 9.2 10.5 -0.6 3.6
Total exports 4.7 3.2 2.6 6.4 4.7 7.0 6.2 6.5 4.2 6.1
Total imports 4.4 0.5 0.9 5.9 3.2 7.2 7.3 7.4 2.9 6.3
1-2. National income accounts
(% QoQ)
GDP 0.9 0.3 0.2 1.1 0.9 0.7 1.0 1.2 2.3 3.3
Total consumption 1.5 0.2 0.7 1.0 0.6 0.4 0.5 0.9 2.4 2.5
Private consumption 1.0 0.4 0.6 0.8 0.6 0.5 0.7 0.9 1.8 2.6
Public consumption 3.4 -0.3 0.9 2.0 0.5 0.2 -0.1 0.8 4.5 2.6
Total investment 1.0 -2.0 -2.9 1.0 1.7 1.5 2.0 2.5 -1.0 3.7
Fixed investment 3.2 -2.9 -1.5 2.2 1.3 1.3 1.6 1.9 0.2 4.0
Construction investment -1.2 -0.4 0.2 2.8 0.0 0.3 1.2 1.8 0.2 3.4
Facility investment 10.3 -7.0 -4.3 1.0 3.3 2.6 2.2 2.0 -0.6 3.6
Total exports 3.0 -0.6 2.5 1.3 1.5 1.6 1.7 1.5 4.2 6.1
Total imports 4.3 -1.9 1.7 1.8 1.6 2.0 1.8 1.8 2.9 6.3
2. Foreign transactions and
consumer prices (% YoY)
Producer prices 3.2 1.7 0.4 -0.3 -0.8 0.6 2.7 3.9 1.3 1.6
Consumer prices 3.0 2.4 1.6 1.6 1.8 2.2 2.7 2.8 2.2 2.4
WTI (eop, USD/bbl) 103.0 85.0 92.2 88.0 90.2 93.0 95.4 96.5 88.0 96.5
WTI (avg., USD/bbl) 102.9 93.4 92.3 90.0 91.5 92.8 94.2 95.0 94.7 93.4
Exports (USD bn) 134.9 140.2 133.3 142.7 137.8 145.4 142.6 148.6 551.1 574.3
Growth (%) 3.0 -1.7 -5.6 1.7 2.1 3.7 7.0 4.1 -0.7 4.2
Imports (USD bn) 133.5 130.7 125.4 133.9 133.9 138.9 141.4 144.6 523.5 558.8
Growth (%) 7.7 -2.7 -7.1 2.1 0.3 6.3 12.8 8.0 -0.2 6.7
Trade balance (USD bn) 1.3 9.5 7.9 8.8. 3.9 6.5 1.2 3.9 27.6 15.6
Current account balance (USD bn) 2.6 11.2 14.7 12.1 7.5 5.3 3.0 4.7 40.5 20.6
3. FX rates
KRW/USD (eop.) 1133 1145 1111 1075 1060 1048 1035 1020 1075 1020
KRW/USD (avg.) 1131 1152 1133 1102 1088 1065 1048 1030 1130 1058
KRW/JPY100 (eop.) 1381 1454 1441 1319 1277 1245 1192 1159 1319 1159
KRW/JPY100 (avg.) 1428 1437 1441 1378 1333 1275 1224 1192 1420 1255
KRW/EUR (eop.) 1513 1435 1444 1408 1401 1404 1402 1397 1408 1397
KRW/EUR (avg.) 1484 1479 1418 1438 1436 1424 1417 1405 1455 1421
KRW/RMB (eop.) 180 181 177 172 170 169 167 166 172 166
KRW/RMB (avg.) 179 182 178 176 174 172 170 169 179 171
JPY/USD (eop.) 82.4 79.4 77.6 81.5 83.0 84.2 86.8 88.0 81.5 88.0
JPY/USD (avg.) 79.3 80.2 78.7 80.0 81.6 83.5 85.6 86.8 79.6 84.4
USD/EUR (eop.) 1.330 1.244 1.291 1.310 1.322 1.340 1.355 1.370 1.310 1.370
USD/EUR (avg.) 1.311 1.284 1.251 1.305 1.320 1.337 1.352 1.364 1.288 1.343
RMB/USD (eop.) 6.31 6.36 6.30 6.26 6.25 6.20 6.21 6.15 6.26 6.15
RMB/USD (avg.) 6.31 6.33 6.36 6.27 6.25 6.20 6.15 6.10 6.32 6.18
112
2013 Outlook
Sector Outlook
Summary ........................................................................................................................................................................... 114

Oil Refining ....................................................................................................................................................................120
Metals.....................................................................................................................................................................................128
Chemicals ........................................................................................................................................................................136
Construction .................................................................................................................................................................146
Shipbuilding ..................................................................................................................................................................156
Machinery ........................................................................................................................................................................164
Transportation............................................................................................................................................................170
Autos .......................................................................................................................................................................................176
Textiles/Apparel .......................................................................................................................................................182
Media & Ad. ...................................................................................................................................................................190
Retail .......................................................................................................................................................................................200
Food, Beverages & Tobacco ...............................................................................................................210
Pharmaceuticals ....................................................................................................................................................218
Banks ......................................................................................................................................................................................228
Securities ..........................................................................................................................................................................238
Insurance ..........................................................................................................................................................................246
Internet/Game............................................................................................................................................................254
Electric/Electronics/Telecom equipment ............................................................................262
Display ..................................................................................................................................................................................268
Semiconductors ......................................................................................................................................................274
LED ............................................................................................................................................................................................282
Telecom Services .................................................................................................................................................290
Utilities...................................................................................................................................................................................298
Summary
Table 1. KIS 2013 sector outlook summayry
Sector Investment points and major issues
 2013 refining industry depends on regional economic issues and refining supply-demand rather than long-term industry
cycle
 2013 supply-demand in Asia: similar balance as 2012 (supply +1.05mn b/d, demand +0.73mn b/d), balance to tighten on
Oil refining demand growth in China, India and SE Asia and decreasing refining capacity in Japan
 Demand decreases in US and Europe, but old refinery closures decrease supply faster, tightening supply-demand balance
 TOP PICK: SK Innovation (096770)

 2013 separate OP at POSCO and Hyundai Steel to increase 14% and 27%, respectively
 Zinc TC to go up to USD230 per tonne in three years
Metals  Zinc TC to increase as smelters become more vocal in treatment charge negotiations with miners, on: 1) rising
self-sufficiency of zinc concentrate in China, and 2) mounting zinc concentrates inventory
 TOP PICKS: POSCO M-Tech (009520), Korea Zinc (010130), Hyundai Hysco (010520)
 2013F ethylene capacity increases 7.36 tonnes in Asia while demand grows 4.97mn tonnes, resulting in supply glut. But,
demand growth should improve YoY from 5.6% in 2012 to 10.2% in 2013
 Petrochemical market should firm on actual demand, depleting accumulated inventories by 1H13 and gradually recover
Chemicals
 China's import demand for petrochemical products should continue, and companies from surrounding countries and ME
should aggressively compete for Chinese demand
 TOP PICK: LG Chem (051910)
 OPM should bottom out in 2013; more companies forming consortiums to avoid extreme competition; builders returning to
growth not only in terms of volume but also quality
 Unconventional markets like Asia, Qatar and upstream should expand, companies with operations in widespread markets
Construction should grab opportunities and highlight differences
 Housing market has bottomed out, companies with capacity to develop products, low PF risks and ample liquidity should
benefit from moderate market recovery
 TOP PICKS: Daewoo E&C (047040), Samsung C&T (000830)
 Backlogs are shrinking as order receipts fall short of sales; shipbuilding stocks should continue to suffer from valuation
de-rating due to lower absolute profit and visibility
 Shipyards are currently engaged in heated competition to secure offshore plant orders to overcome poor commercial ship
market conditions, and this is weighing on profitability
Shipbuilding
 Earnings at some companies are likely to miss consensus, so the market will likely continue lowering forecasts
 2013 order outlook: Big 3 shipyard orders to decline slightly YoY to USD29.5bn
 TOP PICK: Samsung Heavy (010140)
 Fittings market boom should continue in 2013 with strong downstream industries, such as global power plant EPC market
and offshore plant
 Power plant equipment market to remain sluggish in 2013 due to lackluster order receipts by domestic heavy industry
Machinery players and builders
 China’s excavator market should grow only 5% in 2013F, despite uncertain environment; some equipment makers can
perform well regardless of economic conditions
 TOP PICKS: Sungkwang Bend (014620), TK Corp. (023160), Jinsung T.E.C. (036890)
 Transportation stocks are cyclical, so in slow times, structural changes are essential to appeal to investors
 Despite slow economy, air transport demand is on a structural growth path
Transportation  In 2013, international passenger demand should continue to expand; we expect 9.7% YoY growth
 In contrast, shipping shows few signs of structural demand change and, thus, growth will depend on macroeconomic
variables
 TOP PICK: Korean Air (003490)
 Global market share growth to continue
 Quality and service improvements to narrow gap between Korean automakers and other major carmakers
Autos  Concerns about slowing growth to be resolved by capacity expansion and release of competitive new models
 Korean automakers to post highest growth rate in brand value among major players
 TOP PICKS: Kia Motors (000270), Hyundai Mobis (012330)
 Domestic apparel spending to resume recovery in 2013
 Fashion firms normalizing; monitor brand name players in 2013
Textiles & Apparel
 Shares of fashion firms are undervalued compared to the market and consumer goods sector due to de-ratings this year
 TOP PICK: LG Fashion (093050)
114

 Media & ads sector should continue outperforming Kospi
 Content demand should rise on digital conversions, intense competition on platform diversification, improved content
production environment and securing killer content
Media & Ad.  Industrial changes in pay TV market to increase market share of top-tier companies
 Gradual ad market improvement in 2013 on private media reps, improved content quality and higher ad sales efficiency to
increase new advertisers and new media ad demand
 TOP PICKS: KT Skylife (053210), Cheil Worldwide (030000)
 Weak consumption to continue in 2013, focus on micro factors rather than macro issues
 Focus on Lotte Shopping - Himart synergies, and for Hyundai Department Store, renewals and same store sales recovery,
Retail new store profitability
 Home shopping industry to post limited earning growth in 2013 due to SO commission hikes
 TOP PICKS: Himart (071840), Lotte Shopping (023530), Hyundai Department Store (069960)
 Recovery of pricing power to lead to earnings improvements, stable operations to lead to higher valuations
Food, Beverages &  Overseas growth potential for firms with localized production facilities, strategies to strengthen brand equity and solid
Tobacco distribution networks
 TOP PICKS: KT&G (033780), Orion (001800)
 Likely to evolve into growth structure similar to Japan, re-rating possible on mid- to long-term perspective based on
potential structural growth (domestic market expansion driven by aging population, overseas market entries via new drug
development and industry consolidation)
 New drug pipeline and overseas market entry should come to fruition on global trend of modification technology and
Pharmaceuticals & low-priced drugs
Biotech  Recent strict government regulations to accelerate industry consolidation and modernization, less-competitive firms
leaving market and leading firms gaining market share, M&As among domestic and overseas companies should also
become active
 OP should turn around from 2013 as drug price cuts peaked, drug market is expanding and NHIC fund is stabilizing
 TOP PICKS: Green Cross (006280), Yuhan (000100)
 Lighter interest burden will be financials’ top priority for soft landing of household debt
 Due to lower interest rates on fixed-rate loans , pace of conforming loan sales may slow in 2013 and sales weighting of
banks’ fixed-rate loans to grow
Banks  More animated discussions about issuing covered bonds likely
 Since sound asset quality reduces credit risk during macroeconomic downturn, it should be a differentiating factor for
banks
 TOP PICKS: Hana Financial Group (086790), KB Financial Group (105560)
 As new administration starts in 2013, there should be substantial financial policy changes to ease Korean household debt
issues and low-growth economy, and changes should be positive to capital market and financial industry
 Alignment of pension system and growth of pension market would be positive for capital market and brokerage firms;
moreover, brokerage industry has low regulatory risks as most regulations should be related to household debt
Securities  Recently, investors favoring diversified portfolios; economic uncertainties and regulatory changes should trigger demand
for private financial advisory services
 To benefit from the changes, brokers must have ability to manage various assets, other than stocks, and must have
concrete customer bases and, as such, only a few brokers will benefit from the changes
 TOP PICK: Samsung Securities (016360)
 Government has stepped up efforts to rein in household debt since 2011, and 2013 will be a critical year of transition
 While changes to financial industry structure should benefit insurers on many fronts, regulatory uncertainties, such as
taxes, should affect non-life insurance, mainly medical indemnity products
Insurance  Stricter RBC requirements to be the most significant regulatory change for insurance sector; adjustments to health
insurance may have a major impact on non-life insurance, which is most vulnerable to regulatory action in the financial
sector
 TOP PICK: Samsung Fire & Marine (000810)
 2013F online ad market to grow 9% YoY due to domestic economic slowdown and high comparison base, but mobile ad
market to jump 75% YoY
 Success of Daum's start of direct operations for search ads on breakup of partnership with Overture to be a critical concern
Internet portal & Online
games  2013F online game market to post 23% YoY growth on fewer blockbusters but promising overseas royalty income
 Mobile messengers, including Kakao Talk and Line, to firm on content distribution
 TOP PICKS: NHN (035420), NCsoft (036570)
 Uncertain global macro variables: Economic uncertainty of advanced markets and China, and stronger KRW against USD
and JPY
 Mobile devices will offset sluggish PC/TV demand with smartphone and tablet PC demand growth at 20% and 42%,
respectively, in 2013
Electric, electronics,
telecom equipment  Due to rising weighting of low- to mid-priced TVs, growth potential in value terms looks limited despite volume growth
 Despite pricing pressure, handset component vendors should see steady earnings growth as volume growth should offset
price cuts
 TOP PICK: LG Electronics (066570)
115

 Panel inventory burden caused by strong panel demand in 2H12 to deteriorate supply-demand dynamics and lower panel
prices in 1H13
 But, LCD panel supply-demand conditions to improve from 2H13 on limited supply growth
Display
 As for OLED, Samsung 5.5G A3 and 8G mass-production line capex momentum to revive from 2H13 with completion of
technological development
 TOP PICK: Cheil Ind. (001300)
 Mainstream memory demand is changing from conventional computing (PC & servers) to mobile (smart & tablet devices)
 DRAM: Supply limitations to steady prices and lift margins
Semiconductors  NAND: Handsets, tablets and SSDs to drive demand
 Samsung should enter head-on competition with Intel, TSMC and Qualcomm given AP expansion and entry into foundry
business
 TOP PICKS: Samsung Electronics (005930), SK Hynix (000660)
 LED lighting market growth to be gradual and will likely revolve around business-to-business (B2B) and
business-to-government (B2G) over near term
 LED TVs contribute much to earnings, but LED shares should gradually become less affected by LED TVs going forward
LED as market peaks in 2013
 Margin erosion at domestic LED players recently wound down, but companies are still stuck in a downturn, still low
expectations for LED margins
 TOP PICK: Lumens (038060)
 ARPU should increase 5.1% YoY on rising weighting of LTE subscribers
 Given 3G as a precedent, we believe LTE competition will start to ease from end-2012/early-2013 as penetration rate goes
above 30%
Telecom services  Telcos' OP should grow 30.0% YoY in 2013 on ARPU increase and less marketing costs
 Dividend capacity should increase given wrap-up of LTE investment and less capex for 10 years from 2013
 TOP PICKS: SK Telecom (017670), KT (030200)
 When making investment decision, government policy changes are more important than short-term earnings
 Government focused more on public interest than profitability, but with mounting debt at KEPCO and KOGAS, government
must now focus on profitability
Electric & Gas  Focus on KOGAS as growing negative sentiment on nuclear power should make gas generation more favorable
 KEPCO may turn profitable after posting net losses for five years, thanks to successive rate hikes and declining fuel prices
 TOP PICK: KOGAS (036460)
 Companies with unique products or technological competitiveness can have pricing power and control selling and general
cost, leading to sustainable high OPM, and these stocks to
 post steady price trends
 Large-cap stocks have no rebound momentum while overall economic conditions are weak; expect more favorable
conditions for small- and mid-cap stocks than large caps
Small cap  thanks to nationwide economic democratization efforts
 Defensive plays, stocks with improving earnings and undervalued blue chips to be bullish amid austerity in 2013; aging
society and growing health consciousness are new long-term trends
 than temporary phenomenon, so stocks related to healthcare, bio, medical, leisure and entertainment are likely to
outperform going forward
 TOP PICKS: Samyung ENC (065570), Woori Financial (021960), Dong-A Pharmtech (140410), Dongil Metal (109860),
MDS Technology (086960)
116
Table 2. KIS Universe earnings forecast by sector

NP Shareholders’ equity EPS BPS DPS PE PB ROE DY
(W bn) (% YoY) (W bn) (% YoY) (KRW) (KRW) (KRW) (x) (x) (%) (%)
Universe 2011/12A 83,928 (6.0) 772,771 12.3 5,878 54,896 966 11.1 1.2 10.9 1.5
2012/12F 93,708 11.7 860,675 11.4 6,449 60,965 874 10.4 1.1 10.9 1.3
2013/12F 111,664 19.2 960,827 11.6 7,684 67,857 921 8.7 1.0 11.6 1.4
Resource 2011/12A 704 0.1 7,104 18.1 2,362 23,710 306 11.5 1.1 9.9 1.1
development 2012/12F 774 10.0 7,905 11.3 2,493 25,475 301 11.9 1.2 9.8 1.0
2013/12F 879 13.5 8,876 12.3 2,831 28,603 301 10.5 1.0 9.9 1.0
Oil refining 2011/12A 5,170 95.1 25,818 24.0 20,956 105,238 3,850 5.7 1.1 20.0 3.2
2012/12F 3,089 (40.3) 28,718 11.2 12,520 116,993 3,236 10.5 1.1 10.8 2.4
2013/12F 4,150 34.3 32,035 11.5 16,820 130,435 3,945 7.8 1.0 13.0 3.0
Chemicals 2011/12A 5,029 5.0 27,860 23.5 11,680 64,142 1,406 10.2 1.8 18.1 1.1
2012/12F 2,746 (45.4) 30,028 7.8 6,298 69,044 1,388 15.0 1.4 9.1 1.4
2013/12F 3,712 35.2 33,176 10.5 8,514 76,264 1,407 11.1 1.2 11.2 1.4
Metals 2011/12A 5,499 (9.4) 56,465 6.5 13,644 146,233 3,470 9.5 0.9 9.7 2.7
2012/12F 4,646 (15.5) 60,335 6.9 12,709 171,808 3,011 10.3 0.8 7.7 2.3
2013/12F 6,177 33.0 65,670 8.8 16,897 186,402 3,011 7.7 0.7 9.4 2.3
Paper 2011/12A (6) NA 756 (3.6) (133) 17,729 300 NA 0.5 (0.8) 3.5
2012/12F 57 NA 785 3.9 1,316 18,411 450 6.7 0.5 7.3 5.1
2013/12F 72 25.3 824 4.9 1,650 19,290 500 5.4 0.5 8.7 5.6
Construction 2011/12A 3,111 74.7 34,560 4.2 3,406 38,765 501 14.1 1.2 9.0 1.0
2012/12F 3,291 5.8 37,276 7.9 3,603 41,739 544 10.7 0.9 8.8 1.4
2013/12F 3,427 4.1 40,103 7.6 3,752 44,834 574 10.3 0.9 8.5 1.5
Electrical 2011/12A 188 (49.0) 3,018 4.7 3,023 48,926 936 23.6 1.5 6.2 1.3
equipment 2012/12F 349 85.5 3,324 10.2 5,608 53,857 936 14.1 1.5 10.5 1.2
2013/12F 535 53.2 3,818 14.8 8,594 61,786 936 9.2 1.3 14.0 1.2
Industrial 2011/12A 3,460 (24.8) 32,240 7.9 9,588 92,005 1,151 7.2 0.8 10.7 1.6
conglomerates 2012/12F 3,591 3.8 35,314 9.5 10,082 101,857 1,200 7.8 0.8 10.2 1.5
2013/12F 4,694 30.7 39,865 12.9 13,179 114,634 1,310 6.0 0.7 11.8 1.6
Shipbuilding 2011/12A 4,200 (33.8) 30,686 7.4 7,411 57,921 980 8.0 1.0 13.7 1.6
2012/12F 2,946 (29.8) 33,087 7.8 5,199 62,158 980 10.0 0.8 8.9 1.9
2013/12F 2,482 (15.8) 35,024 5.9 4,380 65,577 980 11.9 0.8 7.1 1.9
Machinery 2011/12A 661 (56.8) 7,478 6.4 2,337 27,201 310 17.3 1.5 8.8 0.8
2012/12F 738 11.7 8,115 8.5 2,606 29,423 310 11.9 1.1 9.1 1.0
2013/12F 806 9.2 8,818 8.7 2,847 31,907 315 10.9 1.0 9.1 1.0
Commercial 2011/12A 126 9.8 737 10.6 33,238 235,534 12,500 17.4 2.5 17.1 2.2
services 2012/12F 109 (14.1) 801 8.8 28,568 252,544 13,000 23.3 2.6 13.5 1.9
2013/12F 140 28.8 895 11.8 36,791 277,332 13,500 18.1 2.4 15.6 2.0
Transportation 2011/12A (670) NA 9,770 (7.5) (1,725) 24,576 157 NA 1.4 (6.9) 0.4
2012/12F 968 NA 10,853 11.1 2,240 26,400 141 17.1 1.5 8.9 0.4
2013/12F 1,458 50.7 12,211 12.5 3,376 29,544 141 11.4 1.3 11.9 0.4
Automobiles 2011/12A 15,002 28.7 70,244 27.8 17,293 82,004 1,201 8.0 1.7 21.4 0.8
2012/12F 17,837 18.9 88,558 26.1 20,120 101,454 1,356 6.5 1.3 20.1 1.0
2013/12F 20,015 12.2 107,311 21.2 22,576 122,606 1,412 5.8 1.1 18.7 1.0
Textiles & Apparel 2011/12A 421 5.6 2,957 19.1 8,715 61,372 832 11.5 1.6 14.3 0.8
2012/12F 491 16.5 3,378 14.2 9,989 69,254 868 9.9 1.4 14.5 0.9
2013/12F 571 16.2 3,874 14.7 11,612 79,338 1,012 8.5 1.2 14.7 1.0
Hotels & Leisure 2011/12A 567 (2.0) 3,735 19.1 8,003 55,488 3,592 16.9 2.4 15.2 2.6
2012/12F 735 29.8 4,189 12.2 10,378 61,895 4,071 14.8 2.5 17.6 2.6
2013/12F 731 (0.6) 4,643 10.8 10,318 68,302 4,043 14.9 2.3 15.7 2.6
Education services 2011/12A 121 9.8 973 1.9 10,951 94,245 4,747 10.8 1.3 12.4 3.9
2012/12F 100 (17.3) 1,043 7.1 9,051 100,534 4,173 10.4 0.9 9.6 4.3
2013/12F 104 4.5 1,111 6.6 9,458 106,769 4,460 9.9 0.9 9.4 4.6
117
NP Shareholders’ equity EPS BPS DPS PE PB ROE DY

(W bn) (% YoY) (W bn) (% YoY) (KRW) (KRW) (KRW) (x) (x) (%) (%)
Consumer services 2011/12A 167 (5.6) 738 (3.5) 21,660 109,618 10,500 16.9 3.3 22.6 2.9
2012/12F 195 16.7 843 14.3 25,274 123,291 10,500 15.1 3.1 23.1 2.7
2013/12F 216 11.0 967 14.7 28,051 139,316 12,000 13.6 2.7 22.4 3.1
Media & Ad. 2011/12A 368 117.0 3,673 98.7 3,516 33,362 389 20.1 2.0 10.0 0.6
2012/12F 446 21.4 4,015 9.3 4,002 36,364 365 19.5 2.1 11.1 0.5
2013/12F 625 40.0 4,608 14.8 5,604 41,677 365 13.9 1.9 13.6 0.5
Retailing 2011/12A 5,684 107.3 27,213 13.8 39,200 197,045 1,079 5.2 1.1 20.9 0.5
2012/12F 2,744 (51.7) 31,004 13.9 17,825 201,961 1,166 10.8 1.0 8.9 0.6
2013/12F 3,170 15.5 33,785 9.0 20,592 220,029 1,166 9.3 0.9 9.4 0.6
Food, Beverages & 2011/12A 1,454 (32.8) 12,803 2.7 8,317 76,806 3,014 16.2 1.7 11.4 2.2
Tobacco 2012/12F 1,469 1.0 13,697 7.0 8,391 81,916 3,031 18.3 1.9 10.7 2.0
2013/12F 1,865 27.0 15,340 12.0 10,655 91,300 3,054 14.4 1.7 12.2 2.0
Household goods 2011/12A 654 10.2 3,748 35.0 21,005 121,837 3,319 25.4 4.3 17.4 0.6
2012/12F 786 20.2 4,441 18.5 23,512 135,460 3,218 25.9 4.5 17.7 0.5
2013/12F 985 25.4 5,339 20.2 29,477 162,319 3,218 20.7 3.8 18.5 0.5
Pharmaceuticals & 2011/12A 248 (25.3) 3,346 4.5 4,221 58,842 808 21.3 1.5 7.4 0.9
Biotech 2012/12F 268 8.1 3,576 6.9 4,462 62,112 800 26.2 1.9 7.5 0.7
2013/12F 408 52.1 3,915 9.5 6,788 67,755 800 17.2 1.7 10.4 0.7
Banks 2011/12A 12,668 81.2 104,215 23.0 3,563 29,127 699 5.1 0.6 12.2 3.7
2012/12F 10,944 (13.6) 111,081 6.6 3,094 31,428 458 5.5 0.5 9.9 2.6
2013/12F 10,007 (8.6) 119,127 7.2 2,829 33,703 426 6.0 0.5 8.4 2.4
Securities 2012/03A 877 (22.5) 16,394 22.4 1,078 17,196 345 18.5 1.0 5.4 1.6
2013/03F 528 (39.8) 16,715 2.0 538 17,524 188 24.3 0.7 3.2 1.3
2014/03F 719 36.2 17,289 3.4 733 18,109 229 17.9 0.7 4.2 1.6
Insurance 2012/03A 3,486 (8.7) 39,734 23.7 3,721 42,719 1,178 13.6 1.2 8.8 2.3
2013/03F 4,032 15.7 45,725 15.1 4,303 49,112 1,278 11.5 1.0 8.8 2.6
2014/03F 4,286 6.3 49,529 8.3 4,574 53,171 1,316 10.8 0.9 8.7 2.6
Internet & Software 2011/12A 752 (1.8) 3,138 17.8 71,437 391,570 5,748 25.8 4.7 24.0 0.3
2012/12F 813 8.1 3,794 20.9 77,132 453,361 5,807 20.6 3.5 21.4 0.4
2013/12F 1,029 26.5 4,757 25.4 97,601 544,735 6,641 16.3 2.9 21.6 0.4
Communications 2011/12A (216) NA 14,575 3.8 (1,149) 72,292 440 NA 1.0 (1.5) 0.5
equipment 2012/12F 1,221 NA 15,756 8.1 6,000 77,954 409 14.6 1.1 7.8 0.5
2013/12F 2,002 63.9 17,780 12.8 9,834 87,897 409 8.9 1.0 11.3 0.5
Display 2011/12A (261) NA 14,678 (1.3) (625) 35,281 196 NA 1.2 (1.8) 0.4
2012/12F 826 NA 15,419 5.0 1,972 37,036 197 24.0 1.3 5.4 0.4
2013/12F 1,360 64.6 16,506 7.1 3,245 39,630 624 14.6 1.2 8.2 1.3
Electronic 2011/12A 803 (44.3) 13,302 2.8 3,862 64,862 748 22.0 1.3 6.0 0.9
equipment 2012/12F 2,208 175.0 15,528 16.7 10,620 75,557 793 9.2 1.3 14.2 0.8
2013/12F 1,559 (29.4) 17,094 10.1 7,498 83,088 808 13.1 1.2 9.1 0.8
Semiconductors 2011/12A 13,414 (27.9) 107,011 12.9 16,788 143,190 1,185 14.0 1.6 12.5 0.5
2012/12F 23,161 72.7 131,371 22.8 25,633 153,770 1,046 10.1 1.7 17.6 0.4
2013/12F 29,104 25.7 159,588 21.5 32,211 185,000 1,123 8.1 1.4 18.2 0.4
Telecom services 2011/12A 3,130 (12.8) 28,317 2.9 2,898 29,985 1,258 8.2 0.8 11.1 5.3
2012/12F 2,208 (29.5) 29,413 3.9 2,204 33,419 1,279 12.3 0.8 7.5 4.7
2013/12F 3,262 47.7 31,421 6.8 3,257 35,424 1,410 8.3 0.8 10.4 5.2
Electric & Gas 2011/12A (2,990) NA 64,106 (4.7) (4,060) 88,234 195 NA 0.3 (4.7) 0.6
utilities 2012/12F (825) NA 63,001 (1.7) (1,120) 86,733 195 NA 0.4 (1.3) 0.5
2013/12F 840 NA 63,685 1.1 1,140 87,662 195 33.3 0.4 1.3 0.5
Small cap. 2011/12A 106 (22.2) 1,380 16.9 7,694 101,970 1,109 18.9 1.4 7.7 0.8
2012/12F 214 101.4 1,585 14.8 15,402 116,465 1,431 11.7 1.5 13.5 0.8
2013/12F 272 27.0 1,842 16.2 19,559 134,972 1,474 9.2 1.3 14.8 0.8
Note: 1. NP is the sum of relevant items for each accounting method (Consolidated: NP of controlling interest; Separate: equity-method-based NP; Individual: NP)
2. Shareholders’ equity is the sum of relevant items for each accounting method (Consolidated: controlling interest; Separate: equity-method-based shareholders’ equity;
Individual: shareholders’ equity)
118
Figure 1. KIS Universe yearly NP trend
(W trn) (%)
120 100
NP (L)
growth rate (Y oY , R) 80
100
60
80
40
60 20
0
40
-20
20
-40
0 -60
2006A 2007A 2008A 2009A 2010A 2011A 2012F 2013F
Figure 2. KIS Universe quarterly NP trend
(W trn) (%)
35 NP (L) 100
growth rate (Y oY , R) 80
30
60
25
40
20
20
15
0
10
-20
5 -40
0 -60
2011/03A 2011/09A 2012/03A 2012/09F 2013/03F 2013/09F
119
Oil Refining
Change in regional landscape for supply-demand;
supplies still tight
Overweight Refining outlook hinges on regional supply-demand changes

While the long-term refining margin trend follows a four to five year cycle,
margins by region or crude type largely depend on individual factors. The
▶ Top picks
refining sector is in a deep slump amid the stumbling economy hit by the
SK Innovation (096770, BUY, TP W210,000) global financial crisis. Despite the unprecedented weak demand,
2012F 2013F 2014F
supply-demand conditions remain tight overall due to reduced supply on
accidents or shutdowns at US and European refineries and the
PE (x) 9.0 7.0 6.1
devastating earthquake and tsunami in Japan. We believe the key variable
PB (x) 0.9 0.8 0.7
for the sector outlook will be supply-demand balance by region.
EV/EBITDA (%) 6.9 5.7 4.9
EPS (KRW) 17,359 22,441 25,531
BPS (KRW) 173,368 194,669 219,043
Regional divergence in petroleum product supply-demand
Supply and demand of petroleum products should diverge between
 Considerable earnings improvement on
stabilizing market conditions Europe-Americas and Asia given less production in Europe and growing
 Economies of scale advantage to deserve demand in South America vs. reduced refining capacity in Japan and rising
attention if Asian refining supply-demand demand in China and Southeast Asia. In the US and Europe, conditions
conditions improve
 Steady investments in PX, lubricants and are tightening as supply declines faster than demand. Since 2008, US
electronic materials to secure growth drivers refiners have exported surplus kerosene and diesel, which were
unabsorbed domestically due to weak demand, to Central and South
GS Holdings (078930, BUY, TP W80,000) Americas and Europe. In Europe, supply is falling short due to steady
2012F 2013F 2014F shutdowns of aging refineries that are no longer economically feasible. In
PE (x) 11.7 8.9 8.7 Asia, demand in China, India and Southeast Asia is recovering or growing,
PB (x) 1.0 0.9 0.8 while Japan’s refining capacity has dwindled. As such, the export market
EV/EBITDA (%) 11.4 8.8 8.7 for Korean refiners should grow.
EPS (KRW) 6,140 8,057 8,304
BPS (KRW) 73,281 79,987 86,939 Top pick: SK Innovation, economies of scale and non-refining
 Better product mix on the completion of
growth potential
upgrade facilities With regional separation of supply and demand progressing, large-scale,
 New business expansion at GS Energy efficient refineries in each region should maintain a competitive edge.
 Better earnings at non-refining subsidiaries
SK Energy, one of the three main subsidiaries of SK Innovation, has the
world’s second-largest production capacity based on a single facility and
the largest capacity in Asia. Even if there is no considerable recovery in
▶ 12M sector performance demand, it can secure a cost advantage backed by competitive and
(p) (%p)
efficient facilities. Non-refining growth potential also looks large given
6,000 10 capex for paraxylene (PX), a primary petrochemical feedstock, in the
5
5,000
4,000 0 Incheon complex and capacity expansion at SK Lubricants.
-5
3,000
-10
2,000
Rel.to KOSPI (%p, RHS) -15 Figure 1. Economy-sensitive petroleum demand to rise moderately
1,000 -20
Oil, Gas & Cons umable Fuels sector index (p, LHS )
0 -25
Nov-11 Feb-12 May-12 Aug-12
(%)
10 World GDP growth
8 Dev eloping countries' GDP growth

World petroleum demand growth
6
Kiyong Park 4
822-3276-6177 2
kypark@truefriend.com
0
Nakyung Lee (2)
822-3276-6241
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012F
nklee@truefriend.com
Source: IMF, BP, IEA, Korea Investment & Securities
120
Investment points & major issues
1. Focus more on economy and supply-demand conditions

than industry cycle
Refining market depends Identifying where the industry stands in the long-term cycle does not appear
more on regional necessary at this point. While the long-term refining margin trend follows a rise and
economic issues and fall cycle of four to five years, margins by region or crude type depend on individual
suppy-demand than issues. US refiners have earned large profits by increasing the production of
long-term industry cycle high-margin gasoline (of note, demand for gasoline is particularly high in the US).
On the contrary, European refiners see a steady decline in refining margin ratios
due to aging facilities and slowing economy. Meanwhile, Asian refining margins are
completely different due to economic growth and rising oil demand in China and
Southeast Asian nations. Overall, the refining industry is in a deep slump amid the
stumbling economy. However, supply-demand condition remains tight despite the
unprecedented weak demand. The reason lies in supply reductions following
accidents or shutdowns at US and European refineries and the devastating
earthquake and tsunami in Japan. Overall, we believe a key variable for the sector
outlook is supply-demand balance by region.
Figure 2. US oil prices and refining Figure 3. European oil prices and Figure 4. Asian oil prices and
margin ratio refining margin ratio refining margin ratio
(USD/bbl) (%) (USD/bbl) (%) (USD/bbl) Dubai oil price (LHS) (%)
140 30 140 Brent oil price (LHS) 18 140 Refining margin ratio (RHS) 20
WTI oil price (LHS)
Refining margin ratio (RHS) 16
120 Refining margin ratio (RHS) 25 120 120
15
14
100 20 100 100
12
80 15 80 10
80 10
60 10 60 8 60 5
6
40 5 40 40
4 0
20 0 20 20
2
0 (5) 0 0 0 (5)
92 95 98 01 04 07 10 92 95 98 01 04 07 10 92 95 98 01 04 07 10
Source: Petronet, BP, Korea Investment & Securities Source: Petronet, BP, Korea Investment & Securities Source: Petronet, BP, Korea Investment & Securities
Figure 5. Economy-sensitive petroleum demand Table 1. Refinery shutdowns since 2012
(%)
10 Year Company Location Region Capacity (‘000b/d) Note
World GDP growth
2012 Conoco Philips Trainer, PA NA 185 Resume
Developing countries' GDP growth
2012 LyondellBasel Berre, France EUR 105
8 World petroleum demand growth
2012 Petroplus Antwerp, Belgium EUR 126 Resume
2012 Petroplus Cressier, Switzerland EUR 68 Resume
6
2012 Alon Bakersfield, CA NA 70 Resume
2012 Hess/Hovensa St. Croix, Virgin Islands NA 350
4 2012 Valero Aruba NA 235
2012 Petroplus Coryton, UK EUR 220
2 2012 TNK-BP Lisichansk, Ukraine EUR 141
2013 Exxon Fawley, UK EUR 80
0 2013 Petroplus Petit Couronne, France EUR 162

2013 API Falconara, Italy EUR 80
2013 Shell Clyde, Australia AP 50
(2)
2013 Cosmo Oil Sakaide, Japan AP 140
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012F
Source: IMF, BP, IEA, Korea Investment & Securities Source: Industry data, Korea Investment & Securities
121
2. 2013 supply-demand outlook: Almost flat YoY

2013 net increase in With the resumption of delayed capacity additions in China and the Middle East
supply and demand to be (ME), global supply capacity should grow 1.5mn b/d in 2013F, following the growth
similar to 2012 level; Asia trend in 2012. But given the reduction in supply from shutdowns by 500,000 b/d, the
to represent a large net supply increase is estimated at 1.05mn b/d, up 90,000 b/d from 940,000 b/d in
portion 2012. Meanwhile, demand should grow 810,000 b/d in 2013F, up from 730,000 b/d
in 2012. By region, facility shutdowns are underway in the US and Europe, whereas
capacity expansion is rapidly progressing in Asia (mainly China) and the ME. The
demand weighting of OECD, the group of advanced economies, is on a downward
trajectory from 53.2% in 2010 to 50.6% in 2013F.
Figure 6. Refining capacity growth by region Figure 7. Petroleum supply capacity and demand
growth outlook
(mn b/d) China Ex-China Asia (mn b/d)

2.0 1.4
Middle East Central & South America Capacity increase Demand growth
Non-OECD OECD
1.5 1.2
1.0
1.0
0.8
0.5
0.6
0.0
0.4
(0.5)
0.2
(1.0) 0.0
2011 2012F 2013F 2011 2012F 2013F
Source: IEA, Korea Investment & Securities Source: IEA, Korea Investment & Securities
Table 2. Refinery capacity expansion in Asia and ME: Concentrated completion of delayed projects in 2013
Timeline Country Region Company Capacity (‘000 b/d) Note
1Q12 India Vandinar Essar Oil 150
2Q12 India Vandinar Essar Oil 30
2Q12 India Bhatinda HPCL/Mittal 180
NICRDC (National Iranian Oil Refining &
2Q12 Iran Arak 80
Distribution Company)
2Q12 Iraq Qayarah NRC (North Refineries Company) 10
2Q12 Iraq Diwaniya MRC (Midland Refining Company) 10
3Q12 Pakistan Karachi Byco Petroleum Pakistan 120
4Q12 China Hohhot Petrochina (CNPC) 100 Aging facility shutdown (30,000 b/d)
4Q12 China Jiangsu Sinopec Jinling 160 Aging facility shutdown (50,000 b/d)
4Q12 China Anqing Sinopec 70
4Q12 India Mangalore Mangalore Refinery and Petrochemicals 64
2012 894
1Q13 China Hebei Petrochina Huabei 100
1Q13 China Sichuan Petrochina Pengzhou 200
1Q13 Iran Lavan NICRDC 20
2Q13 China Guangdong Sinopec Maoming 200 Aging facility shutdown (110,000 b/d)
3Q13 China Hebei Sinopec Shijiazhuang 60
3Q13 Saudi Jubail Aramco/Total 400
3Q13 India Paradip IOC (Indian Oil Corporation) 300
3Q13 Oman Sohar Sohar Port/Mashael Group 30
4Q13 India Cuddalore Nagarjuna Oil Company 120
4Q13 China Jiangxi Sinopec Jiujiang 60
2013 1,380
Source: Industry data, Korea Investment & Securities
122
3. Change in supply-demand across Atlantic Ocean:

Reduced supply in Europe and greater exports by US
Supply reduction Following the global financial crisis, countries across the Atlantic have been
outpacing demand grouped as a single region for petroleum production and consumption. Basically,
decline in the US and trade of petroleum products occurs due to the regional difference in consumption
Europe structure, facility operation methods and supply surplus/shortfalls. Currently in the
US and Europe, supply is declining at a faster pace than demand, leading to tight
conditions. Of note, US exports of heavy distillates (kerosene, diesel, etc.) have
grown rapidly since 2008. The surplus products, unabsorbed domestically due to
weak demand, head toward to Central and South Americas and Europe.
Figure 8. Demand weighting by region and product Figure 9. US heavy distillate exports by region:
Surged since 2008
(%) Gasoline Kerosene Diesel RFO Others ('000 b/d)

100 1,200
Others
90 22 26 30 1,000 Netherlands
80 42
2 Mexico
70 8 800
20 Central & South America
13
60
8 10 600
50
42
40 32
21
400
30
48 8 6
20 9 200
10 15 20 19
0 0
US Europe Asia (OECD) Non-OECD 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: IEA, Korea Investment & Securities Source: EIA, Korea Investment & Securities
US: Greater exports to Despite the declining demand in the US and major European countries, we do not
offset sluggish domestic believe supply will overflow. The US has been a major importer of crude and
demand petroleum products. But the shortage of production capacity eased rapidly there as
Europe: Greater imports domestic demand plummeted on the financial crisis. Meanwhile, Europe is in tight
from the sharp decline in supply despite sluggish demand due to the steady shutdowns of aging facilities.
supply capacity Accordingly, the region is increasing imports from the US, ME or Russia. In the US,
inventories of gasoline and diesel are declining in line with growing export demand
and reduced refining capacity, but those of crude are expanding. This is viewed as
an attempt to lower crude (incl. WTI) prices and make petroleum product exports
more competitive.
Figure 10. Petroleum shortage: Severe in Europe Figure 11. Declining petroleum inventory despite
increasing crude inventory in the US
('000 b/d) ('000 b/d) (mn bbl)

6,000 1,900 460
Crude oil inventory
US (LHS) EU (RHS)
440
5,500 1,700 Petroluem product inventory
420
5,000 1,500
400
4,500 1,300 380
360
4,000 1,100
340
3,500 900
320
3,000 700 300

2004 2005 2006 2007 2008 2009 2010 2011 2012F Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Source: BP, EIA, IEA, Korea Investment & Securities Source: EIA, Korea Investment & Securities
123
4. Change in Asia’s supply-demand landscape: Rising

demand in China and supply shortfall in Japan
Growing petroleum In Asia, demand is recovering or growing in China, India and Southeast Asia, while
imports in Japan due to refining capacity is declining in Japan. Of note, Japan has been a traditional
aging facility shutdowns importer of petroleum products. Although demand has weakened gradually on the
and nuclear power slumping economy, supply capacity has also plunged due to the shutdown of aging
replacement demand and inefficient facilities, sustaining import demand at high levels. Moreover, the
nation seeks to offset reduced electricity production from nuclear power generation,
hit by the devastating earthquake in 2011, with thermal power generation.
Accordingly, demand for petroleum products, a feedstock for thermal power
generation, is back on a growth track. Recently, the Japanese government is urging
refiners to increase the weighting of upgrade facilities by tightening regulations. But
the government is not yielding the intended results as companies are only closing
down aging facilities instead of increasing upgrade ratio, amid the perception that
capex is unlikely to secure margins.
Figure 12. Excess demand in Japan due to refining Figure 13. Additional petroleum consumption for
capacity plunge thermal power in Japan post earthquake
('000 b/d) ('000 b/d) Oil + fuel oil (some operation of nuclear plants)
5,500 Japan's petroleum product demand
500 Oil + fuel oil (minimum operation of nuclear plants)
Japan's refining capacity
450 2010 normal = 0
→ Forecast
400
350
5,000
300
250
200
4,500
150
100
50
4,000 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13
Source: BP, EIA, IEA, Korea Investment & Securities Source: IEA, Korea Investment & Securities
China to see a shift to net We expect China’s supply-demand conditions for diesel, one of the major
imports of diesel consumed petroleum items there, to turn to net imports. In the nation, facility
buildup or additions are being delayed and utilization at teapot refineries that
account for 30% of domestic production capacity is falling, bolstering import
demand. Overall, we expect supply and demand of petroleum products to diverge
between Europe-Americas and Asia given less production in Europe and growing
demand in South America vs. reduced refining capacity in Japan and rising demand
in China and Southeast Asia. Large-scale and efficient refineries in each region
should maintain a competitive edge.
124
Figure 14. Possible net imports of diesel in China Figure 15. Korea’s growing Japan/China-bound exports
('000 tonne) (mn bbl) Petroleum product exports to China (LHS) (%)
800 180 Petroleum product exports to Japan (LHS) 70
Diesel net imports
160 Combined weighting of Japan/China-bound exports (RHS)
600 Diesel imports 60
Diesel exports 140
400 50
120
200 100 40
0 80 30
60
(200) 20
40
(400) 10
20
(600) 0 0
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 2004 2005 2006 2007 2008 2009 2010 2011 2012F
Source: CEIC, Korea Investment & Securities Source: Petronet, Korea Investment & Securities
Earnings forecast
1. Key assumptions
 2013F net increase in supply capacity (facility expansion – shutdown) and
demand growth: 1.1 mb/d vs. 0.8 mb/d.
 2013F average oil prices: USD107.7/bbl.
 2013F average FX rate: W1,058/USD.
2. KIS Universe refiners’ 2013F sales up 2.5%, OP up 35.1%

Three refiners in the KIS We expect the three refiners in the KIS Universe – SK Innovation, GS Holdings and
Universe to post 2013F S-Oil – will post sales and OP growth of 2.5% and 35.1% YoY, respectively, in
sales growth of 2.5% and 2013F. A low base of comparison in 2012 (massive losses in 2Q12 due to oil price
OP growth of 35.1% YoY fluctuations) is favorable, but the bigger contributor should be stabilizing oil prices
and supply-demand conditions in line with a recovering economy.
Of SK Innovation’s OP of W652.9bn, 37% (or W241.9bn) should come from SK

Energy’s refining business. Combined OP of chemicals and lubricants businesses
should also grow 33% YoY. If the company fails to acquire resource-producing
blocks or companies in the E&P business, sales and OP growth would be hard to
achieve. But new businesses, such as batteries and electronic materials, should
generate sales in earnest from 2013.
GS Holdings should see a 98.9% YoY gain in GS Caltex’s OP in 2013F on the

completion of upgrade facilities. This would lead to a 29.6% gain in GS Holdings’
OP. Combined OP of non-refining consolidated accounting subsidiaries (incl. GS
Retail) would increase 8.5% YoY based on consensus estimates.
S-Oil’s OP should jump 49% YoY in 2013F. Its condensate fractionation unit (CFU)
and PX production facilities, completed in 2011, have increased the chemical
business OP by 75.8% in 2012. The momentum from facility expansion should be
weaker in 2013. But given robust PX market conditions following regional facility
expansion for terephthalic acid (TPA), the chemical business’ OP contribution
should remain high at 42% (65% in 2012).
125
Figure 16. Three refiners’ sales and OPM outlook Figure 17. Three refiners’ OP outlook by division
(W trn) (%) (W bn) (USD/bbl)

33 Combined sales (LHS) OPM (RHS) 6 2,000 120
5 1,500 115
32
1,000 110
4
500 105
31
3
0 100
2
30
(500) 95
1 Lubricants (LHS)
(1,000) 90
29 Petrochemical (LHS)
0 (1,500) Refining (LHS) 85
Dubai crude price (RHS)
28 (1) (2,000) 80
1Q12 2Q12 3Q12 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 1Q12 2Q12 3Q12 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F
Note: SK Innovation, S-Oil and GS Holdings Note: SK Innovation, S-Oil and GS Caltex
Source: Korea Investment & Securities Source: Korea Investment & Securities
Top picks
SK Innovation (096770)
Economies of scale in The biggest contributor to consolidated earnings improvement at SK Innovation
refinery operation and should be SK Energy, which will likely post sales growth of 4.1% and OP growth of
growth potential secured 36.4% YoY in 2013F on the refining market stabilization. SK Energy, one of the
via PX and lubricants three main subsidiaries of SK Innovation, has the world’s second-largest production
capacity based on a single facility and the largest capacity in Asia. Economic
conditions are unlikely to make a V-shaped recovery in 2013. Unless demand
recovers rapidly, cost advantages should be determined by the competitiveness
and efficiency of facilities. We believe refining market conditions in Asia will respond
to the regional supply-demand changes more sensitively than supply variables
outside the region. Non-refining growth potential also looks large given capex for
PX in the Incheon complex and capacity expansion at SK Lubricants. OP at SK
Global Chemical and SK Lubricants should grow 22.3% YoY and 53.4% YoY in
2013F, respectively. Backed by the robust business growth outlook, investments
should be funded by financial investors and the IPO of SK Lubricants. Securing
both economies of scale and short- and long-term growth potential looks attractive.
GS Holdings (078930)
Refining OP to rise on the We expect GS Caltex to account for 41.3% of OP in GS Holdings’ 2012
completed investment for consolidated earnings. OP contribution should also rise to 52.4% in 2013F. With the
upgrade completion of investment for #4 upgrade facilities in 1H13, the upgrade ratio should
increase from 29% to 35%. Accordingly, the production weighting of diesel, which
earns the biggest margin, should climb from 30% to 34%. Exports demand for
diesel should grow on China’s possible shift to net imports. GS Caltex is 50%
owned by GS Energy, which is 100% owned by GS Holdings. Given the ownership
structure, better earnings at non-refining affiliates such as GS Retail are also
required to see an overall improvement at GS Holdings, even if GS Caltex’s OP is
forecast to grow 98.9% in 2013F. OP of the non-refining affiliates – consolidated
accounting and equity-method subsidiaries, including GS Retail and GS Home
Shopping covered in the KIS Universe – should grow 5.2% YoY in 2013F.
126
Risk factors
Rapid recovery of market Demand in the refining business and broadly oil business is closely related to the
conditions hit hard by the economic conditions of the world and major consumption areas. The financial
global financial crisis crises that first broke out in the US in 2008 and then Europe in 2011 downgraded
unlikely; but demand for overall petroleum products. Until then, market participants only focused
supply-demand balance on the pace of supply capacity growth on expectations that the global economy and
is likely to remain at refining demand should be on an upward trajectory. But the economic outlook has
current level become uncertain, and it is also hard to forecast demand given a rising chance of
alternative energies, such as shale gas. Even if there is no immediate change in the
weighting of energy consumption, there are also no grounds that bolster a rapid
recovery of the US and European economic conditions. If demand remains sluggish
into 2013, market conditions will likely remain uncertain as in 2012. But with
slumping demand, refiners should continue to shut down facilities that are no longer
economically feasible. This would continue supply reduction and maintain the
supply-demand balance at the current level.
Coverage valuation
Table 3. Valuations
Recommendation & TP Earnings & Valuation
Company Sales OP NP EPS BPS PE PB ROE EV/EBITDA
(W bn) (W bn) (W bn) (KRW) (KRW) (X) (X) (%) (X)
SK Innovation Recommendation BUY 2010A 53,722 1,891 1,139 12,241 123,724 15.8 1.6 11.9 10.1
(096770) TP (KRW) W210,000 2011A 68,371 2,842 3,169 34,004 157,089 4.2 0.9 24.4 5.1
Price (Nov 15, KRW) 156,000 2012F 75,453 2,220 1,621 17,359 173,368 9.0 0.9 10.6 6.9
Market cap (W bn) 14,425 2013F 78,267 2,873 2,091 22,441 194,669 7.0 0.8 12.2 5.7
2014F 78,800 3,264 2,379 25,531 219,043 6.1 0.7 12.4 4.9
GS Holdings Recommendation BUY 2010A 929 883 801 8,598 51,341 7.6 1.3 17.9 7.5
(078930) TP (KRW) 80,000 2011A 8,493 930 810 8,556 63,529 5.9 0.8 14.9 7.4
Price (Nov 15, KRW) 71,900 2012F 10,317 810 581 6,140 73,281 11.7 1 9 11.4
Market cap (W bn) 6,681 2013F 11,688 1,050 763 8,057 79,987 8.9 0.9 10.5 8.8
2014F 12,240 1,079 786 8,304 86,939 8.7 0.8 9.9 8.7
S-Oil Recommendation BUY 2010A 20,511 859 711 6,102 38,651 15.2 2.4 16.9 10.9
(010950) TP (KRW) W120,000 2011A 31,914 1,634 1,191 10,229 44,828 9.8 2.2 24.5 7.0
Price (Nov 15, KRW) 96,200 2012F 34,999 1,216 887 7,610 48,696 12.6 2.0 16.3 8.5
Market cap (W bn) 10,830 2013F 33,887 1,815 1,296 11,119 54,573 8.7 1.8 21.5 5.9
2014F 34,430 1,900 1,368 11,739 61,070 8.2 1.6 20.3 5.4
Note: Nov 15 closing prices.
127
Metals
Small and mid-caps merit more attention
Raw material and product prices should continue to drop

Overweight Iron ore prices should continue to slide lower. Australia is the world’s
largest iron ore exporter and its production capacity is set to increase by
146mn tonnes in 2013F alone. The figure equals 13% of global iron ore
▶ Top picks
trade volume. In contrast, global crude steel production volume should
POSCO M-Tech (009520, BUY, TP W16,000) grow only 2.9% YoY. Iron ore prices will fall on a supply glut. Accordingly,
2012F 2013F 2014F
steel product prices should drop as well. But in 2Q13, prices should rally
temporarily on strong seasonal demand. In addition, the drop in product
PE (x) 24.5 11.6 9.0
prices would be more modest than for raw materials as hot-rolled coil
PB (x) 1.9 1.7 1.4
(HRC) demand has increased due to cold-rolled coil (CRC) capacity
EV/EBITDA (x) 12.3 7.6 6.7
additions by Hyundai Hysco. We estimate POSCO’s and Hyundai Steel’s
EPS (KRW) 320 679 871
(separate) OP will gain 14% YoY and 27% YoY, respectively, in 2013F as
BPS (KRW) 4,129 4,723 5,519
OP per tonne improves W10,000 at the blast furnace operators.
 Poised for explosive growth in 2013 with four
business additions
 A new business start every quarter or existing First zinc treatment charge rise in three years
businesses to achieve growth After peaking at USD270/tonne in 2010, the zinc treatment charge fell to
 2013F EPS growth of 90%
USD250/tonne in 2011 and should plunge to USD191/tonne in 2012F. But
in 2013F, we see a rebound to USD230/tonne. China’s zinc concentrate
Korea Zinc (010130, BUY, TP W590,000)
import volume continues to shrink while its inventory appears to have
2012F 2013F 2014F grown steadily to 500,000 tonnes. In addition, China’s zinc concentrate
PE (x) 12.7 9.2 7.8 self-sufficiency is rising. With smelters gaining a more favorable position
PB (x) 2.1 1.8 1.5 than miners in treatment charge negotiations, the charge should go up and
EV/EBITDA (x) 7.6 5.6 4.6 this is expected to boost Korea Zinc’s OP. Of note, if the zinc treatment
EPS (KRW) 35,249 48,951 57,799 charge rises USD10, it would increase Korea Zinc’s OP by USD11mn.
BPS (KRW) 211,607 254,605 304,319
 Zinc treatment charge to rise in 2013 for the first Top picks: POSCO M-Tech, Korea Zinc; Second-favorite:
time in three years Hyundai Hysco
 Double silver production capacity from 2,000
to 4,000 tonnes We believe POSCO M-Tech deserves the most attention in 2013. Although
 Very likely to buy mines using abundant cash its market cap stands at less than W500bn and trading volume is low, it
holdings
should enter an explosive growth period from 2013 backed by new
businesses. Korea Zinc is our top pick in the nonferrous metals sector. Its
▶ 12M sector performance fundamentals should strengthen thanks to a rising zinc treatment charge,
greater copper/silver production capacity and mine acquisition. Hyundai
(p) (%p) Hysco should be noted for its growth potential with the completion of the
4,000 10
5 no. 2 mill in Dangjin, South Chungcheong province. Even if steel industry
3,000 0
-5
conditions do not improve, the company can generate stable profits.
2,000
-10
Rel.to KOSPI (%p, RHS) -15
Figure 1. POSCO M-Tech’s earnings outlook
1,000
Steel sector index (p, LHS ) -20
0 -25
Nov-11 Feb-12 May-12 Aug-12 (W bn) POSCO plant consignment (%)
1,600 Cutting-edge materials 5.1 5.2 6.0
1,400 4.6
Urban mining 5.0
1,200 Steel additiv es
4.0
1,000 3.0 Steel packing
2.8 2.8
800 2.3 3.0
600 OPM (R)
2.0
400
1.0
200
Moonsun Choi 0 -
822-3276-6182 2009 2010 2011 2012F 2013F 2014F 2015F
moonsun@truefriend.com
128
1. Raw material prices to stabilize lower

Greater iron ore In 2013, we must closely monitor the rising iron ore production capacity. With
production in 2013 would miners wrapping up their capacity additions that began in 2004, actual production
lead to oversupply volume would expand from 2013. Of note, Australia’s iron ore production volume
will rise sharply in 2013 (as the world’s largest iron ore exporter, Australia is
expected to ship 480mn tonnes in 2012F, which account for 43% of global iron ore
trade volume of 1.12bn tonnes). In 2013F, Australia’s iron ore production capacity
should increase by 146mn tonnes, which equals 30% of the country’s 2012 iron ore
export volume and 13% of global iron ore trade volume. In contrast, global crude
steel production volume should grow only 2.9% YoY to 1.45bn tonnes in 2013F. We
see a coming oversupply of iron ore.
Table 1. Major miners’ capacity addition schedule (mn tonnes)
Company 2011 2012F 2013F 2014F

BHP Billiton 50 35
Gindalbie Metals/Ansteel 8
CITIC Pacific Mining 28
Rio Tinto 18 26
Rio Tinto/Hancock Prospecting 15
Fortescue Metals Group 60
Fortescue Metals Group 40
Hancock Prospecting 55
Other small companies 8.5 13
Total 50 44.5 146 116
Greater production in We draw close attention to the increase in Australia’s iron ore production capacity
Australia would lead to as the country is responsible for 99.8% of the iron ore export volume to four
more iron ore supply to countries in East Asia, particularly China, followed by Japan, Korea and Taiwan.
East Asia  prices to Australia’s greater iron ore production capacity would lead to greater supply to the
stabilize lower four countries. Accordingly, iron ore prices will stabilize lower.
Figure 2. Australia’s iron ore destination breakdown Figure 3. East Asia’s iron ore supply-demand and price
outlook: Prices to stabilize lower
ChineseTaipei EU-27 (mn tonnes) (USD/tonne)

2.8% 0.2% 800 Iron ore price (R)
180
162
Korea Supply (L)
700 160
10.2%
140
600 125
112
108 120
100
500 95
Demand (L)
Japan 100
17.1% 400 75
80
300
60
200
40
China
69.7% 100 20
0 0
2009 2010 2011 2012F 2013F 2014F 2015F
Source: Australian Bureau of Statistics, Korea Investment & Securities Source: Korea Investment & Securities
129
2. Steel product prices to fall but OP per tonne to rise

Steel product prices to With raw material prices falling in 2012, steel product prices also went down. But
fall but OP per tonne to product prices fell ahead of raw material prices, which dragged down OP per tonne.
rise As such, POSCO’s OP per tonne is expected to drop 29% from W122,000 in 2011
to W85,000 in 2012F. But in 2013F, its OP per tonne should rise 11% to W95,000.
Hyundai Hysco’s no. 2 mill in Dangjin (annual capacity of 1.5mn tonnes) will come
on stream in May 2013, which should boost domestic HRC demand. As a result, the
drop in product prices (particularly hot-rolled plates) should be more modest than
that for raw materials. Accordingly, the OP per tonne would improve.
Figure 4. Quarterly price outlook: Iron ore vs. steel products
(USD/tonne) ('000 won/tonne)

180 1,100
171 169 167
Iron ore price (L)
160 1,000
144 1,011 1,007 926
144
982 876
863
140 942 Steel price (R) 900
925
790 815
795
136 785
131
120 800
120
117
100 110 700
105
100
80 600
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F
Note: Steel product prices are based on POSCO’s average prices

Figure 5. POSCO’s OP per tonne to rise 11% in 2013F Figure 6. Hyundai Steel’s OP per tonne to rise 14% in
2013F
('000 won/tonne) ('000 won/tonne)

250 140 126
210
120
200
152 100 88
150 68
80
146
95 79
60
100 122
111
60 58 58
40
85
50
20
0 0
2007 2008 2009 2010 2011 2012F 2013F 2007 2008 2009 2010 2011 2012F 2013F
130
3. Zinc treatment charge to rise in 2013F

Smelters to gain upper The zinc treatment charge is expected to fall for a second straight year (2011 and
hand over miners in 2012). After reaching USD270/tonne in 2010, the charge fell to USD250/tonne in
negotiating the charge 2011 and should plunge to USD191/tonne in 2012F. Zinc prices also fell due to the
sustained pileup of inventory. In addition, the growing number of Chinese smelters
led to a shortage of zinc concentrates and this contributed to pushing down the
treatment charge. But in 2013F, the treatment charge is set to improve. China’s zinc
concentrate import volume continues to shrink while its inventory appears to have
grown steadily to 500,000 tonnes. Given that China’s zinc concentrate
self-sufficiency is rising, smelters should gain a more favorable position than miners
when negotiating the treatment charge.
Figure 7. Zinc treatment charge to rise in 2013F
(USD/tonne) (USD/tonne)
5,000 400
300 300
4,000 Zinc treatment charge (R)
270 300
229 230
3,000 194
191
200
2,000
100
1,000 Zinc price (L)
0 0
'07 '08 '09 '10 '11 '12 '13
Korea Zinc’s earnings estimates are based on the assumption the zinc treatment
charge will rise to USD200/tonne in 2013. Every USD10 rise in the charge would
drive up Korea Zinc’s OP by USD11mn. This is based on the following calculation.
Given that Korea Zinc’s concentrate consumption stands at 1.1mn tonnes p.a., if
the treatment charge goes up USD10, it would reduce COGS (treatment charge is
subtracted from the list of COGS) by USD11mn (1.1 mn tonnes x USD10).
Figure 8. China’s zinc production volume vs. Figure 9. China’s zinc concentrate self-sufficiency
concentrate import volume
('0100 tonnes) (%)

500 Zinc output 100
400 80
300 60
200 40
Concentrate imports
100 20
0 0
'07 '08 '09 '10 '11 '12 '07 '08 '09 '10 '11 '12
Source: CEIC, Korea Investment & Securities Source: CEIC, Korea Investment & Securities
131
Earnings forecast
1. Key assumptions
 2013F global crude steel production volume: 1.45bn tonnes (+2.9% YoY)
 2013F Korea GDP growth: 3.2%
 See table below for FX rates and raw material, product and metal prices
Table 2. Key assumptions

1Q12 2Q12 3Q12 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 2011 2012F 2013F YoY
KRW/USD 1,131 1,152 1,133 1,102 1,088 1,065 1,048 1,030 1,126 1,130 1,058 (6.4%)
Raw material prices
(USD/tonne)
Iron ore 144 131 136 117 110 120 105 100 163 132 109 (17.6%)
Hard coking coal 235 206 210 170 190 185 175 170 288 205 180 (12.3%)
Zinc 1,981 1,990 1,842 1,900 2,000 2,100 2,050 2,100 2,227 1,928 2,063 7.0%
Lead 2,080 2,044 1,879 2,050 2,100 2,250 2,200 2,300 2,433 2,013 2,213 9.9%
Copper 8,016 8,226 7,508 8,000 8,200 8,700 8,400 8,700 8,962 7,937 8,500 7.1%
Gold 1,680 1,638 1,608 1,750 1,628 1,678 1,698 1,728 1,548 1,669 1,683 0.8%
Silver 32 31 28 34 33 35 36 37 35 31 35 12.9%
Product prices
(W1,000/tonne)
Rebar 806 800 770 749 740 755 745 732 796 781 743 (4.9%)
Section 995 987 961 944 925 942 938 915 947 971 930 (4.2%)
HRC 791 811 757 747 672 680 680 650 850 776 671 (13.6%)
Heavy plate 926 895 864 837 750 770 740 720 1,022 881 745 (15.4%)
CRC 980 981 939 918 853 860 850 825 1,027 954 847 (11.3%)
Key indicators
(W1,000/tonne)
Pig iron cost per tonne 447 408 413 337 336 342 304 287 520 401 317 (20.8%)
CRC spread 189 170 182 170 180 180 170 175 176 178 176 (1.2%)
2. Hyundai Steel’s OP growth to beat POSCO’s

Both POSCO and We estimate OP per tonne will improve by W10,000 at blast furnace operators in
Hyundai Steel’s OP per 2013F. POSCO’s OP per tonne should rise 11% from W85,000 in 2012F to
tonne to gain W10,000 but W95,000 in 2013F and Hyundai Steel 16% from W58,000 to W68,000 over the
the latter’s would be same stretch. Both companies should enjoy the same per tonne gains but Hyundai
stronger Steel’s would be stronger. The reason is Hyundai Steel’s OP per tonne scale is
smaller than at POSCO, so Hyundai Steel is more sensitive to the W10,000 rise. In
addition, Hyundai Steel is expected to benefit from the greater demand from captive
customers thanks to Hyundai Hysco’s CRC capacity additions. We estimate
POSCO and Hyundai Steel’s 2013F (separate) OP will rise 14% YoY and 27% YoY
to W3.449trn and W1.233trn, respectively. Of note, Hyundai Steel is scheduled to
complete its no. 3 blast furnace in Sep 2013 and this would add to the company’s
growth.
132
3. Sensitivity analysis
Table 3. Sensitivity to changes in OP per tonne (W bn)
W1,000 rise in OP per

Base projections Sensitivity
tonne
Sales OP NP Sales OP NP Sales OP NP
POSCO 63,667 4,447 3,403 63,703 4,483 3,431 0.1% 0.8% 0.8%
Hyundai Steel 14,305 1,235 1,010 14,323 1,253 1,025 0.1% 1.4% 1.4%
Hyundai Hysco 10,141 571 424 10,148 579 429 0.1% 1.3% 1.4%
Dongkuk Steel 7,003 99 (14) 7,009 105 (9) 0.1% 6.3% NA
Note: Consolidated
Table 4. Sensitivity to changes in KRW/USD (W bn)
Base projections W10 drop in KRW/USD Sensitivity

POSCO 63,667 4,447 3,403 63,558 4,485 3,432 (0.2%) 0.9% 0.8%
Hyundai Steel 14,305 1,235 1,010 14,273 1,264 1,033 (0.2%) 2.3% 2.3%
Hyundai Hysco 10,141 571 424 10,095 570 422 (0.5%) (0.2%) (0.2%)
Dongkuk Steel 7,003 99 (14) 6,997 121 4 (0.1%) 22.2% NM
Korea Zinc 6,317 1,092 851 6,278 1,088 848 (0.6%) (0.4%) (0.4%)
Poongsan 3,284 201 117 3,273 198 115 (0.3%) (1.4%) (1.9%)
Note: Consolidated
Table 5. Sensitivity to changes in metal prices (W bn)
Base projections 10% rise in metal prices Sensitivity

Korea Zinc 6,317 1,092 851 6,380 1,105 860 1.0% 1.2% 1.1%
Poongsan 3,284 201 117 3,309 205 120 0.8% 1.7% 2.1%
Note: Separate
133
Top picks
POSCO M-Tech (009520)

Explosive growth period We believe POSCO M-Tech will transform and settle as a materials supplier in 2013.
from 2013; TP W16,000 The company jumped in the materials business when it started managing POSCO’s
magnesium smelting mill in a consignment contract from 3Q12. In 1Q13, POSCO
M-Tech should begin the production of high-purity alumina and managing POSCO’s
ferro-silicon plant as well. In 2Q13, it plans to open an aluminum business in
Indonesia (entered market with POSCO) in time for the completion of POSCO’s
blast furnace at end-2013. In 3Q13, the company should renew its contract with
POSCO regarding the steel packing business and managing the magnesium
smelting mill. In 4Q13, the company plans to kick-start its tantalum recycling
business. As such, POSCO M-Tech is poised to enter an explosive growth period
from 2013. The TP of W16,000 equals target PE 24.0x (market avg. PEG 0.51x
2013-2015F EPS CAGR 48%).
Korea Zinc (010130)

Take note of rising zinc We believe the zinc treatment charge will rise in 2013 for the first time in three years
treatment charge, bigger as 1) China’s zinc concentrate self-sufficiency is rising and 2) smelters should gain
supply and mine a more favorable position than miners when negotiating the charge due to an
purchases; TP W590,000 increase in zinc concentrate inventories. In addition, Korea Zinc plans to double
silver production capacity from the current 2,000 to 4,000 tonnes. Although the
schedule to add the 2,000 tonnes is unknown, it appears the plan has already been
finalized. Based on current silver prices, 2,000 tonnes of silver would generate
sales of W2.4trn that account for 38% of 2013F consolidated sales of W6.3trn.
Moreover, Korea Zinc is very likely to purchase mines backed by ample cash
holdings and cash generating capacity. Although any change in metal prices merits
attention, we believe the company’s fundamental improvement must be monitored
more closely. The TP of W590,000 equals target PE 12.0x.
Risk factors
Potential floods in Australia is susceptible to floods every Jan-Feb. In 2011, the country’s mining
Australia in 1Q13 regions were hit by severe floods that disrupted hard coking coal production and
sent prices soaring. If flooding of similar magnitude affects Australia’s mining area
in 2013, it may drive up only raw material prices during the off-peak steel demand
season. In this case, product prices would not rise despite higher raw material
prices, and this could cause dramatic OP erosion.
Stalled economic We believe steel industry conditions will improve in 2Q13 due to the peak season
recovery could hurt effect. But if economic recovery is stalled in 2Q13 and the slowdown continues
demand during 2Q13 even after China’s regime change, there is a chance that demand will not increase
peak season during the 2Q13 peak season. In this case, the steel market could remain sluggish
in 2Q13, contrary to our expectations.
134
Coverage valuation
Table 6. Valuations (W bn, KRW)
Recommendation & TP Earnings & valuation

(W bn) (W bn) (W bn) (KRW) (KRW) (x) (x) (%) (x)
POSCO Recommendation BUY 2010A 47,887 5,434 4,186 53,297 447,074 9.1 1.1 12.2 6.6
(005490) TP (KRW) 420,000 2011A 68,939 5,408 3,714 47,224 467,361 8.0 0.8 9.7 6.9
Price (Nov 15, KRW) 318,000 2012F 65,243 3,942 2,652 33,717 491,010 10.3 0.7 6.6 7.7
Market cap. (W bn) 27,551 2013F 63,667 4,447 3,403 43,275 522,270 8.1 0.7 8.0 6.9
2014F 63,678 4,327 3,244 41,249 554,090 8.4 0.6 7.2 6.6
Hyundai Steel Recommendation BUY 2010A 10,235 1,059 922 10,992 99,056 11.3 1.3 12.3 12.4
(004020) TP (KRW) 111,000 2011A 15,260 1,304 747 8,876 107,087 10.8 0.9 8.5 1.1
Price (Nov 15, KRW) 75,900 2012F 14,425 972 804 9,545 115,649 8.8 0.7 8.5 8.9
Market cap. (W bn) 6,492 2013F 14,305 1,235 1,010 11,988 126,627 7.0 0.7 9.8 8.1
2014F 15,702 1,258 1,026 12,175 137,788 6.9 0.6 9.1 7.4
Hyundai Hysco Recommendation BUY 2010A 6,866 307 195 2,438 16,914 10.3 1.5 15.4 5.7
(010520) TP (KRW) 80,000 2011A 8,170 435 298 3,733 20,386 9.4 1.7 19.9 5.7
Price (Nov 15, KRW) 42,500 2012F 8,645 455 334 4,181 24,398 10.8 1.8 18.6 7.1
Market cap. (W bn) 3,360 2013F 10,141 571 424 5,306 29,434 8.5 1.5 19.6 6.1
2014F 11,004 588 450 5,641 34,802 8.0 1.3 17.5 5.6
Dongkuk Steel Recommendation Hold 2010A 8,155 346 179 2,842 47,660 12.3 0.7 5.7 9.1
(001230) TP (KRW) - 2011A 8,842 267 7 124 45,766 165.3 0.4 0.3 10.2
Price (Nov 15, KRW) 12,800 2012F 7,958 73 (13) (242) 43,558 NM 0.3 (0.5) 17.6
Market cap. (W bn) 791 2013F 7,003 99 (14) (264) 41,328 NM 0.3 (0.6) 19.1
2014F 7,283 67 (20) (374) 38,991 NM 0.4 (0.9) 22.9
POSCO M-Tech Recommendation BUY 2010A 544 15 8 298 3,705 22.0 1.8 7.1 10.6
(009520) TP (KRW) 16,000 2011A 669 16 11 265 3,884 28.3 1.9 7.0 18.3
Price (Nov 15, KRW) 12,000 2012F 852 23 14 320 4,129 24.5 1.9 8.0 12.3
Market cap. (W bn) 497 2013F 980 46 30 679 4,723 11.6 1.7 15.4 7.6
2014F 1,111 57 38 871 5,519 9.0 1.4 17.0 6.7
Korea Zinc Recommendation BUY 2010A 3,838 684 555 31,054 146,631 8.9 1.9 22.4 6.5
(010130) TP (KRW) 590,000 2011A 5,556 964 714 39,868 182,490 7.6 1.7 23.1 4.7
Price (Nov 15, KRW) 418,000 2012F 5,553 864 631 35,249 211,607 12.7 2.1 17.0 7.6
Market cap. (W bn) 7,980 2013F 6,317 1,140 876 48,951 254,605 9.2 1.8 19.9 5.6
2014F 6,598 1,308 1,035 57,799 304,319 7.8 1.5 19.6 4.6
Poongsan Recommendation BUY 2010A 2,708 241 153 5,460 33,290 8.8 1.4 17.2 8.6
(103140) TP (KRW) 40,000 2011A 2,881 123 41 1,452 33,582 18.0 0.8 4.3 11.8
Price (Nov 15, KRW) 32,400 2012F 2,963 165 82 2,909 35,909 11.0 0.9 8.4 10.1
Market cap. (W bn) 884 2013F 3,284 201 117 4,173 39,395 7.7 0.8 11.1 8.0
2014F 3,506 220 131 4,661 43,405 6.9 0.7 11.3 7.2
135
Chemicals
Don’t rush, look far ahead
Taking a breather after rapid growth

Overweight The chemicals industry aggressively installed capacity driven by the
steady boom since the mid-2000s. But the industry took a breather in 2012
(and will into 2013). Most of the delayed capacity projects, mainly in China,
▶ Top picks
will likely end in 2013. Accordingly, Asia’s ethylene production capacity is
LG Chem (051910, BUY, TP W370,000) forecast to rise 7.36mn tonnes in 2013F while demand growth should be
only 4.97mn tonnes. Strictly speaking, the real demand growth will not be
2012F 2013F 2014F
“sluggish” as it should accelerate from 5.6% YoY in 2012 to 10.2% YoY in
PE (x) 14.1 12.5 11.2
2013F. We forecast demand will be limited to a “real” level that absorbs the
PB (x) 2.0 1.8 1.6 inventory piled up through 1H12.
EV/EBITDA (x) 7.8 7.1 6.4
EPS (KRW) 21,050 23,666 26,383 China’s chemicals self-sufficiency unlikely to rise
BPS (KRW) 146,683 166,483 188,985 Despite slower demand growth than supply, China would not switch to
 Best-positioned to enjoy short-term industry 100% chemicals self-sufficiency by immediately cutting back on imports.
recovery and long-term growth China’s ethylene capacity quadrupled from 4mn tonnes in the early 2000s
 Profitability growth by strengthening
downstream petrochemicals lineup
to 17.3mn tonnes in 2012. But the ethylene capacity utilization kept falling
 Bright long-term outlook for batteries and after peaking in 2004 due to the lack of naphtha feedstock (naphtha
glass substrate cracker capacity additions > petroleum refining capacity increase). To feed
the added ethylene capacity, more naphtha imports were unavoidable.
China will continue to rely on imported chemicals to meet growing demand.
Honam Petrochemical Intense competition to supply the demand is expected among chemical
(011170, BUY, TP W310,000)
firms based in the inland region of China, Asia and the ME.
2012F 2013F 2014F
PE (x) 15.7 9.4 7.0
Top pick: LG Chem is best-positioned to respond to near-term
PB (x) 1.1 1.0 0.9 industry recovery and longer-term competition
EV/EBITDA (x) 7.8 5.4 4.3 There are a number of factors that support expectations for better
EPS (KRW) 12,586 21,026 28,229 business conditions, including China’s power transfer and eased debt
BPS (KRW) 182,894 202,767 229,835 crisis in Europe. Chemical prices will likely pick up before China’s capacity
 Easing inventory burden in the regional utilization rises in earnest. It should benefit LG Chem and Honam
market and possible demand recovery Petrochemical (Honam) that have achieved vertical integration for
 Likely near-term recovery for upstream operations and economies of scale. But we note the recovery may not last
petrochemicals
 More efficient production and steadier long considering only limited demand growth in a more complex
foothold in the market, achievable on mergers competitive environment. All things considered, we view LG Chem as a
and overseas investment safe bet as it provides mid to long-term growth potential stemming from a
wide-ranging product portfolio across downstream petrochemicals to
information & eletronic (I&E) materials.
▶ 12M sector performance
(p) Rel.to KOSPI (%p, RHS) (%p) Figure 1. Asia’s ethylene supply-demand outlook: Delayed capacity
projects to end in 2013
5,000 15
Chemicals sector index (p, LHS )
10
4,000 5
3,000 0
-5 (mn tonnes) Asia's ethy lene capacity (LHS) (%)
2,000 -10
-15
70 Asia's ethy lene demand (LHS) 110
1,000
-20
0 -25 60 Asia's ethy lene utilization (RHS) 105
50
100
40
95
Kiyong Park 30
822-3276-6177 20
90
kypark@truefriend.com
10 85
Nakyung Lee 0 80
822-3276-6241 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F
nklee@truefriend.com
Source: Korea Petrochemical Industry Association, Korea Investment & Securities
136
1. Taking a breather after rapid growth

Sluggish industry The chemicals industry aggressively installed capacity driven by the steady boom
conditions in 2012 and since the mid-2000s. But the industry took a breather in 2012 (and will into 2013).
beyond would be a brief Capacity additions for chemicals tend to be broader and larger in scale compared to
pause after breakneck refining capacity due to 1) a material business’ inherently high production elasticity
pace of growth of economic growth and consumption increase and 2) a complicated product mix.
That is, due to a complex product mix, the chemicals business requires a larger
scale, across-the-board capacity expansion even when it is to meet growing
demand from a specific downstream industry. From a long-term perspective, the
shift in ethylene feedstock is also a burden. Naphtha cracking remains the
dominant source of ethylene in Asia, including China. But in the region, there was a
limit to push up the utilization of naphtha cracking centers (NCC, an ethylene plant
using naphtha as feedstock). That was because naphtha production from
petroleum refining fell short of demand. In the Middle East (ME), steady capacity
additions for ethane crackers (ethane-fed ethylene plant) have posed a threat to the
Asian market players. In the US, ethylene producers are adding capacity thanks to
shale gas drilling, which also poses a long-term risk.
Figure 2. Global ethylene and refining capacity Figure 3. Global ethylene and refining capacity
changes utilization changes
(%) (%) Global refining utilization

10 Global refining capacity growth 100
Global ethylene capacity growth Global ethylene utilization
8 95
90
6
85
4
80
2
75
0
70
(2) 65
(4) 60
1980 1984 1988 1992 1996 2000 2004 2008 2012 1980 1984 1988 1992 1996 2000 2004 2008 2012
Source: BP, CMAI, Korea Investment & Securities Source: BP, CMAI, Korea Investment & Securities
Figure 4. China’s ethylene and refining capacity Figure 5. Growing presence of ethane crackers for
changes ethylene production
(mn tonnes) (%) (mn tonnes) (%)

20 120 180 51
China's ethylene capacity (LHS) Naphtha cracker (LHS)
18 160 Ethane cracker (LHS)
China's ethylene utilization (RHS) 100
16 140 Ethane cracker % of total (RHS) 50
14
80 120
12 49
100
10 60
80
8 48
40 60
6
4 40 47
20
2 20
0 0 0 46
1980 1984 1988 1992 1996 2000 2004 2008 2012 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
Source: BP, CMAI, Korea Investment & Securities Source: Industry data, Korea Investment & Securities
137
2. 2013 supply-demand outlook: Resumed supply growth

and low utilization only to meet real demand
Delayed capacity projects Asia’s ethylene production capacity is forecast to rise 7.36mn tonnes in 2013F
to complete  Asia’s while demand growth should be only 4.97mn tonnes. Most of the delayed capacity
ethylene capacity supply projects, mainly in China, will likely end in 2013. Although demand growth of
growth to exceed demand 4.97mn tonnes is greater than 2.59mn tonnes in 2012, the supply gluts will likely get
in 2013 worse. Thus, Asia’s ethylene capacity utilization should be limited to 88% in 2013F,
largely on par with the level in 2010 when 7.96mn tonnes capacity was added. In
2012, the operation of naphtha crackers was suspended at Taiwan’s CPC in Apr
and Formosa in Jun due to troubles at the facilities. Considering the effects, the
supply shock could be much greater than is thought in 2013.
Real demand will grow Demand for chemicals has fast grown since 2009, fueled by China’s economic
but the bubble will not stimulus. Strong demand continued until 1H11 as expectations for a sustainable
return robust business environment pushed up chemical prices, which led to stockpiling.
In turn, the speculative buying put upward pressure on product prices and
accordingly, Asian chemical firms enjoyed soaring sales and profits. But in future,
demand growth will be only gradual unless there is a large-scale stimulus program
to boost production and consumption. Thus, we forecast demand will be limited to a
“real” level that absorbs the inventory piled up through 1H12. Strictly speaking, real
demand growth will not be sluggish as it should accelerate from 5.6% YoY in 2012
to 10.2% YoY in 2013F.
Figure 6. Asia’s ethylene supply-demand outlook: Delayed capacity projects to

complete in 2013
(mn tonnes) (%)

Asia's ethy lene capacity (LHS)
70 110
Asia's ethy lene demand (LHS)
60 Asia's ethy lene utilization (RHS) 105
50
100
40
95
30
90
20
10 85
0 80
2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F
Source: Korea Petrochemical Industry Association, Korea Investment & Securities
3. In China, chemicals self-sufficiency unlikely to rise

China’s chemicals Despite slower demand growth than supply, China will not likely switch to 100%
self-efficiency unlikely to chemicals self-sufficiency by cutting back on imports. China’s ethylene capacity
rise near-term due to lack more than quadrupled from 4mn tonnes in the early 2000s to 17.3mn tonnes in
of naphtha feedstock 2012. But ethylene capacity utilization kept falling after peaking in 2004 due to the
lack of naphtha feedstock (naphtha cracker capacity additions > petroleum refining
capacity increase). To feed the added ethylene capacity, more naphtha imports
were unavoidable. Nonetheless, China’s ethylene facilities have been operating at
only 80% capacity since 2010.
138
Slowing downstream Heavy inventory is also a problem in China. Economic stimulus measures helped
industries led to reduce the chemicals inventory but the effects were only short-lived. Chemicals
chemicals inventory inventory swelled again in 2012 due to excessive accumulation by traders. The
buildup in China industry conditions will not likely fast recover when the inventory depletion is still
underway. Momentum from economic stimulus is slackening and demand growth is
slowing from the downstream industries. At this juncture, China’s chemicals
industry is unlikely to step up capacity utilization for more production. We expect to
see more intense competition to supply the demand among chemical companies
based in the inland region of China, Asia and the ME.
Figure 7. China’s ethylene production growth leads to Figure 8. China’s chemicals downstream production
greater naphtha imports growth by industry
('000 tonnes) ('000 tonnes) (%)

1400 China's monthly average ethylene production (LHS) 300 25
2011 production growth 2012 production growth
1300 China's monthly average naphtha import volume (RHS)

250
20
1200
200
1100
15
1000 150
10
900
100
800
5
50
700
600 0 0
2006 2007 2008 2009 2010 2011 2012 Plastics Synthetic fiber Tire
Source: CEIC, Korea Investment & Securities Note: YTD Jul for 2012
Source: National Bureau of Statistics of China, Korea Petrochemical Industry Association,
Korea Investment & Securities
Figure 9. China’s slowing industrial production growth Figure 10. China’s chemicals inventory rebounded in
2012
(%) (index) Chemicals inventory in China

20 140
China industrial production YoY growth
Annual average
18
120
16
14 100
12
80
10 9.2
60
8
6 40
4
20
2
0 0
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg, Korea Investment & Securities Note: Adjusting RMB-denominated chemicals inventory value by oil prices and RMB/USD
Source: CEIC, Korea Investment & Securities
139
4. Pure chemicals to benefit from near-term recovery;

Diversification is a long-term answer
China seeing a temporary Slowing capacity utilization is causing demand for imported general-purpose
supply shortfall of chemicals to grow in China. Although still large, chemicals inventory began to level
general-purpose off in Jun 2012, implying that products with a low inventory turnover cycle such as
chemicals due to falling polyethylene (PE) and polypropylene (PP) should see demand recover ahead of
utilization others. Looking at Honam’s (parent) OP by product, olefin units such as PE, PP and
mono-ethylene glycol (MEG) already restored the 2010-2011 level in 3Q12. But the
demand-pull industry recovery may not last long considering China will not likely
resume its economic stimulus in such a large scale as the past.
Figure 11. China’s chemical imports up YoY Figure 12. Honam’s OP contribution by product
('000 tonnes) (USD/tonne) (W bn)

1000 1000 350
2010 2011 2012
900
800 300
800
600 250
700
400 600
200
200 500
150
400
0
300 100
(200)
200
50
(400) 100
(600) 0 0
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12
(800)
PE (LHS) MEG (LHS)
Epoxy
Synthetic
PE
PP
PS
ABS
EG
PVC
PC
rubber
PP (LHS) BD (LHS)
SM (LHS) Honam parent OP (RHS)
Note: YTD Sep for 2012 (YoY) Source: Company data, Korea Investment & Securities
Source: CEIC, Korea Investment & Securities
After short-term recovery, For general-purpose chemicals, companies need to compete with a low-cost
diversification and high strategy by using cheaper feedstock such as ethane gas. For other chemicals,
value-added products are further growth opportunities will exist in high value-added products or new business
crucial for long-term areas. Japanese chemical firms found an opportunity in electronic materials
competitiveness benefiting from the country’s IT industry growth. Unlike leading electronic materials
makers Shin-etsu and Nitto Denko, the share prices of conventional chemical firms
such as Sumitomo fell to trade at a price-to-sales (PS) ratio of less than 0.5x. As
such, Japanese chemical firms trade at wildly varying PS multiples, proving that a
product portfolio in and of itself represents corporate value. LG Chem has one of
the two biggest NCCs in Korea (the other belongs to Honam). LG Chem’s product
portfolio is wide-ranging with more focus on acryl and acrylonitrile butadiene
styrene (ABS) rather than on polyolefin. Sales of information & electronic (I&E)
materials are growing fast. As such, branching out the profit structure provides a
bright outlook for LG Chem’s long-term growth.
140
Figure 13. Japanese chemical firms’ PS ratio Figure 14. LG Chem’s sales and OPM by division
: 1995 vs. 2010
(x) (W trn) (%)

2.0 25 Basic chemicals Specialty chemicals 16
1995 2010
I&E materials Battery
14
1.6 Industrial materials OPM (RHS)
20
12
1.2
10
15
0.8 8
10
6
0.4
4
0.0 5
Sumitomo
Showa Denko
Nitto Denko
Kuraray
Shin-etsu
Tosho
2
Asahi Kasei
Mitsui
0 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Bloomberg, Korea Investment & Securities Note: 1. KIS’ classification of LG Chem’s petrochemical business into basic chemicals
(NCC/PO, PVC), specialty chemicals (rubber/specialty resin, acryl/plasticizer,
ABS/EP)
2. Industrial materials division was separated into LG Hausys as of Apr 2009
141
Earnings forecast
1. Key assumptions
 2013F ethylene supply and demand growth: Supply +7.36mn tonnes vs.
demand +4.97mn tonnes
 2013F annual average crude oil and naphtha prices: USD107.7/bbl,
USD935.5/tonne
 2013F annual average KRW/USD: W1,058
2. KIS Universe: Combined sales up 6%, OP up 41%

KIS Universe four In 2013F, combined sales should rise 5.9% YoY and OP jump 41.1% YoY at the
chemical firms: Sales four chemical companies (LG Chem, Honam, Korea Kumho Petrochemical and
+5.9%, OP +41.1% Hanwha Chemical) in the KIS Universe. The growth will be partly attributed to the
sluggish earnings in 2012 (i.e., Honam’s loss-making in 2Q12). However, we
believe the product prices and spread (margin) will stabilize in 2013 backed by
better economic conditions.
LG Chem’s OP should increase W259.1bn, of which 84% (W217.4bn) will come

from the chemicals division. I&E materials and battery businesses will together see
6.4% YoY OP growth. Although demand and sales growth for hybrid-electric
vehicles (HEV) has thus far been slower than expected, LG Chem will be able to
supply its batteries for major carmakers’ second-generation HEV models by taking
advantage of its early advance on the market.
Honam will have the most visible earnings impact from the recoveries for the
economy and chemicals industry, with the parent’s OP up 47.9% YoY. But
subsidiary KP Chemical should see OP drop 51.9% YoY hit by purified terephthalic
acid (PTA) capacity additions in China.
China’s synthetic rubber production grew 17.7% YoY in 2012 despite an overall
drop in capacity utilization in the chemicals industry. China’s imports of synthetic
rubber shrank 9% from 2010, or 2% from 2011, and now are less than the level
before the global financial crisis. Chinese players face challenges due to heated
competition in the ethylene derivatives market but their profitability remains
relatively sound in the non-ethylene segments. The environment is unfavorable for
Korea Kumho but its OP should gain 127.7% YoY thanks to a low base of
comparison from 2012 when it suffered a severe earnings setback.
Hanwha’s consolidated OP should rise 151.1% YoY, for which Hanwha SolarOne’s
earnings is a key variable to watch. The solar PV subsidiary should recover from
the large losses seen in 2012 thanks to easing product price drops, but demand in
the solar PV industry will not likely rise until 2H13. At the parent level, Hanwha’s
chemical sales rely 72.8% on ethylene derivatives, which is disadvantageous to
securing long-term competitiveness.
142
Figure 15. KIS Universe four companies’ petrochemical Figure 16. KIS Universe four companies’ combined
sales and % of total sales and OPM
(W trn) (%) (W trn) (%)

12.5 88 14.5 10
Combined sales (LHS)
Combined petrochemical sales (LHS)
Combined OP (RHS) 9
Petrochemical sales as % of total (RHS) 87
12.0 14.0 8
86 7
11.5 13.5 6
85
5
84
11.0 13.0 4
83 3
10.5 12.5 2
82
1
10.0 81 12.0 0
1Q12 2Q12 3Q12 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 1Q12 2Q12 3Q12 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F
143
Top picks
LG Chem (051910)
1) Near-term polyolefin LG Chem is a safe bet from both short and long-term perspectives. The chemicals
recovery, 2) competitive industry in 2013 will not experience as dramatic changes as it did over the past two
downstream products to three years. While stabilizing conditions in Europe feed expectations for better
including acrylic and 3) business conditions, it is difficult to anticipate the industry’s upturn driven by China’s
long-term growth additional stimulus. Still, China’s new leadership may introduce measures to boost
potential for its economy, which will help improve business sentiment. If demand for chemicals
non-petrochemical can grow accordingly, it would benefit Korean chemical firms that have maintained
business higher capacity utilization than regional competitors. The demand growth will be
first felt for general-purpose products, such as polyolefin with a light inventory
burden, and PVC used in infrastructure projects (building and civil engineering).
The corresponding beneficiary will be LG Chem with its wide-ranging downstream
chemicals. Furthermore, LG Chem’s long-term appeal lies in the growth potential of
non-petrochemical business. When the downstream industries (e.g., autos and IT)
see growing consumption and expand production, LG Chem would see earnings
growth across the entire range of businesses including ABS, synthetic rubber,
polarizer and rechargeable batteries.
Honam Petrochemical (011170)

Likely short-term When the chemicals industry conditions turn for the better, Honam rapidly passes
earnings growth on the rise in oil and naphtha costs on to customers by raising product prices. A rapid
product mix sensitive to price hike for olefin-derivative upstream products is good for Honam, whose major
general-purpose products are PE, PP, MEG and butadiene. Titan Chemicals, the Malaysia-based
chemicals demand; subsidiary, will likely see strong earnings growth given its product mix centered on
Oversupply of PTA PE and PP. For KP Chemical, its core product is purified terephthalic acid (PTA) for
augurs ill for KP which supply should jump 42.4% YoY in 2013F due to 13.4mn tonnes capacity
Chemical’s earnings addition in China. A likely glut of PTA is a hardship particularly when Honam is
planning to merge with KP Chemical. A short-term approach will be rewarding
considering expectations for better business conditions until early 2013 on China’s
policy changes after its power transfer.
Risk factors
Too much optimism is not In the end, optimism toward better business conditions was misplaced in 2012.
helpful Demand from China, which used to drive the chemicals industry’s growth, proved a
disappointment when major events, such as the Lunar New Year holiday and the
National People’s Congress ended. Despite the upcoming power transfer and likely
additional economic stimulus, it is difficult to expect a dramatic improvement for
industry conditions. On the upside, China may resume its role as a major supplier of
finished products to Europe and the US when their economies recover, which will
lead to a gradual improvement for chemicals industry conditions. Meanwhile, China
needs to rely on imported chemicals to meet 20-30% of its demand and intense
competition to provide the supply is expected. In the long-term, low-cost chemicals
produced from ethane crackers in the ME and US will pose a competitive threat as
well, which would be a structural risk for the chemicals industry.
144
Coverage valuation
Table 1. Valuations
LG Chem Recommendation Buy 2010A 19,471 2,821 2,158 29,345 104,451 13.3 3.7 31.9 8.0
(051910) TP (KRW) 370,000 2011A 22,676 2,835 2,138 29,069 129,485 10.9 2.5 24.8 6.4
Price (Nov 15, KRW) 296,000 2012F 23,084 2,062 1,548 21,050 146,683 14.1 2.0 15.2 7.8
Market cap. (W bn) 19,616 2013F 24,430 2,321 1,740 23,666 166,483 12.5 1.8 15.1 7.1
2014F 26,378 2,585 1,940 26,383 188,985 11.2 1.6 14.8 6.4
Honam
Recommendation Buy 2010A 10,635 1,178 791 24,817 141,840 10.8 1.9 19.2 6.4
Petrochemical
(011170) TP (KRW) 310,000 2011A 15,700 1,491 978 30,701 171,456 9.7 1.7 19.6 5.5
Price (Nov 15, KRW) 197,500 2012F 15,992 531 401 12,586 182,894 15.7 1.1 7.1 7.8
Market cap. (W bn) 6,292 2013F 16,412 923 670 21,026 202,767 9.4 1.0 10.9 5.4
2014F 16,748 1,252 899 28,229 229,835 7.0 0.9 13.1 4.3
Korea Kumho Recommendation Buy 2010A 4,957 571 316 15,814 30,427 5.7 3.0 49.1 6.6
Petrochemical TP (KRW) 160,000 2011A 6,457 842 506 24,723 44,423 6.8 3.8 44.5 7.1
(011780) Price (Nov 15, KRW) 96,800 2012F 6,226 278 139 5,021 46,834 19.3 2.1 9.3 11.1
Market cap. (W bn) 2,949 2013F 7,185 632 382 13,917 56,508 7.0 1.7 22.6 5.7
2014F 7,740 666 411 14,975 67,046 6.5 1.4 20.2 5.4
Hanwha Chemical Recommendation Hold 2010A 6,341 655 446 3,155 28,239 9.8 1.1 13.4 9.6
(009830) TP (KRW) - 2011A 7,943 326 254 1,793 29,513 13.7 0.8 6.2 12.2
Price (Nov 15, KRW) 16,950 2012F 7,218 159 78 550 29,657 30.8 0.6 1.9 14.7
Market cap. (W bn) 2,378 2013F 7,596 399 282 1,993 31,244 8.5 0.5 6.5 9.5
2014F 8,098 539 406 2,871 33,710 5.9 0.5 8.8 7.8
145
Construction
From market share game to quality competition
Shift from market share to quality growth competition; Top

Overweight picks are Daewoo E&C and Samsung C&T
Faced with the economic unrest, a selective approach will be rewarding
▶ Top picks toward construction companies meeting the following criteria. 1)
Fundamental changes commenced. 2) Business is wide-ranging rather
Samsung C&T (000830, BUY, TP W97,000)
than concentrated on a single field or market, and risk is under control. 3)
2012F 2013F 2014F
Earnings visibility, rather than orders itself, is good. Daewoo E&C and
PE (x) 17.6 17.8 17.0
Samsung C&T meet the mark as they enjoy an upswing for both the top
PB (x) 0.9 0.8 0.7
line and profitability by exploring their specialty markets, and remain our
EV/EBITDA (x) 9.9 9.9 9.7
top picks, and we also still favor Hyundai E&C. We believe construction
EPS (KRW) 3,206 3,175 3,315
stocks offer opportunities considering 1) a shift in focus from market share
BPS (KRW) 65,757 71,304 76,984
competition to quality growth, 2) the expansion of unconventional markets,
 Getting better in 2013
 Trading earnings becoming visible like Asia, which took less of a hit from Europe’s debt crisis and 3) the
 Samsung Elec.’s share value accounts for average valuation at present (large caps at PE 8.8x), the lowest since
68% of the market value
2006, where concern about low growth is priced in.
Daewoo E&C (040740, BUY, TP W13,000)
2011F 2012F 2013F Key points to watch 1: Upside in unconventional markets
PE (x) 14.6 8.4 6.9 The market size of the Middle East and North Africa (MENA) should
PB (x) 1.1 1.0 0.9 expand 18% YoY in 2013F if there are clean fuel project (CFP) related
EV/EBITDA (x) 11.1 7.6 6.5 orders from Kuwait. Or, the growth would halve to 9% without such orders.
EPS (KRW) 613 1,067 1,295 Building demand is waning in Europe and capacity additions for chemical
BPS (KRW) 8,513 9,185 10,083 plants are being wrapped up in Saudi Arabia. Then it will be power plants,
 Improving in every division and account infrastructure and refineries that drive the construction market amid
 Re-entry to the ME with a contrarian strategy growing interest in public welfare. We believe it is time to pay greater
 Growth the common factor for valuation
premium in the past attention to the upbeat growth prospects of unconventional (i.e.
infrastructure, non-ME and upstream) markets rather than the ME where
growth has been slowing, although orders are stable by volume. First,
▶ 12M sector performance ahead of the 2022 FIFA World Cup, the construction market in host country
(p) (%p) Qatar should grow seven-fold. Second, Petronas (Malaysia) and the
3,000 20
2,500 10
Petroleum Authority of Thailand (PTT) are planning capex worth USD10bn
2,000
0
(combined) for refineries in 2Q13 on relatively solid demand in Asia that
1,500
-10 has been less affected by Europe’s debt woes. Third, construction
1,000
500
Rel.to KOSPI (%p, RHS)
-20 companies are tapping opportunities in offshore projects. Korean
Construction & Engineering sector index (p, LHS )
0 -30 construction companies’ dependence on ME orders should drop from 74%
in 2009 to 54% in 2013F. As such, we expect companies with operations in
widespread markets to grab opportunities and highlight their differences.
Key points to watch 2: Housing market has bottomed out but

entry barrier is getting higher
The housing business is becoming a key earnings variable as some
builders continue to struggle with losses whereas some generate sizeable
Kyungja Lee profits. The housing market conditions are turning for the better with both
822-3276-6155 housing transaction volume and prices picking up in Oct. But the pace of
kyungja.lee@truefriend.com recovery is still moderate, confining the beneficiaries to companies with
capacity to develop products, low PF risks and ample liquidity. Daewoo
Hyungjun Ahn E&C, Hyundai Development and Samsung C&T satisfy those criteria and
822-3276-4460
hyungjoon@truefriend.com
expanded their pre-sale market share to 4-7% in 2012. Other major
construction companies have seen their housing market share shrink to
the 2% level.
146
Figure 1. 2013 construction picks: Companies with rising top line and
profitability
2013F Sales growth Attractiv eness -High

25%
22%
Samsung C&T
19% Daewoo E&C
16%
GS E&C
13% Attractiv eness- Low
Samsung Eng. Attractiv eness -Medium

10% Hy undai E&C
7% Daelim E&C
2013F adj. OPM (%pt Y oY )
4%
-0.3%pt 0.0%pt 0.3%pt 0.6%pt 0.9%pt 1.2%pt
147
1. Shift from market share to quality growth competition

Take a selective BUY Amid the very sour investor sentiment for builders, we believe a selective BUY
approach while sentiment strategy can be effective for three reasons. 1) As the cutthroat competition that
is at bottom intensified since 2010 has eased, builders are returning to growth not simply in
volume but in quality. 2) The Asian and African markets are emerging. The first is
relatively less affected by Europe’s debt woes and the latter is appealing with eased
political risks. 3) Concern about margin erosion and low growth has pushed down
share prices to attractive levels. At present, the large caps’ PE averages 8.8x, the
lowest since 2006.
With concern about a The effects of margins eroded by low-priced orders received from the Middle East
slowing economy, pick (ME) in 2010-2011 should nearly die out in 2013. Thus, the large builders’ average
companies with OPM should hit bottom at 4.4% in 2012F and gradually improve to 4.6% in 2013F.
fundamental changes, In 2013, the profitability concern will persist for most builders and it is difficult to
diversification and visible offer an optimistic order outlook due to the slowing economy. Thus, investment
profits focus should be placed on builders who 1) have started making fundamental
changes, 2) employ a diversification strategy alongside risk management instead of
concentrating on certain markets and 3) have good profit visibility, not just a good
orders backlog.
Figure 2. Large-cap builders’ PE Figure 3. Major builders’ combined OPM
(x) 8% Major builders' combined OPM

35
7.3%
7%
6.7%
30 6.8%
6.7%
6%
25 5.5% 5.5%
5.1% 4.9%
5%
20 4.4% 4.6%
4%
15 3.2%
3%
10 2%
PER=8.8x (as of 2012.11.15)
5 1%
0 0%
Dec-04 Apr-06 Aug-07 Dec-08 Apr-10 Aug-11 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
Source: FnGuide, Korea Investment & Securities Source: Company data, Korea Investment & Securities
Unlikely to continue We believe Korean builders are now entering a phase of quality growth after the
targeting low-priced market share competition that intensified since 2010. There is a slim chance for a
orders; More Korean few companies to make aggressive efforts to win orders. From the risk
builders avoid cutthroat management perspective, builders themselves should see it as difficult to continue
competition targeting low-priced contracts. Recently, more companies tend to form consortiums
among themselves to avoid extreme competition. Also favorable is changes to the
external environment; Markets other than the conventional key arena (ME
petrochemicals) are expanding and more diverse types of projects are tendered.
148
ME a way to maintain the We present two selection criteria for builders in 2013. First, construction companies
top line; New growth that have ventured outside the conventional markets should stand out. The ME
engines to be found market should still offer a way to maintain the current top line and unconventional
outside conventional markets (non-ME, infrastructure and upstream) will likely offer new growth engines.
markets The related preparation started when competition in the ME was overheated in
2010. Such effort should visibly pay off from 2013. A second criterion is
competitiveness in the domestic housing market. Some builders are still setting
aside provisions for bad/questionable debts while others are enjoying solid profits.
And this disparity is widening. The housing market has been improving since Oct
but at a gradual pace, which in turn benefits only companies that have secured
good product development capacity, low project financing risk and abundant
liquidity.
2. Conventional overseas market: MENA to grow 18% YoY

2013F MENA market In 2013, the Middle East and North Africa (MENA) should continue to be the main
could grow 46% YoY in overseas markets. However, the region was not isolated from the slowing global
the best scenario, economy and its order visibility has blurred as a result. We estimated the 2013
9% YoY in the worst MENA market by scenario. For our analysis, we 1) excluded general construction
where Korean builders are not present, 2) used a three-year average tender rate
(amount of tenders to tender budgets) and 3) excluded projects with poor visibility.
As a result, the 2013 MENA market should amount to USD171.6bn (46% YoY, best
scenario) or USD128.6bn (9.4% YoY, worst scenario). If Kuwait tenders its
USD15bn clean fuel project (CFP), for which many have held their breath, in 2013,
the market could amount to USD138.6bn, up 17.9% YoY.
Figure 4. Estimated YoY growth of MENA in 2013
(%)
120% MENA GCC Non-GCC
99.6%
100%
80%
60%
46.0%
40% 29.9% 29.9%

26.4%
14.9% 17.9% 18.8% 14.9%
20% 14.9% 9.4% 7.8%
0%
Best (1)CFP+NRP (2)CFP Worst
Note: 1) Assuming both CFP and new refinery projects (NRP) are tendered; 2) Only CFP is tendered
Source: MEED Projects, Korea Investment & Securities
Key segments in ME Since 2004, the keyword for the ME market was Saudi Arabia’s petrochemical plant
shifting to power plants, capacity addition. However, as bids for the country’s large-scale petrochemical
infrastructure and energy projects such as Petro Rabigh 2, Kemya and Sadara were completed in 1H12,
infrastructure and energy (refinery, upstream and offshore) projects are emerging
as the new mainstream. In 2013, the MENA market should see considerable growth
for the tender weightings of oil and gas facilities and infrastructure. Builders who
have prepared for such shifts in tendering countries and project types should
perform better than the usual cast who had been strong in conventional markets.
We highly regard the growth potential of companies that are strong at energy and
infrastructure such as Samsung C&T, Daewoo E&C and Hyundai E&C.
149
Figure 5. 2013 MENA tender shares by country Figure 6. MENA market by project type
Oman 30% 27.7% 2000-2012F 2013F
Qatar 4% 25.8%
9% Saudi Arabia
25% 22.8% 22.7%
23%
20.1%
19.1%
Algeria 20%
8%
15%
10.9% 11.2%
Egypt 8.2%
10%
7%
5.1% 5.6% 5.6%
4.8%
5% 4.6% 2.5%
Kuwait 3.3%
Libya 15%
0%
9%
Water and
Petrochemicals
Power Plants
Infrastructure
Metals
Facilities
Industrial
Refining
Oil/Gas
Waste
Iraq UAE
13% 12%
Source: MEED, Korea Investment & Securities Source: MEED, Korea Investment & Securities
3. Crossing borders into unconventional markets abroad:

Major factor for quality growth
Asia gives the brightest Among unconventional markets for Korean builders, Asia gives the brightest
outlook among outlook on solid consumption, growing services and shallow dependence on
unconventional markets, Europe, which made it relatively immune to the global economic turbulence. This is
especially hydrocarbon well demonstrated by the emerging nations’ stock markets advancing at a
plants in Malaysia and record-setting pace. The major projects to be tendered in 2013 would include
Thailand refinery complexes by Malaysia's state-owned oil giant Petronas and Thailand's top
energy firm PTT Group. Asia faces a need to invest in energy, particularly refineries,
as energy demand in emerging nations reaches almost 20% of GDP. Moreover, the
consumption of chemicals is fast growing in line with rising incomes among the
middle classes, mainly in China and India. Malaysia and Thailand also have a
geographical advantage allowing them to be a hub for Asia’s petrochemicals.
Figure 7. Petronas’ RAPID project and Thailand Johor’s geographical advantage
Rojana industrial
High-tech industrial
Factoryland industrial
Bangbbain industrial
Nawanakon
industrial
Banchan industrial
Lackaban
industrial
TFD industrial
Banburi
industrial
Berugero
Thailand industrial
Capacity Major products

Refinery 300,000b/d Refined petroleum
Petrochemical plant 3mn tonnes/yr Ethylene, propylene, C4, C5 olefin
Power plant, LNG gas terminal,
Utilities 2,000MW
wastewater treatment
Source: Petronas, Bloomberg Source: Petronas
150
Africa has long-term The African market lags behind Asia in the speed and certainty of tenders. But
growth potential; Daewoo given the underdeveloped infrastructure, the market has long-term growth potential.
E&C with large exposure Among Korean builders, only Daewoo E&C has established a firm foothold in Africa,
which differentiates it from others. While the most noteworthy countries in 2013 are
Algeria and Nigeria, we also need to monitor others by project. Although Algeria is
an oil exporter with 60% of its oil going to North America and elsewhere, it relies on
imports to meet most of its refined petroleum products and petrochemicals demand.
Thus, the country has an urgent need to add refinery capacity. After experiencing a
tender slump since 2010 due to a corruption scandal at Sonatrach, the Algerian
construction market is now reinvigorated on the back of the presidential election
scheduled at end-2012. One of the major projects for 2013 is Sonatrach’s Tiaret oil
refinery whose project cost alone is proposed at USD6bn.
Figure 8. Tender market in Algeria Figure 9. Korean builders’ African orders weighting
(2000-2012)
(USD bn) 70%

25 Africa orders weighting
57.9%
60%
20
50%
15 40%
30%
10
20%
5 9.1% 8.3%
10% 7.2%
1.9% 1.0%
0%
Daewoo E&C Hyundai E&C GS E&C Samsung Daelim Ind. Samsung
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012F
2013F
Eng. C&T
Source: MEED, Korea Investment & Securities Source: ICAK, Korea Investment & Securities
Earnings forecast
Both top and bottom line improvement deserves attention

Rapid profitability The combined OP of Korea’s large builders should drop 7.3% YoY in 2012F but
recovery seems unlikely grow 15.2% YoY in 2013F. Also in 2013, a rapid improvement for profitability seems
unlikely as it will be the final year that recognizes the backlog in 2011 when
overseas order competition was the most intense.
Daewoo E&C and We expect builders to follow one of three profitability patterns. First, profitability at
Samsung C&T to deliver Samsung Engineering and Daelim Ind. should continue to erode in 2013. Second,
better profitability for two Hyundai E&C and Hyundai Development should see an upturn on base of
straight years comparison effects. Third, Daewoo E&C and Samsung C&T should continue to
deliver improvements following 2012. Both are latecomers to the overseas
business but have secured their own niches going beyond the saturated ME by
building a presence in Africa (Daewoo E&C) or introducing the development-type
business model (Samsung C&T). Unlike domestic peers, the two builders have
seen their housing business start getting back to normal since 2011, which bolsters
their profitability improvement.
151
Top line growth is needed For builders, top-line growth is needed to secure firm earnings visibility. The
to secure firm earnings construction business will be still affected by housing-related costs until 2013. If bad
visibility debt provisions for the housing business (fixed costs in nature) are unavoidable for
the time being, builders must deliver top-line growth to offset the contingent costs.
Those ahead of rivals in terms of top-line growth are Hyundai Development,
Daewoo E&C and Samsung C&T. A sustained improvement for profitability must
also be accompanied for builders to reduce downside for the bottom line.
Daewoo E&C and We believe companies that have upside for both top and bottom lines are Daewoo
Samsung C&T have E&C and Samsung C&T. In addition to overseas orders, homebuilding returning to
upside for both top and normal is another top-line growth driver for them. The housing market has been
bottom lines; improving since Oct but at a modest pace. Thus, the recovery will benefit only some
Housing is another key builders that meet some requirements such as product development skills, low
swing factor PF-related risks and ample liquidity. Those builders include Daewoo E&C, Hyundai
Development and Samsung C&T whose pre-sale housing market shares have
grown to 4-7% each in 2012 while those of other large builders have been shrinking
to the 2% level.
Figure 10. Construction division top-line growth by Figure 11. OP growth by major builder in 2012 and 2013
major builder in 2013
2013F construction sales growth 60% 2012F OP growth (% YoY)

45.0% 46.5%
23.0% 2013F OP growth (% YoY)
20.1% 40%
29.5% 29.0% 30.2%
18.3% 24.5%
17.3% 20.1%
18.0% 20%
7.4%
4.3% 6.1%
2.7% -1.1%
12.7% 0%
13.0%
10.9%
-20%
8.3%
-20.7%
8.0%
-40%
4.3%
-45.0%
3.0% -60%
Daelim Samsung Hyundai GS E&C Daewoo Samsung Hyundai Samsung Samsung Hyundai GS E&C Daelim Ind. Daewoo Hyundai
Ind. Eng. E&C E&C C&T Dev. C&T Eng. E&C E&C Dev.
Source: Korea Investment & Securities Note: Samsung C&T’s disposal gain is excluded
Taking into account order projections and OP margins in 2012, we revised the 2013
earnings estimates (see Table 1) and TPs (Table 2) by partially adjusting the target
multiples applied to the operating values. The multiples equal the 2006-2011
average PE 14x. However, we gave a 15% discount to GS E&C, Daelim Ind.,
Samsung Eng. and Hyundai Dev. as their 1) top-line growth remains sluggish, 2)
OP margins are trending downward and 3) business structure weighted toward
housing is at a weak point.
152
Figure 12. Major builders’ adj. OPM from 2011 to 2014
6% 7% 6%
5% 5%
6%
4% 4%
Samsung C&T Samsung Eng. Daelim Ind.
3% 5% 3%
2011 2012F 2013F 2014F 2011 2012F 2013F 2014F 2011 2012F 2013F 2014F
7% 6% 7%
6% 5%
6%
5% 4%
Daewoo E&C GS E&C Hyundai E&C
4% 3% 5%
2011 2012F 2013F 2014F 2011 2012F 2013F 2014F 2011 2012F 2013F 2014F
Table 1. Revised earnings estimates by builder in KIS coverage (W bn, %)
2012 2013
Previous Revised Chg. Previous Revised Chg.
Samsung C&T OP 724 773 6.7% 879 779 -11.4%
NP of controlling
462 519 12.4% 534 564 5.7%
interest
Hyundai E&C OP 746 746 0.0% 965 929 -3.7%
NP of controlling
521 521 0.0% 687 661 -3.7%
interest
GS E&C OP 474 285 -40.0% 669 367 -45.1%
NP of controlling
364 248 -32.0% 503 318 -36.8%
interest
Table 2. TP calculation by builder in KIS coverage (W bn, x)
Daewoo Samsung Hyundai Samsung Hyundai

GS E&C Daelim Ind.
E&C C&T E&C Eng. Dev.
Base NOPLAT 429 432 669 278 326 591 179
Target multiple 14.0 14.0 14.0 11.9 11.9 11.9 11.9
Operating value 6,012 6,048 9,370 3,312 3,884 7,027 2,135
Non-construction
- 3,094 - - 544 - -
division
Main asset value 450 8,116 - - -135 - -
Net debt 1,133 2,110 -644 532 634 - -
Target market
5,329 15,147 10,015 3,264 3,659 7,027 2,135
cap
TP (KRW) 13,000 97,000 90,000 64,000 - - 28,000
Shares (‘000) 415,623 156,218 111,356 51,000 - - 75,384
Recommendation BUY BUY BUY BUY Hold Hold BUY
Note: 1) Daelim Ind.’s fair value is estimated at W95,000, Samsung Eng. at W176,000
2) Based on net earnings rather than NOPLAT for Samsung Eng. and Hyundai Dev.
153
Top picks
Top picks are Daewoo As the sluggish economy continues, we draw attention to the following issues. First,
E&C and Samsung C&T; builders have started experiencing fundamental changes. Second, they are aligning
Hyundai E&C also their strategies toward diversification alongside risk management rather than
favored focusing on a particular market (Table 3). Third, investors must take a selective
approach to construction stocks that offer greater earnings visibility than orders.
Accordingly, we maintain Daewoo E&C and Samsung C&T as our top picks given
their 1) fundamental shifts, 2) diversification into unconventional markets and 3)
good earnings visibility that meets the requirement of a promising stock for 2013.
We also still favor Hyundai E&C as earnings should improve after 3Q 2012
although sales growth is moderate.
Table 3. Weighting of overseas orders by region (2000-2012 YTD) (%)
Samsung
Daewoo E&C Samsung C&T GS E&C Daewoo E&C Daelim Ind.
Eng.
ME 30.5% 51.4% 57.7% 60.1% 62.6% 71.7%
Africa 57.9% 1.0% 8.3% 7.2% 9.1% 1.9%
Asia 10.7% 39.1% 18.0% 22.0% 24.4% 26.4%
Common trait for Builders that traded at a premium in the past shared one common trait: strong
premium is big growth; growth. Hyundai E&C traded at a 55.4% premium on average to the market during
Daewoo E&C’s large EPS 2005-2006 thanks to a turnaround with EPS growth reaching 91% in 2005.
growth justifies high PE Samsung Eng. also received a premium during 2005-2006 and 2010-2011 thanks
partly to little dependence on housing but mainly to solid EPS growth of 62% and
53%, respectively. We set Daewoo E&C’s EPS growth at 42% in 2012F and 72% in
2013F, the most among peers for two straight years. Accordingly, its high PE
valuation is justified for the time being, in our view.
Figure 13. Comparison of OP margin gains and top-line growth in 2013
2013F Sales growth Attractiv eness -High

25%
22%
Samsung C&T
19% Daewoo E&C
16%
GS E&C
13% Attractiv eness- Low
Samsung Eng. Attractiv eness -Medium

10% Hy undai E&C
7% Daelim E&C
2013F adj. OPM (%pt Y oY )
4%
-0.3%pt 0.0%pt 0.3%pt 0.6%pt 0.9%pt 1.2%pt
Source: Quantiwise, Korea Investment & Securities
154
Risk factors
Europe and Kuwait’s The construction sector faces two risks in 2013. First, if Europe’s debt crisis
political unrest are risk worsens, it would inevitably trigger order delays for some projects (especially
factors public-private partnerships or PPP) that rely on private funding. Second, if political
unrest in Kuwait continues, we must assume the worst-case scenario and revise
MENA’s market growth to 9.4% YoY.
Coverage valuation
Table 4. Valuations
Sales OP NP EPS BPS PE PB ROE EV/EBITDA
Daewoo E&C. Recommendation BUY 2010A 6,713 (991) (828) (2,577) 8,145 NM 1.6 (26.1) (7.3)
(047040) TP (KRW) 13,000 2011A 7,020 332 177 431 8,291 24.4 1.3 5.3 14.7
Price (Nov 15, KRW) 8,940 2012F 8,250 398 252 613 8,513 14.6 1.1 7.4 11.1
Market cap. (W bn) 3,715 2013F 9,676 577 438 1,067 9,185 8.4 1.0 12.3 7.6
2014F 10,638 668 532 1,295 10,083 6.9 0.9 13.6 6.5
Samsung C&T Recommendation BUY 2010A 17,756 632 486 3,298 55,025 23.9 1.4 6.1 18.5
(000830) TP (KRW) 97,000 2011A 21,546 597 402 2,722 60,181 25.0 1.1 4.5 18.9
Price (Nov 15, KRW) 56,500 2012F 25,296 747 486 3,206 65,757 17.6 0.9 4.9 9.9
Market cap. (W bn) 8,826 2013F 27,474 684 481 3,175 71,304 17.8 0.8 4.5 9.9
2014F 28,242 693 502 3,315 76,984 17.0 0.7 4.3 9.7
Hyundai E&C Recommendation BUY 2010A 11,378 723 513 4,607 34,344 15.7 2.1 15.0 9.1
(000720) TP (KRW) 90,000 2011A 11,920 754 635 5,705 37,711 12.3 1.9 15.8 9.0
Price (Nov 15, KRW) 60,900 2012F 13,552 746 521 4,672 40,357 13.0 1.5 12.0 8.6
Market cap. (W bn) 6,781 2013F 15,026 929 661 5,931 44,262 10.3 1.4 14.0 7.1
2014F 16,809 1,063 762 6,837 49,073 8.9 1.2 14.6 6.2
GS E&C Recommendation BUY 2010A 8,420 633 397 8,030 71,244 14.4 1.6 11.6 7.9
(006360) TP (KRW) 64,000 2011A 9,052 598 424 8,563 74,846 10.8 1.2 11.6 7.2
Price (Nov 15, KRW) 48,500 2012F 9,562 285 248 5,008 77,762 9.7 0.6 6.5 13.4
Market cap. (W bn) 2,473 2013F 10,490 367 318 6,433 82,061 7.5 0.6 8.0 10.7
2014F 11,623 555 462 9,337 89,178 5.2 0.5 10.8 7.1
Hyundai Dev. Recommendation BUY 2010A 3,590 244 97 1,322 30,849 25.7 1.1 4.4 14.6
(012630) TP (KRW) 28,000 2011A 4,108 403 222 3,013 33,070 5.6 0.5 9.5 7.0
Price (Nov 15, KRW) 18,100 2012F 3,457 221 114 1,554 33,985 11.6 0.5 4.7 10.1
Market cap. (W bn) 1,364 2013F 4,153 324 208 2,831 36,050 6.4 0.5 8.2 7.0
2014F 4,430 355 235 3,190 38,366 5.7 0.5 8.6 6.3
Samsung Eng. Recommendation Hold 2010A 5,312 412 339 9,032 32,052 21.3 6.0 38.3 14.4
(028050) TP (KRW) - 2011A 9,298 717 513 13,892 40,887 14.5 4.9 43.7 9.3
Price (Nov 15, KRW) 144,000 2012F 11,462 736 531 14,375 49,308 10.0 2.9 35.0 8.3
Market cap. (W bn) 5,760 2013F 12,417 768 589 15,947 58,720 9.0 2.5 31.4 7.9
2014F 13,066 818 626 16,943 68,591 8.5 2.1 27.7 7.6
Daelim Ind. Recommendation Hold 2010A 7,438 313 334 8,640 108,237 13.6 1.1 8.4 13.1
(000210) TP (KRW) - 2011A 7,988 516 366 9,469 114,427 9.5 0.8 8.5 6.5
Price (Nov 15, KRW) 69,400 2012F 10,686 498 394 10,230 122,155 6.8 0.6 8.6 7.6
Market cap. (W bn) 2,415 2013F 11,219 534 399 10,352 130,005 6.7 0.5 8.2 7.2
2014F 11,634 554 422 10,959 138,460 6.3 0.5 8.1 7.0
155
Shipbuilding
An inconvenient truth: Offshore plants will not
be enough in 2013
Shipbuilders to underperform the Kospi in 2013
Neutral Shipbuilders’ backlogs are shrinking as full-year order receipts are falling
short of sales. Accordingly, shipbuilding stocks should continue to suffer a
valuation de-rating due to lower absolute profit levels and visibility. In
▶ Top picks
addition, given that newbuilding prices regain strength after backlogs are
Samsung Heavy Ind. filled, thin-margin orders should continue to be placed and the profitability
(010140, BUY, TP W57,000) of shipbuilders should remain a concern. Shipyards are currently engaged
2012F 2013F 2014F in heated competition to secure offshore plant orders to overcome poor
PE (x) 8.2 8.6 7.6 commercial ship market conditions, and this is weighing on profitability.
PB (x) 1.3 1.1 1.0 Accordingly, earnings at some companies are likely to miss consensus, so
EV/EBITDA (x) 17.5 14.5 14.4 the market will likely continue lowering forecasts. Overall, we believe the
EPS (KRW) 4,050 3,864 4,369 shipbuilding sector will continue to underperform the Kospi in 2013.
BPS (KRW) 26,288 29,445 33,076
 Strongest and stable profitability among peers 2013 order outlook: Big 3 shipyard orders to decline slightly
 Offsetting sluggish commercial ship market
conditions via offshore plant orders
YoY to USD29.5bn
 Attract valuations on recent pullback The offshore plant market should continue to place orders in 2013 with
USD11bn in offshore production & storage units (FPSO, platform) and
USD11bn in drilling units. In 2013, there should be a lull in LNG carrier
▶ 12M sector performance orders, which should remain similar YoY at about 20 units (USD4bn) due
to stalled gas field development projects and subsequent delays in the
8,000
(p) (%p)
30
signing of charter contracts for pre-ordered ships. We estimate Korea’s Big
20
3 shipyards (Hyundai Heavy Industries or HHI, Samsung Heavy Industries
6,000
10
or SHI and Daewoo Shipbuilding & Marine Engineering or DSME) will
4,000
0
combine for containership orders of USD3.5bn in 2013F, which would be
2,000 Rel.to KOSPI (%p, RHS)
-10 greater than USD1.2bn in 2012F.
Shipbuilding sector index (p, LHS )
0 -20
Nov-11 Feb-12 May-12 Aug-12 Top pick: Most lucrative SHI with stable profits
Our top pick is Samsung Heavy Industry (SHI, 010140, BUY, TP W57,000),
the most profitable and stable shipyard in terms of profits backed by its
edge in offshore plants, such as drillships. Recently, SHI established an
offshore engineering joint venture with UK-based AMEC, which in turn
should bolster SHI’s edge in offshore production & storage units. A recent
share price correction has pushed down 2013F PE to 9.1x, and making
SHI the most undervalued shipbuilder. We believe this is a bargain
opportunity, considering the solid, stable profitability compared to
competitors.
Figure 1. HHI’s backlogs vs. valuation

(USD bn) HHI backlogs (LHS) (%)
46 120
HHI FY 2 PB premium to KOSPI (RHS)
44 100
42 80
40 60
38 40
36 20
Richard Park, CFA 34 0
822-3276-6175 32 -20
richard.park@truefriend.com 30 -40
1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12
Chulhee Cho
822-3276-6189 Note: FY2 = 2013F
chulhee.cho@truefriend.com Source: Korea Investment & Securities
156
1. Shipbuilding recovery still unlikely

Backlogs serve as a Shipbuilders’ backlogs are shrinking as full-year order receipts are falling short of
yardstick for future sales due to sluggish commercial ship industry conditions. A decline in backlogs
earnings; It is difficult to erodes absolute profit level and visibility, which will likely lead to a valuation
improve backlogs on de-rating. Lower newbuilding prices are also weighing on earnings. Given that
commercial ships alone newbuilding prices regain strength after backlogs are filled with thin-margin orders,
profitability at shipbuilders should remain a concern while orders are being satisfied.
In addition, shipyards are currently engaged in heated competition to offset sluggish
commercial ship industry conditions via the booming offshore plant market, and this
should weigh on profitability. Accordingly, some companies are likely to miss
consensus estimates. We believe shipbuilding shares will continue to slide in 2013
due to ongoing concerns about poor earnings especially as the market has set its
target too high.
Figure 2. SHI’s backlogs vs. valuation Figure 3. DSME’s backlogs vs. valuation
(USD bn) (%) (USD bn) (%)

50 120 48 120
SHI backlogs (LHS)
SHI FY2 PB premium to KOSPI (RHS) 46 DSME backlogs (LHS) 100
47 96
DSME FY2 PB premium to KOSPI (RHS)
44 80
42 60
44 72
40 40
41 48
38 20
36 0
38 24
34 -20
35 0 32 -40
1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12
Note: FY2 = 2013F Note: FY2 = 2013F

2. Offshore plants are the only hope: USD22bn in orders

Offshore plant orders to We believe the offshore plant market boom will be sustained in 2013. As of YTD
reach USD22bn in 2013F 2012, the Big 3 shipyards have combined for offshore plant orders of USD17.2bn
(production & storage units USD9.1bn, drilling units USD8.1bn). Considering the
additional order inflow for the rest of the year, we estimate 2012F offshore plant
orders will amount to USD20bn. In 2013F, orders should rise 10% YoY to USD22bn
(production & storage units USD11bn, drilling units USD11bn). With oil prices
remaining high, oil majors are strongly committed to pursue exploration and
production (E&P) activities and numerous offshore plant projects that were delayed
to 2013 are scheduled to be ordered incrementally. Moreover, the sustained
increase in deep-sea oil field exploration activities is also fueling the offshore plant
market boom. Accordingly, Korea’s Big 3 players that hold a near-monopoly on the
global offshore plant related market should continue to capture related orders in
2013.
157
Big 3 shipyards hold Drilling units should continue to be ordered in 2013 as well. The Big 3 and STX
options for drilling units Offshore & Shipbuilding (O&S) should combine for drilling unit orders of USD11bn
worth USD9bn-10bn (20 units) in 2012F, and the figure should remain similar at ~USD11bn in 2013F.
alone; Hoping for With the delivery date approaching for drillships that were ordered in 2011, charter
full-year orders of contracts are being signed at a brisk pace and charter rates are climbing to record
USD11bn highs, and this indicates supply-demand conditions are tight in the drilling unit
market. The reason is oil majors are aggressively conducting deep-sea oil field
drilling activities. Moreover, as newbuilding prices have shed 30% since the 2008
market boom, drillship operators can recoup newbuilding costs within five years
based on current prices. As such, the favorable conditions in the charter market are
stimulating oil majors to order drilling units. At present, the Big 3 shipyards hold
options for 17 drilling units worth USD9bn-10bn, and they should easily achieve
full-year orders of USD11bn.
Considering offshore As the final investment decision (FID) for a number of highly-anticipated offshore
orders in the pipeline, projects in 2012 were postponed to 2013, the Big 3 shipyards are securing less
USD11bn in orders order receipts than expected. Accordingly, the three shipbuilders have posted
should be achievable in production & storage orders of USD8.1bn (YTD 2012), which is below the initial
2013F estimates of USD13bn-15bn. Considering the offshore orders in the pipeline, we
estimate orders will reach at least USD11bn in 2013F. Projects that were delayed in
2012 should be ordered incrementally in 2013, and new projects are scheduled to
be ordered as well. If floating LNG (FLNG) projects that conduct front-end
engineering and design (FEED) studies in 2013 issue orders at a faster pace, there
is a possibility that orders will reach roughly USD15bn in 2013F.
Figure 4. Big 3 shipyards’ offshore plant order trend
(USD bn) Storage & production f acility Drilling f acility

30
25
20
15
10
0
2005 2006 2007 2008 2009 2010 2011 2012F 2013F
3. LNG carrier orders of USD4bn (20 units)

LNG carrier orders to be In 2012, the LNG carrier market was in a lull as the FID for gas field development
sluggish in 2013 due to projects were postponed due to the shale gas boom, which put a damper on
project delays and slow aggressive order activities by ship owners. In addition, charter contracts for
charter market previous orders were signed later than expected. Accordingly, LNG carrier orders
should be quiet in 2013 as well and full-year orders should stand at only ~20 ships.
Given the ongoing gas field developments across the globe, new demand for LNG
carriers will number in the hundreds over the long term. However, we believe LNG
carrier orders will remain in a lull through 2013, and grow at 30-40 units p.a. after
2014. At the gas fields currently in development, production is scheduled to enter
full-fledged growth after 2017. As such, ship owners are expected to step up orders
from 2014 to prepare for soaring LNG trade volume generated after 2017.
158
Figure 5. LNG carrier order and outlook
(ships) LNG ship orders

80
70
60
50
40
30
20
10
0
96 98 00 02 04 06 08 10 12 14F
Source: Clarksons, Korea Investment & Securities
4. Slight improvement in containerships: 2013F order

receipt of USD3.5bn (400,000 TEU) for Big 3
Weak order orders due to The order market for containerships slumped severely in 2012. As ship prices
persistent low prices; hovered at a level that is difficult for shipbuilders to make profits, negotiations did
Order volume to grow not lead to contracts and sluggish ship finance and shipping market conditions
slightly in 2013 to prepare weighed on the newbuilding market. But from 2013, the containership market is set
for demand outweighing to see a gradual pickup in orders backed by better supply-demand dynamics from
supply from 2015 2015. We forecast order volume will reach 500,000 TEU in 2013F, up 16% YoY
from 430,000 TEU in 2012. The receipts of the domestic Big 3 should amount to
400,000 TEU (USD3.5bn). Although the figure is much lower than the historic
average, it is significant enough given the increasingly empty dockyards for
commercial ships. According to Clarksons, global trade volume via containerships
should grow 5.9% YoY in 2012, which falls short of the 7.5% gain in 2011, due to
the European economic woes. Although trade volume via mainlane routes
(Asia-Europe, Asia-Americas) should be sluggish, total trade volume growth should
hover over at least 5% thanks to an 7.9% gain in non-main lane routes, which
should be up slightly YoY.
Figure 6. Trade volume growth by route
(%) Transpacif ic (main) Far East-Europe (main)

40 Transatlantic (main) Other East-West (non-main)
North-South (non-main) Intra-regional (non-main)
30
20
10
(10)
(20)
(30)
2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F
159
The newbuilding market for containerships should improve gradually from 2013. As
shown in Table 1, we expect newbuild orders of 500,000 TEU in 2013F, 1mn TEU in
2014F and 1.2mn TEU in 2015F. Our estimates are based on the assumption that
annual trade volume growth of more than 6% should be maintained during the
period. If trade volume growth from 2014 to 2017 is kept at 6% (average for 2011
and 2012 when European woes were in play), demand in the containership market
should start to outweigh supply from 2015. Assuming a typical two-year period from
ordering to delivery, ship operators should resume newbuild orders in 2013
targeting demand after 2015.
Table 1. Containership supply-demand model (mn TEU)
2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F 2015F
Newbuild orders 1.7 1.7 1.7 3.2 1.2 0.1 0.6 1.8 0.4 0.5 1.0 1.2
% change 0.8% 4.2% 86.2% -64.0% -92.5% 565.4% 206.1% -88.8% 150.0% 100.0% 20.0%
Delivery 0.7 0.9 1.4 1.3 1.5 1.1 1.4 1.2 1.4 1.6 0.8 1.0
% change 44.5% 46.3% -3.7% 11.6% -24.8% 24.8% -12.9% 12.6% 18.3% -49.3% 22.4%
Demolitions 0.0 0.0 0.0 0.0 0.1 0.4 0.1 0.1 0.1 0.1 0.1 0.1
% change -75.7% 1152.1% -12.0% 381.3% 274.4% -65.6% -45.3% 87.7% -24.9% 0.0% 0.0%
Fleet capacity 8.19 9.54 10.84 12.21 12.95 14.20 15.3 16.5 17.7 18.5 19.4
% change 16.5% 13.6% 12.7% 6.0% 9.7% 7.9% 7.5% 7.8% 4.0% 4.9%
Seaborne trade volume 106.5 118.4 131.6 137.1 124.7 140.7 151.2 160.1 172.3 182.6 193.6
% change 10.5% 11.2% 11.1% 4.2% -9.0% 12.8% 7.5% 5.9% 7.6% 6.0% 6.0%
5. Product Carrier orders worth USD2.5bn (80 vessels)

expected
Robust MR tanker orders Product carrier (PC) orders continue. For a medium range (MR) tanker, a vessel
in 2012: 1) fuel cost cuts, designed to carry refined petroleum products in bulk tanks (30,000-60,000 DWT),
2) newbuilding price global orders totaled 70 ships YTD 2012, already exceeding the full-year target of
drops, and 3) tonne-mile 65 ships. The robust orders may be attributed to the following: 1) growing demand
increase for petroleum for PCs with high fuel economy amid continued oil price hikes. 2) Decline in
product shipping newbuilding price, which spurs orders ahead of real demand growth and resulting
newbuilding price hikes. Newbuilding price has dipped significantly from its peak at
the current level. As the payback period is getting shorter, it helps ease the initial
investment burden of ship owners. 3) Oil refining capacity additions in the emerging
markets, coupled with falling utilization or shutdowns of refineries in the developed
countries. Accordingly, tonne-mile (distance a ship travels) is expected to increase
in the global crude oil/petroleum product shipping market, which leads to the order
growth.
In 2013, at least 80 MR MR tanker orders should remain brisk in 2013. The world’s oil refining capacity
tankers (worth USD2.5bn) additions herald an increase in global seaborne trade of petroleum products (Table
to be ordered 2). In particular, tonne-mile should rise as Europe/US-bound exports grow from the
Asian/ME regions, and that means the trade volume growth should be even greater
measured by DWT. We forecast there will be an additional 140 MR tanker orders for
the next two to three years. We derived this by weighting the YoY growth of
seaborne trade volume with ship owners’ replacement demand for high fuel
economy vessels and subtracting the number of ships waiting for delivery.
Newbuilding orders should amount to 50 vessels in 2013 (for use in 2014) and 30
vessels in 2014 (one third of total needed in 2015). Korean shipbuilders won 74% of
global MR tanker orders for the past two years, and having advanced technology
that improves fuel economy, they should continue to generating order momentum
into 2013.
160
Table 2. Estimated MR tanker demand based on global refinery capacity addition

Unit 2008 2009 2010 2011 2012F 2013F 2014F 2015F
Crude refinery capacity - ① mbpd 87.7 88.2 89.9 91.8 95.3 97.2 99.1 101.1
YoY growth (%) 0.6 1.9 2.1 3.8 2.0 2.0 2.0
Seaborne trade volume (bbl) - ② mbpd 16.6 16.7 17.5 18.1 18.8 19.4 20.0 20.7
YoY growth (%) 0.6 4.8 3.4 3.9 3.0 3.3 3.6
Seaborne trade volume (dwt converted) - ③ mn dwt 88.9 87.6 88.2 92.0 97.3 101.6 106.6 112.4
YoY growth (%) (1.5) 0.7 4.3 5.8 4.5 4.9 5.4
Seaborne trade volume YoY growth - ④ mn dwt 5.3 4.3 5.0 5.8
Considering replacement demand – ⑤ (④*1.4) mn dwt 6.9 6.1 7.0 8.1
PC tankers (scheduled for delivery) – ⑥ mn dwt 7.1 5.9 2.6 0.3
Additional need for PC tankers – ⑦ (⑤-⑥) mn dwt (0.2) 0.2 4.4 7.8
Weighting of MR tankers (55%) - ⑧ (⑦*0.55) mn dwt (0.1) 0.1 2.4 4.3
Average size of additional MR tankers in
ships (2) 2 50 88
demand (48,746dwt) – ⑨ (⑧/0.048746)
Note: ① Clarksons estimates until 2013; Assumed 2013 flat YoY growth for 2014 and 2015 estimates
② Clarksons estimates until 2012; Exports and imports volume should increase on capacity additions in Asia and the ME
③ Clarksons estimates until 2012; With growing ton-mile, volume converted in dwt should grow bigger than volume on a bpd
basis; Clarksons’ conversion factor used for 2012 estimates (from bpd to dwt) is identically applied to 2013 estimates and
onward
⑤ We assign a weight (1.4) to 2013-15 figures to reflect ship operators’ replacement demand pushed by a desire for better
fuel efficiency and eco-friendliness
⑥ Orders backlog compiled by Clarksons
6. Sluggish ship financing works to rein in speculative

demand
Speculative order is less Historically, when the commercial ship market was poised to exit a downcycle for an
likely to emerge as ship upcycle, there have been speculative forces that place orders ahead of the
financing market turned expected recovery. But at present, it is difficult to expect such speculative behavior
sour given considerably weakened lending at ship financing banks and poor conditions
at potential borrowers, i.e., shipping companies. Funding costs increased for
European banks, which used to control more than 60% of the world’s ship financing.
Stricter shareholders’ equity requirements under the Basel III also put pressure on
banks.
Table 3. Structural change in syndicated shipping loans

Pre-financial crisis Post-financial crisis
2008 2010 Present
Tenor Max. 15 years 7-10 years 5-7 years
LTV Max. 90% Max. 75% Max. 65%
Premium Min. 40bp Min. 200bp Min. 300bp
Commission Min. 15bp Min. 100bp Min. 120bp
- Standard term package - Standard term package - Standard term package
Debt covenant
- Regular debt covenant - Stricter debt covenant - Far stricter debt covenant
Debt size USD 25~75 million USD15~25 million USD 10~25 million
- Detailed conditions can be adjusted when market
volatility increases between loan negotiation and
execution
Others
- Clear preference for quality assets (ships)
- Whether a charter contract is inked or not becomes a
key determinant of loan approval
Source: DNB Markets, Korea Investment & Securities
161
Earnings forecast
1. Key assumptions
 In 2013F, the Big 3 (HHI, SHI and DSME)’s combined orders should amount
to USD29.5bn, lower than USD31bn in 2012.
 Expected orders are offshore production & storage units (USD11bn), drilling
units (USD11bn), LNG carriers (USD4bn) and container ships (USD3.5bn).
2. In 2013, earnings to bottom and pick up for some yards

SHI to rebound from In 2013F, SHI should post sales of W15.2trn (+3.3% YoY) and OP of W116.1bn
2H13; DSME slightly (-3.0% YoY). While annual earnings should be on par with 2012, OPM should be
improving; HHI continues flat until 2Q13F due to mounting orders of low-margin container ships and LNG
to be sluggish carriers. From 2H13F, earnings should visibly pick up as lucrative offshore plant
sales will be recognized. DSME’s 2013F consolidated earnings should edge up
from 2012 with sales of W14.8trn (+5.3% YoY) and OP of W749bn (+24.9% YoY).
We believe the consensus outlook for HHI is still inflated. At present, the 2012F and
2013F consensus forecasts are OP of W2.5trn and W2.7trn and NP of W1.7trn and
W1.8trn, respectively. 2013F consensus OP is 41.4% higher than our projection of
W1.9trn, and 2013F NP is 63.2% higher than our W1.1trn forecast. Considering the
shipbuilding earnings erosion, the consensus should continue falling into 2H13.
Accordingly, share prices should continue falling to fresh lows.
Top pick
Samsung Heavy Ind. (010140)

Bargain opportunity Our top pick is SHI, the most lucrative shipyard with stable profits backed by its
given the most stable edge in offshore plants. Our TP is based on a 12MF BPS of W28,500 and target PB
profits and biggest of 2.0x, the 2011 trading peak. Due to macro issues, SHI’s share price has
margins among rivals corrected recently, pulling down 2012F to 8.7x and 2013F PE to 9.1x, the lowest
among peers. We believe it is a bargain hunting opportunity, given the shipbuilder’s
lucrative and stable profitability compared to competitors. We also forecast a stable
flow of orders backed by solid competitiveness in offshore plants, such as drillships
and FPSO and platforms.
Risk factors
Inherent risk of order Without ship owners actively seeking to charter drill-ships and LNG carriers,
backlog; Potential risks additional momentum for orders may shrink and in turn the order drought may be
of contracting ship prolonged. Moreover, less orders should be placed by ship owners as Europe’s
financing market and persistent debt crisis deteriorates financing conditions. Falling oil prices are also a
lower oil prices potential risk. That is because a plunge in prices could delay oil majors’ resource
development projects, which in turn could lead to a sharp decline in offshore
plant-related orders.
162
Coverage valuations
Table 4. Valuations
Hyundai Heavy
Recommendation Hold 2010A 37,342 5,532 4,154 75,873 206,480 5.8 2.1 34.5 6.2
Ind.
(009540) TP (KRW) - 2011A 53,712 4,536 2,559 46,337 233,942 5.5 1.1 16.7 5.0
Price (Nov 15, KRW) 196,500 2012F 54,478 2,474 1,629 26,575 252,147 7.4 0.8 9.5 8.5
Market cap.(W bn) 14,934 2013F 55,168 1,942 1,084 17,681 263,180 11.1 0.7 6.0 9.5
2014F 55,943 1,991 1,192 19,445 275,635 10.1 0.7 6.2 9.1
Samsung Heavy
Recommendation BUY 2010A 13,146 1,433 1,000 4,626 20,755 8.9 2.0 28.7 6.7
Ind.
(010140) TP (KRW) 57,000 2011A 13,392 1,160 851 3,930 22,956 7.1 1.2 19.4 4.6
Price (Nov 15, KRW) 33,400 2012F 14,702 1,197 878 4,050 26,288 8.2 1.3 17.5 5.8
Market cap.(W bn) 7,711 2013F 15,185 1,161 838 3,864 29,445 8.6 1.1 14.5 5.4
2014F 15,628 1,280 947 4,369 33,076 7.6 1.0 14.4 4.9
DSME Recommendation BUY 2010A 12,989 1,203 767 4,056 21,456 9.0 1.7 20.9 6.6
(042660) TP (KRW) 33,000 2011A 13,903 1,104 686 3,631 24,096 6.7 1.0 15.9 6.3
Price (Nov 15, KRW) 21,700 2012F 14,088 600 380 2,008 25,244 10.8 0.9 8.1 11.6
Market cap.(W bn) 4,153 2013F 14,834 749 484 2,559 26,941 8.5 0.8 9.7 9.2
2014F 16,233 877 580 3,068 29,147 7.1 0.7 10.9 8.0
Hyundai Mipo
Recommendation Hold 2010A 4,138 683 493 25,270 207,725 8.9 1.1 14.6 4.3
Dock.
(010620) TP (KRW) - 2011A 4,624 378 200 10,201 163,132 11.0 0.7 5.5 4.0
Price (Nov 15, KRW) 106,500 2012F 4,349 126 120 6,120 167,167 17.4 0.6 3.7 11.0
Market cap.(W bn) 2,130 2013F 3,986 124 109 5,566 170,660 19.1 0.6 3.3 11.3
2014F 4,096 160 136 6,958 175,517 15.3 0.6 4.0 9.2
Hanjin Heavy Ind. Recommendation Hold 2010A 3,168 120 (72) (1,511) 40,899 NM 0.9 (3.6) 18.2
(097230) TP (KRW) - 2011A 2,891 108 (97) (2,007) 38,640 NM 0.5 (5.1) 17.9
Price (Nov 15, KRW) 12,400 2012F 2,579 99 (60) (1,248) 37,544 NM 0.3 (3.3) 17.8
Market cap.(W bn) 598 2013F 2,578 131 (32) (668) 37,028 NM 0.3 (1.8) 14.2
2014F 2,770 161 1 28 37,207 440.0 0.3 0.1 11.5
163
Machinery
Take note of companies that can achieve structural
growth regardless of economic conditions
Overweight Fittings market in a boom all by itself

The fittings market boom should continue in 2013. With shipbuilders
enjoying stronger offshore plant orders since 2011, the sales weighting of
▶ Top picks high-margin products used in offshore plants is growing at equipment
makers. The facility expansions executed in 2012 should take full effect
SungKwang Bend (014620, BUY, TP W36,000)
from 2013 and their quarterly sales would exceed W100bn. As such,
2012F 2013F 2014F
equipment makers should deliver better earnings in terms of both quantity
PE (x) 11.3 8.7 7.9 and quality.
PB (x) 1.9 1.6 1.3
EV/EBITDA (x) 8.8 6.3 5.4 Sluggish power plant equipment
EPS (KRW) 2,109 2,724 3,001 We believe the power plant equipment market will remain sluggish in 2013
BPS (KRW) 12,444 14,938 17,709 due to lackluster order receipts by domestic heavy industry players and
 Earnings improvement to continue on builders. Numerous projects that were expected to be tendered in 2012
booming offshore plant orders
 High-margin stainless steel and alloy sales to have been delayed, while engineering, procurement and construction
grow (EPC) firms are engaged in heated competition to secure orders, and
 Cash flow to improve in earnest
these factors are further weighing on profitability.
TK Corp. (023160, BUY, TP W34,000)
Construction equipment – searching for gems in the mud
2012F 2013F 2014F China’s excavator market that weakened considerably in 2012 should
PE (x) 14.4 8.8 7.2 grow only 5% in 2013F. Although the Chinese government is showing
PB (x) 1.4 1.2 1.1 signs of resuming investment in railroads and subways, the excavator
EV/EBITDA (x) 11.6 7.2 5.6 market is unlikely to recover quickly in the near-term. Despite the uncertain
EPS (KRW) 1,519 2,470 3,031 environment, we draw attention to equipment makers that can perform well
BPS (KRW) 15,767 17,678 20,075 regardless of economic conditions.
 Rising orders for high-margin products related
to offshore plants
 Full-fledged earnings improvement with the Top picks: SungKwang, TK and Jinsung
completion of defective product compensation Our top machinery picks are SungKwang Bend (SungKwang), TK Corp.
 Cash flow to improve in earnest (TK) and Jinsung T.E.C. (Jinsung). SungKwang and TK control the
domestic fittings market that is currently in a boom. Jinsung should
▶ 12M sector performance continue to deliver stable earnings growth regardless of economic
conditions backed by a long-term supply contract with Caterpillar. We also
3,000
(p) (%p)
10
take note of Korea Aerospace Industries (047810) that should enjoy stable
2,500 5 orders from national defense projects and the civil aviation parts business.
2,000 0
-5
Figure 1. Improving cash flow at fittings makers to lead to cash pile-up
1,500
-10
1,000 Rel.to KOSPI (%p, RHS) -15
500 Machinery sector index (p, LHS ) -20 (W bn)
0 -25 40 TK's OP SungKwang's OP
Nov-11 Feb-12 May-12 Aug-12 TK's OCF SungKwang's OCF
30
20
10
0
Richard Park, CFA
-10
82-2-3276-6175
richard.park@truefriend.com -20
Chulhee Cho -30

82-2-3276-6189 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12P 1Q13F 3Q13F
chulhee.cho@truefriend.com
164
1. Fittings still attractive

Fittings market in good The fittings market boom should continue in 2013. With Korea’s Big-3 shipyards
health thanks to booming (Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding &
offshore plant orders for Marine Engineering) enjoying stronger offshore plant orders, equipment makers are
shipbuilders in the receiving better orders in terms of both quantity and quality. SungKwang and TK’s
downstream industry 2012F order receipts should rise 15.1% YoY and 9.5% YoY, respectively, thanks to
big needs related to offshore plants. As shipbuilders will start to order fittings for
offshore plants taken in large measure since 2011, equipment makers would enjoy
a steady order flow over the long-term. A better quality of orders is also noteworthy.
Given the large weighting of high valued-added stainless steel and alloy products
used in offshore plants, the sales mix is fast improving. Backed by the capacity
additions from 4Q12, both SungKwang and TK’s quarterly sales should exceed
W100bn and their earnings improve considerably with annual OPM climbing to the
solid 20% level in 2013F. Another positive is their cash flow is getting better as
capex is wrapped up. As for Hy-Lok Corp. (Hy-Lok), the high-pressure fittings and
valves maker’s sales growth should remain stable at 12% YoY and OPM sturdy at
the 20% level in 2013F thanks to steady orders for products used in offshore plants.
Figure 2. Overseas construction order receipts by type Figure 3. Monthly order receipts by fittings maker
(USD bn) (USD/bbl) (W bn) TK (LHS) (USD/bbl)

80 120 70 SungKwang (LHS) 140
Contracting (LHS) Hy-lok (LHS)
70 Electro-telecom (LHS) Dubai crude (RHS)
60 120
100
Electrical (LHS)
60 Industrial/environmental equipment (LHS) 50 100
Architectural (LHS) 80
50
Civil engineering (LHS) 40 80
40 Dubai crude (RHS) 60
30 60
30
40
20 40
20
20
10 10 20
0 0 0 0
91 93 95 97 99 01 03 05 07 09 11 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Note: As of Nov 5 Source: Company data, DataStream, Korea Investment & Securities
Source: International Contractors Association of Korea, Korea Investment & Securities
2. Overcast skies for power plant equipment

Delayed orders and We believe the power plant equipment market will remain sluggish in 2013 due to
intensifying competition lackluster order receipts by domestic heavy industry players and builders.
among builders are Numerous power plants that were expected to be tendered in 2012 (Doosan Heavy
further weighing on Industries and Construction’s (DHIC) coal-fired power plant in Vietnam) have been
delayed. Moreover, Korea’s heavy industry players and builders are engaged in
profitability
heated competition to secure orders. These factors are further weighing on project
profitability. But in the mid to long-term, expanding oil field development in the
Middle East and the growth of Asia’s power generation market with a large portion
of coal-fired plants should be positive for domestic heavy industry and construction
firms. As a supplier of boilers, turbines and generators (BTG) used for power
generation, DHIC is working with domestic builders to participate in bids and
expanding the horizon for potential orders.
165
3. Construction equipment – searching for gems in the mud

China’s excavator market China’s construction equipment market has been in a slump since 2H11. Excavator
to see limited recovery in sales volume should stand at only 107,736 units in 2012F, down 38% YoY. Although
2013; Favor Jinsung that the Chinese government is showing signs of resuming investment in railroads and
can achieve growth subways, the excavator market should grow only 5% in 2013F. Accordingly,
regardless of economic companies that have a large sales weighting in China’s construction equipment
conditions market would deliver limited growth. We believe the direction of Doosan Infracore’s
shares will be determined by the size of excavator sales growth in China and
market share recovery. But among construction equipment makers, Jinsung that
makes rollers and idlers (undercarriage parts for crawler-type excavators) should
continue to deliver better earnings in 2013 regardless of economic conditions
backed by stable growth drivers, including the long-term supply contract with
Caterpillar.
Figure 4. China’s excavator market to rebound

Figure 5. China’s excavator market share by company
slightly in 2013
('000 units) (%) ('000 units) (%)
210 80 70 Total market (LHS) Doosan (RHS) 21
China excavator sales (LHS)
Sany (RHS) Komatsu (RHS)
YoY growth (RHS) Kobelco (RHS) Caterpillar (RHS)
180 60 60 18
150 40 50 15
120 20 40 12
90 0 30 9
60 (20) 20 6
30 (40) 10 3
0 (60) 0 0
2006 2007 2008 2009 2010 2011 2012F 2013F Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Source: China Construction Machinery Association, Korea Investment & Securities Source: China Construction Machinery Association, Korea Investment & Securities
166
Earnings forecast
1. Key assumptions
 Greater sales portion of fittings used in offshore plants ordered by Korea’s
Big-3 shipyards
 China’s excavator market growth: 5% YoY
2. Stocks to walk different paths in 2013

SungKwang, TK and SungKwang and TK’s operating results should continue to improve in 2013. We set
Jinsung can achieve SungKwang’s 2013F sales at W428.9bn (+17.0% YoY), OP W100.9bn (+26.7%
structural growth YoY) and NP W77.9bn (+29.2% YoY). TK should also post strong results with sales
regardless of economic of W410.1bn (+16.4% YoY), OP W77.9bn (+63.8% YoY) and NP W61.2bn (+67.6%
conditions YoY). In addition, its quarterly sales should surpass W100bn and annual OPM climb
to the 20% level thanks to greater sales of products used in offshore plants. Hy-Lok
should also remain on a steady growth path with 2013F sales of W204bn (+12.0%
YoY) and OP W44.1bn (+11.1% YoY). Jinsung’s 2013F sales should jump to
W268.3bn (+32.0% YoY), OP W27.5bn (+43.7% YoY) and NP W19.6bn (+87.9%
YoY). The company can achieve stable growth backed by the long-term supply
contract with Caterpillar.
Top picks
SungKwang Bend (014620)

Greater offshore The fittings market is flourishing thanks to mounting offshore plant orders combined
plant-related orders and with capacity additions. SungKwang secured orders worth W317.9bn as of YTD Oct,
capacity additions to up 15.1% YoY, on growing needs for large-scale offshore plants. Accordingly, the
bolster earnings in both sales weighting of high-margin stainless steel and alloy products has increased to
quantity and quality ~50% and this is helping improve the OPM. In 2Q13, its OPM returned to the 20%
level for the first time in three years. Quarterly sales are also expected to exceed
W100bn from 4Q12 backed by the added capacity. As such, we believe earnings
will improve in terms of both quantity and quality in 2013 as well. The TP of
W36,000 equals 14.0x mid-cycle PE. Considering the strong market conditions, the
stock trades at an attractive 11.3x 2012F PE and 8.7x 2013F PE.
TK Corp. (023160)
Earnings to improve Along with rival SungKwang, TK’s shares should continue to perform well in 2013.
considerably in 2013 on After completing compensation for defective products in 1H12, the company is
greater spot and offshore refocusing on its business activities. Although TK lacked the capacity to accept
plant-related orders high-margin spot orders due to the compensation issue, the company will resume
taking spot orders thanks to extra production capacity, which should help improve
earnings considerably. In 2012, TK saw weaker offshore plant-related orders
compared to SungKwang. But given that shipbuilders are evenly spreading the
volume of fittings used to build offshore plants between SungKwang and TK, the
company should enjoy stable order momentum for fittings. Accordingly, the sales
portion of the lucrative large-scale stainless steel and alloy products would increase in
2013 and further bolster the profitability improvement. The TP of W34,000 equals 14.0x
mid-cycle PE and the stock currently trades at 14.4x 2012F PE and 8.8x 2013F PE.
167
Figure 6. Monthly order receipts by fittings maker Figure 7. Share performances by fittings maker
(W bn) TK (LHS) (USD/bbl) (Nov 4, 2011=100) SungKwang
70 SungKwang (LHS) 140 160
TK
Hy-lok (LHS)
Dubai crude (RHS) Hy-Lok
60 120 150
140
50 100
130
40 80
120
30 60
110
20 40
100
10 20 90
0 0 80
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12
Source: Company data, Korea Investment & Securities Source: DataStream, Korea Investment & Securities
Jinsung T.E.C. (036890)

30% EPS CAGR over next Jinsung has secured a structural growth engine that is insensitive to economic
three years on long-term conditions by maintaining a close partnership with Caterpillar, the world’s biggest
supply contract with heavy equipment maker. Its EPS is expected to deliver 30% CAGR over the next
Caterpillar three years thanks to the start of a new plant in the US and a wider customer base
in China. In particular, the company would enjoy stable sales growth as it entered a
five-year (2013-17) deal to supply rollers and idlers worth W300bn to Caterpillar,
which will use the parts at its Texas plant (completed Aug 2012). In 2013, Jinsung
will supply parts worth W25.5bn from its headquarters in Korea. And from 2014, the
company plans to start delivering products from its new plant in Texas currently
being built near Caterpillar’s. Accordingly, Jinsung’s sales to Caterpillar (31% of
2011 consolidated sales) should grow to 53% in 2014F. Given that
Caterpillar-bound products are mostly used in large-size excavators, they offer
more than 10% OPM on average, which means greater sales to Caterpillar will lead
to better profitability. Of note, overhang concerns from the W15bn rights and bonus
issue to fund the new US plant have faded. The TP of W16,500 equals 16.5x 2013F
PE (upper-end of the trading range). The multiple is justified by the big EPS growth
potential, in our view.
Figure 8. Earnings estimates breakdown

Figure 9. Caterpillar-bound sales and weighting
(consolidated) (W bn, %)
(W bn) Jinsung's Texas plant (%)

2010 2011 2012F 2013F 2014F 2015F 250 to start operation 60
Sales 168.9 201.3 203.2 268.3 378.0 402.3
Parent-based 119.5 178.4 185.7 206.5 215.8 217.9 Caterpillar-bound sales (LHS)
Chinese subsidiary 67.0 60.4 42.9 53.3 75.2 84.3 Caterpillar-bound sales portion (RHS) 50
200
US subsidiary 1.1 2.6 2.7 11.0 89.6 102.6
(consolidated) (18.7) (40.1) (28.1) (2.5) (2.6) (2.6) 40
Sales growth 19.2 0.9 32.0 40.9 6.4
150
Parent-based 49.3 4.1 11.2 4.5 1.0
Chinese subsidiary (9.8) (29.0) 24.2 41.2 12.1 30
US subsidiary 142.4 1.0 313.0 712.0 14.5
OP 16.5 22.0 19.2 27.5 40.7 43.1 100
Parent-based 8.9 19.3 17.5 22.3 24.2 22.9 20
Chinese subsidiary 9.1 2.9 2.2 4.6 6.8 8.6
US subsidiary (0.2) 0.4 0.1 0.6 9.7 11.6 50
10
OPM 9.8 10.9 9.4 10.3 10.8 10.7
Parent-based 7.5 10.8 9.4 10.8 11.2 10.5
Chinese subsidiary 13.6 4.8 5.1 8.7 9.1 10.2 0 0
US subsidiary (16.6) 16.9 3.0 5.7 10.8 11.3 2010 2011 2012F 2013F 2014F
Source: China Construction Machinery Association, Korea Investment & Securities Source: Company data, Korea Investment & Securities
168
Risk factors
1. Shaky global economy If the global economic conditions turn worse, it would dampen the power plant order
2. Sluggish orders if oil momentum. If oil prices also fall and the low-price environment is sustained, it
prices drop would delay offshore plant tenders, which may lead to shrinking order flows and
3. China delays margin squeeze for the fittings industry. Moreover, if China holds off the resumption
infrastructure spending of infrastructure spending, it would delay the recovery of the excavator market,
which may have adverse effects on the construction equipment market.
Coverage valuations
Table 1. Valuations
Recommendation and TP Earnings & valuations
Stock Sales OP NP EPS BPS PE PB ROE EV/EBITDA
DHIC Recommendation Hold 2010A 7,929 516 1,252 13,940 46,814 6.2 1.8 30.9 17.2
(034020) TP (KRW) - 2011A 8,496 570 275 3,063 47,033 21.3 1.4 5.7 13.0
Price (Nov 15, KRW) 42,850 2012F 9,890 569 319 3,585 49,411 12.0 0.9 6.5 10.8
Market cap (W bn) 4,535 2013F 10,155 594 398 4,472 52,542 9.6 0.8 7.7 10.5
2014F 9,716 598 419 4,706 55,870 9.1 0.8 7.6 10.4
Doosan Infracore Recommendation Hold 2010A 7,482 676 210 1,245 8,614 22.5 3.3 15.4 11.4
(042670) TP (KRW) - 2011A 8,463 708 298 1,769 10,946 10.1 1.6 18.1 9.3
Price (Nov 15, KRW) 15,650 2012F 8,287 393 278 1,501 12,440 10.4 1.3 14.1 13.2
Market cap (W bn) 2,639 2013F 8,414 487 215 1,129 13,569 13.9 1.2 9.8 11.4
2014F 8,892 647 284 1,539 15,108 10.2 1.0 11.8 9.1
SungKwang Recommendation BUY 2010A 205 25 18 639 9,978 36.9 2.4 6.6 26.4
(014620) TP (KRW) 36,000 2011A 256 29 20 715 10,514 26.6 1.8 7.0 18.8
Price (Nov 15, KRW) 23,800 2012F 367 80 60 2,109 12,444 11.3 1.9 18.4 8.8
Market cap (W bn) 680 2013F 429 101 78 2,724 14,938 8.7 1.6 19.9 6.3
2014F 450 110 86 3,001 17,709 7.9 1.3 18.4 5.4
TK Recommendation BUY 2010A 216 2 1 34 14,431 756.2 1.8 0.3 98.2
(023160) TP (KRW) 34,000 2011A 259 37 28 1,182 15,179 20.1 1.6 8.1 13.0
Price (Nov 15, KRW) 21,850 2012F 352 48 37 1,519 15,767 14.4 1.4 9.9 11.6
Market cap (W bn) 530 2013F 410 78 61 2,470 17,678 8.8 1.2 14.6 7.2
2014F 434 98 77 3,031 20,075 7.2 1.1 15.8 5.6
Hy-Lok Recommendation BUY 2010A 111 27 20 1,444 9,734 10.0 1.5 17.3 6.4
(013030) TP (KRW) 28,000 2011A 143 30 24 1,777 11,570 9.6 1.5 16.7 7.2
Price (Nov 15, KRW) 19,800 2012F 182 40 31 2,247 13,629 8.8 1.5 17.8 6.7
Market cap (W bn) 269 2013F 204 44 34 2,508 15,923 7.9 1.2 17.0 5.9
2014F 233 50 39 2,867 18,586 6.9 1.1 16.6 5.1
Jinsung Recommendation BUY 2010A 169 17 30 1,939 2,507 4.5 3.5 118.9 7.8
(036890) TP (KRW) 16,500 2011A 201 22 16 1,013 3,472 9.4 2.7 35.4 6.5
Price (Nov 15, KRW) 7,170 2012F 203 19 14 736 3,365 9.7 2.1 23.6 9.3
Market cap (W bn) 143 2013F 268 28 20 1,006 4,249 7.1 1.7 27.0 6.5
2014F 378 41 30 1,519 5,634 4.7 1.3 31.1 4.1
169
Transportation
Structural demand change for air transport
Transportation’s cyclicality: In slow times, structural change is

Overweight essential to appeal to investors
The transportation sector is cyclical in nature. Transportation stocks tend
▶ Top picks to draw investors’ attention when the economy is up but that would not be
the case in 2013 given the still great uncertainty about the global economy.
Korean Air (003490, BUY, TP W67,000) By segment, we note the airline industry is going through a structural
2012F 2013F 2014F transformation. In contrast, such a change has not been detected for
PE (x) 7.1 6.3 4.4 shipping and a global economic recovery is crucial for the industry to
PB (x) 1.1 1.0 0.8 revive. It is premature to bet with confidence that the shipping industry will
EV/EBITDA (x) 8.1 7.3 6.3 recover any time soon.
EPS (KRW) 6,504 7,340 10,616
BPS (KRW) 40,523 47,410 57,372 Air transport demand on a structural growth path
 Structural passenger demand is growing smoothly For air transport, international passenger demand has grown faster than
 Favorable earnings to continue despite the economic
downturn expected in 2012. Korean outbound demand, accounting for half of
international passenger traffic, should grow 6% YoY and surpass the
▶ 12M sector performance record high set in 2007. Foreign inbound and transit demand should jump
(p) Rel.to KOSPI (%p, RHS) (%p)
22% and 13%, respectively, and pull up overall international passenger
4,000 Airlines sector index (p, LHS ) 25
20
traffic. We believe that will remain a trend well into 2013. In contrast,
3,000 15 shipping shows few signs of a structural demand change and thus its
2,000
10
5
growth will hinge on macroeconomic variables, such as a global economic
1,000
0 recovery, in 2013. In the land transport segment, the main point to watch is
-5
0 -10 when the market-position jockeying among large parcel delivery firms will
Nov-11 Feb-12 May-12 Aug-12 wrap up and boost profits at logistics firms.
Top pick: Korean Air

From a manufacturing perspective, Korean Air has become an
export-oriented company. Selling air tickets to foreigners can be likened to
exports as the airline’s international passenger sales shows a bigger
weighting of foreign currency-denominated sales than KRW. As Incheon
Inernational Airport (IIA) serves as a hub, foreign demand for Korean flag
carriers is rapidly rising. Moreover, the demand growth is relatively
insulated from macro variables, such as the economy or FX rates. We
believe the structural demand growth despite the economy should
continue into 2013.
Figure 1. Korean Air’s international passenger sales: 50+% are

foreign currency-denominated
(%)
70
65
Foreign sales
60
55
50
45
40
Domestic sales
35
Heedo Yun 30
822-3276-6165 03 04 05 06 07 08 09 10 11 12F 13F
heedo@truefriend.com
170
1. Air transport: International passenger demand on

the rise despite weak economy
Brisk growth of International passenger demand is the most important variable in forecasting the air
passenger demand is transport industry. International passenger demand comes from Korean outbound
worthy of attention passengers (51%), foreign inbound passengers (37%) and transit passengers
(12%). At Korean Air, international passenger traffic accounts for 59% of sales. Of
note, a structural change has been detected in the air transport industry this year.
That is, international passenger demand has fast grown despite slower GDP growth
(2.7%) in 2012. We think international passenger demand will increase 13% YoY in
2012F, driven by foreign inbound passengers (+22% YoY) and transit passengers
(+13% YoY). The number of foreign tourists visiting Korea has been increasing
despite the global economic slowdown on Korea’s bigger presence on the world’s
stage, continued rise of Korean pop culture (so-called hallyu) and IIA’s emerging as
a hub for Northeast Asian air transport. International passenger demand should
grow 9.7% YoY in 2013F. The air transport industry should see a structural change
where there is a big demand increase despite slower GDP growth.
Figure 2. Passenger demand grows faster despite slower GDP growth
(%)
30
25 International passenger demand growth
20
15
10
0
03 04 05 06 07 08 09 10 11 12F 13F
(5)
Korea's GDP growth
(10)
Source: IIA, BoK, Korea Investment & Securities
2. Shipping: Oversupply to continue

For shipping, oversupply A global economic recovery is crucial for the shipping industry to rebound as it is
is unlikely to be tackled in open to free competition due to low entry barriers and there is little change in
2013 demand. For business conditions to turn for the better, oversupply must be tackled
but that will not be the case in 2013. That is, container shipping demand should
remain sluggish due to the fragile global economy and accordingly, the industry will
remain in oversupply in 2013. According to the Clarksons shipping database, the
supply-demand dynamics would improve slightly with demand up 7% and supply up
6.6% in 2013F (see Figure 3). But the demand projection is likely to be lowered. In
a report from Sep 2011, Clarksons said the oversupply would be dealt with as
container shipping demand grows 8.8% in 2012. But it later adjusted down the
demand growth outlook to 4.9% due to the economic downturn. And it would not be
surprising if the demand forecast is lowered further, given the questionable
171
economic recovery. Shipping companies have attempted to raise freight rates by

reducing fleet capacity (i.e., lay-up ships, slow-steaming operations and fewer
routes). But any sustainable upturn is unlikely for freight rates considering the
global economic uncertainties.
Figure 3. Container shipping supply-demand dynamics unlikely to

improve much in 2013
(%)
20
Demand growth
15
10
0
1997 1999 2001 2003 2005 2007 2009 2011 2013F
(5)
Supply growth
(10)
(15) Balance
(demand growth - supply growth)
(20)
Source: Clarksons (Sep 2012)
3. Land transport: Rise of parcel delivery a point to

watch
For land transport, parcel Except Glovis, most land transport companies (e.g., Korea Express and Hanjin
delivery providers Shipping) rely on domestic sales, implying the effects of the economic downturn will
deserve attention be felt by the industry in 2013. But growth potential is relatively stronger at parcel
delivery providers and they deserve close attention. The domestic parcel delivery
market posted sales CAGR of 11% from 2007 to 2011, backed by thriving online
shopping. An industry research report earlier forecast the parcel delivery market
would expand 9% YoY to W3.6trn in 2012, and we expect 7% YoY growth in 2013F.
Of note, CJ Korea Express (formerly Korea Express, now a parcel delivery arm of
CJ Group) and CJ GLS are aggressively trying to grab bigger shares of the market.
In this regard, it will be interesting to watch how their efforts will reshape the market.
Glovis’ OP should increase 30.5% YoY in 2012F but the rise should be a bit slower
in 2013 due to slowing capacity additions at Hyundai Motor and Kia Motors.
Figure 4. Parcel delivery market likely to grow 7% YoY in 2013F
(%) (KRW/box)
35 4,000
30 3,500
Parcel deliv ery serv ice rate
3,000
25 (RHS)
2,500
20
2,000
15
1,500
10
1,000
5 Parcel deliv ery v olume growth (LHS) 500
0 0
00 01 02 03 04 05 06 07 08 09 10 11P 12F 13F
Source: Korea Logistics News, Korea Investment & Securities
172
Earnings forecast
1. Key assumptions
 Korean Air’s 2013F international passenger demand growth: 7%
 2013F annual average KRW/USD: W1,058
 2013F annual average jet fuel price: USD127/bbl
 2013F container shipping demand growth: 5%
Airlines: Profits to grow Although airlines and land transport firms should post YoY NP growth in 2013, profit
Seaborne shipping: at seaborne shipping companies should be flat YoY. Historically, air carriers’ profits
Uncertain profit outlook used to be sensitive to fuel prices and the KRW/USD. However, vulnerability to FX
rates has eased thanks to the structural change in passenger demand. The
sensitivity to oil prices has also faded as the fuel surcharge has stably taken root
and now covers at least 50% of oil price increases. Since Korean air carriers will
increase supply only slightly, the passenger load factor should remain at high levels,
similar to 2012. A demand jump despite a slight supply increase should push up
load factor, air fares and profits. Meanwhile, seaborne shipping should struggle with
a supply surplus unless a new emerging economy gains traction with an effect
similar to China in the early- and mid-2000s. Since Korean marine shipping
companies use the functional currency system, USD is used for financial
statements. As such, a drop in the KRW/USD incurs losses on FX conversion for
KRW-denominated debt, i.e., a lower KRW/USD is negative for the profit outlook.
Profits still fluctuate on Korean Air’s profits are still influenced by changes to fuel prices and FX although
fuel prices and FX their effects have become smaller. We forecast 2013F OP at W858bn. For every
changes USD10 drop in the annual average oil price, the airline saves W340bn in fuel costs.
And, 50% of savings contribute to OP growth as the passenger-paid fuel surcharge
system covers 50% of the fuel burden. Korean Air has ~USD8bn in
USD-denominated borrowing (mostly for aircrafts). Every W100 drop in the
KRW/USD leads to a W800bn gain on FX conversion.
Figure 5. Every USD10 drop in annual average fuel prices, OP

grows W170bn
(W bn)
1,400
1,198
Annual OP
1,200
1,028
1,000 858
800 688
600 518
400
200
0
USD147/bbl USD137/bbl USD127/bbl USD117/bbl USD107/bbl
173
Top pick
Korean Air (003490)

Structural change in air We recommend BUY on Korean Air. The airline has posted sizable profits despite
passenger demand difficult conditions, such as the global economic downturn and surging oil prices. In
should continue into 2013 2013, passenger demand should rise rapidly, and cargo demand should also pick
up after a three year slump on base effect. As the company continues to be
profitable against unfavorable macro factors, the market should take a different
perspective on Korean Air.
Evolved into export Historically, Korean Air’s passenger sales were mostly from outbound traffic
industry demand. This explains why profits were sensitive to the KRW/USD and the
business cycle. However, more than half of the international flight passengers are
foreigners. And, the structural shift in demand is noteworthy. We estimate
foreigners should account for 50% of 2012F international passenger demand and
even more in 2013. The trend has to do with Korea’s rising international status, the
hallyu and IIA serving as an air hub for Northeast Asia.
Figure 6. Half the passengers served by Korean carriers are foreigners

and their weighting should continue to go up
('000 people) ('000 people)

1,400 No. of outbound Korean 1,400
passengers (LHS)
1,200 1,200
1,000 1,000
800 800
600 600
400 No. of f oreign v isitors + transit passengers (RHS) 400
200 200
0 0
Aug-03 Feb-05 Aug-06 Feb-08 Aug-09 Feb-11 Aug-12
Note: Monthly data of the airports in Korea

Source: IIA, Korea Tourism Organization
Risk factors
Surge in oil prices or FX Despite the reduced impact, FX and oil prices are risk factors for Korean Air.
could slow profit growth Fortunately, both are unlikely to be serious risks in 2013. The market has some
concerns that low-cost carriers’ aggressive flight additions would negatively affect
Korean Air and Asiana Airlines. However, low-cost carriers are mostly adding short-
and mid-distance flights while larger carriers, such as Korean Air, are more focused
on mid- and long-distance routes. As such, low-cost airlines’ impact should be
negligible.
174
Coverage valuation
Table 1. Valuations
(W bn) (W bn) (W bn) (KRW) (KRW) (x) (x) (%) (X)
Hyundai Glovis Recommendation BUY 2010A 5,834 272 266 7,083 29,803 21.0 5.0 27.3 19.6
(086280) TP (KRW) 260,000 2011A 7,548 340 359 9,568 39,780 20.1 4.8 27.5 19.8
Price (Nov 15, KRW) 207,000 2012F 9,294 443 575 15,341 52,986 13.5 3.9 33.1 17.1
Market cap. (W bn) 7,762 2013F 11,015 523 667 17,789 68,223 11.6 3.0 29.4 14.3
2014F 13,116 636 792 21,111 86,314 9.8 2.4 27.3 11.5
Korean Air Recommendation BUY 2010A 11,640 1,236 563 8,340 38,159 8.3 1.8 19.4 7.2
(003490) TP (KRW) 67,000 2011A 12,269 460 (219) (3,240) 34,426 NM 1.3 (8.4) 9.4
Price (Nov 15, KRW) 46,300 2012F 13,023 645 448 6,504 40,523 7.1 1.1 16.7 8.1
Market cap. (W bn) 3,332 2013F 14,000 858 505 7,340 47,410 6.3 1.0 16.0 7.3
2014F 14,914 1,113 731 10,616 57,372 4.4 0.8 19.3 6.3
CJ Korea Express Recommendation BUY 2010A 2,464 174 98 6,092 115,324 15.5 0.8 4.9 11.1
(000120) TP (KRW) 130,000 2011A 2,588 123 84 4,858 118,018 15.4 0.6 3.9 9.5
Price (Nov 15, KRW) 114,500 2012F 2,871 167 114 6,576 132,236 17.4 0.9 4.8 8.6
Market cap. (W bn) 2,612 2013F 3,221 195 129 7,402 137,878 15.5 0.8 4.9 8.1
2014F 3,609 223 143 8,241 144,160 13.9 0.8 5.2 7.6
Hanjin Shipping Recommendation Hold 2010A 9,625 687 286 3,598 31,794 9.9 1.1 12.4 7.0
(117930) TP (KRW) - 2011A 9,523 (493) (835) (8,481) 15,907 NM 0.7 (35.6) (57.8)
Price (Nov 15, KRW) 10,850 2012F 11,078 160 (232) (1,858) 13,988 (5.8) 0.8 (12.4) 11.3
Market cap. (W bn) 1,356 2013F 11,088 244 (67) (532) 13,456 (20.4) 0.8 (3.9) 10.3
2014F 11,029 334 27 217 13,673 50.0 0.8 1.6 9.2
Asiana Airlines Recommendation BUY 2010A 5,285 550 85 484 5,114 20.0 1.9 10.4 6.7
(020560) TP (KRW) 10,500 2011A 5,609 358 (31) (171) 4,685 NM 1.4 (3.5) 6.7
Price (Nov 15, KRW) 6,270 2012F 5,957 250 64 330 4,539 19.0 1.4 7.3 9.0
Market cap. (W bn) 1,223 2013F 6,271 409 215 1,101 5,640 5.7 1.1 21.6 6.6
2014F 6,616 440 244 1,253 6,892 5.0 0.9 20.0 6.1
Hanjin
Recommendation Hold 2010A 1,264 45 (2) (179) 79,176 NM 0.4 (0.3) 12.6
Transportation
(002320) TP (KRW) - 2011A 1,391 35 (28) (2,404) 63,943 NM 0.3 (3.3) 12.6
Price (Nov 15, KRW) 21,200 2012F 1,484 43 (1) (115) 66,324 (184.3) 0.3 (0.2) 10.2
Market cap. (W bn) 253 2013F 1,575 45 9 775 66,694 27.3 0.3 1.2 10.1
2014F 1,666 52 15 1,282 67,563 16.5 0.3 1.9 9.5
175
Autos
Global market share growth to continue
Hyundai and Kia’s global market share to rise to 9.4% in 2013

Overweight Hyundai Motor (Hyundai, 005380, TP W320,000) and Kia Motors (Kia,
000270, TP W105,000) should continue to outperform in 2013. We
▶ Top picks forecast combined 2013 volume growth rate will reach 8% (Hyundai +8%,
Kia Motors (000270, BUY, TP W105,000) Kia +7.9%) after 2012’s estimated 7.7% growth. In 2012, we forecast the
2012F 2013F 2014F
two automakers will sell 7.1mn units, up from 6.59mn in 2011; Hyundai
PER (x) 5.7 5.0 4.5
4.36mn units (+7.7%) and Kia 2.74mn (+7.8%). In 2013, sales should
PBR (x) 1.2 1.0 0.8
reach 7.66mn units (Hyundai 4.71mn, Kia 2.95mn). As such, global market
EV/EBITDA (x) 4.2 3.8 3.2 share should rise to 9.4% (Hyundai 5.8%, Kia 3.6%) in 2013 from the
EPS (KRW) 9,699 11,016 12,222 estimated 9% (Hyundai 5.5%, Kia 3.5%) this year. Our optimistic view is
BPS (KRW) 43,927 54,577 66,370 based on: 1) quality and service improvements, 2) expanding capacity, and
 Successful design-led transformation
3) brand value enhancement.
 More new model launches
 Improving brand awareness
Top picks: Kia and Mobis
We believe Kia will resume outperforming, led by several new model
Mobis (060980, BUY, TP W400,000)
launches and a sharp improvement in quality and brand awareness. In
2012F 2013F 2014F addition, the construction of the no. 3 China plant and likely decision to
PER (x) 7.8 7.0 6.4
build another overseas plant should reinforce mid- to long-term growth
PBR (x) 1.5 1.3 1.1
potential. Meanwhile, Hyundai Mobis (Mobis, 012330, TP W400,000)
EV/EBITDA (x) 8.1 6.8 5.9
should rebound further on recovering earnings, rapidly improving
EPS (KRW) 34,275 38,293 41,865
technology and a rising rank in Automotive News’ top 100 global suppliers.
BPS (KRW) 174,274 210,867 251,035
 Earnings recovery to continue
 Rapidly improving technology
Risk factors
 Outstanding long-term growth potential As for capacity constraints at Kia, we believe the problem will fade with the
expansion at the Kwangju plant and more overtime at the China plants.
And the no. 3 China plant should start commercial production from
▶ 12M sector performance early-2014. As for labor issues, Hyundai still has contract worker problems.
(p) Rel.to KOSPI (%p, RHS) (%p) However, the introduction of a two-day shift (8 + 9 hours work from the
12,000
10,000
Automobiles sector index (p, LHS ) 20
current 10 + 10) has been one of the most critical issues in the annual
8,000
10
wage negotiations, and its resolution should substantially ease
6,000
4,000
0
strike-related risks.
-10
2,000
Figure 1. Hyundai Motor 12MF PER band

0 -20
(KRW)
300,000
8x
270,000
240,000
210,000 6x
180,000
150,000 4x
120,000
Sung Moon Suh
822-3276-6152 90,000
sungmoon.suh@truefriend.com 60,000
30,000
Daniel Lee 08 09 10 11 12
822-3276-6279
daniel.lee@truefriend.com
Source: KRX , Korea Investment and Securities estimates
176
1. Quality and service improvements

Tied with Toyota in ACSI Americans are becoming less satisfied with Japanese vehicles and are growing
happier with Hyundai and Kia’s quality and service. Hyundai tied Toyota for the first
time in the 2012 American Customer Satisfaction Index (ACSI). According to a
report released Aug 21 by the ACSI, Hyundai’s customer satisfaction score
improved 2.4% YoY to 85 in 2012, tying Toyota and beating Honda for the first time.
Toyota and Honda deteriorated to 85 and 83 from 87 and 85, respectively, a year
earlier. As Nissan also had a 1.2% drop, the ACSI of all three major Japanese
automakers retreated. In contrast, both Hyundai and Kia improved for a second
straight year. Since the index’s first release in 1994, Hyundai has improved 25%
while Toyota and Honda dropped 1.2% and 2.4%, respectively, and Nissan stayed
flat.
2. Capacity expansions
No capacity constraints Hyundai’s capacity constraint has been considerably eased by the construction of
the no. 3 China plant in Jul, the addition of a third shift at the Alabama plant in Sep
and operational start at the first Brazil plant in Sep. With the expansion, Hyundai’s
global capacity would increase from 4.17mn p.a. in 2012 to 4.49mn p.a. in 2013.
Given the sufficient capacity, the China plant set an all-time sales record of 84,188
units (+14.9% YoY) in Sep for a second straight month on the rapid spread of
anti-Japanese sentiment since Sep. Hyundai also plans to double capacity at its
Turkey plant to 200,000 units by the end of 2013. Kia is expanding capacity at its
Kwangju plant to 620,000 units p.a. by end-2012 from the current 500,000. Kia also
held a ground-breaking ceremony for its no. 3 China plant in Jun. With the
expansion, Kia’s global capacity would increase from 2.75mn p.a. to 2.87mn p.a. in
2013 and over 3mn units (3.1mn) in 2014 with the addition of a third China plant. In
addition, it is likely Kia will announce plans to construct another overseas plant at
late 2012 or early 2013 to achieve its goal of selling 3.5mn units in 2016.
3. Brand value enhancement

Biggest brand value Hyundai and Kia’s brand improvement has been remarkable in recent years.
improvement among According to Interbrand’s report on the top 100 brands, Hyundai’s brand value
automotive brands jumped 24.4% YoY to USD7.5bn in 2012, and the company ranked 53, up from 61
in 2011. More remarkably, Kia’s brand value spiked 49.8% YoY to USD4.1bn, and
the automaker entered the top 100 list for the first time at no. 87. In 2007, the
Hyundai and Kia brands were worth a mere USD4.5bn and USD1.1bn, respectively.
Hyundai and Kia’s brand values posted 2007-2012 CAGRs of 10.9% and 30%,
respectively, far exceeding the industry average of 2.8%.
Issue 1. Reduced growth pace

To sustain double-digit The market seems to be concerned about Hyundai and Kia’s slowing growth.
revenue growth through Specifically, volume growth slowed sharply to around 8% YoY from 23.5% in 2010
2015 and 14.8% in 2011. However, we forecast the companies will sustain double-digit
YoY revenue growth by 2015, thanks to: 1) the ongoing construction of overseas
plants, 2) value pricing, and 3) an improving product mix following the sustained
new model launches. Only with the already-announced expansion plans, global
capacity will expand to 8.02mn in 2015 from 6.37mn in 2011, posing a robust
2011-2015 CAGR of 5.9% in capacity growth.
177
Earnings forecast
1. Key assumptions
Table 1. Hyundai and Kia’s 2012 and 2013 sales assumed at 7.1mn and 7.66mn
units, respectively.
2010 2011 2012F 2013F 2014F
Hyundai
Overseas plant sales vol 1,876,237 2,174,805 2,454,189 2,736,677 2,977,263
Domestic volume 659,565 684,157 654,495 665,742 695,499
Export volume 1,072,727 1,192,756 1,253,886 1,309,434 1,343,109
Total sales volume 3,608,529 4,051,718 4,362,571 4,711,853 5,015,870
Domestic ASP 21.7 22.8 23.1 23.7 24.6
Total export US$ ASP 13,939 16,236 16,385 16,703 17,471
Kia
Overseas plant sales vol 729,655 957,098 1,135,000 1,230,750 1,408,689
Domestic volume 484,512 493,003 463,716 503,767 522,209
Export volume 915,781 1,087,960 1,137,980 1,218,091 1,281,365
Total sales volume 2,129,948 2,538,061 2,736,697 2,952,607 3,212,263
Domestic ASP 18.2 18.5 19.1 20.2 20.8
Total export US$ ASP 11,800 13,039 13,389 13,563 14,041
Source: Korea Automobile Manufacturers Association (KAMA), Korea Investment and Securities estimates
2. 2013 NP to grow 10.3% YoY

• Hyundai to sell 4.36mn units (+7.7% YoY) in 2012 and 4.71mn (+8% YoY) in 2013.
• Kia to sell 2.74mn units (+7.8% YoY) in 2012 and 2.95mn (+7.9% YoY) in 2013.
• Hyundai’s NP to reach W9,734.6bn (+10.9% YoY) in 2013.
• Kia’s NP to reach W4,466.7bn (+9.2% YoY) in 2013.
Table 2. KRW/USD sensitivity (FY13F EPS)
Hyundai Motor Kia Motors

(W bn) (USD mn) (W bn) (USD mn)
Total exports 28,240 26,692 22,028 20,820
USD exports* 15,532 14,681 13,217 12,492
USD-denominated cost** 6,223 5,882 5,330 5,038
USD-denominated assets 747 706 540 511
USD-denominated debts 172 163 717 678
Net USD-denominated debts (575) (544) 177 167
Forex forward contract*** 3,954 3,737 3,084 2,915
Net exposure 5,930 5,605 4,626 4,373
Effective tax rate 22.4% 22.4% 25.5% 25.5%
Net exposure x (1-tax rate) 4,602 4,350 3,447 3,258
1% won appreciation**** (46) - (34) -
FY13F net profit 9,734 - 4,466 -
EPS chg for 1% won appreciation (0.5) - (0.8) -
Note: *For Hyundai and Kia, 55% and 60% of exports are paid in USD, respectively.
**Includes warranty costs for exports, export costs, interests payments for USD-denominated debt, etc.
***Assumes that they are hedging 40% of their exposure to the forex risks.
****Year average KRW/USD is assumed at W1,058.
Source: Korea Investment and Securities estimates
178
Figure 2. Hyundai’s volume sales and global market share Figure 3. Kia’s volume sales and global market share
(Mn units) (%) (Mn units) (%)

6 7 3.5 4.0
3.9
3.8
Hyundai's global market share (RHS) Kia's global market share (RHS) 3.6
5 5.9 6.1
6 3.0 3.5 3.5
5.8 3.4
5.4 5.5
4 2.5 3.0
4.9 5.0 5 2.9
4.2
3 4 2.0 2.5
2.4
3.6 3.7 3.7
3.4
3.2 3.2 2.1
2 3 1.5 2.0 2.0
2.9 1.9 1.9
2.6 Hyundai's global sales (LHS) 1.7
1.5 1.6 1.5 Kia's global sales (LHS)
1 2 1.0 1.5 1.5
0 1 0.5 1.0
00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F
Source: KAMA, Korea Investment and Securities estimates Source: KAMA, Korea Investment and Securities estimates
Top picks
Kia Motors (000270)

More new model We maintain BUY and a TP of W105,000 at 10x 12MF PE, the auto sector’s
launches average. As the importance of car design increases and the quality gap narrows,
Kia’s reinforced design edge should keep the company on a rapid growth track. In
Jan 2013, the revamped Carens (RP) will launch in Korea. As such, 13 of 14
passenger cars will have been redesigned by Peter Schreyer. The remaining model,
the Carnival YP, will be unveiled in Jun 2013. The Soul will be replaced with the
new IS Soul in Aug. As such, Kia has more new model launches scheduled in 2013
than Hyundai, which will launch only the new Genesis in Dec. In the US, Kia will
unveil seven new or refreshed models. Kia plans to launch four full model changes
(K3 in Jan, K7 in Mar, new Soul in 3Q13, new Carens in 4Q13) and three facelifts
for the Sorento in Jan and K5 and Sportage in 4Q13.
Table 3. Hyundai and Kia’s new model launches by region

2012 2013 2014
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
DM (Santa Fe Avante & LF (Sonata
Hyundai Korea VF (i40 sedan) Avante coupe Genesis redesign
redesign) Tucson facelifts redesign)
MD (Elantra DM (Santa Fe
Motor China
redesign) redesign)
HG (Grandeur
Long-wheelbase
redesign) DM (Santa Fe
US Santa Fe
GT (GD i30) redesign)
Elantra coupe
VF (Sonata
DM (Santa Fe
hatchback)
EU redesign)
GD (i30
i20 facelift
redesign)
MD (Elantra
India YF (Sonata) i20 facelift i10 redesign
redesign)
Sorento R
KH (K9, Opirus facelift RP (Carens K5 & Sportage YP (Carnival
Kia Korea K7 facelift IS (Soul redesign)
redesign) YD (K3, Forte redesign) facelifts redesign)
redesign)
YDc (K3, Forte KH (K9, Opirus
Motors China
redesign) redesign)
YD (K3, Forte
redesign) RP (Carens
IS (Soul KH (K9, Opirus
US Sorento R redesign) K5 &
redesign) redesign)
facelift Sportage facelifts
Cadenza (K7)
JD (cee'd RP (Carens
EU
redesign) redesign)
Source: Respective company data, Korea Investment and Securities estimates
179
Hyundai Mobis (012330)

Growth stock with We maintain BUY and a TP of W400,000 at 12x 12MF PE, a 10% discount to the
defensive business historic high. We believe Mobis will continue to post strong growth backed by the
nature solid performances of Hyundai and Kia in global auto markets and greater overseas
original equipment (OE) sales. Of note, the accelerating rise of units in operation
(UIO) of the two automakers backed by strong overseas sales bodes well for
replacement parts sales. The company secured more price competitiveness after
the EU lifted a 3.2% tariff from Jul 2011 and the KORUS FTA waived a 2.5% tariff in
Mar 2012. Considering Mobis is stepping up R&D investment, in-house technology
is rapidly advancing. After setting up a battery JV with LG Chem, Mobis has been
focusing on in-vehicle electronics. The company plans to develop proprietary
in-vehicle electronics by 2012-2013, and strengthen the model lineup from 2013 to
2015. Meanwhile, Mobis should benefit from the restructuring of the global
automotive supply chain due to its global production network.
Risk factors
Tight capacity, contract Hyundai’s lack of production capacity has been resolved with the operational start
workers and KRW/USD of its no. 3 China and Brazil plants in Jul and Sep, respectively. However, Kia
approaching W1,000 should suffer from a lack of capacity in 2013 as its no. 3 China plant is anticipated to
mark… begin full production from 2014. We believe this will solve the problem with the
expansion of the Kwangju plant and the more overtime at the China plants. As for
labor issues, Hyundai still has contract worker problems. The introduction of a
two-day shift (8 + 9 hours’ work from the current 10 + 10) has been one of most
critical issues in the annual wage negotiations, and its resolution should have a
substantial impact on easing strike-related risks. Meanwhile, despite the limited
negative impact from the strengthening KRW against the USD, if the KRW/USD
approaches the W1,000 mark, the erosion in sentiment should have an increasing
negative impact on auto shares.
180
Coverage valuation
Table 4. Valuations
Hyundai Motor Recommendation BUY 2010A 66,985.3 5,918.5 5,567.1 19,557 115,531 10.8 1.8 21.9 9.5
(005380) TP (KRW) 320,000 2011A 77,797.9 8,075.5 7,655.9 26,894 141,666 7.9 1.5 22.1 7.6
Price (Nov 15, KRW) 211,500 2012F 84,106.6 8,979.0 8,617.5 30,186 162,923 7.0 1.3 21.0 7.0
Market cap. (W bn) 46,589 2013F 91,123.1 10,191.2 9,733.9 34,097 197,129 6.2 1.1 20.1 6.1
2014F 99,503.4 11,228.4 10,782.4 37,770 235,224 5.6 0.9 18.5 5.1
Hyundai Mobis Recommendation BUY 2010A 22,143.5 2,507.1 2,712.9 27,862 112,566 9.6 2.4 28.9 9.2
(012330) TP (KRW) 400,000 2011A 26,294.6 2,674.9 3,023.0 31,046 141,673 8.6 1.9 24.5 8.9
Price (Nov 15, KRW) 268,500 2012F 30,084.7 2,844.5 3,337.4 34,275 174,274 7.8 1.5 21.7 8.1
Market cap. (W bn) 26,137 2013F 33,165.3 3,266.2 3,728.6 38,293 210,867 7.0 1.3 19.9 6.8
2014F 35,945.4 3,629.2 4,076.3 41,865 251,035 6.4 1.1 18.2 5.9
Kia Motors Recommendation BUY 2010A 35,827.0 2,490.0 2,682.1 6,616 25,281 8.3 2.2 30.6 7.5
(000270) TP (KRW) 105,000 2011A 43,190.9 3,525.1 3,415.6 8,426 33,327 6.5 1.6 29.6 5.3
Price (Nov 15, KRW) 54,900 2012F 48,222.4 4,100.9 3,931.6 9,699 43,927 5.7 1.2 25.9 4.2
Market cap. (W bn) 22,254 2013F 51,977.6 4,742.2 4,465.5 11,016 54,577 5.0 1.0 23.0 3.8
2014F 57,320.2 5,330.1 4,954.6 12,222 66,370 4.5 0.8 20.8 3.2
Hankook Tire Recommendation BUY 2010A 5,420.1 623.6 462.9 3,042 18,831 13.8 2.2 18.8 7.2
(161390) TP (KRW) 64,000 2011A 6,489.0 567.3 355.2 2,337 20,520 17.9 2.0 11.6 8.0
Price (Nov 15, KRW) 41,950 2012F 7,162.6 900.7 654.5 4,585 28,652 9.2 1.5 19.1 5.7
Market cap. (W bn) 5,197 2013F 7,838.3 967.7 703.9 5,683 33,923 7.4 1.2 17.8 5.3
2014F 8,506.8 1,067.5 773.4 6,244 39,754 6.7 1.1 16.6 4.8
Hyundai Wia Recommendation BUY 2010A 5,124.9 220.1 127.9 5,885 45,574 28.0 3.6 14.6 17.9
(011210) TP (KRW) 230,000 2011A 6,392.7 336.8 237.8 9,446 59,411 17.5 2.8 19.4 11.2
Price (Nov 15, KRW) 165,000 2012F 7,055.0 556.3 397.6 15,451 73,275 10.7 2.3 23.8 7.2
Market cap. (W bn) 4,246 2013F 7,841.7 647.0 472.2 18,350 91,117 9.0 1.8 22.6 6.3
2014F 8,630.5 734.6 545.4 21,195 111,591 7.8 1.5 21.2 5.5
Mando Recommendation BUY 2010A 3,639.6 275.7 201.7 11,570 71,110 11.1 1.8 19.5 6.1
(060980) TP (KRW) 200,000 2011A 4,560.1 291.3 224.2 12,307 77,457 10.4 1.7 17.0 6.2
Price (Nov 15, KRW) 128,000 2012F 5,071.3 280.6 197.4 10,840 87,090 11.8 1.5 13.2 6.1
Market cap. (W bn) 2,331 2013F 5,692.1 340.3 253.9 13,938 99,834 9.2 1.3 15.0 5.2
2014F 6,263.3 400.2 309.1 16,968 115,620 7.5 1.1 15.8 4.4
Halla Climate Control Recommendation BUY 2010A 2,909.9 329.3 225.2 2,109 9,165 10.9 2.5 22.3 4.9
(018880) TP (KRW) 28,000 2011A 3,312.1 304.6 223.2 2,091 10,052 11.0 2.3 19.1 5.1
Price (Nov 15, KRW) 22,950 2012F 3,663.4 337.9 256.0 2,398 13,801 9.6 1.7 19.4 4.8
Market cap. (W bn) 2,450 2013F 3,974.6 366.3 284.6 2,666 15,887 8.6 1.4 18.7 4.2
2014F 4,239.7 392.2 311.5 2,918 18,212 7.9 1.3 17.9 3.4
Nexen Tire Recommendation BUY 2010A 1,148.6 132.9 107.2 1,057 4,703 14.1 3.2 24.3 10.4
(002350) TP (KRW) 27,000 2011A 1,430.0 114.3 87.8 865 5,511 17.2 2.7 16.7 13.1
Price (Nov 15, KRW) 14,900 2012F 1,757.8 200.8 140.6 1,387 6,337 10.7 2.4 23.2 8.5
Market cap. (W bn) 1,414 2013F 1,981.4 251.0 181.3 1,788 8,061 8.3 1.8 24.6 6.6
2014F 2,246.5 308.5 226.9 2,238 10,233 6.7 1.5 24.2 5.4
SL Recommendation BUY 2010A 525.6 33.8 82.1 2,478 13,367 10.1 1.9 20.7 18.0
(005850) TP (KRW) 24,000 2011A 438.9 20.2 71.1 2,100 13,318 9.9 1.6 15.7 22.6
Price (Nov 15, KRW) 12,750 2012F 590.5 21.8 80.5 2,378 15,548 5.4 0.8 16.5 11.0
Market cap. (W bn) 432 2013F 613.9 24.2 93.9 2,773 16,624 4.6 0.8 17.2 9.8
2014F 635.6 26.7 112.4 3,320 17,916 3.8 0.7 19.2 8.6
Dongyang Recommendation HOLD 2010A 473.9 26.3 46.5 1,468 6,734 6.0 1.3 23.9 8.7
Mechatroncis TP (KRW) - 2011A 595.0 39.0 42.0 1,326 7,512 6.6 1.2 18.1 5.7
(013570) Price (Nov 15, KRW) 8,820 2012F 661.3 45.5 51.0 1,609 8,887 5.5 1.0 18.8 4.8
Market cap. (W bn) 279 2013F 712.6 49.9 54.5 1,722 10,384 5.1 0.8 17.2 4.4
2014F 771.1 56.6 60.3 1,905 12,059 4.6 0.7 16.4 4.0
S&T Motiv Recommendation HOLD 2010A 681.4 47.8 33.0 2,927 29,079 10.8 1.1 8.5 5.6
(064960) TP (KRW) - 2011A 910.5 61.9 40.7 3,494 30,384 8.8 1.0 9.3 4.6
Price (Nov 15, KRW) 20,350 2012F 884.8 33.8 25.1 2,190 29,992 9.3 0.7 5.7 4.9
Market cap. (W bn) 237 2013F 953.2 46.9 35.5 3,116 32,122 6.5 0.6 7.8 3.8
2014F 1,021.3 55.3 42.2 3,686 34,604 5.5 0.6 8.6 3.3
Source: KRX, respective company data, Korea Investment and Securities estimates
181
Textiles/Apparel
Rebalancing act
Domestic apparel spending to resume recovery in 2013

Overweight We estimate Korea’s apparel spending will rise 4% YoY to W35trn in 2013F.
After peaking in 1H11, apparel consumption growth has stumbled for more
than a year due to Europe’s debt crisis and the slowing economy. But we
▶ Top picks expect both private and apparel consumption growth will bottom out in
3Q13 and see a modest recovery in 2013. Apparel spending growth
LG Fashion (093050, BUY, TP W44,000)
should have further upside in 2013 given that pent-up demand will be
2012F 2013F 2014F
released following the weaker consumer spending compared to income
PE (x) 10.2 7.9 6.8
growth and that apparel same-store sales (SSS) growth at department
PB (x) 1.0 0.9 0.8
stores will rise from a negative base in 1Q13.
EV/EBITDA (x) 5.3 4.0 3.3
EPS (KRW) 3,098 3,981 4,614
Fashion firms getting back to normal; Take note of brand name
BPS (KRW) 30,796 34,306 38,361
players in 2013
 Growth potential stemming from continued
diversification of brands and apparel types Unbranded players had a breakout year in 2012. Major apparel OEMs
 Most aggressive inventory depletion among Youngone Corp. and Hansae saw their shares rise sharply backed by
peers; Likely profitability growth strong production bases in Southeast Asia, weaker KRW, lower raw
material costs and absolutely undervalued stocks. But now, it is time to
▶ 12M sector performance turn attention to brand name players. The reason is sales at full retail price
should climb on improving market conditions and domestic fashion firms
(p) (%p)
1,500 5 should be able to ease inventory burdens and the effects of imported
0 luxury brand withdrawals in 2012. In addition, their shares are undervalued
1,000
-5 compared to the market and the consumer goods sector due to the
500
-10 de-ratings this year. In the apparel sector, they offer ample upside due to
Textiles, Apparel & Luxury Goods sector index (p, LHS )
-15 the decoupling with OEM players.
0 -20
Top pick: LG Fashion
We maintain Overweight on the apparel sector on 1) potential domestic
apparel spending recovery, 2) companies striving to achieve growth and 3)
attractive valuations (2013F PE 7.8x). Our top pick is LG Fashion and we
maintain their respective TP at W44,000 (2013F PE 11.0x). We forecast
top-line growth of LG Fashion in 2013, as 1) moderate production
expansion, 2) a turnaround in men’s wear, 3) securing some brands having
growth potential. In addition, Margins should also climb thanks to
aggressive inventory adjustments.
Figure 1. Fashion sector PE

(%) Apparel PE premium/discount to the market (LHS) (x)
50 12
Apparel PE (RHS)
30 10
10 8
(10) 6
(30) 4
(50) 2
Eun-chae Na (70) 0
822-3276-6160 06 07 08 09 10 11
ec.na@truefriend.com
182
1. Apparel spending to bottom out

Korea’s 2013F apparel In 2013F, Korea’s apparel spending should grow 4% to W34trn. After peaking in
spending to add 6.0% 2011, apparel consumption slowed along with Europe’s debt crisis and the sluggish
real economy. Since then, the industry has been experiencing a slow cycle for more
than a year. In 2012F, apparel spending growth should edge up 1.6% (-0.7% real
growth). As we forecast the private sector’s spending to bottom out in 3Q12
followed by a gradual upswing, apparel spending should begin its attempts to
emerge from the trough in 4Q12 and show a more apparent recovery in 2013.
Figure 2. Korea’s 2013F apparel market to grow 6% to Figure 3. Actual apparel spending growth to pick up in
W35trn 2013 along with private spending recovery
(W bn) Nominal clothing/shoes spending (LHS) (% YoY) (%YoY)
40,000 20 5
Growth (RHS)
4
35,000 15
3
30,000 10 2
1
25,000 5
0
2008 2009 2010 2011 2012F 2013F
20,000 0 -1
Private sector spending growth (actual)
-2 Apparel spending growth (actual)

15,000 -5
2001 2003 2005 2007 2009 2011 2013F -3
Source: Bank of Korea, Korea Investment & Securities Source: Korea Investment & Securities
Pent-up demand after In 2012, not only spending conditions were unfavorable but there was the base
repressed spending and effect of brisk spending in 2010-2011. The effect was evident in department stores’
base effect SSS. In the bullish 1Q11 and 2Q12, the figure reached 15% and 11%, respectively,
faster than total apparel spending growth. Such a high basis contributed to
department stores’ negative SSS when spending slowed in 2012. We believe the
ever-widening gap between income and spending, the biggest variable to
consumption, must have created pent-up demand and such demand should realize
as was the case in 2010. In particular, department stores are the major sales
channel for most Korean apparel companies. Thus, the fact that 2013F SSS should
be based on virtually negative 2012F figures corroborates the argument that they
cannot get any worse.
183
Figure 4. Widening gap between income and spending Figure 5. Can it get any worse in 2013
(% YoY) Disposable income growth (LHS) (%) (%YoY)

10.0 81.0 20
Average spending propensity (RHS) Department store same-store sales growth
80.0
8.0 15 15.1
79.0
6.0 11.0
78.0 10
7.9
77.0
4.0
5
76.0 4.3
2.0
75.0 0
-0.6
74.0 -2.0
0.0
06 06 07 07 08 08 09 09 10 10 11 11 12 -5 -4.5
73.0
1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q
-2.0
72.0
-10
-4.0 71.0 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3q12
Source: Statistics Korea Source: Ministry of Knowledge Economy
2. Normalization in progress: Ongoing changes

In 2012, fashion companies had very volatile profits. When spending slows, apparel
Apparel companies’ profit
makers’ earnings fluctuate due to the percentage of original price sales and the
volatility expanded;
inventory burden. In general, apparel companies’ profitability is determined by a
Inventory concern grows
function of markup and the scale of original price sales. In 2012, the markup did not
see an effective increase but the ASP must have fallen significantly with
widespread discount sales. Profitability was further eroded by efforts to reduce
inventory (which swelled for most clothing makers in 2011) such as additional
discount sales, provisioning, inventory liquidation losses, etc. The inventory
reduction is still being carried out. The efforts are most visible at LG Fashion and its
inventory turnover is picking up at the fastest rate.
Figure 6. Inventory valuation reserve fueled a surge Figure 7. Fastest recovery of inventory turnover at LG
in COGS-to-sales Fashion
(%pYoY) COGS-to-sales growth (X)
8.0 7.0
COGS-to-sales growth excl. inventory valuation reserve
6.0
6.0
5.0
4.0
4.0
2.0
3.0
0.0
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12F
2.0 LG Fashion
-2.0 Handsome
1.0 The Basic House (Consolidated)
-4.0 Shinsegae International
0.0
-6.0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
Source: LG Fashion, Korea Investment & Securities Source: Company data, Korea Investment & Securities
184
Eventful 2012; To For Korean apparel companies, 2012 was a difficult year for many reasons such as
normalize in 2013 slow spending. In particular, Handsome and Shinsegae International had no other
option but to downsize the imported designer brand business, a growth engine for
both companies. As Handsome became a Hyundai Department Store affiliate, the
company was expected to create synergy with retailers. At the same, the
company’s exclusive contracts with three imported luxury brands (e.g., Balenciaga,
Celine and Givenchy) were terminated. In 2013, its deal with Chloe will also expire.
As of 2011, the four brands together constituted 10% of Handsome’s sales.
Shinsegae International was hit as Coach (9% of sales) announced its direct
approach to the Korean market. Thus, Handsome and Shinsegae are looking for
new imported brands and growing their own labels. We expect to see a faster
earnings recovery at Shinsegae International as the company has signed Celine
and Givenchy and is also expanding its non-fashion businesses.
3. Apparel OEM peaking

OEM boom in 2012 is OEMs were thrust into the spotlight in 2012 as the consumption slowdown and
passing a peak in terms inventory pileup emerged as risks for fashion names. With the weaker presence of
of operating environment Chinese peers, Korean OEM players enjoyed an early advance effect in Southeast
and valuation Asian markets and were regarded as attractive over the mid to long-term with better
productivity. Also compared with fashion plays, OEMs carried no inventory risks
and their operating environment was relatively favorable. However, there are some
troubling factors about future profitability. First, given the KRW’s gradual
appreciation, we forecast the average KRW/USD to drop 6.4% YoY in 2013F.
Second, the downward price adjustment for raw materials has almost wound down.
Third, with the tight inventory management by buyers, orders growth is slowing and
price-cut pressure should build up. While fashion companies carry inventory risks,
plant risks could emerge for OEMs. When orders growth slows, OEMs may turn to
thin-margin orders to keep the plants busy in light of the fixed cost burden. Fourth,
valuations of fashion companies and OEMs have reversed in 2012 due to the
former’s de-rating and the latter’s re-rating. In terms of PE, Youngone Corp., a
major OEM, trades at a 30% premium over LG Fashion and FILA Korea.
185
Earnings forecast
1. Key assumptions
Table 1. Major assumptions for fashion sector earnings estimates (%, KRW)
2008 2009 2010 2011 2012F 2013F

Domestic real GDP growth (2005 basis) 2.3 0.3 6.3 3.6 2.3 3.3
Domestic CPI growth 4.7 2.8 3.0 4.0 2.3 3.1
Domestic private consumption growth 1.3 0.0 4.4 2.3 1.8 2.6
Domestic real apparel consumption growth -2.4 -2.0 3.4 3.2 -0.7 1.0
Domestic apparel consumption growth 0.6 3.1 6.6 6.7 1.6 4.1
China’s real GDP growth 9.6 9.2 10.4 9.2 7.8 8.5
China’s private consumption growth 21.6 20.3 18.7 17.0 14.2 15.5
Avg. KRW/USD 1,103 1,276 1,156 1,108 1,130 1,058.0
Year-end KRW/USD 1,260 1,165 1,135 1,152 1,075 1,020.0
Avg. KRW/RMB 159 187 171 172 178 176.6
Year-end KRW/RMB 184 171 173 183 173 171.9
Note: Apparel includes clothing and shoes
2. KIS Universe fashion companies’ 2013F EBT to grow

18% YoY
KIS Universe six fashion The fashion sector posted better earnings for three straight years from 2009 to 2011
companies’ 2013F sales and saw their share prices and valuations rise. But in 2012, both share prices and
and EBT to grow 9% and valuations were de-rated due to profit concerns. The fashion sector’s 2012F sales
18% YoY should grow 4.7% YoY and OP shrink 3%. But we expect earnings growth to
resume in 2013 with sales up 11%, OP 15% and EBT 17% YoY. Companies with
earnings very sensitive to economic conditions, such as LG Fashion, FILA Korea,
Shinsegae International and The Basic House, should see considerable NP
improvement. The upside for Handsome seems limited given the withdrawal of
some imported brands through 1H13.
Figure 8. 2013F fashion sector sales to grow 11% YoY Figure 9. 2013F fashion sector EBT to grow 17% YoY
(W bn) (% YoY) (W bn) 2012F 2013F 2013F (% YoY)

2012F 2013F 2013F 1,200 60
9,000 14
8,000 12.7 12.6

12 1,000 50
7,000 10.7
9.2
10 967
6,000 6,325 800 40
5,791
5,000 8
7.3 600 819 30
29
4,000 6
20 24
5.2
3,000 400 20
4 18
2,000 1,508
1,698
1,165 200 200 7 10
1,000 1,086 2 297 357 87 107
1,619
1,463 0.9 687 722 543 612 213
154 942
0 509 0 0 119 92 24 42 0
504
Total
LG Fashion
Handsome
Fila Korea
The Basic
Youngone
Youngone
Total
LG Fashion
Handsome
The Basic
Youngone
Youngone
Fila Korea
Holdings
Holdings
House
House
Corp.
Corp.
186
Markup and discount rate The major profit variables for Korean apparel firms are markup (selling price/cost of
are key profitability goods) and the percentage of sales at original tag prices to total sales. Assuming a
indicators typical markup multiplier at 5, every 10% fall in the ASP (or 10% discount) would
raise the COGS-to-sales 2%p. At the same discount, a lesser markup causes a
sharper rise in the COGS-to-sales.
Table 2. Rise in COGS-to-sales with changes to markup/discount (%, x, %p)
Discount
Markup 10 20 30 40 50
5.0 2.0 4.0 6.0 8.0 10.0

4.0 2.5 5.0 7.5 10.0 12.5
3.0 3.3 6.7 10.0 13.3 16.7
The FX rate is also crucial for export-driven firms. We set the average KRW/USD
for 2013F to drop 6.4% YoY to W1,058. Youngone Corp. generates more than 95%
of sales from exports and its net exposure to USD is ~15% of sales. Each 1% fall in
the KRW/USD would lower its OPM 0.15%p. On the contrary, a lower KRW/USD is
positive for import-oriented players. Shinsegae International earns 49% of sales
from imported goods. Each 1% fall in the KRW/USD would lift its OPM 0.3%p.
Top pick
LG Fashion (093050)
Superior to domestic We view LG Fashion as a prime beneficiary of domestic apparel consumption
consumer goods peers in recovery in 2013. Our TP of W44,000 (2013F PE 11x) remains unchanged. In 2012,
terms of earnings and LG Fashion’s earnings were dragged down by aggressive inventory disposal and
valuation merit in 2013 valuation accounting, and unexpectedly lengthy consumption slowdown. In
particular, the inventory valuation led to greater earnings volatility and the robust
growth (at 17% CAGR) was halted due to production cutbacks and reduced
weighting of full retail price sales, caused by persistently weak consumption. But
after a substantial inventory reduction, the inventory turnover ratio is stabilizing and
the provisioning ratio climbed to the level of 2009-2010. While rivals have put more
focus on filing the gap caused by the absence of imported luxury brands, LG
Fashion has made aggressive investment in its own lineup. Given the number of
new and growing brands, we believe LG Fashion has the most room to expand
production among peers when the business environment recovers.
187
Risk factors
Prolonged consumption If the domestic consumption slowdown worsens, it would harm the cyclical-nature
slowdown; Will Korea apparel sector. Faced with slow consumption, there have been attempts to forecast
follow Japan’s suit? Korea’s apparel sector by comparing it with Japan. Japan’s apparel consumption
per capita fell 27% from 2001 to 2010 but that can be attributed to an overall
economic downturn given that it remained unchanged as a % of GDP. In Korea,
apparel consumption per capita stood at USD543 in 2010, half the US’ USD1,115
and far less than Japan’s USD817. Korea’s apparel consumption equals 3.0% of
GDP, largely on par with the US’ 3.0% and China’s 3.5%, while Japan’s is very low
at 2.0%. Korea’s apparel consumption is not overly large on an outright basis.
Korea’s fashion industry Concerns are mounting over the domestic fashion industry due to polarizing
stuck between luxury and consumption patterns between luxury brands and fast-fashion labels, and more
fast-fashion brands practical spending habits by consumers. The luxury and fast-fashion brands are
believed to make up respective 15% and 6% of domestic apparel consumption. But
domestic fashion companies have expanded the imported brand business and thus
command some share of the luxury brand market. In particular, global fast-fashion
brands will have only limited bearing on the mid to high-end fashion companies in
Korea as a target market of the fast-fashion brands is the mid to low-end segments
and Korean companies introduce their own fast-fashion brands. H&M, a global
fast-fashion retailer, chalked up Japanese sales of ~W260bn or 0.2% of the
country’s total apparel sales in 2011. It is impressive that global fast-fashion
companies have achieved growth even in slow times, but chances are minimal for
them to lose domestic market share.
188
Coverage valuation
Table 3. Valuations
Youngone Holdings Recommendation BUY 2010A 1,164 212 72 6,714 28,189 5.5 1.3 24.0 2.8
(009970) TP (KRW) 77,000 2011A 1,406 293 103 9,495 35,257 5.9 1.6 25.5 2.8
Price (Nov 15, KRW) 65,000 2012F 1,533 308 111 9,903 40,160 6.6 1.6 22.3 3.2
Market cap. (W bn) 886 2013F 1,750 353 127 10,985 48,349 5.9 1.3 21.3 2.8
2014F 1,942 391 142 12,246 57,569 5.3 1.1 19.8 2.4
Handsome Recommendation Hold 2010A 447 80 72 3,209 23,051 5.7 0.8 14.0 3.8
(020000) TP (KRW) - 2011A 501 108 86 3,903 26,949 7.6 1.1 14.4 5.1
Price (Nov 15, KRW) 29,800 2012F 504 88 70 3,192 29,459 9.2 1.0 10.4 5.7
Market cap. (W bn) 735 2013F 509 89 72 3,264 31,998 9.0 0.9 9.8 5.1
2014F 545 103 83 3,783 34,908 7.7 0.8 10.4 4.2
FILA Korea Recommendation BUY 2010A 616 102 83 10,024 34,646 7.8 2.3 34.8 8.2
(081660) TP (KRW) 76,000 2011A 764 107 2 237 32,607 327.8 2.4 0.7 9.0
Price (Nov 15, KRW) 67,300 2012F 687 97 66 5,364 37,222 12.5 1.8 19.4 9.1
Market cap. (W bn) 668 2013F 722 111 82 6,641 44,883 10.1 1.5 20.0 7.9
2014F 770 126 101 8,189 54,308 8.2 1.2 20.4 6.7
The Basic House Recommendation BUY 2010A 389 29 6 302 7,937 60.5 2.3 3.9 10.8
(084870) TP (KRW) 15,000 2011A 472 33 18 849 9,046 20.1 1.9 10.0 8.8
Price (Nov 15, KRW) 11,050 2012F 543 30 16 764 9,810 14.5 1.1 8.1 6.5
Market cap. (W bn) 230 2013F 612 48 27 1,285 11,095 8.6 1.0 12.3 4.6
2014F 699 55 31 1,492 12,587 7.4 0.9 12.6 4.6
LG Fashion Recommendation BUY 2010A 1,109 127 92 3,155 21,861 9.9 1.4 15.4 5.2
(093050) TP (KRW) 44,000 2011A 1,411 143 96 3,294 28,101 12.3 1.4 13.2 6.9
Price (Nov 15, KRW) 31,500 2012F 1,463 116 91 3,098 30,796 10.2 1.0 10.5 5.4
Market cap. (W bn) 921 2013F 1,619 150 116 3,981 34,306 7.9 0.9 12.2 4.0
2014F 1,776 171 135 4,614 38,361 6.8 0.8 12.7 3.3
Youngone Corp. Recommendation BUY 2010A 807 106 73 1,782 11,299 5.9 0.9 16.9 2.9
(111770) TP (KRW) 37,000 2011A 990 185 117 2,869 13,454 9.7 2.1 23.2 4.9
Price (Nov 15, KRW) 34,950 2012F 1,086 201 138 3,382 16,102 10.3 2.2 22.9 5.3
Market cap. (W bn) 1,426 2013F 1,165 216 147 3,602 18,946 9.7 1.8 20.6 4.8
2014F 1,320 269 184 4,500 22,662 7.8 1.5 21.6 3.5
189
Media & Ad.

Intensifying platform competition and growing
demand for content
Overweight Demand for content is just set to rise; Sector premium likely to continue
The media sector’s upturn should continue led by content providers. We
maintain Overweight on the media & ad sector on the following. 1)
▶ Top picks
Demand for content will rise on growing digital conversion, intensifying
KT Skylife (053210, BUY, TP W40,000) competition among platform operators (meaning a wider selection of
platforms) and a better environment to produce quality content tailored to
2012F 2013F 2014F
viewers’ needs. 2) Top-tier firms should gain market share on the pay-TV
PE (x) 27.3 14.8 10.6 industry shakeup. 3) The industry’s players are going beyond the domestic
PB (x) 4.4 3.4 2.6 market as demonstrated by growing overseas sales. 4) Ad market
EV/EBITDA (x) 11.0 7.1 5.3 conditions should gradually turn for the better with Korea’s real GDP
EPS (KRW) 1,155 2,130 2,970 growing 3.3% YoY in 2013F. Advertisers will see ad efficiency improve on
BPS (KRW) 7,193 9,323 12,293 the rise of new media, introduction of private media representatives
 Subscriber growth to continue on digital (private reps) and better content quality attributed to competition among
conversions and higher apartment broadcasters – and that should lead to an influx of new advertisers.
penetration rate Accordingly, the domestic ad market should expand 4.5% YoY in 2013F.
 Earnings growth to continue on higher
subscribers, platform revenue and cost control
 Additional platform business to maximize Intense competition and greater content demand, key ideas for
synergies with KT 2013 and couple more years
Demand for content should increase and content providers build up
Cheil Worldwide (030000, BUY, TP W26,500) greater bargaining power given the following. 1) Content consumption will
2012F 2013F 2014F rise as access to diverse offerings becomes easier on the rapid
PE (x) 23.0 16.0 12.5
penetration of smartphones, wide-ranging platforms and ultra-fast mobile
Internet. 2) Offering killer content becomes crucial as competition is
PB (x) 3.1 2.6 2.2
intensifying among platform operators. As platform operators rev up
EV/EBITDA (x) 14.2 9.4 6.6
investment in the content market, it should add stability to content providers
EPS (KRW) 951 1,371 1,752 and their production environment will likely improve as well. 3) Content
BPS (KRW) 7,164 8,332 9,856 resale is also on the rise as consumption patterns change. Growing demand
for content is the most important idea for the media industry.
 Overseas earnings growth to continue on
expansion of non-affiliate advertisers and
top-line growth through M&As Top picks: KT Skylife, Cheil Worldwide
 Higher domestic market share on 1) KT Skylife (Skylife): With the looming digital conversion ahead in 2013F,
deregulation and private media reps
 OPM to improve starting 2013 on slower
Skylife’s subscriber growth, the most important catalyst, should continue
recruitments with the support of KT. Higher home shopping transmission revenue and
cost controls should also bolster earnings. We forecast a three-year sales
CAGR of 16% and OP CAGR of 61%.
2) Cheil Worldwide (Cheil): Domestic market share should increase on ad
▶ 12M sector performance market changes along with further growth in overseas revenue on higher
(p) Rel.to KOSPI (%p, RHS) (%p) Samsung Electronics’ ad spending and expansion on non-affiliate advertisers.
5,000
Advertising sector index (p, LHS )
30 We forecast a three-year sales CAGR of 21% and OP CAGR of 27%.
4,000 20
3,000 10
Figure 1. Media & ad sector PE and premium over the market
2,000 0
1,000 -10 (KRW)

0 -20 14,000
Nov-11 Feb-12 May-12 Aug-12 12,000 x19
10,000 x16
8,000 x13
6,000 x10
4,000 x7
Shiwoo Kim
822-3276-6240 2,000
0
swkim@truefriend.com
01 02 03 04 05 06 07 08 09 10 11 12F
190
1. Sector premium to continue

Media & ad sector The media & ad sector has gained 28.7% YTD, outperforming the Kospi by 26.3%p.
outperformed the Kospi Despite a likely short-term retreat due to the valuation burden, we reiterate
by 26.3%p YTD Overweight on expectations for further outperformance over the market.
Maintain Overweight 1) We are upbeat for the following. 1) Demand for content will rise on growing digital
Growing demand for conversion, intensifying competition among platform operators (meaning a wider
content; 2) Top-tiers’ selection of platforms) and a better environment to produce quality content tailored
bigger market share; 3) to viewers’ needs. 2) Top-tier firms should gain market share on the pay-TV industry
Rising overseas sales; 4) shakeup. 3) The industry’s players are going beyond the domestic market as
Ad market growth demonstrated by growing overseas sales. 4) Ad market conditions should gradually
improve. Advertisers will see ad efficiency improve on the rise of new media, the
introduction of private media representatives (private reps) and better content
quality attributed to competition among broadcasters – and that should lead to an
influx of new advertisers. Accordingly, the domestic ad market should expand 4.5%
YoY in 2013F.
2. Domestic ad market size to expand 4.5% YoY in 2013F

Domestic ad market to The domestic ad market should grow 4.5% YoY in 2013F. The figure is lowered
grow 4.5% YoY in 2013F from our previous forecast of 7% YoY for 2013F (and 6% for 2012F) to reflect the
slowdown in domestic demand, which led to a more negative outlook for the ad
market. Nonetheless, the market should still expand on the back of steadily growing
ads placed on the Internet and new media, and continued deregulation. We see
real GDP growing 2.8% YoY in 2012F and 3.3% YoY in 2013F. The domestic ad
market is affected by several factors such as real GDP growth, private consumption
growth, corporate sales and exports. And the ad market has the tightest correlation
with real GDP and private consumption growth. A simple regression analysis using
those variables tells us the domestic ad market will grow 4.5% YoY in 2013F.
3. Online/mobile ad spending to expand and deregulation

effects to materialize
Ad market growth on 1) The domestic ad market should continue to grow given the following. 1) Ad
improving ad efficiency, efficiency is improving as terrestrial broadcasters begin to run their own ad
2) increasing businesses, meaning liberalization of the ad sales market. Better ad efficiency will
online/mobile ad appeal to new advertisers and bring them to the market. 2) Online and mobile ad
spending and 3) wider spending is rapidly growing. 3) Overall ad spending should increase given wider
range of ad media media choices. As the companies’ target ad media differ depending on their size,
more media choices mean a bigger ad market. For large companies, it will be
difficult to find a substitute for terrestrial broadcasts, which deliver effective
advertising fairly quickly. In contrast, cable or online could be the most effective for
small and midsize companies.
191
Terrestrial broadcast outlets, which have the biggest portion of the ad market
among media, face concerns about a possible shrinking of their ad market. Indeed,
per-capita viewing time is falling for terrestrial broadcasters but TV is still the most
efficient media for advertisers. Considering this together with deregulation of the ad
market, we forecast ad spending on terrestrial broadcasters will stay flat or slightly
improve. Since Jul 2009 when the regulations were significantly eased, the ad
market’s growth has accelerated while GDP growth slowed over the same period.
The ad market should deliver stronger growth in 2013 (4.5%) than in 2012 (3.4%)
thanks to a low comparison base and gradual economic recovery. The ad market’s
growth should continue into 2014 helped by major sporting events (e.g., 2014 FIFA
World Cup, Winter Olympics).
4. Growing content demand is a key in 2013

Content providers’ Demand for content should increase and content providers build up greater
bargaining power likely to bargaining power given the following. 1) Content consumption will rise as access to
strengthen diverse offerings becomes easier on the rapid penetration of smartphones,
wide-ranging platforms and ultra-fast mobile Internet on the long-term evolution
(LTE) network. 2) Offering killer content becomes crucial as competition is
intensifying among platform operators. As platform operators rev up investment in
the content market, it should add stability to content providers and their production
environment will likely improve as well. 3) Content resale is also on the rise as
consumption patterns change. Growing demand for content is the most important
idea for the media industry.
Growing penetration of Along with the uptake of smart devices, content providers (e.g., terrestrial
smart devices highlights broadcasters, paid-for program producers, independent producers, etc.) would play
greater reliance on a more important role in the mid/long-term. Offering diverse quality content would
quality content providers be critical for the success of smart devices. With smart devices, users, not
providers, choose what content to consume. The more the smart devices penetrate
the market, the greater the consumption of quality content would be, and therefore
top-tier content providers should continue to trade at a premium. The rising
penetration of smart devices means the environment is getting better for users to
consume content. In addition, VoD is growing on the analog-to-digital conversion
among cable TV subscribers. Changing viewer behavior will also lead to greater
demand for content.
Content producers and Smart devices’ rapid penetration will bring innovative ideas to video content
platform operators with production as well. Survival audition programs have mushroomed in Korea (e.g.
premium content will Super Star K and K-pop Star), as in other countries, and relied much on audience
benefit participation by voting for their favorite contestants. Similar participation by viewers
will likely be seen in the production of TV dramas and shows. That is, interactive
technology on smart devices may allow the audience to take part in the
decision-making process for future episodes. When viewers’ participation expands,
it should help smart TV and N-screen 4 operators add subscribers. Premium
content will lead to the creation of a new price table, which will eventually lift ARPU.
In addition, interactive adverts available on smart devices will benefit content
producers and platform operators. Although the costs of production will go up, the
interactive technology will be very effective to win audiences and sharpen the
competitiveness of content producers.
4
N-screen is a service that allows subscribers to “continuously” enjoy media content across a range of screens (e.g., TV, PC,
tablets, smartphones, etc.) by storing the content on its server. By “continuously”, it means the service resumes playing the
specific content from the point where the subscriber stopped viewing.
192
Figure 2. Digital broadcast subscribers Figure 3. Korea’s smartphone subscriber trend
('000) ('000 subs) (%)

30,000 60,000 100
Digital cable TV Satellite TV IPTV Smartphone subscribers (LHS) 88.5
Smartphone portion (RHS)
25,000 50,000
LTE portion (RHS) 81.2 80
63.6
20,000 40,000
63.8
60
15,000 30,000 49.6

43.0
40
10,000 20,000
28.9
20
5,000 10,000
14.1
1.6
2.3
0 0 0
2003 2005 2007 2009 2011 2013F 2009 2010 2011 2012F 2013F 2014F
Source: Company data, Korea Investment & Securities Source: Company data, Korea Investment & Securities
5. Media & ad industry structure and key issues
Figure 4. Media & ad industry structure
Note: Among the issues related to ad deregulation, those in dashed-line text boxes may be subject to further easing
193
Figure 5. Digital music-related business structure
Table 1. Issues related to media & ad industry structure

Issue Effects
Relationship between terrestrial and pay-TV broadcasters: Ongoing Terrestrial broadcasters to deliver stable profits; Pay-TV subscribers
(1)
dispute over retransmissions may face greater cost burden
Relationship between terrestrial broadcasters and cable operators:

(2)
Competition over content quality & viewer ratings
As ad rates may be applied more efficiently, ad sales rates should

(3) Terrestrial ad deregulation: Regulations continue to be eased
improve
With the liberalization of the ad sales market, the ad market should

(4) Advertising trends
become more efficient and attract new advertisers
Due to greater demand for Korean content, overseas content

(5) Overseas distribution of content
distribution should expand
Top-tier content providers should gain greater bargaining power due to

(6) Domestic distribution of content
platform diversification and increased competition
Competition over pay-TV subscribers: Intensifying competition to attract Intensifying competition to attract subscribers for each platform due to
(7)
subscribers faster digital conversion
Competition for N-screen services: Shift in content consumption

(8) Content consumption should grow with the spread of N-screen services
patterns
Cable services and SBS may see greater ad revenue due to less ad
(9) Discussion of KBS subscription rate hikes and MBC IPO
revenue for KBS
(10) Sales cap deregulation for cable operators Sales to expand on greater market share for top-tier content providers
Digital music market to expand over the mid to long-term on more music
(11) Intensifying competition for music platforms
platform subscribers
(12) Increase in royalties for rights holders Top-tier firms such as SM and YG to benefit
194
Earnings forecast
1. Key assumptions
Key variables to earnings  2013F domestic ad spending to grow 4.5% YoY to W10.3trn
include domestic ad  2013F ad spending for terrestrial broadcasters at W2.12trn and cable operators
spending, number of at W1.47trn
pay-TV subscribers,  2013F pay-TV subscriber-based market share for cable operators at 52.8%,
subscriber-based market IPTV at 29.4% and satellite broadcasters at 17.6%
share and ARPU  2013F ARPU for cable operators at W8,884 and Skylife at W8,538
Table 2. Domestic ad spending (W bn)
2008 2009 2010 2011 2012F 2013F 2014F

Domestic ad spending 7,793.6 7,256.0 8,620.9 9,560.6 9,885.7 10,330.5 10,847.0
Four major media outlets 4,315.1 3,833.5 4,319.9 4,561.3 4,476.2 4,414.2 4,469.0
TV 1,899.7 1,670.9 1,930.7 2,077.5 2,095.8 2,117.8 2,180.3
Radio 276.9 223.1 256.5 260.4 264.9 268.6 276.6
Newspaper 1,658.1 1,500.7 1,643.8 1,709.2 1,611.4 1,528.9 1,496.9
Magazine 480.4 438.8 488.9 514.2 504.2 499.0 515.2
Internet 1,190.0 1,243.0 1,547.0 1,856.0 2,046.3 2,221.1 2,473.1
Cable 860.0 779.4 964.9 1,142.1 1,364.2 1,466.9 1,551.1
New media 26.2 38.5 63.4 141.3 273.9 334.3 459.6
Other 1,402.3 1,361.6 1,725.7 1,859.9 1,725.0 1,894.0 1,894.3
Source: Cheil Worldwide, Korea Investment & Securities
2. KIS Universe
KIS Universe media & ad We estimate the 11 media & ad firms in KIS Universe coverage will see combined
firms to combine for sales jump 18.4% YoY in 2013F. As most of the listed media & ad companies are
18.4% YoY jump in sales major industry players, their greater bargaining power should help drive sales. Of
and 39.5% YoY rise in OP note, sales growth momentum by company includes bigger overseas sales for SM
and YG, market share gains for Cheil, subscriber growth for Skylife and rising
broadcast sales for CJ E&M. We peg the combined OP of the 11 companies to
swell 39.5% YoY in 2013F backed by brisk sales and increased revenue that incurs
less costs (sales from ad agency business for Cheil and home shopping
transmission fee revenue for Skylife and Hyundai HCN).
Table 3. Eight media & ad firms in KIS Universe coverage (W bn, %)
2009 2010 2011 2012F 2013F

Sales 2,612.2 3,914.5 5,654.1 6,977.1 8,260.3
OP 166.6 429.0 605.0 669.9 934.2
EBT 232.3 392.4 583.7 671.6 948.5
NP 182.1 301.4 447.4 543.1 725.2
OPM 6.4 11.0 10.7 9.6 11.3
NPM 7.0 7.7 7.9 7.8 8.8
Note: Six companies merged into CJ E&M in Mar 2011; Merged entity earnings from 2011
195
Biggest earnings variable Domestic ad market conditions have a direct effect on earnings at domestic media
is ad market conditions & ad firms. Of note, Cheil, CJ E&M and YTN are very sensitive to the ad industry. If
domestic ad spending growth is 3%p less than the current estimate of 5.6% in
2013F, Cheil, CJ E&M and YTN’s NP would shrink 2.4%, 2.2% and 3.3%,
respectively.
Figure 6. NP sensitivity according to changes in domestic ad spending growth
(%)
2
Cheil Worldwide CJ E&M Y TN
1
-1
-2
-3
-4
-5
-6
0.0 1.5 3.0 4.5 6.0
Domestic ad spending growth in 2013F (%)
Table 4. Ad revenue sensitivity according to changes in domestic ad spending

2013F domestic ad spending growth (% YoY)
(0.0) 1.5 3.0 4.5 6.0
EPS chg. Cheil (3.6) (2.4) (1.2) 0.0 1.2
CJ E&M (3.8) (2.2) (1.1) 0.0 0.6
YTN (4.9) (3.3) (1.6) 0.0 1.6
196
Top picks
KT Skylife (053210)
Top pick is Skylife Our top pick is Skylife. We remain bullish on the following reasons. 1) Subscriber
growth continues on digital conversions and higher apartment penetration rate. 2)
OP should grow at a three-year CAGR of 60.9% on subscriber growth, platform
revenue growth and cost controls. 3) New platform businesses, which increase
ARPU, such as T-commerce and the N-screen business, should also maximize
synergies with the KT Group. Skylife’s satellite TV value should rise on growing
competition within the pay TV market.
2013 sales and OP to Earnings growth should continue throughout 2013F on rising subscribers.
constantly grow Transmission revenue should surge 16.3% YoY on increased subscribers. ARPU
may drop 1% annually on increased OTS subscribers, but this should be more than
offset by the subscriber growth. Moreover, platform revenue (e.g., home shopping
revenue) should expand, and it generates a high OPM. Overall, home shopping
revenue per subscriber should rise gradually to the level of cable SOs (2013F
cable: W45,000 per subscriber, Skylife: W25,000 per subscriber) on firming
bargaining power fueled by the rapid subscriber growth. In fact, we expect home
shopping revenue to surge 72.0% YoY, as rapid growth continues. Despite rising
marketing expenses, cost controls on lower set-top box costs and depreciation
expenses should facilitate 2013 sales growth of 21.2% YoY and OP growth of
83.1% YoY.
Cheil Worldwide (030000)

Second pick is Cheil Our second pick is Cheil Worldwide (Cheil). Cheil’s overseas expansion should
Worldwide continue throughout 2013. We expect Cheil to acquire at least two overseas ad
agencies in 2013 on top of its recently acquired agencies McKinney (US) and Bravo
(China). Cheil’s goal is to increase non-affiliate advertisers and global advertisers,
including Samsung Electronics (SEC) through M&As and overseas recruitments.
Synergy effects with its acquired agencies in the overseas market and slowdown on
employee recruitment should lead earnings to improve.
OPM to improve in 2013 We forecast 2013 GP to surge 21.1% YoY. 1) Top-line growth should continue on
development of overseas non-affiliate advertisers and SEC’s higher ad spending on
its diversified product line-up. 2) Domestic market share should rise on further
deregulation and introduction of private media reps. 2013 OP should jump 45.5%
YoY led by higher ad spending by SEC and overseas growth. OPM should also hike
in 2013 to 6.3% (5.2% in 2012).
197
Risk factors
Risks for media/advertising companies are the ad market may slow more than
expected and the strong KRW would slow earnings improvement.
Possibility of the slower-than-hoped market growth

Ad market may slow In 2012, the ad market has been slower than hoped amid the sluggish economies in
along with the sluggish and outside Korea. While recovery is delayed both at home and abroad, Korea’s ad
Korean and global market may shrink as well. Since Korean media/ad firms’ earnings move in tandem
economies in 2013 with the ad market atmosphere, a potential slowing of the market growth is a big
risk for the industry. In particular, as CJ E&M, YTN and Cheil are closely linked to
the ad industry, their performance is sensitive to the business.
KRW appreciation may hinder earnings improvement

KRW appreciation hits Recently, the KRW has been gaining strength against the USD and JPY. Such
Cheil, SM and YG appreciation may slow earnings improvement at Cheil with its considerable
overseas sales weighting (e.g., US and Europe) and at SM Entertainment and YG
Entertainment with Japan making up a big sales portion. With overseas sales
comprising ~60%, the strong KRW is negative for Cheil. For every 3% drop of the
KRW/USD, Cheil’s 2013F NP would fall 6.6%. Although the KRW/JPY is being held
at a high level, the KRW may appreciate more in 2013. For every 3% fall in the
KRW/JPY100, SM and YG’s 2013F NP would drop 3.4% and 5.9%, respectively.
Impact of the strong KRW Cheil’s share price has often moved in the opposite direction of the KRW/USD.
to be cushioned Although the exchange rate is trending down, the change has not been big enough
to seriously affect Cheil’s short-term share price. For SM and YG, an average
exchange rate is important as they convert JPY to KRW at the point of payment
settlement. We believe the impact of the strong KRW should be cushioned by rising
ticket prices and guarantees and greater profit-sharing rates for SM and YG.
Figure 7. Cheil Worldwide’s price and KRW/USD Figure 8. SM Entertainment’s price and KRW/JPY100
(pt, 2008.1.1=100) (pt, 2008.1.1=100) (pt, 2008.1.1=100) (pt, 2008.1.1=100)

180 250 200 3,000
KRW/USD exchange rate (LHS) KRW/JPY100 exchange rate (LHS)
Cheil's share price (RHS) SM's share price (RHS)
180
160 2,500
200
160
140 2,000
150
140
120 1,500
120
100
100 1,000
100
50
80 500
80
60 0 60 0
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Source: Datastream Source: Datastream
198
Coverage valuation
Table 5. Valuations
Company Sales OP NP EPS BPS EBITDA PE PB ROE EV/EBITDA
(W bn) (W bn) (W bn) (KRW) (KRW) (x) (x) (%) (x) (KRW)
CJ E&M Recommendation Buy 2010A 98.1 19.2 15.3 1,210.3 30,969.4 50.5 28.5 0.6 1.9 10.1
(130960) TP (KRW) 36,000 2011A 1,143.1 70.1 58.7 1,765.0 30,969.4 361.9 17.2 1.0 7.7 3.7
Price (Nov 15, KRW) 29,000 2012F 1,385.0 43.8 60.4 1,549.1 32,542.0 333.8 18.7 0.9 4.9 3.9
Market cap. (W bn) 1,100.0 2013F 1,531.3 79.7 59.7 1,556.9 34,122.9 369.2 18.6 0.8 4.7 3.3
2014F 1,667.3 95.7 74.1 1,935.0 36,078.2 402.7 15.0 0.8 5.5 2.8
Hyundai HCN Recommendation Hold 2010A 227.3 48.4 34.8 528.0 3,415.2 89.2 6.6 1.0 10.5 3.5
(126560) TP (KRW) - 2011A 248.7 56.5 44.7 492.0 3,801.2 101.2 5.5 0.7 10.7 1.9
Price (Nov 15, KRW) 4,595 2012F 275.7 64.2 51.8 447.9 4,249.3 103.9 10.3 1.1 11.1 4.1
Market cap. (W bn) 389.3 2013F 296.2 68.7 55.7 481.5 4,731.0 110.4 9.5 1.0 10.7 3.7
2014F 315.8 71.7 59.2 512.0 5,243.2 112.7 9.0 0.9 10.3 3.4
Cheil Worldwide Recommendation Buy 2010A 1,449.8 138.9 108.8 985.1 5,997.6 149.4 14.1 2.3 17.5 6.7
(030000) TP (KRW) 26,500 2011A 1,758.2 108.6 95.7 853.0 6,373.7 120.9 22.2 3.0 13.7 12.6
Price (Nov 15, KRW) 21,900 2012F 2,292.5 118.5 107.5 951.3 7,163.6 137.9 23.0 3.1 14.5 14.2
Market cap. (W bn) 2,519.4 2013F 2,738.1 172.4 152.9 1,370.6 8,332.1 194.3 16.0 2.6 18.7 9.4
2014F 3,074.8 221.4 195.5 1,752.3 9,856.0 245.9 12.5 2.2 19.9 6.6
SBS Contents Hub Recommendation Buy 2010A 155.0 30.1 22.4 948.0 4,155.1 32.9 14.2 3.2 25.2 7.6
(046140) TP (KRW) 18,500 2011A 200.3 28.5 22.8 1,043.6 5,046.2 31.3 11.3 2.3 22.7 5.8
Price (Nov 15, KRW) 15,000 2012F 206.9 32.7 25.6 1,192.9 6,002.3 35.7 12.6 2.5 21.6 7.3
Market cap. (W bn) 322.0 2013F 241.9 39.6 31.1 1,450.0 7,254.0 43.0 10.3 2.1 21.9 5.7
2014F 263.4 43.2 34.0 1,584.5 8,642.9 47.0 9.5 1.7 19.9 5.2
SM Entertainment Recommendation Buy 2010A 96.8 20.2 15.9 1,053.5 5,278.7 26.1 14.3 2.9 19.9 8.7
(041510) TP (KRW) 70,000 2011A 143.0 25.3 21.8 1,381.0 6,682.3 32.1 29.5 6.1 23.1 21.5
Price (Nov 15, KRW) 50,100 2012F 229.5 61.3 49.5 2,579.0 8,954.8 69.6 19.4 6.3 37.7 17.3
Market cap. (W bn) 1,023.4 2013F 310.0 90.5 73.6 3,758.8 13,863.1 101.9 13.3 4.2 38.0 11.3
2014F 435.0 142.9 116.5 5,952.9 20,896.6 158.2 8.4 2.8 40.3 6.8
KT Skylife Recommendation Buy 2010A 426.7 45.3 34.0 1,188.2 3,666.6 82.9 NA NA 32.4 NA
(053210) TP (KRW) 40,000 2011A 464.4 41.7 31.3 605.8 6,037.7 89.4 45.2 4.5 12.5 14.5
Price (Nov 15, KRW) 31,500 2012F 546.7 67.9 55.1 1,155.2 7,193.0 123.1 27.3 4.4 17.5 11.0
Market cap. (W bn) 1,501.5 2013F 662.5 124.3 101.5 2,130.1 9,323.0 186.5 14.8 3.4 25.8 7.1
2014F 732.1 173.9 141.6 2,970.4 12,293.4 247.3 10.6 2.6 27.5 5.3
YTN Recommendation Hold 2010A 118.4 15.1 5.3 91.0 3,920.9 22.5 40.4 0.9 2.3 11.8
(040300) TP (KRW) - 2011A 124.5 18.6 10.6 252.0 4,131.7 26.9 11.0 0.7 6.3 8.5
Price (Nov 15, KRW) 3,805 2012F 126.2 16.4 8.9 210.8 4,323.6 20.3 18.0 0.9 5.0 13.7
Market cap. (W bn) 159.8 2013F 137.7 20.4 11.9 283.1 4,575.0 24.7 13.4 0.8 6.4 11.9
2014F 154.2 26.7 16.5 393.0 4,927.9 31.5 9.7 0.8 8.3 9.3
YG Entertainment Recommendation Buy 2010A 57.5 13.6 9.6 2,578.2 5,648.7 14.8 NA NA 45.6 NA
(122870) TP (KRW) 95,000 2011A 78.1 17.3 12.9 3,322.0 15,319.9 19.8 11.1 2.4 26.5 15.3
Price (Nov 15, KRW) 59,700 2012F 109.4 26.3 26.7 2,468.7 10,025.9 31.7 24.2 6.0 29.7 21.6
Market cap. (W bn) 616.2 2013F 157.1 52.5 46.0 4,187.5 14,523.5 59.8 14.3 4.1 36.3 10.9
2014F 182.6 69.2 59.3 5,400.7 20,312.2 78.3 11.1 2.9 33.0 7.9
Loen Entertainment Recommendation Buy 2010A 139.0 7.0 10.8 467.2 140.8 14.8 18.3 10.0 2.6 16.2
(016170) TP (KRW) 19,600 2011A 167.2 26.6 21.4 882.0 88.8 36.5 15.1 7.5 3.1 23.7
Price (Nov 15, KRW) 14,000 2012F 188.1 31.0 24.9 983.5 11.5 43.3 14.2 7.0 2.7 20.9
Market cap. (W bn) 354.1 2013F 240.9 38.5 30.4 1,201.1 22.1 54.1 11.7 5.2 2.3 21.4
2014F 298.8 50.1 40.1 1,586.3 32.1 67.9 8.8 3.9 1.9 23.2
CJ HelloVision Recommendation Buy 2010A 463.8 93.2 57.5 1,364.3 NA 177.5 NA NA NA NA
(037560) TP (KRW) 19,000 2011A 606.0 136.7 77.0 1,113.2 NA 269.0 NA NA 1.7 NA
Price (Nov 15, KRW) 15,100 2012F 832.0 154.5 98.8 1,637.5 47.1 301.7 9.8 4.4 1.5 17.2
Market cap. (W bn) 1,045.9 2013F 1,090.3 161.4 103.3 1,711.1 4.5 343.2 9.4 3.7 1.3 15.5
2014F 1,400.8 174.0 113.7 1,884.6 10.1 385.4 8.5 3.1 1.2 14.8
Source: Company data, Quantiwise, Korea Investment & Securities
199
Retail
Finding growth drivers outside macro variables
Overweight Finding company-specific growth as consumption stays weak

in 2013
For the retail sector, company-specific issues will have a larger earnings
▶ Top picks impact than macro variables. Weak consumption should continue for the
time being and growth prospects for each type of retail business are not
Himart (071840, BUY, TP W95,000)
much different from 2012. Among the retailers are Himart, Lotte Shopping
2012F 2013F 2014F
and Hyundai Department Store (HDS) that deserve closer attention in
PE (x) 17.1 11.4 8.4
2013. The companies have their own drivers of EPS growth. At Himart,
PB (x) 1.1 1.0 0.9
both the top line and NP should turn upward. Lotte Shopping’s earnings
EV/EBITDA (x) 10.5 7.8 5.9
would rise on consolidated accounting with Himart and FX translation
EPS (KRW) 4,221 6,365 8,585
gains on KRW strength against the JPY. For HDS, the COEX branch
BPS (KRW) 63,826 69,311 77,016
renovation and a new store will add to profits.
 Synergies coming from Lotte Shopping’s channel
integration to buy consumer electronics from
manufacturers Top pick is Himart
 Decline in funding rate and less debt With approval from the Korea Fair Trade Commission (FTC), Lotte
 2013F EPS growth 50%
Shopping has become the largest shareholder at Himart. It will emerge as
an integrated source of consumer electronics procurement for Lotte
Lotte Shopping (023530, BUY, TP W460,000) Shopping. With the channel integration, synergies should build up such as
2012F 2013F 2014F Himart’s tighter market grip and profit growth. Lotte Shopping may
PE (x) 9.5 8.3 7.6 consider transforming Himart’s specialty outlets into a hypermart that
PB (x) 0.7 0.6 0.6 covers a wide range of products including apparel and groceries.
EV/EBITDA (x) 5.5 5.0 4.3 Overseas market entry is also expected in 2013 by using Lotte Shopping’s
EPS (KRW) 35,412 40,305 44,406 sales network, which gives an advantage to quickly build economies of
BPS (KRW) 514,786 553,591 596,497 scale.
 Consolidated accounting with Himart
 Earnings growth on Lotte Department Store’s SSS For department stores, SSS to grow and renovations lift profits
growth
 FX translation gains on KRW strength against the JPY Same-store sales (SSS) at the three department stores (Hyundai,
Shinsegae and Lotte) continued to shrink into 3Q12. But growth will
resume in 2013 thanks to the absence of the high base effect beginning in
▶ 12M sector performance 4Q12 and increase in customer traffic. In particular, HDS should enjoy the
(p) Rel.to KOSPI (%p, RHS) (%p) strongest SSS growth among the three as the floor space will expand after
80 Specialty Retail sector index (p, LHS )
0
10
renovations are finished at the COEX branch. HDS’ profit growth is the
60 -10 most visible considering efficient cost controls and a new branch turning to
40
-20
-30
profitability.
20 -40
-50
0 -60
Figure 1. Retail sector’s premium over the Kospi
(%) Premium to the market (LHS) (x)

120 40
Market PE (RHS)
90 Retail sector PE (RHS) 35
60 30
30 25
0 20
(30) 15
Yeongsang Yeo (60) 10
822-3276-6159 (90) 5
yeongsang.yeo@truefriend.com
(120) 0
Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12
Mikyung Chung
822-3276-6248
Source: Quantiwise
mkchung@truefriend.com
200
1. 2013 outlook: Drilling down to isolated issues amid slow

consumption
2012 review: Slower Key issues in the retail sector for 2012 were 1) tighter regulation to protect SMEs
growth at department and and traditional marketplaces, 2) slowing growth at department and discount stores
discount stores; Healthier and 3) robust growth for convenience stores and home shopping. Domestic retail
growth at convenience sales are thought to have grown 4.1% YoY in 2012F, down from 8.7% in 2010 and
stores and home 7.7% in 2011. The slowdown was due mainly to low growth at department and
shopping discount stores, which together account for 29.5% of domestic retail sales. Home
shopping and convenience stores, relatively immune to macro concerns such as
sour consumer sentiment, continued double-digit sales growth on online mall
expansion (home shopping) and store openings (convenience stores). Meanwhile,
it was unprecedented that even major retailers with economies of scale saw their
profits slide. Sluggish sales caused by consumption constraints, coupled with
tighter regulations, led to less OP at retailers. Measured by YoY profit growth in
2012, discount and department stores had the poorest time among retailers, home
shopping firms largely held up while convenience stores made big gains.
2013 outlook: Pay In 2013, growth prospects by type of retail business are not much different from
attention to isolated 2012. GDP growth should only inch up from 2.3% in 2012F to 3.3% in 2013F and
issues rather than macro consumer price and sentiment indexes show little sign of improving. Double-digit
factors sales growth should continue at convenience stores and home shopping.
Department and discount stores, both saturated arenas, should remain sluggish in
2013. But each retailer’s profit trend would be somewhat different from 2012.
Isolated events such as completed renovations, YoY upturn for SSS, continued
control over discount stores’ operating hours (or even stricter measures put in
place) and Lotte Shopping’s takeover of Himart, will work to highlight profit
differences for each company or type of business in 2013.
Figure 2. Sales growth: Retail vs. department and Figure 3. Sales growth: Retail vs. super-supermarkets,
discount stores convenience stores and home shopping
(% YoY) (% YoY)
40 40 Retail
Retail Super-supermarkets
Convenience stores
Department stores
30 30 Home shopping
Discount stores
20 20
10 10
0 0
2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F
(10) (10)
Source: Statistics Korea, Korea Investment & Securities Source: Statistics Korea, The Yearbook of Retail Industry, Korea Investment & Securities
201
2. Key issues by retail business type

Department stores For the department stores, a changing trend for SSS growth and renovation effects
regaining SSS growth are the key points to watch. The three department stores’ (Hyundai, Shinsegae and
Lotte) SSS continued to shrink into 3Q12 due to a high base of comparison. But
growth should be restored in 2013 thanks to 1) the absence of the high base effect
in 4Q12 and onward and 2) greater floor space after renovations are completed at
branches of the three department stores. For Lotte Department Store, renovations
have been underway at major branches from 2011 through 2012. For Hyundai
Department Store, the sales area will expand 52% at the flagship COEX branch and
8% at the Apkujeong branch in Gangnam, in 2013.
Figure 5. Department stores’ basket price per

Figure 4. Department stores’ SSS growth
customer and no. of customers
(% YoY) (% YoY) Basket price per customer
20 20
Customers
15 15
10
10
5
5
0
0
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
(5)
(5)
(10)
(10) Apr-03 Oct-04 Apr-06 Oct-07 Apr-09 Oct-10 Apr-12
Source: Ministry of Knowledge Economy, Korea Investment & Securities Source: Ministry of Knowledge Economy, Korea Investment & Securities
Channel integration with In the specialty consumer electronics retail segment, Himart should gain market
Lotte Shopping to propel share. The FTC recently approved Lotte Shopping’s acquisition of Himart and the
Himart to take sole lead in effects of Himart being an integrated source of consumer electronics procurement
the specialty consumer from manufacturers will materialize beginning in 2013. Himart’s market share
electronics retail market should shrink from 12.2% in 2011 to 11.8% in 2012F as operations were hampered
amid the change to the governance structure. But In 2013F, the share should
expand to 14.6% on Lotte Shopping’s retail channel integration for consumer
electronics. As Himart will absorb consumer electronics sales from Lotte Shopping
as a dedicated distributor, the market share should increase to 20% in 2016F.
Although the domestic consumer electronics market has weak growth potential,
Himart should see both the top line and profits grow rapidly as its market
dominance strengthens on the channel integration.
202
Figure 6. Consumer electronics market vs. Himart’s

Figure 7. Himart’s market share
sales
(% YoY) (%) Himart
30 Consumer electronics market growth 25
Specialty retailer of consumer electronics ex-Himart
Himart's sales growth
Consumer electronics sales agents, shopping arcades, etc.
25 Online (TV home shopping, Internet malls, etc.)
20
Discount stores
20 Department stores
15
15
10 10
5
5
0
2010 2011 2012F 2013F 2014F 2015F 2016F
0
-5 2009 2010 2011 2012F 2013F 2014F 2015F 2016F
Home shopping weighed Home shopping’s gross sales have risen 20% per annum since 2009 and should
down by commissions; grow 15% YoY in 2013F. But commissions paid to cable system operators (SO)
Discount stores’ top line increased accordingly, up 30% YoY in 2011, 20% YoY in 2012F and 15-20% in
is stagnant 2013F. As such, the home shopping industry will expand in size but profit growth
would be limited. For discount stores, sales growth should be at a record low in
2013 hit by slow store additions and shrinking SSS. The market’s saturation and
regulatory pressure will deter growth for the domestic discount store business. Only
limited growth will be achievable on the introduction of warehouse-style stores such
as E-mart Traders and Lotte Big Mart.
Figure 8. Home shopping gross sales vs. SO

Figure 9. Discount stores’ sales growth
commissions
(% YoY) Gross sales (% YoY)
30 30
SO commissions
25 25
20 20
15 15
10 10
5 5
0 0
2008 2009 2010 2011 2012F 2013F 2001 2003 2005 2007 2009 2011 2013F
203
Earnings forecast
1. Key assumptions
Department stores’ SSS  Real economy: GDP growth 3.3%; Consumer price inflation 2.4%
growth of 4.8% YoY  Year-average FX rates: KRW1,104/USD; KRW1,100/JPY100
 Household debt: The past four-quarter average growth; 50bp drop in lending
rate
 Wealth effects: Kospi and housing price index at the monthly averages of late
2. High-street retailers’ better earnings led by Himart and

Lotte Shopping
High-street retailers’ OP Gross sales at high-street retailers should grow 17.2% YoY on average in 2013F.
to resume YoY growth OP and NP of controlling interest would increase 17.0% and 9.6%, respectively. OP
growth is particularly impressive considering the 5.9% drop in 2012F. While
discount stores should remain weak and department stores’ earnings growth be
somewhat limited, Lotte Shopping and Himart would drive overall OP growth.
For online retail, the three home shopping firms’ gross sales should continue 13.3%
YoY growth in 2013 but their profit rise be insignificant due to greater SO
commissions and bigger sales weighting of the low-margin online malls. Meanwhile,
GS Home Shopping’s (GSHS) profit growth will match its gross sales increase as
the positive effects of change in channel number will continue at least into 1H13.
Figure 10. High-street retail Figure 11. Online (home shopping) retail
(% YoY) 2012F 2013F (% YoY) 2012F 2013F

20 20
15 15
10 10
5 5
0 0
Gross sales OP NP of controlling interest Gross sales OP NP of controlling interest
(5) (5)
(10) (10)
204
Table 1. GDP growth and CPI sensitivity for department stores’ SSS growth (% YoY)
GDP growth
1.8 2.3 2.8 3.3 3.8 4.3 4.8
1.8 1.4 2.0 2.4 2.8 3.2 3.7 4.1
2.0 1.7 2.4 3.0 3.5 4.0 4.5 5.1
2.2 2.1 2.9 3.5 4.1 4.8 5.4 6.0
CPI 2.4 2.6 3.3 4.1 4.8 5.5 6.3 7.0
2.6 3.0 3.8 4.6 5.5 6.3 7.1 7.9
2.8 3.3 4.3 5.2 6.1 7.0 8.0 8.9
3.0 3.7 4.7 5.8 6.8 7.8 8.8 9.9
Note: Wealth effect from the Kospi and housing price index changes, consumption transfer from domestic to foreign due to FX rate
changes, mid-term drop in buying customers on inflation and varying consumption depending on household debt size and interest
rate changes are not factored in
205
Top picks
Finding stocks with growth from company-specific issues

Company-specific issues Among the retailers are Himart, Lotte Shopping and Hyundai Department store that
are more important than deserve closer attention in 2013. The companies have their own drivers of EPS
macro variables growth while Himart should boast the strongest EPS growth of all. GS Retail’s
profits should rise led by its convenience stores. Convenience stores is the only
retail business in Korea that remains on a structural growth path with strong
competitiveness in product development. But GS Retail’s profit growth should be a
bit slower in 2013 than in 2012. The stock looks less attractive at the current
valuation. GSHS’ earnings should rise. A bigger sales contribution from high-margin
products and change in channel number helped lift profits and should remain a
trend well into 1H13. Still, it appears the positive changes are largely priced in given
the rapid share price gains of late.
Himart (071840)
Lotte Shopping becomes With the FTC’s approval, Lotte Shopping has become Himart’s largest shareholder
the largest shareholder; and we expect Lotte Shopping’s channel integration with Himart for consumer
Gear shift to growth electronics. Himart’s gross margin is much larger than Lotte Shopping’s figure for
consumer electronics due to the ways they procure products. Himart buys direct
and carries the inventory itself, whereas Lotte Shopping collects commissions from
consumer electronics sellers housed in their stores but do not share the inventory
burden. With the channel integration, synergies should build up, such as Himart’s
tighter market grip and profit growth. Overseas market entry is also expected.
Himart will likely use Lotte Shopping’s sales network instead of making direct
inroads and should be able to fast secure economies of scale. We forecast Himart’s
gross sales to expand 24% YoY and EPS 52% YoY in 2013F. The stock trades at
11.6x 2013F PE and our TP of W95,000 equals 15.0x 2013F PE.
Figure 13. Himart’s NP pre and post acquisition by

Figure 12. Himart’s gross sales forecasts
Lotte Shopping
(W bn) (W bn)
7,000 400 Himart Himart+Lotte Shopping
Lotte's online channels
Lotte Department Store
6,000
Lotte Home Shopping 298
300
Lotte Mart
5,000 252
Himart
4,000 203
200 184
162
150
3,000 141 142
141 123
107 107 100 100
2,000 100
1,000
0
0
2010 2011 2012F 2013F 2014F 2015F 2016F
2009 2010 2011 2012F 2013F 2014F 2015F 2016F
206
Lotte Shopping (023530)

Profit growth on Gross margins should rise on consolidated accounting with Himart and integrated
consolidated accounting consumer electronics purchase. By acquiring Himart, Lotte Shopping has gained
with Himart and FX negotiating power over across-the-board manufacturers of household appliances
translation gains and a fully-equipped retail portfolio. As the KRW strengthens against the JPY, the
retailer would also enjoy the FX translation gains. We estimate the year-end
KRW/JPY at 13.19 in 2012F and 11.59 in 2013F, and accordingly, the FX translation
gains would amount to W36.6bn in 4Q12F and W48bn in 2013F. We also anticipate
a profit increase on a rally by department stores’ SSS and narrower losses at
discount stores in China. We set 2013F gross sales to grow 27% to W31.9trn and
NP of controlling interest up 14% to W1.19trn
Figure 15. Lotte Shopping’s NP of controlling interest

Figure 14. Lotte Shopping’s gross sales forecasts
pre and post acquisition of Himart
(W trn) (W bn)
50 2,000 Lotte Shopping (pre-acquisition of Himart)
Himart (pre-acquisition by Lotte Shopping)
Lotte Shopping (post-acquisition of Himart)
Lotte Shopping (post-acquisition of Himart) 1,750
40
1,500
30 1,250
1,000
20
750
500
10
250
0 0
2010 2011 2012F 2013F 2014F 2015F 2016F 2010 2011 2012F 2013F 2014F 2015F 2016F
Hyundai Department Store (069960)

Likely profit increase on In 2013, key point to watch is profit growth at the flagship COEX branch and a new
renovation of flagship store. After renovation of the COEX branch, the sales area will expand 52% and the
branch and a store resulting sales growth will materialize from 1Q13 through 3Q13 on gradual
addition merchandise changes on each floor. Sales should increase 19% YoY in 2013F and
15% YoY in 2014F. As the Chungcheong branch opened in Aug, rapid profit growth
is worthy of attention. Although the cumulative loss stood at W5bn YTD 3Q12, the
branch’s monthly operations turned to profit in Sep. The branch should contribute to
overall OP growth beginning in 2013. The company will likely boast the most rapid
profit gain among department store rivals in 2013 thanks to the uptick of department
SSS, the effects of the branch renovation and the new store’s earnings growth.
207
Risk factors
Delay for each Our retail sector strategy for 2013 is to invest in stocks with relatively high profit
company-specific issue growth, which would be achievable by issues specific to a type of business or
would be a risk to our company. Thus, risk factors to our strategy would be delayed integration of
estimates appliance purchases for Lotte Shopping and Himart, and deferred renovation and
merchandise changes for HDS. But at this point, chances are slim the risks will
materialize. We took the most conservative approach in estimating the impact of
isolated issues for each company.
Possible consumption If apparel sales surge backed by a strong consumption uptick, it would lead to
rebound and the bigger sales for overall retailers. Should this be the case, the share price upturn
KRW/JPY rise, in contrast would be the steepest at Hyundai Home Shopping and Shinsegae. Hyundai Home
to our assumptions Shopping has the biggest OPM among the three home shopping businesses
thanks to the heaviest apparel sales weighting. Shinsegae has the smallest gross
sales and OP of the top three department stores, and thus its fixed costs-to-sales is
the highest among them. Thus, when apparel sales growth works to accelerate
SSS growth, Shinsegae’s profit rise would outpace the rivals and losses at
Shinsegae’s online mall and the Uijeongbu branch be sharply reduced. And if the
KRW/JPY climbs, our estimates for Lotte Shopping’s FX translation gains will prove
to be wrong.
208
Coverage valuation
Table 2. Valuations
Lotte Shopping Recommendation BUY 2010A 19,018 1,598 1,035 35,626 451,374 13.3 1.0 8.1 7.4
(023530) TP (KRW) 460,000 2011A 22,253 1,663 932 32,084 480,875 10.6 0.7 6.9 5.0
Price (Nov 15, KRW) 335,500 2012F 24,328 1,445 1,028 35,412 514,786 9.5 0.7 7.1 5.5
Market cap. (W bn) 9,744 2013F 30,816 1,855 1,171 40,305 553,591 8.3 0.6 7.5 5.0
2014F 34,187 2,085 1,290 44,406 596,497 7.6 0.6 7.7 4.4
E-mart Recommendation Hold 2010A NM NM NM NM NM NM NM NM NM
(139480) TP (KRW) - 2011A 7,974 490 306 10,976 196,924 25.4 1.4 5.6 15.2
Price (Nov 15, KRW) 233,000 2012F 12,865 918 594 21,317 209,820 10.9 1.1 10.5 8.0
Market cap. (W bn) 6,495 2013F 14,121 1,025 676 24,261 225,660 9.6 1.0 11.1 7.0
2014F 15,461 1,159 778 27,921 245,158 8.3 1.0 11.9 5.9
Hyundai Dep. Store Recommendation BUY 2010A 1,271 392 336 17,819 90,126 7.8 1.5 17.9 8.1
(069960) TP (KRW) 187,000 2011A 1,439 450 346 15,183 106,702 10.7 1.5 15.4 8.6
Price (Nov 15, KRW) 139,500 2012F 1,624 491 366 15,876 121,689 8.8 1.1 14.0 6.1
Market cap. (W bn) 3,264 2013F 1,877 582 431 18,718 139,474 7.5 1.0 14.4 4.9
2014F 2,134 663 489 21,242 159,743 6.6 0.9 14.2 4.0
GS Retail Recommendation Hold 2010A 3,280 95 442 1,149 17,877 0.0 0.0 32.1 2.1
(007070) TP (KRW) - 2011A 3,982 103 94 1,213 18,574 19.1 1.2 6.7 11.7
Price (Nov 15, KRW) 30,400 2012F 4,572 157 128 1,660 19,933 18.3 1.5 8.6 10.4
Market cap. (W bn) 2,340 2013F 5,245 184 154 1,995 21,628 15.2 1.4 9.6 8.7
2014F 6,000 215 176 2,285 23,613 13.3 1.3 10.1 7.4
Shinsegae Recommendation BUY 2010A 1,868 239 1,087 57,658 386,259 5.3 0.8 18.6 41.9
(004170) TP (KRW) 300,000 2011A 2,185 268 3,502 184,581 199,903 1.3 1.2 75.7 8.3
Price (Nov 15, KRW) 204,500 2012F 2,455 287 212 21,574 220,709 9.5 0.9 10.3 7.1
Market cap. (W bn) 2,013 2013F 2,820 344 254 25,866 245,803 7.9 0.8 11.1 6.2
2014F 3,196 410 304 30,863 275,890 6.6 0.7 11.8 5.4
HImart Recommendation BUY 2010A 3,052 215 107 10,225 52,289 0.0 0.0 13.0 4.6
(071840) TP (KRW) 95,000 2011A 3,411 259 141 6,855 60,485 11.8 1.3 11.6 8.8
Price (Nov 15, KRW) 72,300 2012F 3,332 190 100 4,221 63,826 17.1 1.1 6.8 9.4
Market cap. (W bn) 1,706 2013F 4,142 253 150 6,365 69,311 11.4 1.0 9.6 7.0
2014F 4,889 316 203 8,585 77,016 8.4 0.9 11.7 5.3
CJ O Shopping Recommendation BUY 2010A 711 122 93 10,222 59,410 22.6 3.9 20.6 11.3
(035760) TP (KRW) 280,000 2011A 895 132 112 18,698 80,261 13.8 3.2 27.0 12.4
Price (Nov 15, KRW) 246,500 2012F 1,005 130 88 14,631 93,363 16.8 2.6 16.7 11.3
Market cap. (W bn) 1,529 2013F 1,114 135 94 15,690 106,725 15.7 2.3 15.5 10.8
2014F 1,257 147 103 17,157 121,146 14.4 2.0 14.9 9.9
Hyundai Home Recommendation Hold 2010A 581 132 113 11,450 58,756 9.0 1.7 22.1 3.7
Shopping (057050) TP (KRW) - 2011A 711 152 142 11,874 69,374 11.2 1.9 18.5 4.7
Price (Nov 15, KRW) 125,500 2012F 771 154 143 11,923 80,196 10.5 1.6 15.9 3.1
Market cap. (W bn) 1,506 2013F 859 164 152 12,669 91,766 9.9 1.4 14.7 2.3
2014F 988 189 173 14,412 105,078 8.7 1.2 14.6 1.3
GS home Shopping Recommendation Hold 2010A 792 117 77 12,156 67,561 9.0 1.6 19.6 5.3
(028150) TP (KRW) - 2011A 906 106 202 32,164 94,521 3.6 1.2 39.2 3.8
Price (Nov 15, KRW) 150,000 2012F 1,077 97 85 13,399 104,642 11.2 1.4 13.3 3.6
Market cap. (W bn) 984 2013F 1,185 103 87 13,749 114,971 10.9 1.3 12.4 3.2
2014F 1,279 107 91 14,400 125,930 10.4 1.2 11.8 2.9
209
Food, Beverages & Tobacco

Time for re-rating as growth plays
F&B companies to regain pricing power

Overweight Food & beverages (F&B) shares that have pulled back since 2008 due to
product price regulations are beginning to turn around. First, with stronger
▶ Top picks pricing power, expectations for better domestic operations have
heightened. From Mar 2011 until recently, not only foodstuff prices but
KT&G (033780, BUY, TP W92,000) those for beverages, confectioneries, processed convenience foods,
2012F 2013F 2014F ramen and beer were raised in step in Korea. The overall price rises are
PE (x) 12.5 11.2 10.2 perceived as a sign of pricing power recovery at F&B companies as
PB (x) 2.0 1.9 1.7 materials prices remained stable. We expect the companies to have more
EV/EBITDA (x) 7.7 6.8 6.0 autonomy in setting product prices as price upside has been much slower
EPS (KRW) 6,583 7,375 8,030 in Korea than in other countries and the policy of containing price hikes
BPS (KRW) 40,476 44,300 48,724 has its own side effects. The restoration of pricing power should lift
 ASP may rise upon a cigarette tax earnings estimates and strengthen earnings stability, ultimately serving as
increase a critical catalyst for an upward re-rating in shares.
 May lift ASP on its own given the limited
market share erosion
 2013F PE more than 30% undervalued Share performances vary reflecting overseas business
compared to peers
Second, overseas expansion has helped restore investors’ confidence in
Orion (001800, BUY, TP W1,230,000)
growth. Orion is one of the most successful domestic F&B companies in
the overseas market. Orion established a foothold in China ahead of
2012F 2013F 2014F
others by 1) overcoming capital competition with niche products, 2)
PE (x) 32.0 25.2 18.9
boasting advanced technology that competes on a global scale and 3)
PB (x) 6.0 5.0 4.1
localizing products and marketing strategies. Korean F&B firms have
EV/EBITDA (x) 16.2 13.8 10.8
advantages in Asia given a similar food culture and geographical proximity.
EPS (KRW) 33,646 42,684 56,884
Companies with overseas production base, strategy to strengthen brand
BPS (KRW) 178,301 214,660 263,355
equity, and a wide distribution network will become the next Orion.
 Advanced in technology and localization
compared to peers, including those in China
 Profitability to improve on expanded product Top picks: KT&G and Orion
mix and a smaller marketing cost burden
 EPS CAGR of 36.4% for the coming two
With a cigarette tax hike slated for 2013, KT&G should be able to raise the
years, the fastest among peers ASP of some products as the price gap with competing products widens. In
fact, partial ASP hikes are likely even without higher taxes. As KT&G is the
last competitor to raise prices, the burden on sales should be limited. If
▶ 12M sector performance ASP per pack rises W50, 2013 PE should be 40% lower than global peers.
(p) (%p)
As for Orion, rapid growth should continue on its competitiveness in China
5,000 Rel.to KOSPI (%p, RHS)
Tobacco sector index (p, LHS )
30
and Vietnam and coverage expansion inland and at retail shops. The
4,000 20
3,000 10
confectioner should post a two-year forward EPS CAGR of 29.2%, the
2,000 0
fastest among peers.
1,000 -10
0 -20 Figure 1. Sector index on the rise since the product price rise
Kyoung Ju Lee
822-3276-6269
kjlee@truefriend.com
Eunkyung Lee
822-3276-6194
ek.lee@truefrien.com Source: Korea Investment & Securities
210
1. Pricing power recovers

Product price hikes from We believe there are two reasons F&B shares have re-rated recently. First, with
2011 fuels upward F&B firms’ stronger pricing power, expectations for better domestic conditions have
momentum in F&B sector firmed. The sector’s market cap share in the Kospi fell from the average 2.5% in
index 2001-2008 to 1.5% in 2010 due to the government pricing regulations (e.g.,
containing price inflation). But in tandem with the price hikes from 2Q11, F&B
shares began to rally. From Mar to Nov 2011, the prices for sugar, flour, beverages,
confectioneries, processed food (tofu, seasoning) and ramen (Nongshim) were
raised. Also from Jul 2012 until recently, the prices for beer, processed food
(seasoning, cooked rice hetbahn), ramen (excl. Nongshim) and confectioneries
(excluded from the hikes in 2011) were lifted. The overall price rises are perceived
as a sign of pricing power returning to F&B companies as materials prices remained
stable. The restoration of pricing power should lift earnings estimates and
strengthen earnings stability, ultimately serving as the most critical catalyst for the
re-rating of shares.
Figure 2. Product price rises lead to better profitability and sector performance
(W '000/tonne) (index)
160 F&B index climbs as prices are lifted while grain 4,000
prices remain flat
140 3,500
120 3,000
100 2,500
80 2,000
Grain margin
60 1,500
Food & bev erage index (RHS)
40 1,000
2006 2007 2008 2009 2010 2011 2012 2013 F
Source: Bloomberg, Korea Investment & Securities
Table 1. Major product price rises (since 2011) Figure 3. Slower food price rises in Korea
Item Timeframe Company Price rises
(Jan 2009=100)
Sugar Mar 2011 CJ CheilJedang 9.8% (factory price) 250
Flour Apr 2011 Donga One 8.6%
Soybean oil May 2011 CJ CheilJedang 6.8%
Dashida May 2011 CJ CheilJedang 5.0% 200
Dashida Jul 2012 CJ CheilJedang 8.0%
Tofu Dec 2010 Pulmuone 20.5%
Tofu Nov 2011 Pulmuone 7.0% 150
Hetbahn Jul 2012 CJ CheilJedang 9.4%

Spam May 2011 CJ CheilJedang 13.0%
100
Ramen Nov 2011 Nongshim 6.2%
Ramen Aug 2012 Paldo 6.2% Global food index
Ramen Aug 2012 Samyang Foods 10.0% Global sugar index
50
Choco Pie Aug 2012 Orion 25.0% Korea food index
Banana-flavored milk May 2011 Binggrae 7.4% (factory price) Korea sugar index
Banana-flavored milk Nov 2011 Binggrae 8.6% (factory price) 0
Beer Jul 2012 Hite Jinro 5.9% Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Beer Aug 2012 OB Brewery 5.9%
Source: Press report, Korea Investment & Securities Source: FAO, Korea Investment & Securities
211
Softer price regulations We expect pro-low income class policy trends to firm in 2013, the early phase of the
to bolster sector rally new administration. But, we expect F&B companies to have more autonomy in
setting product prices going forward, as: 1) price upside has been much slower in
Korea than in other countries, providing a rationale for a further inflation, and 2) the
side effects of the price controls, such as poorer quality and weaker investments,
are starting to appear. Given the rise in grain prices since end-2Q12, the raw
material input price for F&B companies is likely to rise in early 2013. We expect
product prices to be raised again at that time, after the presidential election, which
would offset the cost burden and improve the profit structure. The price rises so far
alone cannot help the companies return to pre-2008 profitability levels. Moreover,
the call to contain product prices is losing merit due to the reasons mentioned
above. Given F&B companies’ stronger pricing power, the sector rally should
continue for the time being.
Table 2. Correlation coefficient between grain price index and food prices
2000 to present 2007 to present In 2012
Grain price index and global food prices 0.98 0.94 0.73
Grain price index and Korea’s food prices 0.90 0.73 0.33
Source: Bloomberg, FAO, Korea Investment & Securities
2. Overseas advance bearing fruits

Aggressively going Second, a re-rating is expected on rising confidence in growth momentum coming
abroad to tackle limited from overseas expansion. Korean F&B firms have aggressively tapped markets
growth and regulatory abroad as a way to overcome limited volume growth and regulatory pressure at
pressure at home home, and such efforts are recently bearing fruits. In particular, bigger sales in
China is considered essential for Korean F&B firms to grow given the market’s
strong potential, similar food culture and geographical proximity.
Orion should continue Orion, one of the most successful domestic F&B companies in the overseas market,
with ~20% top-line growth should post sales and OP CAGR of 23.4% and 34.6%, respectively, over the next
overseas thanks to two years. By market, Orion’s top-line CAGR is estimated at 24.1% in China, 23.0%
strong brand power and in Vietnam and 15.0% in Russia. For its China business, sales should equal 164%
market expansion of domestic sales in 2014F, up from 123% in 2012F. China OP should equal 179%
of the domestic figure, up from 140%. Growing business in China is attributed to the
Western confections market already in a growth stage and the market share gains
backed by category expansion effects built on its leading brand position. In
particular, Orion’s market share growth has been achieved thanks to a mix of
reasons, including 1) successful niche items that allowed it to overcome capital
competition and gain a foothold there ahead of others, 2) its advanced technology
competing on a global scale and 3) localization of products and marketing
strategies. Orion’s competitive edge should remain intact and this same
combination of factors should continue to drive its growth in Vietnam as well.
Overseas investment will Expectations are also great for other F&B companies’ overseas business, including
deliver different in China. For Binggrae and Maeil Dairies, sales in China should be less than 2% of
outcomes depending on total sales in 2012 but the percentages jumped 87.5% and 85.4%, respectively, at
brand equity and sales end-2H12 compared to end-1H12. At end-2H12 when news reached the stock
network expansion market of their growing exports to China, investors who witnessed Orion’s success
started to reel in shares of the two companies. Cultural and geographical proximity
to China and broader Asia are advantages for Korean F&B firms. But it will take
more than that for their shares to continue to gain after sharp rises. In the food
business, it is extremely important to have a local manufacturing base for
sustainable sales growth. Moreover, companies need to make efforts to 1) build up
brand equity and fend off competition from global makers and 2) add customers
amid the complex and closed distribution structure.
212
Coca-Cola and AB InBev For example, Coca-Cola and AB InBev saw profitability growth and share price
cases indicate gains after successful overseas expansion. The overseas advance ensured them a
“globalization” is a greater chance of sales growth, low-cost raw materials sourcing and less
catalyst for share prices manufacturing costs. A combination of strong brand power and localization efforts
has helped prop up their enterprise values.
Figure 4. Coca-Cola’s domestic and overseas sales Figure 5. Coca-Cola’s overseas expansion and PE rise
(USD mn) Domestic Sales Overseas Sales (USD) 35.0x 30.0x
50000 50
Enters new North American sales grow from 25.0x
45000 45
countries such as acquisition of US bottlers such as
20.0x
40000 East Germany in Coca-Cola Enterprises 40
35000 '90, re-enter India in Overseas sales 35
'93 growth of 23.5% YoY
30000 30
Overseas sales exceed
25000 double domestic sales 25
15.0x
20000 20
15000 15
10000 10
5000 5
0 0 1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
1991
1995
1999
2003
2007
2011
Source: Coca-Cola, Bloomberg, Korea Investment & Securities Source: Bloomberg, Korea Investment & Securities
Figure 6. AB InBev’s domestic and overseas sales Figure 7. AB InBev’s overseas expansion and PE rise
(EUR mn) Domestic Sales Overseas Sales (EUR)
30000 100 26.0x 22.0x
Merger of lnBev and Anheuser- 90
25000 Busch
80
Overseas sales exceed 18.0x
20000 double domestic sales 70
Enters China
60
and Latin 14.0x
15000 America 50
40
10.0x
10000
30
20
5000
10
0 0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: AB InBev, Bloomberg, Korea Investment & Securities Source: Bloomberg, Korea Investment & Securities
Figure 8. Nongshim’s stock price closely follows FCF Figure 9. Orion’s stock price pushed by overseas sales
(W bn) (KRW) (KRW)
140 FCF Share price (RHS) 270000 60% 600000
% of overseas sales Share price (RHS)
120
260000
50% 500000
100
250000
80 40% 400000
60 240000
30% 300000
40 230000
20 20% 200000
220000
0
10% 100000
210000
-20
-40 200000 0% 0
2006 2007 2008 2009 2010 2011 2006 2007 2008 2009 2010 2011
213
Earnings forecast
1. Key assumptions
Operating environment to  Real economy: 2013F GDP growth at 3.3%
improve on lower grain  FX rates: 2013F average KRW/USD at W1,058, end-2013F at W1,020
prices and higher product
 2013F raw material prices (YoY basis): wheat (-5.8%), corn (+7.4%),
prices
soybean (+0.3%), raw sugar (-6.8%)
 2013F product prices (YoY basis): flour (0%), sugar (-5.6%), ramen (+3.9%),
tobacco (+4.2%), confections/ice cream (+4.5%), beer (+3.4%)
2. 2013F NP to gain 26% YoY

F&B sector’s NP to gain We estimate the KIS Universe F&B sector’s NP will grow 25.9% YoY in 2013F,
26% YoY in 2013F which would be similar to the KIS Universe average of 24.0%. Most F&B companies
should deliver better earnings thanks to either higher product prices or a greater
weighting of premium products and reduced raw material cost burden. Orion should
post the biggest adjusted NP growth at 32.4% YoY, followed by CJCJ at 29.1% YoY.
Orion’s earnings should be largely driven by growth in China and Vietnam, while
CJCJ should benefit from the turnaround at its domestic food business and lysine
capacity additions. For KT&G, earnings will have room for additional growth if
tobacco prices are raised, while Nongshim should deliver strong profit growth
backed by a greater weighting of premium products and improving market share.
Figure 10. 2013F OP and adjusted NP growth by F&B company
(YoY) OP growth Adj NP growth

35%
30%
25%
20%
15%
10%
5%
0%
KT&G CJ Nongshim Lotte Binggrae Orion
CheilJedang Conf ectionery
214
Table 3. EPS sensitivity to changes in KT&G’s tobacco ASP and market share (KRW/pack)
ASP 672.6 686.3 693.1 696.6 720.6 768.6 823.5 850.8 892.2
ASP increase/decrease -13.7 0.0 6.9 10.3 34.3 82.3 137.3 164.6 205.9
ASP chg. -2.0% 0.0% 1.0% 1.5% 5.0% 12.0% 20.0% 24.0% 30.0%
57.9% -4.0%p -11.5% -9.0% -7.7% -7.0% -2.5% 6.6% 17.0% 22.1% 29.9%
59.9% -2.0%p -7.2% -4.5% -3.1% -2.5% 2.2% 11.6% 22.3% 27.7% 35.7%
60.9% -1.0%p -5.0% -2.2% -0.9% -0.2% 4.6% 14.1% 25.0% 30.4% 38.6%
61.9% Market 0.0%p -2.8% 0.0% 1.4% 2.1% 6.9% 16.6% 27.7% 33.2% 41.6%
Market
62.9% share 1.0%p -0.6% 2.2% 3.6% 4.3% 9.3% 19.1% 30.4% 36.0% 44.5%
share
63.9% chg. 2.0%p 1.6% 4.5% 5.9% 6.6% 11.6% 21.6% 33.1% 38.8% 47.4%
64.9% 3.0%p 3.8% 6.7% 8.2% 8.9% 14.0% 24.1% 35.8% 41.5% 50.3%
66.9% 5.0%p 8.2% 11.2% 12.7% 13.4% 18.7% 29.1% 41.1% 47.1% 56.1%
71.9% 10.0%p 19.2% 22.4% 24.0% 24.8% 30.4% 41.7% 54.6% 61.0% 70.6%
Note: Based on 2012F EPS W6,583
Table 4. EPS sensitivity to changes in Nongshim’s ramen ASP and flour prices
Changes in domestic ramen ASP
-5.0% 0.0% 1.0% 3.0% 6.2% 7.8% 10.0%
-12.0% -23.8% 15.2% 23.0% 38.7% 63.6% 76.1% 93.3%
-4.0% -33.9% 5.1% 12.9% 28.5% 53.5% 66.0% 83.2%
Changes in 0.0% -39.0% 0.0% 7.9% 23.5% 48.5% 60.9% 78.1%
flour prices 1.0% -40.3% -1.2% 6.6% 22.2% 47.2% 59.7% 76.9%
5.0% -45.3% -6.3% 1.5% 17.1% 42.1% 54.6% 71.8%
11.0% -52.9% -13.9% -6.1% 9.5% 34.5% 47.0% 64.2%
20.0% -64.3% -25.3% -17.5% -1.8% 23.1% 35.6% 52.8%
Note: Assuming no adjustment for material costs and no promotional cost increase if ramen ASP goes up
Table 5. EPS sensitivity to changes in CJCJ’s grain prices

Changes in product prices
-8.0% -6.0% -4.0% -2.0% 0.0% 1.0% 4.0% 7.0% 10.0%
-8.0% -12.8% -5.8% 1.2% 8.2% 15.2% 18.7% 29.2% 39.7% 50.2%
-6.0% -16.6% -9.6% -2.6% 4.4% 11.4% 14.9% 25.4% 35.9% 46.4%
-4.0% -20.4% -13.4% -6.4% 0.6% 7.6% 11.1% 21.6% 32.1% 42.6%
Changes in -2.0% -24.2% -17.2% -10.2% -3.2% 3.8% 7.3% 17.8% 28.3% 38.8%
flour prices 0.0% -28.0% -21.0% -14.0% -7.0% 0.0% 3.5% 14.0% 24.5% 35.0%
1.0% -29.9% -22.9% -15.9% -8.9% -1.9% 1.6% 12.1% 22.6% 33.1%
4.0% -35.6% -28.6% -21.6% -14.6% -7.6% -4.1% 6.4% 16.9% 27.4%
7.0% -41.3% -34.3% -27.3% -20.3% -13.3% -9.8% 0.7% 11.2% 21.7%
10.0% -47.1% -40.1% -33.1% -26.1% -19.1% -15.6% -5.1% 5.4% 15.9%
Figure 11. EPS sensitivity to FX rate changes by F&B company

(%)
2.0%
% change in EPS f or ev ery W10 drop in KRW/USD
1.5%
1.0%
0.5%
0.0%
-0.5%
KT&G Binggrae CJ Lotte Orion Nongshim
CheilJedang Conf ectionery
Note: For Binggrae and other processed food providers, domestically purchased foodstuffs are also considered exposed to FX rate
changes; EPS chg. is based on EPS that excludes FX-related profits/losses
215
Top picks
KT&G (033780)
Attractive valuations & In 2013, KT&G should post EPS growth of 12.0% YoY. We plan to revise up our
possible ASP increase forecast if the company raises existing product prices. We believe tax hikes would
be optimal in early-2013 given relative public enthusiasm during the early stages of
the new presidency. Based on earlier cases, manufactured product ASP tends to
rise, in line with higher taxes. KT&G will likely lift the ASP of some products, even if
taxes are not raised, as the company has secured more market share by leaving
prices flat. For every W10 ASP hike per pack, consolidated EPS would grow 2.1%.
With a W200 hike (similar to peers), EPS would surge 33.4%. As KT&G is the last
competitor to raise prices, sales erosion from higher prices should be negligible. If
ASP per pack rises an average W50, consolidated EPS would grow 10.2% and
2013 PE should slip to 10x, a 40% discount to global peers.
Orion (001800)
Limited impact from Orion’s high share price is attributed to its non-cyclical products and overseas
overseas conditions, competitiveness, including China. The confectioner’s market share should steadily
rapid overseas growth to grow backed by its strengths compared to local and multi-national firms. Compared
continue in 2013 to locals, Orion boasts an edge in manufacturing technologies. The company
produces diverse confectionery products, ranging from moon pies to gums and has
world-class technology for potato chips, for which the entry barrier is high.
Compared to global peers, Orion is more advanced in terms of localization. Since
the initial period, Orion has focused on localizing marketing and Chinese nationals
comprise the majority of the Chinese subsidiary, including operational and
managerial staff. Such efforts serve as a stepping stone for the company to build
strong brand recognition with a humble capital position. Orion’s fast growth should
continue with sales further expanded inland and greater sales coverage in the
existing business areas, including retail shops. Backed by fast overseas growth,
including China and Vietnam, Orion should post the fastest EPS growth (CAGR
36.4% over the coming two years) among global peers whose combined EPS
growth is forecast at 13.9% on average over the same period.
Risk factors
External variables to F&B earnings are sensitive to changes in FX rates and global grain prices. For
earnings include grain grain importers like CJCJ, a 1% rise in grain material costs would trim EPS by 2% if
prices and KRW/USD product prices do not go up. Demand conditions in China also affect the overseas
earnings of F&B companies. But, we believe the growth potential of China’s food
sector will remain largely unchanged compared to the country’s other domestic
demand-driven sectors. The reason is food products are essential consumer goods
and in particular, China’s processed food market will continue to expand due to
lifestyle changes fueled by the ongoing urbanization. Of note, while processed food
represents more than 80% of the overall food market in Korea and advanced
countries, it only has about a 40% weighting in China.
216
Coverage valuation
Table 6. Valuations
Sales OP EBIT NP EPS Chg. EBITDA PE EV/EBITDA PB ROE
(W bn) (W bn) (W bn) (W bn) (KRW) (%) (W bn) (x) (x) (x) (%)
Nongshim Recommendation BUY 2010A 2,083 163 184 140 24,168 9.7 232 8.4 3.1 0.8 10.5
004370 TP (KRW) 330,000 2011A 2,171 116 128 84 14,662 (39.3) 191 15.9 4.9 0.9 5.8
Price (Nov 15, KRW) 251,500 2012F 2,296 126 38 1 159 (98.9) 205 1,581.4 5.3 1.0 0.1
Market cap. (W bn) 1,530 2013F 2,431 161 183 138 23,814 14,873.8 240 10.6 4.2 0.9 9.1
2014F 2,614 194 221 167 28,943 21.5 273 8.7 3.3 0.9 10.3
KT&G Recommendation BUY 2010A 3,461 1,140 1,406 1,031 8,109 22.3 1,289 8.0 6.0 1.9 24.2
033780 TP (KRW) 92,000 2011A 3,723 1,121 1,161 817 6,451 (20.4) 1,278 12.6 8.0 2.2 17.5
Price (Nov 15, KRW) 82,300 2012F 4,029 1,165 1,187 836 6,583 2.0 1,304 12.5 7.7 2.0 16.6
Market cap. (W bn) 11,299 2013F 4,313 1,293 1,323 937 7,375 12.0 1,436 11.2 6.8 1.9 16.9
2014F 4,629 1,407 1,444 1,020 8,030 8.9 1,557 10.2 6.0 1.7 16.7
CJCJ Recommendation BUY 2010A 5,778 453 908 660 47,314 133.0 601 4.6 6.9 1.1 29.3
097950 TP (KRW) 390,000 2011A 6,538 454 461 314 21,854 (53.8) 635 13.2 15.2 1.4 11.2
Price (Nov 15, KRW) 335,000 2012F 10,098 663 580 383 21,414 (2.0) 934 15.6 11.1 1.5 10.2
Market cap. (W bn) 4,471 2013F 11,127 798 706 468 27,648 29.1 1,105 12.1 9.6 1.3 11.7
2014F 12,426 960 884 590 36,484 32.0 1,297 9.2 8.3 1.2 13.5
Lotte
Recommendation BUY 2010A 1,651 171 131 94 66,461 (3.3) 228 22.7 10.3 0.8 3.7
Confectionery
004990 TP (KRW) 2,000,000 2011A 1,854 179 158 100 69,402 4.4 249 24.6 10.5 1.0 3.8
Price (Nov 15, KRW) 1,460,000 2012F 2,062 214 187 139 95,828 38.1 287 15.2 8.0 0.8 5.4
Market cap. (W bn) 2,075 2013F 2,235 243 221 164 113,270 18.2 318 12.9 7.0 0.8 6.4
2014F 2,411 276 260 192 132,843 17.3 351 11.0 6.2 0.8 7.6
Orion Recommendation BUY 2010A 1,595 338 304 196 37,270 924.5 423 10.4 6.6 2.9 31.9
001800 TP (KRW) 1,230,000 2011A 1,914 210 176 99 18,908 (49.3) 320 35.9 14.2 4.5 12.0
Price (Nov 15, KRW) 1,058,000 2012F 2,350 302 274 177 33,646 77.9 428 32.0 16.2 6.0 18.4
Market cap. (W bn) 6,312 2013F 2,663 370 344 224 42,684 26.9 500 25.2 13.8 5.0 19.4
2014F 3,124 476 453 299 56,884 33.3 635 18.9 10.8 4.1 21.2
Binggrae Recommendation Hold 2010A 685 65 65 50 5,658 1.7 83 8.9 4.0 1.3 14.2
005180 TP (KRW) N/A 2011A 721 50 52 40 4,513 (20.2) 70 13.6 6.6 1.5 10.4
Price (Nov 15, KRW) 125,500 2012F 804 67 67 51 5,821 29.0 88 21.6 12.3 2.7 12.4
Market cap. (W bn) 1,236 2013F 862 77 77 59 6,699 15.1 99 18.7 10.7 2.5 13.0
2014F 928 84 85 65 7,377 10.1 107 17.0 9.5 2.2 12.9
217
Pharmaceuticals
Re-rating just begun, unafraid of low-growth era
Concern about short-term surge but should re-rate long-term

Overweight As the regulatory risk peaked, mounting expectations for a turnaround has
driven up the sector’s PE to the past average. While pharmaceutical
stocks are no longer a bargain, there is significant potential for their
▶ Top picks re-rating from a mid/long-term perspective. While Japan’s pharmaceutical
Green Cross (006280, BUY, TP W191,000) sector shares a similar structure with Korea, its development in the 1990s
suggests Korea’s industry still harbors sufficient structural growth potential,
2012F 2013F 2014F
given advances on overseas markets via new drug development, industrial
PE (x) 22.9 15.7 12.3
shuffling and potential growth for the domestic market with an aging
PB (x) 2.3 2.1 1.8
society. Also attractive is the industry’s guaranteed growth potential during
EV/EBITDA (x) 11.0 7.9 6.5
the upcoming low-growth era. Our top pick is Green Cross on solid
EPS (KRW) 6,711 9,806 12,439
overseas exports momentum and Yuhan Corp. is also favored given its
BPS (KRW) 66,279 74,189 84,727 active pharmaceutical ingredient potential and attractive valuation.
 Re-rating to be justified given its overseas
market entry looking most probable among
peers Overseas market potential to materialize
 Exports of multi-dose flu vaccine to expand Korean pharmaceuticals’ new drug pipeline and efforts to join overseas
with WHO’s PQ approval
 Phase 3 clinical trials for two plasma markets should come to fruition after spurring expectations for the last five
derivatives to complete years. We are holding our breath for three major events. 1) Green Cross’
completion of phase 3 clinical trials for intravenous immunoglobulin (IVIG)
Yuhan Corp. (000100, BUY, TP W181,000) and a recombinant hemophilia treatment called GreenGene F. 2) Dong-A
2012F 2013F 2014F Pharm’s completion of phase 3 clinical trials for anti-super-bacterial drugs.
PE (x) 21.5 13.9 11.2 3) LG Life Sciences’ global license-out of dipeptidyl peptidase-4 (DPP-4)
PB (x) 1.6 1.5 1.3 inhibitor, a diabetes treatment. Korea should seize an opportunity
EV/EBITDA (x) 21.5 13.9 11.2 presented by the global pharmaceuticals trend of modified and low-priced
EPS (KRW) 8,417 13,060 16,134 drugs, which are Korea’s forte.
BPS (KRW) 112,334 122,408 134,614
 Drawing attention as API exports become the Industrial shuffling a “rite of passage” for modernization
market’s buzzword; Valuation revisited Industrial consolidation is an inevitable “rite of passage” for Korea’s
 Robust 2013 earnings rally expected given new
lucrative products
pharmaceuticals industry that is far less modernized than other countries
 Attractive valuation (2013F ex-cash PE 11x) in terms of competition and industrial concentration. The time of easy
growth, which allowed all participants to benefit from the market’s growth
without sharpening their competitive edges, has ended. And intensive
▶ 12M sector performance regulatory reforms of late should give an impetus in 2013 to the industry’s
so far sluggish restructuring. In the process, top-tier firms and
5,000
Pharmaceuticals sector index (p, LHS )
30
small/midsize firms with unique strengths should expand their market
4,000 20
shares and achieve economies of scale.
3,000 10
2,000 0
Figure 1. Market growth and OP growth of pharmaceuticals: A
1,000 -10
0 -20
turnaround after bottoming in 2012
(% Y oY ) OP growth (LHS) (% Y oY )
80 16
Domestics drug market growth (RHS) 14
60
12
40
10
20 8
Jung-In Lee
822-3276-6239 6
0
jilee@truefriend.com 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F 4
(20)
2
Sangeun Lee
822-3276-6196 (40) 0
sangeun.lee@truefriend.com
Source: IMS, Korea Investment & Securities
218
1. Glimpse of hope from Japan’s example

The development path taken by the Japanese pharmaceuticals industry in the
1990s suggests a hopeful note of potential structural growth for Korea’s industry
such as domestic market expansion driven by an aging population, industrial
shuffling and overseas market entry via new drug development.
Japan-like structural The Japanese pharmaceuticals industry does not present the future of Korea’s
growth potential industry or the solution Korea must employ. However, for a sharper competitive
edge and better top line and profitability, Korean firms need breakthroughs such as
1) economies of scale and specialization at large companies, 2) new drug
development and 3) exports. Such solutions are not much different from those
adopted by Japanese firms to overcome the country’s low-growth era and drug
price cuts to achieve remarkable growth. Thus, Korea’s pharmaceuticals industry
will likely evolve into a structure that is not exactly the same but similar to Japan. In
an environment that outlaws rebate-dependent generics sales, less competitive
small and midsize firms will go out of business in line with market principles.
Equipped with a solid capital position, brand power and new drug development
capacity, top-tier pharmaceuticals will strengthen their market dominance. Recently,
Korean companies have signed export contracts for in-house developed specialty
and incrementally modified drugs. As such, the weighting of exports to total sales at
top-tier Korean firms should clearly expand in two to three years.
Figure 2. Japan’s pharmaceuticals index: Adopted dual punishment for rebates in

1984  industrial consolidation  global new drug development and M&A
(pt) Topix
3,500
Pharma Economic Overseas expansion
slump (global M&A, license-
3,000
1. M&A between out, etc.)
2,500 domestic players
2. Global new drug
2,000 Japan stock development
market boom
1,500 in 1980s
1,000
Market consolidation
500 Drug price cuts, dual favored top-tier firms
punishment for rebates
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
2. New drugs pipeline and overseas potential to realize

Re-rating potential on After two rallies in May-Jul and Sep-Oct, the pharmaceuticals sector PE has bottomed
new drugs pipeline and out and recovered the past average. If Korean pharmaceuticals’ new drugs pipeline and
full-bore advance on potential overseas market entry materialize from end-2012, the stocks could re-rate
overseas market further in the long-term. Historically, a new drugs pipeline is the most important factor
for a share price rise as it more than offsets regulatory risks. It was also the driving force
for a market cap surge (three to five-fold compared to the 1980s) enjoyed in the
tumultuous 1990s by Japanese pharmaceutical leaders such as Takeda.
219
We are now holding our breath for three new drugs. 1) Green Cross’ successful
completion of phase 3 clinical trials for IVIG and a recombinant hemophilia treatment
called GreenGene F. 2) Dong-A Pharm’s completion of phase 3 clinical trials for
anti-super-bacterial drugs. 3) LG Life Sciences’ global license-out of DPP-4 inhibitor
(a diabetes treatment approved in Korea in Jun 2012). Potential events overseas
include 1) Yuhan Corp.’s sales visibility for a new blockbuster active pharmaceutical
ingredient (API), 2) the likelihood of releasing hypertension incrementally modified
drug (IMD) Amosartan, co-marketed by Hanmi Pharm and Merck, in global markets
and 3) Green Cross’ greater exports of flu vaccines after passing the World Health
Organization’s (WHO) single/multi-dose prequalification (PQ).
Aside from conventional drugs, clinical trials and commercialization of

biopharmaceuticals could also assist the industry’s re-rating. A series of events are
in store such as 1) Gemvax & Kael’s completion of phase 3 clinical trials for a
pancreatic cancer drug in the UK, 2) HanAll BioPharma’s global license-out of
Hanferon (Pegasys bio-better, hepatitis C therapy), 3) Seegene’s global license-out
of molecular diagnostic platform technology and 4) the European Medicines
Agency giving approval for Celltrion’s Remicade biosimilar.
1) Encouragement for Of course, some are skeptical about the possibility of Korean firms succeeding in
low-priced drugs and 2) new drug development and joining the global market, citing their not very
global trend of specialty competitive source technology compared to Japanese firms in the mid-1990s.
However, Korean firms are aiming at “niche-busters” such as recombinant therapy,
drugs and modification
IMD and biopharmaceuticals (e.g., biosimilars, vaccines, plasma derivatives, etc.),
technology present an
not chemical-based treatments for chronic diseases such as hypertension or
opportunity for Korea hyperlipidemia where developed-nation drug companies dominate. Korean firms
clearly stand a chance of victory given the less intense niche markets and their
competitive edge in technology. Moreover, two major streams of worldwide medical
reform are giving more people health insurance coverage and promoting the use of
low-priced drugs (IMD and generics). Such a trend is clearly an opportunity for
technology and price-competitive Korean firms. In addition, the firms seek to
penetrate overseas markets by licensing out their drugs in the mid-phase of clinical
trials to global pharmaceuticals. Such a strategy helps Korean pharmaceuticals
overcome their inferiority in terms of know-how in overseas clinical trials, capital
position and overseas distribution channels. Thus, Korean firms with such a
strategy stand an even better chance to succeed in new drug development and
going global.
We identified two notable factors from when Japan’s pharmaceuticals industry

experienced structural shifts.
1) Advancing on We no longer live in the 1980s or 1990s when blockbuster drugs were easily
overseas markets developed along with emerging chronic diseases. Today, pharmaceuticals must focus
on the specialty and commodity markets to enter global markets. Japanese drug
makers too are conducting joint research or pursuing M&As with small and midsize
venture companies to enter these long-neglected markets as new growth engines.
1) Specialty drugs: Green Cross

2) IMD: Top-tiers including Hanmi Pharm, HanAll BioPharma for bio-betters
2) Pharmaceutical ODM: Since 2000, large Japanese firms aggressively expanded their outsourcing
Kolmar Korea businesses. It has become a general trend for pharmaceuticals to adequately
harness internal and external resources not simply to cut costs but to optimize their
limited resources in every step of research (ventures and research institutes
220
including universities)  development (contract research organization) 

production (contract manufacturing organization)  distribution (contract sales
organization). Some large Japanese firms have spun-off or sold their manufacturing
divisions and closed some of their plants in the process of consolidating facilities.
Using Japan’s example, Kolmar Korea has big growth potential given that it is the
only pharmaceuticals original design manufacturer (ODM). After sweeping price
cuts, small and midsize pharmaceuticals should expand their outsourcing contracts
and large firms will do the same for minor products. Global pharmaceuticals are
widening their global manufacturing bases to include emerging countries. And that
too is an opportunity for Kolmar Korea.
1) API outsourcing: Yuhan Corp., Kolon Life Science, Estech Pharma

2) Pharmaceutical ODM (research  clinical trials  manufacturing): Kolmar
Korea
Table 1. New drug pipeline momentum

4Q12 1H13 2H13 2014 2015
Green 1) WHO PQ flu vaccine 1) Flu vaccine sales to the 1) Bid for multi/single-dose flu
1) Approval for IVIG (US)
Cross (multi-dose) approval (Nov 9) Southern hemisphere vaccine contracts
2) Confirmed the form of blood
2) Sales recognition for blood
derivative business to be 2) Complete phase 3 clinical trial 2) Approval for Green
derivative exports to 1) IVIG exports to US ASD
launched in North for IVIG Gene-F (US)
Thailand
America
3) Bid for multi/single-dose flu 3) Complete phase 3 clinical trial 3) Flu vaccine release 3) Flu vaccine release
vaccine contracts for Green Gene-F (US) (US, Europe) (US, Europe),
1) Release of natural
1) Complete phase 3 clinical
Yuhan 1) Release of premature ingredient-based drug
1) Additional API exports trial for premature
Corp. ejaculation IMD (erectile dysfunction,
ejaculation IMD
asthma, peritonitis)
2) Release of
2) Complete phase 3 clinical biopharmaceuticals
2) Release of antithrombotic IMD
trial for antithrombotic IMD (rheumatoid arthritis,
herniated disc)
1) Phase 3(b) clinical trial for
2) Approval for Zydena (on 1) Release of Zydena (on 1) Release of Zydena (on
Dong-A super-bacteria antibiotics (for 1) NDA for Zydena (on erectile
erectile dysfunction treatment) erectile dysfunction prostate hyperplasia)
Pharm skin and soft tissue infection) dysfunction treatment) (US)
(US) treatment) (US) (Japan)
(US)
2) Release of
2) License deal on
2) Phase 2(b) clinical trial for 2) NDA for super-bacteria super-bacteria
super-bacteria antibiotics
Zydena (on prostate antibiotics (on skin and soft antibiotics (on skin and
with a major European
hyperplasia) (US) tissue infection) (US) soft tissue infection)
pharmaceutical
(US)
3) Phase 2 clinical trial for 3) Phase 3 clinical trial for 3) NDA for Zydena (for
Zydena (for prostate super-bacteria antibiotics prostate hyperplasia)
hyperplasia) (Japan) (for pneumonia) (US) (Japan)
4) Enter phase 1 clinical trial
for biosimilar version of
Herceptin (Korea/Japan)
1) Bid for mixed vaccines
LG Life 1) NDA for SR-hGH (adults) 1) Approval for SR-hGH (adults) 1) Release of SR-hGH 1) Release of SR-hGH
contracts for emerging
Sciences (US) (US) (adults) (US) (children) (US)
market
2) License deal on DDP4 2) NDA for SR-hGH (for
2) Approval for SR-hGH
(diabetes treatment) in children) after approval for
(children) (US)
emerging market SR-hGH (adults) (US)
1) Court ruling on Esomezol
Hanmi
patent infringement lawsuit 1) Approval of Esomezol (US) 1) Release of Esomezol (US)
Pharm
(US)
2) Release of Amosartan
(Europe)
3) License out of Lapscovery
platform technology
1) Enter phase 3 clinical trial
Daewoong 1) Release of cancer gene
for hepatitis B treatment 1) Release of Botox biosimilar
Pharm treatment
(Korea/overseas)
2) Approval of biosimilar
version of Botox
221
3. Industry consolidation via regulatory reform

Gov’t regulation to While government regulation is bad news in the short-term, it could be an
accelerate top-tiered opportunity to improve the top line and margins for top-tier firms with a solid capital
industry consolidation position and brand recognition, and small/midsize players that have targeted a
niche market. In Japan, as the 1970s and 1980s passed, the time of easy growth
also ended and pharmaceuticals could no longer grow on government protection
but had to build a competitive edge. The same is true for Korea. In the early 2000s,
the separation of drug prescribing and dispensing roles led to booms for
prescription drugs and generics. At the time, any market participants could grow
fast without developing new drugs and strong marketing. But the era of easy growth
has come to an end. In the 1990s, the Japanese industry witnessed 1) a series of
drug price cuts, 2) price competition introduced via distribution network reforms and
3) market opening. Such shifts left less-competitive companies behind and required
large firms to sharpen their competitive edges to global levels. Only competitive
companies were privileged to enjoy the benefits of Japan’s pharmaceuticals sector
growth in the 1990s. If industry leaders, after surviving the consolidation, achieve
economies of scale and enter overseas markets with homegrown new drugs, then
their operating margin can recover the pre-regulation level (10-15%) or even more.
Industry consolidation Industrial shuffling is not simply the market’s expectation or hope. It is a rite of
essential for industry’s passage that accompanies industrial modernization for any sector of any country.
modernization While Korea’s pharmaceuticals market size (W11trn) is one-tenth of Japan’s
W117trn, some 300-400 companies operate, similar to Japan. The gulf is also wide
in the modernization aspect. Japan achieved industrial concentration led by the
top-tier players (top five’s combined market share 40% in 2010) through a series of
shakeups in the 1990s and 2000s. Moreover, the industry has become specialized
and each sub-segment conglomerated as well. By contrast, the top five in Korea
account for a mere 19% of the market, which illustrates Korea’s low industrial
concentration and low level of modernization. For this reason, the government
indirectly advocates large-firm-centered consolidation to strengthen the industry’s
competitiveness. And that is another form of support for high-ranking firms. This is
unusual for the government that has recently regulated most industries to tackle the
imbalance between large firms and small/midsize companies.
Visible moves of Like Japan, Korea’s pharmaceutical industry should be shuffled in phases. Related
industrial shuffling, events anticipated in 2013-2014 are less-competitive small/midsize firms leaving
including equity the market and leading firms gaining market share. Then, what happened in Japan
purchase and M&A in the 1990s and early 2000s should replay in Korea. More specifically, M&As would
attempts be frequently spotted among Korean firms and overseas companies should also
move briskly to acquire small/midsize Korean pharmaceuticals. Indeed, equity
purchases and M&A attempts have recently increased in the industry that is known
for its conservative ownership structure. We believe that is an initial sign of
industrial consolidation.
 M&As among Korean firms (to secure new drugs pipeline): 1) Yuhan Corp.’s
9% equity acquisition of HanAll BioPharma, 2) Green Cross’ 23% equity
acquisition of Innocell and 3) Kolmar Korea Holdings’ acquisition of a
manufacturing facility from Boram Pharm
 M&As among overseas and Korean firms (to enter Korea’s generics market):
1) US-based Alvogen’s acquisition of Kunwha Pharmaceutical and 2) a rumor
that Israel-based Teva is considering an M&A with a small/midsize Korean
pharmaceutical
222
Table 2. Comparison of pharmaceuticals industries: Japan vs. Korea

Japan Korea
% of exports Average 40% for top five pharmaceuticals Average 10% for top-tier firms
% of generics 5% based on 2010 medical expenses 32% based on 2010 medical expenses
13,811 medical manufacturers (2004)
849 medical manufacturers, 300-400
400 pharmaceuticals (2007)
pharmaceuticals (2010)
1) Concentrated on leaders: Top five with
Competition level 1) Low concentration on leaders: Top five
40% market share and top 10 54% (2007)
with 19% market share and top 10 36%
2) Multinationals (40%): Penetration surged
2) Multinationals (23%)
since 2000; 20% are US/Europe-based
1) No. 3 (no. 2 as a single nation) and 12% 1) No. 10 and 1.7% market share
market share 2) No Korean firms rank in global top 100
2) Three Japanese firms made the global top 3) One drug approved by the US FDA
20 in 2011 (commercialization failed)
Global status
(Takeda, Daiichi Sankyo, Otsuka)
3) A number of new global blockbuster drugs
Takeda’s Actos (no. 18)
Takeda’s Atacand (no. 23)
R&D budget to
15% (2010) 5.7% (2010)
sales
Source: IMS, Frost & Sullivan, Korea Health Industry Development Institute, Ministry of Health, Labor and Welfare of Japan, Delphi
Pharma, Korea Investment & Securities
Figure 3. Japanese pharmaceutical leaders’ growing Figure 4. Key words in medical reform shifting from
market dominance lower drug prices to medical services
(%) Top 5 Top 10 Below top 30
60
50
40
30
20
10
0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Ministry of Health, Labor and Welfare of Japan, Korea Investment & Securities Note: Three developed countries (Germany, Japan and France)
Source: NHIC, Presidential Advisory Committee for Policy Planning
223
Earnings forecast
1. Key assumptions
OP turnaround in 2013 as  [Korean pharmaceutical market]: Average 8-9% growth possible in 2013
drug price cut peaked,  Healthcare services spending amounts to 7% of Korea’s GDP; CAGR 14%
drug market is expanding growth in volume is possible, provided the figure reaches 8.5% (Japan’s
and NHIC fund is being level) by 2020; If drug price cuts slow the market growth to 5-6%, the market
stabilized should post CAGR 8-9%
 [National Health Insurance Corp.’s fiscal status]: To post a W300bn+ surplus
in 2013
 As of Apr 2012, the NHIC had a surplus of W581.2bn; To post W340.4bn
surplus even if the corporation saw a monthly deficit of W30.1bn from May
through Dec 2012
 A minimum W300bn+ surplus is achievable in 2013F as the program’s fund
has been expanded by 1) a diagnosis related payment system for seven
disease groups that took effect in Jul 2012, 2) drug cost saving (W727bn)
thanks to the sweeping price cuts and 3) premiums reform for high-income
earners (2012)
2. 2013F sales to climb 11.9% YoY and OP 62.8% YoY

 In 2012F, the top six firms should post sales growth of 6.2% YoY and OP
-21.3% YoY
 In 2013F, the top six firms should post sales growth of 11.9% YoY and OP
62.8% YoY
 2013F OP should surge on 1) a low base effect from 2012, 2) operational
stability after regulatory risk peaked and 3) profit contribution from new
products such as license-ins, generics, exports, etc.
 Thanks to the above factors, OP should record CAGR of 45% in 2012-2014
 From 2014F, OPM could recover the pre-regulation level (10-15%) or even
more
Table 3. Japan vs. Korea

Per capita spending on Total healthcare services
Market size Population
healthcare services spending-to-GDP (%)
Japan W117trn 127.9mn W912,473 8.5
Korea W14trn 48.9mn W282,898 7.0
Japan to Korea 8.4x 2.6x 3.2x 1.2x
Source: OECD, IMS Health, Statistics Korea
224
Figure 5. Healthcare services spending-to-GDP: Korea at Japan’s mid-1990s level
(%) Japan Korea

9
8
7
6
5
4
3
2
1
0
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Note: To compare with Japan’s data, Korea’s medical services spending in 1980-2010 has been juxtaposed with Japan’s spending in
1962-2010
Source: OECD, Korea Investment & Securities
Top picks
Green Cross (006280)

Rosy outlook for Although the stock plunged on poor 3Q12 flu vaccine earnings, the WHO’s PQ
overseas advance with approval for the company’s multi-dose flu vaccine has reaffirmed its solid overseas
flu vaccines and blood potential and ensuing re-rating. (Worldwide, Green Cross and Sanofi-Aventis alone
derivatives have passed the WHO’s PQ for single/multi-dose vaccines.) In Japan with a similar
industrial structure as Korea, Takeda and other pharmaceutical leaders succeeded
by discovering new opportunities for top-line growth and better margins via new
drug development and exports. In this context, Green Cross Corp. is the most likely
Korean candidate to succeed in new drug development and join overseas markets.
Green Cross has secured a global top-10 level of capacity and technology through
more than 40 years of operation in globally marketable and lucrative blood
derivatives and vaccines. Entry barriers are high for both markets, which is also a
plus as there are not many rivals. The company has begun exporting flu vaccines
and US clinical trials for two plasma derivatives are progressing smoothly. Thus,
Green Cross has the strongest potential among Korean players to make a case for
successful overseas entry. We maintain the TP at W191,000 (DCF method at
2012-13F inherent PE 28.5x and 19.5x and mid-cycle PE level for global plasma
derivatives makers).
Yuhan Corp (000100)

Valuation re-rating The stock has reached our TP W181,000 (DCF-based SotP) after soaring 33%
expected on higher API over the past two months. The upswing was attributed to its revisited value as a
business value and pioneer of API exports which had been neglected by the market (see our Dual API
robust earnings leaders: Yuhan and Kolon LS published Sep 17, 2012) and attractive valuation. Still,
turnaround there is ample upside potential in the long-term, given 2013F PE 14x (ex-cash PE
11x) is still 15-31% discounted to the past average and the average 2013F PE of
top-tier firms. Moreover, Yuhan recently purchased 9% of HanAll BioPharma with
225
several late-phase new drugs in the pipeline (bio-betters). The equity acquisition
should gradually dispel discount factors such as excess cash and lack of new drugs
pipeline. We maintain BUY and keep the stock as our second-favored pick. First,
we count on a potential upswing for the value of the API business that has begun a
new leap with numerous additional deals. We are also hopeful about a valuation
re-rating given our forecast of a robust 2013F earnings rally (OP 129% YoY)
backed by lucrative license-ins and API profit contribution.
Risk factors
Price cuts are bound to Now that drug pricing and distribution-related regulation have reached the level of
continue; But sweeping developed countries, additional regulation is unlikely for some time. However,
and large-scale cuts are based on the policy for lower drug prices (rebate-linked drug pricing and market
unlikely for the coming price-based purchasing), they should come down on a regular basis. Japan too
three years lowers drugs prices 5-7% every year through a scheme established in the 1980s
and early 1990s. Recently, the Korean government has implemented sweeping
drug price cuts, which in turn eroded the top-tier players’ OP more than 30% in one
shot. The action will likely achieve the government’s goal of reducing the NHIC’s
drug costs to 24% of the total budget. Thus, there should be no more unbearable
drug price cuts even for high-ranking pharmaceuticals for the coming three years.
But for the long-term, the government will likely make further efforts to ease the
drug cost weighting to 20%, given Japan’s example of reducing the portion from
30% to 25% in the 1990s and then to less than 20% in the 2000s.
226
Coverage valuation
Table 4. Valuations
Green Cross Recommendation BUY 2010A 791 146 105 11,087 55,008 12.5 2.5 23.3 7.9
(006280) TP (KRW) 191,000 2011A 768 88 58 5,544 61,071 26.3 2.4 9.6 14.2
Price (KRW) 153,000 2012F 817 97 72 6,711 66,279 22.9 2.3 10.5 11.0
Market cap. (W bn) 1,555 2013F 960 140 107 9,806 74,189 15.7 2.1 13.9 7.9
2014F 1,114 175 135 12,439 84,727 12.3 1.8 15.6 6.5
Yuhan Corp. Recommendation BUY 2010A 649 78 128 11,573 103,271 15.0 1.7 12.6 15.5
(000100) TP (KRW) 181,000 2011A 668 49 83 7,655 105,359 16.7 1.2 7.7 16.2
Price (KRW) 181,000 2012F 768 31 39 8,417 112,334 21.5 1.6 7.9 21.9
Market cap. (W bn) 2,109 2013F 890 71 80 13,060 122,408 13.9 1.5 11.3 10.5
2014F 1,036 101 106 16,134 134,614 11.2 1.3 12.6 7.5
Dong-A Pharm Recommendation BUY 2010A 847 99 70 6,752 67,075 0.0 16.0 10.8 11.4
(000640) TP (KRW) 136,000 2011A 907 95 61 5,630 62,936 19.4 13.2 8.3 8.9
Price (KRW) 112,000 2012F 969 70 49 4,944 68,945 22.7 1.6 7.3 10.0
Market cap. (W bn) 1,247 2013F 1,052 95 69 7,021 75,350 16.0 1.5 9.5 7.5
2014F 1,190 121 82 8,472 86,258 13.2 1.3 10.5 6.1
Daewoong Pharm Recommendation Hold 2010A 510 71 18 1,780 33,981 26.2 1.4 5.5 5.7
(069620) TP (KRW) - 2011A 707 65 52 5,155 36,753 5.6 0.8 15.2 3.1
Price (KRW) 43,800 2012F 695 31 26 2,558 37,598 17.1 1.2 6.9 5.0
Market cap. (W bn) 494 2013F 731 42 35 3,505 39,974 12.5 1.1 8.9 3.9
2014F 784 48 39 3,940 42,823 11.1 1.0 9.3 3.4
Hanmi Pharm Recommendation Hold 2010A 595 (13) (5) (1,396) 40,872 NM 2.2 (1.5) 76.3
(128940) TP (KRW) - 2011A 512 3 (8) (1,032) 40,126 NM 1.6 (2.7) 25.9
Price (KRW) 119,50 2012F 536 13 18 2,311 40,445 51.7 3.0 5.9 24.2
Market cap. (W bn) 942 2013F 616 33 38 4,860 45,299 24.6 2.6 11.3 12.2
2014F 698 45 57 7,286 52,575 16.4 2.3 14.9 9.3
LG Life Sciences Recommendation Hold 2010A 341 20 17 1,003 14,690 52.4 3.6 7.0 25.1
(068870) TP (KRW) - 2011A 381 11 6 339 14,732 101.2 2.3 2.3 22.1
Price (KRW) 45,800 2012F 396 13 13 778 15,214 58.6 3.0 5.2 14.2
Market cap. (W bn) 758 2013F 428 23 21 1,226 16,143 37.2 2.8 7.8 10.6
2014F 470 30 22 1,325 17,172 34.4 2.7 8.0 8.9
227
Banks
Focus on asset quality and valuation merit
Lighter interest burden – financials’ top priority for soft landing

Overweight of household debt
Household debt should be the banking sector’s buzzword in 2013 as well.
▶ Top picks Among many financial regulations prompted by the pileup of household
debt, the greatest impact should come from lower lending rates to help
Hana Financial Group (086790, BUY, TP W50,000) reduce the interest burden shouldered by the indebted. While Industrial
2011F 2012F 2013F Bank of Korea (IBK) responded to the small/midsize enterprises’ (SME)
PE (x) 3.6 5.2 5.1
liquidity crunch by expanding lending, the focus this time is on easing the
PB (x) 0.5 0.4 0.4
borrowers’ principal and interest payments by lowering interest rates. In
Oct, the Financial Supervisory Service (FSS) announced its plan to
DY (%) 3.6 3.0 3.3
strengthen the supervision of the banks’ loan interest rate structures.
EPS (KRW) 8,332 5,790 5,974
BPS (KRW) 65,175 71,219 77,384
Continued sale of fixed-rate loans and discussion to issue
 Solid asset quality covered bonds
 To recover ordinary revenue in 2013
 Valuation discount to disappear in 2013 The sales balance of conforming loans released in early 2012 exceeded
W7trn. The Korea Housing Finance Corp. (KHFC) estimates the end-2012
KB Financial Group (105560, BUY, TP W57,000)
cumulative sales balance will reach W14trn. Recently, interest rates on
fixed-rate loans offered by banks have fallen to a level similar to
2011F 2012F 2013F
conforming loans. Thus, we believe the pace of conforming loan sales
PE (x) 6.3 7.0 6.2
could slow in 2013 and the sales weighting of the banks’ fixed-rate loans
PB (x) 0.5 0.5 0.5 would grow accordingly. We expect to see more animated discussion
DY (%) 2.0 2.0 2.3 about issuing covered bonds given a recently announced plan to legislate
EPS (KRW) 5,574 5,024 5,673 a related bill to boost long-term fixed-rate loans.
BPS (KRW) 63,697 68,562 73,990
 Healthy asset quality thanks to preemptive Top picks: HFG and KBFG for asset quality and valuation merit
management
 Capital adequacy ratio tops the industry We present asset quality and valuation merits as stock selection criteria.
 Business expansion to the non-banking sector is Banks will likely keep suffering from sluggish loan growth and a dwindling
attempted with visible acquisition of ING Life
net interest margin (NIM) triggered by the household debt risk. However,
since sound asset quality reduces the bad debt risk during a
▶ 12M sector performance macroeconomic downturn, it should be a differentiating factor for banks. As
such, our top picks are Hana Financial Group (HFG) and KB Financial
2,500
15
Group (KBFG).
Banks sector index (p, LHS )
2,000 10
5
1,500
0
Figure 1. 2013F credit costs and PB by bank
1,000
-5
500 -10 2013F PB (x)
0 -15 0.8
Nov-11 Feb-12 May-12 Aug-12 SFG BS
0.7
DGB
0.6
KEB KB
0.5 IBK
HFG WFG
0.4
0.3
Joanne Lee 0.2

822-3276-5956 0.1 2013F credit cost (%)
joanne.lee@truefriend.com
0.0
Soohyun Choi 0.0 0.3 0.6 0.9 1.2 1.5
822-3276-6228
soohyun.choi@truefriend.com Source: Korea Investment and Securities
228
1. Household debt risk-prompted financial regulations to

focus on lower interest rates
1). Comparison of IBK’s response to 2010 and 2012 financial crises
2009 solutions: Regulatory risks should stay in place as the financial authority continues to
Preemptive restructuring preemptively respond to household debt. Among them, an issue that should draw
and liquidity for SMEs; attention in 2013 is banks lowering their lending rates to ease the interest burden
2013 household debt: on borrowers.
Focus on lighter interest
burden Table 1. Impact of major environment changes on the financial industry
Banks Insurance Securities
Macroeconomic policy
Encourage extension for household debt maturities ○ △ △
Maintain interest rate at a low level △ X ○
Sustain efforts to stimulate domestic demand ○ ○ ○
Financial industry
Ask financial institutions to bolster their ability to absorb losses
X XX △
in order to tackle crisis in a preemptive manner
Regulations Impose financial regulations centered on administrative
X X X
guidance
Strengthen regulations aimed at protecting financial consumers XX XX X
Change the business model for retail finance that depends on
XX ○ ○
household loans
Structural Accelerate pension reform and stimulate growth △ ○ ○○

changes Cultivate and bolster the long-term bond market X ○○ ○○
Highlight loan products allowing equal installment payments on
X ○ △
principal and interest
Accelerate changes to finance related tax system △ △ △
Taxation
changes Tougher competition to attract high-net worth individuals at
○ X △
financial institutions
Note: ○○ very positive, ○ positive, △ neutral, X negative, XX very negative

In 2009, the financial authority responded to the global financial crisis with
regulations. At that time, the banks’ key risk factor was SMEs in the construction,
shipbuilding and shipping sectors, while the key risk in 2013 is household debt. The
authority’s responses were preemptive restructuring for the risky sectors and lifting
the Bank of Korea’s (BoK) total loan pool by W3.5trn to W10trn to ensure banks
could provide SMEs with sufficient liquidity. While the banking sector’s average loan
growth was a mere 3.5% in 2009, the figure for IBK was 14.8%.
The concern for 2013 is household debt and the authority’s solution is more
focused on reducing the interest burden on borrowers rather than providing liquidity.
While appropriately limiting the size of household debt, the authority aims to lighten
the burden on low-credit borrowers for principal and interest payments by lowering
the interest rate and extending the payment schedule. In early 2012, IBK
announced its policy for a 50bp cut to rates on new or extended guaranteed loans.
The bank also said it would lower its highest rate for SME loans.
229
Figure 2. Post-2009 loan growth: Sector avg. vs. IBK Figure 3. 2012 NIM: Sector avg. vs. IBK
(%) (%)
16 14.8 2.9
IBK Universe banks Universe banks IBK
14 2.8
2.7
12
10.5
9.5 2.6
10 8.8
8.4
2.5
8
2.4
6 5.1
2.3
3.5
4 3.1
2.2
2 2.1
0 2.0
2009A 2010A 2011A 2012F 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12
2) NIS to shrink on stricter supervision of lending rate system

Financial authority In Oct, the financial authority announced a draft version of a plan to strengthen its
announced plans to supervision of bank loan rates. The authority said the plan was needed because its
strengthen supervision of low interest rate policy did not sufficiently reduce the burden shouldered by
bank lending rates; households. The statement hints at the authority’s future regulatory direction.
Additional measures
possible until visible Beginning Jan 2013, the Korea Federation of Banks (KFB) plans to announce each
reduction of interest bank’s spread by credit rating. This is a more aggressive measure than its release
burden of lending rates on the banks’ main financial products. Banks have aggressively
lowered the net interest spread (NIS), a representative spread. For example, the
NIS for new mortgages has narrowed to ~110bp, a record low.
Table 2. Plans to strengthen supervision of bank lending rates

Plan Description
Systematic calculation of
- Improve transparency of lending rate calculations
lending rates
- In principle, spread cannot be added without reasonable explanation
Improve rationality of lending - Regular adjustment of funding spread and liquidity premium
rate management such as - Refrain from excessively increasing target yield during a fiscal year except for
interest rate adjustment special reasons such as a dramatic change to the management environment
- Reflect the borrowers’ credit improvement when automatically extending

maturity for personal credit-based loans
- Ban differentiating spreads (e.g., target yield) by borrowers’ credit rating on

the guarantee for new and old guaranteed loans and new mortgages
Reinforce internal control on - Establish and operate lending rate-related internal control standards
lending rate calculation and - Strengthen internal feasibility review for adjustment or establishment of key
management spreads
- Strengthen internal control on spread determined by branch managers’

discretion
Empower borrowers - Adopt a lending rate notification system
- Bolster the right to ask for a interest rate cut
- Help responsible borrowing practices (e.g., suitability principle, etc.) take root
Source: FSS, summarized by Korea Investment & Securities
230
Figure 4. New mortgage NIS
(%)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2007 2008 2009 2010 2011 2012
Source: BoK, Korea Investment & Securities
2. Mid/long-term effect of household debt: More fixed-rate

loans and preparation to issue covered bonds
1) More fixed-rate loans: Conforming and fixed-rate loans
KHFC released In early 2012, the KHFC released a conforming loan, a fixed-rate product with a
conforming loans; Margin long-term payment schedule. At end-Oct, more than W7trn in conforming loans had
gap narrowed as banks been sold. The KHFC estimates the figure should reach ~W14trn at end-2012.
lowered lending rates Conforming loans have been so popular because their interest rate was 1%p less
than the mortgage rates offered by commercial banks.
With the last two rounds of policy rate cuts, the banks’ fixed rates on mortgages
have fallen. At this point, conforming loans are not as attractive to borrowers as
before. According to the KFB, as of end-Oct, the bank’s fixed-rate loans were
offered at low-4% and the rate for most of their conforming loans was also low-4%.
As such, the banks’ NIS for existing household loans is shrinking from the previous
1.2%p and for newly extended household loans it stands at 1.1%p. Even if existing
household loans are replaced by conforming loans, its impact on the banks’
profitability is growing smaller as the margin gap between the two products is
narrowing.
Table 3. Profitability comparison: Conforming loans vs. existing household (%p)
Category Conforming loans Existing household

Profit NIS 0 1.2
Variable service fees 0.30-0.40 0
Fixed service fees 0.10 0
Expense Credit cost 0 0.2
Costs for lien and others 0 0.30-0.40
Net margin 0.40-0.50 0.60-0.70
Source: KHFC, Korea Investment & Securities
231
2) Legislation for covered bonds, pre-requisite to boost fixed-rate loans

From a borrowers’ perspective, the difference between conforming loans and
banks’ fixed-rate household loans is almost non-existent. In such an atmosphere,
banks need to secure long-term funding to expand their fixed-rate household
lending. To that end, mortgage-backed securities (MBS) and covered bonds are
essential. Deposits account for 70% of banks’ funding sources and are exposed to
interest rate volatility. Thus, selling fixed-rate products with floating-rate funding
could expose banks to an interest risk and early payment risk.
3) FSC announced pre-legislation of covered bond bill; Banks began

discussion on long-term fixed-rate loans
In Jun 2011, the Financial Services Commission (FSC) drew guidelines for the
issuance of covered bonds as a way to offer more diverse funding means for banks
and encourage the expansion of long-term fixed-rate mortgages. In Oct 2012, the
FSC announced a plan to legislate the issuance of covered bonds.
Since liquidity does not abound in the market, issuing covered bonds would not
very effectively lower the funding rate in the short-term. However, it is meaningful
that banks have started discussing ways to stimulate long-term fixed-rate loans and
the discussion should be more animated in 2013.
Table 4. Bill for the issuance of covered bonds

Category Description
Definition of covered bond - A bond that guarantees investors a preferential claim right over the originator and its underlying pool of assets
- A financial institution must meet all qualifications for the organization and its asset quality to become a conforming
Conforming issuer
issuer of covered bonds
- Assets that back covered bonds comprise underlying and current assets, and must meet the 105% minimum collateral
Underlying pool of assets
rate
Registration and issuance - Any institution that intends to issue covered bonds must register its issue plan and detail the cover pool to the FSC
- After registration, a conforming issuer may issue covered bonds backed by 8% of its total assets (as of end-previous
FY) up to a presidential order-limited amount (tentatively 4%)
- An issuer must manage the cover pool for covered bonds separately from other assets and record and keep a
Cover pool management
separate book
- An issuer must meet the collateral retention rate and asset conditions by adding or replacing components of the cover
pool
Preferential claim right - A covered bond owner has the right to claim the bond from the underlying pool of assets prior to a third-party
Notification and supervision - An issuer must establish separate risk management in relation to the issue and payment of covered bonds
- Upon the need to protect investors, the FSC can ask for and investigate details of an issuer’s operation and
possession, and may order the issuer to improve its operations
Source: FSS, summarized by Korea Investment & Securities
3. Investment strategy for banks: Asset quality and

valuation
Top picks: HFG and We present solid asset quality and valuation as the criteria to select bank stocks. As
KBFG with solid asset mentioned above, in 2013 the NIM should dwindle due to slow loan growth at banks
quality and valuation and pressure for lower interest rates, which are common symptoms brought by the
household debt risk. In particular, the key of regulatory risk for 2013 should be lower
lending rates to lighten the interest burden on borrowers. While all banks would feel
the pressure to cut lending rates, banks with sound asset quality will stand out as
they carry a smaller credit risk during a macroeconomic downturn. As such, our top
picks are HFG and KBFG.
232
Figure 5. 2013F credit costs and PB by bank
2013F PB (x)
0.8
SFG BS
0.7
DGB
0.6
KEB KB
0.5 IBK
HFG WFG
0.4
0.3
0.2
0.1
2013F credit cost (%)
0.0
0.0 0.3 0.6 0.9 1.2 1.5
233
Earnings forecast
1. Key assumptions
Table 5. Estimates of three key indicators
2013F NIM 2.53%, 2011 2012F 2013F

loan growth 4.6%, NIM 2.84% 2.62% 2.53%
credit cost 0.77% Loan growth 10.0% 4.2% 4.5%

Credit cost 0.84% 0.84% 0.77%
Source: Company data, Korea Investment & securities
2. KIS Universe banks’ 2013F NP to fall 10% YoY

2013F KIS Universe In 2013, KIS Universe banks should post NP down 10% YoY because loan growth
banks to post NP down would pick up at a slow pace along with a laggardly economic recovery. With
10% YoY another cut to the BoK’s base rate, the NIM would further shrink but not as much as
in 2012. In particular, credit-card fees will be lowered for all affiliate card issuers
from Dec 2012. Non-interest income erosion would then be inevitable as the banks’
credit-card fee income dwindles with the measure in place.
Table 6. KIS Universe banking sector’s NP estimates (W bn)
2011 2012F 2013F 2014F

Net interest income 33,762 34,787 34,862 36,512
Non-interest income 10,638 8,637 7,260 7,394
Total revenue 44,400 43,424 42,122 43,907
Loan loss provisioning 8,067 8,595 8,255 8,401
SG&A 18,070 19,839 20,357 20,811
Recurring NP 18,263 14,979 13,405 14,579
Total NP 12,668 11,255 10,138 11,011
Source: Korea Investment & securities
Figure 6. Banks’ 2012-2013 NP walk
(W trn)
11.5 0.1 -1.5
11.3
11.0
10.5 0.3
-0.5 0.3 0.1 10.1
10.0 0.1
9.5
9.0
8.5
Tax
operating
controlling
2012F
2013F
Net interest
Non-interest
provsioning
SG&A
Loan loss
income
Non-
profit
income
Non-
NP
Source: Korea Investment & securities
234
As of Sep, the NIS for new mortgages reached 1.11%p, a low point and the
end-2007 level when banks fiercely competed to offer mortgages. Our NP estimate
reflects a lesser NIS assuming another cut to the key interest rate. At end-3Q12, the
banks’ household loan delinquency rate was 0.7%, while the peak over the last
decade was set at 2.0% in 1Q04. In the aftermath of the latest global financial crisis,
household loan delinquency has been stably managed at ~0.5%. If the household
debt crisis develops into something worse than we expect such as double the
present delinquency and new non-performing loans (NPL) materialize at more than
the current level, the KIS Universe banks should post 0.94% credit cost in 2013F,
up 17bp from our current estimate. The banks’ NP would then be W8.7trn, down
14.1% from our estimate of W10trn.
235
Top picks
Hana Financial Group (086790)

Boasts solid asset Since HFG purchased 57% of Korea Exchange Bank (KEB) in Feb 2012, its
quality; To recover consolidated financial statement began to reflect KEB’s earnings – Feb and Mar
recurring profitability and earnings in 1Q12 and the whole quarter beginning 2Q12. If 2013 is free of one-offs,
no valuation discount in which has not been the case so far, HFG could see a recovery for recurring
2013 profitability backed by the acquisition. Moreover, HFG has long maintained a big
household loan weighting, which explains its less-than-sector average credit cost.
Since the global financial crisis, the group has made substantial efforts to improve
asset quality by slowing loan growth and reducing/selling NPLs, and has kept the
credit cost at a favorable level. With little asset quality risk, upside potential is solid
if recurring profitability materializes without one-off losses in 2013. Thanks to HFG’s
KEB acquisition, ROE, which used to be 2-3%p less than the sector average, is
now on par and there is no reason for its share price discount. However, the 2013F
PB 0.5x is still less than the sector average. In 2013, shares should no longer trade
at a discount. The TP W50,000 is at target 2013F PB 0.7x (sustainable ROE 8.3%,
perpetual growth 1% and cost of equity capital or CoE 10.7%).
KB Financial Group (105560)

Most favorable asset From 2Q08 (immediately before the global financial crisis) through 2Q12, KBFG’s
quality and capital ratio; lending has been at CAGR 2.3%, half the sector average of 4.2%. The NPLs sold
Diversifying to by banks since 2007 total W52trn and KBFG accounts for 23.5%, 5%p more than
non-banking business IBK at no. 2 (18.5%). It is now time for KBFG’s preemptive asset quality
with possible acquisition management to stand out. Both Kookmin Bank and KBFG (consolidated) have
of ING Life industry-leading capital ratios. Since the group also has the most solid capital buffer
among peers, one can say it is the best prepared for risks. Recently, there is
growing likelihood for KBFG to acquire ING Life’s Korean subsidiary. If the deal
goes through, we could expect a higher recurring ROE and operational synergy.
The TP W57,000 is at target 2013F PB 0.8x (sustainable ROE 8.0%, perpetual
growth 1% and CoE 10.7%).
Risk factors
If the Europe-originated global financial crisis persists and slows the world’s real
economy, macroeconomic variables could deteriorate more than our assumptions.
If domestic income growth drops and the spending doldrums become a long-term
trend, household debt could become a larger-than-feared risk. Then, the downward
trend for real estate prices would accelerate and augment the banks’ credit cost.
Aside from household debt, marginal companies’ financial soundness is another
risk. If it materializes, the banks’ credit risk would also increase.
236
Coverage valuation
Table 7. Valuations
Company Total rev. PPOP EBT NP EPS BPS PE PB ROA ROE
(W bn) (W bn) (W bn) (W bn) (KRW) (KRW)) (x) (x) (%) (%)
KB Fin. Group Recommendation BUY 2010A 7,377 3,047 19 88 242 46,449 144.4 0.8 0.5 0.5
(105560) TP (KRW) 57,000 2011A 9,074 5,142 3,261 2,373 6,142 59,319 5.7 0.6 0.9 11.6
Price (KRW) 34,950 2012F 8,558 4,611 2,798 2,153 5,574 63,697 6.3 0.5 0.7 9.1
Market cap. (W bn) 13,503 2013F 8,406 4,457 2,317 2,003 5,024 68,562 7.0 0.5 0.6 7.8
2014F 8,758 4,814 2,637 2,254 5,673 73,990 2.4 0.5 0.7 8.2
Shinhan Fin. Recommendation BUY 2010A 8,567 4,349 3,089 2,384 4,427 39,565 7.9 0.9 0.8 11.9
Group TP (KRW) 51,000 2011A 9,276 5,141 4,193 3,100 5,774 41,138 6.1 0.9 1.0 14.3
(055550) Price (KRW) 35,000 2012F 8,802 4,667 3,362 2,466 5,070 51,763 6.9 0.7 0.8 10.8
Market cap. (W bn) 16,597 2013F 8,682 4,423 3,197 2,394 4,918 55,943 7.1 0.6 0.8 9.1
2014F 9,010 4,623 3,408 2,552 5,250 60,301 6.7 0.6 0.8 9.0
Hana Fin. Group Recommendation BUY 2010A 3,890 2,098 1,371 1,011 4,829 50,996 6.3 0.6 0.6 10.0
(086790) TP (KRW) 50,000 2011A 4,460 2,353 1,716 1,222 5,072 57,180 6.0 0.5 0.7 10.0
Price (KRW) 30,350 2012F 7,241 3,737 2,549 2,008 8,332 65,175 3.6 0.5 0.8 13.6
Market cap. (W bn) 7,377 2013F 6,848 3,246 2,146 1,395 5,790 71,219 5.2 0.4 0.5 8.5
2014F 7,116 3,416 2,214 1,440 5,974 77,384 5.1 0.4 0.5 8.0
Woori Fin. Hold. Recommendation Hold 2010A 8,116 4,715 1,795 1,195 1,487 18,095 6.9 0.6 0.1 8.5
(053000) TP (KRW) - 2011A 10,133 6,350 3,203 2,156 2,682 21,820 3.8 0.5 0.7 13.4
Price (KRW) 10,200 2012F 8,689 4,726 2,579 1,783 2,217 23,085 4.6 0.4 0.6 9.9
Market cap. (W bn) 8,100 2013F 8,132 3,960 2,215 1,605 1,997 25,072 5.1 0.4 0.5 8.3
2014F 8,407 4,109 2,519 1,825 2,270 27,245 4.5 0.4 0.5 8.7
IBK Recommendation Hold 2010A 4,750 3,354 1,711 1,290 2,086 17,508 5.5 0.7 1.1 12.7
(024110) TP (KRW) - 2011A 5,041 3,374 1,944 1,456 2,430 21,945 4.7 0.5 0.8 12.3
Price (KRW) 11,500 2012F 4,708 2,826 1,743 1,283 2,141 21,525 5.4 0.5 0.7 9.9
Market cap. (W bn) 6,279 2013F 4,668 2,735 1,499 1,160 1,936 23,451 5.9 0.5 0.6 8.6
2014F 4,939 2,953 1,664 1,288 2,150 25,117 5.3 0.5 0.6 8.9
KEB Recommendation Hold 2010A 3,012 1,775 1,360 1,021 1,584 12,987 4.5 0.5 0.9 12.5
(004940) TP (KRW) - 2011A 4,221 2,731 2,177 1,655 2,564 13,378 2.7 0.5 1.7 19.5
Price (KRW) 7,050 2012F 3,193 1,770 1,179 880 1,363 13,646 5.2 0.5 0.8 10.1
Market cap. (W bn) 4,547 2013F 3,024 1,628 1,013 886 1,372 14,133 5.1 0.5 0.7 9.9
2014F 3,150 1,722 1,066 921 1,427 14,675 4.9 0.5 0.7 9.9
DGB Fin. Group Recommendation BUY 2010A 962 564 300 227 1,721 15,234 7.4 0.8 0.9 12.0
(139130) TP (KRW) 21,000 2011A 1,013 546 415 306 2,281 17,093 5.6 0.7 1.0 14.2
Price (KRW) 12,800 2012F 964 520 353 296 2,207 18,473 5.8 0.7 0.9 12.4
Market cap. (W bn) 1,716 2013F 1,035 576 328 314 2,342 20,302 5.5 0.6 0.8 12.1
2014F 1,116 634 363 345 2,571 22,261 5.0 0.6 0.8 12.1
BS Fin. Group Recommendation BUY 2010A 994 588 476 366 1,960 13,167 5.9 0.9 1.1 16.0
(138930) TP (KRW) 19,000 2011A 1,181 692 533 400 2,070 15,281 5.6 0.8 1.1 14.8
Price (KRW) 11,600 2012F 1,270 728 506 386 1,998 16,554 5.8 0.7 1.0 12.6
Market cap. (W bn) 2,243 2013F 1,326 757 488 381 1,969 18,159 5.9 0.6 0.9 11.3
2014F 1,411 824 495 386 1,997 19,792 5.8 0.6 0.9 10.5
Total Recommendation Overweight 2010A 37,668 20,492 10,120 7,583 2,124 26,127 8.9 0.7 0.6 8.5
Market cap. (W bn) 60,362 2011A 44,400 26,330 17,441 12,668 3,549 31,522 5.3 0.6 0.9 12.3
2012F 43,424 23,585 15,069 11,255 3,153 34,662 6.0 0.5 0.7 9.5
2013F 42,122 21,782 13,203 10,138 2,840 37,258 6.7 0.5 0.6 7.9
2014F 43,907 23,096 14,365 11,011 3,241 39,740 5.8 0.5 0.7 8.4
237
Securities
Earnings and shares bottom, but no rebound
momentum
Overweight Relatively insulated from policies to manage household debt

Once the new administration is inaugurated in 2013, policies to manage
household debt should ramp up, in addition to numerous changes in
▶ Top pick financial policies. Growing concerns over slowing growth after a relatively
favorable post-crisis performance should steer Seoul’s economic policies
Samsung Securities (016360, BUY, TP W64,000)
towards directions advantageous for capital markets and the financial
2012F 2013F 2014F
sector. While regulatory pressure is a key negative factor, securities firms
PE (x) 21.4 19.2 18.0 should be relatively insulated given the lower financial leverage compared
PB (x) 1.0 0.9 0.9 to other financial services and less consumer complaints.
DPS (KRW) 560 620 660
EPS (KRW) 2,184 2,428 2,590
Pension reforms and solid growth positive for capital market
BPS (KRW) 48,189 50,057 52,028
Going forward, the pension market should grow steadily backed by
 Good risk management with strong market
dominance and solid capital position government efforts to prepare for an aging society. These measures
 Plans to join the re-insurance market followed should induce growth of the private annuity market and expansion of
by the Chinese auto insurance market diverse financial instruments. In 2013, the need for reform should be
 Shareholder return policy via dividend and
buyback raised given the current low-premium, high-benefit national pension
system. As reforms will likely increase premiums, reduce benefits and
increase the eligible age to receive the national pension, private annuities
should draw more attention. Also positive for the capital market is the
▶ 12M sector performance government’s plan to ease limits on the weighting of risky assets for
(p) Rel.to KOSPI (%p, RHS) (%p) defined contribution (DC)-type retirement pension from 2013.
1,200 25
Securities sector index (p, LHS )
1,000 20
800
15 Emerging importance of risk management offers an
opportunity for select brokerages
10
600
5
400
0 An emerging trend in the recent capital flows in the market is diversified
200
0
-5
-10
investments in assets with low uncertainty or those with mid-level or less
Nov-11 Feb-12 May-12 Aug-12 risk. Along with such change accompanied by rising uncertainties across
the board, tax reforms, which should be disadvantageous to high income
earners, should stimulate retail financial advisory demand. In response,
securities firms should expand the asset management product scope,
which is currently concentrated on equity-relates assets, and grow
customer bases. As most firms would find such measures burdensome,
only securities firms that are strong at risk management should seize the
opportunity. Thus, we recommend Samsung Securities as our top pick.
Figure 1. KIS Universe securities’ 12MF PB

(W bn)
40,000
2.2x
35,000
30,000 1.8x
25,000 1.4x
20,000
1.0x
15,000
Chulho Lee, CFA
10,000 0.6x
822-3276-6167
chlee@truefriend.com 5,000
0
Junsik Park
2005 2006 2008 2009 2011 2012
822-3276-6820
junsik.park@truefriend.com
238
1. Household debt-originated changes and implications

Securities relatively The government’s efforts to manage household debt, which began in 2011, should
insulated from household peak in 2013. With a new administration in place, financial policies will inevitably
debt management policy change. After performing relatively well in the aftermath of the global financial crisis,
the Korean economy is increasingly suffering stagnant exports triggered by
developed economies’ slow growth. As such, the west is increasingly interested in
the private sector’s debt in not only Korea but other Asian countries. We have
reviewed nine types of likely tides to appear in the financial industry and their
impact by segment in Insight into Korea’s household debt: Systemic risk unlikely
but multi-faceted changes coming published Oct 15. Upcoming changes to the
financial industry should accompany numerous advantages for the capital market.
However, many securities firms operate with a fee-based customer base and profit
structure. Would current securities firms enjoy the fruit of the growing capital
market? The fact that the question is not answered by a loud and clear “yes” makes
it difficult to cast a 2013 outlook.
Table 1. Impact of major environment changes on financial industry

Bank InsuranceSecurities
Encourage extension for household debt maturities ○ △ △
Maintain interest rate at a low level △ X ○
Sustain efforts to stimulate domestic demand ○ ○ ○
Financial industry
Ask financial institutions to strengthen loss absorption capacity in
X XX △
order to tackle crisis in a preemptive manner
Regulations Impose financial regulations centered on administrative guidance X X X
Change a business model for retail finance that has depended
XX ○ ○
heavily on household loans
Structural Accelerate adjustment for pension system and stimulate growth △ ○ ○○
changes Cultivate and bolster long-term bond market X ○○ ○○
Highlight loan products allowing equal installment payment for
X ○ △
principal and interest
Accelerate changes to finance related tax system △ △ △
Taxation
changes Fiercer competition to attract high-net-worth individuals at financial
○ X △
institutions
Note: ○○ very positive, ○ positive, △ neutral, X negative, XX very negative
1) To strengthen loss absorption capacity as preemptive response to crisis

Securities firms’ low Securities firms should see a neutral impact of the government’s tighter regulatory
leverage is the problem grip on the capital market. 1) Large brokerage houses have already increased
capital for private banking services in 2011. 2) More fundamentally, securities firms’
financial leverage rates are much lower than banks and insurers, which in turn
explains the chronic low ROE. It is time to ponder how to increase the leverage
over the long term.
239
2) Strengthen regulations aimed at protecting financial consumers

Stronger financial Securities firms too are within the negative impact range. An organization that will
consumer protection exclusively handle financial consumer protection has not been established yet. At
policy to affect securities present, an alternative proposed by the Ministry of Public Administration and
firms but less than banks Security does not seem to match what the ruling and opposing parties have in mind.
and insurers It is likely an actual financial consumer protection policy would be stronger than
considerations and affect brokerages as well. However, complaints filed against
securities firms and asset managers total ~4,000 per year, which is one-tenth of
~40,000 for banks and insurers. For that reason, we believe the impact on
securities should be relatively mild compared to other financial peers.
Table 2. Complaints filed again financial institutions in 2011 Figure 2. Complaints against securities firms/asset managers
('000 cases)
5
4
(cases, %)
2009 2010 2011 YoY 3
Banks/non-banks 31,236 27,760 39,998 44.1
Insurers 40,936 40,334 40,801 1.2 2
Securities/asset managers 4,654 4,075 3,932 -3.5

1
0
2006 2007 2008 2009 2010 2011
Source: Financial Supervisory Service Source: FISIS, Korea Investment & Securities
3) Accelerate adjustment for pension system and stimulate growth

Steady rise of pension The pension market is expected to grow on the authority’s policy support to
premium is positive for encourage savings via pension schemes as a means to prepare for an aging
capital market; Time to society. Reforms for the retirement and national pension systems are inevitable.
seize opportunity Such measures should offer an opportunity for the private pension market to grow,
which in turn should lead to more diverse capital market-related instruments. In
2013, a need should be raised to adjust the supply-demand structure of the national
pension scheme. A new outlook should be presented to keep the system relevant to
the environment that has changed since the supplementary budget allocation in
2008. Efforts will be made to redress the current low-premium high-benefit system.
A move towards a more premium, less benefit and a later receipt starting age is
bound to take place. Such a trend should highlight private pension products. For
retirement pensions, the regulation on the risky asset weighting should be eased for
DC type products from 2013. At present, a mere W3trn of W50trn is invested in
instruments linked to investment performance but the figure should trend up in the
long term.
4) Fiercer competition to attract HNW individuals at financial institutions

Many taxation changes It could be both an opportunity and a threat for securities firms. For a while, the
that are fatal to financial government should maintain its policy to encourage long-term savings for mid-level
instruments are an income earners to raise the savings rate and help accumulate wealth. In the aspect
opportunity to asset of fair taxation and stepped-up welfare, the government’s support for the lower-half
management-focused of income earners is left intact and an effort is being made to reduce tax exemptions
securities firms for high income earners’ gains on financial products. That in turn could turn wealthy
240
customers’ interest to financial instrument sales, advisory competence and services

offered by financial institutions. Individual brokerages’ long-term survival seems to
depend on the ground secured in a competition over financial instrument sales to
so-called high-net-worth (HNW) customers.
2. Internal/external issues regarding securities sector

Difficult times should In 2012, the brokerage operating environment has rapidly deteriorated with trading
continue into 2013 value plunging to W6-7trn. Given the sluggish stock market, securities firms should
see slow earnings from most profit sources, such as various financial instrument
sales, M&A consulting services and in-house account transactions. 2012 will be a
difficult year for brokerages as the trading value decline refocuses attention on the
profit structure limit due to the heavy dependence on low-margin brokerages. And,
it should take time to address the large brokerages’ untimely capital increase for
private banking services, which has structurally pulled down ROE. In 2013, a
recovery is likely but limited.
1) Brokerages’ crisis: Will it be different this time?

Difficult environment to It is difficult to anticipate greater trading volume in 2013. The authority has
blindly expect for cyclical strengthened its intervention for sharp changes in the stock market. A good
shifts in trading value example is the authority’s measure of limiting securities firms’ individual credit
offering when the Korean stock market surged on the ramification of the EU’s
adoption of the long-term refinancing operation in early-2012. At that time, the
authority explained the move was to prevent potential damage to individual
investors with increased leverage amid persistent fears for global financial markets.
Such a policy direction should stay unchanged for a while in line with the
government’s efforts to manage household debt.
Since 2H12, listed companies’ profit visibility is declining for three reasons. First, a
delayed economic recovery in the US and European countries followed by China
has begun to influence emerging economies. Korea is no exception. Second,
Seoul’s economic policy direction is shifting from growth to distribution and the
change should be disadvantageous to listed companies. Slow sales are inevitable
for exporters due to the stagnant external economies and the KRW appreciation. In
terms of costs, we anticipate burdens, such as jobs creation, better working
environment and investment expansion. The corporate tax rate will likely be lifted.
Third, the Korean stock market’s characteristics should come into play. While most
market participants highly value profit growth, fading profit momentum depicts a
bleak picture for share prices and total trading value. There are no scheduled policy
changes to expect better valuation multiples in 2013. Even the discussions on
economic democratization do not hint at higher multiples, such as empowering
minority shareholders, etc. After the Asian currency crisis, foreigners and
institutions expanded investments in Korean companies because of the authority’s
change in its stance. However, there is no such thing at this time.
2) Competition-driven margin erosion continues amid tighter regulations

Margins slide with The intensity of commission rate competition is surprising. A brokerage commission
declining brokerage rate for a lead manager was a mere 1bp according to a recent report on the lead
commission rates and manager selection process for Korea Deposit Insurance Corp.’s sale of its stake in
fierce competition in Korea Life. Industry figures testified that such a low rate is not exactly aimed for an
other businesses advantageous position in the following selling process. Korean brokerages’ fierce
competition is lowering the sustainability of surplus profits. Over the last decade, at
least, there has been no case where a reduced commission rate was raised again.
Instead, whenever trading value increased, the commission rate has been
241
repeatedly lowered to optimize the cost structure. And now this phenomenon
seems to be shared by investment banks as well.
3) Restructuring needed but not easy to implement

Voluntary restructuring We did not agree to the argument the fragmented securities sector needs
needed but difficult to restructuring. In the mid-2000s, we compared the number of brokerages in major
expect concrete moves countries in terms of trading value and market capitalization and did not find
corroborating evidence. We also opined, on the premise of growth, lowering
transaction fees via competition should contribute to the growth of the capital
market. However, it has become difficult to forecast a systematically increasing
trading value, given companies and market regulations that have changed after the
global financial crisis. Rather, voluntary restructuring seems to be needed,
considering the abovementioned competition in major businesses and the
unconcerned government. But then again, restructuring is unlikely to materialize in
2013 due to brokerages’ ownership structure. What should we expect?
4) Regular qualification review for major shareholders

May create unintended Stronger qualifications for major shareholder could lead to brokerages’ restructuring.
opportunity that realizes With the measure in place, which is being attempted as part of economic
need for restructuring democratization efforts, conglomerate-affiliated securities firms may be up for sale
in a couple of years. If the list of institutions subject to the qualification review
requirement is expanded from banks and savings banks under the current laws to
brokerages, insurers and credit-specialized financial institutions, an unexpected
effect could appear and may stimulate the securities sector where restructuring has
yet to occur.
5) Emerging importance of risk management offers an opportunity for select

brokerages
Capital management An emerging trend in the recent capital flow in the market is diversified investment
market’s growth to in assets with low uncertainty or those with mid-level or less risks, regardless of
benefit few brokerages asset type (equity, bonds, insurance, real estate, etc.). As uncertainties rise across
the board, diversified investment advocated by the traditional financial theory is
being highlighted. In this aspect, in Korea, average investors’ equity assets are less
lucrative than bank savings, not to mention gains on the valuation of bonds. Equity
trading on which most brokerages depend may revive only if competing asset yields
fall along with interest rates. Or securities firms would have to expand the scope of
financial instruments and build advisory competence. Unfortunately, only a few KIS
Universe-listed brokerages are capable of that.
Figure 3. Annual profit margin by key investment asset

(%)
15
13
11 8.8
9
6.0
7 4.2
5 3.4 3.4 3.4 3.1 3.1 2.9 2.8
3 1.5
1
-1
Immediate annuity
Government bond (30yr)

Time deposit (1-2yr)
Time deposit (3-4yr)

Return on studio flat rental
Corporate bond (BBB-)
(succession plan)
Corporate bond (AA-)
Annual Kospi gain (since

2008)
Note: As of end-Aug 2012

Source: Media release, KRX, Quantiwise, Korea Investment & Securities
242
Earnings forecast
1. KIS Universe securities sector’s FY13F OP to grow

34%YoY
In 2013F, KIS Universe The six KIS Universe-listed securities firms should post 2013F net revenue growth
firms to post net revenue of 8.8% YoY and OP of 33.5% YoY. Net commission income should grow an
growth of 8.8% YoY, OP of average 9.3% for the six brokerages along with normalization of brokerage and
34% YoY underwriting revenue. 2013F OP growth should outpace NP growth as we expect
the firms to control SG&A expenses. Combined FY13 NP growth is estimated at
36.2% and shareholders’ equity growth at 3.4%.
Table 3. FY12-13 earnings estimates for the KIS Universe securities sector (%, W bn)
FY11/12F FY12F/13F
FY10 FY11 FY12F FY13F
growth growth
Net revenue 4,028 4,178 3,522 -15.7% 3,831 8.8%
Commission revenue 2,640 2,611 1,884 -27.9% 2,058 9.3%
Brokerage 1,760 1,853 1,209 -34.8% 1,358 12.4%
WM & etc. 693 570 528 -7.3% 535 1.3%
Underwriting 187 188 147 -22.0% 165 12.4%
Interest income 1,370 1,417 1,583 11.7% 1,617 2.1%
Trading & etc. 18 150 55 -63.4% 156 184.0%
SG&A (-) 2,743 3,020 2,850 -5.6% 2,934 3.0%
OP 1,285 1,159 672 -42.0% 897 33.5%
EBT 1,285 1,198 678 -43.4% 922 36.1%
NP 1,132 877 528 -39.8% 719 36.2%
Total assets 75,013 91,044 98,077 7.7% 101,417 3.4%
Shareholders’ equity 13,392 16,394 16,715 2.0% 17,289 3.4%
Note: 1) Asset management commission includes beneficiary certificate, wrap account and trust commission (based on the KIS
classification)
2) ELS sales commission is recognized as “trading and others” income under K-IFRS beginning in FY11 (until FY10, it was
recognized as asset management commission)
Table 4. W1trn increase in trading value and its earnings impact
Brokerage Brokerage ROE ROE
Shareholders’
Company market commission Sensitivity sensitivity sensitivity
equity
share rate ranking gap
Commission (W
(%) (bp) (W bn) ROE (%) (bp)
bn)
Kiwoom 15.7 1.9 871 15 1.7% 1 0
Daishin 3.4 14.1 1,730 24 1.4% 2 (32)
Samsung 5.6 15.1 3,573 42 1.2% 3 (52)
Hyundai 4.1 15.8 2,986 32 1.1% 4 (63)
Woori IS 5.4 12.3 3,507 33 0.9% 5 (77)
Daewoo 5.0 13.4 4,049 33 0.8% 6 (89)
Note: 1) Brokerage market share excludes ELW (as of Oct 2012)
2) Brokerage commission rate excludes ELW (as of 1QFY12)
3) Shareholders’ value as of end-Mar 2013
4) Trading value based on 250 trading days a year
Source: KOSCOM, Financial Statistics Information System, Korea Investment & Securities
243
Top pick
Samsung Securities (016360)

To maintain relative edge The market slowed with plunging trading value fades concerns about
backed by its forte in asset securities-related regulatory risks in the short term and paints a bleak FY12 profit
management outlook. We maintain Samsung Securities as our top pick as the firm is expected to
fare better than others. Backed by the big weighting of HNW assets among retail
assets, FY12 financial instrument sales should be relatively favorable. Along with
the new management, the company has also stepped up cost controls and risk
management. Such efforts should offset the shrinking top-line to an extent. For the
long term, the firm should benefit from the large players-centered shift in the
industry’s landscape and the growing capital management market. Amid that, the
current share price (FY12F PB 1.0x) has neared the lowest point since the 2008
financial crisis. Since we believe the valuation is not burdensome on a long-term
horizon, we maintain a buy-and-hold strategy.
Risk factors
1) Steady growth of relatively low-commission exchange-traded fund market could

reduce commission income from other financial instrument sales to individual
investors. However, some brokerages that have secured a solid HNW customer
base may view the market expansion as an opportunity along with retail investors’
mounting financial advisory demand. 2) With persistent low trading value,
commission rates may fall for businesses, such as investment banking operations,
etc. However, some large firms with a relatively balanced profit structure should
enjoy relatively stable earnings even if the low-level trading value continues.
244
Coverage valuation
Table 5. Valuations (W bn, KRW)

Company Revenue OP NP EPS BPS PE PB ROE Div. yield
(W bn) (W bn) (W bn) (KRW) (KRW) (x) (x) (%) (%)
Samsung Securities Recommendation BUY 2010A 2,502 356 238 3,566 43,531 13.1 1.07 9.2 1.6
(016360) TP(KRW) 64,000 2011A 2,730 321 192 2,748 45,674 17.0 1.02 6.9 1.2
Price (KRW) 48,600 2012F 3,086 250 167 2,184 48,189 21.4 0.97 4.9 1.2
Market cap. (W bn) 3,715 2013F 3,340 274 186 2,428 50,057 19.2 0.93 5.2 1.3
2014F 3,616 290 198 2,590 52,028 18.0 0.90 5.3 1.4
Daewoo Securities Recommendation Hold 2010A 3,524 333 256 1,295 14,658 7.9 0.70 9.0 1.9
(006800) TP(KRW) - 2011A 4,154 211 167 624 12,039 16.3 0.85 5.8 1.2
Price (KRW) 10,950 2012F 3,687 145 142 426 12,263 23.9 0.83 3.6 1.1
Market cap. (W bn) 3,638 2013F 3,991 183 161 483 12,608 21.1 0.81 4.0 1.2
2014F 4,320 202 176 527 12,987 19.3 0.79 4.2 1.4
Woo Investment &
Recommendation BUY 2010A 3,779 165 153 1,013 17,363 10.1 0.59 6.1 1.5
Securities
(005940) TP(KRW) 14,000 2011A 2,625 224 168 899 15,841 11.4 0.65 6.4 1.8
Price (KRW) 10,650 2012F 4,297 149 101 465 16,076 22.0 0.64 2.9 1.2
Market cap. (W bn) 2,205 2013F 4,652 159 124 570 16,526 18.0 0.62 3.5 1.5
2014F 5,035 156 128 588 16,964 17.4 0.60 3.6 1.5
Hyundai Securities Recommendation Hold 2010A 1,815 215 292 1,802 16,623 4.3 0.47 12.0 3.8
(003450) TP(KRW) - 2011A 1,773 146 137 814 13,402 9.6 0.58 5.1 1.8
Price (KRW) 8,180 2012F 2,060 (20) (10) (45) 13,153 N/A 0.60 (0.3) -
Market cap. (W bn) 1,924 2013F 2,230 99 93 410 13,582 19.1 0.58 3.1 1.3
2014F 2,414 84 85 373 13,857 21.0 0.57 2.7 1.1
Kiwoom Securities Recommendation BUY 2010A 496 134 108 4,877 31,863 11.7 1.80 15.3 1.3
(039490) TP(KRW) 70,000 2011A 467 162 123 5,552 36,506 10.3 1.57 17.4 1.2
Price (KRW) 60,300 2012F 472 106 84 3,811 39,432 15.0 1.45 10.4 1.0
Market cap. (W bn) 1,333 2013F 511 118 98 4,427 43,275 12.9 1.32 11.2 1.2
2014F 553 114 95 4,294 46,891 13.3 1.22 9.9 1.1
Daishin Securities Recommendation BUY 2010A 4,188 82 84 1,084 21,929 7.9 0.39 5.0 5.1
(003540) TP(KRW) 38,000 2011A 4,298 95 91 1,165 22,282 7.3 0.38 5.3 6.8
Price (KRW) 8,710 2012F 3,395 43 43 555 22,205 15.4 0.39 2.5 8.8
Market cap. (W bn) 669 2013F 3,533 63 57 732 22,628 11.7 0.38 3.3 8.8
2014F 3,676 53 48 622 22,854 13.7 0.37 2.7 8.8
245
Insurance
Policy changes under a new administration
Financial industry change triggered by household debt issue

Overweight The government has stepped up its efforts to rein in household debt since
2011 and 2013 will be a critical year of transition. Financial policy change
is inevitable under a new administration. The slow growth of developed
▶ Top picks economies will drag on the export growth of Korea, which has performed
relatively well after the global financial crisis. And the private sector’s debt
Samsung F&M (041510, BUY, TP W300,000) in East Asian countries (incl. Korea) will draw increasing attention from the
2012F 2013F 2014F rest of the world. While changes to the financial industry’s structure should
PE (x) 12.4 11.5 12.3 benefit insurers on many fronts, regulation uncertainties such as taxes
PB (x) 1.2 1.1 1.1
should affect non-life insurance, mainly its medical indemnity products.
DPS (KRW) 5,000 5,000 5,500
Regulation and business environment changes affect insurers
EPS (KRW) 17,227 18,591 17,373
On the regulatory front, insurers will likely face downward pressure on
BPS (KRW) 173,532 187,511 200,272 expense loading in the long-term. Furthermore, regarding the
 Market dominance; Sound risk control backed government’s approval of online life insurance, the lines could be blurred
by solid capital
 Following entry to reinsurance segment, plans between health insurance products as seen in term and auto insurance.
to advance on China’s auto insurance market The household debt problem will have a bearing on the economy and the
in 2013 financial system for years to come. The low rate environment will likely
 Shareholders’ return via dividend and treasury continue for some time with the central bank likely lowering the key interest
share buyback
rate from 2.75% at present to 2.0% in 2013. A key to forecast the insurers’
share performances is when and where the bottom will be. Regarding the
interest rate trend, external factors, including political events, need to be
▶ 12M sector performance closely watched. If there is a sign of US economic recovery and a possible
bottom for the interest rate, it would be a boon to life insurers’ share price
8,000 Property & Casualty Insurance sector index (p, LHS ) 10 recovery in 2013.
5
6,000
0 KIS Universe insurers’ FY13F NP to grow 11% YoY
4,000
-5
The KIS Universe eight insurers should together post policy premiums of
2,000
-10
W81trn (+9.4% YoY) and NP of W4.4trn (+11.4% YoY) in FY13F. For
0 -15
non-life, direct insurers should see ~11% premium growth thanks to
Nov-11 Feb-12 May-12 Aug-12 stronger-than-expected sales of new business in FY12. The life insurers’
premium growth should slow to the mid-6% level due to the absence of
lump-sum payment for whole life annuity premiums seen in FY12. But in
the long-term, 7-8% premium growth will be achievable led by annuities.
Of note, FY13 NP forecasts are very susceptible to each insurer’s dividend
policy and the valuation gains on bonds in a low rate environment. Thus, in
our approach to FY13 NP estimates, we placed more focus on profits
coming from fixed-income assets. We peg Dongbu’s NP to fall 3% YoY in
FY13F as it saw large securities disposal gains in FY12. Combined NP
should grow 9.9% YoY at non-life insurers and 13.0% YoY for life insurers.
Figure 1. KIS Universe non-life insurers’ PB

(PB, x) 1) Long-term uptrend of the Korean stock Min
4.0 market Median
3.5 2) Strong growth of LT lines Max
3) Long-term uptrend of market interest rate
3.0 4) Favorable regulations toward insurers 1) Record-low market interest rate
2.5 Sales led by auto5) Auto insurance market overhaul
insurance
2) Listing of large-cap life
2.0 with limited growth potential
Chulho Lee, CFA 1.5

822-3276-6167 1.0
chlee@truefriend.com 0.5
0.0
Heejung Song Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
822-3276-6187
hjsong@truefriend.com Source: Quantiwise
246
1. Household debt issue and financial industry changes

Household debt issue will The government has stepped up its efforts to rein in household debt since 2011 and
bring major changes to 2013 will be a critical year of transition. Financial policy change is inevitable under a
the financial sector  new administration. The slow growth of developed economies will drag on the
positive, but regulatory export growth of Korea, which has performed relatively well after the global financial
uncertainties weigh crisis. And the private sector’s debt in East Asian countries (incl. Korea) will draw
increasing attention from the rest of the world. Regarding these issues, we
reviewed upcoming major changes to the financial sector and their effects by
financial services segment in our earlier report Insight to Korea’s household debt:
Systemic risk unlikely, but there is a price to pay published on Oct 15. While
changes to the financial industry structure would benefit insurers on many fronts,
regulation uncertainties such as taxes should affect non-life insurance, mainly its
medical indemnity products.
Table 1. Major changes to the financial business environment triggered by household debt issue
Banks Insurance Securities
Encourage extension for household debt maturity O △ △
Maintain low interest rate X X O
Keep up efforts to stimulate domestic demand O O O
Financial industry
Ask financial institutions to strengthen ability to absorb losses in order to tackle crisis in a
X XX △
pre-emptive manner
Impose financial regulations centered on administrative guidance X X X
Change the business model for retail finance that has depended on household loans XX O O
Accelerate institutional adjustment for pension system and stimulate growth △ O OO
Cultivate and bolster the long-term bond market X O OO
Highlight loan products allowing equal installment payments for principal and interest X O △
Accelerate changes to finance-related tax code △ △ △
Tougher competition to attract high-net worth individuals at financial institutions O X △
Note: OO very positive, O positive, △ neutral, X negative, XX very negative
1) Stricter RBC ratio requirements and dividend restrictions as a crisis tool

Authorities urge financial This would be negative for the short-term share performances of insurers, except
institutions to bolster affluent firms such as Samsung Fire & Marine (SF&M) and Samsung Life Insurance.
capital while discourage The financial authorities forewarned since early 2012 that it would tighten the
cash dividend risk-based capital (RBC) ratio requirements. A full-fledged regulatory tightening will
likely be seen in 2H13 and the focus will be on interest rate risk and credit risk
related to the insurers’ asset management. After discussions between insurers and
the supervisory authorities, it appears the authorities agreed to give consideration
to the insurers’ demand while insurers accepted the authorities’ urge to rein in the
external outflow of retained earnings in the form of cash dividend.
2) Tightening regulations for financial consumer protection

Both ruling and The strengthening of consumer protection in financial services means more sources
opposition parties are of regulatory risks. It requires extra caution by insurers given the complaints about
committed to step up medical indemnity policies piling up at the supervisory authorities. The government
measures to protect has yet to establish an organization exclusively in charge of financial consumer
financial consumers protection. Only a legislative system has been proposed by the Ministry of Public
Administration & Security, which involves the installation of a financial consumer
247
protection institute at the Financial Supervisory Service (FSS) to take charge of

consumer policies via the financial consumer protection law. Both the ruling and
opposition parties are preparing a consumer protection bill that includes the
establishment of an independent organization. The political sphere proposed to
strengthen financial consumer protection by expanding related budgets and
endowing the respective institutions with greater power. If launched as an
independent organization, it will exert greater influence on financial consumer
protection than while under the FSS, whose priority is on quality control at financial
institutions.
3) Growth of long-term bond market

Household debt issue An increase in long-term bond issues would favor the insurers’ asset management.
leads to shift in bank loan Following the issue of a 30-year maturity in Sep, the government plans to increase
structure  increasing the issue of 30-year or longer bonds and in future to lengthen the bond maturity to a
issue of long-term bonds maximum of 50 years. Financial institutions should also increase the issue of
longer-term maturities. For example, the banks’ loan structure is shifting from
short-term, floating-rate bullet repayment (a lump sum principal payment at
maturity) to fixed-rate, straight line repayment (equal installment of principal and
interest). The supply of long-term bonds should increase on more debt
liquidation-covered bond issues.
4) Overhaul of pension system for full-fledged growth

Pension system will Supportive policy measures for the pension system are favorable to life insurers
absorb increased supply who are competitive in pension plans, Samsung Life in particular. The government’s
of long-term bonds commitment to nurture the growth of the pension market is easily seen in its 2012
tax revision bill. Basically, the policy direction is toward a gradual phase-out of tax
exemptions on financial products but the revision bill includes a number of breaks
on pension benefits with the focus placed on stimulating enrollment in private
pensions. For the national pension, Korea’s accumulated pension fund percentage
of GDP has reached the level of Japan. Accordingly, a key issue is to reform the
current payment-benefit structure to ensure a financially sustainable national
pension. In contrast, the amount of accumulated private/retirement pension funds is
far less than in Japan. As such, it seems private pension is one of the few segments
with growth potential in the financial sector.
Table 2. Korea’s public/private pension funds Figure 2. Pensions % of GDP
Public pensions
(W bn) 0%
Retirement pensions
2008 2009 2010 2011 Private pensions
Private pensions (A = B+C+D+E) 150,947 173,168 203,142 231,500

Retirement insurance/trusts (B) 27,096 23,355 16,001 4,383
Retirement pensions (C) 6,612 14,025 29,147 49,917 103%
30%
Annuity savings (tax-qualified, D) 46,277 51,919 59,614 68,200
Individual annuities (unqualified,E) 70,962 83,869 98,380 109,000
29% 16%
National pension (F) 235,425 277,642 323,991 348,900
4%
Total (A+F) 386,372 450,810 527,133 580,400 24%
13% 10%
Korea US Japan
Source: FSS Source: Samsung Research Institute of Finance, FSS, Korea Investment & Securities
248
5) Financial tax revisions and intense competition over HNW individuals

among financial institutions
Tax revisions Unlike pension plans, insurance products would be harmed by tax revisions. Given
disadvantageous to HNW that direct tax benefits and tax-cut effects were used to justify the heavy loading
individuals will work to expenses of insurance products, we believe tax revisions will bring about long-term
fuel demand for financial changes to the insurance sector. Meanwhile, the government’s measures to tackle
advisory services the household debt problem will unfold in a way to expand welfare benefits in an
aging society and ensure fiscal soundness in the long-term. To achieve the
conflicting goals, the government needs to expand fiscal resources, which should
lead to tax revisions that are disadvantageous to high-income earners and high-net
worth (HNW) individuals. But such changes will prompt super-rich clients to rely
more on financial advisory services. In the short-term, major life insurers with
advanced advisory services will stay ahead of rivals, and banks and securities firms
will join the race.
2. Government’s challenge to deal with an aging society,

expand welfare and ensure fiscal soundness and insurers’
roles
1) Health insurance policy changes
National health insurance Uncertainties should linger, mainly regarding medical indemnity policies, at least
policy changes may until 1H13. Presidential candidates from both the ruling and opposition parties are
affect private, mainly advocating greater welfare benefits in their 2012 campaigns. It is certain the welfare
non-life, insurers policy changes will have a bearing on private insurers. But at this point, it would be
fair to call everything “uncertain” because the effects will vary depending on who
wins the presidency. The Democratic United Party’s (DUP) candidate Moon Jaein
has presented more detailed guidelines of his welfare policies, which include 1)
placing an annual ceiling (W1mn) on out-of-pocket medical expenses for individuals
and 2) brining a large part of medical services currently not covered by national
health insurance under its coverage. If implemented, the policies will deal a heavy
blow to the medical indemnity insurance market. In the short-term, insurers will see
profits grow on fewer medical indemnity claims but in the longer run, demand will
shrink for medical indemnity products. Changes to the health insurance policy
structure are inevitable as well.
2) Auto insurance: Loss ratio and possible premium cuts

Auto loss ratio likely to The auto loss ratio has continued to fall for the past two years since the related
turn upward after two regulation changes in 2010. But the ratio will very likely climb in 2013 given the
years of decline following. First, the auto insurance premium cuts will be decided before FY13 starts
while there has been no premium drop since Apr. Second, while an earlier decline
in the auto accident rate helped drive down the auto loss ratio, the rate has since
stayed flat. Third, revisions to the standard terms of an auto insurance contract,
scheduled in Apr 2013, will favor policyholders and should lead to reduced
premiums. We forecast the auto loss ratio of the five non-life insurers (e.g.,
Samsung F&M, Dongbu, Hyundai M&F, LIG and Meritz F&M) will climb 1.5%p on
average in FY13F.
3) Insurance regulation changes

Several regulation As usual, a number of regulation changes are scheduled in the coming year but
changes likely to put none will significantly affect the insurers’ share performances in 2013. The issues of
downward pressure on interest include the following. 1) The ceiling will be lowered for the deferral of new
expense loading in the protection-type business acquisition costs. As the deferred costs recognizable as
long-term intangible assets will be lowered, it would harm the insurers’ profits but the impact
249
should be short-lived (no longer than three quarters). 2) The media is buzzing about
a possible drop for the standard interest rate used to calculate the appropriate level
of policy reserves that insurers must maintain. If lowered, it would be welcomed by
insurers who are struggling in the low rate environment. But if the standard interest
rate is lowered, it will bring down the assumed interest rate as well, on which
insurers calculate the expected return on asset management. A lower assumed
interest rate leads to insurance premium rises, and that is not something wished for
by the government. 3) The welfare of so-called “special employment workers” could
be a matter. They include golf caddies and parcel delivery drivers as well as
insurance sales agents, who have an owner-operator status that puts them outside
the reach of labor rights protection. Assuming the purchase of four major insurance
plans for sales agents, it will have considerable impact on insurers’ monthly profits.
4) The government approved an online life insurance business inconsistent with its
stance not to issue additional licenses for life insurers. The approval helps investors
understand the government’s view of insurance product distribution costs. On the
regulatory front, insurers will likely face downward pressure on expense loading in
the long-term. Furthermore, regarding the government’s approval online life
insurance, the lines could be blurred between health insurance products as seen in
term insurance and auto insurance. For example, Kyobo Auto Insurance introduced
online auto insurance products in 2001 and 11 years later, the online products claim
37% of Korea’s auto insurance market.
4) Low rate environment and market interest rate

Will the interest rate The household debt problem will have a bearing on the economy and the financial
bottom out in 2013? system for years to come. And the low rate environment will likely continue for
Sustainability of US’ some time with the central bank likely lowering the key interest rate from 2.75% at
economic recovery a key present to 2.0% in 2013. A key to forecast the insurers’ share performances is when
variable for share prices and where the bottom will be. Regarding the interest rate trend, external factors,
including political events, need to be closely watched. Changing political leaders at
home and abroad will lead to the implementation of new stimulus programs. If there
is a sign of US economic recovery and a possible bottom for the interest rate, it
would be a boon to the life insurers’ share price recovery in 2013.
Earnings forecast
1. Key assumptions
FY13F NP to slow to +11%  Shareholders’ equity growth: Non-life 18% (FY12F) → 11% (FY13F); Life 5%
(FY12F) → 7% (FY13F)
 Policy premium growth: Non-life 13% (FY12F) → 11% (FY13F); Life 7%
(FY12F) → 7% (FY13F)
 Non-life auto loss ratio: 71.9% (FY12F) → 73.4% (FY13F) → 73.9% (FY14F)
 Non-life long-term line loss ratio: 85.3% (FY12F) → 85.7% (FY13F) → 86.1%
(FY14F)
 AUM growth: Non-life 20% (FY12F) → 13% (FY13F); Life 6.5% (FY 12F) →
6.6% (FY 13F)
 Investment yield: Non-life 4.5% (FY12F) → 4.3% (FY13F); Life 4.9% (FY12F)
→ 4.8% (FY13F)
250
2. KIS Universe: Combined FY13F NP to gain 11% YoY

Life insurers’ NP to rise The KIS Universe’s eight insurers should together post policy premiums of W81trn
13% YoY in FY13F, (+9.4% YoY) and NP of W4.4trn (+11.4% YoY) in FY13F. For non-life, direct
slightly exceeding 10% insurers should see ~11% premium growth thanks to stronger-than-expected sales
for non-life insurers of new business in FY12. The life insurers’ premium growth should slow to the
mid-6% level due to the absence of lump-sum payments for whole life annuity
premiums seen in FY12. But in the long-term, 7-8% premium growth will be
achievable led by annuities. Of note, the FY13 NP forecasts are very susceptible to
each insurer’s dividend policy and the valuation gains on bonds in a low rate
environment. Thus, in our approach to FY13 NP estimates, we placed more focus
on profits coming from fixed-income assets. We forecast Dongbu’s NP to fall 3%
YoY in FY13F as it saw large securities disposal gains in FY12. The combined NP
should grow 9.9% YoY at non-life insurers and 13.0% YoY at life insurers.
Table 3. KIS Universe insurance NP forecasts (W bn, %)
FY11 FY12F) FY13F

Amount Amount % chg. YoY Amount % chg. YoY
Samsung Life 947 1,089 15.0 1,243 14.1
Hanwha Life 534 538 0.8 596 10.8
Life total 1,481 1,627 9.8 1,839 13.0
Samsung F&M 785 871 11.0 940 7.9
Dongbu 403 471 16.9 456 -3.4
Hyundai M&F 399 406 1.7 431 6.3
LIG 209 264 26.3 296 12.2
Meritz F&M 165 160 -2.8 229 43.3
Five direct insurers’ total 1,960 2,172 10.8 2,352 8.3
Korean Re 44 159 261.3 210 32.4
Non-life total 2,004 2,331 16.3 2,562 9.9
Insurers’ total 3,486 3,958 13.6 4,401 11.2
Figure 3. After-tax NP sensitivity to 1%p rise in auto loss ratio
Samsung F&M Dongbu Ins. Hy undai M&F LIG Ins. Meritz F&M 5 non-lif e av g.
-6
-12
-15 -14
-26 Drop in NP (W bn)
Drop in ROE (%p)
-0.3%
-0.4%
-0.5% -0.5%
-0.7%
-0.7% -72
251
Top picks
Samsung Fire & Marine Insurance (000810)

Samsung F&M: Lofty It would be “uncertainty” that best describes non-life insurance in 2013. The
dividend backed by solid financial sector will undergo major regulation changes next year to fix the triggers of
capital and profit source the household debt problem. Stricter RBC requirements will be the most significant
diversification on regulation change for the insurance sector. Adjustments to health insurance could
overseas advance have a major impact on non-life insurance, which is the most vulnerable segment to
regulatory action in the financial sector. Thus, we recommend a cautious approach
toward non-life insurers until the new administration is in office and the policy
uncertainties dissipate. While medical indemnity policies are quite susceptible to
regulatory risks, Samsung F&M, a non-life insurance leader, has diversified its
policy portfolio into property, savings and general line. The diversification will
continue as Samsung F&M is set to enter China’s auto insurance market in 2013.
Samsung F&M plans to use two-thirds of profit to fund dividends and treasury share
buyback, which provides downside protection for the share price.
Samsung Life Insurance (032830)

Samsung Life: Decline in A key for the share price is whether or not the market interest rate will hit bottom in
market interest rate is the 2013. Samsung Life is considered a prime beneficiary of the private pension
only culprit system’s growth, which is becoming increasingly visible, but the interest
rate-related negative momentum cancels out the positive effect. Nonetheless, the
stock will offer a good buy opportunity at a certain level, ~W90,000 in our view,
given its unmatched strength in non-price competition. At W90,000, Samsung Life’s
operating shareholders’ equity is valued at PE 8.2x and PB 0.9x using SotP
valuation. Our TP W116,000 is a simple average of W114,000 (SotP PB valuation)
and W119,000 (trailing EVPS 1x).
Risk factors
Insurers’ earnings will widely miss our estimates if the interest rate is lifted in 2013.
That is, if market interest rates go up to reflect a growing chance of domestic and
global economic recovery, insurers’ profits would beat our forecast thanks to gains
on securities (mainly bonds) disposal.
We note that FY13 will be only nine months (Apr-Dec 2013) instead of 12. The
insurers’ fiscal year-end will change from Mar to Dec as of FY13. But for
comparison purposes, we took into account 12 months of business (Apr 2013-Mar
2014) in our FY13 forecasts. The absence of a quarter and resulting cost and profit
impact are not factored in our earnings estimates.
252
Coverage valuation
Table 4. Valuations
Company Premium OP NP EPS BPS PE PB ROE ROA
(W bn) (W bn) (W bn) (KRW) (KRW) (x) (x) (%) (%)
Samsung Life Recommendation BUY FY10A 14,851 1,644 1,925 9,624 76,950 9.7 1.2 15.9 1.4
(032830) TP (KRW) 116,000 FY11A 14,991 556 947 4,737 90,566 19.7 1.0 6.2 0.6
Price (Nov 15, KRW) 94,100 FY12F 17,755 735 1,112 5,562 104,399 16.8 0.9 6.1 0.7
Market cap. (W bn) 18,820 FY13F 17,247 724 1,126 5,630 111,350 16.6 0.8 5.4 0.6
FY14F 18,390 1,194 1,552 7,759 120,455 12.0 0.8 7.0 0.8
Hanwha Life Recommendation Hold FY10A 7,215 (65) 481 554 7,093 13.4 1.1 8.5 0.8
(088350) TP (KRW) - FY11A 7,163 (90) 534 615 7,701 12.1 1.0 8.7 0.8
Price (Nov 15, KRW) 7,580 FY12F 8,291 (154) 568 654 8,327 11.4 0.9 8.7 0.8
Market cap. (W bn) 6,583 FY13F 7,896 (180) 589 679 8,782 11.0 0.8 8.4 0.8
FY14F 8,311 (234) 600 691 9,250 10.8 0.8 8.1 0.7
Samsung F&M Recommendation BUY FY10A 11,861 922 720 13,979 134,482 15.2 1.6 12.0 2.7
(000810) TP (KRW) 300,000 FY11A 13,679 1,101 785 15,515 154,027 13.7 1.4 11.5 2.5
Price (Nov 15, KRW) 241,500 FY12F 15,844 1,163 871 17,227 173,532 12.3 1.2 11.2 2.3
Market cap. (W bn) 12,212 FY13F 17,236 1,260 940 18,591 187,511 11.4 1.1 10.7 2.1
FY14F 18,960 1,248 931 18,413 201,312 11.5 1.1 9.8 1.9
Dongbu Insurance Recommendation Hold FY10A 6,422 388 328 4,489 24,729 10.6 1.9 21.0 3.1
(005830) TP (KRW) - FY11A 8,368 562 403 5,694 31,558 8.4 1.5 23.0 3.1
Price (Nov 15, KRW) 50,900 FY12F 9,051 645 471 6,657 39,706 7.2 1.2 21.1 2.7
Market cap. (W bn) 3,604 FY13F 10,115 621 456 6,434 44,977 7.4 1.1 16.2 2.1
FY14F 10,136 661 486 6,867 50,682 6.9 0.9 15.3 2.0
Hyundai M&F Recommendation BUY FY10A 6,634 236 205 2,173 16,548 16.1 2.1 14.3 1.8
(001450) TP (KRW) 43,000 FY11A 8,358 560 399 4,462 19,732 7.8 1.8 27.0 3.1
Price (Nov 15, KRW) 36,850 FY12F 9,162 563 406 4,537 24,863 7.7 1.4 23.0 2.3
FY14F 10,207 638 461 5,155 32,636 6.8 1.1 18.1 1.9
LIG Insurance Recommendation BUY FY10A 5,680 129 113 1,718 20,998 15.3 1.3 9.0 1.2
(002550) TP (KRW) 36,000 FY11A 7,052 340 209 3,484 22,384 7.6 1.2 16.6 1.8
Price (Nov 15, KRW) 27,100 FY12F 8,254 365 264 4,399 27,075 6.0 1.0 19.7 1.8
FY14F 9,244 462 332 5,531 35,816 4.8 0.7 17.8 1.6
Meritz F&M Recommendation BUY FY10A 3,526 161 132 1,484 8,189 9.2 1.7 20.6 2.1
(000060) TP (KRW) 17,800 FY11A 4,037 221 165 1,702 9,298 8.0 1.5 20.8 2.4
Price (Nov 15, KRW) 14,400 FY12F 4,531 217 160 1,655 11,512 8.2 1.2 17.8 1.8
FY14F 5,063 350 259 2,678 15,563 5.1 0.9 20.0 2.1
Korean Re Recommendation BUY FY10A 3,085 143 177 1,381 11,081 7.6 0.9 13.8 4.0
(003690) TP (KRW) 19,000 FY11A 3,397 77 44 379 11,790 27.7 0.9 3.4 0.9
Price (Nov 15, KRW) 11,400 FY12F 3,816 214 159 1,368 13,336 7.7 0.8 11.6 2.3
FY14F 4,258 303 228 1,965 16,561 5.3 0.6 13.2 2.7
Source: Company data, Quantiwise, Korea Investment & Securities
253
Internet/Games
Inevitable slowdown of domestic market growth
Online ad market growth to slow

Overweight We expect the Korean online ad market to grow 9% YoY in 2013F
compared to 2012’s 12%. We attribute the tapering off to the domestic
▶ Top picks economic slowdown and a high base of comparison in 2012 that featured
major political/sporting events, ad rate hikes and mobile ad market growth.
NHN (035420, BUY, TP W330,000)
Whether Daum’s start of direct operations for search ads on the breakup of
2012F 2013F 2014F
its partnership with Overture will succeed or not will be a critical concern in
PE (x) 21.0 18.3 14.2
the market. Meanwhile, the domestic online game market should grow
PB (x) 4.0 3.4 2.8
only 23% YoY in 2013F due to the weak lineup of new blockbusters.
EV/EBITDA (x) 13.6 11.1 8.6
EPS (KRW) 11,496 13,205 16,956
BPS (KRW) 59,621 70,986 85,638
Presence of mobile messengers to firm up
 Sales growth on the full implementation of As games on Kakao Talk, such as the hit AniPang, have won countess
Line’s revenue model (incl. mobile games) fans, mobile messengers have become an important platform for content
 Profit contribution of new games (incl.
Winning Eleven Online) distribution. Accordingly, major mobile game companies such as Com2us
 Strong growth of mobile search ad sales are set to release Kakao Talk-based games. With the launch of Chatting
Plus that enables the simultaneous use of applications and chat, Kakao
NCsoft (036570, BUY, TP W300,000)
Talk will provide simple games, photo editing, music and video streaming.
2012F 2013F 2014F
NHN plans to offer mobile games via Line, an internally-developed mobile
PE (x) 23.7 10.8 8.0
instant messenger with more than 73mn downloads, from end-2012 and
PB (x) 3.3 2.6 2.0
provide content and services via Line channels.
EV/EBITDA (x) 15.5 6.9 4.4
EPS (KRW) 6,853 14,993 20,257
BPS (KRW) 49,600 62,698 80,586
Valuation burden to ease
 Better earnings on the overseas penetration of NHN and NCsoft are our top picks. Despite the stumbling economy, NHN
Blade & Soul and Guild Wars 2 should deliver a solid performance in online and mobile ads with its firm
 Solid new game lineup of Wildstar and
Lineage Eternal presence as a search engine. Moreover, Line’s steady gain of subscribers
 Valuation to rise if CEO’s stake disposal and the full implementation of a revenue model raise expectations. For
concern subsides
NCsoft, the commercialization of Blade & Soul and Guild Wars 2 in China
in 2H13 should contribute to further growth. NHN and NCsoft trade at
▶ 12M sector performance respective 2013F PE 18.3x and 10.8x. The figures are 108% and 23%
Rel.to KOSPI (RHS)
more than the KIS Universe average but 13% and 66% less than their past
(p) (%p)
1,000
Internet, Game (LHS)
15
10
three-year averages, indicating the valuation burden is low for both.
800
5
600 0
400
-5 Figure 1. Mobile game market size and growth outlook
-10
-15
200
-20 (W bn) (%)
0 -25 1,400 Market size (LHS) 60
49.4
Nov-11 Feb-12 May-12 Aug-12 Y oY growth (RHS) 45.1
1,200 50
37.0
33.8
40
1,000
23.3 21.1 21.4 30
800
20
600 5.4
10
400
0
Jonggil Hong (14.5)
822-3276-6168 200 (10)
239 252 305 261 317 424 633 918 1,258
jonggil@truefriend.com 0 (20)
2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
Minha Choi
822-3276-6260
Source: Game White Paper 2012
254
1. 2013F online ad market growth to slow to 9%

Based on Korea’s three We expect Korea’s three major portals – NHN, Daum and SK Communications – to
major portals, online ad post combined sales of W1.9trn (+9.3% YoY) in 2013F due to the ad market
sales to grow 9% YoY in slumping in a sluggish real economy (Figure 3). Meanwhile, the online ad market
2013F weighting should inch up 0.8%p YoY to 21.5% (Figure 2). Despite the economic
malaise, the online ad market growth was strong in 2012 thanks to major political
(general/presidential elections) and sporting (London Olympics) events, higher ad
rates and expanding mobile ad market. Given a high base of comparison, the
slower growth in 2013 is not a serious worry. We believe a key concern will be
whether Daum will be able to increase profits by taking search ad market share
from NHN as it is set to start direct operations after ending the partnership with
Overture.
Figure 2. Online ad market size and growth outlook Figure 3. Three major portals’ combined online ad sales
(W bn) Total ad market (LHS) (W bn) Display ads (LHS) (%)

12,000 25% 2,400 30
Online ad market (LHS) 10,847 Search ads (LHS)
Online ads to total ads (RHS) 10,331
9,886 Online ad growth (RHS)
9,561 25
10,000 22.8% 2,000
20%
8,621 21.5% 21.9
20.7%
7,990 7,797 19.8 20
7,634 19.4%
8,000 7,256 1,600 584
6,844 6,987 6,840 7,054 17.1%
17.9%
538
15% 15.9
15
468
15.3%
6,000 1,200
378 11.7
9.3 10
12.8%
10% 340 312
4,000 10.2% 800 293
1,303 5
5.7% 8.0% 2,473 1,188
2,221 1,076
1,856 2,046 5% 955
2,000 2.7% 3.9% 1,190 1,243
1,547 400 790 782 0
779 1,020 650
393 567
185 270
(3.2)
0 0% 0 (5)
2002 2004 2006 2008 2010 2012F 2014F 2007 2008 2009 2010 2011 2012F 2013F
Source: Cheil Worldwide, Korea Investment & Securities Note: NHN’s online ad sales are based on prior to the separation of its business platform
Source: NHN, Daum, SK Communications, Korea Investment & Securities
Mobile ad market is The mobile ad market should grow 75% YoY to W350bn in 2013F. NHN’s Oct
growing fast on wider mobile queries jumped 158% YoY, approaching 89% of PC queries. In addition, its
smartphone penetration sales weighting of mobile search ads has widened to 12% in 3Q12. We expect
NHN’s mobile queries to exceed PC queries that will likely stagnate or decline YoY
in 2013.
255
Figure 4. PC vs. mobile queries growth at NHN Figure 5. Mobile queries weighting at NHN
(%)
50 Mobile queries weighting
45
40
35
30
25
20
15
10
0
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12
Source: NHN, Korea Investment & Securities Source: NHN, Korea Investment & Securities
Figure 6. Mobile ad market size
(W bn)
400 Mobile ad market size
350
350
300
250
200
200
150
100
60
50
0.5
0
2010 2011 2012F 2013F
Source: Cheil Worldwide
2. Online games: Fewer blockbusters but promising

overseas performance
Online game market to We peg the online game market to grow 23.3% YoY to W9.7trn in 2013F. The most
grow 23% YoY in 2013F anticipated games include Winning Eleven Online, Kingdom Under Fire 2 (NHN)
and ArcheAge (XL Games). The game lineup in 2013 falls short of the year earlier
with NCsoft’s Blade & Soul, Blizzard’s Diablo 3 and Riot Game’s League of
Legends. But the strategic focus should be on differentiation from existing games.
NCsoft’s scheduled release of Blade & Soul and Guild Wars 2 in China would
increase royalty income.
256
Figure 7. Online game market size and growth outlook
(W bn) Online game market size (LHS) Winning Eleven Online

14,000 80%
ArcheAge
YoY growth (RHS)
66.8%
Blade & Soul 11,799
12,000 70%
Diablo 3
9,708 60%
10,000 Starcraft (1998) WoW (Nov 2004) Starcraft 2
Lineage (1999) Tera
41.3% 7,876 50%
8,000 Mu Online (2001) Aion
(4Q08) 6,237 40%
6,000 28.5% 30.8%
4,767 26.3%
35.1% 23.4% 26.1% 37.8% 23.3% 30%
21.5%
3,709
4,000 Lineage 2
2,692 20%
(2003) 20.2%
1,777
2,000 1,440
754 1,019 2,240 10%
452
0 0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
Source: Game White Paper 2012
Table 1. New game lineup for 2013 by company

Company Game Genre Release schedule Note
NHN Winning Eleven Online Casual game (sport) Commercialization in 1Q13 2nd CBT: Oct 30 - Nov 5, 2012
Dungeon Striker Action RPG Commercialization in 1H13 Developed by Identity Games
Metro Conflict: Presto FPS Release in 2013 Developed by Red Duck
KritiKa MMORPG Release in 2013 Developed by AllM
Kingdom Under Fire 2 MMORPG Release in 2013 Developed by Blueside
Devilion MMORPG Release in 2013 Developed by Ginno Games
ASTA MMORPG Release in 1H13 Developed by Polygon Games
EoS (Echo of Soul) MMORPG Release in 2013 Developed by NVIUS
Football Day Casual game (sport) Release in 2H13
Blizzard Starcraft 2: Heart of the Swarm RTS Release in 1H13
Nexon FIFA Online 3 Casual game (sport) Release in early 2013 Developed by EA
Probaseball 2K Casual game (sport) OBT in 1Q13
Mabinogi 2 Arena MMO-arena Release in 2013 Cooperation with NCsoft
Counter-strike Online 2 FPS Release in 2013 Developed under license from Valve
Warface FPS Release in 2013 2nd CBT: Nov 22
Wemade Chunryong MMORPG Release in 1H13 1st CBT: Sep 20-26, 2012
Icarus MMORPG Release in 2013
XL Games ArcheAge MMORPG Release in early 2013 5th CBT: Aug 16-31, 2012
Neowiz Games Bless MMORPG Release in 2013
Ein MMORPG Release in 2013
CJ E&M Ghost ’n Goblins Online MMORPG Release in 2013 1st CBT: Sep 12-16, 2012
Cha9Cha9 Casual game (sport) Release in 1Q13
Monarch MMORPG Release in 1H13
Mgame Yulhyul Gangho 2 MMORPG Release in 2013 3rd CBT: Oct 10-26, 2012
257
Mobile messenger-based In the mobile game market, the release of games based on mobile instant
game releases to messengers (e.g., Kakao Talk and Line) and social network games (SNG) should
increase grow considerably. With the sweeping popularity of casual games AniPang and
Dragon Flight, Kakao Talk has established itself as a competitive platform for
content distribution. In addition, the prolonged popularity of I Love Coffee, Tiny
Farm and Rule the Sky showed that SNG can be a source of steady profits. Kakao
Talk plans to offer applications for simple games, photo editing, music and video
streaming with the release of Chatting Plus that enables the simultaneous use of
applications and chat. NHN also plans to offer mobile games, part of its revenue
model, via Line from end-2012 and provide content and services (incl. shopping)
via Line channels.
Figure 8. Line subscriber growth outlook Figure 9. Line sales growth outlook
(mn) (W bn)
160 Subscribers 150 300 Sticker Official Accounts Channels 283.5
140 130
250
120
200 191.1
100
85
80 150
60
44 100
40
25 43.0
50
20 11
5
0 0
Nov-11 Dec-11 Mar-12 Jul-12 Dec-12 Dec-13 Dec-14 2012F 2013F 2014F
Source: NHN, Korea Investment & Securities Source: NHN, Korea Investment & Securities
258
Earnings forecast
1. Key assumptions
Total ad market to grow  GDP growth of 3.3%.
4.5% YoY in 2013F  Annual average exchange rates of W1,058/USD and W1,255/JPY100.
 The total ad market to grow 4.5% YoY to W10.3trn in 2013F, while the online
ad market rises 8.5% YoY to W2.2trn; The online ad market’s share should
inch up 0.8%p to 21.5%; The mobile ad market to reach W350bn.
 Commercialization schedule: Blade & Soul in China (3Q13), Guild Wars 2 in
China (4Q13), Winning Eleven (1Q13).
 Concurrent users of Blade & Soul in China to number 1mn.
2. 2013F KIS Universe Internet/games OP to grow 28% YoY

2013F sales of four KIS We expect the four Internet/game companies in the KIS Universe to post sales
Universe Internet/game growth of 13.8% and OP to rise 28.2% YoY in 2013F. We forecast OPM to go up
companies to grow 16% 3.0%p YoY to 26.4%.
YoY
NHN’s 2013F operating revenue and OP should grow 13.7% and 14.9% YoY on
Line’s profit increase, overseas online ad sales and new games. We peg Line’s
2013F sales at W191.1bn and believe NHN Japan’s search and display ad sales
will also increase. Domestic mobile search ad sales are estimated to climb 44%
YoY to W178.9bn. In the game business, new releases (incl. Winning Eleven
Online), mobile game sales growth and more sales from Japan are anticipated but
web-board game sales should shrink 21.9% YoY due to stricter regulations.
Daum’s 2013F sales should rise 13.5% YoY on recognition in total following the
shift to direction operation of search ads. However, OP should grow a mere 4.5%
YoY due to cost increases (e.g., marketing, commissions and labor).
NCsoft’s 2013F sales should grow 24.6% and NP swell 125.4% YoY backed by the
commercialization of Blade & Soul and Guild Wars 2 in China.
Figure 10. Combined sales and OPM: Internet portals Figure 11. Combined sales and OPM: Online games
(W bn) (%) (W bn) (%)
4,000 Sales (LHS) OPM (RHS) 40 2,400 Sales (LHS) OPM (RHS) 36
34.1
38 34
31.6
2,000 30.7
3,200 32
36
30
33.3 1,600 27.4
34
2,400 32.0 28
32 1,200 24.3 24.1 26

22.8
1,600 28.9 28.7 24
30
800
22
28 18.9
26.0 26.0 18.7
800 20
400
26
18
1,872 2,136 2,543 2,829 3,217 3,664 227 450 594 1,005 1,090 1,277 1,523 1,734 1,924
0 24 0 16
2009 2010 2011 2012F 2013F 2014F 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
Source: NHN, Daum, Korea Investment & Securities Source: NCsoft, Neowiz Games, Korea Investment & Securities
259
Top picks
NHN (035420)
Line and Japanese NHN should enjoy profitability improvement from 2013. Services such as the
search portal Japanese search portal and Line that drove up costs, as well as new titles like
commercialization to Winning Eleven Online, should fully start contributing to profit growth. We set 2013F
bolster profitability operating revenue at W2.7trn (+13.7%), OP at W728.4bn (14.9% YoY) and OPM at
26.9% (+0.3%p YoY). Sales should reach W191.1bn on the solid rise of Line
subscribers (est. 130mn at end-2013) and the full implementation of a revenue
model that includes mobile game sales. Meanwhile, game sales should shrink on
weaker web-board game sales despite the commercialization of Winning Eleven
Online and the release of mobile games and bigger game sales in Japan. Line’s
growth potential and overseas market expansion should be mid to long-term growth
drivers for NHN. Our TP W330,000 is at 2013F PE 23.7x.
NCsoft (036570)
Commercialization of In China, Blade & Soul and Guild Wars 2 should be available from 2H13. Backed by
Blade & Soul and Guild the games’ sales growth (181.8%, 11.0% YoY in 2013F) on overseas penetration,
Wars 2 to drive growth we expect the company’s sales and OP to grow 24.6% and 125.4% YoY in 2013F.
With high-margin royalty income and a rising weighting of item sales, OPM should
go up 17.1%p to 38.2% in 2013F. The new game lineup includes Wildstar and
Lineage Eternal. If concern about the stake disposal by CEO Taek-Jin Kim
disappears, the valuation should return to normal. Our TP W300,000 is at 2013F
PE 20x.
Risk factors
Inevitable ad market With the delayed recovery of the global economy, the slow growth trend on the
contraction on real domestic economic front should continue in 2013. In 2H12, the online ad market
economy’s persistent could not spare the overall ad market contraction affected by the economic
slowdown downturn. Given the large weighting of more than 20%, the online ad market would
inevitably shrink. But compared to the four traditional media outlets – TV, radio,
newspaper and magazines – the negative effects would be relatively less severe
thanks to online ads’ efficiency and the fast-expanding mobile ad market.
Stricter regulations on The Ministry of Culture, Sports & Tourism (MCST) plans to issue an advance notice
web-board games of regulations during Nov and put them in force from Jan 2013. The regulations
include setting a maximum amount of game money players can have (Go-Stop,
Poker), limiting the single play price (W10,000), denying game access for 48 hours
to users who lost a third of their monthly in-game money, a ban on choosing game
opponents, prohibiting auto-play systems and forcing authentication to gain online
access. If the regulations are put in place, it would make playing more inconvenient,
which will reduce users, playing hours and ultimately web-board game sales.
260
Coverage valuation
Table 2. Valuations
NHN Recommendation BUY 2010A 1,785 590 473 10,553 40,696 21.5 5.6 41.0 14.1
(035420) TP (KRW) 330,000 2011A 2,121 620 450 10,134 49,703 20.8 4.2 31.0 11.9
Price (Nov 15, KRW) 241,000 2012F 2,368 634 506 11,496 59,621 21.0 4.0 28.6 14.1
Market cap.(W bn) 11,598 2013F 2,694 728 581 13,205 70,986 18.3 3.4 26.1 11.6
2014F 3,099 931 746 16,956 85,638 14.2 2.8 26.1 9.0
NCsoft Recommendation BUY 2010A 660 174 144 7,284 39,182 28.6 5.3 20.8 19.7
(036570) TP (KRW) 300,000 2011A 609 135 121 6,097 44,008 50.4 7.0 15.1 38.0
Price (Nov 15, KRW) 162,500 2012F 742 157 136 6,853 49,600 23.7 3.3 14.9 25.0
Market cap.(W bn) 3,558 2013F 925 353 299 14,993 62,698 10.8 2.6 26.6 11.6
2014F 1,102 493 404 20,257 80,586 8.0 2.0 27.6 7.7
Daum Recommendation Hold 2010A 350 93 123 2,680 26,671 28.8 2.9 43.4 6.9
(035720) TP (KRW) - 2011A 421 114 108 8,084 34,297 14.8 3.5 26.7 9.8
Price (Nov 15, KRW) 84,400 2012F 461 102 88 6,567 39,434 12.9 2.1 17.9 7.4
Market cap.(W bn) 1,139 2013F 523 107 99 7,365 45,337 11.5 1.9 17.5 6.6
2014F 565 118 112 8,276 52,006 10.2 1.6 17.1 5.4
Neowiz Games Recommendation Hold 2010A 431 27 26 1,308 11,243 35.1 4.1 11.3 23.9
(095660) TP (KRW) - 2011A 668 107 73 3,499 14,143 12.3 3.1 30.1 8.0
Price (Nov 15, KRW) 22,450 2012F 728 118 83 4,013 17,942 5.6 1.3 28.7 4.2
Market cap.(W bn) 491 2013F 637 70 50 2,413 20,225 9.3 1.1 14.0 5.4
2014F 648 71 52 2,491 22,582 9.0 1.0 12.7 5.0
261
Electric/Electronics
/Telecom equipment
Sharper competitive edge despite slow demand
Overweight Six paradigm shifts emerged in 2011

1) IT product demand cycles started to diverge. 2) The expansion of the
Chinese market reduced seasonality in the IT market, which used to see
▶ Top picks
significant quarterly changes in demand. 3) The correlation between
LG Electronics (066570, BUY, TP W90,000) Samsung Electronics (SEC)’s earnings and global IT demand has
2011F 2012F 2013F weakened. 4) The demand side is a more important variable in the global
PE (x) 17.6 9.8 8.4 IT market than the supply side. 5) Component vendors face mounting
PB (x) 1.1 1.0 0.9 pricing pressure as the end-product market shifts to an oligopoly structure.
EV/EBITDA (x) 6.3 5.1 4.6 6) FX changes have a greater impact on IT earnings through more
EPS (KRW) 4,650 8,394 9,776 complicated channels.
BPS (KRW) 75,980 84,136 93,667
 Full-scale recovery of handset division 2013F demand growth of 1% YoY in PCs, 5% in TVs;
 Solid competitiveness in TV, air conditioners smartphone demand on solid growth path
and other home appliances
 Growth story expected for home appliances if Backed by the brisk sales of ultrabooks and the release of Windows 8 OS,
US economy picks up PC demand should turn to marginal positive growth in 2013, from a
contraction of 3% in 2012. LCD TV demand, which is likely to see a decline
▶ 12M sector performance of 1% for the first time in 2012 due to the global economic slowdown,
should also recover to the 5%-level growth in 2013 on growing
(p) (%p)
1,000 30 replacement demand in emerging markets. Smartphone demand, despite
800 20
some concerns, should also continue steady growth of 20% in 2013 on
600 10
growing demand for mobile devices and the massive release of competing
400 0
200
-10
models (2012 demand growth of 32% YoY to 640mn units).
Electronic Products sector index (p, LHS )
0 -20
Nov-11 Feb-12 May-12 Aug-12 Large-cap top pick LG Electronics; Small- and mid-cap plays
related to SEC smartphones also attractive
We recommend LG Electronics (LGE) as our large-cap top pick given its
earnings recovery at the handset division and stable home appliance
earnings (including TVs and air conditioners). We also believe small to
mid-size vendors for SEC will remain attractive as SEC’s smartphone
shipments should steadily grow in 2013.
Figure 1. LGE’s 12MF PB band
(KRW)
200,000
2.2x
180,000
160,000 1.8x
140,000
120,000 1.4x
100,000
80,000 1.0x
Kevin Lee
60,000
822-3276-4589 0.6x
40,000
20,000
Inhyuk Hwang 0
822-3276-6245 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012
inhyuk.hwang@truefriend.com
Source: Datastream, Korea Investment & Securities
262
1. Uncertain global macro variables

Unfavorable macro Full recovery signs have yet to be seen in global macro variables. The US real
variables: Economic estate market has not recovered fully. European fiscal woes are still lingering, and
uncertainty of advanced economic stimulus signs have yet to be observed in China as well. Given the
markets and stronger declining KRW/USD and the likely continuation of the KRW/JPY downtrend into
KRW against USD and 2013, Korean IT plays in direct rivalry with Japanese counterparts should lose some
JPY price merit. Moreover, the cost burden is heavy as commodity (including crude oil
and copper) prices remain high.
2. Mobile devices to offset sluggish PC/TV demand

Growing weighting of Even if PC and TV demand recovers in 2013, we do not believe the extent will be
global IT demand for large. However, smartphone and tablet PC demand should grow 20% and 42% YoY,
mobile devices; Related respectively, and offset sluggish PC and TV demand. Given that global handset
sectors to benefit sales value exceeded PC and TV sales value from 4Q11, IT sectors and companies
closely related to mobile devices should benefit.
3. Stronger competitiveness and larger market share for

most Korean IT names
Korean IT companies Despite lackluster global IT demand, most Korean IT names should post
deliver better earnings estimate-beating earnings in 2H12 backed by a sharper competitive edge and
than Japanese and bigger market presence. In comparison, Japanese and Taiwanese competitors are
Taiwanese competitors stumbling with deteriorating operations and find it difficult to secure funding for
marketing, R&D and capacity expansion. This currently works in favor of Korean
firms. Overall, it is obvious that sluggish global IT demand provides not only
challenges but opportunities for domestic players.
Figure 2. Top three electronic devices: Quarterly global Figure 3. Top three electronic devices: Global sales
sales growth (YoY) breakdown
50% TV PC Handset TV PC Handset

100%
40%
90%
30% 33% 34% 36% 37%
80% 40% 40% 38% 43% 42%
44%
20% 70%
60%
10%
2%
50%
0% 40%
-5%
(10%) 30%
-6%
20%
(20%)
10%
(30%) 0%
1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
Source: Gartner, DisplaySearch, SA, Korea Investment & Securities Source: Gartner, DisplaySearch, SA, Korea Investment & Securities
263
4. US real estate market recovery to have a favorable

effect on the home appliance sector
In 2013, many favorable Due to uncertain global macro variables, the home appliance sector is also
variables for home suffering slow growth. Of note, the termination of China's home appliance subsidy
appliance sector program for rural areas and furniture trade-in program and a growing sales
weighting of low-end and low-cost models are negative to home appliance
manufacturers. But from 2013, China should grant new subsidies for
energy-efficient appliances and the US real estate market is expected to pick up. In
addition, the easing of aggressive price-cutting policies among major home
appliance makers should work for better profitability. We expect LGE to boast stable
profitability in the home appliance division in 2013, backed by its technological
prowess, already proven in many patent infringement and anti-dumping lawsuits.
5. Limited value-based TV growth despite volume growth

Due to rising weighting of Despite major sporting events (London Olympics, Euro 2012), LCD TV shipments
low- to mid-priced TVs, should contract for the first time in 2012. But profitability differs greatly depending
growth potential in value on TV set makers. Korean players SEC and LGE remained profitable (similar extent
terms looks limited YoY) on a better product mix with a growing weighting of LED, 3D and smart TVs.
On the contrary, Japanese competitors still recorded massive deficits despite
restructuring and business scale-down efforts. Meanwhile, Chinese TV makers are
gaining global market share on the rapidly expanding local market. Of note,
Chinese players that secured economies of scale in low- to mid-priced TVs are
showing similar profitability to Korean firms. We expect 2013 to see strong
replacement demand from CRT/PDP to LCD TVs, the rapid penetration of smart
TVs and the release of AMOLED TVs. Accordingly, LCD TV sales volume should be
greater than in 2012 but sales value should remain flat YoY given a rising weighting
of low- to mid-priced TV in a stumbling economy.
6. Stable demand growth in smartphones

Smartphone demand to Although concerns were raised for global smartphone demand in 2Q12, demand
grow 20% YoY in 2013F grew 8% QoQ in 3Q12 on the release of new models, the wrap-up of restructuring
on more 4G and low- to in China and the resolved supply shortage of LTE single chips. Accordingly, annual
mid-priced smartphone demand target of 640mn should be easily achievable. Smartphone demand should
sales also grow at a stable pace in 2013 (+20% YoY) on the full-scale establishment of
4G smartphone infrastructure, a rising weighting of low- to mid-priced smartphones
and more diverse hardware specifications. But, performances would differ by
company. SEC and Apple should firm up dominant positions and Chinese handset
makers should make remarkable growth. But the traditional handset leaders, such
as Nokia, Motorola, RIM and Sony should retreat further. We believe the biggest
issue for the 2013 smartphone market will be whether LGE can catch up.
264
7. Strong growth of smartphone/table PC part makers

Despite pricing pressure, SEC’s smartphone shipments should grow 34% YoY in 2013F. As price and
handset component marketing competition should intensify, component vendors will face stronger
vendors to see steady pricing pressure from set makers. But smartphone and tablet PC-related
earnings growth component suppliers should continue strong growth story as volume growth should
offset price cuts. In 2013, growth should be remarkable at: 1) manufacturers of
components in short supply, 2) those who enjoy an oligopoly, or 3) suppliers to
Chinese handset makers. As such, we recommend a strategy of selective
concentration for investments in handset component suppliers in 2013.
Earnings forecast
1. Key assumptions
2013F global demand for  2013F US/China GDP growth of 2.1% and 8.2%, respectively.
smartphones to grow  2013F annual average exchange rates of W1,058/USD and W1,255/JPY100.
20% YoY to 770mn
 2013F global demand for PCs and LCD TVs to grow 1% and 5% YoY,
respectively.
 2013F global demand for handsets to grow 5% YoY to 1.6bn units.
 2013F global demand for tablet PCs to jump 42% YoY to 145mn units.
 2013F global smartphone shipments to grow 19.5% YoY to 770mn units;
SEC’s smartphone shipments to rise 33.3% YoY to 280mn units.
2. 2013F sector OP to expand 11.8% YoY

Handset-related plays to We expect the electric/electronics/telecom equipment sector to deliver lofty
deliver better earnings earnings growth in 2013 thanks to a rebound in demand, sharper competitive edge,
and market share recovery (SEC handsets, LGE, SEMCO, Samsung SDI and LG
Innotek in the KIS Universe). The 2013F combined OP of five companies (handset
only for SEC) should grow 11.8% YoY to W2.37bn. Unlike the lackluster demand
outlook for PCs and TVs, demand for handsets should be robust in 2013 and shore
up stronger earnings growth at handset-related companies. We expect SEC’s
handset division to post OP of W20.5trn, up 8.8% YoY and LGE’s handset division
OP of W474.6bn, up 613.4% YoY.
Korean IT names to have Earnings of domestic electric/electronics/telecom equipment makers should be on
different strategic a robust recovery track if the following conditions are met: 1) demand for PCs, TVs
approach depending on and home appliances is better than expected, 2) the KRW/USD and the KRW/JPY
economic conditions in decline at a stable pace, rather than a deep decline, 3) raw material prices enter a
advanced nations and stable phase, and 4) global competitors, such as Sony, Sharp, Nokia and RIM are
China late to recover competitiveness. But if Europe’s debt crisis, the US economic
slowdown, or China’s tightening policy continue for a prolonged period, we expect
domestic companies to take a conservative approach to capacity additions and the
size of workforces.
265
Figure 4. Global smartphone penetration and outlook Figure 5. Global tablet shipments and outlook
50% (mn)
Volume % YoY (RHS)
200 300%
182
180
250%
160 146
40% 140
200%
120
103
100 150%
80
65
30% 100%
60 58%
42%
40
18 50%
20
20% 0 0%
1Q11 3Q11 1Q12 3Q12F 1Q13F 3Q13F 2010 2011 2012F 2013F 2014F
Source: SA, Korea Investment & Securities Source: SA, Korea Investment & Securities
Top pick
LG Electronics (066570)
Handset division to make We maintain BUY with a TP of W90,000. We remain bullish as 1) lower TV margins
a robust recovery in 2013 in 3Q12 are due to the broad dip in demand rather than weaker competitiveness at
LGE, 2) a turnaround is underway at the handset division (moderately turned to
profit in 3Q12), which is the biggest catalyst for shares, and 3) home appliances
should emerge as another growth engine if the US economy recovers from 2013.
Our TP is based on SoTP valuation (EV/EBITDA multiples at a discount or premium
to the peer average by segment). As the stock trades at only 2013F PB 1.0x, we
view it as the most undervalued IT name (compared to book value).
The recently launched Optimus G offers substantial improvements in design,

functionality, software and hardware. As such, the smartphone should easily sell
1mn units in 4Q12, despite some concerns, including: 1) competitive rivals Galaxy
S3 and iPhone 5, 2) shrinkage in the Korean telecom market, and 3) problems
related to touch panel and camera module supplies. With Optimus G and follow-up
models, LGE’s handset division should show a full recovery story in 2013.
Risk factors
Global IT demand and FX We believe the key variables that will determine the share prices of
changes to affect share electric/electronics/telecom equipment makers in 2013 are: 1) how much global
prices smartphone and tablet PC demand grows, 2) if global TV and PC demand recovers
in earnest, 3) whether FX rates and raw material prices move in favorable
directions, and 4) whether LED penetration into general lighting comes earlier than
expected.
266
Coverage valuation
Table 1. Valuations
LG Electronics Recommendation BUY 2010A 55,754 176 1,227 7,419 78,408 15.5 1.5 10.0 15.8
(066570) TP (KRW) 90,000 2011A 54,257 280 (470) (2,880) 71,551 NM 1.0 (3.7) 11.0
Price (Nov 15, KRW) 81,000 2012F 51,008 1,271 838 4,650 75,980 17.6 1.1 6.3 6.3
Market cap.(W bn) 13,255 2013F 52,794 1,784 1,512 8,394 84,136 9.8 1.0 10.5 5.1
2014F 54,153 2,019 1,760 9,776 93,667 8.4 0.9 11.0 4.6
Samsung SDI Recommendation BUY 2010A 5,124 287 356 8,203 132,039 20.5 1.3 6.5 10.6
(006400) TP (KRW) 190,000 2011A 5,444 204 320 7,341 133,305 18.2 1.0 5.3 9.6
Price (Nov 15, KRW) 149,000 2012F 5,908 1,728 1,567 34,898 165,086 4.3 0.9 22.8 3.2
Market cap.(W bn) 6,788 2013F 7,142 329 594 13,221 176,242 11.3 0.8 7.5 8.8
2014F 9,077 595 765 17,037 191,029 8.7 0.8 9.0 6.4
SEMCO Recommendation Hold 2010A 5,651 498 555 7,171 44,941 17.3 2.8 18.3 10.4
(009150) TP (KRW) - 2011A 6,032 321 349 4,510 45,295 17.2 1.7 10.0 7.4
Price (Nov 15, KRW) 96,400 2012F 7,853 643 423 5,450 49,991 17.4 1.9 11.5 7.1
Market cap.(W bn) 7,200 2013F 9,046 752 499 6,437 55,676 14.7 1.7 12.2 6.3
2014F 12,723 831 566 7,301 62,225 13.0 1.5 12.4 5.7
LG Innotek Recommendation BUY 2010A 4,103 156 196 10,325 73,048 13.0 1.8 16.5 9.2
(011070) TP (KRW) 95,000 2011A 4,553 (67) (145) (7,211) 65,733 NM 1.0 (10.4) 8.9
Price (Nov 15, KRW) 81,400 2012F 5,176 114 16 790 66,485 104.2 1.2 1.2 6.2
Market cap.(W bn) 1,642 2013F 5,916 290 178 8,806 75,290 9.3 1.1 12.4 4.4
2014F 6,863 385 262 12,978 88,267 6.3 0.9 15.9 3.6
267
Display
TV demand needs to recover
Neutral Panel supply-demand to worsen in 1H13 on stock burden

We expect panel supply-demand dynamics to worsen in 1H13 due to a
heavy inventory burden at setmakers. While TV panel demand should post
▶ Top picks 13% YoY growth in 2H12 indicating setmakers have a positive sales
oulook, 2012F global LCD TV set shipments are expected to edge down
Cheil Ind. (001300, BUY, TP W135,000) 1% YoY. As excessive panel demand compared to set demand leads to an
2012F 2013F 2014F inventory burden, panel supply-demand conditions should deteriorate and
PE (x) 16.0 12.3 10.6 prices will likely decline in Dec, the off-peak season. Panel makers’
PB (x) 1.3 1.2 1.1 earnings should improve until 4Q12, but slow down in 1H13.
EV/EBITDA (x) 8.8 7.4 6.6
EPS (KRW) 5,432 7,090 8,214 Panel supply-demand to be better in 2H13 on limited supply
BPS (KRW) 66,787 72,903 80,103 growth
 2013F sales and OP growth at 12% and 22% LCD production capacity growth should stay at 4% in 2013 as major panel
 Ongoing better margin on supply growth of makers’ capex decreases. LCD risks are marginal in terms of supply unlike
polarizing film, front-end process and
semiconductor materials in electronic material the past. Of note, panel supply & demand should be stable in 2H13 as
division industry-wide production capacity falls from 2H13 given LG Display
 Chemical division’s profitability to improve on (LGD)’s 6G line migration to LTPS.
better product mix
OLED to see recovery on resolved technical problems

Soulbrain (036830, BUY, TP W65,000)
The OLED industry should enter a gradual recovery from 2H13, similar to
2012F 2013F 2014F
the LCD industry. Facility investments will likely have to be delayed until
PER(x) 11.2 9.2 7.7
technical problems are resolved. But, in 5.5G line, which produces
PBR(x) 2.9 2.3 1.8
small-/mid-sized panels, capacity will have to be expanded based on
EV/EBITDA (x) 6.7 5.6 4.6
EPS (KRW) 4,467 5,414 6,505
existing technology, while facility investments in 8G lines are more likely
BPS (KRW) 17,528 22,070 27,626
from 2H13. As such, we expect OLED capex momentum will recover from
mid-2013 and related shares will rise.
 2013F sales and OP growth at 13% and 17%
 Ongoing better earnings on diversifying
business
 Supply volume of thin glass and
semiconductor materials to grow backed by
increasing demand from the customers
▶ 12M sector performance

Figure 1. LCD industry inventory cycle vs. LGD’s share price
2,500 40
Display Panels sector index (p, LHS )
2,000 30
1,500 20
1,000 10
500 0
0 -10
Jay Yoo, CFA

822-3276-6178
jongwoo.yoo@truefriend.com
Source: Displaybank, Korea Investment & Securities
268
1. LCD supply & demand to worsen on inventory burden

2012F TV panel We expect the LCD cycle to slide down in 1H13 on deteriorating panel supply &
shipments to be 13% demand dynamics caused by rising setmaker inventories. The inventory burden
higher than set products, should be caused by the excess panel demand compared to actual demand for set
leading to inventory products throughout 2012. As for TV panels that have the heaviest inventories,
burden 2012 shipments are estimated to be 13% higher than LCD TV sets. Notebook panel
shipments are projected to be 12% higher than laptop sets. Strong panel demand
despite uncertainty over IT set product demand lingers, should result in setmakers’
stock burden in 1H13. From Dec, the off-peak season, supply & demand conditions
should worsen and prices drop due to the inventory burden.
Major panel makers’ Major panel makers should see earnings slowing from a peak in 4Q12. While
earnings to peak out in earnings should continue improving until 4Q12 bolstered by strong panel demand
4Q12 and increasing shipments of high value-added products, profitability should
deteriorate after Dec as panel prices decline. Even though panel makers will try to
defend profitability by focusing on high value-added products, weak earnings seem
inevitable in 1H13 as the inventory burden of TV panels, which account for 50% of
total sales, will be heaviest.
Figure 2. TV panel inventory in LCD industry Figure 3. LGD’s OPM vs. LCD sector’s inventory
120% 25% 115%
20%
115%
15%
110%
110%
10%
5%
105%
105%
0%
100% 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13F
-5%
100%
95% -10%
LGD OPM (LHS)

-15%
90% LCD industry inventory (R)
1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13F -20% 95%
Source: Displaybank, Korea Investment & Securities Source: Displaybank, LG Display, Korea Investment & Securities
2. Panel supply & demand to improve from 2H13 on

capacity reduction
2013F LCD sector’s We expect the LCD sector’s total production capacity growth in 2013 will stay at 4%
capacity growth at 4%, as major panel makers migrate to high-end lines (LTPS, Oxide TFT). Stripping out
supply risks limited Chinese makers’ 8G capacity addition, expansion through facility investments will
be limited and the reduction effects of existing capacity will be significant due to line
migration. As such, LCD risks on the supply side should be marginal in 2013. While
the LCD industry should be sluggish in 1H13 due to poor supply & demand
conditions caused by the inventory burden, we expect a stable recovery from 2H13
as the inventory correction ends.
269
Figure 4. LCD industry’s production capacity growth trend
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10% 1Q04 3Q05 1Q07 3Q08 1Q10 3Q11 1Q13F
Source: DisplaySearch, Korea Investment & Securities
3. OLED momentum recovery requires solution to

technological problems
Facility investment to OLED facility investment momentum should recover after technological problems
recover along with are resolved. Visibility for major additional investments is low as the OLED industry
resolution of has yet to secure production technology for both mid/small and large-sized
technological problems products. Samsung Display is expected to invest in an addition (A2E) to the A2 line,
but the addition is not significant and the processing method will be the same as the
existing one, which indicates a marginal impact on overall industry growth. It is hard
to estimate when technological issues will be resolved, but we expect facility
momentum to slowly recover from 2H13, starting with mid/small-sized products.
Figure 5. Samsung Display’s OLED capex plan
3Q07 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12F 1Q13F 2Q13F 3Q13F 4Q13F 1H14F 2H14F
Samsung Display
4.5G mass-production(7K) capex(18K) capex (50K)
A2 5.5G phase1 equipment order & installation mass-production (24K)
A2 5.5G phase2 equipment order & installation mass-production (40K)
A2 5.5G phase3 flexible + LITI(8K) equipment order & installation mass-production (8K)
A2 5.5G phase3 flexible(16K) equipment order & installation mass-production (16K)
A2E 5.5G equipment order & installation mass-production (32K)
A3 5.5G phase1 equipment order & installation mass-production
8G pilot v1 equipment order & installation ramp-up(8K)
8G mass-production equipment order & installation
270
Earnings forecast
1. Key assumptions
2013F LCD panel growth  FX rate: KRW/USD (2013 avg.) W1,058, KRW/JPY100 (2013 avg.) W1,159
at 5% based on area  LCD panel demand: 2013F shipment growth 8% based on no. of sheets, 5%
based on area
Sheet basis – TV panel -2%, notebook panel 3%, monitor panel -3%, tablet
panel 47%
Area basis – TV panel 6%, notebook panel 5%, monitor panel -2%, tablet
panel 24%
 LCD panel supply: 2013F annual production capacity growth 4% (vs. 6% in
2012)
 Samsung Display’s OLED production capacity as of end-2013
Sheet basis – 55K per month (4.5 inch), 120K per month (5.5 inch)
Area basis – 37km2 per month (4.5 inch), 234km2 per month (5.5 inch)
2. LGD’s 2H13 OP to increase 138% HoH

LG Display OPM to LGD’s OP should drop 71% QoQ in 1Q13 due to eroding supply & demand from the
improve 2.6%p HoH to inventory burden since Dec off-peak season. 1H13 OP is expected to slip to
4.6% in 2H13 W264.9bn, down 59% from 2H12. However, in 2H13 as panel makers’ capacity
reduces, a virtuous cycle of “improved panel supply & demand  panel price
increase  better profitability” should resume. 2H13 OP is estimated at W630.6bn,
surging 138% from 1H13. Considering panel makers’ profitability influences the
margins of components, materials and equipment makers within the supply chain,
we recommend a mid- to long-term investment strategy focusing on earnings
improvement in 2H13.
Figure 6. LGD PB vs. OPM Figure 7. LGD share price vs. LCD sector inventory
(x) LGD OP (R) (W bn) (KRW) LG Display (L)

3.0 1,000 60,000 125%
LG Display 12MF PB (L) LCD panel inventory level (R)
800
2.5 50,000 120%
600
2.0 40,000 115%
400
1.5 200 30,000 110%
0
1.0 20,000 105%
-200
0.5 10,000 100%
-400
0.0 -600 0 95%

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12
Source: LGD, Korea Investment & Securities Source: Displaybank, LGD, Korea Investment & Securities
271
Top picks
Cheil Ind. (001300)

Electronic materials Cheil Ind. (Cheil)’s sales and OP should grow 12% YoY and 23% YoY in 2013 to
division to lift profitability W6.8trn and W481.4bn, respectively, backed by better margins in the electronic
in 2013 materials division. The better margins are mainly attributed to TV polarizing film
business expansion and ongoing sales growth of high-margin front-end process
semiconductor materials. In the chemicals division, profitability should continue
improving due to a better product mix starting from 2H12. We recommend BUY on
Cheil with a TP of W135,000, 18x 2013F PE.
Soulbrain (036830)
Thin glass and We forecast Soulbrain’s 2013F sales and OP to rise 13% YoY and 17% YoY to
semiconductor material W663.5bn and W124.0bn, respectively. The company is likely to post stable
businesses, core growth earnings growth by minimizing the influence from downstream industry through a
engines diversified business structure. In thin glass, as Samsung Electronics’ smartphone
sales should be robust going forward and customers’ 5.5G OLED A2E lines are
expected to be rigid type, not flexible, volume growth effect is expected. In
semiconductor materials, as customers’ production capacity of system LSI line will
increase 59% YoY, demand for materials should escalate. We recommend BUY
with a TP of W65,000, 12x 2013F PE.
Risk factors
As set demand recovery If a recovery in demand for TV and PC appears faster than expected on an early
accelerates, panel recovery of the global economy, setmakers’ panel inventories should remain at low
demand to remain strong levels in 1H13 unlike our concerns, and panel demand could continue to be strong.
In this case, panel supply & demand dynamics would be better than expected, and
seasonal effects on major panel makers’ earnings would be minimal.
272
Coverage valuation
Table 1. Valuations
LG Display Recommendation Hold 2010A 25,512 1,310 1,156 3,232 30,843 12.3 1.3 11.0 3.7
(034220) TP (KRW) - 2011A 24,291 (924) (771) (2,155) 28,271 NM 0.9 (7.3) 4.1
Price (Nov 15, KRW) 34,250 2012F 28,791 443 232 647 28,918 52.9 1.2 2.3 2.8
Market cap.(W bn) 12,255 2013F 27,288 900 639 1,787 30,205 19.2 1.1 6.0 2.7
2014F 28,652 1,035 744 2,079 31,784 16.5 1.1 6.7 2.7
Cheil Industries Recommendation BUY 2010A 5,113 330 279 5,812 56,357 19.1 2.0 11.8 12.4
(001300) TP (KRW) 135,000 2011A 5,581 287 259 5,274 62,270 19.2 1.6 8.7 13.4
Price (Nov 15, KRW) 86,900 2012F 6,020 389 275 5,432 66,787 16.0 1.3 8.2 9.3
Market cap.(W bn) 4,556 2013F 6,645 483 359 7,090 72,903 12.3 1.2 9.9 7.8
2014F 7,641 555 416 8,214 80,103 10.6 1.1 10.5 6.9
SFA Engineering Recommendation BUY 2010A 349 50 40 2,739 14,615 11.2 2.1 20.2 7.8
(056190) TP (KRW) 65,000 2011A 458 62 17 1,181 15,601 32.7 2.5 7.8 8.9
Price (Nov 15, KRW) 50,000 2012F 587 106 74 4,467 17,528 11.2 2.9 28.8 6.3
Market cap.(W bn) 810 2013F 663 124 89 5,414 22,070 9.2 2.3 27.6 5.2
2014F 796 147 107 6,505 27,626 7.7 1.8 26.4 4.3
Soulbrain Recommendation BUY 2010A 632 70 56 3,186 16,647 15.4 2.9 22.1 9.1
(036830) TP (KRW) 80,000 2011A 753 92 76 4,275 20,138 14.3 3.0 24.1 8.4
Price (Nov 15, KRW) 41,400 2012F 845 124 103 5,753 24,639 7.2 1.7 26.8 5.5
Market cap.(W bn) 743 2013F 875 128 105 5,854 29,175 7.1 1.4 22.5 5.2
2014F 1,050 148 121 6,752 34,275 6.1 1.2 21.9 4.1
Duksan Hi-Metal Recommendation Hold 2010A 72 20 16 643 4,222 31.6 4.8 18.7 22.6
(077360) TP (KRW) - 2011A 129 35 35 1,181 5,457 21.5 4.7 29.0 18.6
Price (Nov 15, KRW) 18,200 2012F 141 41 41 1,409 6,868 12.9 2.6 26.0 10.1
Market cap.(W bn) 534 2013F 162 48 47 1,601 8,471 11.4 2.1 23.1 8.4
2014F 182 51 50 1,700 10,173 10.7 1.8 19.8 7.6
Silicon Works Recommendation BUY 2010A 257 38 40 2,656 12,384 12.6 2.7 27.3 9.7
(108320) TP (KRW) 38,000 2011A 301 25 33 2,046 14,251 15.2 2.2 15.5 11.8
Price (Nov 15, KRW) 25,800 2012F 450 46 43 2,664 16,324 9.7 1.6 18.1 4.7
Market cap.(W bn) 419 2013F 544 59 55 3,394 19,264 7.6 1.3 19.7 3.0
2014F 626 68 64 3,914 22,731 6.6 1.1 19.3 2.0
OCI Materials Recommendation Hold 2010A 235 78 60 5,680 26,115 18.1 3.9 24.1 9.6
(036490) TP (KRW) - 2011A 296 98 66 6,230 30,946 12.8 2.6 21.8 6.3
Price (Nov 15, KRW) 31,750 2012F 277 69 45 4,261 34,702 7.5 0.9 13.0 4.4
Market cap.(W bn) 334 2013F 293 79 52 4,971 38,965 6.4 0.8 13.5 3.7
2014F 337 91 66 6,256 44,293 5.1 0.7 15.0 3.1
273
Semiconductors
Paradigm shift
Memory: Rules of the game are changing

Overweight Mainstream memory demand is changing from conventional computing (PC
& servers) to mobile (smart & tablet devices). It is difficult for PC DRAM to be
▶ Top picks differentiated from other products as it is commoditized. However, various
solutions, such as eMMC and eMCP, are critical in mobile devices, which
Samsung Electronics (005930, require embedded and customized solutions. As tech migration to smaller
BUY, TP W1,850,000) nodes from the low-20nm (DRAM) and upper-10nm (NAND) will be difficult
2012F 2013F 2014F without EUV (extreme ultra-violet) equipment, 3D transistors, 3D packaging
PE (x) 8.7 7.2 6.7 and NAND 3-bits-per-cell are becoming increasingly important (rather than
PB (x) 1.8 1.5 1.2
just cost competition). As Samsung Electronics (Samsung) and SK Hynix
are both competitive in mobile DRAM and NAND, we expect their market
EV/EBITDA (x) 4.1 3.3 2.8
dominance to further firm up in the mobile era.
EPS (KRW) 153,798 184,578 198,226
BPS (KRW) 746,468 902,364 1,070,361 DRAM: Supply limitations to steady prices and lift margins
 Valuations remain compelling as earnings We estimate DRAM supply will grow only 26% YoY in 2013F due to slower
continue to improve in 2013 capex and limitations on tech migration. Accordingly, DRAM prices should
 Earnings improvement in components stabilize and fall only 15% YoY in 2013F, which would help improve
(semiconductor and LCD) to accelerate
 System LSI and OLED businesses to profitability at DRAM makers. In addition, Samsung and SK Hynix should
strengthen synergy in mobile devices benefit from the increasing importance of mobile DRAM.
SK Hynix (000660, BUY, TP W34,000)

NAND: Handsets, tablets and SSDs to drive demand
While handset storage and media tablets drove NAND demand in 2012,
2012F 2013F 2014F solid-state drives (SSD) should add to growth thanks to the spread of
PE (x) NM 19.3 12.6 ultrabooks from 2013. As such, we estimate NAND demand will jump 47%
PB (x) 1.8 1.6 1.4 YoY in 2013F. On the supply side, we believe Samsung, Toshiba, IMFT and
EV/EBITDA (x) 7.1 4.6 3.6 SK Hynix will be hampered by technological barriers to sub-20nm-class
EPS (KRW) (311) 1,355 2,074 products and their capacity expansions should be limited as well. We expect
BPS (KRW) 14,515 16,100 18,070
Samsung to gain market share on its stronger competitiveness in controllers
and greater 3-bits-per-cell weighting.
 Earnings to grow from 4Q12 after 3Q12 bottom
 Strong mobile DRAM growth potential and SK
Hynix’s competitiveness System LSI: Battle of the Big Four
 Recommend overweighting before second-tier Apple’s diversification of application processor (AP) suppliers will affect
makers cut utilization Samsung’s investment and capacity management for system LSI in 2013
and onward. But at the same time, there exist opportunities for Samsung to
reach TSMC’s customers with its foundry business by timely adopting 20nm
▶ 12M sector performance process technology. Samsung will have a crucial year in 2013 to beef up
both top-line and quality to stay ahead of looming competition with TSMC in
3,500
40
the foundry business and Intel and Qualcomm in the AP segment.
3,000 Semiconductors & Semiconductor 30
Figure 1. Samsung’s PB band

2,500 Equipment sector index (p, LHS )
2,000 20
1,500 10
1,000
0 (KRW)
500
1,800,000
0 -10 Share price 1.2x
Nov-11 Feb-12 May-12 Aug-12 1,600,000 1.5x 1.8x
1,400,000 2.2x 2.7x
1,200,000
1,000,000
800,000
600,000
Won Seo 400,000
822-3276-6162 200,000
wonseo@truefriend.com
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
Kiheung Park
822-3276-4130
kiheung.park@truefriend.com Source: Korea Investment & Securities
274
1. Memory: Rules of the game are changing

Hegemony changes from Mainstream memory demand is changing from conventional computing (PC &
computing to mobile servers) to mobile (smart & tablet devices). While PC shipments should retreat to
350mn (-2.7% YoY) in 2012, smartphone shipments should reach 640mn (+31%
YoY) and tablets 110mn (+66% YoY). Memory for mobile applications has become
a key demand driver, accounting for 19% of DRAM and 46% of NAND demand in
2012 (shipments basis). As Samsung and SK Hynix are both competitive in mobile
DRAM and NAND, we expect the companies to further their dominance in the
mobile era.
Mobile memory centered It is difficult for PC DRAM to be differentiated from other products, as it is
on set solutions rather commoditized. However, various solutions, such as eMMC5 and eMCP6, are critical
than single-chip in mobile devices that require embedded and customized solutions. Thus, it is
solutions advantageous to secure both mobile DRAM and NAND technologies while
controller and package technologies are also required. Samsung remains
overwhelmingly dominant in mobile solutions thanks to its competitive in-house
controllers and APs. SK Hynix is also seeking to be competitive via in-house R&D,
strategic technology development and M&As.
Tech migration → The memory industry has engaged in cost competition by reducing the fixed cost
set solutions per chip from mass production made possible through tech migration. However,
migration to smaller nodes from the low-20nm (DRAM) and upper-10nm (NAND)
has reached limitations prior to the advancement to EUV (extreme ultra-violet)
lithography technology. This changed the landscape of cost competition and
increased the importance of 3D transistors, 3D packaging and NAND 3-bits-per-cell.
3D transistor designs and through-silicon via (TSV) packaging should allow better
performance, lower costs, scaled-down packaging and low power consumption. For
NAND, there have been heightened expectations for the development and mass
production of 3-bit and 4-bit MLCs7 after the industry had achieved cost reduction
by converting to 2-bit MLC. However, the industry has been biased toward
low-priced memory cards and USBs due to the inferior performance of 3-bit MLC.
With the recent improvements in performance and the reinforcement of controllers,
3-bit MLC are being used in embedded devices. As high-storage and cost reduction
are becoming more important than performance for NAND, we believe the
significance of 3-bit MLC will eventually emerge.
Figure 2. Changing demand for memory applications

Demand for mobile (mn units)
applications to grow 22% 1,000 914
Computing Mobile
in 2013F 750
800
554
600
378 369 371
400
200
-
2011 2012F 2013F
Source: Gartner, SA, Korea Investment & Securities
5
The multimedia card (MMC) is a flash memory card standard used as a storage medium for a portable device; eMMC describes an
architecture comprising an embedded storage solution with MMC interface, flash memory and controller
6
eMCP (embedded multi-chip package) memory is a highly integrated solution design for mobile devices
7
A multi-level cell (MLC) is a memory element capable of storing more than a single bit of information; cf) single-level cell (SLC)
275
2. DRAM: Limited supply to steady prices and lift margins

DRAM prices to fall We estimate DRAM supply will grow only 26% YoY in 2013F due to slower capex
15% YoY in 2013F and limitations on tech migration. Accordingly, DRAM prices should stabilize and fall
on tighter supply only 15% YoY in 2013F, which would help improve profitability at DRAM makers. In
and slower capex addition, with the increasing ubiquity of mobile DRAM, Samsung and SK Hynix
should gain a sharper competitive edge.
Figure 3. DRAM capex and outlook
(USD bn) (%)

20 200
DRAM capex (LHS)
18
DRAM capex growth Y oY (RHS)
150
16
14
100
12
10 50
8
0
6
4
-50
2
0 -100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F
Source: Company data, Gartner, Korea Investment & Securities
Figure 4. Tech migration schedules by DRAM maker
35nm 28nm 25nm 2znm
44nm 38nm 29nm
50nm 42nm 35nm
40nm
50nm 30nm 25nm
Table 1. DDR3 contract prices and outlook (2GB equiv., USD, %)
2011 1Q12 2Q12 3Q12 4Q12F 2012F 1Q13F 2Q13F 3Q13F 4Q13F 2013F
ASP 1.49 0.95 1.15 0.96 0.82 0.96 0.77 0.85 0.88 0.80 0.82
QoQ (0.4) 21 (17) (15) (6) 11 3 (9)
YoY (65) (49) (44) (23) (15) (35) (20) (26) (9) (2) (15)
Source: DRAMeXchange, Korea Investment & Securities
276
3. NAND: Handsets, tablets and SSDs to drive demand

NAND demand to surge While handset storage and media tablets drove NAND demand in 2012, SSD
47% YoY in 2013F on should add to growth thanks to the spread of ultrabooks from 2013. As such, we
handsets, tablets and estimate NAND demand will jump 47% YoY in 2013F. On the supply side, we
SSDs believe Samsung, Toshiba, IMFT and SK Hynix will be hampered by technological
barriers to sub-20nm-class products and their capacity expansions should be
limited as well. We expect Samsung to gain market share on its stronger
competitiveness in controllers and greater 3-bits-per-cell weighting.
Figure 5. NAND demand breakdown by application
(%)
100
6 7 10 11
13 4
80 17 8 18
21 23
22 16 25 8
60
15 7
20
13 17
40 39
37 12
33 11
27
20 21
18
18 18 14 11 9 8
0
2008 2009 2010 2011 2012F 2013F
USB Flash card Consumer Handset Media tablet SSD
Source: Gartner, Korea Investment & Securities
Figure 6. Tech migration schedules by NAND maker
27nm 21nm 19nm 16nm
24nm 19nm 1ynm
25nm 20nm 1xnm
26nm
50nm 20nm 1xnm
277
4. System LSI: Battle of the Big Four

Samsung’s system LSI Apple’s diversification of AP suppliers will affect Samsung’s investment and
faces both opportunity capacity management for system LSI in 2013 and onward. But at the same time,
and risk there exist opportunities for Samsung to reach TSMC’s customers with its foundry
business by timely adopting 20nm process technology.
Global semiconductor In the semiconductor sector, there were four markets represented: Intel in CPU,
giants to be in direct Samsung in memory, TSMC in foundry and Qualcomm in baseband chips.
competition with each Samsung will enter direct competition with the three others in the AP and foundry
other segments. Samsung will step up competition with Intel in AP and CPU on the
release of the Windows 8 operating system. Samsung will also compete with TSMC
in APs for Apple and other foundry business. Samsung now competes with
Qualcomm in APs, and the level of competition should intensify in an integrated
chip, which combines baseband-processing function and APs with telecom function.
Such rivalry among global top-tiers would boost the industry’s development. We
believe Samsung will extend its reach beyond memory to emerge as a true
powerhouse in the semiconductor industry.
Figure 7. Existing semiconductor competitive landscape Figure 8. Future semiconductor competitive landscape
Note: 1) Size of the circles correlate to the scale of each companies’ 2012F sales Source: Korea Investment & Securities
2) For Samsung, based on semiconductor sales only
Figure 9. AP competitive landscape since 2007 Figure 10. AP competitive landscape after 2013
Note: TSMC’s customers include AMD, Qualcomm, Broadcom, nVidia, Mediatek and TI Note: TSMC’s customers include AMD, Qualcomm, Broadcom, nVidia, Mediatek and TI
278
Earnings forecast
1. Key assumptions
 In 2013F, PC shipments should inch up 0.5% YoY. Despite the release of
Windows 8 and growing ultrabook sales, the PC shipments growth will be
slow due to sluggish macro conditions and competition with tablets. As
Windows 8 has an application processor and supports touch interfaces, more
tablet-like PCs should come in the forms of slate or notebook convertible.
Table 2. Annual PC shipments and forecast (mn units, %)
2007 2008 2009 2010 2011 2012F 2013F 2014F

PC total 264.1 291.1 308.3 358.1 365.2 355.2 356.9 362.3
Growth 14.3 10.2 5.9 16.1 2.0 (2.7) 0.5 1.5
Desktop PC 156.6 149.3 138.4 153.7 155.6 146.1 139.7 134.5
Growth 7.6 (4.6) (7.3) 11.1 1.2 (6.1) (4.4) (3.7)
Notebook PC 107.5 141.8 169.9 204.4 209.6 209.0 217.3 227.8
Growth 33.2 31.9 19.8 20.3 2.5 (0.3) 4.0 4.8
 DRAM demand growth should be slower at 28% YoY in 2013F. While

demand for DRAM used in PCs would rise a mere 13% YoY, DRAM for
mobile devices is set to jump 62% YoY thanks to the growing penetration of
mobile devices. DRAM for servers should grow 32% YoY.
Table 3. Key DRAM demand indicators (mn units, MB, 1Gb equiv. in mn units)
PC shipments PC MB/System DRAM demand

Quantity Chg. MB Chg. Quantity Chg.
2009 308 5.9% 2,509 26% 10,384 22%
2010 358 16.1% 2,818 12% 15,323 48%
2011 365 1.9% 3,501 24% 21,598 41%
2012F 355 (2.7%) 4,078 16% 28,228 31%
2013F 357 0.5% 4,557 12% 35,998 28%
 DRAM supply should grow 26% YoY in 2013F, down from 30% YoY in 2012.
The reason is DRAM makers’ capex cuts and limitations of tech migration.
Table 4. Key DRAM supply indicators (mn units, 12-inch eq. in ‘000 units, 1Gb eq. in mn units)
Capex Capacity Per wafer DRAM supply

Amount Chg. Wafer Chg. Bit growth Supply Chg.
2009 5,351 (39%) 14,284 (18%) 49% 10,507 23%
2010 13,456 151% 14,998 5% 39% 15,280 45%
2011 8,537 (37%) 14,248 (5%) 51% 21,892 43%
2012F 4,370 (49%) 13,063 (9%) 44% 28,474 30%
2013F 3,277 (25%) 12,148 (7%) 35% 35,884 26%
2. Samsung OP up 19% YoY; SK Hynix turning profitable

Samsung’s OP should gain 19% YoY to W34.7trn in 2013F. The handset business
would continue to be a cash cow with sustainable quarterly OP of W5trn+. In
addition, earnings growth should accelerate for semiconductors. In 4Q12, SK Hynix
will see a gradual earnings improvement from 3Q12’s bottom. SK Hynix should turn
to operating profit of W1.2trn in 2013F.
279
Top picks
Samsung Electronics (005930)

Attractive valuation and We offer the following investment points. 1) Attractive valuation on steady earnings
full-throttle earnings improvement. 2) Faster improving earnings at parts (semiconductors and LCD). 3)
improvement at parts Stronger mobile synergy between set-products and parts (AP and OLED). There
are concerns about the potential slowing of smartphone sales growth and less
profitability from the models. However, 2013F OP should reach W34.7trn (19%
YoY) backed by the handset division that is a steady cash cow posting W5trn+
quarterly OP and a full-swing rebound for semiconductor earnings.
SK Hynix (000660)
Earnings to visibly We recommend BUY because earnings should improve after bottoming in 3Q12
improve in 2013 after with operating losses and latecomers are lowering utilization at year-end, a typical
bottoming in 3Q12 slow season. SK Hynix is fast reinforcing its mobile memory competitiveness. 1)
With accelerated migration to 38nm class in 3Q12, its mobile DRAM sales
weighting has gone up from 22% in 2Q12 to 33% in 3Q12 and now exceeds the PC
DRAM weighting. 2) For NAND, the company also migrated to 26nm and then to
20nm in 2012 and is steadily expanding the weighting of high value-added
embedded products such as eMMC and eMCP.
Figure 11. DRAM cycles and SK Hynix’s PB
(X)
3.5 Up-cy cle Down-cy cle Up-cy cle Mid-cy cle
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Risk factors
Key risks are 1) a prolonged global economic downturn, 2) KRW appreciation that
goes beyond our forecast, 3) poor Windows 8 effect, 4) slower-than-expected
ultrabook sales and 5) DRAM production disruption due to contingent events such
as earthquakes or brownout.
280
Coverage valuation
Table 5. Valuations
Samsung Recommendation BUY 2010A 154,630 17,297 15,799 105,992 548,698 9.0 1.7 20.4 4.8
Electronics TP (KRW) 1,850,000 2011A 165,002 16,250 13,359 89,073 617,984 11.9 1.7 14.6 5.2
(005930) Price (Nov 15, KRW) 1,331,000 2012F 204,079 29,148 23,177 153,798 746,468 8.7 1.8 21.4 4.1
Market cap. (W bn) 196,055 2013F 230,152 34,701 27,841 184,578 902,364 7.2 1.5 21.0 3.3
2014F 243,792 37,451 29,900 198,226 1,070,361 6.7 1.2 18.7 2.8
SK Hynix Recommendation BUY 2010A 12,106 2,975 2,621 4,440 13,394 5.4 1.8 39.2 3.0
(000660) TP (KRW) 34,000 2011A 10,396 325 (57) (96) 13,300 NM 1.7 (0.7) 4.7
Price (Nov 15, KRW) 26,150 2012F 10,126 (151) (212) (311) 14,515 NM 1.8 (2.4) 7.1
Market cap. (W bn) 18,152 2013F 11,047 1,181 966 1,355 16,100 19.3 1.6 9.0 4.6
2014F 11,717 1,818 1,479 2,074 18,070 12.6 1.4 12.1 3.6
281
LED
LED lighting needs more time to shine
Neutral LED lighting market growth to be long and gradual

We maintain Neutral on the LED sector given 1) the slow LED lighting
market development that will determine the mid to long-term direction for
▶ Top picks share prices, 2) the LED TV market’s likelihood of growth peaking in 2013
Lumens (038060, BUY, TP W10,000) and 3) delayed profitability improvement. The LED industry’s future growth
2012F 2013F 2014F
driver is lighting but bulb prices are still too high (Table 1). The LED lighting
market’s development will likely revolve around business-to-business
PE (x) 11.9 9.5 7.7
(B2B) and business-to-government (B2G) for the time being. Considering
PB (x) 2.0 1.7 1.4
EV/EBITDA(x) 5.5 4.2 3.3
the global economic uncertainties and moderate corporate and
EPS (KRW) 630 792 972
government investment, we recommend a conservative approach to the
BPS (KRW) 3,721 4,497 5,451
LED sector.
 Beneficiary of Samsung’s LED TVs
 Fattest margins among LED plays LED TVs contribute much to earnings but market should peak
 Greater LED lighting sales mainly from Japan
and China
in 2013
Domestic LED makers depend on LED TVs for sales (Fig. 2). Thus, the
display market conditions have a considerable effect on LED shares (Fig.
▶ 12M sector performance 3). But in the TV market, the LED adoption rate should peak in 2013.
According to Samsung’s management during the 3Q12 earnings release,
800 Dis play Equipment & Parts s ec tor index (p, LHS ) 10 LED lighting has already reached 90% adoption in the company’s set
5
600
0
products and is expected to reach near-total penetration in 2013. But
400 -5 considering the sustained LED unit cost cuts, fewer LED packages used
200
-10
per set and the potential launch of AMOLED TVs, LED shares should
-15
0 -20 gradually become less affected by LED TVs going forward.
Still low expectations for LED margins

Margin erosion at domestic LED players recently came to a halt but they
are still stuck in a downturn. We attribute this largely to a heavy fixed cost
burden triggered by low capacity utilization (Fig. 5). In addition, companies
are strengthening product competitiveness and overseas networks for
LED lighting to aggressively advance on markets abroad, and this would
further weigh on SG&A costs (Fig. 6). Given that unit costs must continue
to fall for the LED lighting market to achieve full-fledged growth, LED
margins are unlikely to improve much in 2013.
Figure 1. Quarterly OPM by LED player (through 4Q12F)
(OPM) Seoul Semi Lumens

30%
20% LG Innotek LED Seoul Opto
10%
0%
-10%
-20%
Youngwoo Chung -30%
822-3276-6186
youngwoo.chung@truefriend.com -40%
-50%
Kevin Lee -60%
822-3276-4589 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12
Source: KEPCO, Korea Investment & Securities
282
1. Price premium for LED lighting is falling but not much

LED lighting has been The price premium for LED lighting over alternative sources continues to narrow
receiving less price (Table 1). And recently, the price for compact fluorescent lamp (CFL) lighting has
premium but it is still too risen sharply due to increasing costs for rare earth elements (key raw material
expensive mostly dependent on Chinese imports). However, the absolute price drop for LED
lighting remains rather slow and it is still more expensive than alternatives (14x
equiv. CFL, 49x equiv. incandescent, based on 60W residential products). Even in
terms of total cost of ownership, LED lighting is still 6.4x pricier than the equivalent
CFL source. With our assumption that the sweet spot for the payback period of LED
lighting cost (60W equiv.) is one year, this means prices must still come down more
than 67% before LED demand ramps up. Given that prices fell only 25% during the
past 12 months, we believe LED lighting market growth will progress slowly over
the long-term.
Table 1. 60W bulb price comparison: Incandescent vs. CFL vs. LED
2011 2012
Sep 6 Sep 30 Oct 9 Nov 3 Dec 27 Jan 27 Feb 23 Mar 20 Apr 2 May 2 Jun 4 Jun 20 Jul 9 Jul 24 Aug 3 Sep 5 Oct 2 Nov 1
Incandescent
Maker Philips Philips Philips Philips Philips Philips Philips Philips Philips Philips Philips Philips Philips Philips Philips Philips Philips Philips
Model no. 374843 374843 374843 374843 374843 374843 374843 374843 374843 374843 374843 374843 374843 374843 374843 374843 374843 374843
Output (lm) 860 860 860 860 860 860 860 860 860 860 860 860 860 860 860 860 860 860
Watts 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60 60
Price (USD) 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37 0.37
Price chg. NA 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
CFL
Maker EcoSmart EcoSmart EcoSmart Philips EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart
ES5M8 ES5M8 ES5M8 ES5M8 ES5M8 ES5M8 ES5M8 ES5M8 ES5A81 ES5A81 ES5A81 ES5A81 ES5A81 ES5A81 ES5A81 ES5M8 ES5M8
Model no. 417071
144 144 144 144 144 144 144 144 4Y 4Y 4Y 4Y 4Y 4Y 4Y 144 144
Output (lm) 900 900 900 840 900 900 900 900 900 600 600 600 600 600 600 600 900 900
Watts 14 14 14 13 14 14 14 14 14 14 14 14 14 14 14 14 14 14
Price (USD) 1.46 1.46 0.87 0.99 0.99 0.87 0.99 0.99 1.74 0.97 0.97 0.97 0.97 0.97 0.97 0.97 1.24 1.24
Price chg. NA 0% -41% 14% 0% -13% 14% 0% 76% -44% 0% 0% 0% 0% 0% 0% 28% 0%
LED
Maker Philips Philips Philips EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart EcoSmart Philips Philips Philips Philips Philips Philips Philips Philips
ECS A19 ECS A19 ECS A19 ECS A19 ECS A19 ECS A19 ECS A19
Maker 409904 409904 409904 V2 WW V2 WW V2 WW V2 WW V2 WW V2 WW V2 WW 420240 420240 420240 420240 420240 420240 420240 420240
120 120 120 120 120 120 120
Model no. 800 800 800 850 850 850 850 850 850 850 800 800 800 800 800 800 800 800
Output (lm) 12 12 12 13 13 13 13 13 13 13 10.5 10.5 10.5 10.5 10.5 10.5 10.5 10.5
Watts 39.97 24.97 24.97 23.97 23.97 23.97 23.97 23.97 23.97 23.97 15.97 16.97 16.97 17.97 17.97 17.97 17.97 17.97
Price (USD) NA -38% 0% -4% 0% 0% 0% 0% 0% 0% -33% 6% 0% 6% 0% 0% 0% 0%
LED price premium

Incandescent 109x 68x 68x 65x 65x 65x 65x 65x 65x 65x 43x 46x 46x 49x 49x 49x 49x 49x
CFL 27x 17x 29x 24x 24x 28x 24x 24x 14x 25x 16x 17x 17x 19x 19x 19x 14x 14x
Source: Home Depot, Korea Investment & Securities
283
Table 2. LED ownership cost comparison

Incandescent CFL LED
First cost USD0.37 USD1.24 USD17.97
Annual power (kWh) 60.1 14.9 12.1
Rate (cents/kWh) 12.04 12.04 12.04
Annual cost USD7.23 USD1.79 USD1.46
Annual savings USD0.00 USD5.44 USD5.77
Simple payback (yrs) N/A 0.23 3.11
Source: EIA, Home Depot, Korea Investment & Securitie
Additional price drops As attested by China recently issuing a ban on imports and sales of 100W
and economic recovery incandescent lighting, major governments around the world continue to adopt
must occur to move up policies for more energy efficient light sources (Table 3). But despite such efforts,
the start of LED lighting LED lighting sales growth remains slow, which we attribute to 1) a high cost of
market growth ownership (Table 1 and 2) moderate corporate and government spending on LED
lighting due to the soft global economy. Even if incandescent lighting is banned, a
much cheaper alternative (CFL) exists. Although CFL lighting contains mercury,
which significantly reduces its environmental merits compared to LED, regulations
have yet to be introduced to control this issue. As such, we believe it is still too early
to expect LED lighting to quickly expand market presence in the near-term.
Table 3. LED lighting policies by country

2009 2010 2011 2012 2013 2014 2015
- Ban 40W and
60W
incandescent
- Ban 100W - Ban 75W
bulbs
US incandescent incandescent
- Target 25-30%
bulbs bulbs
efficiency for all
lights (70% by
2020)
- Sep: Ban all sales
- Ban 100W - Sep: Ban 60W
and imports of
EU incandescent incandescent
incandescent
bulbs bulbs
bulbs
- Sep: Ban 40W
- Sep: Ban 60W
and 25W
UK incandescent
incandescent
bulbs
bulbs
- Ban all sales and
- Jun: LED bulbs
production of
Japan market share
incandescent
exceeds CFL
bulbs
- Adopt 2mn LED
lights in 50 cities
- Replace 62% of
- Produce 70% of - Indirect subsidies - Oct: Ban sales
street lights with
LED core for LED company and imports of
- Adopt 1mn LED LED
components - Buy 4mn LED bids (in addition 60W
lights in 21 cities - Replace 30% of
- USD1.5mn lights with to five-year plan) incandescent
- Produce 60% of entire lighting
China subsidy + tax RMB80bn - Oct: Ban sales bulbs
LED core market with LED
breaks + provide government and imports of - LED equipment
components - China’s LED
minimum 70% of spending incandescent and plant
lighting market
total cost for bulbs subsidies end
expected to reach
installing MOCVD
W11bn
(core LED
equipment)
- Replace 11,000
street lights with
- Ban production of
LED
Taiwan incandescent
- Extend subsidies
bulbs
to increase LED
penetration
- Ban sales and
- Ban government
- Ban 100W production of - Ban sales of
purchase of
Russia incandescent 75W incandescent and
incandescent
bulbs incandescent CFL bulbs
bulbs
bulbs
284
2. LED TV market growth to peak in 2013

LED TVs, the growth The LED TV market has been driving the top-line growth for LED companies. The
driver of LED makers, reason is domestic LED makers depend on LED TVs for sales (Fig. 2). Historically,
should gradually have domestic LED shares have shown a strong correlation to display shares (e.g., LG
less effect on LED shares Display, Fig. 3). But LED TVs that had been steadily expanding their presence in
the LCD TV market should see growth peak in 2013. According to Samsung’s 3Q12
earnings release, LED lighting has already reached 90% adoption in the company’s
set products and is expected to reach near-total penetration in 2013. As the LED
adoption rate remains at the 70% level (as of 3Q12) in the overall market, global
LED TV shipments should post solid growth in 2013. But considering the sustained
LED unit cost cuts, fewer LED packages used per set and the potential launch of
AMOLED TVs, LED shares should gradually become less affected by LED TVs
over the long-term.
Figure 2. Sales exposure to LED TVs by company Figure 3. Comparison of LED share prices
90% 140 Kospi LG Display LG Innotek LED
130 Seoul Semi Lumens

80%
120
70%
110
60%
100
50%
90
40%
80
30%
70
20%
60
10% 50
0% 40
Seoul Semi Lumens LG Innotek LED Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12
Figure 4. Global LED penetration vs. LCD TV market (shipments)
('000)
250,000 LCD TV LED TV penetration (RHS) 100%
200,000 80%
150,000 60%
100,000 40%
50,000 20%
0 0%
2010 2011 2012F 2013F
Source: DisplaySearch, Korea Investment & Securities
285
3. LED margins still poor

LED margins unlikely to Although LED margins have recovered to some extent since early 2012, they
fast improve in 2013 remain weak on the whole. We attribute this largely to a heavy fixed cost burden
triggered by low capacity utilization (Fig. 5). In addition, companies are
strengthening product competitiveness and overseas networks for LED lighting to
aggressively advance on markets abroad, and this would further weigh on SG&A
costs (Fig. 6). Given that LED lighting must offer competitive prices via further unit
cost cuts for the market to achieve full-fledged growth, LED margins are unlikely to
improve much in 2013.
Figure 5. Seoul Semi’s LED utilization vs. OPM Figure 6. Seoul Semi’s SG&A/sales vs. LED lighting sales
(through 3Q12)
120% 20% (W bn)

OPM (RHS) Utilization 350 LED lighting sales SG&A/sales (RHS) 30%
100% 15% 300

25%
250
80% 10% 20%
200
60% 5% 15%
150
40% 0% 10%
100
20% -5% 5%
50
0% -10% 0 0%
1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 2008 2009 2010 2011 3Q12YTD
Figure 7. US-based Cree’s sales and OPM (through 4Q12F)
(USD mn)
350,000 Sales OPM (RHS) 30%
300,000 25%
250,000
20%
200,000
15%
150,000
10%
100,000
50,000 5%
0 0%
3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12
Note: Based on 4Q12F company guidance

286
Earnings forecast
1. Key assumptions
 2013F LED penetration in the lighting market: 5%
 2013F flat-panel TV market growth: 5%
 2013F LED penetration in Samsung’s flat-panel TVs: 99%
2. Seoul Semi’s 2013F NP growth at ~5%

NP growth at only ~5% Seoul Semiconductor (Seoul Semi) has the biggest exposure to the lighting market
due to heavy fixed cost among domestic LED players. Its lighting division (for lighting, automotive and
burden and greater SG&A major appliances) posted record quarterly sales of W96.6bn in 3Q12 (+15% QoQ).
costs General lighting and automotive product sales were particularly strong. We expect
lighting revenue to continue growing in 2013 backed by 1) solid growth potential for
the global lighting market and 2) the addition of new global automotive component
makers as customers. In 2013F, the lighting division should post sales of W454.1bn
(+24% YoY) and account for 48% of consolidated sales. But despite greater lighting
sales, consolidated OPM should stand at only 4.9% mainly due to 1) a heavy fixed
cost burden triggered by low capacity utilization, 2) sustained unit cost cuts on
intensifying competition, 3) production development costs for overseas
advancement, 4) commissions and 5) greater SG&A costs.
Figure 8. Seoul Semi: Shares vs. OP Figure 9. Seoul Semi: PB vs. ROE
(KRW) (W bn) 5.0x 50%

60,000 Quarterly OP (RHS) 45
4.5x
SSC share price 40
40%
50,000 4.0x
35
3.5x
30%
40,000 30
3.0x
25
30,000 2.5x 20%
20
2.0x
20,000 15 10%
1.5x
10 1.0x P/B (12MF)
10,000 0%
5 0.5x ROE (RHS)
0 0 0.0x -10%
Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11
287
Top pick
Lumens (038060)
Our favorite pick is We set Lumens’ 2013F sales at W522bn (+20% YoY) and OP at W39.1bn (+23%
Lumens, the main YoY). Lumens supplies LEDs used in Samsung’s LED TV backlight units (BLU) and
beneficiary of Samsung’s the company should benefit from Samsung’s aggressive push for LED TVs in 2013.
LED TVs Moreover, the LED lighting division that is steadily gaining more sales weighting
should continue its stable growth driven by mainly the Japanese and Chinese
markets. We believe Lumens will be able to maintain its industry-best OPM of 7.5%
in 2013F thanks to 1) a strategy for outsourcing low-priced LED chips and 2) stable
utilization. We maintain BUY and TP of W10,000 (2.7x 12MF PB).
Risk factors
Global economy recovers 2013 sales and profit growth would only exceed estimates if 1) demand in the IT
earlier and LED lighting sector grows faster than expected due to a quick global economic recovery and 2)
market expands faster corporate and government spending on LED lighting expands at a faster pace than
than expected expected.
288
Coverage valuations
Table 4. Valuations
Lumens Recommendation BUY 2010A 246 27 18 455 2,727 18.0 3.0 18.4 10.4
(038060) TP (KRW) 10,000 2011A 340 16 15 367 3,156 16.9 2.0 12.7 9.9
Share price (Nov 15, KRW) 8,080 2012F 435 32 25 630 3,721 11.9 2.0 18.3 5.5
Market cap (W bn) 303 2013F 522 39 31 792 4,497 9.5 1.7 18.9 4.2
2014F 591 47 39 972 5,451 7.7 1.4 19.2 3.3
LG Innotek Recommendation BUY 2010A 4,103 156 196 10,325 73,048 13.0 1.8 16.5 9.2
(011070) TP (KRW) 95,000 2011A 4,553 (67) (145) (7,211) 65,733 NM 1.0 (10.4) 8.9
Share price (Nov 15, KRW) 81,400 2012F 5,176 114 16 790 66,485 103.0 1.2 1.2 6.2
Market cap (W bn) 1,642 2013F 5,916 290 178 8,806 75,290 9.2 1.1 12.4 4.3
2014F 6,863 385 262 12,978 88,267 6.3 0.9 15.9 3.6
Seoul Semi. Recommendation Hold 2010A 839 110 94 1,614 9,721 25.2 4.2 18.2 15.9
(046890) TP (KRW) - 2011A 739 24 35 593 9,974 35.4 2.1 5.9 23.2
Share price (Nov 15, KRW) 22,950 2012F 852 18 19 320 10,699 71.7 2.1 3.0 16.7
Market cap (W bn) 1,338 2013F 951 47 47 801 11,339 28.7 2.0 7.3 11.5
2014F 1,090 61 63 1,073 12,197 21.4 1.9 9.1 9.9
289
Telecom Services
Competition to ease and ARPU to rise in 2013
2013F mobile telecom ARPU to gain 5.1% YoY

Overweight A year after the start of service, domestic LTE subscribers numbered
11.72mn in Sep 2012 (penetration 22.0%) and are set to reach 15.5mn
▶ Top pick (28.9%) at end-2012F and 27mn (49.6%) at end-2013F. The three mobile
telcos’ ARPU should turn upward on LTE effects in 2H12 and gain 5.1%
SK Telecom (017670, BUY, TP W200,000) YoY in 2013F.
2012F 2013F 2014F
PE (x) 9.5 6.7 5.4 Eased competition from end-2012/early 2013 with LTE
PB (x) 0.8 0.8 0.7 penetration above 30%
EV/EBITDA (x) 4.0 3.4 3.2 Due to fierce LTE competition, the telcos’ profitability has been sluggish in
EPS (KRW) 16,011 22,534 28,039 2012. In Sep, handset subsidies spiked to a record high. Over the
BPS (KRW) 179,986 191,322 207,410 short-term, LTE boosts ARPU but erodes profitability. But over the
 Attractive valuation and dividend merit long-term, the service should shore up both ARPU and profitability. Taking
 4G LTE subscriber growth to shore up ARPU 3G as a precedent, we believe LTE competition will start to ease from
 Subsidiaries’ EV to increase on better end-2012/early 2013 when the penetration rate goes above 30%. Demand
profitability
for popular handsets should also slow after Dec 2012. The short-term
benefits of LTE would go to LG Uplus (LGU+) with market share gains. But
KT (030200, BUY, TP W48,000)
from 2013, there should be no differentiating point and competition will
2012F 2013F 2014F ease to benefit all. The telcos’ OP should fall 22.3% YoY in 2012F on rate
PE (x) 8.5 7.7 7.4 cuts but gain 30.0% YoY in 2013F.
PB (x) 0.8 0.7 0.7
EV/EBITDA (x) 3.9 3.7 3.6 Outperformance to continue on favorable ARPU and
EPS (KRW) 4,573 5,057 5,304 competition trends
BPS (KRW) 51,107 54,146 57,424 Since Jun, telco shares have been outperforming the broader domestic
 Attractive valuation and dividend merit market on their defensive edge, attractive valuations (PE 7.8x) and
 4G LTE subscriber growth to shore up ARPU dividend merits (5-6% yields). We expect the outperformance to continue
 Growth potential of non-telecom businesses
to be high over the next year as ARPU would see an upswing in 2H12 and
competition should ease and profitability improve from 2013. Dividend
capacity should increase given the wrap-up of LTE investment and less
▶ 12M sector performance capex for 10 years from 2013. For a top pick, we present SK Telecom
(SKT) on LTE competitiveness and improving profitability at subsidiaries.
300
(p)
(%p)
20
We also recommend BUY on KT for stronger media and non-telecom
250
Telec ommunication Serv ic es s ec tor index (p, LHS )
10
businesses and LGU+ for the regaining of mobile competitiveness.
200
150 0
100
-10
Figure 1. Telcos’ combined ARPU, marketing costs and profitability
50
0 -20 (KRW) ARPU (LHS) (%)
Nov-11 Feb-12 May-12 Aug-12 34,000 25
Marketing costs to serv ice sales (RHS)
OPM (RHS)
33,000 20
32,000 15
31,000 10
Jong In Yang
822-3276-6153/6154 30,000 5
jiyang@truefriend.com
29,000 0
Dongyeon Lee
10 11 12F 13F
822-3276-6276
dongyeon@truefriend.com
290
1. Defensive stocks with dividend merits

Attractive defensive, We maintain Overweight on telecom services. Telco shares have outperformed the
dividend plays during broader market by 5.2%p YTD and 31.8%p since Jun. The rally is slowing on
global economic crisis concern about fierce competition that lasted for a year. But as the negatives are
reflected to a great extent, we expect telco shares to continue the outperformance
for the next year. We recommend Overweight. 1) The three mobile telcos’ 2013F
ARPU should grow 5.1% YoY on LTE effects. 2) As seen earlier with 3G,
competition should ease from end-2012/early 2013 when LTE penetration
surpasses 30%. 3) Valuations have appeal with 12MF PE 7.8x and dividend yields
of 5-6%. 4) With the wrap-up of LTE investment, capex and facility operating costs
would diminish from 2013.
Figure 2. SKT, KT dividends and yields
(KRW) KT DPS (LHS) SKT DPS (LHS) (%)

12,000 8
KT div idend y ield (RHS) SKT div idend y ield (RHS)
10,000
6
8,000
6,000 4
4,000
2
2,000
0 0
00 01 02 03 04 05 06 07 08 09 10 11 12F 13F
2. LTE subscriber growth ARPU catalyst

Heavier weighting of LTE We expect the telcos’ ARPU to turn upward YoY from 2H12 on more LTE customers.
customers (49.6% in Launched in Oct 2011, LTE has been offered for only a year. But its subscribers
2013) to boost ARPU by reached 11.72mn in Sep 2012 with a penetration rate of 22.0%. The figures are set
5.1% YoY to reach 15.5mn (28.9%) at end-2012F and 27mn (49.6%) at end-2013F. With the
rapid addition of LTE subscribers, the telcos’ ARPU should turn to growth YoY in
2H12 and see a 2.1% YoY gain in 2012F despite rate cuts in 4Q11. ARPU growth
effects should be great until early 2013 on the sign-ups of high-ARPU LTE
customers. The 2013F ARPU is pegged to grow 5.1% YoY.
291
Figure 3. Smartphone and LTE subscriber outlook Figure 4. Three mobile telcos’ annual ARPU
('000 subs) (%) (KRW)

60,000 100 40,000
Smartphone subscribers (LHS) 88.5 SKT KT LGU+
Smartphone portion (RHS)

50,000 81.2 80
LTE portion (RHS)
35,000
63.6
40,000
63.8
60
30,000 49.6 30,000

43.0
40
20,000
28.9
25,000
20
10,000
14.1
1.6
2.3
0 0 20,000
2009 2010 2011 2012F 2013F 2014F 10 11 12F 13F
3. Marketing to cost less with competition eased by

greater LTE penetration
At end-2012 or early 2013, Similar to the 3G example, the carriers’ competition should ease once LTE
LTE penetration to penetration reaches 30%+ at end-2012 or early 2013. Korean telcos’ full-bore effort
exceed 30% and to attract 3G subscribers began in 2007. Thirteen months later in Mar 2008, 9.06mn
marketing competition to handset users (penetration 24.9%) were connected to the 3G network. Then, net
ease growth for the number of subscribers began to dwindle at SKT and KT. As 3G
penetration hit 33.4% in Jun 2008, the net increase in subscribers sharply fell at
both carriers and competition subsided. Since then, marketing costs began to
shrink at the three service providers. In Sep 2012, the number of LTE subscribers
totaled 11.72mn (penetration 22.0%) and should reach 15.5mn (28.9%) in Dec.
Based on the 3G case, the current competition for LTE subscribers should wane
from end-2012 or early 2013. By then, the three carriers’ marketing should be less
effective as quality differences between networks, calls and handsets would pretty
much be erased. Thus, the three carriers should spend less (0.9% YoY, combined)
on marketing in 2013.
Figure 5. 3G penetration and net subscribers increase Figure 6. 3G penetration and marketing costs
('000 subs) 3G net additions (LHS) (%) (W bn) Marketing costs (LHS) (%)
1,600 60 2,000 3G penetration rate (RHS) 60
3G penetration rate (RHS)
1,400 1,800
50 50
1,600
1,200
1,400
40 40
1,000
1,200
800 30 1,000 30
800
600
20 20
600
400
400
10 10
200
200
0 0 0 0
Jan-07 Jul Jan-08 Jul Jan-09 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09
Note: Combined figures for the three carriers Note: Combined figures for the three carriers
292
Earnings forecast
1. Key assumptions for our profit estimates

Assumptions: Slower  Growth in the number of fixed-line and mobile subscribers would slow due to
growth for subscribers, market saturation; Growth in mobile subscribers should fall from 3.4% in 2011
higher ARPU and less
to 2.0% in 2012F and to 1.6% in 2013F
capex
 Despite the W1,000 basic rate cut, more LTE users would drive up ARPU
2.1% in 2012F and 5.1% in 2013F
 The subscriber acquisition cost (SAC) would grow 24.5% YoY in 2012F but
slide 3.6% in 2013F
 Capex would increase 15.5% YoY in 2012F but fall 13.2% in 2013F as
investment in LTE winds down
Table 1. Assumed number of mobile subscribers, ARPU and SAC in Korea

2010 2011 2012F 2013F
Mobile subscribers (‘000 people) 50,768 52,507 53,578 54,438
Smartphone users (‘000 people) 7,178 22,578 34,200 44,200
LTE users (‘000 people) - 1,191 15,500 27,000
ARPU growth (%) (4.4) (4.1) 2.1 5.1
SAC growth (%) 8.5 (3.8) 24.5 (3.6)
Capex growth (2.0) 20.2 15.5 (13.2)
Figure 7. Subscribers: Market saturated Figure 8. Four carriers’ capex scale
(mn subs) (mn subs) Combined capex of four telcos

30 Population (RHS) 60 (W bn) Capex as % of sales (%)
8,000 20
25 50
Household (LHS)
7,000 18
20 40
17.1
15 30 16.2
6,000 16
10 20
Broadband (LHS) 14.4
5,000 14.1 14
Telephony (LHS)
5 10
Mobile (RHS)
0 0 4,000 12
03 04 05 06 07 08 09 10 11 12F 13F 2010 2011 2012F 2013F
Source: Company data, Korea Investment & Securities Note: Four carriers refer to SKT, KT, LGU+ and SK Broadband
293
2. Profits to grow in 2013 on LTE effects and less capex

Four telcos’ combined OP The four telcos’ (incl. SK Broadband) service sales should inch up 1.5% YoY in
to drop 22.3% YoY in 2012F. Although their YoY subscriber growth should slow from 2.0% in 2012F to
2012F but jump 30.0% 1.6% in 2013F, the service sales increase would accelerate to 5.7% in 2013F as the
YoY in 2013F rise in APRU gathers pace from 2.1% to 5.1%. OP should fall 22.3% YoY in 2012F
due to the rate cuts and greater marketing costs and depreciation. But OP would
jump 30.0% YoY in 2013F thanks to higher ARPU and less depreciation.
Table 2. Four telcos’ combined earnings (W bn, %)
2010 2011 2012F 2013F

Sales 44,439.1 47,211.8 51,977.1 54,593.2
Growth (%) 6.2 10.1 5.0
Service sales 37,788.6 38,234.9 38,806.5 41,025.9
Growth (%) 1.2 1.5 5.7
Marketing costs 7,570.9 7,203.4 8,274.6 8,202.9
Growth (%) (4.9) 14.9 (0.9)
OP 4,983.3 4,433.4 3,442.8 4,476.9
Growth (%) (11.0) (22.3) 30.0
NP 3,733.0 3,144.3 2,182.2 3,176.4
Growth (%) (15.8) (30.6) 45.6
EBITDA 11,524.9 11,036.8 10,649.8 11,746.7
Growth (%) (4.2) (3.5) 10.3
OPM to gain from 8.9% in Capex should diminish beginning in 2013 after peaking in 2012. Depreciation as a
2012F to 10.9% in 2013F percentage of service sales should also drop from 17.8% in 2012F to 17.3% in
2013F on weakened effects from a change in depreciation accounting (from
declining balance to straight-line) in K-IFRS. The marketing costs-to-service sales
should fall from 21.3% in 2012F to 20.0% in 2013F. Accordingly, the telcos’
respective OPM would gain from 8.9% to 10.9% over the same period. In particular,
capex should continue to shrink into 2020. The resulting increase in free cash flow
suggests greater dividend capacity.
Figure 9. Marketing costs-to-service sales and OP Figure 10. Depreciation-to-service sales and OP
(%) Combined OPM (%)

30 30 Combined OPM
Combined marketing costs to service sales
Combined depreciation to service sales
24.8
25 22.8 25
22.1 22.1
21.2 21.3 20.8
20.0 20.0 20.2 19.9
18.6 18.8 18.8
20 20 17.8 17.8
17.3
16.7 16.7
15.7
14.9
15 15
12.4
10 10
5 5
03 04 05 06 07 08 09 10 11 12F 13F 03 04 05 06 07 08 09 10 11 12F 13F
294
3. Key variables are ARPU and marketing costs

Each 1% rise in ARPU As the number of subscribers is stalled, key variables to the telcos’ profits are
would lift 2013F EPS by ARPU and SAC. The ARPU is affected mainly by rate cuts and pay schemes for
4.3-9.1% smartphones and 4G services. While the ARPU fell 4.1% YoY in 2011, we think it
will climb 2.1% in 2012F and 5.1% in 2013F. Each 1% rise in the ARPU on LTE
effects would lift the 2013F EPS by 5.9% for SKT, 4.3% for KT and 9.1% for LGU+.
1% rise in SAC would trim Marketing costs are the most decisive variable for the telcos’ short-term profits. For
2013F EPS by 1.2-4.0% example, their profitability eroded since 2004 due mainly to mounting handset
subsidies in the wake of mobile number portability (MNP). We forecast marketing
costs will shrink 0.9% YoY in 2013F as the SAC would drop 3.6% despite a 2.5%
gain in new subscribers. Each 1% rise in the SAC would trim the 2013F EPS by
2.5% for SKT, 1.2% for KT and 4.0% for LGU+.
Table 3. EPS sensitivity to ARPU changes (KRW, %)
% chg. in ARPU and EPS

ARPU -3 -2 -1 0 1 2 3
SKT’s EPS (17.7) (11.8) (5.9) 0.0 5.9 11.8 17.7
KT’s EPS (12.9) (8.6) (4.3) 0.0 4.3 8.6 12.9
LGU+’s EPS (27.4) (18.2) (9.1) 0.0 9.1 18.2 27.4
% chg. in SAC and EPS
SAC -3 -2 -1 0 1 2 3
SKT’s EPS 7.4 4.9 2.5 0.0 (2.5) (4.9) (7.4)
KT’s EPS 3.7 2.5 1.2 0.0 (1.2) (2.5) (3.7)
LGU+’s EPS 12.0 8.0 4.0 0.0 (4.0) (8.0) (12.0)
Top picks
We prefer SKT for its Our top pick criteria comprise six components such as valuations (PE, EV/EBITDA,
valuations and dividend etc.), growth potential (sales, NP, etc.), dividend yields and other issues. We based
appeal our selection on a total score of 30 with five points for each of the six categories.
SK Telecom (017670)
Our top pick is SKT given its valuations and dividend appeal. At present, the
company’s subsidiaries deserve close attention, i.e., SK Planet’s growth potential
and SK Hynix’s and SKB’s profitability improvement. In addition, SKT has a sharp
competitive edge in LTE services, including network and content.
KT (030200)
We recommend KT as a second favorite on valuation and dividend merits. The
media and non-telecom businesses are turning for the better. LTE competitiveness
should recover from 2013.
295
Table 4. Investment appeal scores by company

Valuation Growth potential Dividend yield Others Score
Sales
PE EV/EBITDA NP growth
growth
SKT 5 5 3 3 5 2 23
KT 5 4 2 2 5 2 20
LGU+ 5 4 4 3 0 1 17
SKB 0 3 5 5 0 2 15
Note: Higher score means better performance
Risk factors
1. Rate-cut pressure
Since current The government has been inducing telecom rate cuts almost every year. Since
government took office in taking office in 2008, the current administration has further tightened control over
2008, regulatory control service rates as part of a policy to stabilize consumer prices and lessen the burden
has tightened, including a on low to mid-income households. The government has been pushing telcos to
20% rate cut lower fees every year to fulfill an election pledge of 20% lower rates before the end
of its term. Accordingly, SKT introduced per-second voice billing in Mar 2010,
followed by KT and LGU+ in Dec. With the new billing scheme in place, the three
mobile telcos saw their OP shrink W397bn or 8.2% in 2011. The companies also
lowered their monthly base fees by W1,000 in 2011 and this is expected to erode
their 2012F OP by W644.6bn or 14.8%. As such, rate cuts have a very negative
effect on profitability for the mobile telcos.
Election pledges and Korea’s presidential election will be held in Dec 2012 and rate cuts will probably be
following through are key included as an election pledge by the candidates. As the telcos lowered fees in
variables 2010 and 2011, rates should have less room to fall. In 2013, LTE rates may come
under regulatory control.
Table 5. Rate-cut measures since 2008

Time frame
Jan 2008 SMS: W30 per message → W20
Mar 2008 Larger discount for intra-network calls: 50% → 80%
Deeper cuts for low-income households: Wider range for all welfare recipients and those in the
Sep 2008 second-lowest income bracket (people whose monthly income equals 100-120% of the poverty
line) / free base fees and 50% cut to call charges for welfare recipients
Sep 2009 Sign-up fees: SKT (W55,000 → W39,600), KT (W30,000 → W24,000)
Pre-paid fees: SKT (W6.2/sec. → W4.8), KT (W5.8 → W4.9), LGU+ (W6.5 → W4.9)
Mobile data: Flat-rate cuts and bigger data offering
Mar 2010 Per-second voice billing: SKT (Mar), KT and LGU+ (Dec)
Sep 2010 Full free CID service: KT and LGU+ (SKT’s free service since 2006)
Mobile data rate improvements: Allow unused data to be carried over to the following month;
Reduce Internet direct interconnection rates (SKT, W1.5/0.5kbyte → W0.25))
W1,000 cut to monthly base fees and monthly offering of 50 free SMS starting with SKT and
Sep 2011
then followed by KT in Oct and LGU+ in Nov
Source: Korea Communications Commission, company data, Korea Investment & Securities
296
2. Tougher regulations on marketing is really a pro

Stricter subsidy In 2012 alone, the Korea Communications Commission (KCC) issued three
regulations would help separate warnings to telecom operators about the overheated competitive
ease competition environment. However, the telcos engaged in more cutthroat competition in Sep.
Although there are guidelines on controlling handset subsidies, they were not
followed. The reason is the revenue from subscriber additions can offset the fines.
Accordingly, regulatory control has been gradually tightening. According to the
Telecommunications Business Act revised in 2010, a mobile carrier that violates the
subsidy rule three times will be restricted from mobile operations for up to three
months and face double the fines as of Nov 2012. As such, we believe stricter
subsidy regulations will help reduce marketing costs and lead to better profitability.
Coverage valuations
Table 6. Valuations
Recommendation and TP Earnings and valuations
SKT Recommendation BUY 2010A 15,599 2,286 1,842 25,599 167,593 6.8 1.0 16.4 3.8
(017670) TP (KRW) 200,000 2011A 15,988 2,131 1,613 22,848 174,280 6.2 0.8 14.0 2.8
Price (Nov 15, KRW) 151,500 2012F 16,383 1,562 1,116 16,011 179,986 9.5 0.8 9.4 4.0
Market cap (W bn) 12,233 2013F 17,137 1,933 1,570 22,534 191,322 6.7 0.8 12.5 3.4
2014F 17,644 2,038 1,954 28,039 207,410 5.4 0.7 14.3 3.2
KT Recommendation BUY 2010A 20,326 2,008 1,296 5,329 46,296 8.7 1.0 12.0 3.7
(030200) TP (KRW) 48,000 2011A 21,990 1,974 1,447 5,946 48,477 6.0 0.7 12.7 3.8
Price (Nov 15, KRW) 39,050 2012F 24,588 1,764 1,114 4,573 51,107 8.5 0.8 9.2 3.9
Market cap (W bn) 10,196 2013F 26,000 1,910 1,232 5,057 54,146 7.7 0.7 9.6 3.7
2014F 26,213 2,017 1,293 5,304 57,424 7.4 0.7 9.5 3.6
LGU+ Recommendation BUY 2010A 8,501 655 570 1,318 9,034 5.4 0.8 19.2 2.7
(032640) TP (KRW) 8,900 2011A 9,256 286 85 196 8,861 37.8 0.8 2.2 4.7
Price (Nov 15, KRW) 7,750 2012F 11,006 117 (47) (113) 8,757 NM 0.9 (1.2) 5.5
Market cap (W bn) 3,384 2013F 11,457 634 373 860 9,262 9.0 0.8 9.6 4.2
2014F 11,788 779 480 1,106 9,963 7.0 0.8 11.5 3.9
SK Broadband Recommendation Hold 2010A 2,137 (23) (120) (405) 3,767 NM 1.4 (10.2) 6.7
(033630) TP (KRW) - 2011A 2,313 65 (14) (48) 3,694 NM 0.9 (1.3) 4.3
Price (Nov 15, KRW) 4,570 2012F 2,524 87 29 98 3,766 46.5 1.2 2.6 4.2
Market cap (W bn) 1,353 2013F 2,668 140 90 303 4,043 15.1 1.1 7.8 3.8
2014F 2,782 175 127 429 4,446 10.7 1.0 10.1 3.6
Note: 1. Nov 15 closing prices.
2. KT merged in Jun 2009 and LGU+ in Jan 2010
297
Utilities
Anticipate lighter cost burden and deregulation
Gov’t should look to state-owned energy firms for profitability

Overweight When examining Korea Electric Power Corp. (KEPCO) or Korea Gas Corp.
(KOGAS), it is more important to consider changes to the government’s
▶ Top picks management policy toward them rather than their profit growth on the income
statement. This is because as the largest shareholder of KEPCO and KOGAS,
Korea Gas Corp. (036460, BUY, TP W110,000) the government has run the companies only in the name of public interest with
2012F 2013F 2014F almost no regard for profitability. But in the current circumstances, the
PE (x) 20.0 15.1 11.2 government has to turn its attention toward profitability. The reasons are
PB (x) 0.8 0.8 0.7 KEPCO and KOGAS are being warned about their snowballing debt and
EV/EBITDA (x) 17.2 14.9 13.5 Korea needs money to pave the way for the energy industry.
EPS (KRW) 4,143 5,480 7,405
BPS (KRW) 103,090 107,525 113,768 KEPCO: NP turnaround will be key
 The market is shifting focus toward the gas In 2012, KEPCO is expected to report a net loss for a fifth straight year due
industry as expanding nuclear plants is getting
tougher to a huge cost burden that has been building every year, in addition to an
 Growing expectations that the government unbalanced power generation mix (light nuclear weighting and heavier
will provide aid to Korea Gas Corp. again
LNG leads to bigger fuel costs) stemming from rising oil prices since 2008.
The reason is even though electricity rates went up every recent year, the
▶ 12M sector performance cost burden increased at a faster pace. However, the burden should ease
from 2013 as oil prices are unlikely to rise much compared to 2012 and the
3,500
(p) Rel.to KOSPI (%p, RHS)
Gas Utilities sector index (p, LHS )
(%p)
100 power generation mix should improve on better electricity supply-demand
3,000
2,500
80 conditions. But given that KEPCO employs cost-linked pricing in its
60
2,000
40
accounting, a drop in oil prices would barely boost earnings. Still, if the
1,500
1,000 20 power generation mix improves, then profits would increase and KEPCO
500 0
could see an NP turnaround for the first time in six years.
0 -20
KOGAS: High valuation justified on hopes for gov’t support

KOGAS also uses cost-linked pricing, which means even if imported LNG
prices go down, it would not affect profits. Investment points for KOGAS
include the renewed importance of gas-fired power generation in Korea and
the national effort to aggressively advance on the shale gas industry, for
which KOGAS’ role is gaining momentum. As such, the government now
must again provide aid to KOGAS. Although shares have risen sharply on
such expectations, KOGAS should still draw the market’s attention.
Figure 1. Even if KEPCO’s NP turns around in 2013, its free cash flow
would remain negative due to heavy investment burden
(W bn)
4,000
2,290 2,314 2,162
2,000 1,115 2,295
934 (322)
0
99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F
(2,000) (917) (1,160) (1,224) (3,013)
KEPCO's FCF (3,940)
(4,000)
(4,418)
(5,006)
Heedo Yun (6,000) (5,608)
822-3276-6165
(8,000) (7,228)
heedo@truefriend.com
298
1. Better electricity supply-demand conditions

Concern about power “Power shortage” was the biggest issue in the power industry in both 2011 and
shortages should 2012. Although the prices for primary energy such as oil and LNG rose sharply, the
gradually fade government only slightly raised electricity rates, so people consumed more. But
from 2013, the concern about power shortages should fade considerably. Current
electricity prices stand 15% higher than at end-2010 and electricity demand growth
has waned noticeably due to the slowing economy. Improving electricity
supply-demand conditions would be favorable for KEPCO as the company can
depend less on expensive LNG power generation. In 2011, KEPCO purchased
W7.5trn worth of electricity from independent power producers (IPP) that use LNG
to generate power. As such, if KEPCO can lower its dependence on LNG power
generation, the company can bring down the cost burden by a meaningful amount.
2. Electricity rate hikes

Next rate hike to take Electricity rates have been lifted 15% during the past two years. But considering
place in 2H13 KEPCO’s much heavier power generation costs and its investment burden for
power plants currently being built, rates must be raised further. Of note, the market
estimates KEPCO’s 2013 EBITDA at W10trn (OP W2.3trn + depreciation W7.7trn)
and capital expenditure and interest expenses at W20trn and W2.6trn, respectively.
This means KEPCO will again have to finance investment with borrowings. KEPCO
said it will push for higher electricity rates in early 2013. But we believe the next rate
hike will take place in 2H13. Given that the rates were upped only recently and it
would take some time for the new administration to reorganize after the presidential
election in Dec, raising electricity rates is unlikely to emerge as a major topic for the
time being. We believe the rate hike issue is the most favorable catalyst that can
drive up KEPCO’s shares.
Figure 2. KEPCO’s debt to exceed W100trn in 2013F
(W trn) (%)
120 Debt ratio 110 250
(RHS) 102
100 92
200
83 206
193
80 72
175
150
60
126 126
100
40
Total debt (LHS)
50
20
0 0
2010A 2011A 2012F 2013F 2014F
299
3. Government support for KOGAS

Hopes for government So far in 2012, KOGAS’ shares have risen sharply thanks to growing expectations
support to materialize in for the gas industry. We believe such hopes will materialize one by one in 2013,
2013 including 1) the issuance of asset-backed securities by using accounts receivable
as underlying assets, 2) implementing debt-for-equity swaps without repaying
money borrowed from the government, 3) a rights offer and 4) the government
announcing an energy policy that hints at reducing nuclear power generation. But
even if government support for KOGAS materializes, it is unlikely to boost profits in
the short-term. As such, we believe KOGAS’ shares will slope upward via multiple
(fair target multiple in valuation) upgrades rather than upward earnings revisions. In
addition, the government is more likely to introduce policies to support KOGAS in
2H13 than in 1H13.
Figure 3. Gov’t projections indicate more nuclear and Figure 4. … but there will be less nuclear and more
less gas-fired power generation… gas-fired in the not-so-distant future
(%) (%)
60 45
48.5 41.9
44.0
50 40
41.9 37.2
40.8 36.6 Nuclear 35.4
Nuclear
40 35
31.4
37.2 36.9 31.4 33.7
32.6
30 30 Coal 30.7
Coal 31.0
21.8
20 16.6 25
10.5 9.7 23.8
22.3 23.1
10 20 LNG
21.8
LNG
0 15
10F 15F 20F 24F 10F 15F 20F 24F
Note: Government projections for power generation by energy source Source: Korea Investment & Securities
Source: The 5th Basic Plan for Power Supply
4. IPPs to lose some glitter

IPPs should gradually The market showed great interest in IPPs in 2011 and 2012. As electricity
become less profitable supply-demand conditions weakened during the past two years, KEPCO’s
dependence on IPPs climbed to as much as 11% (as of 2011). Most IPPs use
natural gas to generate power. Thus, when there is big nationwide demand for
electricity, the utilization at IPPs goes up and their margins increase as well. But
from 2013, power generation capacity will likely expand at a faster pace than
electricity demand. If this is the case, the utilization at gas-fired plants would drop to
less than in 2012. Over the past decade, electricity demand has grown 5.9% p.a.,
1.4-times faster than GDP growth. But from 2012, chances are the demand will
increase only on par with the nation’s economic growth. YTD to Sep, electricity
demand grew a mere 2.8%. The annual average demand growth should be ~3%
and accordingly, the concern about power shortages would fade considerably.
300
Figure 5. Reserve margin to enter upswing from 2013
(MW) Peak demand (LHS) (%)

120,000 20
Power generation capacity (LHS) 18.4
Reserve margin 1 (RHS) 18
15.6
100,000 Reserve margin 2 (RHS) 16
12.6
14
80,000
14.9 12
9.5
12.2
60,000 10
9.2 8
40,000 6.2
5.5 6
6.2
3.8 4
20,000
2
0 0
10 11 12 13F 14F 15F 16F
Note: 1) Peak demand is expected electricity demand assuming current supply-demand conditions are sustained; Reserve margins
are as of end-Jun in respective years
2) Reserve margins for 2010-2012 are actual figures
3) Reserve margin 1 is based on installed capacity; Reserve margin 2 is based on available capacity
Earnings forecast
1. Key assumptions for our profit estimates

Electricity demand to  Real economy: GDP growth 3.3%
grow 3% YoY in 2013F  FX rate: Annual average W1,058/USD
 Oil price: USD100/bbl (Dubai crude)
 Electricity demand growth: 3.0%
 LNG sales volume growth: 4.1%
 Electricity rate hike: 4.5% (Jul 2013)
2. Changes in FX rates and oil prices to have only marginal

effects on profits
Marginal effects on Many market participants believe a fall in the KRW/USD would lead to greater
profits by fluctuations in profits both for KEPCO (lighter fuel cost burden) and KOGAS (lower LNG import
KRW/USD and oil prices prices). But as cost pass-through accounting has been in place for both, changes in
FX rates and oil prices have only limited effects on their income statement profits. A
falling KRW/USD and lower oil prices would be positive for the companies in that
the conditions will help them address accounts receivable that have piled up. But
for KEPCO, whether or not electricity rates will be raised is a more critical issue. We
peg the company’s 2013F electricity sales value at W50trn. If electricity rates are
lifted 5%, sales would grow W2.5trn. But with cost-linked pricing in place, changes
in sales would not directly translate into OP. We expect a 4.5% rate hike next
summer, while the company will start pushing for a rise in early 2013.
301
We expect gradual profit growth at KOGAS in 2013. We anticipate domestic LNG

sales volume to grow 4.1% YoY in 2013F compared to 2012F’s 4.6%. The lesser
growth outlook is attributed to a possibility that electricity demand would gain at a
slower pace amid the economic slowdown, which in turn would drive down
utilization at LNG-fired power plants. In 2013, a number of key issues are ahead,
such as mounting negative public sentiment toward nuclear power, the steady
introduction of shale gas and exploration, and a policy for more gas imports. But the
issues are unlikely to have immediate effects on KOGAS’ 2013F profits. Thus, it
would not be wide of the mark if we assume 2013F sales and NP would grow a bit
from 2012. We peg OP to rise 9.1% YoY in 2013F.
Figure 6. Expect a 4.5% rate hike in summer 2013 Figure 7. LNG sales volume to grow 4.1% YoY in 2013F
(%) ('000 tonnes) (%)

12 40,000 30.0
26.6
9.6 35,000 25.0
10 Sales volume
growth (YoY, RHS)
8 30,000 20.0
15.6
25,000 15.0
6 4.9
4.5 4.5
3.9 8.3
3.5 20,000 7.6 10.0
4
2.8 5.0
2.1 15,000 3.5 5.0
2 5.0 4.6
4.2 4.1
0.0 0.0 0.0 10,000 0.0
0
02 03 04 05 06 07 08 09 10 11 12 13F 5,000 Sales volume (LHS) (5.0)
(2) (6.5)
(1.5)
0 (10.0)
(4) 03 04 05 06 07 08 09 10 11 12F 13F
Source: KEPCO, Korea Investment & Securities Source: KOGAS
Many market participants believe a fall in the KRW/USD would lead to greater
profits both for KEPCO (lighter fuel cost burden) and KOGAS (lower LNG import
prices). But as cost-linked pricing has been in place for both, changes in FX rates
and oil prices have only limited effects on their income statement profits. By
company, expectations are great that a fall in unit costs for electricity generation
(using coal or LNG as fuel) would drive up KEPCO’s earnings. But we expect only
limited effects given the company’s fuel cost pass-through accounting system (fuel
cost changes are linked to electricity rates). Thus, in theory, price fluctuations for
bituminous coal, LNG and petroleum products have no earnings impact from an
accounting perspective. However, in the case of LNG, lower gas prices help
KEPCO buy electricity from IPPs for less, which can increase the profit upside.
Meanwhile, also for KOGAS, changes in FX rates and oil prices have no impact on
OP in theory as cost-linked pricing is applied in the accounting. Some may think a
fall in the KRW/USD will increase FX translation gains at KEPCO and KOGAS
given their large debts denominated in USD. But this is not the case. Most of
KEPCO’s USD-denominated debt (W11.8trn) is hedged via financial products and
the amount exposed to FX risks is only W2.5trn. Thus for the company, each W10
fall in the KRW/USD would add a mere W22bn in FX translation gains. Likewise,
KOGAS’ unhedged exposure out of total USD borrowings (W8trn) is only W190bn.
Thus, each W10 fall in the KRW/USD would add only W1.7bn in FX translation
gains.
302
Table 1. Changes in FX rates and oil prices have only marginal effects
Operating balance (KEPCO)

Past Present
• Cost-linked pricing not in place • Cost-linked pricing in place since Jul 2011
• Falling KRW/USD and lower oil prices lead to greater profits • OP change effect from falling KRW/USD and lower oil prices is insignificant
• Entire fuel cost burden in USD (W25trn) • Entire fuel cost burden in USD (W25trn)
• Each W100 fall in the KRW/USD would lift operating balance • Each W100 fall in the KRW/USD would trim sales and operating costs by W2.3trn each
by W2.3trn (in the accounting)
Non-operating balance
KEPCO KOGAS
• Total USD-denominated debt worth W11.8trn • Total USD-denominated debt worth W8trn
• Unhedged exposure worth W2.5trn • Unhedged exposure worth W190bn
• Each W100 fall in the KRW/USD would add FX translation • Each W100 fall in the KRW/USD would add FX translation gains of W17bn
gains of W220bn
Source: company data, Korea Investment & Securities
Top pick
Korea Gas Corp. (036460)

Largest beneficiary of KOGAS’ business areas can be divided into gas imports and wholesale (core) and
energy policy changes overseas resources exploration & production (E&P, non-core). The government’s
regulation on gas rates, started from 2008, heightened risks for the core business
and pushed KOGAS away from the market’s interest. But from 2H12, expectations
for the non-core business have increased and leveled up the stock price. While
attention on the non-core area is mounting, the market’s interest in the core
business is also showing signs of reviving. Under the government’s rate scheme,
KOGAS receives the value of facility assets related to LNG supply multiplied by the
weighted average cost of capital (WACC) as a guaranteed profit. The government
estimates Korea’s consumption of natural gas will shrink from 2015 due to a rising
weighting of nuclear power generation in the total electricity mix. If so, KOGAS will
cut back on capex and see a contraction of facility assets due to depreciation. This
means KOGAS’ guaranteed profit could shrink from 2015. But we believe
conditions will fast change in favor of increasing the guaranteed profit. If the
government’s focus in energy policy shifts from nuclear to gas, KOGAS would
ratchet up the import of LNG and invest more on securing related facility assets.
Korea’s presidential candidates announced energy policies focused on closing
nuclear power plants. Building nuclear plants will get tougher as Korea will face
decommissioning and nuclear waste disposal issues in just a few years. We believe
the only realistic option is gas-fired power generation.
Capex increase by W1trn KOGAS’ capex related to LNG supply should total W1.8trn in 2012F, which will
to lift guaranteed profit by likely gradually shrink. But if Korea starts to increase LNG imports, KOGAS’ facility
W62.1bn investment would again rise. We estimate a W1trn increase in capex would lift
KOGAS’ guaranteed profit by W62.1bn. As we peg 2012F OP to reach W1.1trn, the
increase of W62.1bn is not marginal.
303
Risk factors
Uncertainty over In theory, the wholesale price for LNG that KOGAS sells to city gas companies
cost-linked pricing must reflect the cost changes in the selling price once every two months. This rule
system lingers should be applied every odd month but it was suspended for two-and-a-half years
starting Mar 2008. Although restarted in Sep 2010, its function has yet to return to
normal mainly because the government is burdened by high oil prices in 2012. But
given that oil prices are unlikely to go much higher for several reasons including the
global economic downturn, we do not believe the government will further tighten the
wholesale price. Whether the cost-linked pricing can be fully implemented is one of
the critical investment points for KOGAS. Amid growing hopes for steady
deregulation at the core business, the efforts to expand E&P should gradually
deliver results from 2013. Thus, we believe the company will gain greater attention.
304
Coverage valuations
Table 2. Valuations
KEPCO Recommendation BUY 2010A 39,507 2,260 (120) (193) 89,717 NM 0.3 (0.2) 6.4
(015760) TP (KRW) 33,000 2011A 43,532 (685) (3,370) (5,411) 84,135 NM 0.3 (6.1) 9.9
Price (Nov 15, KRW) 27,300 2012F 49,973 236 (1,442) (2,314) 81,890 (11.8) 0.3 (2.7) 8.6
Market cap.(W bn) 17,525 2013F 53,629 2,448 74 118 82,005 230.6 0.3 0.1 7.1
2014F 57,582 3,610 697 1,120 83,091 24.4 0.3 1.3 6.6
Korea Gas Recommendation BUY 2010A 22,740 970 277 3,813 101,328 12.7 0.5 4.3 12.5
(036460) TP (KRW) 110,000 2011A 28,494 1,018 181 2,499 105,478 16.7 0.4 2.3 14.0
Price (Nov 15, KRW) 82,900 2012F 35,252 1,131 301 4,143 103,090 20.0 0.8 3.8 17.2
Market cap.(W bn) 6,406 2013F 34,652 1,344 398 5,480 107,525 15.1 0.8 5.0 14.9
2014F 36,071 1,498 538 7,405 113,768 11.2 0.7 6.4 13.5
KPS Recommendation BUY 2010A 839 74 98 2,186 11,575 24.0 4.5 19.8 21.9
(051600) TP (KRW) 68,000 2011A 925 119 105 2,326 10,981 17.7 3.8 20.6 11.6
Price (Nov 15, KRW) 58,600 2012F 999 135 119 2,650 11,893 22.1 4.9 23.2 15.5
Market cap.(W bn) 2,637 2013F 1,091 150 127 2,830 12,761 20.7 4.6 23.0 14.1
2014F 1,201 168 144 3,192 13,952 18.4 4.2 23.9 11.9
Korea Distr. Heat. Recommendation Hold 2010A 1,533 144 100 8,761 120,083 9.1 0.7 8.8 11.9
(071320) TP (KRW) - 2011A 2,134 74 3 271 119,077 230.6 0.5 0.2 13.6
Price (Nov 15, KRW) 79,400 2012F 2,510 193 106 9,191 153,296 8.6 0.5 6.7 8.4
Market cap.(W bn) 919 2013F 2,646 231 142 12,253 165,160 6.5 0.5 7.7 7.1
2014F 2,740 251 153 13,255 178,028 6.0 0.4 7.7 6.7
305
Korea Investment & Securities Research Center

E-mail
Industry Sector Analyst Phone
@truefriend.com
Head of research Jun J. Lee 3276-6156 junj.lee
Energy Chemicals / Oil refining Ki-yong Park 6177 kiyong
Nakyung Lee 6241 nklee
Materials Metals Moon-Sun Choi 6182 moonsun
Jinwoo Kim 6278 jinwoo.kim
Construction Kyungja Lee 6155 momo322
Hyungjoon Ahn 4460 hyungjoon
Industrials Industrial Conglomerates Hoon Lee 6158 hoon.lee
Sunyoung Park 6195 sunyoung.park
Shipbuilding / Machinery Richard Park 6175 richard.park
Chulhee Cho 6189 chulhee.cho
Small-cap Jihyung Han 6236 jhh6
Jungsoo Kim 4459 kjungsoo
Gayoung Park 5979 parkga00
Minyoung Lee 6235 my.lee
Man Jin 6582 jinman05
Automobiles Sung-Moon Suh 6152 sungmoon.suh
Heonyoung Lee 6279 lee.heonyoung
Consumer
Textiles & Appar. Eunchae Na 6160 ec.na
Discretionary
Jinah Na 6171 jinah.na
Retailing Yeongsang Yeo 6195 yeongsang.yeo
Mi-kyung Chung 6248 mkchung
Consumer Staples F&B & Tobacco Kyoung Ju Lee 6269 kjlee
Eunkyung Lee 6194 ek.lee
Healthcare Pharm. & Biotech Jung-In Lee 6239 jilee
Sangeun Lee 6196 sangeun.lee
Financials Securities / Insurance Chul-Ho Lee 6167 chlee
Heejung Song 6187 hjsong
Jumsik Park 6820 junsik.park
Bank / Card Joanne Lee 5956 joanne.lee
Soohyun Choi 4126 soohyun.choi
Information Internet & Softw. Jong-Gil Hong 6168 jonggil
Technology Minha Choi 6260 mhchoi
Semiconductors Won Seo 6162 wonseo
Kyheung Park 4130 kiheung.park
Display Jay Yoo 6178 jay_woo
Heuiseok Chung 6277 heuiseok.j
Electronic Equip. Kevin Lee 4589 kevin.lee
Inhyuk Hwang 6245 inhyuk.hwang
Telecommunications Equip. Mattew Yang 6174 mattew.yang
Semiconductors Equip. Young-Woo Chung 6186 youngwoo.chung
Bohwa Hong 5644 bohwa.hong
Telecom Telecom Service Jong-In Yang 6153 jiyang
Service Dongyeon Lee 5276 dongyeon
Media Siwoo Kim 6240 swkim
Sangung Han 4563 sangung
Utilities Transportation / Utilities Hee-Do Yun 6165 heedo
Changwon Lee 4564 cw.lee
Market Macro Economy Minkyu Jun 6229 min.jun
Eunjung Jin 5231 eunjung.jin
Chaewon Lee 5150 chaewon.lee
Strategy Keun-Hwan Noh 6226 khnoh
Soyeon Park 4176 sypark
JJ Park 6560 jj.park
Chuljung Kim 6247 cjkim
Dasuel Lee 6246 ds.lee
Sujeong Lee 6252 sujeong.lee
Quant Ray Ahn 6272 ray.ahn
Youngjoo Huh 6238 youngjoo.huh
Kyungjoo Kim 6179 kj.kim
Inkon Jung 6166 inkon.jung
Emerging Market Hangjin Yun 6280 hjyun
SJ Cho 6233 sh.cho
Lindsay Hsu 6234 lindsay.hsu
Vu Xuan Tho 6244 chunsu20
306
■ Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance
 BUY: Expected to give a return of +15% or more
 Hold: Expected to give a return between -15% and +15%
 Underweight: Expected to give a return of -15% or less
 Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings.
■ Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months
 Overweight: Recommend increasing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market
capitalization.
 Neutral: Recommend maintaining the sector’s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization.
 Underweight: Recommend reducing the sector’s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market
capitalization.
■ Analyst Certification
I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal
views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or
indirectly related to the specific recommendations or views contained in this research report.
■ Important Disclosures
As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent
month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does
not own 1% or more of any class of common equity securities of the companies mentioned in this report.
There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of
the research report or at the time of the public appearance.
Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for the companies mentioned in this report
in the past 12 months;
Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from the companies mentioned in this
report in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intends to seek compensation for investment
banking services from the companies mentioned in this report in the next 3 months.
Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in shares of the companies mentioned in this report at the time that the research
report was published.
Korea Investment & Securities Co., Ltd. does not own over 1% of shares of the companies mentioned in this report as of November 22, 2012.
Korea Investment & Securities Co., Ltd. has not provided this report to various third parties.
Neither the analysts covering these companies nor their associates own any shares of as of November 22, 2012.
Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of SK Innovation, LG Chemical, Korea Zinc, Samsung C&T, SK Holdings, Samsung
Heavy Ind., Hyundai Mobis, Kia Motors, KT&G, NHN, Samsung Electronics, Samsung SDI and SK Telecom and is the liquidity provider.
Korea Investment & Securities Co., Ltd. is the liquidity provider of single-stock futures and options underlying shares of SK Innovation, Samsung C&T and Kia
Motors as of November 22, 2012.
Prepared by: Korea Investment & Securities
This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed,
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Korea Invest - 2013 OUTLOOK

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Korea Invest - 2013 OUTLOOK

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November 22, 2012

Exploring growth opportunities in slow times

Energy Oil Refining - Change in regional landscape for supply-demand;

Materials Metals - Small and mid-caps merit more attention 128

Industrials Construction - From market share game to quality competition 146

Consumer Discretionary Autos - Global market share growth to continue 176

Financials Banks - Focus on asset quality and valuation merit 228

Information Technology Internet/Games - Inevitable slowdown of domestic market growth 254

Appendix Korea Investment & Securities Research Center 306

Exploring growth opportunities in slow times

Exploring growth opportunities in slow times

II. Key issues and macro assumptions

III. 2013 NP outlook via top-down analysis

IV. Kospi outlook and portfolio strategy

Market diagnosis: Disparity between risk indicators and investor

Key issues and macro assumptions: Modest recovery but slow

KIS top-down analysis suggests 2013 NP consensus has 20.5%

2013F stock market: Kospi fair at 2,075pt, range 1,780-2,400pt

I. Market diagnosis: Disparity between risk

1. Risk aversion parameter

Figure 1. EMBI+ spread and the Kospi

Figure 2. CDS premiums for Spain and Italy

Figure 3. Stock market volatility

Note: 36-month window; Annualized

Figure 4. Kospi’s coefficient of variation (CV)

35% 20-y ear av erage: 23.4%

Note: CV=(yearly high-yearly low)/(mean*2)

Figure 5. Capital market line and risk aversion parameter

Source: Korea Investment & Securities

2. Mistrust? Paradigm shift? Delayed adaptation to

Figure 6. Risk aversion parameter

Source: Thomson, Datastream, Korea Investment & Securities

Figure 7. Equity market risk premium (EMRP)

Source: Thomson, Datastream, Korea Investment & Securities

 Are the consensus earnings estimates trustworthy?

II. Key issues and macro assumptions

1. Deleveraging and slow global growth

Table 1. Economy and stock market indicators during deleveraging/leveraging cycles

2. Will Europe help a low base effect materialize?

1) EU taking first step toward banking union

2) Spanish bad bank and butterfly effects

3. US fiscal cliff and dollar economics

4. Korea’s household debt issue

1) Korea’s household debt burden: Heavy or not?

Figure 8. Household debt-to-disposable income in Korea, US, UK, Germany and

Source: OECD, BoK, Korea Investment & Securities

2) What are risks related to household debt?

3) Household debt with little systemic risk

5. New administration and economic democracy

To end conglomerate circular shareholding, disposal of non-core affiliates or

Whoever becomes president, regulations on circular shareholdings will be

Figure 9. Major conglomerates’ circular shareholdings and elimination costs

At present, Life Insurance/Fire & Marine’s stake in Electronics is 8.78%. To protect

Figure 10. Samsung financial affiliates’ ownership of non-financial affiliates

Source: FnGuide, Korea Investment & Securities

Table 3. Tax-related campaign pledges by presidential candidate

Source: Hankook Ilbo, Korea Investment & Securities

6. Key macro assumptions

Table 4. Outlook for the Korean economy (% YoY, KRW)

Table 5. Outlook for the global economy (% YoY)

2005 2006 2007 2008 2009 2010 2011 2012F 2013F

III. 2013 NP outlook via top-down analysis

1. 2013F NP has 20.5% downside from the current

Figure 11. 2012F and 2013F NP adjustments