November 8, 2019 Korea Daily Focus

Company News & Analysis (035720/Buy/TP: W185,000) Raise TP Time to show its strength

NAVER (035420/Buy/TP: W230,000) Another earnings surprise looks likely in 4Q19

Studio Dragon (253450/Buy/TP: W87,000) Priced to buy

CJ ENM (035760/Trading Buy/TP: W195,000) Downgrade rating & Lower TP Tighter production cost control is needed

Lotte Data Communication (286940/Buy/TP: W63,000) Focus on 4Q19 rather than weak 3Q19

CJ Logistics (000120/Buy/TP: W210,0000) Raise TP From quantitative to qualitative growth

GS Retail (007070/Buy/TP: W48,000) 3Q19 review: Increasing store competitiveness

BGF Retail (282330/Buy/TP: W240,000) Lower TP Differentiation is the key

Dentium (145720/Buy/TP: W85,000) China competitiveness to improve on local plant approval

Vatech (043150/Buy/TP: W38,000) Market-specific strategies are paying off

Sector News & Analysis Airlines (Neutral) October IIA data: Traffic recovers, except for Japan

This document is a summary of a report prepared by Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) and published on our website. Please review the compliance notices contained in the original report. Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Mirae Asset Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for informational purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose.

Kakao (035720 KS ) Time to show its strength

Internet 3Q19 review: Slightly above our estimates Company Report For 3Q19, Kakao announced revenue of W783.2bn (+31% YoY) and operating profit of November 8, 2019 W59.1bn (+93% YoY), slightly exceeding our expectations (W760bn and W58 bn, respectively).

Earnings improved thanks to: 1) the recognition of new revenue from KakaoTalk chat tab ads (product name: Bizboard); 2) strong paid cont ent revenue (KakaoPage, (Maintain) Buy KakaoMusic); and 3) revenue growth in New Biz (KakaoPay and Kakao Mobility) . Notably, revenue from Talk Biz (KakaoTalk-related revenue) grew 52% YoY, driven by Target Price (12M, W) ▲ 185,000 brisk ad sales. OP margin was 7.5%, the highest level since 3Q17. Labor expenses increased by W15bn Share Price (11/07/19, W) 151,000 QoQ due to Chuseok bonus payments and payments for unused vacation time. Despite the increase in the absolute amount of labor expenses and active investments in new Expected Return 23% businesses, we believe the earnings structure began to stabilize in 3Q19.

The 3Q19 earnings release confirmed various positive business indicators. Transaction OP (19F, Wbn) 208 volumes for KakaoPage and Japan-based , which are Kakao's services Consensus OP (19F, Wbn) 177 (and potential IPO candidates), increased in 3Q19. During 1Q-3Q19, to tal transaction volume for Kakao’s webtoon services amounted to 160% of the full-year 2018 level. In EPS Growth (19F, %) 226.0 addition, KakaoPay’s transaction volume increased to W12.9tr in 3Q19. Meanwhile, we Market EPS Growth (19F, %) -31.6 expect money transfer fees, a key cost factor, to decline in early 2020 with the P/E (19F, x) 75.6 introduction of the open banking system. Market P/E (19F, x) 14.3 KOSPI 2,144.29 New Biz (mobility and financial product sales) to materialize in 4Q19

Market Cap (Wbn) 12,664 For 4Q19, we forecast Kakao to post revenue of W866bn (+28.6% YoY) and operating Shares Outstanding (mn) 86 profit of W80bn (+1,768% YoY). We expect OP margin to improve markedly in 4Q19, Free Float (%) 66.1 supported by a sharp increase in high-margin KakaoTalk Bizboard sales. Foreign Ownership (%) 29.9 We expect Kakao to fully implement new mobility businesses ( Blue and Kakao Beta (12M) 0.06 T Venti) and KakaoPay’s insurance business ( jeonse deposit insurance) in 4Q19. 52-Week Low 95,600 52-Week High 151,000 Lift TP to W185,000

(%) 1M 6M 12M In light of the 3Q19 earnings report, we revise up our 2019 and 20 20 revenue forecasts Absolute 12.3 18.4 57.9 by 0.7% and 1.9%, respectively, and our 2019 and 2020 net profit forecasts by 7.1% and Relative 5.9 20.2 53.1 4.0%, respectively, reflecting growing expectations for KakaoTalk chat tab ads in 2020. We maintain our Buy rating on Kakao and lift our target price to W185,000 (from 160 Kakao KOSPI W177,000). Our target price is based on the sum of the values of Kakao’s business 140 segments, derived by applying the average P/S of peers to the revenues of the

120 respective units.

100

80 11.18 3.19 7.19 11.19

Mirae Asset Daewoo Co., Ltd.

[ Internet ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 1,464 1,972 2,417 3,088 3,868 4,611 Chang -kwean Kim +822 -3774 -1614 OP (Wbn) 116 165 73 208 495 628 [email protected] OP Margin (%) 7.9 8.4 3.0 6.7 12.8 13.6

NP (Wbn) 58 109 48 168 369 421 EPS (W) 874 1,602 613 1,998 4,290 4,894 ROE (%) 1.9 2.9 1.0 3.2 6.7 7.2

P/E (x) 88.1 85.5 168.0 75.6 35.2 30.9 P/B (x) 1.5 2.3 1.7 2.5 2.3 2.1 Dividend Yield (%) 0.2 0.1 0.1 0.1 0.1 0.1 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

NAVER (035420 KS) Another earnings surprise looks likely in 4Q19

Internet 4Q19 e-commerce battle: September data point to win for NAVER’s C2C mall Company Report NAVER and Coupang have been rapidly forming a duopoly in the e-commerce market November 8, 2019 in 2H19. According to WiseApp data, NAVER held on to the no. 1 spot in terms of transaction volume in September, while Coupang rose to second place for the first time ever. The pace of growth is important. WiseApp data show that Coupang’s transaction (Maintain) Buy volume nearly tripled from W0.57tr in January 2018 to W1.5tr in September 2019. We forecast NAVER’s 2019 total e-commerce transaction volume to grow 29% YoY to Target Price (12M, W) 230,000 W19tr. In particular, we expect transaction volume of NAVER’s C2C mall Smart Store (300 sellers and 8mn products at end-3Q19) to expand more than 50% YoY in 2019, Share Price (11/07/19, W) 165,500 following a 58% YoY increase in 2018. According to data released in November by Statistics Korea, domestic online shopping Expected Return 39% transaction volume growth accelerated from 21.4% YoY in August to 22.3% YoY in September. Growth was particularly strong in apparel, electronics, and cosmetics— categories in which NAVER’s C2C mall enjoys an advantage. OP (19F, Wbn) 786 Consensus OP (19F, Wbn) 776 The fourth quarter is traditionally a peak season, during which almost 40% of annual e- commerce transaction volume takes place, led by categories like apparel and EPS Growth (19F, %) -46.2 electronics. Market EPS Growth (19F, %) -31.6 P/E (19F, x) 78.2 NAVER Webtoon’s total and US revenue in October grew 25% and 45%, Market P/E (19F, x) 14.3 respectively, from 3Q19 monthly averages KOSPI 2,144.29 NAVER Webtoon’s growth has been picking up pace in 4Q19. Data from market Market Cap (Wbn) 27,277 researcher Sensor Tower reveal that NAVER Webtoon’s total revenue in October grew Shares Outstanding (mn) 165 25% from the monthly average in 3Q19. Free Float (%) 77.1 Downloads in the US have increased sharply after marketing campaigns were Foreign Ownership (%) 59.1 concentrated during the summer break season. NAVER Webtoon’s US revenue, which Beta (12M) 0.35 grew 70% QoQ in 3Q19, expanded 45% in October from the monthly average in 3Q19. 52-Week Low 106,500 The US as a percentage of NAVER Webtoon’s total revenue has now increased to the 52-Week High 167,000 mid-20% level.

(%) 1M 6M 12M Rally has just begun and could last two to three years Absolute 8.2 33.5 43.3 Relative 2.0 35.5 38.9 NAVER’s 3Q19 earnings results once again confirmed the strong growth of its core advertising and e-commerce businesses. Meanwhile, data on 1) September e- 160 NAVER KOSPI commerce transaction volume by platform, 2) domestic e-commerce transaction

140 volume, and 3) NAVER Webtoon’s October revenue all point to another strong quarter in 4Q19. 120 We believe NAVER’s global new businesses, including and finance (including 100 LINE [3938 JP/CP: JPY4,415]), are making impressive progress in 4Q19, continuing the 80 trends seen in 2Q19 and 3Q19. In our view, expectations on growth have only just 11.18 3.19 7.19 11.19 begun. We maintain our Buy rating and target price of W230,000 on NAVER.

Mirae Asset Daewoo Co., Ltd.

[Internet] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 4,023 4,678 5,587 6,610 7,714 8,882 Chang-kwean Kim +822-3774-1614 OP (Wbn) 1,102 1,179 943 786 1,385 1,760 [email protected] OP Margin (%) 27.4 25.2 16.9 11.9 18.0 19.8 NP (Wbn) 749 773 649 349 804 1,123 EPS (W) 4,546 4,689 3,937 2,116 4,878 6,814 ROE (%) 26.2 18.5 13.0 6.5 13.6 16.4 P/E (x) 34.1 37.1 31.0 78.2 33.9 24.3 P/B (x) 5.2 4.8 3.1 4.0 3.6 3.1 Dividend Yield (%) 0.1 0.2 0.3 0.2 0.2 0.2 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

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

Studio Dragon (253450 KQ /Buy )

Priced to buy

Media ¢ 3Q19 review: In-line results ¢ Production companies to benefit from platform competition in 2020 Issue Comment ¢ Downside risk is limited; Accumulate shares in anticipation of 2020 November 8, 2019

3Q19 review: In-line results Mirae Asset Daewoo Co., Ltd. For 3Q19, Studio Dragon reported consolidated revenue of W131.2bn (+6.0% YoY; all growth figures hereafter are YoY) and operating profit of W10.9bn (-49.3%). Operating profit was [ Media ] consistent with the consensus (W11.9bn) and our estimate (W10.9bn). Profit contracted YoY,

Jeong -yeob Park affected by weaker licensing revenue caused by a high base of comparison (related to Mr. +822 -3774 -1652 Sunshine ). However, revenue reached a quarterly record, driven by the production of a new [email protected] original drama ( Love Alarm ), the scaling up of intellectual properties, and an increase in the

number of titles produced. Major globally licensed titles in the quarter included Designated Survivor: 60 Days (Netflix [NFLX/CP: US$289.57]), Hotel Del Luna (regional sales), and Arthdal Chronicles (eight episodes to Netflix).

Platform competition to intensify in 2020

In 2020, we believe the media industry will once again face seismic changes due to competition among OTT platforms, leading to more bargaining power for content producers. In Korea, existing broadcast networks are strategically increasing content investments (SBS will air The King: Eternal Monarch ), as are new platforms such as Wavve (broadcast networks + SK Telecom; W300bn in total by 2023). Overseas, Disney (DIS/CP: US$132.96), Apple (AAPL/CP: US$259.43), Warner Media, and NBCUniversal have launched OTT platforms, signaling intensifying content competition.

With new platforms likely to pursue regional expansion to achieve economies of scale, we expect production companies, including Studio Dragon, to benefit. This should materialize into key earnings variables, such as bigger production budgets across new platforms and higher pricing. For Studio Dragon’s third original title (to air in 2020), we believe the cost per episode and margins are around double current levels. Global contract wins by production companies bear close watching going forward.

Accumulate shares in anticipation of 2020 We maintain our Buy call and target price of W87,000 on Studio Dragon. We see a number of potential tailwinds in 2020, including: 1) increases in budgets and pricing due to the emergence of multi-OTTs; 2) content collaboration in Western countries (launch of US subsidiary is imminent); and 3) the opening of the Chinese market. We believe Studio Dragon is well-positioned to benefit from upcoming industry changes, given its undisputed market leadership. That said, the outlook for 4Q19 looks less promising, as the number of titles produced (i.e., top line) is set to decrease due to less content on the OCN channel. There are also upside risks to amortization expenses related to the changes in useful life applied since 3Q18. Still, we believe investors should accumulate shares, looking beyond the 4Q19 earnings headwinds to the company’s transition into a global player in 2020.

FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 0 287 380 481 613 666 OP (Wbn) 0 33 40 39 71 80 OP Margin (%) - 11.5 10.5 8.1 11.6 12.0 NP (Wbn) 0 24 36 33 57 61 EPS (W) 0 1,050 1,278 1,162 2,041 2,175 ROE (%) 0.0 12.9 9.3 7.8 12.4 11.7 P/E (x) - 61.9 72.3 67.4 38.4 36.0 P/B (x) - 4.9 6.5 5.1 4.5 4.0 Dividend Yield (%) - 0.0 0.0 0.0 0.0 0.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

CJ ENM (035760 KQ ) Tighter production cost control is needed

Media 3Q19 review: OP sharply misses Results Comment For 3Q19, CJ ENM reported consolidated revenue of W1.15tr (+6.9% YoY ; all growth figures hereafter are YoY) and operating profit of W64.1bn (-16.3%). Operating profit fell November 8, 2019 far short of the consensus (W84.8bn) and our expectation (W76.8bn). Earnings quality was also disappointing, as the media/music segments ( considered the company’s growth drivers) fared poorly, while the commerce/movie segments performed well. Media (operating profit of W16.1bn; -56.8%): Ad revenue was sluggish, partly due to (Downgrade) Trading Buy the defection of Japanese advertisers and unfavorable macro conditions. Top-line growth slowed materially in TV ads (+0.8%) and the digital segment (+24.4%). While the Target Price (12M, W) ▼ 195,000 third quarter is traditionally a slow season, we estimate media operating profit when excluding Studio Dragon (253450 KQ/Buy/TP: W87,000/CP: W78,300) was just W5.2bn. Share Price (11/07/19, W) 167,300 Commerce (operating profit of W29.4bn; +64.8%): Both revenue and margins continued to improve on the back of increased sales of in-house brands (+61.9%). Expected Return 17% Film (operating profit of W15.8bn; turning to profit). The films Exit and The Bad Guys performed strongly in the box office. The recognition of Parasite exports and ancillary revenue from older titles led to better-than-expected operating profit. OP (19F, Wbn) 328 Consensus OP (19F, Wbn) 364 Music (operating loss of W1bn; turn to loss): Despite strong revenue from internally produced intellectual property (IP), the music business suffered a loss due to the front- EPS Growth (19F, %) -18.1 loading of production costs of several programs, including Produce 101 Japan (the Market EPS Growth (19F, %) -31.6 difference in timing of revenue and expense recognition caused a loss of W4.5bn). P/E (19F, x) 17.7 Market P/E (19F, x) 14.3 Either ad revenue needs to turn around or production costs need to be scaled KOSDAQ 666.15 back On its earnings call yesterday, CJ ENM lowered its 2019 operating profit guidance to Market Cap (Wbn) 3,669 W350bn (from W370bn previously). We see no reason to react twice, as the revision Shares Outstanding (mn) 22 merely reflects the sluggish 3Q19 results. That said, we acknowledge that channel Free Float (%) 46.8 operators will face a tougher environment in 2020, as they are likely to cede some Foreign Ownership (%) 18.9 share to new media platforms amid increasing competition. Beta (12M) 0.77 From this perspective, the sharp slowdown in 3Q19 TV ad revenue is somewhat 52-Week Low 150,900 disturbing. The company had long showed resilience to weakness in the ad and 52-Week High 243,800 broadcast markets because of its strong content competitiveness . TV ads remain a major source of income for the company, accounting for 40% of media revenue. If the (%) 1M 6M 12M deceleration in TV ads continues in 4Q19, we think the company will need to take bold Absolute 7.3 -23.2 -23.4 steps to cushion margins, such as tightening its control on production costs. Relative 1.0 -13.1 -21.6 Downgrade to Trading Buy and lower TP to W195,000 130 CJ ENM KOSDAQ We downgrade our rating on CJ ENM to Trading Buy and lower our target price to 110 W195,000. Our SOTP-derived target price represents the sum of the values of the media business (W1.6tr; P/NOPLAT of 20x), the commerce business (W1tr; P/NOPLAT of 90 11x), and equity holdings (W2.5tr). 70 While we see some potential tailwinds in 2020, including entry into the US drama 50 market through a subsidiary and a possible re-rating of the music business, we think it 11.18 3.19 7.19 11.19 is difficult to focus on such prospects when margins are at risk. We recommend taking a cautious approach until worries about the ad slowdown are addressed or tighter Mirae Asset Daewoo Co., Ltd. control on production costs is confirmed in management’s 2020 guidance.

[ Media ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 2,209 2,260 3,427 4,730 4,667 4,605 Jeong -yeob Park +822 -3774 -1652 OP (Wbn) 179 224 251 328 358 1,810 [email protected] OP margin (%) 8.1 9.9 7.3 6.9 7.7 39.3

NP (Wbn) 23 131 163 207 277 1,343 EPS (W) 3,769 21,054 11,514 9,435 12,609 61,230 ROE (%) 2.6 13.5 8.6 7.3 9.0 34.9

P/E (x) 43.2 11.0 17.5 17.7 13.3 2.7 P/B (x) 1.1 1.4 1.4 1.1 1.0 0.7 Dividend yield (%) 1.5 1.3 0.6 0.7 0.7 0.7 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Lotte Data Communication (286940 KS ) Focus on 4Q19 rather than weak 3Q19

3Q19 review: OP of W5.5bn (-25.2% YoY), missing consensus due to one-off expenses Results Comment November 8, 2019 For 3Q19, Lotte Data Communication announced revenue of W205.1bn (+6.8% YoY), operating profit of W5.5bn (-25.2% YoY), and net profit attributable to controlling interests of W5.6bn (+19.8% YoY). Earnings missed the consensus on one-off expenses (W4.3bn; severance packages) (Maintain) Buy related to the merger with Hyundai Information Technology (HIT; merged on July 1 st ). Adjusted operating profit (stripping away the one-off expenses) was W9.8bn (+34.2% Target Price (12M, W) 63,000 YoY), showing continued improvement. Meanwhile, as part of business reorganization following the merger, some personnel Share Price (11/07/19, W) 44,450 were reassigned from the system management unit to the system integration unit. As a result, system management revenue declined by around W15bn, with its contribution Expected Return 42% to total revenue dropping YoY and QoQ to 17.6%.

4Q19 preview: Record-high quarterly OP of W19.7bn (+17.3% YoY) OP (19F, Wbn) 45 For 4Q19, we forecast Lotte Data Communication to post record-high quarterly results, Consensus OP (19F, Wbn) 48 with revenue of W287.2bn (+21.8% YoY), operating profit of W19.7bn (+17.3% YoY), and EPS Growth (19F, %) 74.4 net profit attributable to controlling interests of W15.4bn (+60.1% YoY). We expect Market EPS Growth (19F, %) -31.6 revenue and profits to grow YoY, despite a high base of comparison. (In 4Q18, strong P/E (19F, x) 11.6 seasonality coincided with the implementation of projects delayed from 3Q18.) Market P/E (19F, x) 14.3 Despite the weakness in 3Q19 caused by one-off expenses, we expect the company to KOSPI 2,144.29 easily exceed its full-year guidance (revenue growth of more than 10% and OP margin Market Cap (Wbn) 684 of more than 4.8%). Shares Outstanding (mn) 15 Maintain Buy and TP of W63,000; Biggest beneficiary of Lotte Group’s IT Free Float (%) 30.5 spending Foreign Ownership (%) 2.7 Beta (12M) -0.06 We reaffirm our Buy rating and target price of W63,000 on Lotte Data Communication. 52-Week Low 30,100 At a 2019F P/E of 16.3x (level after stripping away the loss carryforward of W15bn 52-Week High 51,300 related to the HIT merger), the stock’s valuation looks attractive relative to peers such as Samsung SDS (018260 KS/Buy/TP: W290,000/CP: W200,000; 22.1x) and Hyundai (%) 1M 6M 12M Autoever (307950 KS/CP: W53,600; 18.6x). Given the likely earnings improvement in Absolute 0.3 -2.5 31.3 4Q19, we recommend using any share price correction caused by the weak 3Q19 Relative -5.4 -1.0 27.3 results as an opportunity to accumulate shares.

150 Lotte Data Communication Lotte Corp. (004990 KS/Buy/TP: W52,000/CP: W37,500) has launched a digital KOSPI 130 transformation strategy that focuses on realizing smart factory, smart logistics, smart retail, and smart services across the group. As the only IT services firm under Lotte 110 Group’s umbrella, Lotte Data Communication stands to benefit from the group’s

90 aggressive IT investments.

70 Moreover, Lotte Data Communication secured new turnkey orders in 2H19 11.18 3.19 7.19 11.19 (encompassing consulting, design, control, installation, and maintenance), which should help the firm enhance its competitiveness and secure business opportunities Mirae Asset Daewoo Co., Ltd. inside and outside of the group.

[ Conglomerates/Software ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) - 149 812 895 1,004 1,140 Dae -ro Jeong +822 -3774 -1634 OP (Wbn) - 5 39 45 57 68 [email protected] OP margin (%) - 3.4 4.8 5.0 5.7 6.0

NP (Wbn) - 2 26 57 47 56 EPS (W) - 1,139 2,205 3,844 3,076 3,611 ROE (%) - 1.0 9.6 15.4 11.5 12.3

P/E (x) - - 16.1 11.6 14.5 12.3 P/B (x) - - 1.4 1.7 1.6 1.4 Dividend yield (%) - - 1.8 1.5 1.5 1.5 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

CJ Logistics (000120 KS ) From quantitative to qualitative growth

Logistics 3Q19 review: Record-high OP, helped by ASP gains and cost savings Company Report For 3Q19, CJ Logistics reported revenue of W2.6tr (+8.4% YoY). Contract logistics November 8, 2019 revenue was down 1.2% YoY, hurt by weakness in port & delivery (P&D) and de- marketing. However, revenue growth remained solid, supported by healthy growth in parcel delivery (+13.0% YoY) and global (+13.6% YoY) revenue. Parcel delivery revenue was in line with expectations thanks to volume growth (+9.5% YoY) and ASP gains (+3.2% YoY). (Maintain) Buy Operating profit was W88.7bn, handily beating our estimate (W75.7bn) and the market Target Price (12M, W) ▲▲▲ 210,000 consensus (W78.4bn) and surpassing the previous record set in 4Q18 (W87.4bn). SG&A expense ratio declined to 6% , supported by a decline in delivery fees and the Share Price (11/07/19, W) 163,000 completion of amortization on certain intangible assets. Parcel delivery OP margin was 4.6%, supported by a volume recovery and higher ASP. Expected Return 29% Global business OP margin was 1.7% , helped by margin improvements at overseas subsidiaries such as CJ Gemadept (Vietnam), CJ ICM (UAE), and CJ Darcl (India). OP (19F, Wbn) 303 Net profit attributable to controlling interests was W6bn, below the consensus, due to Consensus OP (19F, Wbn) 283 an impairment loss (W7.6bn) from the revaluation of deposits and an increase in corporate income taxes following a regular tax audit. Financing costs remained flattish EPS Growth (19F, %) 11.1 YoY at W28.7bn. Market EPS Growth (19F, %) -31.6 P/E (19F, x) 88.3 Launch of fulfillment business and recovering global business Market P/E (19F, x) 14.3 1) Fulfillment center: CJ Logistics is set to advance into the fulfillment business using KOSPI 2,144.29 its Gonjiam terminal. Of the roughly 115,500m 2 warehouse area, approximately 2 Market Cap (Wbn) 3,718 66,000m is already occupied by tenants such as CJ O Shopping , and the remaining Shares Outstanding (mn) 23 area is likely to be used by major e-commerce companies. In this case, we estimate CJ Free Float (%) 39.4 Logistics will save W30bn in collection and distribution costs annually. In addition, we Foreign Ownership (%) 19.5 expect same-day delivery services enabled by the fulfillment center to contribute more Beta (12M) 0.73 than W50bn in annual profit. 52-Week Low 130,500 2) Global business: The global unit’s gross margin has remained below 10% for two 52-Week High 190,500 years, due to a series of M&A deals. However , overseas subsidiaries in India and the Middle East are displaying margin recoveries. With the completion of post-merger (%) 1M 6M 12M integration, subsidiaries in the US and China are also likely to achieve margin Absolute 15.2 0.9 5.5 improvement. We expect the Thailand subsidiary, which records quarterly losses of Relative 8.6 2.5 2.3 more than W3bn, to turn around at end-2020.

130 CJ Logistics KOSPI 120 Maintain Buy and lift TP to W210,000 110 We maintain our Buy rating on CJ Logistics and raise our target price to W210,000 100 (from W200,000). Our RIM-based target price corresponds to a 2020F P/B of 1.3x, in 90 line with the historical average, and an EV/EBITDA o f 13x, a 20% discount to the 80 historical average. We believe our target price is justified given the likely improvement 70 11.18 3.19 7.19 11.19 in ROE and the strong growth potential of the logistics market.

Mirae Asset Daewoo Co., Ltd.

[ Transport/Energy ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 6,082 7,110 9,220 10,286 11,043 11,909 Jay JH Ryu +822 -3774 -1738 OP (Wbn) 228 236 243 303 344 380 [email protected] OP Margin (%) 3.7 3.3 2.6 2.9 3.1 3.2

NP (Wbn) 56 31 38 42 113 173 EPS (W) 2,446 1,380 1,660 1,845 4,952 7,584 ROE (%) 2.4 1.3 1.5 1.5 3.6 5.3

P/E (x) 73.2 101.4 100.6 88.3 32.9 21.5 P/B (x) 1.4 1.1 1.2 1.1 1.0 1.0 Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0 0.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

GS Retail (007070 KS ) 3Q19 review: Increasing store competitiveness

Retail 3Q19 review: Convenience store strength continues on cost ratio improvements Company Report For 3Q19, GS Retail announced consolidated revenue of W2.38tr (+2.2% YoY) and November 8, 2019 operating profit of W90.6bn (+16.7% YoY). Operating profit was above our projection and the consensus. Despite sluggish same-store sales (SSS) due to unfavorable weather conditions, the company continued to deliver healthy operating profit on the back of 1) cost ratio improvements (70bps) and 2) the rollout of new high-quality stores (including converted stores). (Maintain) Buy Convenience stores: Operating profit grew 17.6% YoY to W89.8bn. SSS was down 1% overall and 2% for general items. SSS growth and traffic were adversely affected by 1) Target Price (12M, W) 48,000 unfavorable weather conditions (such as typhoons during weekends) and 2) th e absence of hit items capable of driving traffic growth. While the latter situation is likely to continue in 4Q19, we believe that as long as weather conditions are supportive, Share Price (11/07/19, W) 38,650 operating profit will be boosted by leverage effects from ongoing cost ratio improvements. Expected Return 24% Supermarkets: Operating profit contracted 57.4% YoY to W0.24bn, dragged down by dwindling traffic caused by the consumer shift to online shopping. The supermarket division has been closing directly operated stores that are underperformin g, while OP (19F, Wbn) 225 increasing the number of smaller franchise stores, which are generally making profits Consensus OP (19F, Wbn) 223 (current percentage of directly operated stores is 60%). As such, we believe supermarket profits will likely improve from 2020. EPS Growth (19F, %) 25.8 Increasing store competitiveness Market EPS Growth (19F, %) -31.6 P/E (19F, x) 19.6 Without the presence of any compelling offerings (such as lunch boxes in the past), convenience store traffic looks unlikely to meaningfully improve across the industry in Market P/E (19F, x) 14.3 2020. However, we believe GS Retail’s stores are becoming more competitive tha n KOSPI 2,144.29 those of its rivals, and this explains why the company’s operating profit has been improving even amid an industry slowdown. In 2020, we expect GS Retail to 1) secure Market Cap (Wbn) 2,976 converted stores that are highly competitive and 2) see a gradual traffic pickup in its Shares Outstanding (mn) 77 existing stores. Free Float (%) 34.1 1) Expanding services: GS Retail has been introducing unique services such as “My Foreign Ownership (%) 20.3 Own Refrigerator” and half-price parcel delivery. While such initiatives are unlikely to Beta (12M) 0.28 provide a meaningful boost to traffic in the near term, we believ e they will serve as 52-Week Low 34,000 major differentiators for GS25 stores over the medium and long term. 52-Week High 42,000 2) Differentiated categories: The company expanded its fried food/coffee-selling stores early on, and we believe those stores are now generating stable revenue. We (%) 1M 6M 12M expect the company’s competitiveness in the food category to strengthen further. Absolute -5.5 3.3 9.2 Maintain Buy and TP of W48,000 Relative -10.9 4.9 5.8 We maintain our Buy call and target price of W48,000 on GS Retail. In 2020, valuation is 120 GS Retail KOSPI unlikely to recover to the high levels seen in 2015, given slowing industry growth and a weak traffic recovery. Nevertheless, we believe operating profit will improve in 2020, 110 driven by 1) continued cost ratio improvements and 2) the addition of converted stores that are highly competitive. In addition, depr eciation expenses related to some of the 100 stores opened in 2015 should come to an end in 2020. Notably, b ecause of its high 90 percentage of rented sites, GS Retail bears a lower depreciation burden than its peers.

80 If GS Retail demonstrates differentiated competitiveness by expanding into distinctive 11.18 3.19 7.19 11.19 services and categories, we think the stock could receive a valuation premium to its peers, regardless of industry growth conditions. Mirae Asset Daewoo Co., Ltd. [ Retail ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 7,402 8,267 8,692 9,003 9,267 9,437 Myoungjoo Kim +822 -3774 -1458 OP (Wbn) 218 166 180 225 254 268 [email protected] OP Margin (%) 2.9 2.0 2.1 2.5 2.7 2.8

NP (Wbn) 274 118 121 152 185 196 EPS (W) 3,562 1,535 1,566 1,970 2,403 2,548 ROE (%) 14.5 5.9 5.9 7.1 8.1 8.1

P/E (x) 13.4 26.3 25.9 19.6 16.1 15.2 P/B (x) 1.8 1.5 1.5 1.3 1.3 1.2 Dividend Yield (%) 2.3 1.5 1.6 1.7 1.7 1.7 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

BGF Retail (282330 KS ) Differentiation is the key

Retail 3Q19 review: Slightly below consensus Company Report For 3Q19, BGF Retail reported consolidated revenue of W1.58tr (+2.8% YoY) and November 8, 2019 operating profit of W64.8bn (-1.2% YoY). Earnings came in slightly below both our forecast and the consensus, as unfavorable weather weighed on traffic and general item same-store sales (SSS) growth. Notably, product margin improvements (+30bps in 3Q1 9 vs. +50bps in 1H19) have continued since 4Q18. Given its focus on cost efficiency, BGF Retail appears on track to achieve operating profit growth in 4Q19 as long as (Maintain) Buy weather conditions and SSS growth (general items) are supportive.

Target Price (12M, W) ▼ 240,000 SSS declined 3% YoY (-3% for general items, -2% for cigarettes) in 3Q19. Traffic declined 4% (vs. -2% in 1H19), hurt by unfavorable weather conditions (such as typhoons during Share Price (11/07/19, W) 189,500 weekends). Despite the absence of base effects related to cigarettes, BGF Retail displayed weaker SSS g rowth in general items than its rivals, due to its 1) somewhat Expected Return 27% high revenue exposure to cigarettes and 2) lower percentage of stores located in the Seoul capital area.

Differentiation is the key to survival OP (19F, Wbn) 194 Consensus OP (19F, Wbn) 204 Convenience store players need to differentiate themselves to attract traffic, as the market is slowing, and stores cannot compete on proximity alone due to the growing EPS Growth (19F, %) -2.9 popularity of delivery services. In particular, we believe top-tier players can achieve Market EPS Growth (19F, %) -31.6 differentiation by: 1) enhancing store competit iveness in ways that can expand traffic P/E (19F, x) 21.9 and increase average customer expenditure; and 2) securing competitive converted Market P/E (19F, x) 14.3 mom-and-pop stores (rather than rolling out new stores for top-line growth). Looking KOSPI 2,144.29 to 2020, we expect BGF Retail to enhance store com petitiveness by offering more competitive food products (helped by the establishment of a central kitchen facility). Market Cap (Wbn) 3,275 Shares Outstanding (mn) 17 Expansion of services: BGF Retail has been expanding the scope of services by Free Float (%) 44.6 increasing the number of stores offering delivery services and fried foods. The Foreign Ownership (%) 34.7 expansion of services is unlikely to drive a strong traffic recovery in the near term, but Beta (12M) 0.27 should bolster revenue growth over the medium and long term. 52-Week Low 166,000 Establishment of a central kitchen: BGF Retail is scheduled to open a central kitchen 52-Week High 232,500 facility in 1Q20. This will enable the firm to increase cost efficiencies in fresh foods and (%) 1M 6M 12M HMR in the near term and offer distinctive products in the medium and long term. Absolute 1.1 -11.0 13.5 Relative -4.7 -9.7 10.0 Maintain Buy, but lower TP to W240,000 We lower our target price on BGF Reta il to W240,000 (from W262,000), as we trimmed 140 BGF Retail KOSPI our multiple to 24x (from 25x) reflecting: 1) the likely slowdown in industry growth in 130 2020; and 2) the absence of hit products (such as lunch boxes in 2015). 120 110 Nevertheless, we reiterate our Buy rating, as BGF Retail is well-positioned to enhance 100 its store competitiveness in 2020 through improvements in the food segment (with the 90 start of the central kitchen). We expect BGF Retail’s existing stores to improve in 2020, 80 11.18 3.19 7.19 11.19 given: 1) limitations on new store rollouts due to the statutory distance between cigarette retailers; and 2) a likely increase in the number of converted mom-and-pop

Mirae Asset Daewoo Co., Ltd. stores.

[ Retail ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) - 939 5,776 5,934 6,205 6,421 Myoungjoo Kim +822 -3774 -1458 OP (Wbn) - 27 190 194 217 229 [email protected] OP Margin (%) - 2.9 3.3 3.3 3.5 3.6

NP (Wbn) - 28 154 150 171 182 EPS (W) - 9,688 8,921 8,666 9,907 10,533 ROE (%) - 7.2 33.9 26.1 24.9 22.3

P/E (x) - 21.7 22.9 21.9 19.1 18.0 P/B (x) - 9.3 6.7 5.2 4.4 3.7 Dividend Yield (%) - 0.5 1.3 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: Company data, Mirae Asset Daewoo Research estimates

Dentium (145720 KS ) China competitiveness to improve on local plant approval MedTech 3Q19 review: Revenue meets consensus Results Comment For 3Q19, Dentium reported revenue of W63.8bn (+38.0% YoY), in line with the consensus. Overseas revenue grew sharply (+35.9% YoY), led by China (+35.9% YoY) November 8, 2019 and India (+75.7% YoY), while domestic revenue (+44.5% YoY) also surprised to the upside. However, operating profit was well below the consensus at W10.9bn (+8.3% YoY; OP margin of 17.1%), affected mainly by changes in the domestic revenue mix (sharp increase in low-margin merchandise/CT revenue). Allowances were not the main (Maintain) Buy cause, as the market had feared. One of Korea’s leading growth stocks Target Price (12M, W) 85,000 1) Long-term clinical data: Armed with more than 15 years of clinical data, Dentium has penetrated overseas dental implant markets still in the early stages of growth. The Share Price (11/07/19, W) 60,400 company has evolved into the world’s seventh-largest implant maker, with overseas top-line CAGR of 25.6% over the past five years. Expected Return 41% 2) A leader in emerging markets: China is the most important region in the global dental implant market, as the number of implants placed in the country per 10,000 people is equivalent to only one-tenth of the global average. It is safe to say that OP (19F, Wbn) 51 Dentium is essentially the no. 1 player in China, given that dealer sales (which have a Consensus OP (19F, Wbn) 53 30% lower ASP than direct sales) account for half of its China revenue. Dentium is also the first foreign company in China to receive regulatory approval for local dental EPS Growth (19F, %) -5.8 implant production, which should further enhance its competitive position in the Market EPS Growth (19F, %) -31.6 country. Elsewhere, the company’s growth in India (where it ranks no. 1) and Rus sia P/E (19F, x) 20.7 also warrants attention. Market P/E (19F, x) 14.3 KOSPI 2,144.29 3) High OP margin: Despite concerns about potential margin erosion, we see several reasons why Dentium is likely to maintain an OP margin in the low-20% range. For one, Market Cap (Wbn) 669 the most important factor when it comes to direct sales is speed. Straumann (STMN Shares Outstanding (mn) 11 SW/CHF888.60) employs roughly 6,000 people but still generates a high OP margin of Free Float (%) 55.3 25%. Dentium has no plans to sharply increase its head count, while the switch to direct sales should drive up ASP. Second, the revenue mix of equipment is unlikely to Foreign Ownership (%) 26.8 increase significantly. And third, allowances are already at record-high levels. Beta (12M) 0.77 52-Week Low 53,100 Reiterate Buy and TP of W85,000 52-Week High 80,600 While 3Q19 earnings fell short of market expectations, we note that allowances were not the main issue. We think what deserves the most attention now is the recent (%) 1M 6M 12M approval of the company’s China plant, which should strengthen its competitiveness in Absolute -6.1 -14.9 -25.1 the all-important China market. Once the China plant goes into operation, the Relative -11.4 -13.6 -27.4 company should be favorably positioned in terms of both pricing and regulatory issues. 130 Dentium KOSPI

110 Denti um is one of the cheapest dental implant stocks in the global market, currently trading at a 12-month forward P/E of 14.8x (vs. 22.7x for global peers). We think the 90 discount is unwarranted, given the company’s compelling growth story and high margins. We reaffirm our Buy rating and target price of W85,000. 70

50 That said, while there is no need to get overly concerned, it is important to keep in 11.18 3.19 7.19 11.19 mind that various allowances related to inventory, returns, and bad debts could occur with high frequency due to the nature of the dental implant business (which relies on Mirae Asset Daewoo Co., Ltd. long-term contracts and credit transactions).

[ MedTech/Healthcare Solutions ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 120 151 186 255 305 374 Choong -hyun Kim, CFA +822 -3774 -1740 OP (Wbn) 29 41 42 51 62 77 [email protected] OP Margin (%) 24.2 27.2 22.6 20.0 20.3 20.6

NP (Wbn) 20 30 34 32 48 60 EPS (W) 1,788 2,716 3,095 2,915 4,306 5,404 ROE (%) 33.7 26.0 19.2 15.4 19.2 19.9

P/E (x) - 22.9 18.6 20.7 14.0 11.2 P/B (x) - 3.8 3.0 2.7 2.3 1.9 Dividend Yield (%) - 0.2 0.3 0.2 0.2 0.2 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Vatech (043150 KQ ) Market -specific strategies are paying off

MedTech 3Q19 review: In-line revenue Results Comment For 3Q19, Vatech delivered revenue of W65bn (+18.5% YoY), in line with the consensus. November 8, 2019 By region, growth was robust in Europe (+70.5% YoY), supported by B2B supply contracts. Growth was also solid in North America (+14.1% YoY) and other markets (+28.4% YoY). Meanwhile, Korea (-6.7% YoY) and Asia (+3.7% YoY) lagged behind. Operating profit grew 26.8% YoY to W10.3bn (OP margin of 15.9%) , in line with the consensus. (Maintain) Buy Market-specific strategies and business diversification for long-term growth Target Price (12M, W) 38,000 1) Improved price competitiveness in China: In China, an important em erging market, Vatech continues to see strong growth fueled by its Smart 3D system, which Share Price (11/07/19, W) 25,600 received regulatory approval in June 2018. Backed by improved price competitiveness, we expect top-line growth to accelerate further. In addition, we expect Vatech to be Expected Return 48% able to begin local production in 2H20, once the China plant is certified for the production of 3D systems (Green 16/18), which should allow the company to further

enhance its portfolio. OP (19F, Wbn) 46 Consensus OP (19F, Wbn) 45 Vatech is adopting market-specific strategies, focusing on intraoral sensors in India (where purchasing power is low) and prioritizing radiology center s over private clinics EPS Growth (19F, %) 51.4 in Mexico. For the full year, we estimate revenue from India and Mexico each to reach Market EPS Growth (19F, %) -31.6 W10bn. P/E (19F, x) 9.2 Market P/E (19F, x) 14.3 2) Aggressive branding strategy in developed markets: We believe that Vatech has KOSDAQ 666.15 expanded its North American market share to 20% in 3D systems and the low teens in 2D systems on the back of differentiation through its low-radiation product lineup. Market Cap (Wbn) 380 Vatech is bolstering top-line growth in Europe, with a focus on B2B supply contracts. Shares Outstanding (mn) 15 Free Float (%) 46.4 3) Business diversification into digital dentistry: Vatech has strengthened its Foreign Ownership (%) 22.3 prosthodontics business by launching 3D intraoral scanners (key equipment used in Beta (12M) 0.81 digital prosthodontics) and recently acquirin g zirconia maker Acucera. We expect new 52-Week Low 19,400 products to begin contributing to earnings full swing in 2H20. 52-Week High 29,050 Maintain Buy and TP of W38,000 (%) 1M 6M 12M We maintain our Buy rating and target price of W38,000 on Vatech. Even though Absolute -0.8 -2.7 8.2 Vatech is forecast to post higher revenue growth in 2020 (9.3%) than global companies Relative -6.6 10.1 10.9 with high exposures to imaging equipment (1.6-3.3%), the stock is trading at a 12- month forward P/E of 8.7x, a steep discount to peers (average of 20.2x). 130 Vatech KOSDAQ 120 In our view, Vatech’s discount largely stems from concerns over insufficient 110 diversification. While the company’s launch of 3D intraoral scanners and acquisition of 100 a zirconia maker may be viewed as somewhat overdue, we view the moves as positive 90 from a share price perspective. We also believe market-specific strategies are paying 80 off, with growth recovering. The stock is excessively undervalued, and share price s 70 11.18 3.19 7.19 11.19 should normalize as earnings improve.

Mirae Asset Daewoo Co., Ltd.

[ MedTech/Healthcare Solutions ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 179 219 234 273 298 328 Choong -hyun Kim, CFA +822 -3774 -1740 OP (Wbn) 30 39 39 46 51 56 [email protected] OP margin (%) 16.8 17.8 16.7 16.8 17.1 17.1

NP (Wbn) 25 79 27 41 44 50 EPS (W) 1,667 5,324 1,835 2,779 2,962 3,345 ROE (%) 19.9 46.1 13.1 17.4 15.8 15.4

P/E (x) 21.7 6.4 11.8 9.2 8.6 7.7 P/B (x) 3.7 2.6 1.5 1.5 1.3 1.1 Dividend yield (%) 0.3 0.3 0.5 0.4 0.4 0.4 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Airlines October IIA data: Traffic recovers, except for Japan

Neutral (Maintain) October IIA data: Traffic recovers, except for Japan 1) Passengers: According to Incheon International Airport (IIA) data, international Industry Report passenger traffic growth remained muted in October, at 1.3% YoY (vs. +0.9% YoY in November 8, 2019 September; all growth figures are YoY unless denoted otherwise). Overall growth was weighed down by an accelerated traffic decline on Japan routes (-38.9% vs. -29.2% in September). That said, traffic improved across all other routes, including China (+5.7% vs. +3.8% in September), Europe (+8.3% vs. +6.0% in September), and the US (+7.6% vs. Mirae Asset Daewoo Co., Ltd. +4.1% in Septembe r). In particular, traffic growth on Southeast Asia routes (+17.0% vs. +13.8% in September) improved to the highest level since April 2018. As a result of [Transport/Energy ] capacity cuts at airlines, the load factor indicator also recovered (-0.2%p vs. -4.0%p in September). Jay JH Ryu +822 -3774 -1738 2) Cargo: In October, international cargo traffic fell at a slower pace than in the [email protected] previous month, declining 5.6% (vs. -9.5% in September). The rate of decline

moderated across most routes, including the US (-7.8% vs. -11.3% in September), Europe (-0.3% vs. -9.1% in September), and China (-0.2% vs. -5.9% in September). Japan was the sole soft spot, with traffic growth worsening to -26.3% (vs. -25.3% in September). The decline in the load factor indicator (-3.2%p vs. -3.4%p in September)

also slowed for the second straight month. 3) Traffic by carrier: In October, international passenger traffic growth improved to 0.4% (vs.-0.7% in September) at Korean Air (003490 KS/Buy/TP: W30,000/CP: W26,950) and 3.7% (vs. +1.8% in September) at Asiana Airlines (020560 KS/Hold/CP: W5,310). Cargo traffic also fell more moderately than in the previous month at both Korean Air (-8.5% vs. -10.2% in September) and Asiana Airlines (-5.0% vs. -11.3% in September).

4) Regional airports: In October, international passenger traffic growth at regional airports (airports excluding IIA and Gimpo International Airport) fell deeper into negative territory (-2.8% vs. -0.2% in September). Helped by ongoing capacity adjustments, the load factor indicator improved (-0.5%p vs. -6.8%p in September).

LCCs: Traffic returns to positive growth, but market share continues to fall in international routes In October, low-cost carrier (LCC) traffic returned to positive growth, rising 4.8% (vs. -3.6% in Sep tember). That said, growth was driven by domestic routes (+12.8%) rather than international routes (-5.0%). Similarly, LCC market share continued to expand in the domestic segment (58% vs. 57.7% in September), but fell below 40% for the first time since April 2018 in the short-haul international segment (39.6% vs. 40.3% in September). By carrier, Jeju Air (089590 KS/Buy/TP: W30,000/CP: W25,450; 10.8% vs. 11.8% in September; traffic growth of 6.3%), Jin Air (272450 KS/Trading Buy/TP: W17,000/CP: W15,750; 5.2% vs. 5.3% in September), and Air Busan (298690 KS/CP: W6,410; 3.6% vs. 3.7% in September) saw market share losses, while T’way Air’s (091810 KS/CP: W5,160) market share (5.8% vs. 5.8% in September) held steady. Japan traffic review: Load factor improves on flight reductions The traffic decline on Japan routes at major airports (Incheon, Gimpo, Cheongju, Gimhae, and Jeju) showed few signs of easing, with traffic plunging 36.6% during the week from late October to early November. That said, flight reductions (-32.0%) appear to be driving a recovery in load factor indicators. In October, load factor indicators improved at full-service carriers (FSCs), including Korean Air (-15.4%p vs. -30.8%p in September) and Asiana Airlines (-12.7%p vs. -22.1%p in Septemb er). Jeju Air’s load factor indicator (-4.7%p vs. -8.0%p in September) also continued to recover.

Pay attention to FSCs in the near term At a time when airline earnings are continuing to deteriorate, we believe market leaders with strong competitiveness deserve attention over the long term. In the near term, we think investors should pay attention to FSCs, given 1) the decline in LCC market shares and 2) FSCs’ higher exposure to robust demand in medium/long-haul routes. As for Jeju Air, the outcome of the Asiana Airlines bid bears close watching.