Index Watcher: KOSPI 200 Special reconstitution: C&T out, Hyundai Green Food in

Hyundai Green Food set to be added to KOSPI 200 On August 18th, the (KRX) announced that Samsung C&T would be AI Report deleted from the KOSPI 200 following its merger with Cheil Industries, and that Hyundai August 19, 2015 Green Food (free-float ratio of 55%) would be added. In an effort to minimize the potential impact on supply and demand conditions, the KRX has decided to carry out the reconstitution on September 1st, the official date of the Samsung C&T-Cheil Industries Daewoo Securities Co., Ltd. merger. [Derivatives] Table 1. Special reconstitution: KOSPI 200 and other indices () Youngsung Kim +822-768-4120 Index Deletions Additions [email protected] KOSPI 200 (including EWI) Samsung C&T Hyundai Green Food KOSPI 100 (including EWI) Samsung C&T GKL

KOSPI 50 (including EWI) Samsung C&T Orion

KOSPI 200 Industrials Samsung C&T -

KOSPI 200 Consumer Staples - Hyundai Green Food KOSPI 200 Intrinsic Value Samsung C&T - KOSPI 200 MidSmallCap GKL Hyundai Green Food KOSPI Growth Dividend 50 Samsung C&T NCsoft KOSPI Preferred Stock Samsung C&T (1P) GS Holdings (1P) KRX 100 (including EWI) Samsung C&T Green Cross KRX SRI Samsung C&T - KRX SRI ECO Samsung C&T - Source: KRX, KDB Daewoo Securities Research

Potential demand for Hyundai Green Food from index funds: KRW72.4bn Hyundai Green Food’s weight in the index is projected to be 0.21%, ranking 88th. As such, the stock will likely see a significant increase in demand from KOSPI 200 index funds.

As an estimated KRW35tr is tracking the KOSPI 200, we project potential demand for Hyundai Green Food at KRW72.4bn, 6.63 times higher than the stock’s 20-day average trading value.

If the announcement of Hyundai Green Food’s addition boosts its share price, increased short covering should push the stock up further. Currently, the stock lending balance for Hyundai Green Food is not high, but the level has recently experienced a surge. In addition, the gaps between the current share price and the levels at which short-selling positions were recently opened are not particularly wide. Accordingly, a rise in share price will likely lead to a rise in short covering.

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.

August 19, 2015 Index Watcher: KOSPI 200

Table 2. Key metrics for Hyundai Green Food Mkt. cap P/E P/B EPS OP margin (%) ROE Ticker Company (KRWtr) (12MF) (12MF) (12MF) 2014 2015F 2016F 2014 2015F 2016F 005440 KS Hyundai Green Food 2.47 21.22 1.42 1,190 3.98 4.22 4.37 6.99 7.53 7.88 Notes: As of August 18, 2015; based on net profit attributable to controlling interests Source: KDB Daewoo Securities Research

Figure 1. Hyundai Green Food: Short selling and stock lending/borrowing

Est. short selling (shares, U) last 5TD (U) (KRW) (%) Share price (L) Last 5TD (L) 28000 SLB to free float (R) Last 5TD (R) 4.0 0 20,000 40,000 60,000 Share price (L) Last 5TD (L) 28000

25500 26000 3.0

24000 23000

22000 2.0 20500 20000

18000 18000 1.0 5/22 6/22 7/20 5/22 6/22 7/20

Notes: Short selling share prices are estimated; not considering short covering. Source: KDB Daewoo Securities Research

Weight of merged entity to decrease by 0.64%p

KRX did not make any comments on potential adjustments to the free-float ratio of Cheil Industries following its merger with Samsung C&T. As such, we estimate that the free-float ratio for the merged entity will remain unchanged at 30%.

Based on August 18th closing prices, the weight of the merged entity in the KOSPI 200 is forecast to decrease 0.64%p to 1.26%. (Currently, the respective weights of Cheil Industries and Samsung C&T stand at 0.89% and 1.01%.) That said, selling by index funds of Samsung C&T could potentially reach KRW224.4bn, which is equivalent to 2.99 times the daily average trading value of Samsung C&T.

Figure 2. Samsung C&T is undervalued by 2-3% relative to Figure 3. SK Holdings was undervalued relative to SK C&C

Cheil Industries (share price) before trading suspension (share price)

(KRW)Disparity (R) (%) (KRW)Disparity (R) (%) Samsung C&T (L) 52,000 5 SK Holdings (L) Cheil Industries - 0.35 shares (L) 230,000 SK C&C - 0.74 shares (L) 4

51,000 4 220,000 3

50,000 3

210,000 2 49,000 2

200,000 1 48,000 1

47,000 0 190,000 0 09 11 13 09 11 13 09 11 13 09 11 13 Aug. 17 Aug. 18 Trading suspension D-2 D-1

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 2 August 19, 2015 Index Watcher: KOSPI 200

Meanwhile, if Samsung C&T becomes deeply undervalued relative to Cheil Industries due to a sell- off by index funds, some selling pressure could shift to Cheil Industries.

And, depending on the gaps between the spot and futures prices for Samsung C&T and Cheil Industries, investors could use rebalancing as an opportunity to implement hedging and arbitrage strategies. Of note, the expiry date for Samsung C&T futures has been changed to August 26th (the day before the suspension of trading).

Broader impact of KOSPI 200 rebalancing to be mitigated by MSCI rebalancing

Aside from Samsung C&T and Cheil Industries, all existing KOSPI 200 constituents will likely see increased buying demand from index trackers, with trading concentrated on August 31st. Total demand related to KOSPI 200 rebalancing is estimated at KRW152bn, or 0.64% of the index’s value.

Despite the relatively large scale of the rebalancing, the market impact is likely to be limited, because demand will be distributed across 198 stocks. Moreover, MSCI’s quarterly index rebalancing is also scheduled for August 31st, and attendant selling of KRW92.2bn (KDB Daewoo estimate) should be able to somewhat offset the impact of KOSPI 200 rebalancing (KRW152bn).

For large caps, the impact should be particularly small, given the similarities between the KOSPI 200 and the MSCI series in terms of weighting and constituents. Indeed, KOSPI 200 trackers are expected to buy KRW30.2bn worth of (SEC) shares, while MSCI trackers are projected to sell KRW30.1bn worth of the stock.

Of note, KOSDAQ stocks that are MSCI constituents and large-cap preferred stocks that are included in the MSCI series but not the KOSPI 200 will likely be impacted, but only modestly, by the rebalancing.

Figure 4. Weight changes arising from merger between Samsung C&T and Cheil Industries

(%, %p) 2.0 0.64 0.43 0.21

1.5 1.01

1.0

1.26 0.5 0.89

0.0 Pre-merger Post-merger Weight decrease Weight increase of Weight of due to merger other KOSPI 200 stocks Hyundai Green Food

Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 3 August 19, 2015 Index Watcher: KOSPI 200

Event-driven strategy recommended

We recommend that investors take an event-driven approach to stocks added to or deleted from MSCI indices or the KOSPI 200, as the impact of MSCI rebalancing on these plays is unlikely to be offset by KOSPI 200 changes (and vice versa).

Hyundai Green Food, which is set to be added to the KOSPI 200 is not an MSCI constituent. BGF Retail, Dongsuh, and Hanmi Science, which will be included in the MSCI Standard index series are not KOSPI 200 constituents. With regard to Hyundai Mipo Dockyard and LS, KOSPI 200 constituents set to be dropped from the MSCI Standard index series, the impact of MSCI rebalancing is unlikely to be offset by KOSPI 200 rebalancing due to their low weights.

Table 3. Estimates of index fund demand for additions to and deletions from the KOSPI 200 and MSCI Mkt. cap Potential demand from index funds (KRWbn) 20TD avg. TV Impact Tickers Stock (KRWtr) KOSPI 200 MSCI KOSPI 200 + MSCI (A) (KRWbn, B) (A/B) KOSPI 200 additions 005440 KS Hyundai Green Food 2.40 72.4 0.0 72.4 10.9 6.63 027410 KS BGF Retail 4.47 0.0 113.3 113.3 27.9 4.06 MSCI Standard additions 026960 KQ Dongsuh 4.41 0.0 104.0 104.0 15.7 6.63 008930 KS Hanmi Science 8.15 0.0 106.2 106.2 142.4 0.75 KOSPI 200 deletions 000830 KS Samsung C&T 7.61 -224.4 -1.5 -225.9 74.9 -3.01 010620 KS Hyundai Mipo Dockyard 1.05 0.1 -38.8 -38.7 10.3 -3.77 MSCI Standard deletions 006260 KS LS 1.05 0.1 -41.9 -41.7 8.3 -5.00 Notes: As of August 18, 2015; data related to MSCI indices are estimates Source: KDB Daewoo Securities Research

Table 4. Buying/selling demand for other KOSPI 200 and MSCI stocks Mkt. cap Potential demand from index funds (KRWbn) 20TD avg. TV Impact Tickers Companies (KRWtr) KOSPI 200 MSCI KOSPI 200 + MSCI (A) (KRWbn, B) (A/B) 035720 KQ Daum 7.87 0.0 29.5 29.5 100.9 0.29 Greatest 086790 KS 8.42 1.9 9.7 11.6 24.0 0.48 buying 068270 KQ Celltrion. 8.70 0.0 6.3 6.3 68.5 0.09 demand 003490 KS Korean Air 2.49 0.3 3.3 3.7 30.5 0.12 017670 KS SK Telecom 20.47 3.5 -0.6 2.9 40.9 0.07 005935 KS Samsung Electronics (1P) 20.05 0.0 -4.4 -4.4 34.2 -0.13 Greatest 005387 KS Hyundai Motor (2PB) 3.76 0.0 -0.9 -0.9 13.2 -0.07 selling 005385 KS Hyundai Motor (1P) 2.49 0.0 -0.6 -0.6 5.0 -0.12 demand 001450 KS Hyundai M&F 2.59 0.0 -0.4 -0.4 10.1 -0.04 139130 KS DGB Financial Group 1.79 0.0 -0.4 -0.4 4.0 -0.11 Notes: As of August 18, 2015; data related to MSCI indices are estimates Source: KDB Daewoo Securities Research

Table 5. Buying/selling impact on other KOSPI 200 and MSCI stocks Mkt .cap Potential demand from index funds (KRWbn) 20TD avg. TV Impact Tickers Companies (KRWtr) KOSPI 200 MSCI KOSPI 200 + MSCI (A) (KRWbn, B) (A/B) 086790 KS Hana Financial Group 8.42 1.9 9.7 11.6 24.0 0.48 Greatest 035720 KQ Daum Kakao 7.87 0.0 29.5 29.5 100.9 0.29 buying 004700 KS Chokwang Leather 0.81 0.1 0.0 0.1 0.3 0.22 impact 003200 KS Ilshin Spinning 0.49 0.1 0.0 0.1 0.4 0.16 000050 KS Kyungbang 0.66 0.1 0.0 0.1 0.5 0.14 005935 KS SEC (1P) 20.05 0.0 -4.4 -4.4 34.2 -0.13 Greatest 051915 KS LG Chem (1P) 1.26 0.0 -0.3 -0.3 2.6 -0.12 selling 005385 KS Hyundai Motor (1P) 2.49 0.0 -0.6 -0.6 5.0 -0.12 impact 139130 KS DGB Financial Group 1.79 0.0 -0.4 -0.4 4.0 -0.11 090435 KS AmorePacific (1P) 1.92 0.0 -0.4 -0.4 3.9 -0.11 Notes: As of August 18, 2015; data related to MSCI indices are estimates Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 4 August 19, 2015 Index Watcher: KOSPI 200

Table 6. Changes in weights of existing KOSPI 200 constituents after merger between Samsung C&T and Cheil Industries Free-float mkt cap Weights in KOSPI 200 (%, %p) Tickers Companies Price (KRWtr) Current Revised Change 005440 KS Hyundai Green Food 24,550 1.32 0.21 0.21 028260 KS Samsung C&T + Cheil Industries 141,500 8.05 1.90 1.26 -0.64 005930 KS Samsung Electronics 1,131,000 124.95 19.49 19.58 0.09 005380 KS Hyundai Motor 146,500 22.59 3.52 3.54 0.02 000660 KS SK Hynix 35,050 20.41 3.18 3.20 0.01 055550 KS 42,650 18.20 2.84 2.85 0.01 015760 KS KEPCO 50,800 16.31 2.54 2.56 0.01 017670 KS SK Telecom 253,500 14.33 2.24 2.25 0.01 012330 KS 209,500 14.28 2.23 2.24 0.01 005490 KS POSCO 188,000 13.93 2.17 2.18 0.01 035420 KS NAVER 522,000 13.77 2.15 2.16 0.01 105560 KS KB Financial Group 37,100 13.62 2.12 2.13 0.01 090430 KS AmorePacific 362,000 11.64 1.82 1.82 0.01 033780 KS KT&G 108,000 11.86 1.85 1.86 0.01 000270 KS Motors 45,050 11.87 1.85 1.86 0.01 051910 KS LG Chem 232,000 10.76 1.68 1.69 0.01 034730 KS SK Holdings 265,500 9.34 1.46 1.46 0.01 032830 KS Samsung Life 103,500 10.35 1.61 1.62 0.01 000810 KS Samsung F&M 261,000 9.27 1.45 1.45 0.01 018260 KS Samsung SDS 263,500 8.16 1.27 1.28 0.01 086790 KS Hana Financial Group 28,450 8.00 1.25 1.25 0.01 051900 KS LG Household & Health Care 802,000 7.52 1.17 1.18 0.01 096770 KS SK Innovation 95,100 6.60 1.03 1.03 0.00 047810 KS Korea Aerospace Industries 95,900 6.54 1.02 1.03 0.00 030200 KS KT 29,600 6.57 1.02 1.03 0.00 035250 KS 44,150 6.14 0.96 0.96 0.00 003550 KS LG Corp. 56,700 5.38 0.84 0.84 0.00 Note: As of August 18, 2015 Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 5 August 19, 2015 Index Watcher: KOSPI 200

APPENDIX 1

Important Disclosures & Disclaimers 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. Daewoo Securities Co., Ltd. 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 Daewoo Securities, the Analysts receive compensation that is impacted 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 Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclaimers This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and 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. If this report is 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. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. 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 Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and 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 Daewoo. 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. 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. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

KDB Daewoo Securities Research 6 August 19, 2015 Index Watcher: KOSPI 200

KDB Daewoo Securities International Network

Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 320 Park Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 31st Floor

Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong, China United States Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000 Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower 42 Six Battery Road #11-01 7th Floor, Yusen Building 25 Old Broad St. Singapore, 049909 2-3-2 Marunouchi, Chiyoda-ku London EC2N 1HQ Tokyo 100-0005 United Kingdom Japan Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511 Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers Room 38T31, 38F SWFC Suite 2103, Saigon Trade Center B-12 Jianguomenwai Avenue 100 Century Avenue 37 Ton Duc Thang St,

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KDB Daewoo Securities Research 7