October 30, 2012 Company Report

Hyundai Department Store (069960 KS) Retail

Daewoo Securities Co., Ltd. 3Q review: Department store business still bleak Mina Kim +822-768-4163 Trim TP to W156,000; Maintain Trading Buy [email protected]

We maintain our Trading Buy rating on Hyundai Department Store (HDS), but trim Jieun Lee our target price by 3.7% to W156,000 (from W162,000). We do so because we +822-768-3265 lowered our 2012 and 2013 EPS estimates by 3.2% each following the release of [email protected] the companyÊs 3Q results.

Using a sum-of-the-parts methodology, we derived our target price by adding the value of HDSÊ operations (W145,000/sh; based on a P/E of 9x and a 2013 EPS estimate) to the value of its equity stake (W11,000/sh). The value of HDSÊ equity Trading Buy (Maintain) stake is based on the value of HDSÊ Hyundai Home Shopping shares (based on the October 29th closing price of W126,000/sh; no discount). Target Price (12M, W) 156,000 Share Price (10/29/12, W) 131,000 3Q review: Department store business still bleak Expected Return (%) 19.1 EPS Growth (12F, %) 1.1 For 3Q, HDS posted gross merchandise sales (GMS) of W993bn (down 0.8% YoY), Market EPS Growth (12F, %) 7.9 net revenues of W346.2bn (up 0.8% YoY), an operating profit of W77.5bn (down P/E (12F, x) 8.6 7.1% YoY), and a net profit of W65.7bn (down 40.6% YoY) under consolidated K- Market P/E (12F, x) 10.2 IFRS. GMS and operating profit missed our expectations (W1tr (up 0.2% YoY) for KOSPI 1,891.52 GMS; W81.9bn (down 1.8% YoY) for operating profit). And they also fell short of Market Cap (Wbn) 3,066 Shares Outstanding (mn) 23 the market consensus (W1.1tr (up 7.4% YoY) for GMS; W81.5bn (down 2.3% YoY) Avg Trading Volume (60D, '000) 100 for operating profit). HDSÊ 3Q same-store sales (based on GMS) showed negative Avg Trading Value (60D, Wbn) 14 growth of 3% YoY. Dividend Yield (12F, %) 0.5 We attribute the companyÊs sluggish revenues to the renovation of HDSÊ COEX Free Float (%) 63.5 52-Week Low (W) 116,000 Mall store, as well as weak sales at non-major stores. 3Q OP margin (based on 52-Week High (W) 187,500 GMS) came in at 7.8% (down 0.5%p YoY). We believe this deterioration in OP Beta (12M, Daily Rate of Return) 0.69 margin was caused by: 1) increased promotional and depreciation expenses Price Return Volatility (12M Daily, %, SD) 2.4 associated with a new Chungcheong store opened in August; and 2) an increase in Foreign Ownership (%) 37.7 personnel expenses from changes to HDSÊ payout schedule for bonuses. Major Shareholder(s) J.S. Jung et al. (36.16%) Meanwhile, the companyÊs 3Q net profit margin was 6.6% (down 4.4%p YoY). Net NPS (8.27%) profit plunged YoY due to a high base effect from gains related to the merger with Hyundai DSF in 3Q11. Stripping away this base effect, net profit (before corporate Price Performance tax) would have grown 4.9% YoY. (%) 1M 6M 12M Absolute -14.4 -16.6 -22.9 Relative -9.1 -12.3 -21.0 Key Business A retail company operating 14 department stores in Korea.

§ Earnings & Valuation Metrics Share price FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 120 KOSPI (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 110 12/10 1,271 392 30.9 336 14,798 444 -10 17.9 9.4 1.6 8.3 100 12/11 1,439 450 31.3 346 15,027 514 -302 15.4 10.9 1.6 9.0 90 12/12F 1,534 437 28.5 356 15,196 505 278 13.6 8.6 1.1 6.0 80 70 12/13F 1,640 455 27.7 377 16,113 532 43 12.7 8.1 1.0 6.2 60 12/14F 1,808 485 26.9 415 17,727 570 141 12.4 7.4 0.9 5.5 10/11 2/12 6/12 10/12 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. October 30, 2012 Hyundai Department Store

Department store business is highly vulnerable to economic conditions

Consumer sentiment remains depressed amid the economic slump. The Consumer Sentiment Index (CSI) came in at 98 in October, falling below 100 for the third consecutive month. Consumer sentiment is affected not only by the actual economic growth rate, but also by growth prospects. We believe weak consumer sentiment is likely to continue to dampen sales at department stores.

However, we project HDS to achieve revenue expansion largely from increased floor space. Indeed, we forecast the new Chungcheong store to generate revenues of W95bn in 2012 and W220bn in 2013. Revenues at the COEX Mall store are also likely to expand by W100bn following its renovation. HDS also plans to open five more stores (including one outlet) by 2016. Nevertheless, we believe the resulting increases in personnel and depreciation expenses are likely to drag down the companyÊs margins.

Table 1. 3Q earnings review (Wbn) 3Q12P Growth rate (%) 3Q11 2Q12 Actual KDB Daewoo Consensus QoQ YoY GMS 1,001.6 1,046.4 993.0 1,003.3 1,075.6 -5.1 -0.8 Net revenues 343.5 362.8 346.2 351.3 363.4 -4.6 0.8 Operating profit 83.4 117.6 77.5 81.9 81.5 -34.1 -7.1 Pretax profit 143.9 133.9 90.3 83.7 94.5 -32.5 -37.2 Net profit 110.6 100.6 65.7 59.7 68.2 -34.7 -40.6 OP margin (%) 8.3 11.2 7.8 8.2 7.6 -3.4%p -0.5%p Pretax margin (%) 14.4 12.8 9.1 8.3 8.8 -3.7%p -5.3%p Net margin (%) 11.0 9.6 6.6 5.9 6.3 -3.0%p -4.4%p Note: Margins are based on GMS Source: Company data, KDB Daewoo Securities Research

Table 2. Earnings forecast revisions (Wbn) Before After Diff. (%) Comments 12F 13F 14F 12F 13F 14F 12F 13F 14F GMS 4,381.3 4,621.8 4,849.2 4,381.3 4,621.8 4,849.2 0.0 0.0 0.0 Net revenues 1,534.3 1,640.1 1,807.8 1,534.3 1,640.1 1,807.8 0.0 0.0 0.0 Operating profit 452.7 471.4 503.4 437.4 455.0 485.3 -3.4 -3.5 -3.6 To reflect 3Q results Pretax profit 479.9 509.3 560.4 464.6 492.9 542.3 -3.2 -3.2 -3.2 Net profit 359.9 382.0 420.3 348.4 369.7 406.7 -3.2 -3.2 -3.2 OP margin (%) 10.3 10.2 10.4 10.0 9.8 10.0 Pretax margin (%) 11.0 11.0 11.6 10.6 10.7 11.2 Net margin (%) 8.2 8.3 8.7 8.0 8.0 8.4 Note: Margins are based on GMS Source: KDB Daewoo Securities Research estimates

Table 3. Quarterly earnings forecasts (Wbn) 2011 2012F 4Q12F Growth (%) 2011 2012F 2013F 1Q 2Q 3Q 4Q 1Q 2Q 3QP 4QF QoQ YoY GMS 974.6 958.6 1,001.6 1,220.4 1,100.7 1,046.4 993.0 1,241.2 25.0 1.7 4,155.2 4,381.3 4,621.8 Net revenues 347.8 333.7 343.5 414.3 390.9 362.8 346.2 434.3 25.4 4.8 1,439.1 1,534.3 1,640.1 Operating profit 121.5 126.3 83.4 118.9 126.3 117.6 77.5 116.0 49.6 -2.5 450.1 437.4 455.0 Pretax profit 148.7 140.9 143.9 127.2 141.4 133.9 90.3 99.0 9.6 -22.2 560.6 464.6 492.9 Net profit 111.5 102.8 110.6 69.6 106.3 100.6 65.7 74.5 13.3 7.0 394.5 348.4 369.7 OP margin (%) 12.5 13.2 8.3 9.7 11.5 11.2 7.8 9.3 1.5%p -0.4%p 10.8 10.0 9.8 Pretax margin (%) 15.3 14.7 14.4 10.4 12.8 12.8 9.1 8.0 -1.1%p -2.4%p 13.5 10.6 10.7 Net margin (%) 11.4 10.7 11.0 5.7 9.7 9.6 6.6 6.0 -0.6%p 0.3%p 9.5 8.0 8.0 Note: Margins are based on GMS Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 2 October 30, 2012 Hyundai Department Store

Figure 1. Same-store sales Figure 2. Sales growth of womenÊs formal wear at department stores

(%, YoY) (%, YoY) 30 Hyundai Department Store 24 Department stores Women's formal wear 25 16 20

8 15

10 0

5 -8 0

-5 -16 9/10 3/11 9/11 3/12 9/12 9/10 3/11 9/11 3/12 9/12

Source: Company data, KDB Daewoo Securities Research Source: Ministry of Knowledge Economy, KDB Daewoo Securities Research

Figure 3. 12-month forward P/E Figure 4. Sales growth of luxury goods at department stores

(W) 16x (%, YoY) 200,000 13x 48 Department stores Luxury goods 11x 36 150,000 8x 24

100,000 5x 12

50,000 0

0 -12 02 03 04 05 06 07 08 09 10 11 12 9/10 3/11 9/11 3/12 9/12

Source: KDB Daewoo Securities Research estimates Source: Ministry of Knowledge Economy, KDB Daewoo Securities Research

Table 4. New store openings Location Owner Date Expected sales (Wbn) Sales area (m²) Capex (Wbn) Gimpo outlet Han Moo Shopping 2014 276 39,600 270 Pangyo HDS 2015 457 60,390 650 (for entire shopping mall) Gwanggyo HDS 2015 278 42,900 291 Ansan HDS 2015 245 39,600 217 Asan HDS 2016 250 29,700 179 Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 3 October 30, 2012 Hyundai Department Store

Hyundai Department Store (069960 KS/Trading Buy/TP: W156,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 1,439 1,534 1,640 1,808 Current Assets 849 1,033 1,209 1,537 Cost of Sales 248 310 331 383 Cash and Cash Equivalents 9 147 273 521 Gross Profit 1,192 1,224 1,309 1,425 AR & Other Receivables 625 669 715 789 SG&A Expenses 755 801 868 954 Inventories 41 44 47 52 Operating Profit (Adj) 437 423 441 471 Other Current Assets 24 21 21 22 Operating Profit 450 437 455 485 Non-Current Assets 3,871 4,137 4,467 4,792 Non-Operating Profit 110 27 38 57 Investments in Associates 403 405 407 409 Net Financial Income 7 10 -1 -19 Property, Plant and Equipment 3,258 3,476 3,786 4,087 Net Gain from Inv in Associates 44 23 24 24 Intangible Assets 39 39 39 39 Pretax Profit 561 465 493 542 Total Assets 4,720 5,370 5,876 6,527 Income Tax 166 116 123 136 Current Liabilities 1,132 1,339 1,410 1,581 Profit from Continuing Operations 395 348 370 407 AP & Other Payables 707 1,022 1,091 1,261 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 115 115 115 115 Net Profit 395 348 370 407 Other Current Liabilities 310 202 204 206 Controlling Interests 346 356 377 415 Non-Current Liabilities 695 698 701 704 Non-Controlling Interests 48 -7 -7 -8 Long-Term Financial Liabilities 399 0 0 0 Total Comprehensive Profit 391 337 370 407 Other Non-Current Liabilities 276 698 701 704 Controlling Interests 343 345 377 415 Total Liabilities 1,828 2,037 2,111 2,285 Non-Controlling Interests 48 -7 -7 -8 Controlling Interests 2,444 2,782 3,143 3,541 EBITDA 514 505 532 570 Capital Stock 117 117 117 117 FCF (Free Cash Flow) -302 278 43 141 Capital Surplus 612 612 612 612 EBITDA Margin (%) 35.7 32.9 32.4 31.5 Retained Earnings 1,708 2,046 2,407 2,805 Operating Profit Margin (%) 31.3 28.5 27.7 26.9 Non-Controlling Interests 449 551 622 701 Net Profit Margin (%) 24.1 23.2 23.0 23.0 Stockholders' Equity 2,892 3,333 3,765 4,242

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 348 554 449 566 P/E (x) 10.9 8.6 8.1 7.4 Net Profit 395 347 370 407 P/CF (x) 8.9 7.0 6.6 6.0 Non-Cash Income and Expense 151 109 58 66 P/B (x) 1.6 1.1 1.0 0.9 Depreciation 77 81 91 99 EV/EBITDA (x) 9.0 6.0 6.2 5.5 Amortization 1 0 0 0 EPS (W) 15,027 15,196 16,113 17,727 Others 66 -11 0 0 CFPS (W) 18,394 18,688 19,994 21,954 Chg in Working Capital -77 162 22 93 BPS (W) 105,018 118,366 134,486 152,216 Chg in AR & Other Receivables -4 -42 -46 -73 DPS (W) 650 650 650 650 Chg in Inventories -14 -3 -3 -5 Payout ratio (%) 4.3 4.3 4.0 3.7 Chg in AP & Other Payables 11 205 69 169 Dividend Yield (%) 0.4 0.5 0.5 0.5 Income Tax Paid -121 -65 0 0 Revenue Growth (%) 13.3 6.6 6.9 10.2 Cash Flows from Inv Activities -665 -397 -307 -302 EBITDA Growth (%) 15.9 -1.8 5.3 7.2 Chg in PP&E -662 -300 -400 -400 Operating Profit Growth (%) 14.8 -2.9 4.1 6.7 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) 1.6 1.1 6.0 10.0 Chg in Financial Assets -17 -1 2 2 Accounts Receivable Turnover (x) 2.7 2.4 2.4 2.4 Others 14 -96 92 97 Inventory Turnover (x) 42.5 36.2 36.2 36.7 Cash Flows from Fin Activities 241 -19 -17 -17 Accounts Payable Turnover (x) 2.9 1.9 1.6 1.5 Chg in Financial Liabilities 213 299 0 0 ROA (%) 9.1 6.9 6.6 6.6 Chg in Equity 0 0 0 0 ROE (%) 15.4 13.6 12.7 12.4 Dividends Paid -17 -17 -17 -17 ROIC (%) 12.0 10.6 10.4 10.3 Others 45 -2 0 0 Liability to Equity Ratio (%) 63.2 61.1 56.1 53.9 Increase (Decrease) in Cash -76 138 126 248 Current Ratio (%) 75.0 77.1 85.8 97.2 Beginning Balance 85 9 147 273 Net Debt to Equity Ratio (%) 12.3 -5.5 -8.3 -13.2 Ending Balance 9 147 273 521 Interest Coverage Ratio (x) 31.3 24.9 26.3 28.0 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 4 October 30, 2012 Hyundai Department Store

Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

Buy Relative performance of 20% or greater (W) Hyundai Department Store Stock Trading Buy Relative performance of 10% or greater, but with volatility 250,000 Ratings Hold Relative performance of -10% and 10% 200,000 Sell Relative performance of -10% 150,000 100,000 Overweight Fundamentals are favorable or improving Industry 50,000 Neutral Fundamentals are steady without any material changes Ratings 0 11/10 4/11 10/11 4/12 10/12 Underweight Fundamentals are unfavorable or worsening * 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 Daewoo Securities, 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 analystÊs 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.

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 AnalystÊs 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 . 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 . 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.

KDB Daewoo Securities Research 5 October 30, 2012 Hyundai Department Store

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.

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Daewoo Securities Co. Ltd. () Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 600 Lexington Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 Suite 301 Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong United States Tel: 82-2-768-3026 Tel: 85-2-2514-1304 Tel: 1-212-407-1022

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KDB Daewoo Securities Research 6