Samsung C&T Corporation

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2 February 2017 Asia Pacific/South Korea Equity Research Conglomerates Samsung C&T Corporation

(028260.KS / 028260 KS) Rating (from RESTRICTED) NEUTRAL Price (31-Jan-17, W) 126,000 REINSTATEMENT Target price (W) 135,000 Upside/downside (%) 7.1 Reshuffling process already irreversible Mkt cap (W/US$ bn) 23,901 / 20.77 Enterprise value (W bn) 28,451 ■ Reinstating coverage with NEUTRAL. We reinstate coverage on Samsung Number of shares (mn) 189.69 C&T with a NEUTRAL rating and a target price of W135,000 (a 30% discount Free float (%) 38.5 to our target NAV estimates; we use listed Hong Kong/China conglomerates’ 52-wk price range (W) 169,000-114,000 historical discount as reference). Risks to our thesis are lots of moving parts ADTO-6M (US$ mn) 59.5 Target price is for 12 months. in the fashion division’s aggressive penetration strategy into the Chinese

Research Analysts market and an unexpected cost overrun in E&C division. Minseok Sinn ■ A split-up of Samsung Electronics the most likely next step. We expect 82 2 3707 8898 the Samsung Group to continue the reshuffling work as it tries to cut flab—this minseok.sinn@credit-suisse.com would not only help enhance the controlling family’s governance power in the Hoonsik Min 82 2 3707 3761 group but also significantly reduce the gap between the interest of the [email protected] controlling family and that of the minorities. We believe Samsung Group would eventually evolve into a dual-layer holding company structure after the split-up of Samsung Electronics into a holding company and an operating company, which appears the optimal way to meet the key requirements for the reshuffling work with minimised financial burden and reputational risk. Full report. ■ Turnaround in E&C margin a key swing factor in the consolidated OP. Samsung C&T reported a huge OP loss of W345 bn in 2015 (adjusted) and a poor OP income of W34 bn in 2016 from the E&C division, due to sizable cost overruns from multiple overseas projects. While management indicates that it has eventually fully reflected the expected cost overruns from the problematic overseas projects as of end-2016, which we largely agree with, we expect the E&C division to generate an OP income of W383 bn in 2017E, 65% of Samsung C&T’s entire consolidated OP of W591 bn in 2017E. ■ A bright long-term prospect for biologics CMO business. Samsung C&T owns a controlling 43% stake in Samsung Biologics, one of the world’s leading biologics Contract Manufacturing Organisation (CMO). While (1) timely production capability with minimised financial risk, (2) lower production cost and (3) higher flexibility, are CMOs’ key advantages over the pharmaceutical companies’ in-house capacity production capacities, scale and partnership with leading biopharmaceutical companies appear to be Samsung Biologics’ key strengths in the growing business.

Share price performance Financial and valuation metrics

Year 12/15A 12/16E 12/17E 12/18E Revenue (W bn) 13,344.7 28,103.0 27,456.5 27,422.4 EBITDA (W bn) 318.2 627.5 1,072.2 1,242.1 EBIT (W bn) 37.1 140.0 590.5 742.7 Net profit (W bn) 2,746.8 106.7 443.7 579.4 EPS (CS adj.) (W) 16,385 646.89 2,690 3,513 Change from previous EPS (%) n.a. (62.4) 13.0 - Consensus EPS (W) n.a. (230.00) 2,970 3,836 EPS growth (%) 317.0 (96.1) 315.9 30.6 The price relative chart measures performance against the P/E (x) 7.7 194.8 46.8 35.9 KOREA SE KOSPI IDX which closed at 2,067.57 on Dividend yield (%) 0.0 0.4 0.4 0.4 31/01/17. On 31/01/17 the spot exchange rate was EV/EBITDA (x) 92.4 45.4 26.1 22.5 W1,150.65/US$1 P/B (x) 1.28 1.26 1.23 1.20

Performance 1M 3M 12M ROE (%) 25.2 0.6 2.7 3.4 Absolute (%) 0.4 -18.2 -16.6 Net debt/equity (%) 30.0 25.2 22.1 21.1

Relative (%) -1.6 -22.7 -24.0 Source: Company data, Thomson Reuters, Credit Suisse estimates

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 February 2017

Focus tables and chart

Figure 1: Samsung Group–governance structure reshuffling scenario by Credit Suisse Steps Process The essential five steps Essential 1 A demerger of Samsung Electronics into a HoldCo and an OpCo Essential 2 1) SEC HoldCo’s acquisition of Life/F&M's 7.8%/1.3% stakes in SEC OpCo 2) SEC HoldCo’s acquisition of Samsung Group affiliates' (ex. C&T) stakes in non-financial affiliates of Samsung Group 3) Life's acquisition of Samsung F&M's 15.9% stakes in treasury Essential 3 Share swap of Lee family's 4.8%/17.0% stakes in SEC OpCo/SDS into shares of SEC HoldCo Essential 4 Share swap of C&T's stakes in non-financial Samsung Group affiliates into shares of SEC HoldCo Essential 5 Lee family’s (and other investors) acquisition of SDI, F&M, SEMCO's 6.2% stake in C&T The optional three steps after the completion of the essential five steps Optional 1 A demerger of Samsung Life into a financial HoldCo and an OpCo Optional 2 A demerger of C&T into an OpCo and a financial HoldCo (with stakes in Samsung Life) Optional 3 A merger between C&T financial HoldCo and Life financial HoldCo The additional two steps for an optimal structure in the long term after completion of the 5+3 steps Optimal 1 A merger between C&T OpCo and SEC HoldCo Optimal 2 Share swap of Lee family's 20.8% stakes in Life OpCo into shares of the Financial HoldCo

Source: Credit Suisse estimates Figure 2: Samsung Group — shareholding structure (final, after completion of the essential five steps and the three optional steps)

Lee family

16.1% 37.3% 23.9%

Samsung C&T (13.8%)

43.4% 14.4%

31.5% Samsung Financial SEC HoldCo Holdco (26.5%) Biologics 20.8%

29.6% 1.2%

30.9% 71.9%

30.8% 19.6% 23.7% 23.9% 18.9% 56.7% 6.7% Samsung Samsung Samsung Samsung Life Samsung F&M Samsung Card SEMCO Samsung SEC OpCo SDI Heavy SDS (10.2%) (15.9%) (2.3%) (2.7%) Eng (1.3%) (11.3%) (0.1%)

Note: Figures in parenthesis are stakes in treasury. Based on share price on 23 Jan 2017 and a demerger ratio of 30 : 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Minor stake holdings or stakes in non-major affiliates are ignored. Source: Credit Suisse estimates Figure 3: Samsung C&T-NAV (current vs target) (W bn) BV (Sep 2016) NAV – Current1 NAV - Target Rationales Core business n.a 7,266 7,266 15x 2017E NOPAT Stakes in Samsung Electronics (4.1%) 9,550 11,923 15,837 1.0x CS TP Stakes in Samsung Life (19.3%) 4,082 4,256 4,797 1.0x CS TP Stakes in Samsung Biologics (43.4%) 853 4,628 4,628 1.0x MV Stakes in Samsung SDS (17.1%) 2,035 1,672 1,586 1.0x CS TP Stakes in other listed companies 397 176 176 1.0x MV Other investment assets 1,313 1,313 1,313 1.0x Sep 2016 BV Net cash -5,491 -4,110 -4,110 Dec 2017E Total 27,123 31,494 No. of outstanding shares (mn) 164.9 164.9 Excluding 26.4 mn shares in treasury NAV per share (W) 164,000 191,000 30% discount-to-NAV (W) 115,000 135,000 1: Current NAV of stakes in listed companies are based on current market value (26 Jan 2017). Source: Company data, Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 2 2 February 2017

Reshuffling process already irreversible Reshuffling process may be accelerated Samsung Group will Regardless of the final outcome of the ongoing political churn in Korea, we expect the likely eventually evolve Samsung Group to continue the reshuffling work as it tries to cut flab—this would not only into a dual-layer help enhance the controlling family’s governance power in the group but also significantly holding company reduce the gap between the interest of the controlling family and that of the minorities. structure after the split- Indeed, given: (1) the improving trend of the governance structure-related regulations in up of Samsung Korea of late; and (2) the increasing request for a transparent governance structure, we Electronics (SEC) into a think Samsung Group may accelerate the remaining reshuffling work. After all, we believe holding company and the Group would eventually evolve into a dual-layer holding company structure after the an operating company split-up of Samsung Electronics (SEC) into a holding company and an operating company, which appears the optimal way to meet the key requirements for the reshuffling work with minimised reputational risk. Turnaround in E&C margin a key swing factor in the consolidated OP outlook Profitability of E&C Samsung C&T reported a sizable OP loss of W345 bn in 2015 (adjusted) and a poor OP of division likely to W34 bn in 2016 from the E&C division, due to substantial cost overruns from problematic turnaround in 2017 overseas projects, whereas it had generated steady OP income of about W300 bn p.a. given most of its over 2005-2014 from the E&C division. While management indicates that it has eventually problematic overseas fully reflected the expected cost overruns from the problematic overseas projects as of projects were end-2016, which we largely agree with, we expect the E&C division to generate OP of completed as of end-16 W383 bn in 2017E, 65% of Samsung C&T’s entire consolidated OP of W591 bn in 2017E. A bright long-term prospect for biologics CMO business Scale and partnership Samsung C&T owns a controlling 43% stake in Samsung Biologics, one of the world’s with leading leading biologics CMOs. While the global biopharmaceutical market is likely to grow from biopharmaceutical US$205 bn in 2015 to US$489 bn in 2025E (a CAGR of 9.1%), implying the portion of companies Samsung’s biologics in the global pharmaceutical market will increase from 19% in 2015 to 30% in key strengths in the 2025E, demand growth for bio CMO appears even steeper than the overall 9% CAGR. growing biologics CMO While (1) a timely production capability with minimised financial risk, (2) a lower production business cost and (3) a higher flexibility are CMOs’ key advantages over in-house capacity in the pharmaceutical production, scale and partnership with leading biopharmaceutical companies appear Samsung Biologics’ key strengths in the growing business. Investment risk Lots of moving parts in There are lots of moving parts in the fashion division’s aggressive penetration strategy into the fashion division’s the Chinese apparel market, in our view. Additionally, the probability of an unexpected aggressive penetration cost overrun is an intrinsic risk of the E&C business, particularly for turnkey projects. strategy into China Reinstating coverage with NEUTRAL Reinstating coverage with a NEUTRAL rating We reinstate our coverage on Samsung C&T with a NEUTRAL rating and a target price of and a SOTP-based TP W135,000 (a 30% discount to our target NAV estimates; we use listed Hong Kong/China of W135,000 conglomerates’ historical discount as reference). While we estimate an NAV of W7.3 tn for its core operation (15x 2017E NOPAT), its investment assets are worth W28.3 tn in our estimates.

Samsung C&T Corporation (028260.KS / 028260 KS) 3 2 February 2017

Samsung C&T Corporation (028260.KS / 028260 KS) Price (31 Jan 2017): W126,000; Rating: (from RESTRICTED) NEUTRAL; Target Price: W135,000; Analyst: Minseok Sinn Income Statement (W bn) 12/15A 12/16E 12/17E 12/18E Company Background Sales revenue 13,345 28,103 27,457 27,422 Samsung C&T conducts diversified business support services and Cost of goods sold 11,199 24,771 23,671 23,387 resort operation activities. The company offers a range of services in EBITDA 318 628 1,072 1,242 areas including clothing retail, contraction, energy, real estate, food EBIT 37 140 591 743 service, and resort accommodations. Net interest expense/(inc.) 66 33 36 35 Recurring PBT 2,776 89 586 775 Blue/Grey Sky Scenario Profit after tax 2,686 20 434 573 Reported net profit 2,747 107 444 579 Net profit (Credit Suisse) 2,747 107 444 579 Balance Sheet (W bn) 12/15A 12/16E 12/17E 12/18E Cash & cash equivalents 2,066 2,348 2,631 2,320 Current receivables 7,287 5,464 4,957 4,951 Inventories 1,386 1,327 1,144 1,143 Other current assets 1,802 1,602 1,602 1,602 Current assets 12,541 10,741 10,334 10,016 Property, plant & equip. 5,098 4,961 5,029 5,079 Investments 21,619 21,919 22,219 22,519 Intangibles 1,840 1,840 1,840 1,840 Other non-current assets 1,264 1,264 1,264 1,264 Total assets 42,361 40,724 40,685 40,717 Current liabilities 15,074 13,701 13,118 12,568 Total liabilities 24,047 22,474 22,091 21,641 Shareholders' equity 16,502 16,525 16,878 17,366 Minority interests 1,812 1,726 1,716 1,710 Total liabilities & equity 42,361 40,724 40,685 40,717 Cash Flow (W bn) 12/15A 12/16E 12/17E 12/18E EBIT 37 140 591 743 Net interest 0 0 0 0 Tax paid 0 0 0 0 Working capital (212) 1,125 508 (43) Other cash & non-cash items 112 454 335 336 Our Blue Sky Scenario (W) 154,000 Operating cash flow (62) 1,719 1,433 1,036 Our TP of W135,000 is based on a 30% discount-to-our NAV Capex (259) (350) (550) (550) estimates. Up on direction/progress of ongoing reshuffling work of Free cash flow to the firm (322) 1,369 883 486 Samsung Group, we think the discount could be narrowed as low as Investing cash flow 2,369 (650) (850) (850) 20%, which could increase our TP to W154,000. Additionally, share Equity raised (416) 0 0 0 price change of Samsung C&T's stakes in listed Samsung Group Dividends paid (4) (84) (91) (91) affiliates, which account for 85% of our NAV estimate for Samsung Financing cash flow (1,055) (1,401) (581) (981) C&T, could substantially increase/reduce the company's NAV. Total cash flow 1,252 (332) 2 (795) Adjustments 510 701 291 491 Our Grey Sky Scenario (W) 116,000 Net change in cash 1,762 368 292 (305) Our TP of W135,000 is based on a 30% discount-to-our NAV Per share 12/15A 12/16E 12/17E 12/18E estimates. Up on direction/progress of ongoing reshuffling work of Shares (wtd avg.) (mn) 168 165 165 165 Samsung Group, we think the discount could be narrowed as high EPS (Credit Suisse) (W) 16,385 647 2,690 3,513 as 40%, which could reduce our TP to W116,000. Additionally, DPS (W) 22 508 550 550 share price change of Samsung C&T's stakes in listed Samsung Operating CFPS (W) -372 10,421 8,689 6,282 Group affiliates, which account for 85% of our NAV estimate for Earnings 12/15A 12/16E 12/17E 12/18E Samsung C&T, could substantially increase/reduce the company's Growth (%) NAV. Sales revenue 160.2 110.6 (2.3) (0.1) EBIT (82.6) 277.0 321.8 25.8 Share price performance EPS 317.0 (96.1) 315.9 30.6 Margins (%) EBITDA 2.4 2.2 3.9 4.5 EBIT 0.3 0.5 2.2 2.7 Valuation (x) 12/15A 12/16E 12/17E 12/18E P/E 7.7 194.8 46.8 35.9 P/B 1.28 1.26 1.23 1.20 Dividend yield (%) 0.0 0.4 0.4 0.4 EV/sales 2.2 1.0 1.0 1.0 EV/EBITDA 92.4 45.4 26.1 22.5 EV/EBIT 791.4 203.5 47.4 37.6 ROE analysis (%) 12/15A 12/16E 12/17E 12/18E ROE 25.2 0.6 2.7 3.4 ROIC 0.2 0.1 1.9 2.4 The price relative chart measures performance against the KOREA SE KOSPI Credit ratios 12/15A 12/16E 12/17E 12/18E IDX which closed at 2,067.57 on 31-Jan-2017 Net debt/equity (%) 30.0 25.2 22.1 21.1 On 31-Jan-2017 the spot exchange rate was W1,150.65/US$1 Net debt/EBITDA (x) 17.26 7.32 3.83 3.24

Source: Company data, Thomson Reuters, Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 4 2 February 2017

Reshuffling process may be accelerated Samsung Group’s Samsung Group's active reshuffling work in recent years (since late 2013) has been a two- reshuffling work will pronged strategy—operational and governance. not only help enhance the controlling family’s Samsung Group’s exit from the machinery/ chemical business with the disposal of its governance power in controlling stake in its machinery/ chemical affiliates to Hanwha Group in 2014 and Lotte the group but also Group in 2105 reflect the group management's enhanced focus on its core electronics significantly reduce the business. gap between interest of In the meantime, the merger between Samsung C&T and Cheil Industries in 2015 was one the controlling family of the key events for change in its governance structure, which has significantly enhanced and that of the the controlling Lee family's governance power on Samsung Electronics, although it minorities eventually appears still a long way before the Group’s governance structure assumes the final shape. Samsung Group may reconsider the schedule of the remaining major steps in the ongoing reshuffling process due to the political churn in Korea of late, implying increased uncertainty in the timing of the remaining major events within the reshuffling work. However, regardless of the final outcome of the ongoing scandal, we expect Samsung Group to continue the reshuffling work, which would not only help enhance the controlling family’s governance power in the group but also significantly reduce the gap between interest of the controlling family and that of the minorities. While the major restructuring events that have happened so far are irreversible, we fail to find a better alternative. Indeed, given (1) the improving trend of the governance structure-related regulations in Korea of late and (2) the increasing request for a transparent governance structure, we think Samsung Group may accelerate the remaining reshuffling work. Samsung Group’s final ownership structure after the completion of our reshuffling scenario would satisfy most of the related regulations/restrictions even if regulations/restrictions are further enhanced by proposed bills in the National Assembly currently. It is uncertain at the current stage how many of the proposed bills would be approved and implemented.

Figure 4: Samsung Group–governance structure reshuffling scenario by Credit Suisse (the essential five steps + the optional three steps + the optimal two steps) Steps Process The essential five steps Essential 1 A demerger of Samsung Electronics into a HoldCo and an OpCo Essential 2 1) SEC HoldCo’s acquisition of Life/F&M's 7.8%/1.3% stakes in SEC OpCo 2) SEC HoldCo’s acquisition of Samsung Group affiliates' (ex. C&T) stakes in non-financial affiliates of Samsung Group 3) Life's acquisition of Samsung F&M's 15.9% stakes in treasury Essential 3 Share swap of Lee family's 4.8%/17.0% stakes in SEC OpCo/SDS into shares of SEC HoldCo Essential 4 Share swap of C&T's stakes in non-financial Samsung Group affiliates into shares of SEC HoldCo Essential 5 Lee family’s (and other investors) acquisition of SDI, F&M, SEMCO's 6.2% stake in C&T The optional three steps after the completion of the essential five steps Optional 1 A demerger of Samsung Life into a financial HoldCo and an OpCo Optional 2 A demerger of C&T into an OpCo and a financial HoldCo (with stakes in Samsung Life) Optional 3 A merger between C&T financial HoldCo and Life financial HoldCo The additional two steps for an optimal structure in the long term after the completion of the 5+3 steps Optimal 1 A merger between C&T OpCo and SEC HoldCo Optimal 2 Share swap of Lee family's 20.8% stake in Life OpCo into shares of the Financial HoldCo

Source: Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 5 2 February 2017

Figure 5: Korea—key regulations related to the ongoing reshuffling process of Samsung Group Regulation Details Conditions for If a non-financial company’s total asset is >W100 bn, non-financial HoldCos and aggregated value of its stakes in its subsidiaries is >50% of its total asset, Then, the company automatically transits to a formal non-financial holdco, which is designated/regulated by FTC A non-financial HoldCo MUST maintain gross gearing of <200% MUST own >40% stakes in its subsidiaries (>20% for listed subsidiaries; Should also be the largest shareholder) NOT allowed to own >5% stake in non-affiliated companies NOT allowed to own any stake in other affiliates but its direct subsidiaries NOT allowed to own any share in financial/ insurance companies in Korea (grace period of two years) A subsidiary of MUST own >40% stake in its subsidiaries (>20% for listed subsidiaries) a non-financial HoldCo NOT allowed to own any stake in other affiliates but its direct subsidiaries A grandson subsidiary MUST own the entire 100% stake in its subsidiaries of a non- financial HoldCo NOT allowed to own any stake in other affiliates but its direct subsidiaries A non-bank MUST maintain gross gearing of <200% financial HoldCo MUST own >50% stake in subsidiaries (>30% for listed subsidiaries) NOT allowed to own >5% stake in non-financial companies NOT allowed to own >5% stake in non-affiliated companies A subsidiary of MUST own >50% stake in their own subsidiaries (>30% for listed subsidiaries) financial HoldCos NOT allowed to be a controlling shareholder in a non-financial company A grandson subsidiary of financial NOT allowed to be a controlling shareholder in a non-financial company HoldCos An insurance company NOT allowed to invest >7% of its total asset into equity/bonds issued by a single company NOT allowed to own >15% stake in non-subsidiaries NOT allowed to be a controlling shareholder in a non-financial company What is not allowed for Cross stake holding structure between the affiliates Chaebol affiliates… Incremental circular stake holding structure among affiliates other than the existing ownerships A Chaebol financial/ insurance company cannot exercise its voting rights for its stakes in their affiliates

Source: Korea Ministry of Government Legislation, Credit Suisse

Figure 6: Samsung Group—Implication from the potential enhancement of the governance structure-related regulations, which are proposed in the National Assembly currently Proposed bills in the National Does Samsung Group's current Does any of process within CS' Does Samsung Group's final Remarks Assembly structure breach the regulation? reshuffling scenario breach the structure under CS' reshuffling regulation or is affected by the scenario breach the regulation? regulation? Current After the Current After the Current After the enhancement enhancement enhancement Enhancement of restriction on No Yes No No No No CS’s 5+3+2 step scenario clears circular ownership current circular ownership Restriction of voting right of No No No Yes No Yes SEC HoldCo may not have HoldCo's stakes in OpCo from enough stake for control in SEC treasury shares, in case of a OpCo if this bill is implemented HoldCo/OpCo split-up Enhancement of insurance No Yes No No No No CS scenario clears a potential companies' investment limit in breach even if the bill is affiliates out of their total assets implemented Enhancement of restrictions on No No Yes Yes No No CS’s 5+3+2 step scenario would holding companies satisfy most conditions even if the bill is implemented Enhancement of restrictions on Yes Yes No No Yes Yes Samsung C&T's revenues to other inter-affiliates transaction by an Samsung Group affiliates can be affiliate, in which the controlling affected if the bill is implemented family has sizable direct ownership Enhancement of restrictions on No Yes No No No Yes Samsung's several foundations public foundations' voting rights for own small stakes in C&T, their stakes in affiliated companies Electronics, Life, F&M, etc. Note: it is uncertain at current stage how many of the proposed bills here would be approved and implemented. Source: National Assembly, Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 6 2 February 2017

Figure 7: Korea—Special Act for Corporate Restructuring Promotion (often called One Shot Law) Regulation Content Expansion of range of small scale merger, If number of total new share issuance for a merger plan is <10% of the acquirer's current total outstanding shares, the merger is which does not require approval by the considered as a ‘Small scale merger’ under current regulation. The One Shot Law expands range of the small scale merger cap to acquirer's shareholders 20% from 10% temporarily until August 2018, which would enable lots of merger plans without approval by the acquirer's shareholders and without put pack option offering to the dissenting shareholders. Easing of put back option regulation for Reduction of the dissenting shareholders’ put back exercise period against a merger plan from current 20 days to 10 days dissenting shareholders in merger process Extension of the dissenting put back purchase period from current one month to three months Easing of restrictions on holding Lift of maximum gross gearing cap of 200% for HoldCos companies1 Lift of minimum stake ownership of 40% in their subsidiaries (20% for the listed subsidiaries) Lift of ban on >5% stake ownership in non-affiliates Easing of restrictions on subsidiaries of Lift of minimum stake ownership of 40% in their subsidiaries (20% for the listed subsidiaries) holding companies1 Lift of ban on any stake ownership in other affiliated companies but their own direct subsidiaries Easing of restrictions on grandson Relaxation of the grandson subsidiaries’ minimum stake ownership in affiliated companies from 100% to 50% subsidiaries of holding companies1 Note: The One Shot Law was implemented on 13 August 2016 and temporarily effective for the following three years. 1: The grace period is 1-2 years currently if a holding company or its subsidiaries are not satisfying the restrictions. Source: Korea Ministry of Government Legislation, Credit Suisse

Figure 8: Samsung Group—shareholding structure of the major affiliates (Current)

Lee family

17.1% 4.9% 31.1% 1.5% 20.8% Samsung C&T 2.6% (13.8%)

4.3% 0.1% 1.4% 19.3% 17.1% Samsung Samsung SDS Samsung Life Electronics 7.6% (0.1%) (10.2%) 22.6% (12.8%) 1.3% 43.4% 7.0% 3.4% 31.5% 22.8% 17.6% 15.0% 0.1%

SEMCO Samsung Heavy Samsung F&M Samsung Biologics Samsung Eng (2.7%) (11.3%) 0.2% (15.9%) 2.4%

2.1% 0.1% 71.9% 11.7%

19.6% Samsung SDI Samsung Card (1.3%) (2.3%)

Note: Figures in parenthesis are stakes in treasury. Based on share price on 23 Jan 2017 and a demerger ratio of 30 : 70 between SEC HolCo and SEC OpCo. Stake ownership is based on common shares only. Minor stake holdings or stakes in non-major affiliates are ignored. Source: Company data, Credit Suisse

Samsung C&T Corporation (028260.KS / 028260 KS) 7 2 February 2017

Figure 9: Samsung Group—ownership and financial structure of the major affiliates (Current) (23 Jan 2017) C&T SEC Life F&M Card SDS SDI SEMCO Biologics Heavy Eng Basic info

# of shares (mn) 189.7 140.7 200.0 47.4 115.9 77.4 68.8 74.7 66.2 230.9 196.0 Share price (W) 120,500 1,903,000 112,000 273,500 38,750 132,000 106,500 54,200 155,500 10,400 11,600 Mkt cap (W bn) 22,858 267,713 22,400 12,957 4,490 10,214 7,323 4,048 10,289 2,401 2,274 Stake owned by (%) Lee family 31.1 4.9 20.8 17.0 1.5 C&T 4.2 19.3 17.1 43.4 0.1 7.0 SEC 22.6 19.6 23.7 31.5 17.6 Life 0.0 7.6 15.0 71.9 3.4 0.0 F&M 1.4 1.3 0.2 SDI 2.1 0.4 11.7 SEMCO 2.6 2.4 Other related parties 2.0 0.1 6.9 3.4 0.8 0.1 Aggregated 39.3 18.1 47.0 18.4 71.9 56.7 20.4 23.7 74.9 24.1 20.5 Treasury 13.8 12.8 10.2 15.9 2.3 0.0 0.1 2.7 0.0 11.2 Samsung+T shares 53.1 30.9 57.2 34.3 74.1 56.7 20.5 26.4 74.9 35.3 20.5 MV of the Samsung's stakes (W bn) Lee family 7,111 13,148 4,664 0 0 1,738 0 0 0 0 35 C&T 0 11,373 4,333 0 0 1,744 0 0 4,469 3 159 SEC 0 0 0 0 0 2,306 1,434 959 3,240 423 0 Life 0 20,215 0 1,942 3,226 0 0 0 0 81 1 F&M 315 3,533 0 0 0 0 0 0 0 0 5 SDI 487 0 0 0 0 0 0 0 0 10 266 SEMCO 603 0 0 0 0 0 0 0 0 57 0 Other related parties 461 242 1,537 444 0 0 61 0 0 3 0 Aggregated 8,977 48,511 10,533 2,385 3,226 5,788 1,495 959 7,710 578 465 Treasury 3,160 34,220 2,288 2,064 103 4 4 108 0 270 0 Samsung+T shares 12,138 82,731 12,821 4,449 3,329 5,792 1,498 1,067 7,710 848 465 Consolidated (W bn) Total asset 40,359 244,471 262,116 68,049 20,275 6,556 15,244 7,326 5,960 16,475 5,377 Liabilities 22,252 64,935 231,209 55,994 13,623 1,503 4,127 2,989 3,186 11,371 4,308 Equity 18,107 179,536 30,908 12,055 6,652 5,053 11,117 4,337 2,775 5,104 1,069 Net debt (Net cash) 4,563 -69,165 -2,178 7 969 657 5,142 1,096 Gross gearing (%) 123% 36% 748% 464% 205% 30% 37% 69% 115% 223% 403% Parent (W bn, Sep 2016) Total asset 33,009 165,002 226,244 67,762 20,219 5,223 13,940 5,340 5,960 15,775 4,696 Liabilities 16,320 33,095 203,378 55,806 13,542 815 3,338 1,293 3,186 10,806 3,630 Equity 16,689 131,907 22,866 11,956 6,677 4,408 10,602 4,047 2,775 4,968 1,067 Net debt (Net cash) 3,512 -25,789 -1,388 288 -432 657 4,306 590 Gross gearing (%) 98% 25% 889% 467% 203% 18% 31% 32% 115% 218% 340% Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Source: Company data, Credit Suisse

Samsung C&T Corporation (028260.KS / 028260 KS) 8 2 February 2017

Figure 10: Samsung Group—major reshuffling events since 2013

Date Acquirer/ Issuer Target company Events CS view about the background Sep. 13 Cheil Ind (Everland) Former-Cheil Ind Announced to take over former-Cheil Ind's fashion division by Dec 2013 (W1.0 tn) A governance event Oct. 13 Samsung SDS Samsung SNS Announced merger with Samsung SNS by Dec 2013 To increase JY Lee's ownership in SDS Nov. 13 S1 Corp Cheil Ind (Everland) Announced to take over Everland's building mgt business by Jan 2014 (at W0.5 tn) A governance event Nov. 13 Cheil Ind (Everland) Samsung Welstory Announced a spin-off of its food catering division by Dec 2013 (Samsung An operational decision Welstory) Dec. 13 Samsung C&T Samsung Eng Acquired the stake of Samsung Eng (0% → 7.8%) from Samsung SDI and others A pre-step for clearance of the circular ownership structure Dec. 13 Samsung Life Samsung Card Acquired the stake of Samsung Card (28% → 34%) from Samsung C&T and Integration of financial affiliates others of Samsung Group under Life Mar. 14 Samsung SDI Former-Cheil Ind Announced a merger with former-Cheil Ind by Jul 2014 A pre-step for clearance of the (SDI issued new shares by 51% of its old shares) circular ownership structure Mar. 14 Samsung C&T / Cheil Seoul Lake Side Announced a joint acquisition of Seoul Lake Side Golf Club at W350 bn (80:20) An operational decision Ind Golf Club May. 14 Samsung SDS n.a Announced to go public by end-2014 To minimise potential reputational risk May. 14 Chairman Lee n.a Took emergency surgery due to a heart attack May. 14 Samsung Life Samsung Asset Announced to fully acquire (5.5% → 100%) Samsung Asset from Sec and others Integration of financial affiliates of Samsung Group under Life May. 14 Samsung Securities Samsung Futures Announced to fully acquire Samsung Futures Integration of financial affiliates of Samsung Group under Life Jun. 14 Cheil Ind n.a Announced to go public by end-2014 To minimise potential reputational risk Sep. 14 Samsung Heavy1 Samsung Eng1 Announced merger with Samsung Eng by Dec 2014* (Samsung Heavy was to An operational decision issue new shares by 41% of its old shares) Nov. 14 SEC/ C&T and others2 Samsung Samsung Group has agreed to sell its 32.4% stake in Samsung Techwin at W842 An operational decision Techwin/Samsung bn and 57.6% stake (including Lee family's 6.1% stake) in Samsung General General Chemical2 Chemical at W1,060 bn to Hanwha Group. Nov. 14 SEC n.a SEC first share buyback since 2007 - buying back 1.65mn common shares (1.1% of total) and 250K preferred shares (1.1% of total); total amount W2.2 tn Dec. 14 SEC n.a Announced increase of DPS for FY2014 by 30-50% YoY May. 15 Cheil Ind (Everland) Samsung C&T Announced merger between Cheil Ind and Samsung C&T by Sep 2015 To enhance Lee family's control on C&T's 4.0% stakes in SEC Jun. 15 SEC SDS SEC officially denied any merger plan with SDS Aug. 15 SDI, Fine Chemical SDI, Fine Chemical SDI announced acquisition of Samsung Fine Chemical's battery business at W19 An operational decision bn and disposal of its 29% stakes in Samsung BP Chemical at W82 bn to Samsung Fine Chemical Oct. 15 Samsung Securities n.a Announced buyback of its own 2.45 mn shares (3.2% stake; no retirement), which A governance-related event would increase its t-shares from 5.5% to 8.7%. Oct. 15 Samsung F&M n.a Announced buyback of its own 1.66 mn shares (3.5% stake; no retirement), which A governance-related event would increase its t-shares from 12.4% to 15.9%. Oct. 15 SEC n.a SEC announced its first ever active shareholder return policy; (1) Spending W11.3 A governance-related event tn in total for share buyback/cancellation over the following 9-12 months (no cancellation for existing t-shares), (2) Returning 30-50% of FCF over 2015-17 back to its shareholders via dividend and share buyback/cancellation, and (3) Introducing quarterly dividend payment system from 2016 Oct. 15 SEC SDS SEC again firmly denied any merger plan with SDS A governance-related decision Oct. 15 SDI, SEC, C&T and SDI' chemical Samsung Group has agreed to sell (1) 90% stakes of SDI's chemical division after An operational decision Hotel Shilla division, Samsung a spin-off, (2) its controlling 31.2% stake in Samsung Fine Chemical (owned by Fine Chemical and SDI, SEC, C&T and Shilla), which also owns 49.0% stake in Samsung BP Samsung BP Chemical, at c.W3.0 tn to Lotte Chemical. Chemical Dec. 15 JY Lee Samsung JY Lee announced to participate max W300 bn in Samsung Eng's new rights To help Samsung Eng's new Engineering offering plan for cash raise of W1.2 tn. JY Lee has zero direct stake in Samsung rights offering plan Eng. Jan. 16 Samsung Life Samsung Card Samsung Life announced acquisition of Samsung Electronics' 37.4% stakes in A pre-step for SEC's split-up into Samsung Card at W1.54 tn (W35,500/share for 43.4mn shares), which would a HoldCo and an OpCo, in our increase Samsung Life's stake in Samsung Card from 34.4% to 71.9%. Samsung view, given a non-financial Life also announced buyback of its own 3.0mn shares (1.5% stake; no retirement) HoldCo and its subsidiaries are on the same day, which would increase its t-shares from 5.46% to 6.96%. not allowed to own stakes in financial affiliates.

Samsung C&T Corporation (028260.KS / 028260 KS) 9 2 February 2017

Date Acquirer/ Issuer Target company Events CS view about the background Jan. 16 JY Lee SDS JY Lee disposed 2.05% stake in SDS at W382 bn (W240,500/share for 1.59mn A governance-related decision shares). Lee family's stakes in SDS has been reduced from 19.1% to 17.0% (JY's direct ownership in SDS has been decreased from 11.25% to 9.20%). Feb. 16 JY Lee, Samsung Public Samsung C&T Samsung SDI disposed 5.0mn shares (2.64%) in C&T at W765 bn (W153,000/ A governance-related decision Welfare Foundation share), which is to satisfy FTC’s due date of 1 March 2016 to resolve incremental circular holding structure within Samsung Group by the merger between Samsung C&T and Cheil Industries in Sep 2015. Out of the 5.0mn shares, JY Lee and Samsung Public Welfare Foundation acquired 1.3mn/ 2.0mn shares at W199 bn/ W306 bn, respectively. Feb. 16 JY Lee Samsung JY Lee acquired 3.0mn shares (1.54%) in Samsung ENG's treasury at W30 bn Engineering (W9,980/ share) Oct. 16 SEC Cheil Worldwide SEC acquired 14.5mn shares (12.64%) in Cheil Worldwide from Samsung C&T at W268 bn (W18,400/ share) Nov. 16 Samsung Biologics Samsung Biologics IPO of Samsung Biologics Nov. 16 SEC SEC Confirmed (1) review of demerger plan of SEC, (2) pay back 50% of FCF in 2016- 17 to shareholders (including dividend and share retirement), and (3) establishment of an efficient capital management policy. 1: The merger attempt had failed. 2: The disposal deal was completed in June 2015. Source: Company data, Credit Suisse

Samsung C&T Corporation (028260.KS / 028260 KS) 10 2 February 2017

Samsung Electronics’ HoldCo/OpCo split-up, an essential step, favours the minorities Samsung Group would Korea’s major Chaebol groups’ (including Samsung Group) ongoing reshuffling work of eventually evolve into a their ownership/ governance structure appears to have the following three key goals or dual-layer holding requirements, in our view. company structure after the split-up of (1) Clearance of the Group’s current circular ownership structure, Samsung Electronics (2) Enhancement of the controlling family's ownership/ control (the Lee family, in case of into a HoldCo and an Samsung Group) over the entire Group (particularly over Samsung Electronics, in case of OpCo Samsung Group), (3) Minimisation of net cash outflow (which are mainly tax) from the controlling families and/or their affiliates. After checking through the feasibility of multiple possible scenarios, we believe that Samsung Group would eventually evolve into a dual-layer holding company structure after the split-up of Samsung Electronics (SEC) into a HoldCo and an OpCo, which Samsung Electronics admits could be under consideration. Within the structure, Samsung C&T would be at the top while Samsung Electronics Holdings would be at the second spot under Samsung C&T. We think that the dual-layer holding company structure is the optimal way at least in the near term to achieve the three key goals/ requirements of the Group’s ongoing reshuffling process with minimised financial burden and reputational risk for the family/Group. A split-up of Samsung We believe that a split-up of Samsung Electronics into a HoldCo and an OpCo is the most Electronics into a likely next major event given the other major steps require the split-up first, while there still HoldCo and an OpCo are several other steps remaining for completion in the dual-layer holding company appears the most likely structure. In case of a split-up of SEC, we estimate a demerger ratio of 30:70 between next major event SEC HoldCo and SEC OpCo. This implies current 100 shares in SEC would be converted into 30 shares of SEC HoldCo and 70 shares of SEC OpCo after the demerger assuming the HoldCo would have SEC's current 12.8% stake in treasury, its stakes in other Samsung Group affiliates and net cash of W20 tn out of SEC's current total consolidated net cash of W73 tn and the OpCo would keep SEC's current entire global operations and all other assets/liabilities. While the split-up plan requires approval by Samsung Electronics’ shareholders, we see no major barriers to shareholder approval given the split-up implies unlocking of underappreciated value in its investment asset and helps increase the value of minority shareholders in the company. After completion of the essential five steps within our reshuffling scenario for Samsung Group, the Lee family would eventually have 37% stake in Samsung C&T, which would mean a net cash outflow of W1.4 tn to the family. And the family would eventually control the entire Samsung Group, including SEC HoldCo, SEC OpCo and Samsung Life through Samsung C&T. Samsung Life also Meanwhile, given the active changes in shareholding structure of Samsung Fire & Marine appears to be and Samsung Card over the past 12 months, Samsung Life appears to be preparing for a preparing for a split-up transition into a financial HoldCo, meaning a split-up of Samsung Life into a financial into a financial HoldCo HoldCo and a non-life insurance company, which does not seem a mandatory step under and a non-life the current regulation though. In this case, after the split-up of Samsung Life, we expect insurance company (1) a split-up of Samsung C&T into an OpCo (with stakes in SEC HoldCo and Samsung Biologics) and a financial HoldCo (with stakes in Samsung Life), and (2) a merger between C&T financial HoldCo and Life financial HoldCo to follow. This means, the integrated financial HoldCo would have controlling stake in every financial affiliate of Samsung Group.

Samsung C&T Corporation (028260.KS / 028260 KS) 11 2 February 2017

Figure 11: Samsung Group— shareholding structure of the major affiliates (E, Interim-final, after completion of the essential five steps)

Lee family

16.1% 37.3% 20.8%

Samsung C&T (12.3%)

14.4% 19.3% 43.4%

31.5% Samsung Samsung Life SEC HoldCo Biologics 6.7% (10.2%)

1.2%

30.8% 19.6% 23.7% 23.9% 18.9% 56.7% 30.9% 71.9% Samsung Samsung Samsung Samsung SEC OpCo SDI SEMCO Heavy Eng SDS Samsung F&M Samsung Card (1.3%) (6.1%) (1.5%) (0.1%) (15.9%) (0.4%)

Figure 12: Samsung Group— shareholding structure of the major affiliates (E, Final, after completion of the essential five steps and the optional three steps)

Lee family

16.1% 37.3% 23.9%

Samsung C&T (13.8%)

43.4% 14.4%

31.5% Samsung Financial SEC HoldCo Holdco (26.5%) Biologics 20.8%

29.6% 1.2%

30.9% 71.9%

30.8% 19.6% 23.7% 23.9% 18.9% 56.7% 6.7% Samsung Samsung Samsung Samsung Life Samsung F&M Samsung Card SEMCO Samsung SEC OpCo SDI Heavy SDS (10.2%) (15.9%) (2.3%) (2.7%) Eng (1.3%) (11.3%) (0.1%)

Samsung C&T Corporation (028260.KS / 028260 KS) 12 2 February 2017

Figure 13: Samsung Group—ownership and financial structure of the major affiliates (E, Interim-final, after completion of the essential five steps) (23 Jan 2017) C&T SEC SEC Life F&M Card SDS SDI SEMCO Biologics Heavy Eng HoldCo OpCo Basic info (common only) # of shares (mn) 189.7 48.5 97.6 200.0 47.4 115.9 77.4 68.8 74.7 66.2 230.9 196.0 Share price (W) 120,500 1,903,000 1,903,000 112,000 273,500 38,750 132,000 106,500 54,200 155,500 10,400 11,600 Mkt cap (W bn) 22,858 92,228 185,642 22,400 12,957 4,490 10,214 7,323 4,048 10,289 2,401 2,274 Stake owned by (%) Lee family 37.3 16.1 20.8 1.5 C&T 14.4 19.3 43.4 SEC HoldCo 30.8 56.7 19.6 23.7 31.5 23.9 18.9 SEC OpCo Life 6.7 30.9 71.9 F&M 1.2 SDI SEMCO Other related parties 2.0 0.1 0.1 6.9 3.4 0.8 0.1 Aggregated 39.3 38.5 30.9 47.0 34.3 71.9 56.7 20.4 23.7 74.9 24.1 20.5 Treasury 13.8 10.2 2.3 0.0 0.1 2.7 0.0 11.2 Samsung+T shares 53.1 38.5 30.9 57.2 34.3 74.1 56.7 20.5 26.4 74.9 35.3 20.5

MV of the Samsung's stakes (W bn) Lee family 8,516 14,885 4,664 35 C&T 13,279 4,333 4,469 SEC HoldCo 57,200 5,788 1,434 959 3,240 575 430 SEC OpCo Life 6,197 4,006 3,226 F&M 1,083 SDI SEMCO Other related parties 461 74 168 1,537 444 61 3 Aggregated 8,977 35,519 57,368 10,533 4,449 3,226 5,788 1,495 959 7,710 578 465 Treasury 3,160 2,288 103 4 4 108 0 270 Samsung+T shares 12,138 35,519 57,368 12,821 4,449 3,329 5,792 1,498 1,067 7,710 848 465

Consolidated (W bn) Total asset 40,359 84,276 180,843 262,116 68,049 20,275 6,556 15,244 7,326 5,960 16,475 5,377 Liabilities 22,252 64,935 231,209 55,994 13,623 1,503 4,127 2,989 3,186 11,371 4,308 Equity 18,107 84,276 115,908 30,908 12,055 6,652 5,053 11,117 4,337 2,775 5,104 1,069 Net debt (Net cash) 4,563 -3,113 -49,165 -7,929 -4,116 -2,178 -728 504 657 5,142 1,096 Gross gearing (%) 123% 56% 748% 464% 205% 30% 37% 69% 115% 223% 403% Parent (W bn) Total asset 33,009 84,276 101,373 226,244 67,762 20,219 5,223 13,940 5,340 5,960 15,775 4,696 Liabilities 16,320 33,095 203,378 55,806 13,542 815 3,338 1,293 3,186 10,806 3,630 Equity 16,689 84,276 68,278 22,866 11,956 6,677 4,408 10,602 4,047 2,775 4,968 1,067 Net debt (Net cash) 3,512 -3,113 -5,789 -7,929 -4,116 -1,388 -446 -897 657 4,306 590 Gross gearing (%) 98% 48% 889% 467% 203% 18% 31% 32% 115% 218% 340%

Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates.

Samsung C&T Corporation (028260.KS / 028260 KS) 13 2 February 2017

Figure 14: Samsung Group—ownership and financial structure of the major affiliates (E, Final, After completion of the essential five steps and the optional three steps) (23 Jan 2017) C&T SEC Financial SEC Life F&M Card SDS SDI SEMCO Biologics Heavy Eng HoldCo HoldCo OpCo Basic info (common only) # of shares (mn) 167.0 48.5 120.0 97.6 95.3 47.4 115.9 77.4 68.8 74.7 66.2 230.9 196.0 Share price (W) 120,500 1,903,000 120,500 1,903,000 112,000 273,500 38,750 132,000 106,500 54,200 155,500 10,400 11,600 Mkt cap (W bn) 20,123 92,228 14,456 185,642 10,679 12,957 4,490 10,214 7,323 4,048 10,289 2,401 2,274 Stake owned by (%) Lee family 37.3 16.1 23.9 20.8 1.5 C&T 14.4 43.4 Financial HoldCo 29.6 30.9 71.9 SEC HoldCo 30.8 56.7 19.6 23.7 31.5 23.9 18.9 SEC OpCo Life 6.7 F&M 1.2 SDI SEMCO Other related parties 2.0 0.1 5.9 0.1 6.9 3.4 0.8 0.1 Aggregated 39.3 38.5 29.9 30.9 57.2 34.3 71.9 56.7 20.4 23.7 74.9 24.1 20.5 Treasury 13.8 26.6 2.3 0.0 0.1 2.7 0.0 11.2 Samsung+T shares 53.1 38.5 56.5 30.9 57.2 34.3 74.1 56.7 20.5 26.4 74.9 35.3 20.5 MV of the Samsung's stakes (W bn) Lee family 7,497 14,885 3,459 2,223 35 C&T 13,279 4,469 Financial HoldCo 3,156 4,006 3,226 SEC HoldCo 57,200 5,788 1,434 959 3,240 575 430 SEC OpCo Life 6,197 F&M 1,083 SDI SEMCO Other related parties 406 74 859 168 733 444 61 3 Aggregated 7,903 35,519 4,319 57,368 6,112 4,449 3,226 5,788 1,495 959 7,710 578 465 Treasury 2,782 3,843 103 4 4 108 0 270 Samsung+T shares 10,685 35,519 8,161 57,368 6,112 4,449 3,329 5,792 1,498 1,067 7,710 848 465 Consolidated (W bn) Total asset 36,026 84,276 14,585 180,843 249,597 68,049 20,275 6,556 15,244 7,326 5,960 16,475 5,377 Liabilities 20,086 10,513 64,935 222,862 55,994 13,623 1,503 4,127 2,989 3,186 11,371 4,308 Equity 15,940 84,276 4,072 115,908 26,735 12,055 6,652 5,053 11,117 4,337 2,775 5,104 1,069 Net debt (Net cash) 4,563 -3,113 -2,379 -49,165 -5,550 -4,116 -2,178 -728 504 657 5,142 1,096 Gross gearing (%) 126% 258% 56% 834% 464% 205% 30% 37% 69% 115% 223% 403% Parent (W bn) Total asset 28,676 84,276 14,585 101,373 213,724 67,762 20,219 5,223 13,940 5,340 5,960 15,775 4,696 Liabilities 14,153 0 10,513 33,095 195,032 55,806 13,542 815 3,338 1,293 3,186 10,806 3,630 Equity 14,522 84,276 4,072 68,278 18,693 11,956 6,677 4,408 10,602 4,047 2,775 4,968 1,067 Net debt (Net cash) 3,512 -3,113 -2,379 -5,789 -5,550 -4,116 0 -1,388 -446 -897 657 4,306 590 Gross gearing (%) 97% 0% 258% 48% 1043% 467% 203% 18% 31% 32% 115% 218% 340% Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 14 2 February 2017

Lee family's friendly stake in SEC HoldCo could rise from 18% to as high as 39% through two share swaps without any cash outflow Lee family and Out of the several possible options, we believe that a share swap of the controlling Lee Samsung C&T will family's 4.9%/17.0% stakes in SEC OpCo/Samsung SDS (worth W10.9 tn in aggregate likely attempt share currently; based on current share prices of SEC/SDS and our demerger ratio estimate) swaps with their stakes into shares of SEC HoldCo after the split-up of SEC is the most feasible way to increase in SEC OpCo/SDS into Lee family's direct ownership in SEC HoldCo with minimised cash cost burden (i.e., zero shares of SEC HoldCo, tax incurred effectively). in our view After completion of the first share swap, we expect Samsung C&T to attempt another share swap with its stakes in non-financial Samsung Group affiliates (including its 4.2% stake in SEC OpCo and 17.1% stake in SDS) into shares of SEC HoldCo. Of note, the two share swap plans are unlikely to require any approval from SEC HoldCo’s shareholders as SEC HoldCo’s new share issuance for the plans is unlikely to be higher than 20% of the HoldCo’s total outstanding shares if it utilises its 12.8% stake of its own under its treasury for the share swap plans, implying a minimised execution risk. All-in-all, we estimate that the Lee family/Samsung Group could increase their aggregated stake in SEC HoldCo from 18% right after the demerger of SEC into a HoldCo and an OpCo to about 39% through two share swaps without any cash injection and any cash outflow, based on current share prices of the related stocks and our demerger ratio estimate.

Figure 15: SEC HoldCo—changes in ownership by two share swaps (Step 3 and step 4 under Credit Suisse’s reshuffling scenario) After Step 2 After Step 3 After Step 4 (W tn) Mkt value1 Stake (%) Mkt value1 Stake (%) Mkt value1 Stake (%) Lee family 4.0 4.9 14.9 18.1 14.9 16.1 Samsung C&T 3.5 4.2 3.5 4.2 13.3 14.4 Other Samsung Group affiliates 7.4 9.0 7.4 8.9 7.4 8.0 Treasury 10.5 12.8 0.0 0.0 0.0 0.0 Minorities 56.7 69.1 56.7 68.8 56.7 61.5 Total 82.1 100.0 82.4 100 92.2 100.0

1: Based on closing price on 23 Jan 2017 and a demerger ratio of 30:70 between SEC HoldCo and SEC OpCo. Source: Credit Suisse estimates

Figure 16: Korea—series of sunset extensions for income tax deferral favour for share swap with holding companies

Until Dec 2003 Until Dec 2006 Until Dec 2009 Until Dec 2012 Until Dec 2015 Until Dec 2018 (initially introduced in (extended in 2003) (extended in 2006) (extended in 2009) (extended in 2012) (extended in 2015) 2000)

Note: Deferral of a company/individual's income tax payment is allowed until the disposal of the newly acquired stake in a holding company if it swaps its stakes in subsidiaries of a holdco with shares of the holding company before end-2018. Source: Korea Ministry of Government Legislation, Credit Suisse

Samsung C&T Corporation (028260.KS / 028260 KS) 15 2 February 2017

Figure 17: Samsung Group—changes in shareholding structure of the major affiliates under Credit Suisse’s reshuffling scenario (%) Stakes owned by Current Essential 1 Essential 2 Essential 3 Essential 4 Essential 5 Optional 1 Optional 2 Optional 3 Samsung C&T Lee family 31.1 31.1 31.1 31.1 31.1 37.3 37.3 37.3 37.3 Other related parties 8.2 8.2 8.2 8.2 8.2 2.0 2.0 2.0 2.0 Aggregated 39.3 39.3 39.3 39.3 39.3 39.3 39.3 39.3 39.3 T-shares 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 Aggregated + t-shares 53.1 53.1 53.1 53.1 53.1 53.1 53.1 53.1 53.1 C&T Financial HoldCo Lee family 37.3 23.9 Other related parties 2.0 5.9 Aggregated 39.3 29.9 T-shares 13.8 26.6 Aggregated + t-shares 53.1 56.5 SEC (SEC OpCo) Lee family 4.9 4.9 4.9 C&T 4.2 4.2 4.2 4.2 SEC HoldCo 12.8 21.7 26.6 30.8 30.8 30.8 30.8 30.8 Life 7.6 7.6 Other related parties 1.4 1.4 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Aggregated 18.1 30.9 30.9 30.9 30.9 30.9 30.9 30.9 30.9 T-shares 12.8 Aggregated + t-shares 30.9 30.9 30.9 30.9 30.9 30.9 30.9 30.9 30.9 SEC HoldCo Lee family 4.9 4.9 18.1 16.1 16.1 16.1 16.1 16.1 C&T 4.2 4.2 4.2 14.4 14.4 14.4 14.4 14.4 Life 7.6 7.6 7.5 6.7 6.7 6.7 6.7 6.7 Other related parties 1.4 1.4 1.4 1.3 1.3 1.3 1.3 1.3 Aggregated 18.1 18.1 31.2 38.5 38.5 38.5 38.5 38.5 T-shares 12.8 12.8 0.0 Aggregated + t-shares 30.9 30.9 31.2 38.5 38.5 38.5 38.5 38.5 Life (Life OpCo) Lee family 20.8 20.8 20.8 20.8 20.8 20.8 20.8 20.8 20.8 C&T 19.3 19.3 19.3 19.3 19.3 19.3 19.3 C&T financial HoldCo 19.3 29.6 Life HoldCo 10.2 10.2 Other related parties 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 6.9 Aggregated 47.0 47.0 47.0 47.0 47.0 47.0 57.2 57.2 57.2 T-shares 10.2 10.2 10.2 10.2 10.2 10.2 Aggregated + t-shares 57.2 57.2 57.2 57.2 57.2 57.2 57.2 57.2 57.2 Life HoldCo Lee family 20.8 20.8 C&T 19.3 C&T financial HoldCo 19.3 Other related parties 6.9 6.9 Aggregated 47.0 47.0 T-shares 10.2 10.2 Aggregated + t-shares 57.2 57.2 Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HolCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 16 2 February 2017

Figure 18: Samsung Group—changes in shareholding structure of the major affiliates under Credit Suisse’s reshuffling scenario (%) Stakes in Current Essential 1 Essential 2 Essential 3 Essential 4 Essential 5 Optional 1 Optional 2 Optional 3 Lee family C&T 31.1 31.1 31.1 31.1 31.1 37.3 37.3 37.3 37.3 C&T Financial HoldCo 37.3 23.9 SEC 4.9 SEC HoldCo 4.9 4.9 18.1 16.1 16.1 16.1 16.1 16.1 SEC OpCo 4.9 4.9 Life 20.8 20.8 20.8 20.8 20.8 20.8 20.8 20.8 20.8 Life HoldCo 20.8 20.8 SDS 17.0 17.0 17.0 Samsung C&T SEC 4.2 SEC HoldCo 4.2 4.2 4.2 14.4 14.4 14.4 14.4 14.4 SEC OpCo 4.2 4.2 4.2 Life 19.3 19.3 19.3 19.3 19.3 19.3 19.3 Life HoldCo 19.3 SDS 17.1 17.1 17.1 17.1 Biologics 43.4 43.4 43.4 43.4 43.4 43.4 43.4 43.4 43.4 Treasury 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 13.8 C&T Financial HoldCo Life 19.3 29.6 Life HoldCo 19.3 F&M 30.9 Card 71.9 Treasury 13.8 26.6 SEC (SEC OpCo) SDS 22.6 SDI 19.6 SEMCO 23.7 Heavy 17.6 Treasury 12.8 SEC HoldCo SEC OpCo 12.8 21.7 26.6 30.8 30.8 30.8 30.8 30.8 SDS 22.6 22.6 39.6 56.7 56.7 56.7 56.7 56.7 SDI 19.6 19.6 19.6 19.6 19.6 19.6 19.6 19.6 SEMCO 23.7 23.7 23.7 23.7 23.7 23.7 23.7 23.7 Heavy 17.6 23.8 23.8 23.9 23.9 23.9 23.9 23.9 Treasury 12.8 12.8 0.0 0.0 0.0 0.0 0.0 0.0 Life (Life OpCo) SEC 7.6 SEC HoldCo 7.6 7.6 7.5 6.7 6.7 6.7 6.7 6.7 SEC OpCo 7.6 0.0 Non-Financial HoldCo F&M 15.0 15.0 30.9 30.9 30.9 30.9 Card 71.9 71.9 71.9 71.9 71.9 71.9 Treasury 10.2 10.2 10.2 10.2 10.2 10.2 Life HoldCo Life 10.2 10.2 F&M 30.9 30.9 Card 71.9 71.9 Treasury 10.2 10.2 Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HolCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 17 2 February 2017

Figure 19: Samsung Group—cash flow of the major affiliates under Credit Suisse’s reshuffling scenario (W bn) Current Essential 1 Essential 2 Essential 3 Essential 4 Essential 5 Optional 1 Optional 2 Optional 3 Total Lee family Inflow 0 Outflow 1,405 1,405 Net CF -1,405 -1,405 SEC HoldCo Inflow 0 Outflow 16,887 16,887 Net CF -16,887 -16,887 Life Inflow 14,100 0 14,100 Outflow 6,172 0 6,172 Net CF 7,928 0 7,929 F&M Inflow 4,519 315 4,834 Outflow 718 0 718 Net CF 3,800 315 4,116 SDI Inflow 276 487 763 Outflow 0 29 29 Net CF 276 459 735 SEMCO Inflow 57 603 660 Outflow 17 178 195 Net CF 40 425 465 Aggregated Inflow 18,952 1,405 20,357 Outflow 23,794 1,612 25,406 Net CF -4,842 -206 -5,048 Note: The total net cash outflow of W5.0 tn (E) to the outside of Lee family/Samsung Group is purely income tax on capital gains from disposal of their stakes in other Samsung Group affiliates within the reshuffling process. Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates

Figure 20: Samsung Group—income tax on capital gains from disposal of stakes in other Samsung Group affiliates under Credit Suisse’s reshuffling scenario (W bn) Current Essential 1 Essential 2 Essential 3 Essential 4 Essential 5 Optional 1 Optional 2 Optional 3 Total Samsung Life 4,108 0 4,108 Samsung F&M 718 0 718 Samsung SDI 0 29 29 SEMCO 17 178 195 Total 4,843 206 5,049

Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 18 2 February 2017

A merger between SEC (or SEC HoldCo) and SDS unlikely given a bigger side-effect than a tiny benefit Increase in the A merger between SEC and SDS is highly unlikely as SEC has already officially denied. controlling family’s While minority shareholders of SEC would be barely supportive of the merger plan given friendly stake in SEC SDS' higher valuation over that of SEC, the merger could increase the family/Group's by a merger between stake in SEC only marginally, implying a bigger reputational risk for the controlling family SEC and SDS is very versus the marginal benefit by the merger. marginal Figure 21: Samsung Electronics—changes in shareholding structure by merger with Samsung SDS SEC SDS SEC + SDS (W bn) Mkt value Stake Mkt value Stake Mkt value Stake Lee family 13.1 4.9% 1.7 17.0% 14.6 5.4% Samsung Group affiliates 35.4 13.2% 4.1 39.7% 37.1 13.4% Treasury 34.2 12.8% 0.0 0.0% 36.5 13.1% Minorities 185.0 69.1% 4.4 43.3% 189.4 68.1% Total 267.7 100.0% 10.2 100.0% 277.9 100.0% Note: Based on share price on 23 Jan 2017. Source: Company data, Credit Suisse estimates

From the same standpoint, we believe a merger between SEC HoldCo (after the split-up of SEC into a HoldCo and an OpCo) and SDS is also unlikely, given the limited increase in the family/Group's stake in SEC HoldCo by the merger versus a bigger reputational risk. Further, SEC HoldCo shareholders are unlikely to approve the merger plan considering SDS’ higher valuation over that of SEC, while the merger plan would require the approval from shareholders of both SEC HoldCo and SDS.

Figure 22: Samsung Electronics—changes in shareholding structure by merger with Samsung SDS SEC HoldCo1 SDS SEC HoldCo1 + SDS (W bn) Mkt value Stake Mkt value Stake Mkt value Stake Lee family 4.0 4.9% 1.7 17.0% 5.8 6.3% Samsung Group affiliates 10.8 13.2% 4.1 39.7% 12.6 13.6% Treasury 10.5 12.8% 0.0 0.0% 12.8 13.9% Minorities 56.7 69.1% 4.4 43.3% 61.1 66.2% Total 82.1 100.0% 10.2 100.0% 92.3 100.0% Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Source: Company data, Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 19 2 February 2017

A merger between C&T and SEC HoldCo offers an optimal structure but not a must process A merger between A merger between Samsung C&T and SEC HoldCo (after the split-up of SEC) would make Samsung C&T and SEC overall ownership/governance structure into an optimal straightforward one. HoldCo (after the split- up of SEC) would make Nonetheless, the final merger between C&T and SEC HoldCo for the optimal structure is an optimal ownership unlikely at least in the near term. While the merger would drastically reduce the Lee structure but family’s stake in C&T from 37% (E) to 20% (E), we fail to find any obvious benefit other substantially reduce than the optimal shape itself, which does not appear convincing enough to offset the the controlling family’s family’s disadvantage by the sizable decrease of its stake in C&T. stake in C&T It is also uncertain whether the merger plan can be approved by shareholders of SEC HoldCo. Of note, more than half of the entire shares should vote and more than two-thirds of attending shares should approve it for the final approval of a merger plan. Finally, we expect the Lee family may also try a share swap of its 20.8% stake in Life OpCo into shares of Financial HoldCo, so that it could increase its stake in the financial HoldCo from 24% to 44%.

Figure 23: Samsung Group—the additional two steps in the long term for an optimal governance structure (E, After completion of the essential five steps and the optional three steps under CS’s reshuffling scenario) Steps Process Optimal 1 A merger between C&T OpCo and SEC HoldCo Optimal 2 Share swap of Lee family's 20.8% stake in Life OpCo into shares of the Financial HoldCo

Source: Credit Suisse estimates

Figure 24: Samsung Group—the optimal shareholding structure in the long term (Final, after completion of the essential five steps + the optional three steps + the optimal two steps under CS’ reshuffling scenario)

Lee family

19.9% 44.3%

Samsung C&T Financial (14.3%) Holdco

50.4% 1.0%

30.9% 71.9%

30.8% 19.6% 23.7% 23.9% 18.9% 56.7% 74.9% 5.5% Samsung Samsung Samsung Samsung Card SEMCO Samsung Samsung Samsung Life SEC SDI Heavy SDS Samsung F&M (2.7%) Eng Biologics (2.3%) (0.1%) (11.3%) (0.1%)

Samsung C&T Corporation (028260.KS / 028260 KS) 20 2 February 2017

Figure 25: Major Samsung Group affiliates—ownership and financial structure (E, optimal, after completion of the essential five steps + the optional three steps + the optimal two steps under CS’ reshuffling scenario) (23 Jan 2017) C&T Financial SEC Life F&M Card SDS SDI SEMCO Biologics Heavy Eng HoldCo Basic info # of shares (mn) 59.0 106.5 97.6 95.3 47.4 115.9 77.4 68.8 74.7 66.2 230.9 196.0 Share price (W) 1,903,000 120,500 1,903,000 112,000 273,500 38,750 132,000 106,500 54,200 155,500 10,400 11,600 Mkt cap (W bn) 112,351 12,837 185,642 10,679 12,957 4,490 10,214 7,323 4,048 10,289 2,401 2,274 Stake owned by (%) Lee family 19.9 44.3 1.5 C&T 30.8 56.7 19.6 23.7 74.9 23.9 18.9 Financial HoldCo 50.4 30.9 71.9 SEC Life 5.5 F&M 1.0 SDI SEMCO Other related parties 0.4 6.7 0.1 6.9 3.4 0.8 0.1 Aggregated 26.8 51.0 30.9 57.2 34.3 71.9 56.7 20.4 23.7 74.9 24.1 20.5 Treasury 14.3 2.3 0.0 0.1 2.7 0.0 11.2 Samsung+T shares 41.1 51.0 30.9 57.2 34.3 74.1 56.7 20.5 26.4 74.9 35.3 20.5 MV of the Samsung's stakes (W bn) Lee family 22,383 5,683 35 C&T 57,200 5,788 1,434 959 7,710 575 430 Financial HoldCo 5,380 4,006 3,226 SEC Life 6,197 F&M 1,083 SDI SEMCO Other related parties 480 859 168 733 444 61 3 Aggregated 30,143 6,542 57,368 6,112 4,449 3,226 5,788 1,495 959 7,710 578 465 Treasury 16,061 103 4 4 108 0 270 Samsung+T shares 46,204 6,542 57,368 6,112 4,449 3,329 5,792 1,498 1,067 7,710 848 465 Consolidated (W bn) Total asset 107,023 12,966 180,843 249,597 68,049 20,275 6,556 15,244 7,326 5,960 16,475 5,377 Liabilities 20,086 10,513 64,935 222,862 55,994 13,623 1,503 4,127 2,989 3,186 11,371 4,308 Equity 86,937 2,453 115,908 26,735 12,055 6,652 5,053 11,117 4,337 2,775 5,104 1,069 Net debt (Net cash) 1,450 -2,379 -49,165 -5,550 -4,116 -2,178 -728 504 657 5,142 1,096 Gross gearing (%) 23% 429% 56% 834% 464% 205% 30% 37% 69% 115% 223% 403% Parent (W bn) Total asset 99,672 12,966 101,373 213,724 67,762 20,219 5,223 13,940 5,340 5,960 15,775 4,696 Liabilities 14,153 10,513 33,095 195,032 55,806 13,542 815 3,338 1,293 3,186 10,806 3,630 Equity 85,519 2,453 68,278 18,693 11,956 6,677 4,408 10,602 4,047 2,775 4,968 1,067 Net debt (Net cash) 399 -2,379 -5,789 -5,550 -4,116 -1,388 -446 -897 657 4,306 590 Gross gearing (%) 17% 429% 48% 1043% 467% 203% 18% 31% 32% 115% 218% 340% Note: Based on share price on 23 Jan 2017 and a demerger ratio of 30: 70 between SEC HoldCo and SEC OpCo. Stake ownership is based on common shares only. Source: Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 21 2 February 2017

Turnaround in E&C margin a key swing factor in the consolidated OP outlook Management indicates Former Samsung C&T’s E&C division had generated a steady operating profit of about that it has eventually W300 bn p.a. over 2005-2014 with an average OP margin of 4.5% p.a. during the period. fully reflected the However, the company’s E&C division reported sizable operating loss of W345 bn in 2015 expected cost overruns (including full-year operational performance of former-Samsung C&T in 2015; whereas from the problematic Samsung C&T’s official filings for 2015 do not include operational performance of former overseas projects as of Samsung C&T over Jan-Aug 2015) and a poor operating profit of W34 bn in 2016, due end-2016 mostly to sizable cost overruns from problematic overseas projects such as Roy Hill iron ore mine development in Australia. While management indicates that it has eventually fully reflected the expected cost overruns from the problematic overseas projects as of end-2016, recovery of the E&C margin appears a key swing factor for the outlook of Samsung C&T’s consolidated earnings 2017 onwards. We think that management’s assertion is largely reasonable and expect the E&C division to generate OP of W383 bn in 2017E, 65% of Samsung C&T’s entire consolidated OP of W591 bn in 2017E. Figure 26: Samsung C&T—operating profit from E&C division (reported vs. adjusted) Operating profit (nominal) Operating profit (adjusted) (W bn) (W bn) OP margin (RHS) OP margin (RHS, adjusted) 600 6 400 4 200 2 0 0

-200 -2

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

2017E 2018E -400 -4 -600 -6 -800 -8 -1,000 -10

Note: Adjusted OPs for 2012-2016 include cost overruns that were reflected in the non-OP expense. 2005-2014 figures refer former-Samsung C&T’s operational performance. 2015 figures include former-Samsung C&T’s operational performance in Jan-Aug. Source: Company data, Credit Suisse estimates

Figure 27: Samsung C&T—reflection of cost overruns on E&C division’s pre-tax profit 2012E1 201E31 2014E1 2015E 2016E Aggregated (W bn) Roy Hill Others Total Roy Hill Others Total COGS & SG&A 0 0 0 280 2303 510 0 385 385 895 Non-OP expense 1302 1002 2503 680 -1503 530 0 40 420 1,050 Total 130 100 250 960 80 1,040 0 425 425 1,945

1: Former-Samsung C&T. 2: Mostly from a couple of troubled domestic housing projects. 3: Non-OP expense of W150 bn for a power plant project in Saudi Arabia in 2014 was reclassified to COGS in 2015. Note: Samsung C&T’s construction work for the Roy Hill iron ore mine development projection in Australia was completed in early 2016. Source: Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 22 2 February 2017

Figure 28: Samsung C&T—revenues by division Figure 29: Samsung C&T—OP by division

(W bn) (W tn) E&C/Resort Trading Fashion Food Bio E&C/Resort Trading Fashion Food Bio 30 800

25 600 20 400 15 200 10

5 0

0 -200 16 17E 18E 2016 2017E 2018E

Source: Credit Suisse estimates Source: Credit Suisse estimates

Figure 30: Samsung C&T—revenues, gross profit and operating profit 20151 2016 2017E 2018E Revenues (W bn) E&C 4,244 12,953 11,896 11,094 Trading 3,597 10,538 10,643 10,643 Resort 2,025 676 717 760 Food 1,687 1,798 1,942 2,097 Fashion 1,738 1,843 1,954 2,149 Others 54 295 305 679 Total 13,345 28,103 27,457 27,422 Gross Profit (W bn) E&C 184 817 1,121 1,057 Trading 334 943 947 947 Resort 308 2292 243 257 Food 244 2632 282 304 Fashion 1,036 1,0992 1,178 1,296 Others 40 -192 16 174 Total 2,146 3,332 3,786 4,035 Operating Profit (W bn) E&C -130 34 383 370 Trading 52 70 75 75 Resort 34 47 50 53 Food 110 110 120 130 Fashion -9 -45 10 17 Others -20 -76 -47 99 Total 37 140 591 743 OP margin (%) E&C -3.1% 0.3% 3.2% 3.3% Trading 1.5% 0.7% 0.7% 0.7% Resort 1.7% 7.0% 7.0% 7.0% Food 6.5% 6.1% 6.2% 6.2% Fashion -0.5% -2.4% 0.5% 0.8% Total 0.3% 0.5% 2.2% 2.7% 1: Officially reported numbers, which only includes former-Samsung C&T’s operational performance during 1 Sep 2015 and 31 Dec 2015. 2: Estimates. Source: Company data, Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 23 2 February 2017

Tightened accounting standards from 2016 onwards to help reducing earnings volatility The enhanced Samsung C&T explains that a majority of its huge cost overruns of W425 bn from the E&C accounting standards division in 2016E (mostly in 1Q16) are primarily a result of its conservative translation of could help improve Korea’s tightened accounting standards on order-based industries (i.e., E&C, shipbuilding, accounting etc.), which was implemented in Jan 2016 aiming to protect investors of the related transparency and companies by improving accounting transparency. reduce earnings volatility of the E&C Most major Korean E&C companies and shipbuilders’ sizable cost overruns in recent division from 2017 years appear to be primarily a result of (1) intrinsically higher uncertainties in profitability of onwards, in our view mega overseas projects that generally continue over multi-years, (2) the companies’ insufficient execution capability/ experience, and (3) their aggressive bidding stance despite intensified completion after the GFC in 2008. However, we think the companies’ irregular recognitions of the huge losses and high earnings volatility in recent years are at least partly due to their untrustworthy accounting practices under relatively relaxed accounting standards, which left big room for managements’ discretionary accounting decision (i.e., delayed recognition of cost overruns, etc.). From that perspective, given no further recognition of additional sizable cost overruns from 2Q16, Samsung C&T’s explanation for the voluntary kitchen-sinking works in 2016 (mostly 1Q16), triggered by the tightened accounting standards implemented in Jan 2016, appears largely reasonable. All-in-all, we anticipate the enhanced accounting standards could help improve accounting transparency and reduce earnings volatility of the E&C division 2017 onwards.

Figure 31: Korea—revised accounting standards and public disclosure for order industries, implemented in January 2016 Standards Details Tightened accounting practice Quarterly adjustment of incremental cost by project (to avoid overstatement of earnings) and mandatory disclosure of additional information (i.e., input man-hour) by project No further discretionary recognition of additional revenues from variation order until the official confirmation of the variation order by the project owner No further discretionary inclusion of SG&A cost in COGS, which results in acceleration of the construction progress/revenue recognition and a higher-than-actual margin for a certain period Introduction of quarterly re-evaluation and quarterly provisioning on unclaimed works Enlarged mandatory disclosure Mandatory disclosure of additional key information on major projects by quarter, of which requirements revenues are >5% of annual revenues (i.e., % of completion by project, unclaimed works by project, provisioning by project, etc.) Mandatory disclosure of re-estimates of expected total COGS by segment by quarter Stricter audit process Introduction of key audit matters system, which allows auditors' access on enlarged internal information on material topics Enlarged role for internal audit committee and increased penalty to the internal audit committee in case of material accounting issue Enlarged participation of external industry experts in the audit process Enhanced supervision Enhanced monitoring on accounting process by regulators Enhanced incentive to internal whistle-blowers from current max. W100 mn to W500 mn Increase of penalties on accounting manipulation to the companies/ auditors

Source: Korea Accounting Standards Board, Credit Suisse

Samsung C&T Corporation (028260.KS / 028260 KS) 24 2 February 2017

Steady operational outlook for food business Samsung Welstory to Samsung Welstory (unlisted, a 100%-owned subsidiary of Samsung C&T) is one of remain a steady cash Korea's leading catering/ foodstuff distribution service providers. We anticipate Samsung cow Welstory to deliver a revenue CAGR of 8% over 2017-18E with a stable OP margin of 6.2%. First, on top of steady demand growth from captive customers, we expect robust demand growth from the dining industry to propel stellar demand growth, thanks to the continuing positive demographic changes for the dining demands (i.e., increasing female economic participation rate, growing single person households, etc.). Second, we anticipate ongoing consolidation trend in the domestic B2B foodstuff distribution industry to accelerate over 2017-20E, thanks to economies of scale, enhanced sanitation requirements, increasing portion of franchise/larger size restaurants and improved tax transparency for transactions of mom & pop restaurants, etc.

Figure 32: Samsung Welstory—revenue Figure 33: Korea—catering market size

(W tn) (%) (W tn) 2.5 8 15 10%

2.0 7 12 8% 1.5 9 6% 6 1.0 6 4% 0.5 5 3 2% 0.0 4 0 0% 2012 2013 2014 2015 2016 2017E 2018E 2010 2011 2012 2013 2014 2015 2016E 2017E

Sales OP margin (RHS) Catering market size YoY (RHS)

Source: Company data, Credit Suisse estimates Source: NSO, Credit Suisse estimates

Figure 35: Korea—B2B foodstuff distribution market Figure 34: Korea—food catering market share and top 6 companies' aggregated market share

Samsung Welstory Top 6 Others Top 6's aggregated market share (RHS) Our Home (W tn) 60 12% HGF

Shinsegae Food 40 10% CJ Freshway Other large cos 20 8% Other small-mid cos 0 6% 2011 2012 2013 2014 2015 2016E 2017E

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 36: Samsung Welstory—SWOT analysis Strength Opportunity - Economies of scale and brand advantage by occupying the biggest captive customer - Structural consolidation trend in the domestic foodstuff distribution industry in Korea - Fast-growing demand on specialized catering service (i.e., healthcare facilities) - Well-established food sourcing/logistics system and superior quality control capability Weakness Threat - Limited access on processed food manufacturers, which is one of major end- - Potential anti-Chaebol policy to protect SME food catering and foodstuff distribution industries of B2B foodstuff distribution companies Source: Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 25 2 February 2017

A bright long-term prospect for biologics CMO business Samsung Biologics is Samsung Biologics, which is a part of Samsung C&T’s consolidated accounting, is one of already one of the the world’s largest CMOs for biologics. Samsung Biologics provides OEM outsourcing world’s largest CMOs production service for multiple biopharmaceutical companies, and its customer list for Biologics includes global majors such as Roche and Bristol-Myers Squibb. In short, out of the entire value chain within biopharmaceuticals, which includes R&D, production and sales/marketing, Samsung Biologics is only in charge of productions based on long-term supply OEM contracts with biopharmaceutical companies. Samsung C&T’s Samsung C&T’s controlling 43% stake in Samsung Biologics is currently worth W4.6 tn controlling 43% stake (based on Samsung Biologics’s closing price of W161,000/share on 26 Jan 2017) and in Samsung Biologics constitutes 15% of our target NAV estimate of W31.5 tn for the company.

constitutes 15% of our target NAV estimate of Figure 37: Samsung Biologics—corporate history W31.5 tn for the Date Event company Feb 2011 Samsung Group agreed establishment of a bio CMO JV with Quintiles Apr 2011 Established Samsung Biologics May 2011 Began construction of the #1 reactor (30,000 litres, 5,000 litres * 6) Jul 2012 Completed construction of the #1 reactor (15 months) Jun 2013 The #1 reactor completed validation Jul 2013 Secured first CMO contract from BMS Sep 2013 Began construction of the #2 reactor (150,000 litres, 15,000 litres * 10) Oct 2013 Secured CMO contract from Roche Apr 2014 Extended cooperation with BMS Feb 2015 Completed construction of the #2 reactor (18 months, capex: W750 bn) Mar 2015 The #1 reactor completed validation and began test production Oct 2015 The #1 reactor got GMP from US FDA Nov 2015 Began construction of the #3 reactor (180,000 litres, capex: W850 bn, E) Dec 2015 The #1 reactor began commercial production Mar 2016 The #2 reactor completed validation and began test production Nov 2016 Listed on Kospi

Source: Company data, Credit Suisse

Figure 38: Samsung Biologics—shareholding structure ESOP 5%

Minorities 20% Samsung C&T 43%

Samsung Electronics 32%

Source: Company data, Credit Suisse

Samsung C&T Corporation (028260.KS / 028260 KS) 26 2 February 2017

Timely production capability a Biologics CMO’s key advantage Global biopharmaceutical market is likely to grow from US$205 bn in 2015 to US$489 bn in 2025E (CAGR of 9.1%), which is much higher than the CAGR of 2.6% for chemical medicines during the same period, thanks to Biologics’ higher effectiveness and lower side effect than those of chemical-based pharmaceuticals. This implies that the portion of biologics in the global pharmaceutical market is likely to increase from 19% in 2015 to 30% in 2025E.

Figure 39: Global pharmaceuticals sales Figure 40: CMO-to-global pharma production spending (including both chemical and biologics) 2015A-25E CAGR (USD bn) (% share) (USD bn) 2015A-25E CAGR (% share) - Chemical: 3% - In-house: 8% 144 1,800 Aggregate Global 1,649 50% 150 50% - Biologics: 9% 1,586 - CMO: 15% 132 Pharma Market Size 1,525 120 1,600 1,410 1,466 30 1,356 120 110 26 40% 1,400 1,246 1,300 40% 101 1,150 1,195 92 22 1,105 85 19 1,200 90 77 16 30% 30% 70 15 1,000 64 13 60 11 28% 30% 10 800 26% 27% 60 7 9 20% 23% 24% 20% 21% 600 21% 22% 18% 20% 19% 19% 20% 16% 17% 16% 17% 30 13% 14% 15% 10% 400 10% 12% 200 0 0% 0 0% 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E In-house (LHS) CMO (LHS) % share of CMO (RHS) Chemical (LHS) Biologics (LHS) % share of Biologics (RHS)

Source: Frost & Sullivan, Credit Suisse Source: Frost & Sullivan, Credit Suisse

Meanwhile, the portion of CMO out of the global pharmaceutical production (particularly for biologics production) is continuously rising, as CMOs offer the following three major Compared to the direct advantages to their customers compared to biopharmaceutical companies’ in-house production, CMO productions. The advantages would propel a steeper sales growth for the biologics CMO offers: (1) timely industry in the long term, in our view. production capability with minimised (1) A timely production capability with minimised financial risk. While success or failure of financial risk, (2) lower a new biologics development work often remains very uncertain until the very last minute, production cost and (3) it could take at least two to three years to have a new biologics production capacity. Under higher production/cost the circumstance, pre-investment for a production capacity before the approval of a flexibility biologics medicine could be a substantial risk to biologics developers in case of failure of the approval, particularly to small developers. CMO could minimise the leadtime between the approval and production, as well as a developer's potential financial risk. (2) A lower production cost thanks to the economies of scale and lower overhead cost compared to biopharmaceutical companies’ in-house productions, (3) A higher production/cost flexibility depending on demands on the medicines compared to biopharmaceutical companies’ in-house productions. A strong demand growth outlook for the biosimilar industry and an increasing portion of the biosimilar out of the entire biopharmaceutical market, led by serial patent expires of multiple original blockbuster biologics medicines 2015 onwards, could also help drive the bio CMO demand growth in the biologics space, in our view.

Samsung C&T Corporation (028260.KS / 028260 KS) 27 2 February 2017

Scale and partnership with leading biopharma companies Samsung Biologics’s key strengths Samsung Biologics Samsung Biologics is still in an early stage of its business, given the company began would have the world’s commercial production from its #1 reactor only in Dec 2015 and its #2 reactor has yet to largest bioreactor begin commercial production. capacity by end-2018 Nonetheless, Samsung Biologics is already ready to take full advantage of growing global demand for biologics CMO, given (1) its scale, and (2) its partnerships with multiple leading biopharmaceutical companies, which appears a key success factor in the CMO business. Already signed up Indeed, Samsung Biologics already has one of the world’s biggest bioreactor capacities long-term OEM among peers. Additionally, Samsung Biologics began construction work for the #3 reactor production contracts in November 2015, targeting completion of the construction work in 2H18, which would with multiple leading make the company have the world’s largest bioreactor capacity. biopharmaceutical companies Samsung Biologics has also been partnering with multiple leading biopharmaceutical companies since 2013, which clears much of the uncertainties in the company’s sales and earnings outlook, in our view.

Figure 41: Samsung Biologics—bioreactor capacity P1 P2 P3 Total # of reactors 6 10 12 28 Capacity/Reactor (‘000 L) 5.0 15.0 15.0 12.9 Capacity (‘000 L) 30 150 180 360 Construction Mar 11 - Jun 12 Oct 13 - Feb 15 Nov 15 - Sep 17E cGMP approval in Jun-13 Mar-16 4Q18E Beginning of commercial production in Dec-15 4Q17E 4Q19E Capex (KRW bn) 350 750 850 1,950 Source: Company data, Credit Suisse

Figure 42: Global bioreactor capacity by company Figure 43: Global bioreactor capacity

(Kilo Litre) (KL) 400 360 2,500 25% Samsung Biologics 350 19% 18% 300 2,000 20% 180 250 14% 15% 1,500 15% 200 180 12%

150 1,000 10% 259 233 100 150 150 197 4% 4% 4% 50 500 5% 30 30 30 0 360 360 360 30 30 30 180 180 2013A 2016A 2018E Lonza (2015A) Boehringer Others 0 0% Ingelheim (2015A) 2013 2014 2015 2016E 2017E 2018E 2019E 2020E (2015A) Samsung Biologics (LHS) Others (LHS) % Samsung Share (RHS)

*: To be increased to 360,000 litres with completion of the ongoing construction work for its #3 Source: Company data, Frost & Sullivan BioProcess Technology Consultants, Credit Suisse reactor in 2H18. Source: Company data, Credit Suisse estimates

Figure 44: Samsung Biologics—strategic partnership with leading biopharmaceutical companies Date Partner Nature Jul 2013 Bristol-Myers Squibb Announced a ten-year agreement under which Samsung Biologics will manufacture a commercial antibody cancer drug for BMS Oct 2013 Roche Announced a long-term manufacturing agreement under which Samsung will manufacture Roche’s proprietary commercial Biologics Apr 2014 Bristol-Myers Squibb Announced that the two companies will increase the scope of their existing manufacturing agreement in which Samsung will manufacture commercial drug substances and drug product for Bristol-Myers Squibb’s several Biologics Aug 2014 Merck Millipore Announced a strategic alliance, which is intended to encompass a long-term supply agreement in which Merck Millipore will provide raw materials for biopharmaceutical manufacturing Source: Company data, Credit Suisse

Samsung C&T Corporation (028260.KS / 028260 KS) 28 2 February 2017

Investment risk Lots of moving parts in the fashion division’s aggressive penetration strategy into China

The online and fast Samsung C&T, which has about 4-5% share in the matured domestic apparel market of fashion strategies will about W40 tn p.a., plans an aggressive penetration into the Chinese apparel market. be the key variables Indeed, 8 Seconds (Samsung C&T fashion division’s fast fashion brand) opened its first flagship store outside of Korea in Shanghai in Sep 2016. We agree that the fashion business in China has a huge growth potential. However, while we also see lots of moving parts in the aggressive penetration plan into China, there are higher uncertainties in the company’s success in the China apparel market. In particular, given that online retailing and fast fashion have been key trends in both Korean and Chinese apparel markets in recent years, we believe the online and fast fashion strategies will be the key variables for Samsung C&T to deliver the challenging long-term apparel sales target besides the conventional key success factors in the apparel business (designing capability, pricing policy, marketing strategy, inventory control, etc.).

Figure 45: Samsung C&T— apparel sales and OP Figure 46: Samsung C&T—apparel sales in China margin and China-to-total sales

(W tn) (%) (W bn) 2.5 4 600 20% 3 2.0 2 400 1.5 1 10% 1.0 0 -1 200 0.5 -2 0.0 -3 0 0% 2013 2014 2015 2016 2017E 2018E 2013 2014 2015 2016E 2017E 2018E

Sales OP margin (RHS) China sales % to total (RHS)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 47: Samsung C&T—SWOT analysis in Chinese apparel market Strength Opportunity - Korean designers' competitive designing capability - Fast-growing demand of fast fashion brands - Strong supply chain and inventory management system - Korean and Japanese fashions have been increasingly popular among Chinese female - Korea's friendly perception in China (i.e., Korea Wave, etc.) shoppers lately as their designs are more appropriate for Chinese people, given similar skin tone and stature Weakness Threat - Weaker brand power than major global fast fashion brands - Intense competition with global/ local fast fashion brands - Smaller economies of scale than major global fast fashion brands - Higher initial opening cost of about US$3 mn per store Source: Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 29 2 February 2017

China is likely to China’s apparel market, worth about U$250 bn in 2016E, is one of the fastest growing overtake the US and apparel markets in the world. According to Euromonitor, China is likely to overtake the US become the world’s and become the world’s largest apparel market by 2018. Whereas the formal largest apparel market wear/sportswear markets are relatively matured, the casual wear/kids wear/outdoor wear by 2018 markets appear to still be in growing stages. Relatively new retailing channels (outlets, multi-brand stores, etc.) have been gaining more traction in recent years in the Chinese apparel market, while conventional channels (i.e., department stores, specialty stores) are still the major distribution channels in the market. In particular, online retailing is the fastest growing retailing channel in recent years and more fashion brands have introduced enhanced online strategies of late (online stores, opening online store on a third-party e-commerce platforms, O2O connection, etc.). Given the abovementioned factors, the online strategy would be one of the key variables for success of Samsung C&T's aggressive expansion plan in the Chinese apparel market, in our view.

Figure 48: China—retail apparel sales Figure 49: China—apparel sales mix by distribution channel

(U$ bn) (%) Others Retail sales YoY (RHS) (including 300 50 online) 16% 250 40 200 Leisure Department 30 retailers stores 150 12% 36% 20 100 Grocery Apparel 50 10 retailiers retailers 6% 30% 0 0 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E

Source: Company data, Credit Suisse estimates Source: Euromonitor, Fung Business Intelligence Centre, Credit Suisse

Rapid growth of fast Meanwhile, fast fashion brands have sustained strong growth momentum in China over fashion brands a key recent years on the back of appealing design, affordable pricing and rapid growth of the phenomenon in the urban middle class. In terms of store numbers, China is now the most important Chinese apparel market international market for several major fast fashion brands, including Uniqlo and H&M.

Figure 50: Korea—apparel retail sales by Figure 51: Korea—fast fashion sales and fast distribution channel fashion to the overall retail apparel sales

(2010=100) 140 (W tn) (%) 5 12 120 4 11 100 10 3 80 9 2 8 60 1 7 2010 2011 2012 2013 2014 Department store Discount store 0 6 Specialty retailer Non-store retailer* 2013 2014E 2015E 2016E 2017E Fast fashion sales Fast fashion-to-the domestic apparel market (RHS)

Includes online channel. Source: NSO, Credit Suisse Source: Samsung Fashion Institute, Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 30 2 February 2017

Risk of additional cost overrun in E&C division Samsung C&T’s recognition of cost overruns from the E&C division appears to have been Probability of cost mostly completed by end-2016 as aforementioned. overrun is an intrinsic risk of the E&C Nonetheless, the probability of cost overrun is an intrinsic risk of the E&C business, business, particularly particularly for turnkey projects. Whereas entire cost/cash outflow over construction period for turnkey projects of multiple years for a turnkey project cannot be precisely projected at the bidding stage of the project, revenue/cash inflow for the project is already fixed at the bidding stage.

Figure 52: Samsung C&T—E&C revenues (W bn) 20131 20141 20152 2016 2017E 2018E Domestic 6,894 6,576 5,600 5,827 5,755 5,617 Overseas 6,548 8,298 7,447 7,126 6,141 5,478 Total 13,441 14,874 13,047 12,953 11,896 11,094 1 : Former-Samsung C&T’s E&C revenues. 2: Includes former-Samsung C&T’s E&C revenues in Jan-Aug. Source: Company data, Credit Suisse estimates

Figure 53: Samsung C&T—unbilled receivable by major project (as of September 2016) Project Country Contract % of Completion Unbilled Unbilled Unbilled value completion in (P) receivable receivable days receivable-to- (W bn) (W bn) (days) cumulated revenues (%) SR-Project II Korea 1,056 99.9% Jul-2016 8 8 1% Anyang Korea 457 93.1% Oct-2016 21 37 5% Gaepo apartment Korea 526 10.5% Mar-2019 26 55 47% Gangneung power plant Korea 3,780 1.9% Mar-2022 26 17 37% RABIGH 2 IPP Saudi Arabia 1,339 85.8% Jun-2017 62 115 10% Mostaghanem Algeria 844 14.4% Aug-2017 31 54 30% Naama Algeria 703 26.5% Aug-2017 26 89 26% FAC D IWPP Qatar 2,075 51.7% Jun-2018 0 0 0% DohaMetro42 Qatar 788 12.9% Oct-2018 19 61 26% Westconnex Stage 1b Australia 762 15.9% Mar-2019 0 27 13% (M4 East) Westconnex Stage2 Australia 1,008 5.9% Mar-2020 0 42 45% (M5 Main Tunnel) UAE nuclear power UAE 2,806 74.4% May-2020 128 169 6%

Note: Samsung C&T’s E&C division has order backlog of W41.0 tn (domestic: W20.7 tn, overseas: W20.3 tn) as of March 2016. The above table shows cumulated revenue and unclaimed works for major projects only, from which revenue is >5% of the company’s total E&C revenues in 2015. Source: Company data, Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 31 2 February 2017

Reinstating with NEUTRAL Reinstating coverage We reinstate coverage on Samsung C&T with a NEUTRAL rating and a target price of with a NEUTRAL rating W135,000 (a 30% discount to our target NAV estimates; we use listed Hong Kong /China and a TP of W135,000 conglomerates’ historical discount as reference). (a 30% discount to our target NAV est; While we estimate an NAV of W7.3 tn for its core operation (15x 2017E NOPAT), its referencing listed investment assets are worth W31.5 tn in our estimate. In the NAV estimates, we have not HKG/China allocated any separate value for the company’s sizable property assets, as our NAV conglomerates’ estimate for its core operation already incorporates the cash flow from the property assets, historical discount) which are mostly already used for the company's resorts business.

Figure 54: Samsung C&T—NAV (current vs target) (W bn) BV (Sep 2016) NAV – Current1 NAV - Target Rationales Core business n.a 7,266 7,266 15x 2017E NOPAT Stakes in Samsung Electronics (4.1%) 9,550 11,923 15,837 1.0x CS TP Stakes in Samsung Life (19.3%) 4,082 4,256 4,797 1.0x CS TP Stakes in Samsung Biologics (43.4%) 853 4,628 4,628 1.0x MV Stakes in Samsung SDS (17.1%) 2,035 1,672 1,586 1.0x CS TP Stakes in other listed companies 397 176 176 1.0x MV Other investment assets 1,313 1,313 1,313 1.0x Sep 2016 BV Net cash -5,491 -4,110 -4,110 Dec 2017E Total 27,123 31,494 No. of outstanding shares (mn) 164.9 164.9 Excluding 26.4 mn shares in treasury NAV per share (W) 164,000 191,000 30% discount-to-NAV (W) 115,000 135,000 1: Current NAV of stakes in listed companies are based on current market value (26 Jan 2017). Source: Company data, Credit Suisse estimates

Figure 55: Samsung C&T—NAV mix Figure 56: Samsung C&T—shareholding structure

(%) (%)

Other assets 4

Stakes in SS SDS 4 Minorities, 38.5 Lee family, 31.2 Stakes in SS Life 13

Stakes in SEC 44

KCC Treasury, 13.7 SEMCO/Samsung Core business 33 Corp, SDI/Samsung 8.9 F&M/Samsung 0 10 20 30 40 50 Foundations, 7.8

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 57: Samsung C&T—property asset details Usage Location Size BV Remarks (mn sq m) (W bn) Leisure complex – A Yongin 1.9 n.a Currently used by resort division Leisure complex - B Yongin 1.5 n.a To be gradually developed by 2024 Leisure complex - C Yongin 2.6 n.a Preservation area (development restricted) Sub-total 5.9 235 Golf course Anyang, Gapyung, Ansung 6.3 394 Currently used by resort division Fashion division Seoul, metro cities 0.0 204 Currently used by fashion division E&C division Yeoncheon, Gimcheon, etc. 2.1 32 Currently used by E&C division Total 14.3 865

Source: Company data, Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 32 2 February 2017

Figure 58: Samsung C&T—adjusted EV (excluding market value of its stakes in listed affiliates) and market value of its stakes in listed affiliates-to-EV

(W tn) Samsung C&T - Adjusted EV (excluding mkt value of its stakes in listed affiliates) (%) 20 80% Mkt value of its stakes in listed affiliates out of Samsung C&T's EV (RHS) 18

16 70%

12 60%

8 50%

4 40% Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16

Source: Company data, Credit Suisse estimates

Figure 59: Listed conglomerates in HK/China—Historical discount-to-NAV (as of Dec 2016) Company Ticker 3 years 5 years 10 years CK Hutchison 0001.HK 30% 30% 33% Fosun International 0656.HK 24% 25% 27% Shanghai Industrial 0636.HK 39% 40% n.a CITIC 0267.HK 22% n.a n.a Legend Holdings 3396.HK 24% n.a n.a Average 28% 32% 30% Source: Credit Suisse estimates

Figure 60: LG Corp—discount-to-NAV

(%) 30 Discount-to-NAV (%) Average +1STD -1STD

Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16

Jan-12 Jan-13 Jan-11 Jan-14 Jan-15 Jan-16 Jan-17

Source: Company data, Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 33

( Corporation C&T Samsung

028260.KS / 028260 KS) / 028260 028260.KS Figure 61: Valuation comparison Price Tgt Price Upside CS Mkt Cap P/E (x) EV/EBITDA (x) EPS growth (%) P/B (x) ROE (%) Div. Yield (%) Net gearing (%) As of Jan 31, 2017 (LCY) (LCY) (%) rating (US$ mn) 16E 17E 18E 16E 17E 18E 16E 17E 18E 16E 17E 18E 16E 17E 18E 16E 17E 18E 16E 17E 18E 028260.KS Samsung C&T 126,000 135,000 7.1 N 20,585 194.8 46.8 35.9 45.4 26.1 22.5 -96.1 315.9 30.6 1.3 1.2 1.2 0.6 2.7 3.4 0.4 0.4 0.4 25.2 22.1 21.1 Samsung Group affiliates

005930.KS Samsung Elec 1,973,000 2,650,000 34.3 O 239,049 12.2 8.4 7.9 4.8 3.8 3.4 23.0 44.6 7.4 1.3 1.1 1.0 11.4 14.4 13.8 1.4 1.8 2.1 -12.8 -10.2 -15.7

032830.KS Samsung Life 111,000 124,000 11.7 O 19,120 8.3 14.3 13.0 14.8 57.9 38.4 106.8 -42.3 10.5 0.6 0.6 0.6 8.7 4.3 4.6 1.7 1.9 2.1 -9.8 -10.3 -10.7 000810.KS Samsung F&M 269,000 330,000 22.7 O 10,976 11.8 10.3 9.3 9.2 8.3 7.5 22.6 14.3 10.8 1.0 0.9 0.9 9.0 9.6 9.9 2.4 2.8 2.8 -10.4 -7.8 -7.7 018260.KS Samsung SDS 126,000 120,000 -4.8 N 8,397 21.0 20.9 18.7 7.3 7.0 6.3 5.5 0.8 11.5 1.9 1.8 1.7 9.7 9.0 9.2 0.6 0.6 0.6 -46.6 -47.4 -47.3 006400.KS Samsung SDI 115,500 99,000 -14.3 N 6,840 36.2 19.8 15.3 n.a 5.8 4.9 438.7 82.6 29.7 0.8 0.8 0.7 2.1 3.9 4.8 0.9 0.9 0.9 1.6 -2.2 -2.0 009150.KS SEMCO 56,700 66,000 16.4 O 3,648 280.3 17.1 14.3 4.4 3.2 2.8 35.0 nm 19.8 1.0 0.9 0.9 0.4 5.6 6.4 0.9 0.9 0.9 13.0 2.5 -6.9 010140.KS Samsung Heavy 10,400 NC N/A N/A 3,493 -30.2 48.0 33.4 n.a 15.1 14.1 -93.2 n.a 43.9 0.7 0.6 0.7 n.a 1.4 1.9 0.2 0.3 0.2 n.a n.a n.a Conglomerates 003550.KS LG corp 59,200 72,000 21.6 O 8,798 8.8 7.1 6.8 6.3 5.4 5.1 25.6 22.9 5.2 0.7 0.7 0.6 8.8 10.0 9.7 2.5 2.5 2.5 4.0 2.8 1.6 086280.KS Hyundai Glovis 155,500 140,000 -10.0 U 5,022 11.5 10.6 10.1 7.0 6.1 5.4 34.1 9.3 4.2 1.7 1.5 1.3 15.4 14.9 14.0 2.3 2.6 2.9 12.3 2.5 -6.4 Korea - E&C 000210.KS Daelim Ind 83,900 102,000 21.6 O 2,515 10.9 8.0 8.8 8.1 6.9 6.3 43.4 37.1 -9.8 0.7 0.6 0.6 6.6 8.5 7.1 0.4 0.4 0.4 23.6 18.2 10.0 047040.KS Daewoo E&C 5,180 5,300 2.3 U 1,854 22.9 8.9 7.4 10.3 7.1 5.8 -34.3 155.8 20.1 0.8 0.7 0.6 3.3 8.1 8.9 0.0 0.0 0.0 79.6 60.3 42.1 006360.KS GS E&C 27,700 30,000 8.3 N 1,694 n.a 9.1 7.3 13.6 6.4 4.6 n.a n.a 24 0.6 0.6 0.5 -0.8 6.5 7.5 0.0 0.0 0.7 29.4 28.0 12.2 012630.KS Hyundai Dev 43,700 54,000 23.6 O 2,837 9.6 7.5 7.7 6.1 5.0 4.7 54.2 28.2 -2.6 1.2 1.1 1.0 13.3 15.0 12.9 1.1 1.1 1.1 7.3 1.8 -7.1 000720.KS Hyundai E&C 41,550 42,000 1.1 N 3,985 9.4 9.0 9.4 3.1 2.4 1.8 33.3 5.3 -5.0 0.7 0.7 0.6 8.1 8.0 7.1 1.2 1.2 1.2 -12.7 -18.8 -26.3 Trading/E&P 047050.KS Posco Daewoo 25,450 NC N/A N/A 2,496 14.7 11.4 9.6 12.3 11.0 10.1 53.1 29.1 18.8 1.1 1.1 1.0 8.0 9.7 10.6 2.0 2.3 2.6 n.a n.a n.a Food 005440.KS Hyundai Greenfood 16,500 NC N/A N/A 1,388 15.9 14.9 13.8 13.3 12.1 10.8 -0.5 7.3 7.6 1.0 1.0 0.9 6.7 6.7 6.7 0.4 0.4 0.4 n.a n.a n.a 051500.KQ CJ Freshway 35,750 NC N/A N/A 366 51.0 24.3 16.5 14.0 11.9 10.0 -23.4 110.0 47.1 2.1 2.0 1.8 3.8 8.2 11.1 0.6 0.6 0.6 n.a n.a n.a 031440.KS Shinsegae food 138,500 NC N/A N/A 462 34.3 21.0 15.4 12.1 9.4 7.4 133.9 63.6 36.3 1.9 1.7 1.6 5.3 8.2 10.2 0.4 0.4 0.4 n.a n.a n.a Apparel 093050.KS LF 21,400 NC N/A N/A 539 11.5 9.9 8.9 3.7 3.1 2.4 6.9 15.6 12.2 0.6 0.6 0.5 5.3 5.9 6.3 2.4 2.5 2.5 n.a n.a n.a 081660.KS Fila Korea 68,800 NC N/A N/A 676 7.1 11.4 9.4 22.7 17.3 14.6 n.a -37.1 21.3 1.7 1.5 1.3 21.8 14.3 14.8 0.4 0.4 0.4 n.a n.a n.a Global fast fashion ITX.MC Inditex 31 27 -11.2 U 102,186 33.2 30.2 26.9 19.2 17.5 15.5 15.0 9.9 12.3 11.2 10.1 9.0 35.1 35.3 35.4 1.5 1.7 1.9 -46.3 -48.2 -50.7 HMb.ST Hennes & mauritz 237 224 -5.4 U 39,188 22.3 19.7 17.3 11.2 9.9 8.7 -15.8 13.0 13.7 6.5 6.0 5.4 29.7 31.6 32.6 4.1 4.1 4.4 -12.2 -8.6 -8.9 9983.T Fast retailing 35,580 NC N/A N/A 31,943 75.5 32.9 30.2 22.6 17.5 15.7 -56.3 129.7 8.8 6.1 5.4 4.8 n.a 18.2 17.4 1.0 1.0 1.1 n.a n.a n.a Source: Company data, I/B/E/S consensus, Credit Suisse estimates

2 February 2017 2 February

2 February 2017

Financial statements and analysis

Figure 62: Samsung C&T—income statement (W bn) 2014A 2015A1 2016E 2017E 2018E Sales 5,130 13,345 28,103 27,457 27,422 E&C / resort 16,583 6,269 13,629 12,613 11,854 Trading 13,572 3,597 10,538 10,643 10,643 Food 1,570 1,687 1,798 1,942 2,097 Fashion 1,851 1,738 1,843 1,954 2,149 Others 105 54 295 305 679 Operating Profit 213 37 140 591 743 E&C / resort 609 -96 81 433 422 Trading 83 52 70 75 75 Food 118 110 110 120 130 Fashion 56 -9 -45 10 17 Others -105 -20 -76 -47 99 Non-Operating Income 34 3,453 211 272 308 Interest income 12 34 138 140 140 Equity method gain -37 -161 -151 -90 -54 Others 60 3,579 224 222 222 Non-Operating Expense 101 714 262 276 275 Interest expense 65 101 171 176 175 Equity method loss 0 0 0 0 0 Others 35 613 91 101 101 Pre-tax Profit 147 2,776 89 586 775 Net Profit (ex. minorities’ interest) 456 2,747 107 444 579 1: Only includes former-Samsung C&T’s operational performance during 1 Sep and 31 Dec. Source: Company data, Credit Suisse estimates

Figure 63: Samsung C&T—statement of financial position (W bn) 2014A 2015A 2016E 2017E 2018E Cash & cash equivalents 375 2,255 2,537 2,819 2,509 Receivables 979 7,287 5,464 4,957 4,951 Inventories 536 1,386 1,327 1,144 1,143 Other current assets 90 1,613 1,413 1,413 1,413 Investment assets 4,935 21,619 21,919 22,219 22,519 Tangible assets 2,132 5,098 4,961 5,029 5,079 Other non-current assets 464 3,104 3,104 3,104 3,104 Total assets 9,511 42,361 40,724 40,685 40,717 Payables 470 5,004 4,047 3,865 3,815 Short-term debts 63 2,287 1,787 1,787 1,787 Current portion of long-term debts 312 1,517 1,600 1,200 700 Other current liabilities 421 6,267 6,267 6,267 6,267 Bonds & long-term debts 1,385 3,943 3,743 3,943 4,043 Other long-term liabilities 1,575 5,030 5,030 5,030 5,030 Total liabilities 4,226 24,047 22,474 22,091 21,641 Shareholders' equity (incl. minority interests) 5,285 18,314 18,251 18,593 19,076 Source: Company data, Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 35 2 February 2017

Figure 64: Samsung C&T—cash flow statement (W bn) 2014A 2015A1 2016E 2017E 2018E Cash flow from operation 143 -62 1,719 1,433 1,036 Net profit 455 2,686 20 434 573 Depreciation and amortization 144 281 488 482 499 Changes in working capital -118 -212 1,125 508 -43 Other operating cash flow -338 -2,817 86 10 6 Cash flow from investments 54 2,369 -650 -850 -850 Capital expenditure -186 -259 -350 -550 -550 Sale of tangible and intangible asset 5 26 0 0 0 Acquisition of investments -330 -250 -300 -300 -300 Sale of investments 582 2,893 0 0 0 Other investing cash flow -16 -41 0 0 0 Cash flow of financing -46 -527 -701 -291 -491 Net increase of loans -570 -108 -617 -200 -400 Dividend 0 -4 -84 -91 -91 New equity issued 525 -416 0 0 0 Other financing cash flow 0 0 0 0 0 Other cash flow 1 -17 0 0 0 Net change of cash2 153 1,762 368 292 -305 1: Only includes former-Samsung C&T’s operational performance during 1 Sep and 31 Dec. 2: Only include cash on hand and exclude cash equivalents. Source: Company data, Credit Suisse estimates

Figure 65: Samsung C&T—ratio analysis Year-end 31 Dec 2014A 2015A 2016E 2017E 2018E Sales growth (%) 59 n.a1 n.a1 -2 0 EBITDA growth (%) 70 n.a1 n.a1 71 16 Operating profit growth (%) 92 n.a1 n.a1 322 26 Net profit growth (%) 907 n.a1 n.a1 2,027 32 GP margin (%) 31.8 16.1 11.9 13.8 14.7 EBITDA margin (%) 7.0 2.4 2.2 3.9 4.5 OP margin (%) 4.2 0.3 0.5 2.2 2.7 NP margin (%) 8.9 20.1 0.1 1.6 2.1 Net debt (W bn) 1,385 5,491 4,593 4,110 4,021 Gross gearing (%) 80 131 123 119 113 Net gearing (%) 26 30 25 22 21 Interest coverage (x) 5.5 3.2 3.7 6.1 7.1 Receivable days 69 197 70 65 65 Inventory days 38 38 17 15 15 Payable days 50 165 60 60 60 # of outstanding shares (nominal) 135.0 191.3 191.3 191.3 191.3 EPS (W, nominal) 3,375 14,357 558 2,319 3,029 EPS (W, fully diluted) 3,929 16,385 647 2,690 3,513 BVPS (W, fully diluted) 45,557 98,436 100,190 102,330 105,293 ROE (%) 9.9 25.2 0.6 2.7 3.4 ROA (%) 5.8 10.7 0.5 1.5 1.8 Dividend payout (%) 0.8 3.1 444.8 20.9 15.8 Effective income tax rate (%) -210 3 77 26 26 1: Due to merger between former-Samsung C&T and Cheil Industries in Sep 2015. Source: Company data, Credit Suisse estimates

Samsung C&T Corporation (028260.KS / 028260 KS) 36 2 February 2017

Companies Mentioned (Price as of 31-Jan-2017) Boehringer Ingelheim (Unlisted) Bristol-Myers (BMY.BA, $836.0) CITIC (0267.HK, HK$11.54) CJ Freshway (051500.KQ, W35,700) CK Hutchison Holdings Limited (0001.HK, HK$93.45) Daelim Industrial (000210.KS, W83,900, OUTPERFORM, TP W102,000) Daewoo E&C (047040.KS, W5,180, UNDERPERFORM, TP W5,300) Fast Retailing (9983.T, ¥35,580) Fila Korea (081660.KS, W68,800) Fosun International Ltd (0656.HK, HK$11.84) GS E&C (006360.KS, W27,700, NEUTRAL, TP W30,000) Hennes & Mauritz (HMb.ST, Skr250.0) Hyundai Development (012630.KS, W43,700, OUTPERFORM[V], TP W53,000) Hyundai E&C (000720.KS, W41,550, NEUTRAL, TP W42,000) Hyundai Glovis (086280.KS, W155,500, NEUTRAL, TP W140,000) Hyundai Green Food (005440.KS, W16,500) Inditex (ITX.MC, €30.54) Kerry Logistics (0636.HK, HK$10.04) LF (093050.KS, W21,400) LG Corp (003550.KS, W59,200, OUTPERFORM, TP W72,000) Legend Holdings (3396.HK, HK$17.64) Lonza (LONN.S, SFr180.9) Posco Daewoo (047050.KS, W25,450) Roche (ROG.S, SFr233.0) Samsung Biologic (207940.KS, W161,000) Samsung C&T Corporation (028260.KS, W126,000, NEUTRAL, TP W135,000) Samsung Electro-Mechanics (009150.KS, W56,700, OUTPERFORM, TP W66,000) Samsung Electronics (005930.KS, W1,973,000, OUTPERFORM, TP W2,650,000) Samsung Fire & Marine (000810.KS, W269,000, OUTPERFORM, TP W330,000) Samsung Heavy Industries (010140.KS, W10,400) Samsung Life Insurance (032830.KS, W111,000, OUTPERFORM, TP W124,000) Samsung SDI (006400.KS, W115,500, NEUTRAL, TP W99,000) Samsung SDS (018260.KS, W126,000, NEUTRAL, TP W120,000) Shinsegae Food (031440.KS, W138,500)

Disclosure Appendix Analyst Certification I, Minseok Sinn, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Daelim Industrial (000210.KS)

000210.KS Closing Price Target Price Date (W) (W) Rating 24-Apr-14 82,100 97,000 O 24-Jul-14 84,000 100,000 23-Oct-14 65,600 65,000 N 20-Apr-15 82,000 87,000 23-Jul-15 82,700 90,000 28-Oct-15 69,400 78,000 29-Jan-16 78,000 80,000 21-Apr-16 93,600 90,000 29-Jul-16 84,000 105,000 O 25-Oct-16 89,300 110,000 OUTPERFORM NEUTRAL 24-Jan-17 84,700 102,000 * Asterisk signifies initiation or assumption of coverage.

Samsung C&T Corporation (028260.KS / 028260 KS) 37 2 February 2017

3-Year Price and Rating History for Daewoo E&C (047040.KS)

047040.KS Closing Price Target Price Date (W) (W) Rating 28-Apr-14 7,970 8,200 N 25-Jul-14 9,700 9,000 31-Oct-14 6,550 7,500 28-Jan-15 6,250 6,500 28-Apr-15 7,980 8,500 28-Jul-15 6,400 7,200 27-Jan-16 5,560 6,000 29-Jul-16 6,220 5,300 U * Asterisk signifies initiation or assumption of coverage. NEUTRAL UNDERPERFORM

3-Year Price and Rating History for GS E&C (006360.KS)

006360.KS Closing Price Target Price Date (W) (W) Rating 06-Feb-14 31,948 30,000 U 29-Apr-14 35,300 39,000 N 28-Oct-14 29,400 34,000 27-Jan-15 22,750 27,000 29-Apr-15 33,800 33,000 30-Jul-15 25,900 30,000 29-Oct-15 24,000 25,000 27-Apr-16 28,300 28,000 26-Oct-16 28,750 30,000 * Asterisk signifies initiation or assumption of coverage. UNDERPERFORM NEUTRAL

3-Year Price and Rating History for Hyundai Development (012630.KS)

012630.KS Closing Price Target Price Date (W) (W) Rating 04-Feb-14 23,650 30,000 O 23-Apr-14 30,500 35,000 25-Jul-14 37,100 45,000 23-Sep-14 45,400 52,000 09-Apr-15 56,900 70,000 10-Jul-15 70,200 87,000 26-Oct-15 53,500 70,000 27-Apr-16 46,150 65,000 26-Jul-16 44,000 62,000 29-Nov-16 41,850 54,000 OUTPERFORM

* Asterisk signifies initiation or assumption of coverage.

Samsung C&T Corporation (028260.KS / 028260 KS) 38 2 February 2017

3-Year Price and Rating History for Hyundai E&C (000720.KS)

000720.KS Closing Price Target Price Date (W) (W) Rating 25-Apr-14 55,000 70,000 O 25-Jul-14 62,100 75,000 24-Oct-14 49,350 70,000 23-Jan-15 41,200 60,000 24-Apr-15 55,000 60,000 N 27-Jul-15 34,450 45,000 O 27-Jan-16 34,750 48,000 27-Apr-16 39,000 45,000 N 27-Jul-16 34,950 42,000 O 27-Oct-16 42,250 42,000 N OUTPERFORM NEUTRAL * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for LG Corp (003550.KS)

003550.KS Closing Price Target Price Date (W) (W) Rating 23-Mar-16 68,700 78,000 N * 15-Nov-16 58,100 72,000 O * Asterisk signifies initiation or assumption of coverage.

NEUTRAL OUTPERFORM

3-Year Price and Rating History for Samsung C&T Corporation (028260.KS)

028260.KS Closing Price Target Price Date (W) (W) Rating 07-Jan-15 135,500 100,000 U * 27-May-15 190,500 140,000 12-Jun-15 182,000 R * Asterisk signifies initiation or assumption of coverage.

UNDERPERFORM REST RICT ED

Samsung C&T Corporation (028260.KS / 028260 KS) 39 2 February 2017

3-Year Price and Rating History for Samsung Electro-Mechanics (009150.KS)

009150.KS Closing Price Target Price Date (W) (W) Rating 28-Apr-14 69,000 72,000 N 02-Jul-14 58,700 44,000 U 30-Oct-14 47,000 44,000 N 02-Dec-14 59,700 53,000 30-Jan-15 67,000 58,000 27-Apr-15 67,900 60,000 10-Jun-15 57,300 58,000 14-Oct-15 61,500 80,000 O 25-Jan-16 54,100 70,000 26-Apr-16 53,400 65,000 NEUTRAL UNDERPERFORM 25-Jul-16 55,800 68,000 OUTPERFORM 27-Oct-16 48,000 60,000 25-Jan-17 56,600 66,000 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Samsung Electronics (005930.KS)

005930.KS Closing Price Target Price Date (W) (W) Rating 06-May-14 1,346,000 1,760,000 O 07-Jul-14 1,292,000 1,740,000 08-Jul-14 1,295,000 1,720,000 28-Aug-14 1,242,000 1,700,000 07-Oct-14 1,162,000 1,680,000 03-Sep-15 1,122,000 1,630,000 29-Oct-15 1,325,000 1,785,000 11-Jan-16 1,152,000 1,690,000 28-Jan-16 1,145,000 1,550,000 01-Jun-16 1,333,000 1,702,000 OUTPERFORM

28-Jul-16 1,507,000 1,790,000 15-Dec-16 1,759,000 2,400,000 24-Jan-17 1,908,000 2,650,000 * Asterisk signifies initiation or assumption of coverage.

3-Year Price and Rating History for Samsung Fire & Marine (000810.KS)

000810.KS Closing Price Target Price Date (W) (W) Rating 17-Feb-14 233,500 285,000 O 31-Jul-14 283,000 320,000 17-Feb-15 261,500 290,000 N 28-Oct-15 317,000 377,000 O 18-Feb-16 315,500 364,000 01-Aug-16 279,500 320,000 31-Oct-16 291,500 330,000 * Asterisk signifies initiation or assumption of coverage.

OUTPERFORM NEUTRAL

Samsung C&T Corporation (028260.KS / 028260 KS) 40 2 February 2017

3-Year Price and Rating History for Samsung Life Insurance (032830.KS)

032830.KS Closing Price Target Price Date (W) (W) Rating 17-Feb-14 101,500 120,000 O 22-Apr-14 98,900 R 19-Jun-14 104,500 120,000 O 17-Sep-14 109,000 130,000 12-May-15 110,000 135,000 14-May-15 116,500 R 15-May-15 116,500 135,000 O 11-Aug-16 103,000 124,000 * Asterisk signifies initiation or assumption of coverage. OUTPERFORM REST RICT ED

3-Year Price and Rating History for Samsung SDI (006400.KS)

006400.KS Closing Price Target Price Date (W) (W) Rating 27-Apr-14 150,000 142,000 N 28-Apr-15 126,000 132,000 30-Jul-15 94,600 105,000 31-Aug-15 84,500 88,000 02-Nov-15 111,000 91,000 26-Jan-17 116,000 99,000 * Asterisk signifies initiation or assumption of coverage.

NEUTRAL

3-Year Price and Rating History for Samsung SDS (018260.KS)

018260.KS Closing Price Target Price Date (W) (W) Rating 25-Nov-14 428,000 470,000 O * 27-Jan-15 242,000 270,000 N 01-May-15 256,000 220,000 U 29-Oct-15 275,000 200,000 22-Jan-16 259,500 180,000 28-Apr-16 168,000 130,000 06-Dec-16 127,500 125,000 N 23-Jan-17 132,000 120,000

* Asterisk signifies initiation or assumption of coverage. OUTPERFORM NEUTRAL UNDERPERFORM

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Daelim Industrial (000210.KS) Method: Our 12-month target price of W102,000 for Daelim Industrial is based on a sum-of-the-parts valuation, on which we have a target EBITDA of 6.0x in 2017E for the NAV of the company's core construction business. While concerns about overseas cost overruns have been a key overhang for the stock despite its cheap valuation, we see signs of diminishing risk of the cost overrun of late. Hence, we rate the stock OUTPERFORM. Risk: The risks to our W102,000 target price and OUTPERFORM rating for Daelim Industrial include an uncertain global economy & oil price outlook and potential downward petrochem cycle given higher importance of the petrochemical division/subsidiaries out of the company's total earnings. Target Price and Rating Valuation Methodology and Risks: (12 months) for Daewoo E&C (047040.KS) Method: Our 12-month target price of W5,300 for Daewoo E&C is based on 0.7x 2017E P/B (price-to-book) by referring the company's ROE of 7.9%/8.7% in 2017/18E. Daewoo E&C currently generates strong earnings from housing and architecture business on the back of surge of new housing construction starts since early 2015 with strong presale results. However, we have an UNDERPERFORM rating. We are concerned that the company's deteriorating overseas margin trend of late may indicate its overseas cost overrun issue may yet be in a growing stage.

Samsung C&T Corporation (028260.KS / 028260 KS) 42 2 February 2017

Risk: Risks to our target price of W5,300 and UNDERPERFORM rating on Daewoo E&C include: its continuing strong earnings from the domestic housing business. Target Price and Rating Valuation Methodology and Risks: (12 months) for GS E&C (006360.KS) Method: Our 12-month target price of W30,000 for GS E&C is based on 0.60x 2017E P/B (price-to-book), referring 2017E ROE (return on equity) of 6.5%. We believe the stock's current valuation already fairly reflects anticipation for recovery in the company's earnings beyond 2017; we thus have a NEUTRAL rating. Risk: We believe that the risks to our W30,000 target price and NEUTRAL rating for GS E&C include: (1) housing market fluctuation, (2) uncertainties in overseas margins, and (3) uncertainties in overseas new orders. Target Price and Rating Valuation Methodology and Risks: (12 months) for Hyundai Development (012630.KS) Method: Our 12-month target price for Hyundai Dev of W53,000 is based on 1.3X 2017E price-to-book multiple by referring ROE (return on equity) of 15%/14% in 2017/18E. We believe Hyundai Dev would remain capable of generating double-digit ROE in the long term, given its proven expertise in the housing development business. We thus rate the stock OUTPERFORM. Risk: Risks to our target price of W53,000 and OUTPERFORM rating for Hyundai Dev include unexpected regulatory changes in the construction sector, especially those that could have an impact on housing prices and the market situation, given the company’s large exposure to domestic housing business. Target Price and Rating Valuation Methodology and Risks: (12 months) for Hyundai E&C (000720.KS) Method: Our 12-month target price of W42,000 for Hyundai E&C is based on a 0.70x 2017E P/B referring ROE of 8.0%/7.1% in 2017-18E. After the rebound in recent months, we believe the stock now trades at around its fair value, therefore we have a NEUTRAL rating. Risk: Risks to our W42,000 target price and NEUTRAL rating for Hyundai E&C include unexpected cost overrun from overseas projects and potential slowdown in the domestic housing market. Target Price and Rating Valuation Methodology and Risks: (12 months) for Hyundai Glovis (086280.KS) Method: We assign Hyundai Glovis a NEUTRAL rating in view of slower Hyundai Motor and Kia Motors (HMG) sales growth. We derive the target price of W140,000 by applying a target P/E of 9.6x, which is based on an average P/E of HMG stocks and Glovis' historical average P/E, to 2017E EPS. Risk: Risks to our NEUTRAL rating and TP of KRW140,000 include the following. If third-party sales grow faster than expected, there is upside risk to our cautious view on the stock. For the downside risk, government regulation could be tighter on governance structure and ownership succession. This could lead to more stake selling by the owner family. Also, we are cautious on Hyundai Motors' group sales volume going forward, and believe Glovis is going to see slower growth in the foreseeable future. Target Price and Rating Valuation Methodology and Risks: (12 months) for LG Corp (003550.KS) Method: Our target price of W72,000 for LG Corp (a 45% discount-to-its NAV) refers the holding company's average discount-to-NAV (net asset value) of 45% since Jan 2011. We have OUTPERFORM rating on the name, while the stock currently trades on a 55% from our target NAV estimates for the holdco. Risk: LG Electronics' slow operational outlook and unexpected share price declines of major subsidiaries, such as LG H&H and LG Uplus are key risks to our W72,000 target price and Outperform rating. Target Price and Rating Valuation Methodology and Risks: (12 months) for Samsung C&T Corporation (028260.KS) Method: Our target price of W135,000 for Samsung C&T Corporation is based on a 30% discount- to-our target NAV estimates; referring listed Hong Kong /China conglomerates' historical discount. While we estimate a NAV of W7.3 tn for its core operation (15x 2017E NOPAT), its investment assets are worth W31.5 tn in our estimate. In the NAV estimates, we have not allocated any separate value for the company's sizable property assets, as our NAV estimate for its core operation already incorporates the cash flow from the property assets, which are mostly already used for the company's resorts business. Our NEUTRAL rating is based on uncertain regulatory environment regarding the conglomerates restructuring and bleak outlook on E&C business. Risk: Risks to our W135,000 target price and NETURAL rating for Samsung C&T Corporation include: (1) A bigger/smaller-than-expected success in execution of the growth strategy for the bio subsidiary and apparel businesses, (2) The higher operational gearing on captive customers could pose either an upside or a downside risk, and (3) share price moves of listed Samsung Group affiliates, which Samsung C&T owns stakes in. Samsung C&T Corporation (028260.KS / 028260 KS) 43 2 February 2017

Target Price and Rating Valuation Methodology and Risks: (12 months) for Samsung Electro-Mechanics (009150.KS) Method: Our 12-month target price of W66,000 for Samsung Electro-Mechanics is based on 1.1x 2017E P/B. The company will continue to expand revenue exposure in China while MLCC supply & demand dynamics are improving. SEMCO has now managed to get a cleaner balance sheet and has ample cash to invest in its core business. Exposure to auto related components is also positive which is why we maintain our OUTPERFORM rating. Risk: Key risks to our W66,000 target price and OUTPERFORM rating for Samsung Electro-Mechanics include: (1) lower-than-expected utilisation rate for MLCCs, (2) slower addition of new customers for camera modules and (3) an unfavourable exchange rate. Target Price and Rating Valuation Methodology and Risks: (12 months) for Samsung Electronics (005930.KS) Method: Our 12-month target price of W2,650,000 for Samsung Electronics is based on a split-up value into Opco/Holdco. We attribute a target P/E of 10x to Opco’s 2017 earnings while applying a discount of 30% to Holdco’s NAV. The dividend yield should rise for the next few years, driving P/E multiple expansion as Samsung ’s yield approaches the global tech average of about 2.5%. We assign an OUTPERFORM rating given our confidence on higher earnings and dividends led by faster 3D NAND/OLED penetration, strong DRAM profitability, smartphone recovery post the GN7 crisis and a more proactive shareholder return policy and value creation from the demerger. Risk: Risks that may impede the achievement of our 12-month target price of W2,650,000 and our OUTPERFORM rating for Samsung Electronics include: (1) the demerger process not starting in 2017, (2) heavy earnings dependence on the strength of its smartphone products and its margin sustainability given intensifying competition, (3) an earlier China entrance into 3D NAND, and (4) mis-execution in W10 tn in OLED investment for a once core additional customer. Target Price and Rating Valuation Methodology and Risks: (12 months) for Samsung Fire & Marine (000810.KS) Method: Our sum-of-the-parts valuation (life insurance and equity stakes in affiliated companies) suggests a target price of W330,000 for Samsung Fire & Marine, comprising: (1) insurance operation value based on 1.2x FY17E P/B and (2) value of affiliated equity of W2.3 tn. Given its commitment on capital management policy and outlook on earnings improvement we expect upside in the share price. We therefore maintain our Outperform rating. Risk: Risks that could impede achievement of our target price of W330,000 and Outperform rating for Samsung Fire & Marine include: (1) further rise in auto claim loss ratio, (2) less proactive capital management. Despite the conservative stance by management, the overpayment for M&A is a key risk for our assumptions. Target Price and Rating Valuation Methodology and Risks: (12 months) for Samsung Life Insurance (032830.KS) Method: Our sum-of-the-parts valuation (life insurance and equity stakes in affiliated companies) suggests a target price of W124,000 for Samsung Life Insurance, comprising: (1) insurance operation value based on the simple average of 0.9x FY17E P/EV and 0.5x FY17E P/B and (2) value of affiliated equity. We maintain our Outperform rating as we believe that the turnaround of net investment spread, stabilization of underwriting efficiency while growth of the protection type insurance would further support SLI's earnings. Risk: Risks that could impede achievement of our target price of W124,000 and Outperform rating for Samsung Life Insurance include: (1) share price correction of affiliate shares, including Samsung Electronics, which may negatively impact SLI's valuations, and (2) potential share overhang which would be a short lived risks to the share price. Target Price and Rating Valuation Methodology and Risks: (12 months) for Samsung SDI (006400.KS) Method: Our 12-month target price of W99,000 for Samsung SDI is based on 0.6x FY17 forecast book. 0.6x is the trough multiple as SDI's core businesses' earnings are expected to face slower recovery. While xEV demand will no doubt continue to grow, SDI needs more time to recuperate on its heavy investments. Recent disposal of non-core chemical business is positive in the long-run but has eliminated most of the company's cash earnings as it's battery business continues to stay red. As a result, we maintain our NEUTRAL rating. Risk: Upside risk to our TP of W99,000 and Neutral rating for Samsung SDI is faster-than-expected xEV(Electric Vehicles) growth and the downside risk is the company's worse-than-expected cost control measures. Target Price and Rating Valuation Methodology and Risks: (12 months) for Samsung SDS (018260.KS) Method: Our target price of W120,000 for Samsung SDS is based on a 20X 2017E P/E. Given limited upside/downside to our TP, we have a NEUTRAL rating.

Samsung C&T Corporation (028260.KS / 028260 KS) 44 2 February 2017

Risk: Risks to our target price of W120,000 and NEUTRAL rating for Samsung SDS: We expect captive revenues from Samsung Group affiliates to continue driving the earnings growth of SDS and to constitute >75% of the company's overall revenues over the next several years. Given this, we think that material changes in Samsung Group's governance structure or its operational performance could have a significant impact on SDS's operational outlook or the stock's valuation.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (028260.KS, 000210.KS, 000720.KS, 000810.KS, 003550.KS, 005930.KS, 006400.KS, 009150.KS, 012630.KS, 018260.KS, 032830.KS, 047040.KS, 0001.HK, 0267.HK, 0636.HK, 0656.HK, 3396.HK, LONN.S, ROG.S) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (028260.KS, 000810.KS, 003550.KS, 005930.KS, 006400.KS, 009150.KS, 012630.KS, 032830.KS, 3396.HK, LONN.S, ROG.S) within the past 12 months. Credit Suisse has managed or co-managed a public offering of securities for the subject company (LONN.S, ROG.S) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (028260.KS, 000810.KS, 003550.KS, 005930.KS, 006400.KS, 009150.KS, 012630.KS, 032830.KS, 3396.HK, LONN.S, ROG.S) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (028260.KS, 000210.KS, 000720.KS, 000810.KS, 003550.KS, 005930.KS, 006360.KS, 006400.KS, 009150.KS, 012630.KS, 018260.KS, 032830.KS, 047040.KS, 0001.HK, 0267.HK, 0636.HK, 0656.HK, 3396.HK, 9983.T, LONN.S, ROG.S) within the next 3 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (LONN.S). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (028260.KS, 000210.KS, 000720.KS, 000810.KS, 003550.KS, 005930.KS, 006360.KS, 006400.KS, 009150.KS, 012630.KS, 018260.KS, 032830.KS, 047040.KS, 086280.KS, 9983.T). Credit Suisse has a material conflict of interest with the subject company (003550.KS) . Credit Suisse is acting as an exclusive financial advisor to LG Corp. (003550.KS) relating to the announced sale of their 51% stake in LG Siltron Inc. to SK Holdings Co., Ltd. (034730.KS). For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit- suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=280440&v=618wlvc3uurcebnql9akiu8vv . Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit- suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (0001.HK, HMb.ST, ITX.MC). Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (012630.KS, 032830.KS, 0656.HK, LONN.S, ROG.S) within the past 3 years. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse Securities (Europe) Limited, Seoul Branch ...... Minseok Sinn ; Hoonsik Min To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. 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Samsung C&T Corporation (028260.KS / 028260 KS) 45 2 February 2017

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