[Korea] Travel Retail October 5, 2020

Hotel Shilla Buy (008770 KS ) (Maintain)

3Q20 preview: Strong downside support TP: W100,000 Upside: 32.1%

Mirae Asset Daewoo Co., Ltd. Myoungjoo Kim [email protected] Minjeong Kyeong [email protected]

3Q20 preview Likely operating loss of W32 .2bn (consolidated basis) ó For 3Q20, we expect to post an operating loss for the third straight quarter, as: 1) customer traffic in duty-free stores has been slow to recover due to the continuing impact of the pandemic; and 2) fixed-cost burden remained high in the quarter. ó That said, we believe Incheon International Airport’s (IIA) temporary introduction of variable rental fees (linked to sales) in September has significantly eased the fixed-cost burden. ó We expect earnings to improve meaningfully beginning in 4Q20, supported by: 1) a reduced fixed-cost burden; and 2) a steady increase in average ticket.

Additional negatives to be Despite lingering uncertainties, additional negatives to be limited limited ó The number of foreign customers at domestic duty-free stores has plummeted (-95% YoY as of August). ó As the pandemic drags on, the timing of a recovery in store traffic remains a big uncertainty. ó Nevertheless, we believe additional negatives are limited. Store traffic is unlikely to decline any further from current levels. ó Despite the continuing impact of the pandemic, average ticket has steadily increased, which reflects: 1) solid demand from daigou ; and 2) Korean duty-free stores’ strong competitiveness.

Recommendation and v aluation Maintain Buy and TP of W100,000 ó Valuation currently looks demanding, with the stock trading at a 2021F P/E of 30.6x. ó In the absence of favorable developments (e.g., the launch of an effective vaccine), the impact of the pandemic is likely to continue well into 2021. ó Nevertheless, we believe the stock has strong downside support, as the current share price reflects all COVID-19-related uncertainties and sluggish earnings. ó We believe the stock is more leveraged to tailwinds than headwinds. We reiterate our Buy recommendation on Hotel Shilla.

Key data

Current price (10/5/20, W) 75,700 Market cap (Wbn) 2,971 140 Hotel Shilla KOSPI OP (20F, Wbn) -167 Shares outstanding (mn) 40 120 Consensus OP (20F, Wbn) -170 Free float (%) 77.2 100 EPS growth (20F, %) - Foreign ownership (%) 21.1

80 P/E (20F, x) - Beta (12M) 1.04

60 Market P/E (20F, x) 16.4 52-week low (W) 61,800 10.19 2.20 6.20 10.20 KOSPI 2,358.00 52-week high (W) 108,500

Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2016 2017 2018 2019 2020F 2021F Absolute 1.5 13.0 -5.1 Revenue (Wbn) 3,715 3,515 4,714 5,717 3,257 5,000 Relative 1.9 -17.3 -18.7 OP (Wbn) 79 73 209 296 -167 193

OP margin (%) 2.1 2.1 4.4 5.2 -5.1 3.9 NP (Wbn) 28 25 110 170 -193 99 EPS (W) 696 632 2,758 4,243 -4,832 2,475 ROE (%) 4.0 3.8 15.4 20.2 -23.7 13.1 P/E (x) 69.2 134.3 27.7 21.4 - 30.6 P/B (x) 2.5 4.4 3.5 3.5 3.7 3.3 Dividend yield (%) 0.7 0.4 0.5 0.4 0.5 0.5 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimat es Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. October 5, 2020 Hotel Shilla

Table 1. 3Q20 preview (Wbn, %, %p) 3Q20F Growth

3Q19 2Q20 Mirae Asset Consensus YoY QoQ Daewoo Revenue 1,475 523 809 773 -45.2 54.7 OP 57 -63 -32 -37 TTR RR OP margin (%) 3.9 - - - - - NP 28 -68 -34 -36 TTR RR Notes: Under consolidated K-IFRS. NP is attributable to owners of the parent Source: DataGuide, company data, Mirae Asset Daewoo Research estimates

Table 2. Earnings forecast revisions (Wbn, %, %p) Previous Revised % chg. Notes 2020F 2021F 2020F 2021F 2020F 2021F Revenue 3,183 5,150 3,257 5,000 2.3 -2.9 OP -165 192 -167 193 - 0.5 OP margin (%) -5.2 3.7 -5.1 3.9 - 0.1 NP -197 98 -193 99 - 1.2 Notes: Under consolidated K-IFRS. NP is attributable to owners of the parent Source: DataGuide, company data, Mirae Asset Daewoo Research

Table 3. Earnings and forecasts (Wbn) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20F 4Q20F 2018 2019 2020F 2021F Revenue 1,126 1,175 1,220 1,193 1,343 1,355 1,475 1,544 944 523 809 981 4,714 5,717 3,257 5,000 Duty-free 1,014 1,055 1,094 1,072 1,225 1,227 1,339 1,411 849 439 699 864 4,234 5,201 2,851 4,444 Downtown 581 613 626 621 721 756 856 941 559 394 614 733 2,441 3,274 2,300 2,983 Airport 432 442 468 451 504 470 482 470 290 46 85 130 1,793 1,927 551 1,461 Hotel/leisure 112 120 127 121 118 128 137 133 94 84 110 117 480 516 406 557 COGS 594 600 631 637 753 741 861 887 588 292 562 684 2,462 3,301 2,204 2,900 COGS ratio (%) 53 51 52 53 56 55 58 57 62 56 69 70 52.2 57.7 68 58 SG&A 487 505 521 529 509 534 557 580 422 295 280 302 2,042 2,121 1,220 1,907 OP 44 69 68 27 82 79 57 78 -67 -63 -32 -4 209 296 -167 193 Duty-free 48 64 59 25 82 70 45 70 -49 -47 -30 0 196 267 -126 164 Hotel/leisure -3 6 9 2 -1 9 12 8 -18 -16 -2 -5 13 29 -41 29 Pretax profit 42 65 66 -25 67 68 38 54 -93 -82 -46 -23 147 226 -243 132 NP 32 53 47 -21 52 52 28 38 -74 -68 -34 -18 110 170 -193 99 YoY (%) Revenue 10 31 14 127 19 15 21 29 -30 -61 -45 -36 34 21 -43.0 53.5 OP 342 303 124 77 85 14 -16 182 TTR TTR TTR TTR 186 41 TTR TTB NP 1,074 1,668 275 -402 64 -1 -41 TTB TTR TTR TTR TTR 336 54 TTR TTB Notes: Under consolidated K-IFRS. NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research

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Hotel Shilla (008770 KS)

Income statement (summarized) Balance sheet (summarized) (Wbn) 2018 2019 2020F 2021F (Wbn) 2018 2019 2020F 2021F Revenue 4,714 5,717 3,257 5,000 Current assets 1,272 1,716 1,358 1,726 Cost of revenue 2,462 3,301 2,204 2,900 Cash & equivalents 282 508 599 542 Gross profit 2,252 2,416 1,053 2,100 AR & other receivables 203 266 169 264 SG&A expenses 2,042 2,121 1,220 1,907 Inventory 704 849 540 842 OP (adj.) 209 296 -167 193 Other current assets 83 93 50 78 OP 209 296 -167 193 Non-current assets 1,032 1,811 1,788 1,832 Non-operating profit -62 -70 -76 -61 Investments in associates 34 48 30 47 Net financial income -8 -27 -35 -42 PP&E 697 675 641 608 Net income from associates 0 0 -12 -1 Intangible assets 48 56 56 41 Pretax profit 147 226 -243 132 Total assets 2,304 3,527 3,146 3,558 Income tax 37 56 -50 33 Current liabilities 1,003 1,438 935 1,351 Profit from continuing operations 110 169 -193 99 AP & other payables 350 507 322 503 Profit from discontinued operations 0 0 0 0 Short-term financial liabilities 160 419 287 340 NP 110 169 -193 99 Other current liabilities 493 512 326 508 Attributable to owners 110 170 -193 99 Non-current liabilities 536 1,170 1,496 1,405 Attributable to minority interests 0 0 0 0 Long-term financial liabilities 499 1,143 1,479 1,379 Total comprehensive income 110 168 -190 99 Other non-current liabilities 37 27 17 26 Attributable to owners 110 168 -191 99 Total liabilities 1,539 2,608 2,431 2,756 Attributable to minority interests 0 0 0 0 Equity attributable to owners 764 920 715 801 EBITDA 284 515 80 441 Capital stock 200 200 200 200 FCF 76 338 -21 171 Capital surplus 197 197 197 197 EBITDA margin (%) 6.0 9.0 2.5 8.8 Retained earnings 475 627 420 506 OP margin (%) 4.4 5.2 -5.1 3.9 Minority interests 1 0 1 1 Net margin (%) 2.3 3.0 -5.9 2.0 Shareholders' equity 765 920 716 802

Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2018 2019 2020F 2021F 2018 2019 2020F 2021F Operating cash flow 154 404 104 371 P/E (x) 27.7 21.4 - 30.6 NP 110 169 -193 99 P/CF (x) 10.6 7.1 55.9 7.2 Non-cash income/expenses 178 341 247 323 P/B (x) 3.5 3.5 3.7 3.3 Depreciation 62 205 228 232 EV/EBITDA (x) 12.0 9.0 52.2 9.5 Amortization 12 15 18 15 EPS (W) 2,758 4,243 -4,832 2,475 Other 104 121 1 76 CFPS (W) 7,201 12,764 1,354 10,551 Chg. in working capital -117 -44 26 -45 BPS (W) 21,722 25,591 20,491 22,634 Chg. in AR & other receivables -16 -28 38 -44 DPS (W) 350 350 350 350 Chg. in inventory -230 -139 309 -302 Dividend payout ratio (%) 11.8 7.7 -6.7 13.1 Chg. in AP & other payables 43 150 -156 154 Dividend yield (%) 0.5 0.4 0.5 0.5 Income tax -23 -70 14 -33 Revenue growth (%) 34.1 21.3 -43.0 53.5 Cash flow from investing activities -103 -93 -131 -282 EBITDA growth (%) 95.9 81.3 -84.5 451.3 Chg. in PP&E -71 -65 -124 -200 OP growth (%) 186.3 41.6 - - Chg. in intangible assets 0 0 -9 0 EPS growth (%) 336.4 53.8 - - Chg. in financial assets 20 7 84 -82 AR turnover (x) 54.8 52.4 32.2 49.7 Other -52 -35 -82 0 Inventory turnover (x) 8.0 7.4 4.7 7.2 Cash flow from financing activities -245 -87 21 -129 AP turnover (x) 9.4 9.2 6.2 8.2 Chg. in financial liabilities -211 903 204 -47 ROA (%) 4.9 5.8 -5.8 3.0 Chg. in equity 0 0 0 0 ROE (%) 15.4 20.2 -23.7 13.1 Dividends -13 -13 -13 -13 ROIC (%) 18.7 17.3 -10.1 8.7 Other -21 -977 -170 -69 Debt-to-equity ratio (%) 201.1 283.6 339.6 343.9 Chg. in cash -193 226 91 -57 Current ratio (%) 126.9 119.3 145.3 127.8 Beginning balance 474 282 508 599 Net debt-to-equity ratio (%) 46.3 112.2 161.0 144.1 Ending balance 282 508 599 542 Interest coverage ratio (x) 11.3 7.5 -3.5 2.8 Source: Company data, Mirae Asset Daewoo Research estimates

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Appendix 1

Important disclosures and disclaimers Two-year rating and TP history

Company Date Rating TP (W) (W) Hotel Shilla Hotel Shilla (008770) 04/27/20 Buy 100,000 150,000 02/02/20 Trading Buy 100,000 10/28/19 Buy 100,000 100,000 10/01/19 Buy 110,000 08/07/18 No Coverage 50,000

0 Oct 18 Oct 19 Oct 20

Stock ratings Sector ratings Buy Expected 12-month performance: +20% or greater Overweight Expected to outperform the market over 12 months Trading Buy Expected 12-month performance: +10% to +20% Neutral Expected to perform in line with the market over 12 months Hold Expected 12-month performance: -10% to +10% Underweight Expected to underperform the market over 12 months Sell Expected 12-month performance: -10% or worse

Rating and TP history: Share price (─), TP (▬), Not Rated ( ■), Buy (▲), Trading Buy (■), Hold (●), Sell ( ◆) * Our investment rating is a guide to the expected return of the stock over the next 12 months. * Outside of the official ratings of Mirae Asset Daewoo Co., Ltd., analysts may call trading opportunities should technical or short-term material developments arise. * The TP was determined by the research analyst through valuation methods discussed in this report, in part based on estimates of future earnings. * TP achievement may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Ratings distribution and investment banking services Buy Trading Buy Hold Sell Ratings distribution 76.22% 11.59% 11.59% 0.60% Investment banking services 75.00% 10.00% 15.00% 0% * Based on recommendations in the last 12 months (as of June 30, 2020)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Hotel Shilla as an underlying asset; other than this, Mirae Asset Daewoo has no other special interests in the covered companies.

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 or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director, or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading, and private client divisions. 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 Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report was prepared by Mirae Asset 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 in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset 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. In case of 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. 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 or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person, and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates, and their directors, officers, employees, and agents

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do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views, and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset 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. Mirae Asset 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. 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 Mirae Asset Daewoo. For further information regarding company-specific information as it pertains to the representations and disclosures in this Appendix 1, please contact [email protected] or +1 (212) 407-1000.

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