2H18 Outlook

Holding Companies Issues facing major conglomerates in 2H18

IT Services/Software Cloud and

Dae-ro Jeong Su Yeon Lee +822-3774-1634 +822-3774-7162 [email protected] [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

I. Increasing adoption of holding company structure 3

II. Regulatory changes in 2018 6

III. Introduction of Korean Stewardship Code 7

IV. Corporate structure analysis 8

V. Top pick 18 SK Holdings (034730 KS)

[IT Services/Software] ICT market overview for 2018 20

I. Cloud services 21

II. Blockchain 22

III. Top pick 23 SDS (018260 KS) I. Increasing adoption of holding company structure

Increasing adoption of • As of end-2017, the number of holding companies in Korea stands at 193 (+5 in 2014, +8 in 2015, +22 in 2016, and +31 in 2017). holding company • Factors driving holding company conversions: structure in order to ① Government: Encouraging simpler and more transparent shareholding structures tighten managerial ② Investors: Expectations for growth in EV based on enhanced governance control and facilitate ③ Controlling shareholders: Low stakes  Concerns over hostile M&As  Higher stakes, defense/transfer succession of managerial control

Growing number of holding companies Benefits of holding company conversion

(No.) Simpler and more 250 transparent Financial holdcos shareholding

Holdcos 200 Government

150

100 Controlling Investors shareholders 50

Growth in EV based on 0 governance Defense/transfer of 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 enhancement managerial control

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

3| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research I. Increasing adoption of holding company structure

Among conglomerates, • 46% of the top 50 conglomerates have adopted holding structures. holding company conversions have seen significant progress Major conglomerates’ holding company conversions

2017 2016 Group Largest shareholder Date of holdco conversion 2017 2016 Group Largest shareholder Date of holdco conversion 1 1 Samsung Lee Kun-hee 32 32 Kolon Lee Woong-yeul 1/1/10 2 2 HMG Chung Mong-koo 33 31 Cho Yang-rae 7/6/13 3 3 SK Chey Tae-won 3/15/08 34 33 Kyobo Life Insurance Shin Chang-jae 4 4 LG Koo Bon-moo 4/3/01 35 40 Jungheung Construction Jung Chang-sun 5 5 Lotte Shin Dong-bin 36 35 DB Kim Nam-ho 7 7 GS Huh Chang-soo 7/7/04 37 New Dongwon Kim Nam-jung 4/16/01 38 36 Halla Jung Mong-won 9/2/14 8 8 Hanwha Kim Seung-yeon 39 39 SeAH Lee Tae-sung 7/3/01 9 9 Chung Mong-joon 4/5/17 40 44 Taeyoung Yoon Seok-min 11 14 Lee Myung-hee 42 41 E-Land Park Sung-su 13 12 Doosan Park Yong-kon 43 45 AmorePacific Suh Kyung-bae 1/1/07 14 11 Cho Yang-ho 8/1/13 44 43 Taekwang Lee Ho-jin 15 15 CJ Lee Jae-hyun 9/4/07 45 37 Dongkuk Steel Mill Chang Sae-joo 16 16 Booyoung Lee Jung-keun 12/30/09 46 New SM Woo Oh-hyun 1/1/17 17 17 LS Christopher Koo 7/2/08 47 New Hoban Construction Kim Sang-youl 18 19 Daelim Lee Hae-wook 48 46 Hyundai Development Chung Mong-gyu 19 20 Kumho Asiana Park Sam-koo 49 47 Seo Jung-jin 11/25/10 21 24 Mirae Asset Park Hyun-joo 50 52 Kim Bum-soo 23 21 Hyundai Department Store Chung Ji-sun 51 New NAVER NPS 24 22 OCI Lee Soo-young 52 38 Hanjin Heavy Industries Cho Nam-ho 8/1/07 25 23 Cho Seok-rae 53 49 Samchully Lee Man-deuk 26 27 Young Poong Chang Se-jun 54 51 Park Chul-wan 28 34 Korea Investment Holdings Kim Nam-koo 5/31/03 55 48 HiteJinro Park Moon-deok 7/3/08 30 28 Jeil Holdings Kim Heung-kuk 1/4/11 56 New Nexon Kim Jung-Ju 31 29 KCC Chung Mong-jin 57 50 Hansol Cho Dong-gil 1/2/15 Note: Based on total assets Source: FTC, Mirae Asset DaewooResearch 4| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research I. Increasing adoption of holding company structure

Weight of listed holding • Holding companies account for around 8% (W148.1tr) of the combined market cap of KOSPI and KOSDAQ plays companies’ combined (W1,867tr). • As such, it is important to develop an investment strategy for holding companies. market cap is rising • Holding company investment ideas: 1) Upside from increases in the value of stakes in listed subsidiaries; 2) exposure to unlisted subsidiaries; and 3) cash flow improvements arising from their holding structures (e.g., brand royalty income, dividends, and transparent governance)

Domestic market cap comparison by sector

(Wtr) 450

400

350

300

250

200

150

100

50

0

Note: Based on May 4th closing prices; de facto holding companies are also included Source: FTC, Mirae Asset DaewooResearch

5| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research II. Regulatory changes in 2018

Discussions on economic • A variety of holding company-related legal revisions have been proposed since the 20th National Assembly democratization to gain session opened in 2016. • President Moon Jae-in’s campaign pledges and five-year plan indicate that his administration will pursue greater momentum after the economic democratization; discussions on economic democratization will likely gain momentum after the upcoming local election upcoming local election in June. in June • The major goals of the administration’s announced policies are to strengthen the rights of minority shareholders, secure board of director independence, and prevent controlling families from abusing their power.

Moon administration’s economic democratization policies (based on five-year plan)

No. Goal Plans Expected impact

Introduction of multiple derivative suits and electronic voting; adoption of either a Preventing controlling families cumulative voting system or separate election of audit committee members (-2018) 1 from abusing power ▶ Stricter enforcement of laws governing economic crimes and more rigorous pardon review process

Stronger legal requirements for holding companies (2017-18) Stronger minority shareholder rights and Preventing controlling families Ban on the allotment of new subsidiary shares (post-spin-off) based on treasury stock greater board of director independence 2 from amassing control via Introduction of measures to gradually unwind existing circular shareholdings illegal means ▶ Disclosure of investments in domestic subsidiaries via overseas subsidiaries Prevention of abuse of power by controlling families

Prevention of the amassing of control via Expansion of the scope of regulations on controlling families’ pursuit of private interests Rooting out controlling illegal means via illegal means (-2018) 3 families’ pursuit of private ▶ Continuous monitoring of controlling families’ pursuit of private interests via illegal interests via illegal means Prevention of unfair transfer of wealth and means promotion of fair competition

Stricter separation of financial Tighter regulations on voting rights of financial/insurance affiliates (-2018) 4 and non-financial capital ▶ Introduction of a comprehensive supervisory system for financial groups (2018-)

Source: Presidential Commission on Policy Planning, Mirae Asset Daewoo Research

6| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research III. Introduction of Korean Stewardship Code

Korean Stewardship • The original Stewardship Code, which was established in the UK after the global financial crisis, mandates that Code institutional investors monitor key management issues (as shareholders); similar codes have been adopted in 20 countries. • The Korean Stewardship Code highlights the fiduciary responsibilities of institutional investors.  Institutions should act in the best medium/long-term interests of beneficiaries.  Stewardship entails more than just voting. • Limitations of the Korean Stewardship Code: “Soft law”; massive costs associated with expert hiring/training; environmental differences compared to the UK and Taiwan, which are cited as successful cases • The NPS is expected to introduce Korean Stewardship Code in 2H18: If the code is introduced, the NPS will likely be able to enhance shareholder value and the National Pension Fund’s investment return via independent voting. Share performances of holding companies in the month Overview of the Korean Stewardship Code following the 19th presidential election

(5/9/17=100) Characteristics Details 150 LG SK Principle-based Code participants may refer to statutory interpretations approach issued by the FSC. 140 Doosan Hanwha Institutional investors shall focus on achieving clear and CJ Active communication constructive goals in partnership with investees , rather 130 KOSPI than intervening in business operations. Efforts to bolster 120 confidence in Code participants shall enhance their expertise to ensure institutional investors’ that they can fully fulfill their fiduciary duties. activities 110 Guidelines on implementation, fiduciary duty, and Effectiveness in code prevention of conflicts of interests are specified; the role of implementation the Korea Corporate Governance Service is also explicitly 100 stated. Division of duties Asset owners are required to set the tone for stewardship; between asset communication between asset owners and managers is 90 managers and asset necessary to ensure the appropriate division of duties. owners Code participants, including institutional investors and Cooperation between 80 advisory firms, present cases; government agencies offer market participants authoritative interpretations to minimize legal 5/9/17 5/23/17 6/6/17 6/20/17 7/4/17 and authorities uncertainties. Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

7| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research IV. Corporate structure analysis: (1) Samsung Group

Why Samsung Life can’t • Under the Act on the Structural Improvement Act of the Financial Industry (Article 24), a financial firm acquiring a keep its SEC stake 10% (or greater) stake in another company must gain approval from the Financial Services Commission (FSC). If (SEC) retires 7% of its shares in 2018, the combined stake held by Samsung Life and Samsung F&M would exceed 10% (currently 9.7%). The insurers will likely have to sell part of their current stake in SEC before the cancellation. • The proposed revisions to the Insurance Business Act mandate the mark-to-market valuation of equity holdings. If the revisions are passed, Samsung Life would be required to sell its SEC shares in excess of 3% of its total assets (which would be equivalent to 6.3%) within a seven-year grace period.

Change in the combined stake held by Samsung Life and Proposed revisions to Insurance Business Act mandate Samsung F&M in the event of SEC retiring 7% of its shares mark-to-market valuations

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

8| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research IV. Corporate structure analysis: (1) Samsung Group

Samsung Life expected • At present, Samsung Group holds a 19.9% stake in SEC, which represents a 21.4% voting interest; however, under to unload its SEC stake the Act on the Structural Improvement Act of the Financial Industry and Monopoly Regulation and Fair Trade Act (MRFTA), actual exercisable voting power is restricted to 15%. on the market • Therefore, even if Samsung Life unloads its SEC shares on the market, the group’s voting interest in SEC would remain essentially unchanged, provided that only up to 5.9% of SEC holdings are sold.

Even if Samsung Life unloads its SEC shares, the group’s Changes in stakes in voting rights to SEC voting interest in SEC would remain unchanged

Source: DART, Mirae Asset Daewoo Research Source: DART, Mirae Asset Daewoo Research

9| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research IV. Corporate structure analysis: (1) Samsung Group

Why Samsung C&T is • It would be difficult for Samsung C&T to fund such a purchase (a 1% SEC stake acquisition would cost W3.4tr); however, even if Samsung C&T did increase its stake, the relevant regulations would ultimately cap the group’s unlikely to acquire SEC maximum voting power at 15%. shares • Furthermore, Samsung C&T needs to keep its holding ratio (combined value of subsidiary shares to total assets) below 50%. The company’s current holding ratio is around 16% (as of end-2017). If Samsung C&T acquires additional SEC shares from Samsung Life, making it the largest shareholder of SEC within the group, its SEC stake would have to be included in the calculation of the holding ratio. Under such a scenario, Samsung C&T’s ratio would rise to 56%, forcing a holding company conversion. Samsung C&T will likely aggressively expand its assets.

If Samsung C&T’s holding ratio rises above 50%, the company Samsung Life is expected to dispose of some of its SEC shares will be forced to adopt a holding company structure

Source: DART, Mirae Asset Daewoo Research Source: DART, Mirae Asset Daewoo Research

10| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research IV. Corporate structure analysis: (1) Samsung Group

Samsung Group structure

Lee Jae-yong and affiliates

31.1%

Samsung C&T [028260 KS]

100% Samsung Welstory

43.4% 4.7% 19.3% 20.8% 5.4% 31.5% SEC 8.3% Samsung Life [207940 KS] [005930 KS] [032830 KS] 94.6% 1.5% (50.1%)

Samsung Bioepis 17.0%

22.6%Samsung SDS 25.2% Samsung F&M 15.0.% [018260 KS] [030000 KS] [000810 KS] 17.1%

23.7% SEMCO 2.3% SHI 16.9% Samsung Securities 29.4% [009150 KS] [010140 KS] [016360 KS]

7.0% 19.6% Samsung SDI 11.7% 71.9% [006400 KS] [028050 KS] [029780 KS]

15.2% 84.8% 5.1% Samsung Asset 100% Samsung Display [008770 KS] Management 7.7%

11.0% S1 5.4% [012750 KS] Source: DART, Mirae Asset Daewoo Research

11| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research IV. Corporate structure analysis: (2) HMG

• Hyundai Motor Group’s (HMG) ownership restructuring plan largely involves two steps: 1) establishing a de facto holding HMG’s ownership company (surviving ); and 2) subsequently expanding control and removing circular shareholding/related- restructuring plan; party transaction overhangs through stock purchase agreements between major shareholders and affiliates. • The main obstacle to HMG’s reorganization plan is Hyundai Mobis’s weak share price, which stems from the long-short problem lies in long- trade dynamics created by the perceived interests of major shareholders in their planned stock transactions with group short dynamics affiliates. • Assuming the deals are approved, we estimate the value of major shareholders’ 15.8% stake in merged Glovis at W2.5tr, and the value of the 23.2% stake in surviving Mobis collectively owned by , , and merged Glovis at W3.1tr. This means the major shareholders would face an over W1tr shortfall (including capital gains taxes that would be imposed on major shareholders) if they were to acquire the entire 23.2% stake. Historically, investors have preferred to align their positions to the interests of major shareholders. Relative share performances of Hyundai Mobis and Hyundai Post-spinoff/merger ownership structure Glovis since announcement of ownership restructuring plan (3/28/18=100) 120 Hyundai Mobis

110

100

90 Hyundai Mobis appraisal rights exercise price: W233,429

80

70 3/28 4/4 4/11 4/18 4/25 5/2

Source: Company materials, Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research 12| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research IV. Corporate structure analysis: (2) HMG

Hyundai Mobis • Mergers and spin-offs are subject to the approval of a special resolution, requiring an affirmative vote of two- shareholder approval thirds of the shareholders present and at least one-third of total issued shares (Article 434 of the Commercial Act). critical to HMG’s • Amid growing interest in minority shareholder rights, high-profile deals in recent years have shown shareholder overhaul meeting attendance rates of around 70-80% • We thus expect more than 70% of shareholders to be present for the upcoming Hyundai Mobis and Hyundai Glovis meetings, meaning the approval of the spin-off/merger will require affirmative votes from 46.7-53.3% of shares with voting rights. • Currently, HMG’s affiliated parties own 31% of Hyundai Mobis and 51.4% of Hyundai Glovis. Thus, Hyundai Mobis needs to gain consent from at least 15% of outside shareholders.

Minimum stake required to approve special resolution (varies by attendance rate)

Source: Mirae Asset Daewoo Research

13| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research IV. Corporate structure analysis: (2) HMG

Valuations of Hyundai Glovis’s spun-off units (Wbn) Post-merger Merged entity New shares of Hyundai Glovis to be issued for Shareholders Hyundai Mobis module and A/S businesses Hyundai Mobis’s spun-off units Notes No. of shares Stake Value No. of shares Stake Value Chung Mong-koo 1,426,766 7.0% 646 4,167,847 4.3% 675 +30 Chung Eui-sun 0 0.0% 0 0 0.0% 0 +0 Hyundai Motor 0 0.0% 0 0 0.0% 0 +0 Kia Motors 3,457,398 16.9% 1,565 10,099,700 10.4% 1,636 +72 Hyundai Steel 1,158,602 5.7% 524 3,384,492 3.5% 548 +24 Hyundai Motor Chung Mong- 00.0%0 00.0%0 +0 Koo Foundation Hyundai Glovis 138,130 0.7% 63 403,502 0.4% 65 +3 Hyundai Mobis's spun-off units 556,312 2.7% 252 1,625,090 1.7% 263 +12 Total shares issued 20,487,914 100.0% 9,271 59,848,992 61.5% 9,696 +424 Expected changes in ownership after Hyundai Mobis’s spin-off (Wbn) Pre-merger Post-merger Merging entity Merged entity Shareholders Post-merger Hyundai Glovis Hyundai Glovis Hyundai Mobis module and A/S businesses No. of shares Stake Market cap No. of shares Stake Value No. of shares Stake Value Chung Mong-koo 2,517,701 6.7% 408 1,426,766 7.0% 675 6,685,548 6.9% 1,083 Chung Eui-sun 8,732,290 23.3% 1,415 0 0.0% 0 8,732,290 9.0% 1,415 Hyundai Motors 1,830,939 4.9% 297 0 0.0% 0 1,830,939 1.9% 297 Kia Motors 0 0.0% 0 3,457,398 16.9% 1,636 10,099,700 10.4% 1,636 Hyundai Steel 0 0.0% 0 1,158,602 5.7% 548 3,384,492 3.5% 548 Hyundai Motor Chung Mong- 1,671,018 4.5% 271 0 0.0% 0 1,671,018 1.7% 271 Koo Foundation Hyundai Glovis 0 0.0% 0 138,130 0.7% 65 403,502 0.4% 65 Hyundai Mobis's spun-off units 0 0.0% 0 556,312 2.7% 263 1,625,090 1.7% 263 Total shares issued 37,500,000 100.0% 6,075 20,487,914 100.0% 9,696 97,348,992 100.0% 15,771 Valuation of Hyundai Mobis before and after spin-off (Wbn) Pre-spin-off Post-spin-off Shareholders Hyundai Mobis Hyundai Mobis module and A/S businesses Hyundai Mobis (surviving entity) No. of shares Stake Market cap No. of shares Stake Value No. of shares Stake Value Chung Mong-koo 6,778,966 7.0% 1,593 1,426,766 7.0% 675 5,352,200 7.0% 918 Chung Eui-sun 0 0.0% 0 0 0.0% 0 0 0.0% 0 Kia Motors 16,427,074 16.9% 3,860 3,457,398 16.9% 1,636 12,969,676 16.9% 2,224 Hyundai Steel 5,504,846 5.7% 1,294 1,158,602 5.7% 548 4,346,244 5.7% 745 Hyundai Glovis 656,293 0.7% 154 138,130 0.7% 65 518,163 0.7% 89 Hyundai Mobis 2,643,195 2.7% 621 556,312 2.7% 263 2,086,883 2.7% 358

Source:Total shares Mirae issued Asset Daewoo Research 97,343,863 100.0% 22,876 20,487,914 100.0% 9,696 76,855,949 100.0% 13,180 14| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research IV. Corporate structure analysis: (2) HMG

HMG structure (projected)

Chung Eui-sun

Chung Mong-koo

30.2% Hyundai Mobis [012330 KS]

20.8% 33.9% Hyundai Motor Kia Motors [005830 KS] [000270 KS]

43.4% 20.9% 25.3% 29.0% 6.9% 1.9%

Hyundai Rotem Hyundai E&C Hyundai Wia Hyundai Steel 3.5% Hyundai Glovis Hyundai AutoEver [064350 KS] [004020 KS] [011210 KS] [010520 KS] [086280 KS]

38.6% 5.2% 13.4% 19.4% 41.1% 17.3% 28.1%

Hyundai BNG Steel Hyundai Engineering [004560 KS]

30.3% 50.0% 59.7% 37.0% 27.5% 20.4% HMC Investment Securities Hyundai Life Hyundai Commercial Hyundai Capital Hyundai Card [001500 KS]

20.1% 24.5% 11.5% 4.9%

Source: DART, Mirae Asset Daewoo Research

15| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research IV. Corporate structure analysis: (3) SK Group

SK Group structure

Chey Tae-won and Chey Chang-won affiliates

30.9% 44.6%

SK Materials 49.1% 100% [036490 KQ] SK Infosec SK Holdings [034730 KS] SK Discovery SM Core [006120 KS] SK Siltron [007820 KQ] 26.7% 51.0% 28.3%

25.2% 33.4%41.0% 39.1% 100% 57.2% 90.0% 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

24.2% 60.0%100% 45.6% 100% 20.1% 45.9%100% 100% 98.1%

SK Chemicals SK Gas SK SK Hynix Iriver SK Plasma SK Syntec SK Telink SK Planet [285130 KS] [018670 KS] Broadband [000660 KS] [060570 KQ] Communications 10.0% 31.0%

SK D&D [210980 KS]

Source: DART, Mirae Asset Daewoo Research

16| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research IV. Corporate structure analysis: (3) SK Group

Efforts to tighten holding • Lawmakers proposed a revision to the MRFTA, which would raise minimum equity ownership to 30% for first-tier and second- tier listed subsidiaries (50% in unlisted subsidiaries) from the current 20% (40% in unlisted companies). company requirements • Impact on SK Group: underway - If the bill is passed, SK Holdings would need to raise its stake in SK Telecom from 25.2% to 30%, and SK Telecom would need to raise its stake in SK Hynix from 20.1% to 30%. This is estimate to cost W7tr in total. - In order to avoid a share overhang, the firm is highly likely to purchase treasury shares held by SK Telecom and SK Hynix.

SK Group’s additional ownership requirements to meet revised Changes to holding company requirements minimum equity ownership

Initial Current Proposed revision If the revision bill is Treasury Companies passed shares held

Equity ownership Additional Equity ownership interest in subsidiaries (Second-tier) Amount interest in all affiliates Stake stake Stake subsidiaries (Wbn) Holdco requirements required

Book value Fair value SK Telecom 25.20% 4.80% 893 12.60%

SK Holdings Minimum equity Listed: 30% Listed: 20% Listed: 30% ownership for (second- SK E&C 44.50% 5.50% 78 3.80% Unlisted: 50% Unlisted : 40% Unlisted: 50% tier) subsidiaries

Holdco’s debt ratio 100% 200% 100% SK Telecom SK Hynix 20.10% 9.90% 5,982 3.00%

Business relations between subsidiary Daehan Oil Necessary Unnecessary Necessary SK Innovation 41.00% 9.00% 42 0.00% and second-tier Pipeline Corp. subsidiary

Joint investment in Possible Possible Impossible SKC SK Bioland 27.90% 2.10% 7 0.00% second-tier subsidiary

Source: Bill Information, Mirae Asset Daewoo Research Note: Based on May 4, 2018 closing prices Source: Mirae Asset DaewooResearch

17| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research SK Holdings (034730 KS)

Value of unlisted subsidiaries to be re-rated in 2H18

Investment points (Maintain) Buy • We project the value of stakes in unlisted subsidiaries to be re-rated to W14.9tr (+58.3% YoY) in 2018 (from W9.4tr in 2017). • SK Biopharmaceuticals: For the epilepsy treatment YKP3089, the phase 3 trial is set to be completed in 1H18, and a new Target Price (12M, W) 390,000 drug application is expected to be filed in 2H18. • SK Biotek: After having completed the construction of a new plant (160,000 liters) in Korea, the company recently acquired Bristol-Myers Squibb's API plant (81,000 liters) in Swords, Ireland, with the aim of expanding its total capacity to 800,000 Share Price (5/4/18, W) 299,000 liters by end-2020. • SK E&S enjoys cost competitiveness thanks to its direct sourcing of LNG; the revision to the Electric Utility Act should create Expected Return 30% additional opportunities for the company. • SK Siltron: We expect the semiconductor up cycle to drive the company’s earnings and enterprise value higher. • Other investment assets: Stakes in firm ESR (W372bn) and gas gathering & processing company Eureka OP (18F, Wbn) 6,132 (W117.2bn). Consensus OP (18F, Wbn) - Risk factors EPS Growth (18F, %) 26.5 • Earnings volatility could increase depending on oil prices and semiconductor market trends. Market EPS Growth (18F, %) 16.2 Regulatory risks P/E (18F, x) 10.0 • Market P/E (18F, x) 9.4

KOSPI 2,461.38

125 Market Cap (Wbn) 21,038 SK Holdings FY (Dec.) 12/14 12/15 12/16 12/17 12/18F 12/19F Shares Outstanding 71 120 Revenue (Wbn) 2,426 39,300 82,730 93,296 97,253 100,991 (mn) KOSPI Free Float (%) 48.4 115 OP (Wbn) 272 1,407 5,281 5,861 6,132 6,562

Foreign Ownership (%) 24.7 110 OP margin (%) 11.2 3.6 6.4 6.3 6.3 6.5

Beta (12M) 1.33 105 NP (Wbn) 127 5,346 766 1,677 2,122 2,252

52-Week Low 245,500 100 EPS (W) 2,546 93,713 10,794 23,650 29,924 31,746 52-Week High 328,500 95 ROE (%) 5.0 70.6 6.0 12.5 14.5 13.6

(%) 1M 6M 12M90 P/E (x) 83.9 2.6 21.3 12.0 10.0 9.4 85 Absolute 4.5 2.7 20.3 P/B (x) 3.3 1.3 1.2 1.4 1.3 1.1 80 Relative 2.3 6.8 9.617.4 17.8 17.12 18.4 Div.Yield (%) 0.9 1.4 1.6 1.4 1.3 1.3 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

18| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research SK Holdings (034730 KS)

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

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

Revenue 82,730 93,296 97,253 100,991 Current Assets 32,450 35,199 30,442 33,999 P/E (x) 21.3 12.0 10.0 9.4

Cost of Sales 73,006 82,400 85,647 88,939 Cash and Cash Equivalen 7,087 7,146 6,129 8,017 P/CF (x) 1.5 1.7 1.6 1.6

Gross Profit 9,724 10,896 11,606 12,052 AR & Other Receivables 12,227 13,530 13,687 14,626 P/B (x) 1.2 1.4 1.3 1.1

SG&A Expenses 4,443 5,036 5,474 5,490 Inventories 6,019 8,178 8,272 8,840 EV/EBITDA (x) 6.2 6.4 6.5 6.6

Operating Profit (Adj) 5,281 5,861 6,132 6,562 Other Current Assets 7,117 6,345 2,354 2,516 EPS (W) 10,794 23,650 29,924 31,746

Operating Profit 5,281 5,861 6,132 6,562 Non-Current Assets 70,597 74,578 69,002 73,002 CFPS (W) 154,633 164,215 185,527 185,980

Non-Operating Profit -891 1,581 1,538 1,575 Investments in Associates 11,560 14,630 14,630 14,630 BPS (W) 197,625 205,348 232,329 260,927

Net Financial Income -600 -697 0 0 Property, Plant and Equipm 41,033 41,286 37,008 42,011 DPS (W) 3,700 4,000 4,000 4,000

Net Gain from Inv in Associat 722 2,488 2,567 2,572 Intangible Assets 11,772 12,351 11,025 9,852 Payout ratio (%) 7.3 4.4 3.8 3.6

Pretax Profit 4,390 7,442 7,670 8,137 Total Assets 103,047 109,777 99,444 107,002 Dividend Yield (%) 1.6 1.4 1.3 1.3

Income Tax 1,360 2,261 1,833 1,942 Current Liabilities 28,717 31,368 23,299 24,244 Revenue Growth (%) 110.5 12.8 4.2 3.8

Profit from Continuing Opera 3,030 5,181 5,837 6,195 AP & Other Payables 12,139 13,199 13,352 14,268 EBITDA Growth (%) 190.9 9.6 2.0 0.0

Profit from Discontinued Ope -208 -115 0 0 Short-Term Financial Liab 8,502 9,696 9,698 9,708 Operating Profit Growth (%) 275.3 11.0 4.6 7.0

Net Profit 2,822 5,066 5,837 6,195 Other Current Liabilities 8,076 8,473 249 268 EPS Growth (%) -88.5 119.1 26.5 6.1

Controlling Interests 766 1,677 2,122 2,252 Non-Current Liabilities 32,004 32,652 24,759 25,402 Accounts Receivable Turno 8.0 8.5 8.4 8.4

Non-Controlling Interests 2,057 3,389 3,715 3,943 Long-Term Financial Liab 23,196 23,405 15,405 15,405 Inventory Turnover (x) 14.2 13.1 11.8 11.8

Total Comprehensive Profit 2,867 4,466 5,837 6,195 Other Non-Current Liabilit 8,808 9,247 9,354 9,997 Accounts Payable Turnover 8.9 8.9 8.9 8.9

Controlling Interests 766 1,395 -246 -261 Total Liabilities 60,721 64,021 48,059 49,645 ROA (%) 2.8 4.8 5.6 6.0

Non-Controlling Interests 2,101 3,071 6,083 6,456 Controlling Interests 13,113 13,660 15,574 17,602 ROE (%) 6.0 12.5 14.5 13.6

EBITDA 10,494 11,503 11,737 11,732 Capital Stock 15 15 15 15 ROIC (%) 6.6 7.1 7.8 8.3

FCF (Free Cash Flow) 4,175 1,958 3,201 2,272 Capital Surplus 5,646 5,017 5,017 5,017 Liability to Equity Ratio (%) 143.5 139.9 93.5 86.6

EBITDA Margin (%) 12.7 12.3 12.1 11.6 Retained Earnings 8,368 9,838 11,751 13,780 Current Ratio (%) 113.0 112.2 130.7 140.2

Operating Profit Margin (%) 6.4 6.3 6.3 6.5 Non-Controlling Interests 29,214 32,096 35,811 39,755 Net Debt to Equity Ratio (%) 46.5 47.9 36.9 29.8

Net Profit Margin (%) 0.9 1.8 2.2 2.2 Stockholders' Equity 42,327 45,756 51,385 57,357 Interest Coverage Ratio (x) 6.6 6.4 0.0 0.0 Source: SK Holdings, Mirae Asset Daewoo Research estimates

19| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research [IT Services/Software] ICT market overview for 2018

New ICT technologies • The Korean government has designated key ICT areas—e.g., 5G, cloud computing, blockchain—in which domestic that will lead the Fourth firms are likely to gain early leads backed by strong technological competitiveness. • The aforementioned technologies are likely to facilitate hyper-connectivity, which should help accelerate the Industrial Revolution Fourth Industrial Revolution in Korea. • Against this backdrop, domestic ICT firms are expected to strive to build differentiated competitiveness to secure new business opportunities.

Key ICT issues for 2018

2018 vs. 2017

10 ICT keys in 2018 Next- Smart Realistic Safety/ Autono- Block- 5G gen IoT AI Cloud disaster mous security city media prevention vehicles chain

10 ICT keys in 2017 Cloud Smart Info Intelli- Realistic Healthcare Smart Autono- IoT 5G mous big data devices security gence media ICT home vehicles

Source: Telecommunications Technology Association, Mirae Asset Daewoo Research

20| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research I. Cloud services

ICT cost reductions via cloud solutions • Cloud computing: Users can lease servers, storage, and software they need. • Service models: Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS) • Cloud computing can help users reduce costs for the establishment and management of ICT systems high accessibility, scalability, and distributability. • The top five cloud service providers—Amazon AWS, Microsoft, Google, IBM, and Alibaba—claim 60% of the global market.

Cloud service market outlook Overview of global cloud infrastructure service market

Source: Gartner, Mirae Asset Daewoo Research Source: Synergy Research Group, Mirae Asset Daewoo Research

21| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research II. Blockchain

Blockchain enables smart contracts

• A blockchain is a P2P distributed ledger where participants jointly verify transaction data and record/store the date in a sequential chain of cryptographic hash-linked blocks. Accordingly, blockchain technology can ensure data integrity without third-party verification. • Blockchain is a new paradigm for transactions that can be applied to logistics, retail, public services, and financial services. • The domestic blockchain market: W12bn in 2015  W356.2bn in 2022 (CAGR of +61.7%); The global market is projected to grow to W11.2tr in 2022 (according to Gartner)

Domestic blockchain market trend and outlook Development of blockchain

(Wbn) 400 Blockchain Blockchain Blockchain Blockchain 1.0 2.0 3.0 4.0 356 350

Expansion Proliferation 300 Introduction Stabilization

250 2013-16 2017-22 221 2009-13 2022-30

200 - Individual Convergence (corporate) with other Fully- Open industries 150 137 decentralized blockchains -Smart contracts infrastructure

100 85 SCM, energy, etc. Ethereum Budget 52 management, 50 32 Bitcoin elections, 12 20 OTC trading of public services, non-NASDAQ Hyperledgers etc. 0 stocks 2015 2016 2017 2018F 2019F 2020F 2021F 2022F

Source: KIST, Mirae Asset Daewoo Research Source: SPRI, Mirae Asset Daewoo Research

22| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research Samsung SDS (018260 KS)

IT services earnings remain strong

Investment points (Maintain) Trading Buy • The IT services business has entered a structural growth phase; IT investments are now being considered strategically important for improving corporate competitiveness. Target Price (12M, W) 280,000 • Revenue growth is expected to continue, driven by new businesses, including solutions, smart factory, analytics, and cloud services. Share Price (5/4/18, W) 218,500 • Samsung SDS’s targets by business: ① Solutions/analytics (proprietary solutions): 2018 revenue forecast of W600bn; 2020 target of W1.5tr Expected Return 28% ② Smart factories ( sector): 2018 revenue forecast of W500bn; 2020 target of W1tr ③ Cloud services (cloud service brokerage): 2018 revenue forecast of W700bn; 2020 target of W1tr • The company introduced Nexledger, a blockchain platform, to provide infrastructure for a wide range of OP (18F, Wbn) 863 businesses (e.g., financial, electronics, manufacturing, and logistics). Consensus OP (18F, Wbn) 867 • Based on its ample cash holdings of W3.2tr, the company is expected to actively seek M&A opportunities to EPS Growth (18F, %) 22.7 find new growth drivers and diversify its business portfolio. Market EPS Growth (18F, %) 16.2 Risks P/E (18F, x) 26.0 • Samsung SDS could be hit by strengthening regulations on related-party transactions due to its high Market P/E (18F, x) 9.4 proportion of revenue from group affiliates. KOSPI 2,461.38 • Uncertainties still remain over Samsung Group’s ownership restructuring. 170 Market Cap (Wbn) 16,907 Samsung SDS FY (Dec.) 12/14 12/15 12/16 12/17 12/18F 12/19F Shares Outstanding 77 160 Revenue (Wbn) 7,898 7,853 8,180 9,299 10,292 11,328 (mn) KOSPI Free Float (%) 42.6 150 OP (Wbn) 593 588 627 732 863 976

Foreign Ownership (%) 11.4 140 OP margin (%) 7.5 7.5 7.7 7.9 8.4 8.6

Beta (12M) 1.83 130 NP (Wbn) 413 439 464 530 651 720

52-Week Low 142,000 120 EPS (W) 5,336 5,674 5,995 6,854 8,407 9,306 52-Week High 264,000 110 ROE (%) 10.4 10.1 9.5 9.9 11.1 11.2

(%) 1M 6M 12M100 P/E (x) 55.0 44.8 23.3 29.2 26.0 23.5 90 Absolute -8.8 3.8 53.9 P/B (x) 5.5 4.3 2.1 2.8 2.7 2.5 80 Relative -10.7 7.9 40.117.4 17.8 17.12 18.4 Div.Yield (%) 0.2 0.2 0.5 1.0 1.1 1.2 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Samsung SDS, Mirae Asset Daew oo Research estimates

23| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research Samsung SDS (018260 KS)

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

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

Revenue 8,180 9,299 10,292 11,328 Current Assets 4,548 5,117 6,251 7,344 P/E (x) 23.3 29.2 26.0 23.5

Cost of Sales 6,762 7,805 8,557 9,430 Cash and Cash Equivalen 1,190 931 1,548 2,097 P/CF (x) 9.5 13.3 14.0 12.7

Gross Profit 1,418 1,494 1,735 1,898 AR & Other Receivables 1,874 1,962 2,204 2,459 P/B (x) 2.1 2.8 2.7 2.5

SG&A Expenses 791 763 872 922 Inventories 16 25 28 31 EV/EBITDA (x) 8.6 11.9 11.0 9.3

Operating Profit (Adj) 627 732 863 976 Other Current Assets 1,468 2,199 2,471 2,757 EPS (W) 5,995 6,854 8,407 9,306

Operating Profit 627 732 863 976 Non-Current Assets 2,294 2,160 1,821 1,467 CFPS (W) 14,631 15,045 15,655 17,233

Non-Operating Profit 125 20 40 24 Investments in Associates 41 41 46 51 BPS (W) 66,457 71,854 79,511 86,318

Net Financial Income 30 41 45 42 Property, Plant and Equipm 1,052 1,029 803 565 DPS (W) 750 2,000 2,500 2,700

Net Gain from Inv in Associat 4 2 3 3 Intangible Assets 1,041 935 814 692 Payout ratio (%) 11.3 28.6 29.3 28.6

Pretax Profit 752 752 903 1,000 Total Assets 6,842 7,278 8,072 8,811 Dividend Yield (%) 0.5 1.0 1.1 1.2

Income Tax 238 210 243 270 Current Liabilities 1,347 1,325 1,488 1,660 Revenue Growth (%) 4.2 13.7 10.7 10.1

Profit from Continuing Opera 514 542 660 730 AP & Other Payables 491 511 574 641 EBITDA Growth (%) 1.5 7.3 13.5 10.6

Profit from Discontinued Ope 0 0 0 0 Short-Term Financial Liab 5 1 1 1 Operating Profit Growth (%) 6.6 16.7 17.9 13.1

Net Profit 514 542 660 730 Other Current Liabilities 851 813 913 1,018 EPS Growth (%) 5.7 14.3 22.7 10.7

Controlling Interests 464 530 651 720 Non-Current Liabilities 203 233 262 293 Accounts Receivable Turno 8.3 8.2 8.0 7.9

Non-Controlling Interests 50 11 9 10 Long-Term Financial Liab 2 0 0 0 Inventory Turnover (x) 496.3 453.8 391.5 385.0

Total Comprehensive Profit 554 478 660 730 Other Non-Current Liabilit 201 233 262 293 Accounts Payable Turnover 17.3 18.7 18.2 17.9

Controlling Interests 500 467 638 706 Total Liabilities 1,551 1,558 1,751 1,953 ROA (%) 7.8 7.7 8.6 8.7

Non-Controlling Interests 54 11 22 24 Controlling Interests 5,141 5,558 6,151 6,677 ROE (%) 9.5 9.9 11.1 11.2

EBITDA 992 1,064 1,208 1,336 Capital Stock 39 39 39 39 ROIC (%) 14.4 17.7 22.9 28.2

FCF (Free Cash Flow) 433 643 935 1,023 Capital Surplus 1,297 1,297 1,297 1,297 Liability to Equity Ratio (%) 29.3 27.2 27.7 28.5

EBITDA Margin (%) 12.1 11.4 11.7 11.8 Retained Earnings 3,875 4,347 4,940 5,466 Current Ratio (%) 337.6 386.3 420.0 442.3

Operating Profit Margin (%) 7.7 7.9 8.4 8.6 Non-Controlling Interests 150 161 170 181 Net Debt to Equity Ratio (%) -46.3 -51.1 -59.9 -67.0

Net Profit Margin (%) 5.7 5.7 6.3 6.4 Stockholders' Equity 5,291 5,719 6,321 6,858 Interest Coverage Ratio (x) 463.7 384.8 514.5 545.4 Source: Samsung SDS, Mirae Asset Daewoo Research estimates

24| 2H18 Outlook [Holding Companies, IT Services/Software] 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) 10/31/2017 Buy 390,000 Samsung SDS(018260) 02/04/2018 Trading Buy 280,000 08/15/2017 Buy 350,000 07/19/2017 Buy 240,000 2016.08.30 AFTER 1YR 01/24/2017 Buy 200,000 08/30/2015 Buy 330,000 04/29/2016 Buy 270,000

(W) SK Holdings (W) Samsung SDS

500,000 300,000 400,000 250,000 200,000 300,000 150,000 200,000 100,000

100,000 50,000

0 0 May 16 May 17May May 16 18 May 17 May 18

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 & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 75.00% 11.11% 13.89% 0.00% Investment Banking Services 70.73% 19.51% 9.76% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2018)

25| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research APPENDIX 1

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Hyundai Glovis, Hyundai Mobis, SK Holdings, Samsung SDS, Samsung C&T Corporation as an underlying asset, and other than this, Mirae Asset Daewoo has no other special interests in the covered companies.

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 or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in 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. 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.

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26| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research APPENDIX 1

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27| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research APPENDIX 1

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28| 2H18 Outlook [Holding Companies, IT Services/Software] Mirae Asset Daewoo Research