2H17 Outlook

Holding Companies Minority shareholder-driven changes

Dae-ro Jeong +822-3774-1634 [email protected]

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

[Summary] 3

I. Strengthening minority shareholder rights 4

II. Regulatory changes 12

III. [Top pick] SK Holdings 31 [Summary] Overhaul of governance structure

Changes aimed at strengthening minority shareholder rights

Value of one share소수주주 of a minority 1株 Value of one shareholder share of a majority Revisions to the shareholder Commercial Act aimed at PresentCurrent strengthening minority shareholder rights Current situation favors majority shareholders Wealth accumulation through related-party transactions ☜

Value of one Value of one 지배주주share of a share of a majority minority shareholder1株 shareholder

FutureFuture

Source: Mirae Asset Daewoo Research

3| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research I. Strengthening minority shareholder rights

Cheil Industries- • On May 26, 2015, C&T and announced a merger agreement (1:0.35 ratio); minority Samsung C&T merger shareholders, including Elliott Associates, opposed the deal. • In the run-up to the merger, some minority shareholders, including Elliott Associates raised questions about the met fierce resistance deal’s timing and exchange ratio. • The merger was approved at a shareholders’ meeting on July 17, 2015 (83.57% attendance; 69.53% in favor).

Cheil Industries’ and Samsung C&T’s major shareholders Cheil Industries-Samsung C&T exchange ratio trend before and after merger

Before merger After merger 0.50 Cheil Industries Shareholder Cheil Industries Samsung C&T + Samsung C&T Note

Shares Ownership Shares Ownership Shares Ownership Lee Jae-yong 31,369,500 23.24% 0 0.00% 31,369,500 16.54%

Merger announcement (5/26/15) → Lee Boo-jin 10,456,450 7.75% 0 0.00% 10,456,450 5.51% Controlling Lee Seo-hyun 10,456,450 7.75% 0 0.00% 10,456,450 5.51% 0.45 0.3500885 Cheil Industries shares family for each share of Samsung C&T Lee Kun-hee 4,653,400 3.45% 2,206,110 1.41% 5,425,734 2.86% 30.79% Lee Yu-jeong 600,000 0.44% 0 0.00% 600,000 0.32% Cho Woon-hae 100,000 0.07% 0 0.00% 100,000 0.05% SEMCO 5,000,000 3.70% 0 0.00% 5,000,000 2.64% Samsung SDI 5,000,000 3.70% 11,547,819 7.39% 9,042,759 4.77% 0.40 Samsung F&M 0 0.00% 7,476,102 4.79% 2,617,297 1.38% Affiliates Sumsung Life 0 0.00% 678,754 0.43% 237,624 0.13% 9.55% Foundation of Culture 1,101,000 0.82% 123,072 0.08% 1,144,086 0.60% Samsung Foundation 0 0.00% 231,217 0.15% 80,946 0.04% KCC 13,750,000 10.19% 9,310,557 5.96% 17,009,519 8.97% 0.35 Cheil Industries 19,033,800 14.10% 0 0.00% 19,033,800 10.03% Treasury stock: Samsung C&T 1,849,850 1.37% 0 0.00% 1,849,850 0.98% 11.01% Total no. of issued 135,000,000 100.00% 156,217,764 100.00% 189,690,045 100.00% shares

0.30 2/23 3/23 4/23 5/23

Note: Please see page 5 for detailed information on the calculation of the exchange ratio. Notes: Based on July 17, 2016 closing prices Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo research

4| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research I. Strengthening minority shareholder rights

Controversy over timing • Some minority shareholders, including Elliott Associates argued the following: and ratio - The exchange ratio calculation (based on average share prices over the previous month) was timed to coincide with a sharp retreat in Samsung C&T shares, and did not accurately reflect the value of the company’s assets. - The merger ratio should be decided based on the fair value of each company. • Meanwhile, Samsung Group asserted that the calculation of the ratio was in strict accordance with the Financial Investment Services and Capital Markets Act (FSCMA)

Cheil Industries-Samsung C&T fair price calculation (appraisal Cheil Industries-Samsung C&T exchange ratio calculation rights) Cheil Industries Samsung C&T Cheil Industries Samsung C&T (surviving) (Surviving company) (Non-surviving company)

Base price (per share) W159,294 W55,767 Fair price (per share) W156,493 W57,234

A. Volume-weighted arithmetic A. Volume-weighted arithmetic mean mean of closing prices over the W153,704 W56,953 of closing prices over the most recent W155,098 W59,703 most recent one month two months B. Volume-weighted arithmetic B. Volume-weighted arithmetic mean mean of closing prices over the W160,678 W55,047 of closing prices over the most recent W153,704 W56,953 most recent one week one month C. Volume-weighted arithmetic mean C. Most recent closing price W163,500 W55,300 of closing prices over the most recent W160,678 W55,047 one month

D. Average ([A+B+C]/3) W159,294 W55,767 D. Average [A+B+C]/3) W156,493 W57,234

Base prices will be set by averaging: the volume- weighted arithmetic mean of closing prices over the most Prices will be set by averaging the volume-weighted FSCMA Enforcement Ordinance recent one month; the volume-weighted arithmetic mean FSCMA Article 165-5; Enforcement arithmetic means of closing prices over the most recent Article 176-5-1-1 of closing prices over the most recent one week; and the Ordinance Article 176-7 two months; over the most recent one month; and over most recent closing price. the most recent one week.

Note: Calculation period: April 26, 2015 to May 25, 2015 Notes: Calculation period: March 26, 2015 to May 25, 2015 Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

5| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research I. Strengthening minority shareholder rights

Lawsuit to adjust fair • On May 31, 2016, the High Court ruled that the fair price of Samsung C&T shares should be adjusted to price W66,602 (from W57,234). • In our view, the risk of the merger being nullified is on the grounds of unfair pricing is limited (in light of Supreme Court precedent). • Merger terms should not be disadvantageous or unfair to shareholders of either company. • The timing of mergers should be determined with consideration given to minority shareholders.

Determination of fair price under FSCMA Timeline of Samsung C&T-Cheil Industries merger events

Date From BOD approval until shareholders’ meeting Method Notes 5/26/15 Cheil Industries and Samsung C&T announce that the merger was approved by BOD. 5/27/15 Minority shareholder Elliott Associates announces that it will oppose the merger. 6/9/15 Elliott and files an injunction request to block shareholders’ meeting and merger. 6/10/15 Samsung C&T decides to sell its treasury shares (5.76%) to KCC. Average of the volume- 6/11/15 Elliott files an injunction request to block the sale of treasury shares. weighted arithmetic 6/12/15 The Fair Trade Commission (FTC) approves the merger. means of closing prices FSCMA Article 165-5; 7/1/15 The court rejects Elliott’s injunction request. If companies reach over the most recent two Enforcement Ordinance 7/3/15 Institutional Shareholder Services (ISS) recommends objecting to the merger. agreement months; most recent one Article 176-7 7/7/15 The court rejects Elliott’s injunction request to block the sale of treasury shares. month; and most recent 7/16/15 An appellate court dismisses an appeal filed by Elliott to block the sale of treasury shares. one week. 7/17/15 The merger is approved at a shareholders’ meeting. Date After shareholders’ meeting Dissenting shareholders, including Elliott and Ilsung Pharmaceuticals, file a lawsuit against Samsung 8/15 C&T to adjust the appraisal rights fair price. 9/1/15 The merged company, Samsung C&T, is launched. Regarding the appraisal rights lawsuit, a lower court rules in favor of Samsung C&T. Dissenting 1/16 If agreement cannot shareholders file an appeal. Shareholders can ask the court to determine a fair value. be reached 3/23/16 Elliott withdraws its lawsuit against Samsung C&T. 3/24/16 Four dissenting shareholders, including Ilsung Pharmaceuticals, file a lawsuit to nullify the merger.

An appellate court rules against Samsung C&T in the lawsuit related to the appraisal rights fair price. 5/31/16 Samsung C&T files an appeal.

Source: MOLEG, Mirae Asset Daewoo Research Source: Media reports, Mirae Asset Daewoo Research

6| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research I. Strengthening minority shareholder rights

Comparison of merger • [Korea] For mergers between listed companies, base prices (for exchange ratio calculation) are determined by regulations market prices, but can vary depending on the calculation period. • The calculation period of the merger price can be extended to ensure fairness. • [Overseas] Companies determine merger prices via negotiation, instead of relying on a regulatory formula.

Merger price calculation method (FSCMA Enforcement Comparison of merger regulations Ordinance Article 176-5) Merger price calculation method Regulations Korea US Japan UK Germany Surviving Consolidated Surviving Consolidated

Merger price (The average of the volume-weighted arithmetic mean of Setting of merger price O X X X △ Listed Listed closing prices over the most recent one month; the volume- weighted arithmetic mean of closing prices over the most recent one week; and the most recent closing price) Legal guarantee of fair OOOXO price (appraisal rights)

Merger price Intrinsic value (If merger price is lower than (Weighted average of asset External evaluation of Listed Unlisted OXXXX asset value, asset value can value and income approach- merger price calculation be applied) derived value: 1:1.5)

Announcement of OOOOO merger conditions, etc. Unlisted Unlisted Unlimited

Source: Compiled by Mirae Asset Daewoo Research Note: In Germany, lower limits on merger prices are set only in the case of hostile takeovers. Source: FSS, Mirae Asset Daewoo Research

7| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research I. Strengthening minority shareholder rights

Overview of minority • According to the Commercial Act, a minority shareholder may bring a claim when the company has been, or is shareholder rights being, managed in a way that is unfairly prejudicial to some or all of its shareholders. • Under the Commercial Act, for minority shareholders of listed companies who meet a minimum six-month holding period requirement, ownership thresholds for exercising minority interest rights may be lowered when certain criteria are met (Article 542-6).

Domestic shareholder proposals & minority shareholder rights Minority shareholder rights in other countries according to the Commercial Law

2013 2014 2015 US UK Germany Japan

Number of shareholder 36 42 116 Director appointments (72); dividends (20); articles proposals Convocation of a of incorporation revisions (8), share cancellations, Number of shareholder general meeting of 10% 10% 5% 3% 12 16 36 etc. (7); management participation (9) proposals stockholders

Ownership Special conditions for companies meeting certain threshold criteria (Article 542-6) Conditional Right to inspect Independent Independent Convocation of a general meeting independent 3% 3% Holding at least 1.5% of shares for six months accounting records shareholders’ right shareholders’ right of stockholders (Article 366) shareholders’ right Right to make proposals Holding at least 1% of shares for six months 3% (Article 363-2) (0.5% if the company’s capital is over W100bn) Right to make 1% or 5% or Right to file motions for dismissal 5% Six months, 1% Holding at least 0.5% of shares for six months proposals US$2,000 EUR0.5bn of executives (Article 385) and 3% (0.25% if the company’s capital is over W100bn) liquidators (Article 539) Right to inspect accounting Holding at least 1% of shares for six months Right to file a motions 3% 10% or records (Article 466) (0.5% if the company’s capital is over W100bn) for dismissal of 10% N/A 3% EUR1bn executives Right to file injunctions (Article Holding at least 0.5% of shares for six months 1% 402) (0.25% if the company’s capital is over W100bn) Right to file derivative Independent Independent Independent Right to file derivative suits (Article 1% (EUR0.1bn) 1% Holding at least 0.1% of shares for six months suits shareholders’ right shareholders’ right shareholders’ right 403)

Notes: Based on total issued shares excluding shares without voting rights Source: Korea Corporate Governance Service, Mirae Asset Daewoo Research Source: MOLEG , Mirae Asset Daewoo Research

8| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research I. Strengthening minority shareholder rights

Ownership restructuring • In 2016, the number of spin-offs, split-offs, and mergers increased 5% YoY (59 in 2016 vs. 56 in 2015). requires shareholders’ • Large conglomerates will likely continue to pursue ownership restructuring in 2017 in efforts to secure competitiveness and solidify control over their groups. approval • Notably, more SMEs are opting for holding company structures, as they face fewer obstacles than large companies, and large companies may not be able to enjoy policy benefits (e.g., tax deferrals) following conversion to a holding structure.

Number of disclosed spin-offs/split-offs and mergers of listed Holding company conversions announced in 2015 and 2016 companies (KOSPI and KOSDAQ) Spin-offs Holding company Split-offs Mergers Total Newly conversion Spin-off ratio Holdco Year Surviving conversions established (BOD resolution (surviving:new) date for split-off) 2016 7 7 14 50 71 Sempio Sempio Foods 2/23/16 0.4860164:0.5139836 2015 2084656 Ildong Ildong Holdings 3/9/16 0.2881280:0.7118720 2014 6 4 14 41 61 Pharmaceutical KOSPI 2016 Crown Crown Holdings 10/21/16 0.66003:0.33997 2013 11 7 10 44 65 Confectionery Kyungdong City Kyungdong Invest 11/10/16 0.5486776:0.4513224 Gas Simmtech Holdings Simmtech 2/23/15 0.4601398:0.5398602 KOSPI KOSDAQ Osstem Holdings Osstem Implant 3/18/15 0.4245386:0.5754614 Spin-offs Spin-offs Bubang Cuchen 3/20/15 0.6950173:0.3049827 Split-offs Split-offs 2015 Holdco Holdco Suprema HQ Suprema 7/8/15 0.4807356:0.5192644 conversions conversions KOSDAQ Wonik Holdings Wonik IPS 11/9/15 0.4872905:0.5127095 2016 76144321 Huons Global Huons 11/24/15 0.4826795:0.5173205

2015 2088611 Ubiquoss Holdings Ubiquoss 10/7/16 0.2416960:0.7583040 2016 APS Holdings AP Systems 10/14/16 0.4658706:0.5341294

Source: Dart, Mirae Asset Daewoo Research Source: Dart, Mirae Asset Daewoo Research

9| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research I. Strengthening minority shareholder rights

Mergers and corporate • Mergers and corporate splits require the approval of a special resolution at a shareholders’ meeting.  splits require a special A special resolution requires the affirmative vote of two-thirds of the shareholders present in person (or by proxy), comprising at least one-third of total issued shares. resolution • For controversial, highly-publicized merger/spin-off cases, we would expect the shareholders’ meeting attendance rate to reach 70-80%.  In such cases, the group would need affirmative votes from 46.7-53.3% of shares with voting rights.

Minimum vote percentage (based on ownership) required Quorum requirements for shareholders’ meeting to approve special resolution For convocation of (%) Purpose For resolution 100 Minimum stake required for merger a meeting 100 Shareholders' attendance rate 90

33.3 80 80 Electing BOD/BOA members Affirmative vote of Affirmative vote of at 30.0 70 Ordinary and setting their pay, majority of members least one-quarter of resolution approving financial present in person or total issued shares 26.7 60 statements, etc. by proxy 60 23.3 50 20.0

40 16.7 66.7 Alteration of articles of 60.0 incorporation, transfer of 53.3 Affirmative vote of at whole or part of business Affirmative vote of at 46.7 Special least two-thirds of the 20 40.0 division, dismissal of least one-third of total resolution members present in 33.3 BOD/BOA members, issued shares person or by proxy approval of company split or merger 0 123456

Source: Mirae Asset Daewoo Research Note: Varies depending on attendance levels Source: Mirae Asset Daewoo Research

10| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research I. Strengthening minority shareholder rights

Foreign investors’ stake • For controversial, highly-publicized merger/spin-off cases, we would expect the shareholders’ meeting in top 30 companies (in attendance rate to reach 70-80%.  In such cases, the group would need affirmative votes from 46.7-53.3% of shares with voting rights. terms of market cap) • Corporate split and merger proposals generally cannot receive smooth passage without active support from averages 39% outside (especially foreign) shareholders.

Related parties’ and foreign investors’ stakes

Rank Company Market cap Affiliates’ stake Foreign investors’ stake Rank Company Market cap Affiliates’ stake Foreign investors’ stake

1 SEC 253,504 18.4 50.7 16 LG Chemical 14,878 33.5 37.2 2 SK Hynix 32,542 20.1 51.5 17 KT&G 14,553 8.6 53.8 3 Hyundai Motor 32,160 28.2 43.3 18 SK Innovation 14,286 33.4 40.9 3 KEPCO 28,279 51.1 31.7 19 Samsung F&M 14,284 18.5 47.1 5 NAVER 26,634 11.0 60.9 20 LG Life Sciences 12,245 34.0 44.8

6 Samsung C&T 26,367 39.3 9.1 21 11,210 21.3 15.0

7 24,482 30.2 47.7 22 Lotte Chemical 11,088 53.5 31.5 8 Samsung Life 23,300 47.0 15.3 23 Samsung SDS 10,910 56.7 8.4 9 POSCO 22,538 10.0 51.0 24 LG Display 10,198 37.9 32.4

10 20,699 9.3 67.3 25 Amore G 10,094 61.5 17.3

11 AmorePacific 18,911 49.3 36.6 26 LG Corp. 9,836 48.4 28.1 12 SK Telecom 17,966 25.2 40.6 27 S-Oil 9,693 63.5 77.0 13 KB Financial Group 17,540 9.2 62.9 28 9,546 9.4 68.9 14 SK Holdings 16,429 30.9 25.1 29 Korea Zinc 8,982 49.9 20.5 15 Motors 15,019 35.6 37.6 30 Woori Bank 8,247 51.1 23.6

Notes: Based on common stock and end-2016 prices Source: Mirae Asset Daewoo Research

11| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes

Commercial Act and • President Moon Jae-in’s campaign pledges indicate that his administration will pursue greater economic Monopoly Regulation and democratization. • For key economic democratization policies, discussions on related bills have been well underway since the 20th Fair Trade Act (MRFTA) to National Assembly opened in 2016. be revised to promote economic democratization

Expected changes in ownership structure policies in 2017

Economic democratization No. President Moon Jae-in’s key campaign pledges Proposed bills policies

1 Investors to be allowed to file multiple derivative suits and inspect accounting records

2 Introduction of electronic voting and written ballot systems Relevant revisions to the Commercial Act were proposed on July 4, 2016 and February 14, 2017.

Introduction of either a cumulative voting system or separate election of audit committee 3 members Stricter holding company requirements (higher subsidiary ownership threshold and lower 4 Relevant revisions to the MRFTA were proposed on October 21, 2016. Prevention of illegal ownership debt ratio threshold) succession, drastic reform of Prevention of controlling families’ use of company-sponsored foundations to strengthen 5 family-run conglomerates, Relevant revisions to the MRFTA and Commercial Act were proposed on July 2, 2016. their control

6 Gradual unwinding of existing circular shareholdings Relevant revisions to the MRFTA were proposed on September 2, 2016.

Tighter regulations on related-party transactions and unfair trading practices between 7 Relevant revisions to the MRFTA were proposed on August 5, 2016. affiliates Separation of non-banking financial firms from groups; limitations on voting rights 8 Relevant revisions to the MRFTA were proposed on January 11, 2017 and January 18, 2017. of financial affiliates Efforts to strengthen the voting rights of public pension and funds services (and pursue 9 - Establishment of sound market relevant corporate governance improvements) principles 10 Efforts to enhance stewardship efforts by institutional investors (Stewardship Code) Voluntary guidelines

Source: Mirae Asset Daewoo Research

12| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (1) Cumulative voting and independent auditors

Efforts to improve • Cumulative voting: Each shareholder is entitled to one vote per share, multiplied by the number of directors to be transparency elected. • Separate selection of auditors: Companies will be obligated to appoint auditors separately from ordinary directors.

Potential revisions to the Commercial Act related proposed on July 4, 2016

Bill Details

[Cumulative voting] Proposed by 122 lawmakers, including Kim Jong-in When a listed firm of a certain size selects two or more directors, if a minority shareholder calls for cumulative voting, the company shall not be allowed to reject the request. [Selection of independent auditors] 1) Proposed by 122 lawmakers, including Kim Jong-in Listed firms must have an audit committee to select auditors separately from ordinary directors. The bill aims to restrict the influence of controlling shareholders in the selection of

Revision to the auditors and ensure their independence. Commercial Act ▲When selecting internal audit directors, the combined voting rights of the largest shareholder and affiliated parties shall not exceed 3%. ▲When selecting internal audit directors, the voting rights of all shareholders with stakes in excess of 3% shall not exceed 3%.

2) Proposed by 10 lawmakers, including Oh Shin-whan A firm shall select auditors separately from ordinary directors. When selecting auditors, no shareholder’s voting rights will exceed 3%. A firm with assets of W2tr or more can opt for either the selection of full-time auditors or the establishment of an audit committee.

Expected impact The bill aims to restrict the influence of controlling shareholders by securing the independence of auditors.

Source: Bill Information System, Mirae Asset Daewoo Research

13| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (2) Stronger holding company requirements

Requirements for holding 1) Assets worth more than W100bn (based on non-consolidated financial statements; W500bn starting from July 1, company 2017) * Existing holding companies with asset values between W100bn and W500bn will have until June 30, 2027 (10- establishment/conversion year grace period) to satisfy the strengthened requirement. 2) Sum of subsidiary stakes must be at least 50% of holding company’s asset value

Requirements to legally 1) Debt ratio must be less than or equal to 2x asset value. qualify as a holding 2) Stakes in first-tier and second-tier subsidiaries must be at least 20% for listed firms and 40% for unlisted firms. company 3) Holding a third-tier subsidiary is permitted only when it is 100% owned by a second-tier subsidiary. 4) Holding stakes in financial subsidiaries is banned (separation of non-financial and financial capital). 5) Stakes in domestic non-affiliates must be 5% or lower. *A holding company must meet the shareholding requirements within two years of the date of establishment/conversion. If company is unable to satisfy the requirements within two years, the grace period can be extended by another two years upon approval from FTC.

Affiliates

Holding companies Non-affiliates Barred from acquiring more than 5% of total issued shares

Ban on inter-subsidiary share purchases Subsidiary Subsidiary Subsidiary

Ban on joint investment Subsidiary Subsidiary Subsidiary

Second-tier subsidiaries must have 100% ownership to hold third-tier subsidiaries

Subsidiary

14| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (2) Stronger holding company requirements

Proposed MRFTA Amendment 1. Stricter standards for becoming a holding company  issues may arise due to potential for amendments unwanted conversion into a holding company Comprehensive equity ownership of affiliates (not just equity ownership of a subsidiary as the largest shareholder) and market value (not book value) would be taken into account. [Impact] If enacted, the amendment might force some companies to transform into a holding company unwillingly. Amendment 2. Stricter regulations to qualify as a holding company  higher financial burden to register as, transform into, and maintain holding company status 1) Debt ratio: Less than or equal to 100% of asset value (from current 200%) 2) Minimum equity ownership: 20% in first- and second-tier listed subsidiaries (40% in unlisted subsidiaries)  30% (50% in unlisted companies). 3) Controlling a second-tier subsidiary: The amendment would ban two first-tier subsidiaries from owning and/or controlling the same second-tier subsidiary and require first-tier subsidiaries to have business relations with second-tier subsidiaries. [Impact] 1) The groups currently converting to holding companies would face additional financial burdens. SK Group would need to raise an additional W3.9tr to increase its ownership in subsidiaries likes SK Telecom and SK Hynix. 2) The proposed requirements related to debt ratio and business relationship with subsidiaries will likely have a limited impact on existing holding companies.

Value of SK Group’s additional ownership to meet revised minimum equity ownership (%, Wbn)

External funding from non- Subsidiary/second-tier subsidiary If amendments are passed Investees’ treasury shares holding company

Additional stake Company No. shares Stake Value No. of shares % Stake Value required (%)

SK Telecom 20,363,452 25.20% 4.80% 928 10,136,551 12.60% 0% 0 SK Holdings SK E&C 15,698,853 44.50% 5.50% 38 1,325,000 3.80% 1.80% 12 SK Telecom SK Hynix 146,100,000 20.10% 9.90% 3,986 22,000,570 3.00% 6.90% 2,778

Daehan Oil Pipeline SK Innovation 9,223,552 41.00% 9.00% 42 0 0.00% 9.00% 42 Corp.

SKC SK Bioland 4,190,841 27.90% 2.10% 6 0 0.00% 2.10% 6

Note: Based on May 16th closing prices Source: Mirae Asset Daewoo Research

15| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (2) Stronger holding company requirements

SK Group case study: Additional stake needed to meet revised minimum equity ownership requirement

Chey Tae-won Chey Chang-won

30.9% 20.6%

99.4% SK Materials 49.1% SK Infosec [036490 KQ] SK Holdings 50.0% [034730 KS] Encarsales.com SK Chemicals SM Core [006120 KS] 10.0% [007820 KQ] 34.8% SK Securities [001510 KS] 28.2%

25.2% 33.4%41.7% 39.1% 100% 83.1% 100% 100%100% 44.5% 24.0%

SK Telecom SK Innovation SKC SK Networks SK SK Forest SK Shipping SK E&S SK Biotek SK E&C [017670 KS] [096770 KS] [011790 KS] [001740 KS] Biopharm

100% 20.1% 48.9%64.5% 83.8% 100% 100% 66.0%50.0% 45.6%

SK SK Hynix Iriver SK SK SK Gas SK Telink SK Syntec Initz Entis Broadband [000660 KS] [060570 KQ] Communications Planet [018670 KS]

31.0%

SKD&D [210980 KS]

16| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (2) Stronger holding company requirements

Case study: Samsung • Samsung C&T’s total assets are W35.3tr (based on non-consolidated financial statements as of end-2016). Group’s potential • The total market value of its stakes in affiliates exceeds W26tr.  Based on the proposed amendments, holdings in affiliates would reach 73.8% of total assets, which would conversion of Samsung trigger a compulsory switchover to a holding company. C&T into a holding • As the MRFTA bans any equity ownership in financial institutions under a regular ownership structure, Samsung C&T would have to dispose of its 19.3% stake in Samsung Life within a certain period of time. company • If the bill on intermediary financial holding companies is passed, Samsung C&T, as a holding company, would be able to hold Samsung Life shares. • Samsung C&T would have to increase its ownership in non-financial subsidiaries, such as (SEC) and Samsung SDS.

Samsung C&T may be forced to transition into a holding company

(Wtr) Total assets of Samsung C&T (L) (%) 40 Value of Samsung C&T's stakes in affiliates (L) 80 % of holdings in affiliates (R) 73.8%

30 60

50%

20 40

10 20

9.1%

0 0 Current If bill passes

Source: DART, Mirae Asset Daewoo Research

17| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (3) Regulations on post-spin-off share allotment

Potential ban on post- • Lawmakers proposed a revision to the Commercial Act that would ban the allotment of new subsidiary shares spin-off share allotment (post-spin-off) based on treasury shares.  The bill aims to prevent controlling shareholders from amassing too much control by leveraging treasury based on treasury stock stock. • The revision will likely be discussed thoroughly during the National Assembly extraordinary sessions in June.

Proposed amendment to Commercial Act regarding treasury shares Parties’ positions on regulating utilization of treasury shares (July 12, 2016) during spin-offs Liberty Law Details Minjoo Party People’s Party Justice Party Projection Korea

Special provision on treasury shares in case of division and merger after division Position -In favor-- A company to be incorporated through division or merger after division shall not allot new shares based on treasury shares of the company to Article 530-8 be incorporated through division. In case of merger after division, the (proposed by 10 other party to merger after division shall not allot new shares based on Discussions lawmakers treasury shares of the company to be incorporated through division or expected including Park treasury shares of the other party to merger after division. Yong-jin) Treasury shares Paragraph 1 (effective date) The article shall become effective three (3) should not be taken months after the date of promulgation into consideration Paragraph 2 (application) The amended Article shall become applicable Reason - -- when allocating from the first division and merger after division after the Article becomes shares of a new effective. subsidiary

Source: Bill Information System, Mirae Asset Daewoo Research Source: CCEJ, Mirae Asset Daewoo Research

18| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (3) Regulations on post-spin-off share allotment

Currently, treasury • Currently, following a spin-off for the purpose of converting to a holding company, shares of a new entity shares gain voting rights (subsidiary) are allotted to both existing shareholders and based on treasury shares of the holding company. • While treasury shares have no voting rights, shares in the subsidiary that are allotted based on treasury stock do after a holding company have voting rights. conversion via a spin-off • If a holding company owns treasury shares, a spun-off subsidiary will experience a ownership change with a holding company becoming a new shareholder. Buybacks ahead of a spin-off leads to a contraction in minority interest post-spin-off.

New share allotment based on treasury shares  Perceived to violate the “equal treatment of shareholders” principle

Controlling Controlling shareholder A shareholder A *Ownership (effective ownership)

Ownership 20%  effective ownership (voting rights) 22.2% 1% Minority 20% Minority Ownership 1%→ effective ownership 1.11% (1.11%) shareholder B (22.22%) shareholder B Company A Holdco A

Treasury Treasury shares Ownership 10%→ effective ownership 0% 10% 10% Spin-off 20% (20%)

10% 1% Controlling (10%) Minority (1%) shareholder A shareholder B • Spin-offs are not meant to alter shareholder structure. • Controlling shareholder A can strengthen control over newly established Opco A via Holdco A.

Opco A

Source: Mirae Asset Daewoo Research

19| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (4) End of circular shareholding

End of circular • Under the revised MRFTA, large corporate groups are banned from forming new circular shareholdings or shareholding (1) strengthening existing ones (7/25/14-). • Some of the biggest Korean conglomerates, such as Samsung, Hyundai Motor Group (HMG), and Lotte, have recently been making great efforts to unwind their existing circular shareholdings.  By doing so, they may be able to avoid potential policy risks.

Number of circular shareholdings of major groups

Group 2013 2014 2015 2016

Samsung 30 14 10 7 Holds financial affiliates

HMG 2553Holds financial affiliates

Lotte 5,851 299 299 50 Holds financial affiliates

Hyundai Heavy Industries 1111

Hanjin 2300

Dongbu 5000Holds financial affiliates

Daelim 1111

Hyundai 4600Holds financial affiliates

Hyundai Department Store 3333

Youngpoong 10666

Hyundai Development 4444Holds financial affiliates

Notes: Based on circular shareholdings in which the stake exceeds 1% Source: Fair Trade Commission, Mirae Asset Daewoo Research

20| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (4) End of circular shareholding

Most business groups have unwound their circular shareholdings via holding company conversion Major conglomerates’ circular shareholdings and financial subsidiaries Financial Financial Rank Name Head Circular shareholding Rank Name Head Circular shareholding subsidiaries subsidiaries 1 Samsung Lee Kun-hee ○○21 Cho Seok-lae X ○ 2 HMG Chung Mong-koo ○○22 Dongkuk Steel Jang Se-joo X X Converted to holding company 3 SK Chey Tae-won 23 Youngpoong Jang Hyung-jin ○ X (Jul. 3, 2007) Converted to holding company 4 LG Koo Bon-moo 24 Mirae Asset Park Hyeon-joo X ○ (Apr. 3, 2001) Converted to holding company 5 Lotte Shin Kyuk-ho ○○25 Kolon Lee Woong-yul (Jan. 1, 2010) Converted to holding company 6 Hyundai Heavy Industries Chung Mong-joon ○○26 Heavy Industries Cho Nam-ho (Aug. 1, 2007) Converted to holding company 7 GS Huh Chang-soo 27 KCC Jung Mong-jin X ○ (Jul. 7, 2004) Converted to holding company Converted to holding company 8 Hanjin Cho Yang-ho 28 Halla Jung Mong-won (Aug. 1, 2013) (Sep. 2, 2014) Converted to holding company 9 Hanwha Kim Seung-yeon X ○ 29 Cho Yang-lae (Jul. 6, 2013) 10 Doosan Park Yong-gon X ○ 30 Taekwang Lee Ho-jin X ○ Converted to holding company 11 Lee Myung-hee X X 31 Daesung Kim Young-dae (Jan. 1, 2011) Converted to holding company 12 CJ Lee Jae-hyun 32 Hyundai Development Jung Mong-gyu ○○ (Sep. 4, 2007) Converted to holding company 13 LS Ku Tae-hoi 33 Kyobo Life Insurance Shin Chang-jae X ○ (Jul. 2, 2008) Converted to holding company 14 Kumho Asiana Park Sam-gu ○ X 34 SeAH Lee Soon-hyung (Jul. 3, 2001) 15 Dongbu Kim Joon-gi X ○ 35 E-Land Park Sung-su X ○ 16 Daelim Lee Joon-young ○ X 36 Taeyoung Yoon Sae-young X X Converted to holding company Converted to holding company 17 Booyoung Lee Joong-geun 37 HiteJinro Park Moon-deok (Dec. 30, 2009) (Jul. 3, 2008) Converted to holding company 18 Hyundai Hyun Jeong-eun X ○ 38 AmorePacific Seo Kyung-bae (Jul. 1, 2007) 19 OCI Lee Soo-young X X 39 Samchully Lee Man-deuk X ○ Converted to holding company 20 Hyundai Department Store Jeong Jee-sun ○ X 40 Lee In-hee (Jan. 1, 2015) Note: Excludes government-owned companies/Source: FTC, Mirae Asset Daewoo Research 21| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (4) End of circular shareholding

End of circular • A revision to the MRFTA was proposed in September 2016 to require that conglomerates untie existing circular shareholding (2) shareholdings within a certain period of time (three years). • The government’s restrictions spell the end of circular ownership as a means for large Korean conglomerates to maintain managerial rights and expand control over their groups. • Most business groups will likely continue to unwind existing circular shareholdings, while also improving governance and making the transition to a holding company structure.

Proposed revisions to MRFTA requiring conglomerates to Major parties’ positions on existing circular shareholding ban untie existing circular shareholdings and our forecast

Present (July 2014 until now) Proposed revision Mirae Liberty Justice Asset Minjoo Party People’s Party ▶ Article 9-2-2 ▶ Article 9-3-1 Korea Party Daewoo No company belonging to an A company belonging to an enterprise projection enterprise group subject to limitations group subject to limitations on mutual on mutual investment shall make an investment shall unwind the circular Position -- In favor Opposed In favor affiliated investment that: shareholdings formed before July 24, 1) forms circular equity investment or 2014 within three years. 2) strengthens existing circular shareholdings. ▶ Article 9-3-2 A company belonging to an enterprise A violation of the rule could result in: group that became subject to No need to No law Financial MRFTA 1) penalties (within 10/100 of the limitations on mutual investment after introduce law; Law necessary to necessary, deterioration, Intro- share purchase price), July 24, 2014 shall unwind the circular measures to narrow because groups malfeasance, 2) restrictions on the exercise of shareholdings within three years. duction induce ownership-control are currently and manage- voting rights (for every stock used Reasons likely voluntary gap and ease canceling their ment issues to establish or strengthen circular ▶ Based on Articles 9-2-2 and 9-2-3 ownership following the date on which A company that fails to untie existing cancellation concentration of cross share- could lead to an order of disposal was issued), or circular shareholdings within three would be economic power holdings a chain of 3) criminal prosecution (up to three years shall be subject to the same sufficient voluntarily bankruptcies years in prison or up to W200mn in regulations as those applied to fines). violations of the ban on the formation of new circular shareholdings.

Source: Bill Information System, Mirae Asset Daewoo Research Source: The Citizens´ Coalition for Economic Justice, Mirae Asset Daewoo Research

22| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (4) End of circular shareholding

How will HMG unwind • HMG has four circular shareholdings, with Hyundai Mobis at the top of the ownership structure controlling HMC, circular shareholdings? Kia, and other affiliates. • Of the four, the key chain for maintaining control over the group is bound by Kia’s stake in Hyundai Mobis (Mobis (1) → HMC → Kia → Mobis). • If a pending revision to the MRFTA ends up being passed, requiring HMG to unwind its circular shareholdings, the simplest way to do so would seem to be disposing of Hyundai Mobis stakes owned by Kia (16.9%), (0.7%), and (5.7%).

Current circular shareholdings of HMG (%)

Affiliate 1 Affiliate 2 Affiliate 3 Affiliate 4 Affiliate 5

1 Hyundai Mobis → HMC → Kia Motors → Hyundai Mobis

20.80% 33.90% 16.90% (W6.2tr) (W5.1tr) (W4.1tr)

2 Hyundai Mobis → HMC → Hyundai Glovis → Hyundai Mobis

20.80% 4.90% 0.70% (W6.2tr) (W0.3tr) (W0.2tr)

3 Hyundai Mobis → HMC → Hyundai Steel → Hyundai Mobis

20.80% 11.20% 5.70% (W6.2tr) (W0.8tr) (W1.4tr)

4 Hyundai Mobis → HMC → Kia Motors → Hyundai Steel → Hyundai Mobis

20.80% 33.90% 19.60% 5.70% (W6.2tr) (W5.1tr) (W1.3tr) (W1.4tr)

Notes: Numbers in parentheses indicate stake value; based on closing prices as of the end of 2016 Source: FTC, Mirae Asset Daewoo Research

23| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (4) End of circular shareholding

How will HMG unwind • However, HMG can ill afford to sell Kia’s 16.9% stake in Hyundai Mobis. circular shareholdings? 1) Sell-off to third-party buyers not an option: Selling Kia’s 16.9% stake to third-party buyers would lower the group’s stake to 13.3% . (2) 2) Sell-off to affiliates is unlikely. - Hyundai Mobis cannot buy back its shares from Kia, due to legal restrictions (Article 341 of the Commercial Act); HMC must dispose of Mobis shares it purchases within six months of the acquisition, due to the cross investment ban. - Financial constraints or regulatory bans also prevent other affiliates from buying Kia’s 16.9% stake. - The controlling family cannot afford to buy the stake in its entirety, given the huge financial commitment.

Corporate governance of HMG

4.9% 2.3% Chung 23.3% Hyundai Glovis Eui-sun [086280 KS] 6.7% Chung Mong-koo 6.9% 0.7% Hyundai Mobis 5.7% [012330 KS] 20.8% 16.9% 1.7%

Hyundai Motor 33.9% Kia Motors [005830 KS] [000270 KS]

43.4% 20.9% 25.4% 29.0% 6.9% Hyundai Rotem Hyundai E&C Hyundai Wia Hyundai Hyundai Steel [064350 KS] [004020 KS] [011210 KS] AutoEver [010520 KS] 11.8% 38.6% 5.2% 13.4% 19.4% 41.1% 17.3%

Hyundai BNG Steel Hyundai Engineering [004560 KS]

58.9% 50.0% 56.5% 37.0% 27.5% 39.7% HMC Investment Hyundai Life Hyundai Commercial Hyundai Capital Hyundai Card Securities Source: Mirae Asset Daewoo Research [001500 KS] 24| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (4) End of circular shareholding

How will HMG unwind • 1) Stakes in affiliates held by Hyundai Mobis, HMC, and Kia circular shareholdings? - The key companies in HMG—Mobis, HMC, and Kia—have stakes in most HMG affiliates. - If an HMG affiliate is split into a holding company and an operating entity, with the former then purchasing the (3) three key group members’ stakes in affiliates to meet subsidiary shareholding requirements, this would likely impose a huge financial burden on the holding company. • 2) Stakes in financial affiliates - HMG currently has five financial affiliates, including Hyundai Card and Hyundai Capital. - HMG has to establish an intermediate financial holding company (now under consideration), in order to maintain its control over financial affiliates after holding company conversion. Current shareholders by affiliate Hyundai Engineering (shares, %) Hyundai E&C (shares, %) Name Relationship No. of shares Stake Name Relationship No. of shares Stake Hyundai E&C Largest shareholder 2,933,000 38.6 HMC Largest shareholder 23,327,400 20.9 Chung Eui-sun Affiliated party 890,327 11.7 Kia Subsidiary 5,831,850 5.2 Hyundai Glovis Subsidiary 886,740 11.7 Hyundai Mobis Subsidiary 9,719,750 8.7 Kia Subsidiary 710,020 9.3 Total 38,879,000 34.9 Hyundai Mobis Subsidiary 710,020 9.3 No. of shares outstanding 111,355,765 100 Chung Mong-koo Affiliated party 355,234 4.7 Total 6,485,341 85.4 Hyundai Wia (shares, %) Treasury stock 323,715 4.3 Name Relationship No. of shares Stake No. of shares outstanding 7,595,341 100 HMC Largest shareholder 6,893,596 25.3 Kia Subsidiary 3,654,004 13.4 Hyundai Steel (+ Hyundai Hysco) (shares, %) Chung Eui-sun Subsidiary executive 531,095 2 Name Relationship No. of shares Stake Total 11,078,695 40.7 HMC Subsidiary 9,173,595 6.9 Treasury stock 633,294 2.3 Kia Largest shareholder 23,049,159 17.3 No. of shares outstanding 27,195,083 100 Chung Mong-koo Affiliated party 15,761,674 11.8 Total 47,984,428 36 No. of shares outstanding 133,445,785 100 Hyundai Dymos (shares, %) Name Relationship No. of shares Stake Hyundai Powertech (shares, %) HMC Subsidiary 14,185,000 47.3 Name Relationship No. of shares Stake Kia Subsidiary 13,615,000 45.4 HMC Subsidiary 34,488,000 37.6 Hyundai Wia Subsidiary 1,536,000 5.1 Kia Subsidiary 34,488,000 37.6 Total 29,336,000 97.8 Hyundai Mobis Subsidiary 22,805,000 24.8 No. of shares outstanding 30,008,765 100 Total 91,781,000 100 No. of shares outstanding 91,781,200 100

Hyundai Autoever (shares, %) Other (%) Name Relationship No. of shares Stake Haevichi Hotel & Resort Haevichi Country Club Hyundai Auto Electronics Hyundai Partecs Hyundai MN Source: Bill Information, Mirae Asset Daewoo Research HMC Subsidiary 598,000 29 HMC 41.9 30 60 56 31.8 25|Kia 2H17 Outlook Subsidiary[Holding Companies] 400,000 19.4 Kia 23.2 15 20 31 Mirae Asset Daewoo Research Hyundai Mobis Subsidiary 400,000 19.4 Hyundai Mobis 5.8 15 20 13 25.7 Hyundai E&C Subsidiary 45,670 2.2 Total 71 60 100 100 57.5 Hyundai Engineering Subsidiary 13,048 0.6 Financial companies (%) Hyundai E&S Subsidiary 6,524 0.3 Hyundai Capital Hyundai Card Hyundai Commercial HMC Securities Hyundai Life Chung Eui-sun Affiliated party 402,000 19.5 HMC 59.7 37 50 27.5 Total 1,865,242 90.3 Kia 20.1 11.5 4.9 No. of shares outstanding 2,065,242 100 Hyundai Mobis 17 58.9 Total 79.8 48.4 50 49.4 58.9 II. Regulatory changes: (4) End of circular shareholding

How will HMG unwind • HMG will switch to a holding structure via the consecutive splits and mergers of Mobis, HMC, and Kia. circular shareholdings? 1) We believe HMG can untie the current circular shareholdings of Mobis, HMC, and Kia by opting to transition to a holding company. (4) 2) This will likely be done by having Hyundai Mobis switch to a holding company, after which HMC and Kia will split themselves up into investment and operating entities, with the investment units then merging with Hyundai Mobis’ holding company. • This merger process would allow the group holding company to meet subsidiary stake requirements (more than 20% for listed companies; 40% for unlisted) without the need to purchase the three key group members’ stakes in affiliates.

HMG’s projected conversion to holding company

Step 1. Hyundai Mobis’s equity spin-off Step 2. Hyundai Motor spin-off Step 3. Kia Motors’ spin-off  Change Hyundai Mobis’s investment unit  Merge Hyundai Motor investment unit with  Merge Kia Motors’ investment unit with into HMC holdco HMC holdco HMC holdco

Merge Merge HMC holdco Hyundai Mobis Hyundai Mobis Hyundai Mobis Hyundai Mobis investment unit investment unit investment unit opco Hyundai Mobis 16.9% investment unit Kia Motors HMC 33.9% investment unit investment unit 16.9% 20.8% 16.9% 20.8% 16.9% 16.9%

33.9% HMC 33.9% 20.8% 33.9% 16.9% HMC Kia Motors Kia Motors investment unit

20.8% Hyundai Motor HMC Kia Motors Hyundai Mobis opco opco opco opco Source: Mirae Asset Daewoo Research

26| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (4) End of circular shareholding

Expected corporate governance of HMG

Controlling shareholders

HMC holdco 1) HMC investment unit Hyundai Mobis investment unit + Kia Motors 2) investment unit

Intermediate Hyundai Mobis HMC Kia Motors Hyundai Wia Hyundai Steel Hyundai Glovis financial company [012330 KS] [005380 KS] [000270 KS] [011210 KS] [004020 KS] [086280 KS]

Hyundai E&C Hyundai Rotem [004020 KS] [064350 KS]

HMC Investment Hyundai Hyundai Hyundai Hyundai Hyundai BNG Steel Hyundai Securities Commercial Capital Card Life [004560 KS] Engineering [001500 KS]

Source: Dart, Mirae Asset Daewoo Research 27| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (4) End of circular shareholding

Hyundai Mobis serves as • From an ownership perspective, Hyundai Mobis serves as the group’s de-facto holding company . the group’s de-facto • Given that HMG owns only a 30.2% stake (excluding 2.8% in treasury shares) in Hyundai Mobis, the group would need to gain consent from outside shareholders, especially foreign shareholders (48% stake), in order to pass any holding company spin-off or merger for its group restructuring. • In the case of Samsung Group, which holds only an 18.1% stake in SEC (excluding 12.8% in treasury shares), converting the electronics giant into a holding company via a spin-off would require approval from a significant number of its outside shareholders. • SEC has recently made favorable changes in its shareholder return policy; this can be seen as part of the company’s move to bring more outside shareholders on board in a potential spin-off. • Likewise, we think Hyundai Mobis will also adopt a more aggressive shareholder return policy in a bid to gain more support for its ownership restructuring.

SEC’s favorable shareholder return policy (repurchase & Hyundai Mobis’s major shareholders cancellation of treasury stock) and share price trend

Number of Shares Ownership Value (W) 1,800,000 (7/28/16) Controlling family (1) Chung Mong-koo 6,778,966 7.0 1,763 Fourth repurchase/retirement

Total 6,778,966 7.0 1,763 (4/28/16) Third repurchase/retirement Affiliates (2) Kia Motors 16,427,074 16.9 4,271 1,600,000 (10/29/15) First repurchase/retirement Hyundai Steel 5,504,846 5.7 1,431

Hyundai Glovis 656,293 0.7 171 (1/28/16) 1,400,000 Second repurchase/retirement Total 22,588,213 23.2 5,873

Controlling family + affiliates (1)+(2) 29,367,179 30.2 7,635

Treasury shares 2,678,295 2.8 696 1,200,000

Holdings in the group 32,045,474 32.9 8,332

Foreign ownership 46,540,101 47.8 12,100 1,000,000 Total 97,343,863 100.0 25,309 9/15 11/15 1/16 3/16 5/16 7/16 9/16 11/16

Notes: Based on May 18th closing prices Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

28| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (5) Stronger regulations on related-party transactions

Strengthened • Tougher regulations on related-party transactions are likely to make it harder for group owners to amass wealth regulations on related- through deals between affiliates. • However, the current regulations are widely perceived as ineffective, as companies are able to elude restrictions party transactions through various means, including stake adjustments (e.g., lowering stakes through the sale of stock, etc.). • As such, revisions to the current regulations have been proposed. The revisions would unify the threshold regardless of listing status, and lower it to either 20% or 10%; indirect stakes would also be taken into account. • In light of strengthening regulations on related-party transactions, corporate groups need a legitimate way to acquire funds to pay inheritance and gift tax for the transfer of managerial control. As such, we expect the dividend payout of holding companies or de-facto holding companies to increase gradually

Regulations on related-party transactions Proposed revisions to related-party transaction regulations

Law Provisions Timeline Proposed bill Details

Ban on: 1) Deals with substantially favorable conditions MRFTA revision bill passed by National -Unify the stake threshold at 20% regardless of listing status * Exemption: The price difference with arm’s length transaction is Revision to less than 7%, and the annual transaction value is less than W5bn Assembly (July 2, -Inclusion of indirect stakes MRFTA (June 7, MRFTA (or W20bn for goods/services) 2013) -Toughen criteria for exemptions related to improvements in efficiency, 2016) ↓ Notice of revision to security, etc. Enabling 2) Bestowal of business opportunities enforcement decree companies, * Exemption: Only the related party is capable of performing the (October 2, 2013) beneficiary business, or the related party won the contract in a fair manner Revised enforcement companies, decree took effect Strengthened controlling (February 14, 2014) 3) Transactions of substantial volume without reasonable consideration regulations on Revision to families * One-year grace of external options related-party MRFTA (June 7, -Lower the stake threshold from 30% to 20% (including indirect stakes) period for ongoing * Exemption: Annual transaction amount is less than 12% of transactions 2016) revenue and less than W20bn; or the transactions are necessary to related party improve efficiency, ensure security, and meet urgent needs transactions

Revision to Inheritance -Lower the stake threshold to 10% of issued shares Profits from related-party transactions are deemed taxable gifts given to inheritance/gift tax Revision to & gift tax -Ensure that business opportunities provided to affiliates are in accordance the controlling shareholder, etc. (December 31, 2011) MRFTA (June 7, ↓ with the Commercial Act provision stipulating a ban on the usurpation of * Taxable profit = NOPAT × (percentage of related-party Revised inheritance/ controlling 2016) transactions - 15%) × (ownership stake - 3%) × gift tax rate gift tax took effect as corporate opportunity families of 2013

Source: Mirae Asset Daewoo Research Source: EIA, Mirae Asset Daewoo Research

29| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research II. Regulatory changes: (5) Stronger regulations on related-party transactions

Expansion of executive • Each registered executive with annual compensation greater than or equal to W500mn is currently required to compensation disclosure disclose his or her compensation. • However, as some executives have avoided disclosure through deregistration, the relevant act was revised in March to apply the disclosure rule to the top five executives by compensation, regardless of registration, from 2018. • As such, it appears likely that controlling families of conglomerates will have to disclose their compensation levels starting in 2018. • If the disclosed compensation levels do not appear reasonable or justified in light of individual capabilities and business performance, conglomerates might face criticism and resistance .

Expansion of executive compensation disclosure

Law Details

Companies that are required to submit financial reports shall include the following information in the reports 2nd clause of Article 159 of and attach documents prescribed by the presidential decree: the FSCMA 1. Purpose, name, and business details of a company 2. Executive compensation (including stock options) 3. Compensation of each executive with annual compensation greater than or equal to W500mn and detailed calculation methodology (top five executives or employees by compensation)

Source: Hager Hughes, Mirae Asset Daewoo Research

30| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research Top pick SK Holdings (034730 KS)

To be re-rated on the back of five growth strategies

Investment points (Maintain) Buy • Five growth strategies for 2017 1) IT services (in-house): Seek to raise its global IT services profile via partnerships Target Price (12M, W) 330,000 2) ICT security convergence and smart logistics (in-house): Expand into new businesses based on competitiveness in ICT Share Price (5/18/17, W) 262,000 3) Biotech/pharmaceuticals (SK Biopharmaceuticals and SK Biotek): Create new value in the healthcare industry Expected Return 26% 4) LNG (SK E&S): Integrate and expand LNG value chain in the group and secure new businesses in China 5) Semiconductor module (Essencore) and materials (SK Materials, joint venture, etc.): Expand high-growth,

OP (17F, W bn) 6,026 high-margin businesses

Consensus OP (17F, W bn) - Maintain Buy and TP of W330,000 EPS Growth (17F, %) 131.3 • SK Holdings is focusing on five key areas that it believes are essential to ensuring sustainable growth. Market EPS Growth (17F, %) 35.7 • As the company executes its growth strategies, we expect the values of its in-house business and subsidiary P/E (17F, x) 10.5 stakes to increase.

Market P/E (17F, x) 9.9

KOSPI 2,286.82

140 Market Cap (W bn) 18,434 SK Holdings FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Shares O utstanding 71 KOSPI Revenue (W bn) 2,426 39,300 83,617 92,926 97,212 97,212 (m n) 130 Free Float (%) 48.4 OP (W bn) 272 1,407 5,298 6,026 6,433 6,433 Foreign Ownership (%) 24 120 OP margin (%) 11.2 3.6 6.3 6.5 6.6 6.6

Beta (12M) 0.75 NP (W bn) 127 5,346 766 1,771 1,878 1,878 110 52-W eek Low 200,000 EPS (W ) 2,546 93,713 10,794 24,969 26,481 26,481

52-W eek High 262,000 100 ROE (%) 5 70.6 6 12.7 12.1 10.9 (%) 1M 6M 12M P/E (x) 83.9 2.6 21.3 10.5 9.9 9.9 90 Absolute 12.4 11.7 18.3 P/B (x) 3.3 1.3 1.2 1.2 1.1 1 80 Relative 5.6 -3.5 1.216.5 16.9 17.1 17.5 Div.Yield (%) 0.9 1.4 1.6 1.4 1.4 1.4 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: SK Holdings, Mirae Asset Daew oo Research estimates

31| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research Top pick SK Holdings (034730 KS)

SK Group’s corporate governance

Chey Tae-won Chey Chang-won ▶SK Holdings’ shareholders Chey Tae‐won: 23.4% Choi Gi‐won: 7.5% ▶SK Chemicals’ major shareholders Treasury stock: 20.7% Chey Chang‐won: 17% 30.9% Chey Shin‐won: 0.1% 19.7% Treasury stock: 13.3% 99.4% SK Infosec SK C&C + SK SK Materials Holdings 50% Encarsales.com [036490 KQ] 49.1% [034730 KS] SK Chemicals [006120 KS] 10% SK Securities [001510 KS] 28.2%

25.2% 33.4%41.7% 39.1% 100% 83.1% 100% 100%100% 44.5% 24%

SK Telecom SK Innovation SKC SK Networks SK SK Forest SK Shipping SK E&S SK Biotek SK E&C [017670 KS] [096770 KS] [011790 KS] [001740 KS] Biopharm

100% 20.1% 48.9%64.5% 83.5% 100% 100% 66%50% 45.6%

SK SK Hynix Iriver SK SK SK Gas SK Telink SK Syntec Initz Entis Broadband [000660 KS] [060570 KQ] Communications Planet [018670 KS]

31%

SKD&D [210980 KS]

Source: Mirae Asset Daewoo Research

32| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research Top pick SK Holdings (034730 KS)

Five growth strategies to pay off SK Group’s strategic growth plans

Growth areas Relevant companies 2020F target Details

*Cloud Revenue: W600bn SK Holdings OP: W60bn - Extend coverage of IT services, establish overseas footholds through business partnerships, and (1) IT services (in-house) *Smart factory broaden cloud-based offerings Revenue: W500bn OP: W50bn ICT *Smart logistics Revenue: W1tr - Security convergence platform (information/physical security) OP: W60bn (2) ICT convergence SK Holdings, Infosec - Expand into security devices (sensors, etc.), as well as biometric- and video surveillance-related *AI software Revenue: W400bn OP: W80bn

Revenue: W1tr (3) Biotech/ SK Biopharm OP: W600bn - Integrate the pharmaceuticals value chain, including R&D, manufacturing, and marketing, by 2018 pharmaceuticals SK Biotek Revenue: W1.5tr - Take SK Biopharmaceuticals public in 2018 and acquire drug developers with strong potential OP: W300bn - Integrate and expand the group’s LNG value chain and expand the capacity of the LNG business to 5mn tonnes by 2020 New growth Revenue: W8.2tr (4) LNG SK E&S - Benefit from cost advantages (due to direct access to cheap gas in the US and Australia) and portfolio OP: W840bn captive demand - Expected to partner with a Chinese firm in the near future to secure new business opportunities Revenue: W2tr (5) Semiconductor SK Holdings, Essencore, OP: W200bn - Semiconductor module business (Essencore) aims to achieve W2tr in revenue by 2020 modules/materials SK Materials Revenue: W1.5tr - Plans to acquire a firm with global technology to secure stable footing in the market OP: W500bn

Source: Company data, Mirae Asset Daewoo Research

33| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research Top pick SK Holdings (034730 KS)

Revaluation of SK E&S

SK E&S’s power generation capacity SK E&S’s direct LNG procurement

(MW) Gwangyang Hanam Jangheung ('000 tonnes) Munsan Wirye Yeoju 4,685 5,000 4,000 Tangguh Gorgon Shale gas (North America) Australia (C-B) 4,000 3,735 950 3.2x increase in capacity 3,000 1000 450 450 3,000 910 910 2,000 1200 1,200 2,000 1,465 910 910 339 339 339 1,000 800 800 800 1,000 1,126 1,126 1,126 600 600 600 600 0 0 2016 2017 2021- 2016 2017 2019 2023

Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

SMP trend System marginal price trend

(Oil=W/kl, LNG=W/tonne) (W/kWh) 1,400,000 Oil 200 SMP 185.14 LNG 1,200,000 150 1,000,000 800,000 100 92.06 600,000 400,000 50 67.06 200,000 0 0 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

34| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research Top pick SK Holdings (034730 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 83,617 92,926 97,212 97,212 Current Assets 32,450 33,358 35,542 44,308 P/E (x) 21.3 10.5 9.9 9.9

Cost of Sales 73,770 81,783 85,559 85,559 Cash and Cash Equivalen 7,087 10,576 11,885 20,651 P/CF (x) 1.5 1.6 1.6 1.7

Gross Profit 9,847 11,138 11,653 11,653 AR & Other Receivables 12,227 13,624 14,147 14,147 P/B (x) 1.2 1.2 1.1 1

SG&A Expenses 4,550 5,112 5,220 5,220 Inventories 6,019 6,706 6,964 6,964 EV/EBITDA (x) 6.2 5.2 4.7 4.5

Operating Profit (Adj) 5,298 6,026 6,433 6,433 Other Current Assets 7,117 2,452 2,546 2,546 EPS (W) 10,794 24,969 26,481 26,481

Operating Profit 5,298 6,026 6,433 6,433 Non-Current Assets 70,597 54,245 49,978 46,205 CFPS (W) 154,633 168,527 164,611 156,296

Non-Operating Profit -922 978 978 978 Investments in Associates 11,560 0 0 0 BPS (W) 197,625 219,891 243,430 266,998

Net Financial Income -597 0 0 0 Property, Plant and Equipm 41,033 37,119 33,776 30,919 DPS (W) 3,700 3,700 3,700 3,700

N et Gain from Inv in As s ocia t 719 1,849 1,818 1,818 Intangible Assets 11,772 10,639 9,620 8,704 Payout ratio (%) 7.3 4.2 4 4

Pretax Profit 4,376 7,004 7,411 7,411 Total Assets 103,047 87,603 85,520 90,514 Dividend Yield (%) 1.6 1.4 1.4 1.4

Income Tax 1,354 2,072 2,211 2,211 Current Liabilities 28,717 22,526 23,074 23,074 Revenue Growth (%) 112.8 11.1 4.6 0

Profit from Continuing Opera 3,022 4,932 5,200 5,200 AP & Other Payables 12,139 13,526 14,045 14,045 EBITDA Growth (%) 191.4 5.3 -2.5 -5.5

Profit from Discontinued Ope -199 0 0 0 Short-Term Financial Liab 8,502 8,531 8,542 8,542 Operating Profit Growth (%) 276.5 13.7 6.8 0

Net Profit 2,822 4,932 5,200 5,200 Other Current Liabilities 8,076 469 487 487 EPS Growth (%) -88.5 131.3 6.1 0

Controlling Interests 766 1,771 1,878 1,878 Non-Current Liabilities 32,004 18,010 10,387 10,387 Accounts Receivable Turno 8.1 8.5 8.2 8.1

Non-Controlling Interests 2,057 3,161 3,322 3,322 Long-Term Financial Liab 23,196 8,196 196 196 Inventory Turnover (x) 14.3 14.6 14.2 14

Total Comprehensive Profit 2,867 4,932 5,200 5,200 Other Non-Current Liabilit 8,808 9,814 10,191 10,191 Accounts Payable Turnover 9 8.7 8.5 8.3

Controlling Interests 766 1,129 1,191 1,191 Total Liabilities 60,721 40,536 33,461 33,461 ROA (%) 2.8 5.2 6 5.9

Non-Controlling Interests 2,101 3,803 4,010 4,010 Controlling Interests 13,113 14,691 16,361 18,033 ROE (%) 6 12.7 12.1 10.9

EBITDA 10,511 11,073 10,795 10,205 Capital Stock 15 15 15 15 ROIC (%) 6.7 7.3 8.1 8.4

FCF (Free Cash Flow) 4,175 2,429 9,602 8,973 Capital Surplus 5,646 5,646 5,646 5,646 Liability to Equity Ratio (%) 143.5 86.1 64.3 58.6

EBITDA Margin (%) 12.6 11.9 11.1 10.5 Retained Earnings 8,368 9,947 11,617 13,289 Current Ratio (%) 113 148.1 154 192

Operating Profit Margin (%) 6.3 6.5 6.6 6.6 Non-Controlling Interests 29,214 32,376 35,698 39,020 Net Debt to Equity Ratio (%) 46.5 13.1 -6 -20.9

Net Profit Margin (%) 0.9 1.9 1.9 1.9 Stockholders' Equity 42,327 47,067 52,059 57,053 Interest Coverage Ratio (x) 6.6 0 0 0 Source: SK Holdings, M irae Asset Daewoo Research estim ates

35| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research APPENDIX 1

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

Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price SK Holdings(034730) 08/30/2015 Buy 330,000 04/28/2015 Buy 290,000

(W) SK Holdings

400,000

300,000

200,000

100,000

0 May 15 May 16 May 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 72.86% 15.58% 11.56% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2017)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject 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. 36| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research APPENDIX 1

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 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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37| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research APPENDIX 1

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38| 2H17 Outlook [Holding Companies] Mirae Asset Daewoo Research