Halla Holdings (060980 KS ) Undervalued stock with limited risks

Auto Limited exposure to China risks In 4Q16, major Korean auto parts suppliers suffered sharp margin erosion in Initiation Report China, and this is an issue that warrants continued attention. Given that China’s March 7, 2017 auto and auto parts industries are facing structural margin downtrends, we think that investors should focus on identifying market players that are relatively free from risks to downside. Based on 4Q16 results alone, it appears as though Mando fits the bill, as the company was able to overcome headwinds by pursuing revenue (Initiate) Buy growth via customer and product diversification. However, in our view, Halla Holdings is more attractive than its subsidiary. Indeed, despite its relatively solid Target Price (12M, W) 83,000 performance in 4Q16, Mando is highly exposed to China-related risks , as over 70% of its consolidated operating profit is generated in that country. Meanwhile, only Share Price (03/03/17, W) 61,500 34% of Halla Holdings’ enterprise value (EV) stems from Mando’s net profit and share price. This profile allows Halla Holdings to benefit from Mando’s strong top- Expected Return 35% line growth (in the form of brand royalties), while limiting exposure to margin risk in China.

OP (16F, Wbn) 112 Growth potential for MHE, margin improvement for distribution/logistics Consensus OP (16F, Wbn) 107 Mando-Hella Electronics (MHE), which is 50% owned by Halla Holdings, saw its EPS Growth (16F, %) -9.4 revenue grow by a CAGR of 19% from 2013 through 2016. A nd we believe the Market EPS Growth (16F, %) 14.0 company still has plenty of room to run, as: 1) demand for electronic control units P/E (16F, x) 9.6 (ECUs) for braking / systems is rapidly expanding, driven by the increasing Market P/E (16F, x) 11.6 adoption of electronic chassis systems in emerging markets; and 2) dema nd for KOSPI 2,078.75 advanced driver assistance system (ADAS) sensors is on the rise, as stricter safety regulations and technological competition among global automakers are Market Cap (Wbn) 664 accelerating ADAS adoption in developed markets. We project that MHE’s revenue Shares Outstanding (mn) 11 will increase at a CAGR of 11.5% from 2016 through 2020, on the back of global Free Float (%) 69.7 technology trends. Foreign Ownership (%) 10.5 Beta (12M) 0.31 Since 2013, the in-house distribution/logistics unit has been pursuing 52-Week Low 51,400 restructuring, which has translated into higher profitability (OP margin : 2.2% in ‰ 52-Week High 78,500 2015 3.7% in 2016F). We expect OP margin to rise further to the high-4% level by 2020, driven by production cost savings for auto parts and improved efficiency in (%) 1M 6M 12M the logistics segment. Absolute 2.5 -21.0 3.2 Relative 2.2 -22.5 -2.8 Initiate coverage with Buy call and TP of W83,000 We initiate our coverage on Halla Holdings with a Buy rating and recommend 150 Halla Holdings KOSPI focusing more on Halla Holdings than on Mando. Our target price of W83,000 was 130 derived using net asset value (NAV) analysis, with 40-60% discount rates applied to

110 equity stakes in affiliates and subsidiaries. In our view, Halla Holdings is undervalued, with the company’s current market cap (W664bn) falling below the 90 value of its holdings in Mando (W695bn). While Halla Holdings’ share momentum

70 has been largely driven by Mando’s growth potential since 2016, we believe 3.16 7.16 11.16 3.17 earnings stability will take center stage going forward.

Mirae Asset Daewoo Co., Ltd. FY (Dec.) 12/13 12/14 12/15 12/16F 12/17F 12/18F Revenue (Wbn) 929 919 892 959 999 1,047 [Autonomous Driving/Auto Parts ] OP (Wbn) 31 50 96 112 121 132

Inwoo Park OP margin (%) 3.3 5.4 10.8 11.7 12.1 12.6 +822 -3774 -3763 NP (Wbn) 178 1,079 75 68 71 82 [email protected] EPS (W) 9,852 72,030 6,959 6,304 6,530 7,559 ROE (%) 11.3 84.0 8.2 7.3 7.1 7.7

P/E (x) 11.8 1.0 9.3 9.6 9.4 8.1

P/B (x) 1.2 0.8 0.8 0.7 0.6 0.6 Dividend yield (%) 1.0 0.7 1.9 2.1 2.1 2.3

Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

March 7, 2017 Halla Holdings

I. Investment recommendation and valuation

Initiate coverage with Buy call and TP of W83,000

We initiate our coverage on Halla Holdings with a Buy rating and target price of W83,000. We derived our target price using NAV analysis, with key assumptions outlined in Table 1.

Of Halla Holdings’ EV, we estimate that: 1) 17% comes from the operating value of the in- house distribution/logistics business; 2) 22% derives from brand royalties paid by affiliates; and 3) the remaining 61% is from the value of its stakes in affiliates (discounted by 40-60%), to which Mando (34% of EV) and MHE (9%) are the two largest contributors.

Given that Mando pays more than 90% of Halla Holdings’ brand royalties, the auto parts supplier essentially accounts for around 55% of the company’s EV. The reliance on Mando looms even larger, when considering the fact that it is one of the biggest clients of Halla Holdings’ distribution/logistics business and other major affiliates.

Table 1. NAV analysis (Wbn, ‘000 shares, W) Components Value Details Operating value (A) 227 2017F distribution/logistics net profit × target P/E of 10x Intangible assets (B) 287 PV of future after-tax brand royalties (WACC: 8.5%; growth rate: 0%) Investments (C) 816

Mando 451 YTD avg. market cap × 30.25% stake × 60% (40% discount) 2017F net profit × target P/E of 12 x × 50% stake × 60% MHE 126 (40% discount) 2017F net profit × target P/E of 8x × 70% stake × 60% HSC 58 (40% discount) Halla Corp.’s common stock 16 YTD avg. market cap × 16.89% stake × 60% (40% discount) Halla Corp.’s preferred stock 102 Book value × 40% (60% discount) (W50bn in common equity + W80bn in participating bonds ) × 50% J.J. Halla 65 (50% discount ) Discounted EV (D=A+B+C) 1,331

Net debt (E) 436 Non-consolidated basis Discounted NAV (F=D-E); target EV 895 No. of shares outstanding (G) 10,803 Target price (H=F/G, W) 82,821 Source: Mirae Asset Daewoo Research

Figure 1. EV breakdown

Investment value - Other, 14% Operating value, 17% Investment value -HSC, 4%

Investment value - MHE, 9% Brand royalties, 22%

Investment value - Mando, 34%

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 March 7, 2017 Halla Holdings

While Halla Holdings’ EV and share price are significantly influenced by Mando’s operating earnings and share price, we think that the company has several unique features that distinguish it from its subsidiary.

In 4Q16, many Korean auto parts suppliers suffered sharp margin erosion in China, which is an issue that warrants continued attention. In our view, Halla Holdings is relatively free from such margin risks, compared with Mando. Indeed, because Mando generates more than 70% of its consolidated operating profit from China, it is particularly vulnerable to risks of margin deterioration in the country. However, only 34% of Halla Holdings’ EV is tied to Mando’s net profit and share price; this profile allows the company to benefit from Mando’s strong top-line growth, while limiting exposure to the risk of margin deterioration in China.

In addition, we see great growth potential for another subsidiary, MHE. Indeed, MHE’s revenue is projected to increase at a CAGR of 11.5% from 2016 through 2020 on the back of growing demand in emerging markets for ECUs for braking/steering systems, as well as increasing adoption of ADAS in developed countries. Furthermore, the subsidiary’s margins have been improving sharply since 2016, due to the discontinuation of unprofitable logistics businesses.

In light of the aforementioned merits, we initiate our coverage on Halla Holdings with a Buy rating. We also recommend greater focus on Halla Holdings than on Mando.

Figure 2. Halla Group governance

23.2%

Chung Mong-won Halla Holdings

70% 30.25% 50% 16.88% 100%

Halla Stackpole Mando Mando Brose Halla Corp. Halla Encom (HSC)

： 50% 100% ： Mando-Hella Electronics Mando China Holdings (MHE)

： 100% ：

J.J. Halla

100%

WECO

51%

Halla MTIS

： ：

Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 March 7, 2017 Halla Holdings

II. Investment points

1. Relatively free from China risk

In 4Q16, all major Korean auto parts firms reported sluggish earnings, except for Mando. ’ operating profit fell below the market consensus by 23%, and Hanon Systems’ by 9%. Both firms cited downward pricing pressure from China as the main culprit behind their dismal performances. posted a particularly disappointing result, likely for the same reason, with operating profit underperforming the consensus by a whopping 68%. Hyundai Wia’s machinery unit recorded a quarterly operating loss of W30bn, and the auto parts unit also displayed a weak performance. While Mando faced the same pressure from China, higher operating leverage (resulting from a 19% YoY surge in revenue) more than offset the negative impact from price cuts.

The 4Q results will likely serve as a wake-up all for companies and investors alike, as worries over a structural decline in the profitability of China operations have finally begun to materialize.

Figure 3. Major Korean auto parts firms ’ 4Q16 sluggish earnings: Pressure from Chinese customers to cut delivery price a common factor

(Wbn) 1,000 882 4Q16 OP reported Consensus

800 680

600

400

200 127 116 87 109 88 28 0 Hyundai Mobis Hanon Systems Hyundai Wia Mando

Source: Company data, FnGuide, Mirae Asset Daewoo Research

The margin deterioration in China has resulted from: 1) tougher competition among finished makers (amid the strengthening competitiveness of local brands), and 2) aggressive capacity ramp-ups in finished . As the finished car ASP has fallen (at both global and local brands; see Figure 4), downward pressure on auto parts prices has mounted.

Among the five Chinese carmakers, only BAIC has reported a rise in gross profit margin since 2013 (helped by solid sales and earnings at Beijing Benz, a joint venture with Mercedes). Others (i.e., Great Wall, Geely, and FAW) have seen a steady decline since 2013; meanwhile, Changan’s gross profit margin has turned downward since 2016, after rising until 2015.

Going forward, we advise investors to brace for further profit deterioration in the Chinese operations of Korean auto parts makers.

Mirae Asset Daewoo Research 4 March 7, 2017 Halla Holdings

Figure 4. Chinese carmakers’ GPM trends: Deteriorating profitability, due to intense competition

(%)

30 2013 2014 2015 2016YTD

25 21.6 20.5 20 18.1 15.6 14.2 15

10

5

0 Great Wall Changan Geely BAIC FAW

Note: Cumulative basis until 2016 announced quarterly earnings Source: Bloomberg, Mirae Asset Daewoo Research

Mando and Halla Holdings appear to be relatively immune to China risks. Mando beat the consensus in 4Q16, as the diversification of customers (Chinese carmakers) and products (ADAS) diversification has boosted revenue.

In our view, Halla Holdings looks more attractive. Mando is highly exposed to China risks, as over 70% of its consolidated operating profit (74% as of 1H16; profits by region have not been announced since 3Q16) is generated in China. Meanwhile, only 34% of Halla Holdings’ EV is affected by Mando’s net profit and share price. The company’s brand royalties (about 22% of Halla Holdings’ total EV), to which Mando contributes over 90%, should hardly be swayed by China risks, as they are determined by Mando’s revenue (0.4% of Mando’s consolidated revenue). Accordingly, Halla Holdings should benefit from Mando’s strong revenue growth, while keeping a low risk of a potential deterioration in the profitability of China-bound sales.

Figure 5. Mando ’s operating profit portion from China: 1H16 Figure 6. Only 34% of Halla Holdin gs EVs are linked to Mando's exceeded 70% net profit/share price

(%) Invested asset - 80 % of Mando's OP from China 74.4 Others, 14% Operating value, 17% 70 64.7 Invested asset - HSC, 4% 60 52.9 47.4 50 45.4 Invested asset - 40.8 MHE, 9% 40 Brand royalty, 22% 30

20

10 Invested asset - 0 Mando, 34% 2011 2012 2013 1H14 2015 1H16

Note: No data from 2H14, due to corporate split; data from 2H16 not given Source: Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 March 7, 2017 Halla Holdings

2. Ongoing margin expansion in distribution/logistics

Halla Holdings’ in-house distribution/logistics business was previously operated by Halla Meister, which merged with Halla Holdings in July 2015. The distribution/logistics business can be largely divided into five segments: 1) auto parts distribution; 2) auto accessories; 3) auto parts logistics; 4) cold chain logistics; and 5) construction materials distribution (see Table 2 for details). The operating value of the distribution/logistics business accounts for around 17% of Halla Holdings’ enterprise value, making it the second largest contributor after Mando (invested assets and brand royalties combined).

Looking at distribution/logistics earnings, OP margin improved from 2013 to 2015, even as revenue declined. The margin expansion stemmed primarily from the company’s efforts to shed its less profitable businesses, such as auto parts recycling, auto parts remanufacturing, and the distribution of grain resources. The fruits of such efforts began to show up in earnings in 2016: from 1Q16 to 3Q16, revenue grew just 1% YoY, but operating profit surged 81% YoY and OP margin rose to 4% (+1.8%p YoY). Such margin improvements are still ongoing, and we expect OP margin to rise further to the high-4% levels by 2020, driven by production cost savings in auto parts and improved logistics efficiency. Revenue growth, which is now back in positive territory, should return to around 2-3% on an annual average basis, backed by the diversification of distributed parts and customers, and the internal sourcing of CKD logistics.

Table 2. Detailed business of distribution/logistics Business Details Contents Strategic alliance with Hyundai Mobis ; h andl es approximately 50,00 items of auto repair parts Genuine auto parts distribution related to brakes, steering, suspension, electronic instruments, and air conditioning equipment Auto parts distribution Distribution of imported car parts Direct importer and distributer of car parts manufactured by global parts makers Aftermarket parts distribution Mando+ (Mando Corporation’s global auto repair parts distribution brand in aftermarket) Car black boxes Car appliances Navigation systems

Consulting service

Global infrastructure and logistics Auto parts logistics 6 branches in China, 2 branches in US system Logistics centers 6 centers in Korea Halla refrigeration Osan Cold and frozen logistics Halla refrigeration Pyeongtaek

Construction steel rebar Construction material distribution Shaped steel

Source: Company data, Mirae Asset Daewoo Research

Figure 7. Sales trends of distribution/logistics business Figure 8. OP and OPM trends of distribution/logistics business

(Wbn) (% YoY) (Wbn) (%) Sales (LHS) % YoY (RHS) OP (LHS) OPM (RHS) 900 6 40 4.5 5 2.5 3.0 4.3 800 3 1.1 3.7 792 32 4 700 752 0 717 696 672 679 24 3 600 (3) 2.2 500 (5.0) (6) 32 16 1.5 30 2 25 400 (9) 1.1 8 15 1 300 (12) 11 (10.7) 8 200 (15) 0 0 2013 2014 2015 2016F 2017F 2018F 2013 2014 2015 2016F 2017F 2018F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 6 March 7, 2017 Halla Holdings

3. Attractive subsidiary: Mando-Hella Electronics

Founded in November 2008, Mando-Hella Electronics (MHE) is a 50/50 joint venture between Mando Corp and Germany-based Hella KGaA Hueck (Hella). When the Halla Group underwent conversion into a holding company structure, MHE was integrated into Halla Holdings as its subsidiary (rather than remaining a subsidiary of Mando Corp). MHE currently represents roughly 9% of Halla Holdings’ enterprise value.

Given that Hella is a German automotive supplier specializing in automotive engine control units (ECUs) and sensors, we think the JV has enabled Mando to produce in-house: 1) ECUs for both brake and steering systems; 2) general sensors (e.g. yaw & G, torque, and wheel speed); and 3) advanced driver assistance system (ADAS) sensors (e.g. ultrasonic sensors, camera sensors, short/long-distance radar sensors). MHE currently derives 60-65% of its revenue from brake/steering system ECUs; 25-30% from general sensors; and nearly 10% from ADAS-use sensors. For reference, the JV generates roughly 97-98% of its total revenue via Mando.

Figure 9. Core products of MHE

Source: Company data, Mirae Asset Daewoo Research

HME boasts robust growth potential, with its revenue estimated at W570bn, as of end-2016, growing at a 19% CAGR from only W340bn in 2013. Its steep revenue growth should be driven by: 1) solid demand for brake/steering system ECUs mainly in EMs (e.g. China and India), fueled by rising demand for electronic chassis (e.g. brake/steering systems); and 2) greater adoption of ADAS-use sensors by global automakers, amid increasingly stricter automobile safety regulations in DMs and intensifying competition among global automakers.

We expect strong demand for electronic chassis in EMs to continue for some time. As referred to in Figure 12, the global electronic power steering system (EPS) market is forecast to expand at a CAGR of 10% from 2016 through 2020, with the markets in Asia Pacific and the rest of the world (excluding Asia Pacific, Europe, and the Americas) likely to post greater CAGRs of 14% and 20%, respectively.

Mirae Asset Daewoo Research 7 March 7, 2017 Halla Holdings

In addition, the increasing adoption of ADAS in advanced countries deserves more attention. In particular, the automatic emergency braking (AEB) system, one of the key ADAS features, has the potential to drive down accident rates sharply. Therefore, European governments have been encouraging the adoption of the AEB system by giving extra points to vehicles equipped with the system, under the European New Car Assessment Programme (Euro NCAP). In the US, the AEB system will become mandatory in new vehicles starting in 2022. Of note, Mobileye, one of the major providers of ADAS, projected in its 4Q16 earnings conference call that the adoption of AEB features would expand sharply between end-2018 and 2019.

All in all, we expect MHE to deliver solid revenue growth (with a 2016-20F CAGR of 11.5%) through 2020. Assuming that sales of brake-and-steering-control-use ECUs/sensors and ADAS-use sensors will increase at CAGRs of 9% and 30%, respectively, we estimate that MHE’s revenue will exceed W880bn in 2020.

Furthermore, MHE’s OP margin, which improved from 5.1% in 2013 to around 8% in 2016, will likely remain at the current level, given its robust revenue growth. However, OP margin could dip temporarily in 2017-18, as the Indian plant, which is likely to come online in 2H17, should post losses in the early stage of its operation.

Figure 10. MHE’s sales trends Figure 11. MHE’s OP and OPM trends

(Wbn) (% YoY) (Wbn) (%) Sales (LHS) % YoY (RHS) OP (LHS) OPM 1,000 30 100 9 881 779 8.7 800 25 80 8.5 8.5 8 8.2 8.3 8.3 696 8.1 627 600 570 20 60 7 477 428 400 340 15 40 77 6 66 5.1 58 48 52 200 10 20 5 34 39 17 0 5 0 4 2013 2014 2015 2016F 2017F 2018F 2019F 2020F 2013 2014 2015 2016F 2017F 2018F 2019F 2020F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 12 . EPS market -size trends by region: Ele ctricalization Figure 13 . Mando ’s ADAS sales trends: Forecast of CAGR 29% trend in emerging markets is steep by 2020

(US$bn) (Wbn) (% YoY) Mando's ADAS sales (LHS) 60 Rest of world 900 120 % YoY (RHS) 800 Europe 50 750 100 America 2.8 Asia Pacific 2.5 600 40 14.5 600 80 12.9 1.3 450 30 11.2 450 60 1.2 16.1 350 14.2 287 20 9.1 300 40 12.0 9.1 135 10 150 20 13.8 16.8 86 6.6 10.0 0 0 0 2014 2016 2018F 2020F 2014 2015 2016 2017F 2018F 2019F 2020F

Note: EPS stands for Electric Power Steering Source: Company Data, Mirae Asset Daewoo Research Source: Industry data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 8 March 7, 2017 Halla Holdings

III. Earnings outlook and risks

1. Earnings outlook

Halla Holdings’ revenue and operating profit can be broken down into four parts: First, earnings from the holdings unit include: 1) brand royalties from subsidiaries (0.4% of revenue from Mando; 0.1% of revenue from Halla Corp.); 2) equity method income; and 3) IT service revenue from group subsidiaries. Second, the company’s own logistics business also contributes to earnings. Third, earnings from Halla Stackpole (HSC), a sintered parts producer, in which Halla Holdings owns a 70% stake, are also reflected as consolidated earnings. Finally, earnings from JJ Halla, a wholly-owned subsidiary of Halla Holdings, are included. JJ Halla is a developer of Saint Four Golf & Resort and neighboring areas. Halla Holdings acquired the company via the establishment of a special-purpose company, Halla Jeju Development. As we have already covered the holdings and logistics businesses, we will take a look at HSC in more detail.

HSC is a joint venture between Mando and Stackpole of Canada formed in March 2008. The JV is 70% owned by Halla Holdings and 30% by Stackpole, with the latter holding a call option on 20% of the former’s stake. Since the acquisition of Saeron Automotive’s power metallurgy business in June 2008, power metallurgy (R&D and production) has been HSC’s main business area. Major products include core components used in automobile engines, transmissions, steering, and compressor parts; customers include Mando (40~45% of revenue), GM (30-35%), Hanon Systems (7-8%), ZF-TRW, and S&T Motiv.

HSC’s revenue has expanded at a CAGR of 6% since 2013 (from W132bn in 2013 to W156bn in 2016F), and is likely to grow at an accelerated pace of a CAGR of 9% until 2020, with automobiles becoming increasingly lighter (to improve fuel mileage), and starting to adopt eight-/nine-speed transmissions. Expansion of the customer base should also help boost revenue growth. While profitability may suffer in the short term, due to outlay costs, HSC should comfortably achieve OP margin of at least 12-13%.

Figure 14. Core products of HSC

Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 9 March 7, 2017 Halla Holdings

J.J. Halla’s financial statements have been consolidated since 2Q16. The company reported 2Q-3Q cumulative revenue and operating loss of W3.8bn and W4.2bn, respectively, after converting part of its Saint Four golf resort into a public golf course. It plans to sell the resort next year, after business normalization efforts are completed. Moreover, it plans to pre-sell Saint Four’s 52 condominiums this year, with the proceeds to be used to repay some of its W90bn debt. Meanwhile, J.J. Halla also has a 2,45mn m 2 undeveloped site, in addition to the 1.76mn m 2 of land developed so far. The undeveloped land will be later developed to accommodate condos, hotels, and commercial facilities.

Figure 15. Jeju Saint Four’s golf course

Source: Company data

We summarized earnings trends and forecasts for Halla Holdings’ in-house businesses and its major affiliates in Table 2 and Table 3, respectively. Table 4 shows the company’s consolidated quarterly earnings trend and forecasts.

For 2007, we forecast that Halla Holdings will post consolidated revenue of W999bn (+4% YoY), operating profit of W121bn (+8% YoY, OP margin of 12.1%), and net profit attributable to controlling interests of W71bn (+4% YoY). Operating profit growth will likely be driven by the distribution/logistics (+W9bn YoY) and holding company (+W4bn YoY) units. For the holding company unit, Mando and MHE will likely deliver solid growth in both revenue and net profit. On a positive note, the distribution/logistics unit has displayed steady revenue expansion and margin improvement since it discontinued loss-making businesses.

Table 3. In-house business earnings’ trends and forecasts (Wbn, %) 2013 2014 2015 2016F 2017F 2018F 2019F Linked to Halla Holdings’ earnings Sales 792 752 672 679 696 717 738 Distribution/logistics business’ sales Distribution/logistics OP 8 11 15 25 30 32 35 Distribution/logistics business’ OP business OPM (%) 1.1 1.5 2.2 3.7 4.3 4.5 4.7 Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 10 March 7, 2017 Halla Holdings

Table 4. Major related-companies’ earnings trends and forecasts (Wbn, %) 2013 2014 2015 2016F 2017F 2018F 2019F Linked to Halla Holdings’ earnings Sales 4,972 5,029 5,299 5,866 6,160 6,569 7,063 Brand royalty sales (0.4%) OP 287 276 266 305 334 357 383 Mando OPM (%) 5.8 5.5 5.0 5.2 5.4 5.4 5.4 NP 187 130 211 223 248 270 Equity method income sales Sales 340 428 477 570 627 696 779 OP 17 34 39 48 52 58 66 MHE OPM (%) 5.1 8.1 8.2 8.5 8.3 8.3 8.5 NP 12 29 23 32 35 39 44 Equity method income sales Sales 132 141 148 156 170 187 204 Auto division sales OP 20 20 19 21 21 24 27 Auto division OP HSC OPM (%) 15.1 13.9 12.6 13.5 12.6 12.6 13.0

NP 15 16 15 14 17 19 21 Sales 6 8 8 8 Other business sales JJ Halla OP (6) (6) (6) (6) Other business OP Source: Company data, Mirae Asset Daewoo Research

Table 5. Consolidated quarterly earnings trends and forecasts (Wbn, %) 1Q16 2Q16 3Q16 4Q16F 2016F 1Q17F 2Q17F 3Q17F 4Q17F 2017F 2018F Revenue 219 249 253 238 959 235 256 265 244 999 1,047 Holding company 25 29 27 37 118 27 32 31 36 126 136 Distribution/logistics 155 179 187 158 679 164 179 192 162 696 717 Auto 39 39 36 41 156 42 43 41 44 170 187 Other business 2 2 2 6 2 2 2 2 8 8 Operating profit 24 30 25 33 112 25 34 30 33 121 132 Holding company 14 18 15 25 71 15 20 18 23 75 83 Distribution/logistics 5 9 7 5 25 6 10 9 6 30 32 Auto 5 6 5 5 21 5 6 5 6 21 24 Other business (2) (2) (2) (6) (2) (2) (2) (2) (6) (6) Other income (0) 11 (3) 1 10 (0) 1 1 1 3 4 Financial income (5) (7) (9) (7) (27) (6) (6) (7) (6) (25) (22) Pretax profit 19 35 13 28 95 19 28 24 28 99 114 Net profit 13 26 9 21 68 13 20 17 20 71 82 (YoY growth) Revenue 2.8 12.5 2.6 12.7 7.5 7.0 2.8 4.8 2.4 4.2 4.8 Holding company 70.0 95.5 6.3 112.0 62.9 8.0 9.7 12.8 (3.3) 6.0 8.1 Distribution/logistics (4.7) 5.6 1.2 2.0 1.1 5.6 0.3 2.4 2.0 2.5 3.0 Auto 9.0 5.8 1.7 5.5 5.5 6.8 8.9 11.6 8.9 9.0 10.0 Other business 8.8 2.4 0.0 38.1 0.0

Operating profit 16.1 26.2 (13.7) 45.9 16.9 4.0 10.5 20.7 (2.1) 7.6 9.6 Holding company 15.3 35.6 (34.6) 67.0 13.6 7.9 10.7 18.3 (7.0) 5.7 9.5 Distribution/logistics 12.2 43.5 536.2 51.1 74.9 25.2 10.8 19.2 20.4 17.6 7.8 Auto 21.8 16.2 4.5 10.4 13.1 3.5 (0.0) 2.8 0.9 1.7 10.0 Other business RR RR RR RR RR

Other income (27.0) 86.4 (44.9) 17.0 2.5 0.3 (17.9) 81.4 (1.7) 4.5 15.4 Financial income (38.7) 112.5 (55.1) (10.4) (9.4) 4.0 (22.4) 100.1 (4.0) 3.6 15.7 (Margins) OP margin 10.9 12.2 9.7 14.0 11.7 10.6 13.1 11.2 13.3 12.1 12.6 Holding company 55.8 61.4 54.9 66.2 60.2 55.8 62.0 57.6 63.7 60.0 60.8 Distribution/logistics 3.0 5.0 3.9 3.0 3.7 3.5 5.5 4.5 3.5 4.3 4.5 Auto 13.4 14.2 13.0 13.4 13.5 13.0 13.0 12.0 12.4 12.6 12.6 Other business (99.9) (119.4) (75.0) (97.9) (75.0) (75.0) (75.0) (75.0) (75.0) (75.0) Pretax margin 8.6 13.9 5.3 11.8 9.9 8.0 11.1 9.1 11.3 9.9 10.9 Net margin 5.8 10.6 3.4 8.6 7.1 5.6 8.0 6.5 8.1 7.1 7.8 Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 11 March 7, 2017 Halla Holdings

2. Risks

Currently, earnings at Halla are not consolidated into Halla Holdings’ earnings, as the holding company holds only a 16.88% stake in the construction affiliate (accounted as available-for-sale securities). However, Halla Holdings holds 10,174.42 convertible preferred shares of Halla. If these shares are converted into common shares (with a conversion ratio of 1:5) in 2019, Halla’s earnings will be consolidated into those of the holding company.

Up until 2013, Halla Corp had been exposed to the greatest risk among all affiliates of Halla Holdings. As of 2009, Halla Corp’s parent-based net debt stood at only W482bn, but its PF loan amount for less-profitable project sites reached a hefty W2tn. Its efforts to reduce PF loans led to a sharp rise in its parent-based net debt to W961bn in 2013, with the subsequent deterioration in financials resulting in a liquidity risk. However, the company has been improving both its financials and earnings, backed by: 1) the successful implementation of the Baegot New Town project (which has generated W2.2tr in proceeds from apartment presales) since 2014; 2) continued efforts to enhance asset quality; and 3) cash inflows from the conversion of the Halla Group into a holding company structure (in 2014), and the acquisition of JJ Halla. As a result of such efforts, as of end-3Q16, the company saw a decline in its parent-based net debt to W362bn, as well as a recovery in its annual operating margin to 5%, with its net profit returning to positive territory, thanks to reduced interest expenses.

We expect a continued pickup in Halla Corp’s earnings in 2018, given its dwindling overseas losses and growing revenue contribution from housing projects (now with higher margins). As part of its efforts to boost margins and control risks, the company now plans to focus on developing builder-initiated projects, backed by the success of its Baegot New Town project. We believe that Halla Corp-related risks have diminished markedly.

Table 6. Halla Corporation’s non-consolidated financial statements summary (Wbn, %) 2009 2010 2011 2012 2013 2014 2015 1~3Q 2016 Revenue 1,616 1,503 1,686 1,874 1,465 1,408 1,353 941 Operating profit 120 90 42 (220) (283) 11 21 53 OP margin (%) 7.4 6.0 2.5 (11.7) (19.3) 0.8 1.6 5.6 Net interest 84 62 63 83 96 91 84 27 expense Net profit 59 9 (20) (226) (414) 44 (33) 15 Net debt 482 739 578 899 961 520 494 362 Debt ratio (%) 139 178 201 369 380 212 232 124 Source: Company data, Mirae Asset Daewoo Research

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Halla Holdings (060980 KS/Buy/TP: W83,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/15 12/16F 12/17F 12/18F (Wbn) 12/15 12/16F 12/17F 12/18F Revenue 892 959 999 1,047 Current Assets 435 496 469 420 Cost of Sales 716 755 782 813 Cash and Cash Equivalents 150 200 160 97 Gross Profit 176 204 217 234 AR & Other Receivables 176 194 202 212 SG&A Expenses 81 92 97 102 Inventories 96 87 91 95 Operating Profit (Adj) 96 112 121 132 Other Current Assets 13 15 16 16 Operating Profit 96 112 121 132 Non-Current Assets 1,171 1,457 1,518 1,587 Non-Operating Profit -4 -17 -22 -18 Investments in Associates 645 688 733 783 Net Financial Income -16 -25 -25 -22 Property, Plant and Equipment 135 354 357 360 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 46 48 49 49 Pretax Profit 92 95 99 114 Total Assets 1,606 1,953 1,987 2,007 Income Tax 13 22 23 27 Current Liabilities 378 429 414 401 Profit from Continuing Operations 80 72 76 87 AP & Other Payables 137 153 160 168 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 225 257 235 214 Net Profit 80 72 76 87 Other Current Liabilities 16 19 19 19 Controlling Interests 75 68 71 82 Non-Current Liabilities 285 522 509 468 Non-Controlling Interests 5 4 5 6 Long-Term Financial Liabilities 263 468 453 409 Total Comprehensive Profit 3 72 76 87 Other Non-Current Liabilities 22 54 56 59 Controlling Interests -1 68 71 82 Total Liabilities 663 951 922 869 Non-Controlling Interests 4 4 5 6 Controlling Interests 910 965 1,022 1,090 EBITDA 109 130 141 152 Capital Stock 55 55 55 55 FCF (Free Cash Flow) 22 -104 73 84 Capital Surplus 265 265 265 265 EBITDA Margin (%) 12.2 13.6 14.1 14.5 Retained Earnings 698 753 810 878 Operating Profit Margin (%) 10.8 11.7 12.1 12.6 Non-Controlling Interests 33 37 43 48 Net Profit Margin (%) 8.4 7.1 7.1 7.8 Stockholders' Equity 943 1,002 1,065 1,138

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/15 12/16F 12/17F 12/18F 12/15 12/16F 12/17F 12/18F Cash Flows from Op Activities 41 131 93 104 P/E (x) 9.3 9.6 9.4 8.1 Net Profit 80 72 76 87 P/CF (x) 12.0 5.6 5.4 4.9 Non-Cash Income and Expense -22 44 46 48 P/B (x) 0.8 0.7 0.6 0.6 Depreciation 11 15 17 17 EV/EBITDA (x) 9.8 9.3 8.8 8.1 Amortization 2 3 3 3 EPS (W) 6,959 6,304 6,530 7,559 Others -35 26 26 28 CFPS (W) 5,361 10,784 11,295 12,486 Chg in Working Capital -11 40 -3 -3 BPS (W) 84,903 90,022 95,318 101,593 Chg in AR & Other Receivables 7 -15 -8 -9 DPS (W) 1,200 1,250 1,300 1,400 Chg in Inventories 4 9 -4 -4 Payout ratio (%) 16.1 18.4 18.3 17.1 Chg in AP & Other Payables -13 16 6 7 Dividend Yield (%) 1.9 2.1 2.1 2.3 Income Tax Paid -24 -22 -23 -27 Revenue Growth (%) -2.9 7.5 4.2 4.8 Cash Flows from Inv Activities -6 -262 -36 -39 EBITDA Growth (%) -44.9 19.3 8.5 7.8 Chg in PP&E -18 -235 -20 -20 Operating Profit Growth (%) 92.0 16.7 8.0 9.1 Chg in Intangible Assets -23 -5 -3 -3 EPS Growth (%) -90.3 -9.4 3.6 15.8 Chg in Financial Assets 139 -22 -13 -16 Accounts Receivable Turnover (x) 5.4 5.6 5.5 5.5 Others -104 0 0 0 Inventory Turnover (x) 8.9 10.5 11.2 11.3 Cash Flows from Fin Activities -53 224 -51 -79 Accounts Payable Turnover (x) 5.6 5.9 5.6 5.6 Chg in Financial Liabilities -48 237 -38 -65 ROA (%) 4.9 4.1 3.8 4.4 Chg in Equity 0 0 0 0 ROE (%) 8.2 7.3 7.1 7.7 Dividends Paid -5 -13 -13 -14 ROIC (%) 27.1 19.9 17.1 18.8 Others 0 0 0 0 Liability to Equity Ratio (%) 70.4 94.9 86.6 76.4 Increase (Decrease) in Cash -16 50 -40 -63 Current Ratio (%) 115.0 115.7 113.3 104.7 Beginning Balance 166 150 200 160 Net Debt to Equity Ratio (%) 35.6 52.1 49.2 45.9 Ending Balance 150 200 160 97 Interest Coverage Ratio (x) 5.2 5.1 4.8 5.6 Source: Company data, Mirae Asset Daewoo Research estimates

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APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price (W) Halla Holdings Halla Holdings(060980) 03/06/2017 Buy 83,000 100,000 No Coverage 80,000

60,000

40,000

20,000

0 Mar 15 Mar 16 Mar 17

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ─), Target price (▬), Not covered ( ■), Buy ( ▲), Trading Buy ( ■), Hold ( ●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution Buy Trading Buy Hold Sell 75.13% 13.99% 10.88% 0.00% * Based on recommendations in the last 12-months (as of December 31, 2016)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subj ect company and do not own 1% or more of the subject company's shares outstanding.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the . Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Mirae Asset Daewoo and its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of

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the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

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Mirae Asset Daewoo Research 15 March 7, 2017 Halla Holdings

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