AI Analysis Combined market cap of Mando and Halla Holdings likely to grow after split

Mando to split into a holding company and an operating company

The auto parts manufacturer Mando will split into a holding company (Halla Holdings: AI Report surviving entity) and an operating company (Mando, which will be re-listed), in a plan that was approved during Mando’s shareholder meeting on July 28 th . Trading will be August 25, 2014 suspended from Aug. 28 th to Oct 2 nd . Halla Holdings will remain in the KOSPI 200 index (K200).

Daewoo Securities CCo.,o., Ltd. Table 111.1. Details of Mando’s spinspinspin-spin ---offoffoffoff

[Derivatives] Surviving entity Halla Holdings Newly listed entity Mando Youngsung Kim Period of trading suspension Aug. 28 th - Oct. 2nd +822-768-4120 Date of listing change/re-listing Oct. 6th [email protected] Asset split ratio (surviving: new) 0.4782394 : 0.5217606

Source: Dart, KDB Daewoo Securities Research

Spin-offs offer excess returns

Among K200 constituents, nine out of the 10 most recent cases of company splits resulted in a combined market cap of the surviving and new entities—based on the closing prices on the date of trading resumption—that exceeded the pre-split market cap on the day prior to the trading suspension. The only exception was Chong Kun Dang.

Therefore, for index funds that seek alpha (excess returns), it is generally more advantageous to hold shares of a company undergoing a split until the trading resumption date and then sell only the shares of the newly listed entity (which will be excluded from the K200), rather than to sell just before trading suspension and then buy shares of the surviving entity (which will remain in the K200) on the resumption date.

Looking again at recent cases, in addition to the combined market cap increasing on the trading resumption date compared to the day prior to trading suspension, the combined market cap growth rate also exceeded the returns on the K200 during the same period.

As such, for investors who do not hold shares of Mando, we recommend buying shares and selling K200 futures just before the trading suspension. Instead of selling K200 futures, another option would be to sell K200 ETF or buy K200 Inverse ETF. In that case, investors should close out of this position on the trading resumption date.

It should be noted that, if excessive expectations for a company split send the shares surging even before the split, as occurred with Chong Kun Dang, the combined market cap may shrink after the split. In this case, investors should exercise caution in adopting this strategy.

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

August 25, 2014 AI Analysis

Table 222.2. SpinSpinSpin-Spin ---offoff cases among K200 stocks Woori Hankook DongDongDong-Dong ---AA Chong HanilHanilHanil Before splitsplitsplit LG Chem Shinsegae NHNNHNNHN Korean Air Cosmax Financial Tire Pharm. Kun Dang EEE-E---HHHHwawawawa GroupGroupGroup Hankook Dong-A Chong Kun NAVER Tire Socio Dang Cosmax WFG Seoyeon Surviving/ LG Chem/ Shinsegae/ /NHN Korean Air Worldwide Holdings Holdings BTI /KJB FG /Hanil E- new entity LG Hausys Emart Entertain- /Hanjin KAL /Hankook /Dong-A /Chong Kun /Cosmax /KNB FG Hwa ment Tire Pharm. Dang Last trading day 3/27/09 4/27/11 8/29/12 2/26/13 7/29/13 7/29/13 10/30/13 2/26/14 4/28/14 6/26/14 before trading suspension Trading resumption date 4/20/09 6/10/11 10/04/12 4/08/13 8/29/13 9/16/13 12/06/13 4/07/14 5/22/14 8/08/14 % of free-float Before 1.28 (20) 1.07 (27) 0.61 (35) 0.18 (87) 1.99 (11) 0.23 (79) 0.12 (102) 0.10 (110) 0.63 (31) 0.06 (133) mkt. cap of surviving entity After 1.49 (17) 0.40 (55) 0.05 (137) 0.07 (126) 2.20 (8) 0.22 (81) 0.02 (188) 0.03 (170) 0.56 (37) 0.01 (198) (rank in K200) Before 6.77 10.18 6.33 1.38 14.13 2.05 1.04 0.82 9.39 0.83 Market cap After 9.41 10.24 6.55 1.47 17.76 2.49 0.85 0.85 10.18 0.88 (Wtr) Return (A, %)(A, %) 38.95 0.56 3.52 6.59 25.70 21.30 ---18.06-18.06 3.66 8.37 5.23 Last day before Closing price trading 161.66 292.08 254.22 264.68 246.53 246.53 271.44 257.31 256.80 258.78 of K200 (p) suspension Resumption date 172.30 269.04 261.92 252.39 248.86 263.86 260.71 259.89 263.33 262.02 Index return (B, %) 6.58 -7.89 3.03 -4.64 0.95 7.03 -3.95 1.00 2.54 1.25 Return rrelativeelative to K200 (A(A(A-(A ---B,B, %)B, %) 32.37 8.45 0.49 11.23 24.75 14.27 ---14.11-14.11 2.66 7.63 3.98 Note: All data based on closing prices Source: Quantiwise, KDB Daewoo Securities Research

Domestic index funds to keep Halla Holdings even after split

Whether index funds maintain or exclude Halla Holdings after the split will likely have a significant impact on supply and demand conditions for the stock on the day prior to the trading suspension and the day of trading resumption. We expect domestic index funds to keep Halla Holdings after the split.

Based on the closing price on August 22 nd , Mando accounted for 0.243% of the K200’s total free float market cap (74th out of 200 companies). Factoring in the split ratio, the proportion of Halla Holdings’ free floats is projected to fall to 0.116% (105th).

After a company is split into a holding company and an operating company, the holding company tends to see a discount to its theoretical market value. Thus, we need to factor in potential undervaluation after the split, as well as the split ratio, in forecasting the post-split market cap of Halla Holdings.

When Cosmax converted to a holding company structure via a spin-off, Cosmax BTI (the holding company) saw the slightest undervaluation (12.67% vs. theoretical market cap) among K200 constituents that had recently undergone spin-offs. Meanwhile, Hankook Tire Worldwide, a holding company after Hankook Tire’s spin-off, suffered the steepest undervaluation (54.68%).

Factoring in the extent of undervaluation for Cosmax BTI, Halla Holdings is expected to see its proportion in K200’s total free float market cap to slide to 0.101%, with its rank falling to 109th. Even if Halla Holdings is undervalued by as much as Hankook Tire Worldwide was after its spin- off, the stock is still anticipated to rank 141 st , with a 0.053% proportion. Index funds usually tend to hold about 170 stocks.

Accordingly, even in the worst-case scenario, domestic index funds are not expected to exclude Halla Holdings after the spin-off.

KDB Daewoo Securities Research 2

August 25, 2014 AI Analysis

Table 333.3... Cases of sspinpinpinpin----offoffoffoffss into holding and operaoperatingting companies K200 stocksstocksstocks NonNonNon-Non ---K200K200 stocksstocksstocks Company Chong Kun Korea Hankook Tire DongDongDong-Dong ---AA Pharm. Korean Air Cosmax HanilHanilHanil EEE-E---HHHHwawawawa AK Petrochemical before spin ---offoffoff Dang Kolmar Chong Kun Hankook Tire Dong-A Socio Korea Kolmar Dang Holdings AK Holdings (S) Holding/operating Worldwide Holdings (S) Hanjin KAL (N) Cosmax BTI (S) Seoyeon (S) Holdings (S) (S) /AK Petrochemical company after spin-off (S)/Hankook /Dong-A Pharm. /Korean Air (S) /Cosmax (N) /Hanil E-Hwa (N) /Korea /Chong Kun (N) Tire (N) (N) Kolmar (N) Dang (N) Last trading day before 8/29/12 2/26/13 7/29/13 10/30/13 2/26/14 6/26/14 8/29/12 9/26/12 trading suspension Resumption of trading 10/04/12 4/08/13 9/16/13 12/06/13 4/07/14 8/08/14 9/17/12 10/19/12 after spin -off 0.325 : Spin-off ratio (HC:OC) 0.186 : 0.814 0.371 : 0.629 0.195 : 0.805 0.279 : 0.721 0.338 : 0.662 0.314 : 0.686 0.640 : 0.360 0.675 Mkt. cap HC (theoretical) 1.18 0.51 0.40 0.29 0.28 0.26 0.21 0.14 before OC (theoretical) 5.15 0.87 1.65 0.75 0.54 0.57 0.12 0.29 spin-off (Wtr) Total 6.33 1.38 2.05 1.04 0.82 0.83 0.32 0.43 HC, actual 0.08 0.53 (-54.7%) 0.43 (-15.7%) 0.34 (-13.6%) 0.17 (-39.8%) 0.24 (-12.7%) 0.15 (-41.1%) 0.13 (-35.8%) Mkt. cap (vs. theoretical) (-40.6%) after spin-OC, actual 0.48 6.02 (+16.9%) 1.04 (+19.8%) 2.15 (+30.1%) 0.68 (-9.7%) 0.60 (+12.0%) 0.72 (+26.5%) 0.17 (+46.3%) off (vs. theoretical) (+65.5%) (Wtr) Total 6.55 1.47 2.49 0.85 0.85 0.88 0.30 0.56 Note: All data based on closing prices on respective days Source: Quantiwise, KDB Daewoo Securities Research

Figure 111.1. Estimated weight and rank of Halla Holdings in K200K200 after spinspin----offoffoffoff

(Estimated % of free float market cap) (Freefloat rank in K200) 0.12 150 Free float rank of Halla Holdings in K200 to be above 170 even under the worst-case scenario Cosmax Korean Air 140 0.10 Dong-A Pharm Hankook Tire Hanil E-hwa 130 0.08 AK Petrochemical Chong Kun Dang Korea Kolmar Chong Kun Dang Korea Kolmar 120 AK Petrochemical Hanil E-hwa 0.06 Hankook Tire Cosmax 110 Dong-A Pharm. Korean Air (Discount rate of holding companies after spin-off, %) (Discount rate of holding companies after spin-off, %) 0.04 100 0 10 20 30 40 50 60 0 10 20 30 40 50 60

Note: Estimated free-float proportion and rank for Halla Holdings after spin-off factoring in the extent of undervaluation and spin-off ratios for the K-200 constituents that had already undergone spin-offs Source: Quantiwise, KDB Daewoo Securities Research

KDB Daewoo Securities Research 3

August 25, 2014 AI Analysis

Supply and demand outlook around the trading suspension day

We expect index funds’ selling of Mando to outweigh buying near market closing time on the day prior to the trading suspension. On the day of trading resumption, however, index funds’ buying of Halla Holdings is forecast to outweigh selling near market closing time. While domestic index funds (ex. ETFs) tend to display limited selling around the day of trading suspension, ETFs and foreign index funds are expected to sell Mando before trading is suspended and buy Halla Holdings after trading is resumed.

We believe that domestic index funds (except for ETFs) will not sell the stock until after the spin- off, because the combined market cap of the parent company and the spun-off company tends to be greater than the pre-spin off market cap.

Following the spin-off, Halla Holdings is forecast to rank around 170 th among the K200 constituents in terms of market cap, because most domestic index funds are anticipated to hold the stock even after the spin-off. Thus, we expect limited stock trading among domestic index funds related to the spin-off.

Meanwhile, domestic ETFs and foreign index funds, which tend to trade stocks to reduce tracking error, will likely sell off Mando before the spin-off and then buy Halla Holdings shares on the day trading resumes, at roughly the closing price.

Halla Holdings shares likely to decline on the trading resumption date

On the day trading resumes, Halla Holdings is anticipated to trade below its closing price before the suspension date, given that holding company stocks tend to suffer visible valuation discounts post spin-off. In Halla Holdings’ case, however, such a discount would likely be relatively small.

According to market analysts and media reports, risks associated with the company’s additional financial support for Halla Corporation have eased following Halla Holdings’ revision to its articles of incorporation. Moreover, Halla Holdings is expected to have a healthier financial position than Mando following the spin-off.

The current case seems similar to the split-off of Hanjin KAL. When it was split off from Korean Air, it was in healthy financial condition, and was thus one of the least undervalued among holding companies.

We believe that Halla Holdings will also receive a relatively low discount, although the stock might fall below the pre-suspension closing price when trading resumes.

KDB Daewoo Securities Research 4

August 25, 2014 AI Analysis

Post-split Mando to perform more strongly than the pre-suspension closing price; Index funds likely to unload Mando

We expect that following the split, shares of Mando (the operating entity) will exceed the closing price on the day before trading suspension. Indeed, generally speaking, shares of operating entities tend to perform more strongly than those of holding companies. On a positive note, equity analysts are expecting Mando to be re-rated following the split.

Nevertheless, we expect that index funds will prefer the selling of Mando over buying. Indeed, as the company will not be included in the K200, there should be no buying demand from foreign index funds and ETFs. On the other hand, index funds that have yet to sell pre-split Mando shares are likely to unload them.

However, considering the possible re-rating, and the fact that shares of operating entities tend to be bullish on the trading resumption day, we advise investors to focus more on fundamentals than on selling by index funds. In other words, we do not expect index funds’ selling to keep Mando shares from falling below the pre-suspension closing price.

Weights of leading stocks in the K200 (by market cap) to increase

As post-split Mando will be off the K200, the weights of other stocks in the K200 will increase. Specifically, the weights of SEC, Hyundai Motor, and SK Hynix will increase by 0.028%p, 0.007p, and 0.005%p, respectively.

Table 444.4. Estimated changes tototo K200 stock weightsweights:: Weights of large cap stocks areareare likely to increase SpinSpinSpin-Spin ---offoff ratio and Closing discount rate of FreeFreeFree-Free ---floatfloatfloatfloat Weight SpinSpinSpin-Spin ---offoff ratio applied RankRankRank pricepriceprice FreeFreeFree-Free ---floatfloatfloatfloat Mkt.Mkt.Mkt. holding companies Tickers Company mktmktmkt.mkt ... capcapcap in KKK200K200200200 in K200 (Aug.(Aug.(Aug. 22,22,22, ratio (%) cap (Wtr) applied (Wtr)(Wtr)(Wtr) (Aug 22, %)%)%) W)W)W) Weight DDDiffDiff Weight DDDiffDiff (E,(E,(E, %)%)%) (%p)(%p)(%p) (E,(E,(E, %)%)%) (%p)(%p)(%p) 060980 KS Mando (Halla Holdings) 134,000 70 2.41 1.69 0.24 0.12 -0.1264 0.10 -0.1411

1 005930 KS Samsung Electronics 1,247,000 75 183.68 137.76 19.80 19.82 0.0251 19.82 0.0280 2 005380 KS Hyundai Motor 224,500 70 49.45 34.62 4.97 4.98 0.0063 4.98 0.0070 3 000660 KS SK Hynix 45,950 80 33.19 26.56 3.82 3.82 0.0048 3.82 0.0054 4 005490 KS POSCO 341,000 85 29.73 25.27 3.63 3.64 0.0046 3.64 0.0051 5 035420 KS NAVER 774,000 90 25.51 22.96 3.30 3.30 0.0042 3.30 0.0047 6 055550 KS Shinhan FG 51,800 90 24.56 22.11 3.18 3.18 0.0040 3.18 0.0045 7 012330 KS Hyundai Mobis 286,000 70 27.84 19.49 2.80 2.80 0.0035 2.80 0.0040 8 000270 KS Kia Motors 59,300 65 24.04 15.62 2.25 2.25 0.0028 2.25 0.0032 9 017670 KS SK Telecom 271,000 70 21.88 15.32 2.20 2.20 0.0028 2.20 0.0031 10 105560 KS KB FG 40,000 95 15.45 14.68 2.11 2.11 0.0027 2.11 0.0030 11 015760 KS KEPCO 42,000 50 26.96 13.48 1.94 1.94 0.0025 1.94 0.0027 12 051910 KS LG Chem 275,000 70 18.22 12.76 1.83 1.84 0.0023 1.84 0.0026 13 086790 KS Hana FG 42,250 95 12.25 11.64 1.67 1.67 0.0021 1.67 0.0024 14 032830 KS Samsung Life 107,500 50 21.50 10.75 1.54 1.55 0.0020 1.55 0.0022 15 033780 KS KT&G 95,500 80 13.11 10.49 1.51 1.51 0.0019 1.51 0.0021 16 000810 KS Samsung F&M 284,000 75 13.45 10.09 1.45 1.45 0.0018 1.45 0.0021 17 000830 KS Samsung C&T 73,600 85 11.50 9.77 1.40 1.41 0.0018 1.41 0.0020 18 066570 KS LG Electronics 74,500 65 12.19 7.92 1.14 1.14 0.0014 1.14 0.0016 19 034220 KS LG Display 34,000 65 12.17 7.91 1.14 1.14 0.0014 1.14 0.0016 20 006400 KS Samsung SDI 148,000 75 10.18 7.63 1.10 1.10 0.0014 1.10 0.0016 Notes: As of Aug.22; we applied a discount of12.67% to post-split holding companies (based on the rate for Cosmax) Source: Quantiwise, KDB Daewoo Securities Research

KDB Daewoo Securities Research 5

August 25, 2014 AI Analysis

APPENDIX 1

Important Disclosures & Disclaimers Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Associatio n 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 Analyst s primarily responsible for this report. Daewoo Securities Co., Ltd. policy p rohibits 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 spec ified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 month s 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 compensa tion that is impacted by overall firm profitability, which includes revenue s 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.

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KDB Daewoo Securities International Network

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