December 9, 2011 Company Report

Hite Jinro (000080 KS) Food & Beverage

Daewoo Securities Co., Ltd. Implications of ’s price hike Woon-mok Baek +822-768-4158 Hite Jinro likely to raise beer prices in early 2012 [email protected]

Oriental Brewery, one of KoreaÊs two largest beer makers (along with Hite Jinro), Amy Lee announced that it would raise its ex-factory prices for beer products by an average of +822-768-3066 7.48%. The ex-factory price for a 500ml bottle of Cass beer (the companyÊs flagship [email protected]

product) will increase by W76.42 (or 7.48%) to W1,098.22 (from W1,021.8). This will mark the first price hike since October 2009. Even though the increase will be smaller than the companyÊs initial target (10%), it still appears pretty significant. Hite Jinro is likely to follow suit in early 2012, in our view. The beer price hike has been widely expected since 1H in light of rising malt prices, higher distribution costs, and won depreciation. However, considering the governmentÊs inflation control efforts, this price hike (of a major consumer product) Buy (Maintain) seems especially meaningful. Before beer prices are hiked, the prices for most food and beverage products (excluding and tobacco) would have already gone up. Target Price (12M, W) 42,000 Share Price (12/08/11, W) 32,450 Impacts of a potential price hike on Hite Jinro’s earnings Expected Return (%) 29.4 EPS Growth (11F, %) 43.5 Hite JinroÊs beer business generated revenues of approximately W1.02tr in 2010. A Market EPS Growth (11F, %) -2.8 7.5% increase (on average) in beer prices is forecast to add W70~75bn to the P/E (11F, x) 15.5 companyÊs annual revenues. While higher prices may lead to consumption Market P/E (11F, x) 10.9 contraction in 1Q12, consumption should return to normal three to four months KOSPI 1,912.39 after the hike. We think that a W100 increase in consumer prices will not affect Market Cap (Wbn) 2,255 consumption by that much. Even factoring in cost increases, higher beer prices are Shares Outstanding (mn) 71 projected to boost Hite JinroÊs annual operating profit by W30bn. Avg Trading Volume (60D, '000) 128 Avg Trading Value (60D, Wbn) 3 Maintain Buy call with TP of W42,000 Dividend Yield (11F, %) 2.2 Free Float (%) 40.1 The merger between Hite (beer) and Jinro (soju) is expected to create synergies 52-Week Low (W) 21,650 starting in 2012, including the integration of wholesale distributors and operating 52-Week High (W) 40,000 expense reductions. Furthermore, since soju prices have been frozen for the past Beta (12M, Daily Rate of Return) 0.3 three years, there seems to be ample room for price hikes in 1H12. A 1% rise in Price Return Volatility (12M Daily, %, SD) 2.5 soju prices should boost revenues by W6~7bn and operating profit by W4~5bn. Foreign Ownership (%) 20.1 With Hite JinroÊs share of the beer market falling, the companyÊs stock was Major Shareholder (s) sluggish until October. However, since Oriental BreweryÊs price increase plans Hite Holdings et al. (57.78%) Lazard Asset Management LLC et al. (6.43%) surfaced in mid-November, Hite JinroÊs shares have been rebounding.

And we expect positive momentum to outweigh the negatives in 2012. We Price Performance reiterate our Buy call with a target price of W42,000. Once Hite Jinro confirms its (%) 1M 6M 12M price hike plans, we will revise up our earnings forecasts. Absolute 24.6 -6.8 -8.6 Relative 24.1 1.5 -6.4 § Earnings & Valuation Metrics Share price

FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 120 KOSPI (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 110 100 12/09 980 151 15.4 123 2,867 188 -44 20.2 13.9 2.3 10.0 90 12/10 1,035 126 12.2 61 1,457 164 -36 8.9 24.3 2.3 10.5 80 12/11F 1,424 160 11.2 105 2,090 197 -221 10.0 15.5 1.6 18.6 70 12/12F 2,124 246 11.6 154 2,185 319 99 10.1 14.9 1.5 11.4 60 50 12/13F 2,183 271 12.4 169 2,399 346 150 10.2 13.5 1.4 10.3 40 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests 12/10 6/11 12/11 Hite Jinro merged with Hite Brewery in September 2011 Source: Company data, KDB Daewoo Securities Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. December 9, 2011 Hite Jinro

Table 1. Hite JinroÊs past beer price hikes (W) 12.99 1.00 1.01 1.03 12.04 1.05 1.06 1.07 5.07 7.08 12.09 1.12F Factory price 347 364 378 401 401 421 421 434 442 467 479 514 Liquor tax 450 418 378 401 401 379 337 312 318 336 345 370 Liquor tax rate (%) 130 115 100 100 100 90 80 72 72 72 72 72 Education tax 135 126 114 120 120 114 101 94 95 101 103 111 Supply price 932 908 870 923 923 914 859 839 855 903 927 996 Value-added tax 93 91 87 92 92 91 86 84 86 90 93 100 Total taxes on beer 679 635 579 614 614 584 524 490 499 527 541 581 Ex-factory price 1,025 999 957 1015 1015 1005 945 923 941 994 1,019 1,095 Tax burden ratio (%) 66 64 60 60 60 58 55 53 53 53 53 53 Distribution margin 205 200 191 203 203 201 189 185 188 199 204 219 Retail margin 246 240 230 244 244 241 227 222 226 238 245 263 Consumer price 1,476 1,438 1,379 1,462 1,462 1,447 1,360 1,330 1,355 1,431 1,468 1,577 Increase in factory price (%) 0.0 5.0 4.0 6.1 0.0 4.9 0.0 3.0 1.9 5.6 2.6 7.5 Increase in ex-factory price (%) 0.0 -2.6 -4.1 6.1 0.0 -1.0 -6.0 -2.3 1.9 5.6 2.6 7.5 Increase in consumer price (%) 0.0 -2.6 -4.1 6.1 0.0 -1.0 -6.0 -2.3 1.9 5.6 2.6 7.5 Note: 1) Based on a 500ml bottle of ÂHiteÊ beer 2) Factory price: Hite JinroÊs ASP 3) Ex-factory price: Supply price for wholesalers 4) Distribution margin: 20% of ex-factory price 5) Retail margin: 20% of ex-factory price + distribution margin 6) Consumer price: Ex-factory price + distribution margin + retail margin 7) Assumed Hite JinroÊs beer price hike of 7.5% in early 2012 Source: Company data, KDB Daewoo Securities Research

Figure 1. Hite JinroÊs beer price hike trend and forecast Figure 2. Beer CPI trend

(W) (W) (10=100) 550 Factory price (L) 1,200 110 Ex-factory price (R) 105 500 1,100 100 450

1,000 95 400 90 900 350 85

300 800 80 12.99 1.01 12.04 1.06 5.07 12.09 00 02 04 06 08 10 12

Note: Based on a 500ml bottle of ÂHiteÊ beer, Assumed Hite JinroÊs beer price Note: Based on Oriental BreweryÊs beer price hike in Dec. 2011 hike of 7.5% in early 2012 Source: Statistics Korea, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 2 December 9, 2011 Hite Jinro

Figure 3. Composition of beer consumer price Figure 4. International malt prices

(W) (US$/tonne) (W'000/tonne) 600 800 International prices (L) 1,000 Won-denominated prices (R) 500 800 600 400 600 300 400 400 200 200 200 100

0 0 0 Factory price Tax Distribution margin Retail margin 94 97 00 03 06 09 12

Note: Based on a 500ml bottle of ÂHiteÊ beer Source: Korea International Trade Association, KDB Daewoo Securities Source: Company data, KDB Daewoo Securities Research Research

Figure 5. Beer shipment growth Figure 6. Soju shipment growth

('000 kl) (%) ('000 kl) (%) 250 Beer shipments (L) 60 150 Soju shipments (L) 60 % YoY (R) % YoY (R) 200 40 120 40

150 20 90 20

100 0 60 0

50 -20 30 -20

0 -40 0 -40 99 01 03 05 07 09 11 99 01 03 05 07 09 11

Source: Statistics Korea, KDB Daewoo Securities Research Source: Statistics Korea, KDB Daewoo Securities Research

Figure 7. Soju CPI trend Figure 8. Spread between soju and alcohol

(1/00=100) (1/00=100) (1/00=0) 150 150 Spread between soju and alcohol prices (R) 12 CPI for soju (L) 140 140 PPI for alcohol (L) 8

130 130 4

120 120 0

110 110 -4

100 100 -8

90 90 -12 00 02 04 06 08 10 12 00 02 04 06 08 10 12

Source: Statistics Korea, KDB Daewoo Securities Research Source: Statistics Korea, KDB Daewoo Securities Research

KDB Daewoo Securities Research 3 December 9, 2011 Hite Jinro

Hite Jinro (000080 KS/Buy/TP: W42,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F Revenues 1,035 1,424 2,124 2,183 Current Assets 402 907 994 1,005 Cost of Sales 610 872 1,253 1,270 Cash and Cash Equivalents 150 132 214 226 Gross Profit 425 553 871 912 AR & Other Receivables 182 537 537 530 SG&A Expenses 299 410 625 642 Inventories 52 171 170 175 Operating Profit (Adj) 126 142 246 271 Other Current Assets 16 64 70 72 Operating Profit 126 160 246 271 Non-Current Assets 1,017 2,732 2,817 2,900 Non-Operating Profit -1 1 -29 -31 Investments in Associates 40 39 45 51 Net Financial Income 13 25 45 48 Property, Plant and Equipment 688 2,345 2,399 2,455 Net Gain from Inv in Associates 7 9 6 6 Intangible Assets 3 46 48 49 Pretax Profit 125 143 218 239 Total Assets 1,418 3,639 3,811 3,905 Income Tax 64 38 64 70 Current Liabilities 609 1,543 1,573 1,635 Profit from Continuing Operations 61 105 154 169 AP & Other Payables 225 232 234 240 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 271 912 957 1,002 Net Profit 61 105 154 169 Other Current Liabilities 113 399 382 393 Controlling Interests 61 105 154 169 Non-Current Liabilities 189 619 647 550 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 150 534 555 453 Total Comprehensive Profit 61 115 161 176 Other Non-Current Liabilities 12 22 24 24 Controlling Interests 61 115 161 176 Total Liabilities 798 2,162 2,220 2,185 Non-Controlling Interests 0 0 0 0 Controlling Interests 621 1,477 1,591 1,720 EBITDA 164 197 319 346 Capital Stock 215 366 366 366 FCF (Free Cash Flow) -36 -221 99 150 Capital Surplus 0 710 710 710 EBITDA Margin (%) 15.9 13.8 15.0 15.9 Retained Earnings 251 469 576 697 Operating Profit Margin (%) 12.2 11.2 11.6 12.4 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 5.9 7.4 7.3 7.8 Stockholders' Equity 621 1,477 1,591 1,720

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F 12/10 12/11F 12/12F 12/13F Cash Flows from Op Activities 114 151 235 297 P/E (x) 24.3 15.5 14.9 13.5 Net Profit 61 105 154 169 P/CF (x) 14.9 10.3 10.1 9.4 Non-Cash Income and Expense 56 108 165 177 P/B (x) 2.3 1.6 1.5 1.4 Depreciation 37 52 71 73 EV/EBITDA (x) 10.5 18.6 11.4 10.3 Amortization 1 2 2 2 EPS (W) 1,457 2,090 2,185 2,399 Others -24 4 8 8 CFPS (W) 2,371 3,167 3,215 3,464 Chg in Working Capital -3 20 -15 21 BPS (W) 15,260 20,438 22,029 23,836 Chg in AR & Other Receivables -44 64 -1 7 DPS (W) 1,500 700 700 700 Chg in Inventories -9 -5 1 -5 Payout ratio (%) 96.0 45.4 30.9 28.1 Chg in AP & Other Payables 2 1 2 7 Dividend Yield (%) 4.2 2.2 2.2 2.2 Income Tax Paid 0 -82 -69 -70 Revenue Growth (%) 5.6 37.6 49.2 2.8 Cash Flows from Inv Activities -9 -78 -124 -128 EBITDA Growth (%) -12.6 19.7 62.4 8.4 Chg in PP&E -51 -116 -125 -130 Operating Profit Growth (%) -16.6 27.0 54.2 9.9 Chg in Intangible Assets -1 -3 -3 -3 EPS Growth (%) -49.2 43.5 4.6 9.8 Chg in Financial Assets 44 10 0 0 Accounts Receivable Turnover (x) 6.8 4.2 4.2 4.3 Others -2 31 4 6 Inventory Turnover (x) 21.9 12.8 12.5 12.7 Cash Flows from Fin Activities -126 -66 -29 -158 Accounts Payable Turnover (x) 15.5 16.2 20.2 20.3 Chg in Financial Liabilities 120 -23 28 -122 ROA (%) 4.3 4.2 4.1 4.4 Chg in Equity -105 -16 0 0 ROE (%) 8.9 10.0 10.1 10.2 Dividends Paid -84 -59 -48 -48 ROIC (%) 10.4 6.5 6.6 7.1 Others -57 -28 -48 -53 Liability to Equity Ratio (%) 128.6 146.3 139.5 127.1 Increase (Decrease) in Cash -6 -18 82 11 Current Ratio (%) 66.0 58.8 63.2 61.5 Beginning Balance 156 150 132 214 Net Debt to Equity Ratio (%) 43.2 88.7 81.4 71.3 Ending Balance 150 132 214 226 Interest Coverage Ratio (x) 7.8 5.6 5.2 5.1 Source: Company data, KDB Daewoo Securities Research estimates

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Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd. has been acting as a financial advisor to HITEJINRO for its treasury stock trust, and other than this, Daewoo Securities has no other special interests in the companies covered in this report.

Buy Relative performance of 20% or greater (W) HITEJINRO Stock Trading Buy Relative performance of 10% or greater, but with volatility 60,000 50,000 Ratings Hold Relative performance of -10% and 10% 40,000 Sell Relative performance of -10% 30,000 Overweight Fundamentals are favorable or improving 20,000 Industry 10,000 Neutral Fundamentals are steady without any material changes Ratings 0 12/09 6/10 12/10 6/11 11/11 Underweight Fundamentals are unfavorable or worsening * Ratings and Target Price History (Share price (----), Target price (----), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analystÊs estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Analyst Certification The research analysts who prepared this report (the „Analysts‰) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclaimers This report is published by Daewoo Securities Co., Ltd. („Daewoo‰), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

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December 9, 2011 Hite Jinro

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