Hanjin Transportation (002320 KS) Parcel Delivery and Stevedoring to Lead the Way

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Hanjin Transportation (002320 KS) Parcel delivery and stevedoring to lead the way

Logistics An asset-based logistics provider oriented toward parcel delivery Hanjin Transportation, the logistics arm of the Hanjin Group (established in 1958), Initiation Report mainly engages in ground transport, stevedoring, shipping, and parcel delivery October 28, 2015 operations. As of 2014, parcel delivery accounted for 27.3% of revenue, ground transport 27.2%, and stevedoring 15.8%. Among the company’s business divisions, we

believe investors should pay particular attention to parcel delivery, which generates (Initiate) Buy more than 27% of revenue and 47% of operating profit. Investment points: Urban logistics complex and container terminals Target Price (12M, W) 60,000 1) Parcel delivery reinforced by the new Seoul Integrated Freight Terminal : Major Share Price (10/28/15, W) 45,100 retailers and manufacturers (cargo owners) are increasingly coming to realize the importance of delivery service competitiveness. The new Seoul Integrated Freight Expected Return 33% Terminal commenced operations in September, boosting Hanjin Transportation’s terminal capacity by 30%. Given rapid market growth, as well as the favorable location

and state-of-the-art facilities of the new complex, we expect terminal utilization ratio to OP (15F, Wbn) 46 reach the mid-80% level in 4Q15 . Volume growth should lead to operating leverage Consensus OP (15F, Wbn) 47 effects, further lifting margins.

EPS Growth (15F, %) 149.3 2) Opportunities from container terminals: We believe stevedoring will grow into a Market EPS Growth (15F, %) 20.6 major business that contributes 10-13% of the company’s operating profit (vs. 3.2% in P/E (15F, x) 5.0 2014), driven by the Pyeongtaek Container Terminal (which was acquired in 2Q15) and Market P/E (15F, x) 11.9 Incheon New Port Terminal A (which is set to open in early 2016). There are also talks of KOSPI 2,042.51 the company potentially acquiring Hanjin Newport (Pusan Newport International Market Cap (Wbn) 540 Terminal) from Hanjin Shipping. If the deal goes through, this could boost our 2016 Shares Outstanding (mn) 12 operating profit estimate by 38.3%. Free Float (%) 65.3 3) Non-operating assets: In July, Hanjin Transportation sold its stake (5.79mn shares) in Foreign Ownership (%) 9.5 Korean Air for W217bn. The company also has holdings in Seoul Express Bus Terminal Beta (12M) 1.69 52-Week Low 40,500 valued at roughly W160bn. We believe the company will use the proceeds from its 52-Week High 69,200 Korean Air stake sale to pay down its debt. As such, debt-to-equity ratio and interest expenses should decline, which should in turn drive up ROE. (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Absolute -6.0 -25.0 -14.4 Initiate coverage with Buy and TP of W60,000 Relative -10.6 -21.1 -19.3 We initiate our coverage on Hanjin Transportation with a Buy recommendation and target price of W60,000. We derived our target price using a sum-of-the-parts 150 HanjinTrnspt KOSPI methodology. With the Korean Air stake sale now complete and earnings set to 130 meaningfully improve, we only reflected non-operating assets that are readily disposable 110 into our valuation. Our target price implies a 2016F P/B of 0.8x , which we believe is

90 highly achievable, given the expected pace of earnings growth led by parcel delivery.

70 Furthermore, if the Hanjin Newport acquisition comes to pass, this would boost 10.14 2.15 6.15 10.15 earnings, potentially leading to multiple expansion.

Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 1,437 1,500 1,533 1,646 1,778 1,831 [Transportation/Energy] OP (Wbn) 38 40 53 46 64 69

Choong-hyun Kim OP margin (%) 2.6 2.7 3.5 2.8 3.6 3.8 +822-768-4126 NP (Wbn) -10 -7 44 108 49 54 [email protected] EPS (W) -842 -577 3,634 9,059 4,090 4,476 ROE (%) -1.3 -1.0 5.9 13.4 5.6 5.9

Jay JH Ryu P/E (x) - - 14.9 5.0 11.0 10.1 +822-768-4175 P/B (x) 0.3 0.3 0.8 0.6 0.6 0.6 jay.ryu @dwsec.com Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

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

October 28, 2015 Hanjin Transportation

C O N T E N T S

I. Investment points 3 1. Parcel delivery reinforced by the new Seoul Integrated Freight Terminal 2. Opportunities from container terminals 3. Non-operating assets

II. Valuation 4 Initiate coverage with Buy and TP of W60,000

III. Industry analysis 5 Asset-based logistics provider to outperform non-asset-based rivals

IV. Major businesses 11 1. Seoul Integrated Freight Terminal holds the key to Hanjin’s competitiveness 11 2. Stevedoring unit 12

V. Value of non-operating assets 14 Sale of non-operating assets to lower debt-to-equity ratio, leading to higher ROE

VI. Earnings outlook 15 1. 3Q15 preview: Revenue of W405.8bn (+7.2% YoY)

VII. Risks 17 1. FCF improvement needed 17 2. Competition for second and third place to intensify due to M&As 17 3. Relatively low contribution from overseas operations 18

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October 28, 2015 Hanjin Transportation

I. Investment points

1. Parcel delivery reinforced by the new Seoul Integrated Freight Terminal

We expect the parcel delivery business to lead Hanjin Transportation’s growth. The new Seoul Integrated Freight Terminal commenced operations in September, boosting the company’s terminal capacity by 30%. Given rapid market growth (driven by an increase in single-person households and the development of the mobile shopping market), as well as the favorable location and state-of-the-art facilities of the new complex, we expect utilization to reach the mid- 80% level in 4Q15. Volume growth should lead to operating leverage effects, further lifting margins.

The new terminal, located in Jangji-dong, Songpa-gu, is the only urban freight terminal within Seoul, and its biggest merit is its proximity to the Seoul capital area (SCA). The favorable location should allow the firm to stay ahead of its rivals.

2. Opportunities from container terminals

We believe stevedoring will grow into a major business accounting for 10-13% of the company’s operating profit (vs. 3.2% in 2014), driven by the Pyeongtaek Container Terminal (which was acquired in 2Q15) and Incheon New Port Terminal A. The Incheon terminal, set to open in early 2016, is projected to generate W40-60bn in revenue per year (although it may take some time before the business settles down).

There are also talks of the company potentially acquiring Hanjin Newport from Hanjin Shipping. If the deal goes through, this could boost our 2016 operating profit estimate by 38.3%, and add at least W130bn per year to revenue.

3. Non-operating assets

In July, Hanjin sold its stake (5.79mn shares) in Korean Air for W217bn. The company also has holdings in Seoul Express Bus Terminal, which are valued at roughly W160bn. As of end-2Q15, it held around W820bn worth of interest-bearing liabilities. If the firm uses non-operating assets to pay down its debt, debt-to-equity ratio could fall from 154% to close to 120%. Interest expenses will also decline which should in turn drive up ROE.

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II. Valuation

Initiate coverage with Buy and TP of W60,000

We initiate our coverage on Hanjin Transportation with a Buy recommendation and target price of W60,000. We derived our target price using a sum-of-the-parts methodology. With the Korean Air stake sale now complete and earnings set to meaningfully improve, we only reflected non- operating assets that are readily disposable into our valuation (Incheon New Port Terminal A and the potential acquisition of Hanjin Newport were not taken into account in our valuation.).

Hanjin’s stock price was up by as much as 27.7% from early in the year, aided by the strength of the parcel delivery business and the increased value of securities holdings. The stock’s rally came to a halt after the sale of Korean Air shares (W217bn) last July. Our target price implies 2016F P/B of 0.8x, which we believe is highly justifiable, given the expected pace of earnings growth led by parcel delivery. The stock is currently trading at 2016F P/B of 0.6x.

We believe that: 1) the new Seoul Integrated Freight Terminal (opened in September) will reinforce Hanjin’s parcel delivery business; 2) the Incheon terminal, set to open in early 2016, will accelerate the firm’s earnings growth; 3) the proceeds from the Korean Air stake sale will be used to pay down debts, helping drive up ROE; and 4) Hanjin Newport, if acquired, will boost valuation.

Table 111.1. SumSumSum-Sum ---ofofofof----thethethethe----partsparts valuation (Wbn) ValueValueValue

Operating assetassetssss 1,049

EBITDA 107 2016F Target EV/EBITDA 10 2016F average of Asian players NonNonNon-Non ---operatingoperating assetassetssss 172

Seoul Express Bus Terminal 160 Hana Financial Group 5 POSCO 3 eNtoB 3 KL-Net 1 Net debt 512 2016F NAV 709

Shares outstanding (‘000) 11,803 Excluding treasury stocks Target price (W(W(W ))) 60,000 Source: KDB Daewoo Securities Research

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III. Industry analysis

Asset-based logistics provider to outperform non-asset-based rivals

In 1H15, SoftBank invested a whopping W1.1tr in the e-commerce firm Coupang, which was aggressively expanding operations via its in-house delivery service system. We believe that the investment is a sign that market watchers are starting to recognize the growing importance and value of in-house logistics systems such as Coupang's Rocket Delivery.

This may be bad news for logistics players, which will face intensifying competition if a significant number of manufacturers and retailers (i.e., cargo owners) start to offer their own delivery services. However, we believe this scenario is unlikely, given that few companies can afford to build their own delivery networks. Rather, the ties between cargo owners and logistics firms are likely to become stronger than ever going forward.

1) Retailers strengthening delivery services

Coupang’s success in attracting large-scale investments largely stems from the competitiveness of Rocket Delivery. The service encompasses 3,000 delivery trucks, 3,000 couriers, and eight logistics centers in Gyeonggi, Incheon, and Daegu (as of September). Rocket Delivery guarantees 24-hour delivery for certain items priced at W9,800 or higher.

In addition to Rocket Delivery’s sheer speed, the service’s more qualitative aspects have helped Coupang steadily gain ground. Simply put, for Coupang, logistics investments have led to revenue growth, making clear the importance of delivery services in enhancing competitiveness.

Table 222.2. Coupang revenue vs. logistics expenseexpensessss (Wbn, %) 201320132013 201420142014 Growth Revenue 48 348 629.1 Logistics expenses 16 117 647.3 Wages 12 80 596.2 General expenses 1 18 1,511.7

Rent 3 18 520.7 Source: Forward Ventures, KDB Daewoo Securities Research

Indeed, CJ O Shopping (CJOS) has expanded its same-day delivery service coverage from the SCA to include five other major cities. Gmarket and Auction have strengthened their smart delivery services, while Ticket Monster (TMON) has started to offer same-day delivery for items in its Supermart category. As retailers increasingly compete on logistics, traditional logistics players are facing new challenges.

The growing focus on delivery services has been driven by the sharp expansion of the parcel delivery market owing to an increase in single-person households and the development of the mobile shopping market. Demographic changes (single/two-person households account for 50% of total households) and the development of information technology have facilitated the development of the mobile shopping market.

Currently, online channels are responsible for around 14% of total retail sales. And m-commerce, which accounts for 40% of e-commerce (W14tr), is leading the growth of the online retail market. The parcel delivery industry has expanded in line with online sales, with revenue jumping from W2.7tr in 2009 to W4tr in 2014.

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Table 333.3. Korea online/online/mobilemobile shopping market (Wbn) 201220122012 201320132013 201420142014

Retail sales 350,006 353,642 359,746 (Growth) - 1.04% 1.73% Online shopping (PC) 34,068 38,498 45,302 (Growth) - 13.00% 17.67% Mobile shopping 1,700 6,560 14,870 (Growth) - 285.88% 126.68% Source: Statistics Korea, KDB Daewoo Securities Research

Figure 111.1. Proportion of singlesingle---- and twotwo----personperson households Figure 222.2. OOOnlineOnlinenlinenline retail marketmarket:: Mobile vs. PCPCPC

(%) (Wbn) 60 Single- and two-person households 6,000 Mobile Online (PC-based) 50 5,000

40 4,000

30 3,000

20 2,000

10 1,000

0 0 1/80 1/85 1/90 1/95 1/00 1/05 1/10 1/13 4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15 4/15 7/15 Source: Statistics Korea, KDB Daewoo Securities Research Source: Statistics Korea, KDB Daewoo Securities Research

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2) In-house delivery services vs. stronger alliances between retailers and logistics firms

Retailers are deploying different strategies to improve delivery competitiveness. 1) Coupang is utilizing in-house logistics centers and courier services. 2) CJOS relies on outsourcing for both its logistics centers and delivery services. 3) EBay Korea has its own logistics centers but outsources their operation as well as delivery services. 4) Emart has its own logistics centers and brick-and- mortar stores, and utilizes both in-house and independent courier services.

For traditional logistics service providers, retailers’ growing reliance on in-house delivery systems poses a significant threat. Still, it is important to note that the vast majority of retailers have chosen to continue to outsource delivery to traditional logistics firms. We believe that the ongoing war to provide faster delivery services will end up strengthening existing alliances between retailers and logistics service providers, for the following three reasons.

■ Viability

First, the establishment of in-house delivery operations requires a significant capital commitment. While it has been proven that investments in logistics lead to top-line growth for retailers, such expenditure tends to lead to sizeable operating losses until the achievement of economies of scale. For example, JD.com has become China’s second-largest e-commerce company on the back of its efficient logistics services. And, as the company’s top line expands, the unit cost of logistics declines (and profit margins gradually improve). However, the retailer is still reporting operating losses.

Amazon has become one of the world’s largest retailers following innovative investments in its logistics systems. The firm recognized operating losses after making its initial investments, but it saw a turnaround in the early 2000s. The Amazon case shows that the key to successful logistics investments is achieving the level of economies of scale sufficient for operating leverage effects.

Figure 333.3. JD. JD.comJD .com.com.com’’’’ss orders vs. fulfillment costs/no. of orders Figure 444.4. JD. JD.comJD .com.com.com’’’’ss operating profit vs. OP margin

(mn orders) Fulfilled orders (L) (RMB ) (RMBmn ) OP (L) OP margin (R) (% ) 350 Fulfillment cost/orders (R) 14 0 0

-100 300 13 -1 -200 250 12 -300 -1

200 -400 11 -2 150 -500 10 -600 -2 100 -700 50 9 -3 -800

0 8 -900 -3 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 1Q13 3Q13 1Q14 3Q14 1Q15

Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

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Coupang is believed to have invested W150bn last year to acquire 1,000 delivery trucks and establish logistics centers. Weighed down by the large-scale investment, the company recorded an operating loss of over W120bn in 2014 despite recording over sixfold growth in revenue. As its logistics capacity is still not sufficient for nationwide coverage, the company still outsources some of its delivery services.

As authorities are currently not accepting new commercial delivery vehicle registrations, Coupang can only provide Rocket Delivery for directly-purchased product. In light of this, the company is increasing the proportion of goods available for direct purchase in its offerings. The company does not disclose COGS ratios for commission revenue and revenue from merchandise (directly- purchased goods) sales in its financial statements. Extrapolating from the ratios of other social commerce firms, we estimate the company’s COGS ratios for merchandise and commission revenue at 80-90% and 20-30%, respectively.

Coupang’s gross margin plunged 44%p last year. In our view, the sharp fall is attributable to the increase in merchandise revenue, which bears high COGS. An increase in the mix of direct purchases should also give rise to inventory and provisioning costs.

Recently, TMON introduced Super Delivery, which guarantees delivery of groceries and household goods within 24 hours. The service is similar to Rocket Delivery but is provided via contract logistics (Hyundai Logistics). Through the service, TMON aims to meet customer demand for faster delivery while managing investment costs related to logistics.

Table 444.4. CoupangCoupang’’’’ss gross profit & logistics expenses (Wbn, %) 201320132013 201420142014 Growth Revenue 48 348 629.1 Commission (%) 42 (88%) 154 (44%) 263.9 Merchandise (%) 6 (12%) 194 (56%) 3,264.2 COGS 5 189 3,680.0 Gross profit 43 159 269.8 Gross margin 89.6 45.7 ---43.9-43.9 Logistics expenses 16 117 647.3 Wages 12 80 596.2 General 1 18 1,511.7 expenses Rent 3 18 520.7 Operating profit -0.1 -122 RR Source: Forward Ventures, KDB Daewoo Securities Research

Figure 555.5. AmazonAmazon’’’’ss revenue vs. fulfillment costscostscosts Figure 666.6. AmazonAmazon’’’’ss revenue and OP margin (US$mn) (US$mn) (US$mn) Net revenue (L) (%) 80,000 Net revenue (L) 10,000 100,000 OP margin (R) 10 Fulfillment (R) 9,000 70,000 90,000 5 Technological investment (R) 8,000 80,000 60,000 0 7,000 70,000 50,000 6,000 60,000 -5 40,000 5,000 50,000 -10 4,000 30,000 40,000 -15 3,000 30,000 20,000 -20 2,000 20,000 10,000 1,000 10,000 -25 0 0 0 -30 03 04 05 06 07 08 09 10 11 12 13 00 03 06 09 12 1H15

Source: Amazon, KDB Daewoo Securities Research Source: Amazon, KDB Daewoo Securities Research

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■ Inefficiency

In our view, Coupang is likely to find that in-house delivery services are not cost-efficient. Currently, the company operates about 3,000 delivery vehicles and eight logistics centers. In addition, Coupang is constructing an additional logistics center (99,173 ㎡) in Incheon, and plans to build another one in 2016. In our view, these efforts to expand the coverage of its delivery services should inevitably lead to lower efficiency. To maintain its service quality, the company will have to reduce loads or extend work hours for delivery personnel. To address these issues, Coupang is partly outsourcing logistics services.

While traditional logistics firms also provide other services like parcel pickup in addition to delivery, Coupang can provide only delivery services as the company is not a transport company. Accordingly, the company should be weighed down by low asset utilization and inefficiency.

Figure 777.7. No. of registered cargo vehicles Figure 888.8. Official increases in delivery vehicles

(000 vehicles) (%) Offical increase in no. of registered vehicles 500 Registered cargo vehicles (L) 18 12,000 450 YoY (R) 16 11,200

400 14 350 12 300 10 250 8 200 6 150 100 4 50 2 - 0 0 95 97 99 01 03 05 07 09 11 2013 2014 2015

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

■ Legal risks

Coupang is also exposed to legal risks. Uber, which entered the Korean market in 2013, halted its services in March this year due to backlash from the taxi industry and controversy over legality. Like Uber, Coupang’s Rocket Delivery service has proven controversial.

Currently, Rocket Delivery is available only for goods priced W9,800 or over after the Ministry of Land, Infrastructure and Transport (MOLIT) ruled that a fee of W2,500 for the delivery of products below that price level was illegal. And after the decision, the Korea Integrated Logistics Association (KILA) sought prosecution of Coupang, alleging that Rocket Service was illegal. Although several district prosecutors’ offices refused to pursue the case, the KILA is preparing for a civil lawsuit.

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3) Asset-based firms to benefit from stronger alliances between retail and logistics firms

In-house logistics systems such as Coupang’s pose a threat to traditional logistics firms. However, in light of the costs, inefficiencies, and legal risks associated with in-house delivery services, existing asset-based logistics firms remain attractive, in our view

In addition, it is important to note that social commerce firms, including Coupang, remain in the red amid strong competition. Indeed, the major three players have failed to turn around so far. We believe that Coupang’s logistics investments are part of a broader attempt to take the lead amid ever-intensifying competition and are unlikely to become the industry norm.

We believe that, in light of the fierce competition in the delivery service space, retailers are unlikely to expand logistics operations. Rather, they are likely to reinforce their own logistics facilities while outsourcing delivery services. Regulations will likely make it difficult to expand delivery vehicle fleets and establish nationwide networks.

However, retailers are allowed to build logistics complexes if they can prove real demand. Lotte Mart is currently building an online-specific logistics facility in Gimpo (slated to be completed in 2H15). Once this facility commences full-swing operations, it will be able to handle more than 10,000 online orders per day, doubling same-day delivery capacity to the SCA. In addition, the company plans to build additional two to three online-specific facilities in the SCA by 2017.

Last year, Emart established an online-specific logistics facility in Bojeong, Gyeonggi province, marking a retail industry first. The facility, built with an investment of W80bn, handles online orders, which had previously been handled by 15 stores in Seoul and the Gyeonggi province, and has lifted the same-day delivery service rate from 26% to the 60% level. Emart plans to open a second online-specific facility in Gimpo at the end of this year and aims to build six additional online-specific facilities in the SCA by 2020.

Figure 999.9. Revenue of top three social commerce players Figure 101010.10 . OP of top three social commerce players

(Wbn) (Wbn) 400 Coupang 0 TMON 350 WeMakePrice -20

300 -40 250 -60 200 -80 150 -100 100

50 -120 Coupang TMON 0 -140 WeMakePrice 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014

Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

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IV. Major businesses

1. Seoul Integrated Freight Terminal holds the key to Hanjin’s competitiveness

We believe that delivery competition between retailers will lead to stronger ties between retailers and logistics firms. Hanjin Transportation is a major third-party logistics (3PL) player in Korea with a robust nationwide delivery network. The parcel delivery unit is the most important for the company, accounting for 27% of overall revenue and 47% of operating profit in 2014.

We expect the parcel delivery unit to drive the company’s growth. Traditionally, the second half of the year (from the Chuseok holidays through 4Q) has been a strong season for the parcel delivery business. And Hanjin Transportation’s state-of-the-art logistics center within the Seoul Integrated Freight Terminal (404,347 ㎡; eight levels) commenced operations in September, boosting capacity by 30%.

Considering its superior location, as well as robust parcel delivery volume growth (more than 10% YoY monthly), we expect Hanjin Transportation’s new facility to record utilization of mid-80% starting in 4Q15. We believe that parcel delivery volume grew 17.3% YoY in 3Q to approximately 54mn parcels and expect to see 20% YoY growth starting in 4Q.

The Seoul Integrated Freight Terminal is the only domestic retail/logistics cluster located in the SCA. It features temperature-controlled storage areas, terminals, and collection/delivery facilities. Theoretically, it has the capacity to handle more than 35% of orders in the SCA. (Demand in the capital area represents 60% of the nationwide level.)

The strongest point for the Seoul Integrated Freight Terminal is its superior location, which enables quick delivery to the SCA. It is close to key cities such as Bundang, Pangyo, and Wirye as well as major highways (e.g., Dongbu Expressway, Seoul Ring Expressway, Gyeongbu Expressway, and Jungbu Naeryuk Expressway). As a result of these advantages, Hanjin Transportation is able to offer same-day delivery and delivery time selection—and competing firms lacking facilities at the terminal are struggling to keep up.

Figure 111111.11 . HanjinHanjin’’’’ss 2014 OPOPOP breakdown Figure 121212.12 . HanjinHanjin’’’’ss parcel volume vs. terminal utilization

(mn parcels) (%) Warehousing 20 100 Stevedoring 4% Volume (L) 3% 18 Utilization (R) 95 Car rental 11% 16 90 14 85 12 Ground Parcel delivery 80 transport 47% 10 15% 75 8 70 6 4 65 2 60 Forwarding 20% 0 55 1/13 4/13 7/13 10/13 1/14 4/14 7/14 10/14 1/15 4/15

Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

In addition, by utilizing large self-powered lamps on each level and cutting-edge automatic sorters, the complex is operating with staggering efficiency. In addition, top-of-the-line equipment enables Hanjin’s operations at the complex to handle roughly 300,000 boxes per day. Given that the Seoul Integrated Freight Terminal runs five to six days per week, it should be able to process 80mn boxes each year. Notably, the complex handled roughly 20mn boxes in September (which includes the Chuseok holidays).

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2. Stevedoring unit

The stevedoring unit also deserves attention. Hanjin Transportation has been steadily acquiring high-margin container terminals. The company acquired Pyeongtaek Container Terminal in May and reflected related revenue of W4.9bn and operating profit of W600mn in 2Q. The terminal delivered revenue of W7.9bn and operating profit of W900mn in 1H.

In addition, Hanjin Transportation will launch operations at its Incheon New Port container terminal in early 2016. Although it will likely take some time for the new terminal to stabilize, it is likely to make a W40-60bn revenue contribution. Hanjin Transportation is likely to acquire Hanjin Shipping’s stake in Hanjin Newport. Under this scenario, annual revenue is likely to increase by more than W130bn.

1) Incheon New Port container terminal to open in 2016

The Incheon New Port project was launched in 2007 to attract containerships and expand trade volume with China. The three-stage development project is currently in its first stage. The first stage involves operation of Terminal A (Hanjin Transportation) and Terminal B (Sunkwang). Sunkwang launched a portion of its capacity (410mn of 800mn TEU) in June and plans to launch the remainder next year.

Hanjin Transportation plans to open Terminal A, which is likely to be able to handle 1.2mn TEU annually, in early 2016. The company plans to first open 60% of capacity next year and launch the remaining 40% thereafter. As mentioned above, full-scale operation of Terminal A will likely drive up annual revenue by W40-60bn.

Table 555.5. Incheon coconnnntainershiptainership ports Berth capacity Stevedoring PortPortPort TTTeminal/operatorTeminal/operator BerthBerthBerthsBerth sss Length (m)(m)(m) (TEU)(TEU)(TEU) capacity (((‘‘‘000 TEU)TEU)TEU) 3,000 1 300 Terminal A/Hanjin 600 2,000 2 500 Terminal 3,000 1 300 New Port 600 B/Sunkwang 2,000 2 500 2,000 4 1,000 680 TBD 4,000 2 700 480 TotalTotalTotal 121212 3,3003,3003,300 1,9901,9901,990

CJ Korex 400 2 223 100 SICT 1,500 2 407 240 South Port ICT 3,000 2 600 400 E1CT 2,000 1 259 140 10,000 1 225 240 4-1 20,000 1 200 240 Inner Port 40,000 1 250 240 4-2 50,000 1 285 240 TotalTotalTotal 111111 2,4492,4492,449 1,8401,8401,840 Source: ICPA, KDB Daewoo Securities Research

Figure 131313.13 . Incheon container traffic

(000 TEU) (%) 2,500 Volume (L) 25 YoY (R) 20 2,000 15

1,500 10

5 1,000

0 500 -5

0 -10 2007 2008 2009 2010 2011 2012 2013 2014

Source: ICPA, KDB Daewoo Securities Research

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2) Potential acquisition of Hanjin Shipping’s stake in Hanjin Newport

The Hanjin Group is currently transitioning to a holding company structure. Under the revised Monopoly Regulation and Fair Trade Act (MRFTA), a second-tier subsidiary can only hold wholly- owned subsidiaries. As such, Hanjin Shipping sold its 59% stake (W14.4bn) in Pyeongtaek Container Terminal to Hanjin Transportation in May.

In addition, Hanjin Shipping needs to dispose of its stakes in eight other subsidiaries. Against this backdrop, the likelihood of Hanjin Transportation acquiring Hanjin Shipping’s stake in Hanjin Newport is growing. Hanjin Newport operates the container terminal of Pusan Newport International Terminal, with annual capacity of 2.8mn TEU. In 2014, Hanjin Newport handled 13% of Pusan Newport International Terminal’s total container traffic, posting revenue of W137.5bn. Hanjin Newport generates stable operating profit of W30-40bn annually.

The deal would be positive to both Hanjin Shipping and Hanjin Transportation. Hanjin Shipping would be able to address its liquidity risk by selling a solid subsidiary to an affiliate, while Hanjin Transportation could deliver steady top-line growth via the acquisition. The acquisition cost will likely amount to around W150-200bn. We believe Hanjin Transportation has enough cash to cover the cost, given the proceeds from the sale of its 7.95% stake (W210bn) in Korean Air in June.

Pyeongtaek Container Terminal, which has annual capacity of 480,000 TEU, delivered revenue of W7.9bn and operating profit of W900mn in 1H. We expect Hanjin Newport to generate annual revenue of W130bn, given that it is five times larger than Pyeongtaek Container Terminal.

TableTableTable 666.6. Hanjin Newport financial summary (Wbn) 201020102010 201120112011 201220122012 201320132013 201420142014

Revenue 105.3 134.8 153.1 138.2 137.5 Operating profit 4.0 23.0 34.5 34.7 42.0 Net profit 2.6 20.0 25.9 21.9 24.3 Asset 48.2 67.2 88.2 229.5 228.6 Liabilities 31.2 30.1 25.2 191.6 185.8 Source: KDB Daewoo Securities Research

Table 7.7.7. 2016F propropro-pro ---formaforma financial statements postpostpost-post ---HanjinHanjin Newport stake purchase (((Wbn(WbnWbnWbn)))) Statement of Financial Condition Income statement Current assets 521 Revenue 1,936 Non-current assets 1,819 Operating profit 108 AssetAssetAssetsAsset sss 2,340 OP margin (%) 5.6 Current liabilities 671 Net profit 62 Non-current liabilities 742 P/E (2016F) 8.6 Liabilities 1,412 P/B (2016F) 0.6 EquityEquityEquity 928 ROE (2016F) 7.0 Note: Assuming 50% stake, Source: KDB Daewoo Securities Research

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V. Value of non-operating assets

Sale of non-operating assets to lower debt-to-equity ratio, leading to higher ROE

1) Sale of stake in Korean Air

In July, Hanjin Transportation sold its stake (5.79mn shares) in Korean Air for W217bn in order to meet the requirements of the MRFTA amid Hanjin Group’s transition to a holding company structure. The company gained around W100bn on the sale of the stake (initial acquisition cost of W113.1bn).

As of end-2Q, the company held W820bn in interest-bearing liabilities, incurring annual interest expenses of W35bn. If the company uses the proceeds from the its Korean Air stake sale to pay down debts, its debt-to-equity ratio would decrease from 154% to around 120%, leading to lower interest expenses, which would in turn drive up ROE.

Figure 141414.14 . Hanjin TransportationTransportation’’’’ss interestinterest----bearingbearing liabilities andandand interest expenses

(Wbn) (wbn) 900 Interest-bearing liabilities (L) 40 800 Interest expenses (R) 35 700

600 30

500 25 400

300 20

200 15 100

0 10 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 1H15

Source: Company data, KDB Daewoo Securities Research

2) Value of stake in Seoul Express Bus Terminal

Following the sale of its stake in Korean Air, Hanjin Transportation is likely to sell its stake in Seoul Express Bus Terminal. Shinsegae has steadily been expanding its stake in the terminal in order to redevelop the immediate area. Seoul Express Bus Terminal is currently owned by Central City (48.3%), of which Shinsegae is the largest shareholder, Hanjin Transportation (16.7%), Chunil Express (16.7%), Dongbu Express (11.1%), Joongang Express (5.5%), Shin Sun-ho (1.6%), and Dongyang Express (0.16%).

Shinsegae needs to increase its ownership of the terminal to ensure smooth redevelopment and solidify its management control. Given Shinsegae’s past stake purchases, Hanjin Transportation’s share of the terminal is estimated at around W160bn.

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VI. Earnings outlook

1. 3Q15 preview: Revenue of W405.8bn (+7.2% YoY)

We believe that, in 3Q15, Hanjin Transportation’s revenue grew 7.2% YoY to W405.8bn, as the parcel delivery unit performed strongly on the back of Seoul Integrated Freight Terminal operations. However, monthly rental payments for the logistics complex (starting in May) are believed to have caused operating profit to decline 11.2% YoY to W12.4bn (OP margin of 2.1%, vs. 2.7% in 2Q). On the non-operating side, despite interest expenses of W8.7bn, we estimate net profit to come in at W92.1bn thanks to gains on the sale of Korean Air shares (approximately W100bn).

2. 2016 operating profit to reach W64.2bn (OP margin of 3.6%)

Once the Seoul Integrated Freight Terminal begins to take off in 4Q, Hanjin Transportation’s earnings should see full-swing improvement. We expect the company’s 2016 revenue to expand 8% YoY to W1.78tr, boosted in large part by the parcel delivery unit. The company’s parcel delivery volume is forecast to jump 18.7% YoY to W260mn boxes, causing terminal utilization ratio to reach 86% (vs. 85.7% in 2015F). We believe that the parcel delivery unit will account for 34.7% of overall revenue next year (vs. 31.9% in 2015F).

With parcel delivery volume expanding, margins should improve thanks to strong operating leverage effects. We forecast 2016 operating profit to soar 40.5% YoY to W64.2bn (OP margin of 3.6%). Notably, this figure does not take into account earnings at Incheon New Port Terminal A and Hanjin Newport.

What seems worrisome is that earnings at the ground transport and international units (both of which make sizeable revenue contributions) are still sluggish. However, we do not see further downside, considering: 1) ground transport contracts with the US Army will remain in place until end-2H16, and 2) the international unit is aggressively expanding top line.

Figure 151515.15 . Revenue vs. OP margin Figure 161616.16 . Revenue breakdown

(Wbn) (%) 9 7 5 6 6 2,000 Revenue (L) 4.0 10 OP margin (R) 14 14 13 13 1,800 12 13 10 1,600 3.5 7 8 8 12 11 Warehousing 1,400 Shipping 14 16 16 16 16 15 1,200 3.0 Forwarding Car rental 1,000 21 20 28 26 27 27 Stevedoring 800 2.5 Ground transport 600 Parcel delivery 400 2.0 32 35 26 27 27 27 200 0 1.5 08 09 10 11 12 13 14 15F 16F 11 12 13 14 15F 16F

Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

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Table 888.8. 3Q15 pppreviewpreview (Wbn, %) 3Q15F Growth 3Q143Q143Q14 2Q152Q152Q15 KDBKDBKDB Daewoo Consensus YoYYoYYoY QoQQoQQoQ Revenue 379 394 406 - 7.2 3.0 Operating profit 14 8 12 - -11.2 47.3 OP margin (%) 3.7 2.1 3.1 - -17.1 43.0 Pretax profit 5 1 99 - 1,998.2 7,666.2 Net profit 4 1 92 - 2,278.0 7,666.2 Note: All figures are based on consolidated K-IFRS Source: Hanjin Transportation, KDB Daewoo Securities Research

Table 999.9. Quarterly and anannnnnualual earnings (Wbn, %) 1Q141Q141Q14 2Q142Q142Q14 3Q143Q143Q14 4Q144Q144Q14 1Q151Q151Q15 2Q152Q152Q15 3Q15F 4Q15F 201420142014 2015F2015F2015F 2016F2016F2016F Revenue 380380380 357357357 379379379 418418418 388388388 394394394 406406406 458458458 1,5331,5331,533 1,6461,6461,646 1,7781,7781,778 Parcel delivery 98 98 103 119 121 125 126 154 418 526 616 Ground transport 120 97 96 104 92 80 86 92 417 350 356 Stevedoring 64 65 63 50 64 66 66 63 242 259 259 Overseas 46 46 57 60 47 51 57 60 209 215 231 Other 52 51 59 84 64 72 71 89 246 296 316 OPOPOP 151515 121212 141414 121212 111111 888 121212 141414 535353 464646 646464 Parcel delivery 6 5 6 9 6 4 5 8 26 24 35 Ground transport 3 2 2 1 2 0 1 1 8 5 7 Stevedoring 2 1 1 -2 -1 1 1 1 2 2 3 Overseas 3 3 3 2 1 1 2 1 10 5 8 Other 1 1 2 2 2 2 3 3 7 10 11 Pretax profit 5 3 5 47 10 1 99 9 60 119 53 Net profit 5 1 4 33 7 1 92 8 44 108 49 OP margin 3.9 3.3 3.7 2.8 2.7 2.1 3.1 3.1 3.4 2.8 3.6 Pretax margin 1.3 0.7 1.2 11.4 2.5 0.3 24.4 2.0 3.9 7.2 3.0 Net margin 1.2 0.3 0.9 7.8 1.7 0.3 19.3 1.5 2.8 6.6 2.8 Parcel volume 4.7 0.7 9.0 11.3 14.4 14.4 17.3 23.4 6.5 17.7 18.7 growth (%) Parcel rate (W) 2,332 2,172 2,234 2,238 2,508 2,419 2,340 2,340 2,242 2,394 2,368 Source: KDB Daewoo Securities Research

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VII. Risks

1. FCF improvement needed

The logistics industry is characterized by resource/infrastructure competition. Indeed, because logistics firms must have advanced logistics centers and ample delivery staff and vehicles in order to achieve competiveness, they are forced to make massive investments and tend to be characterized by high leverage. As such, logistics players are often plagued by sizable fixed cost burdens during market slumps.

Although Hanjin Transportation is seeing its EBITDA pick up amid the delivery market boom, its free cash flow (FCF) remains in negative territory, leading to increased borrowings. However, FCF has been steadily improving since the beginning of 2015. EBITDA will likely continue to increase thanks to the solid performance of the parcel delivery and stevedoring units. As such, interest expenses should hold the key to a turnaround in FCF. The company currently has W210bn in cash from the sale of its stake in Korean Air. Although the company is expected to use the cash for debt repayment, additional capex efforts remain a risk.

2. Competition for second and third place to intensify due to M&As

The number of Korean logistics firms increased sharply after the Asian financial crisis, leading to cutthroat competition and falling prices. However, ongoing industry restructuring has reduced the number of domestic parcel delivery companies from more than 30 to around 20. In particular, from end-2014 to 1H15, M&As raised the market shares of Logen and KG Yellow Cap to 10% and 7%, respectively.

From a long-term perspective, M&As will likely reduce the number of logistics players, easing competition. In the short term, however, competition for second and third place is likely to intensify. And the case of the merger between Korea Express and CJ GLS suggests that there will be disruptions arising from post-merger integration for one to two years. We think logistics firms should gain market share by leveraging 1) Seoul Integrated Freight Terminal operations and 2) the potential breakaway of customers from rival players during the post-merger integration process.

Figure 171717.17 . FCF trendtrendtrend Figure 181818.18 . Debt vs. FCFFCFFCF

(Wbn) (Wbn) (Wbn) Debt (L) (Wbn) 150 EBITDA (L) 10 900 FCF (R) 10 Net interest expenses (L) 800 0 100 Capex (L) 0 700 -10 -10 50 600

-20 500 -20 0 -30 400 -30 -50 300 -40 -40 200 -100 -50 -50 100

-150 -60 0 -60 08 09 10 11 12 13 14 15F 16F 08 09 10 11 12 13 14 15F 16F

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

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3. Relatively low contribution from overseas operations

Hanjin Transportation is strengthening its global operations to achieve further growth. Currently, the company generates 13% of its revenue from overseas businesses. Its rival CJ Korea Express records a 27% revenue contribution from overseas businesses, and the proportion is expected to expand further thanks to its recent acquisition of Rokin Logistics.

Overseas businesses are becoming increasingly important for logistics firms in light of the strong growth of global e-commerce and intensifying competition. Hanjin Transportation has already made inroads into North America, China, and Europe, and continues to expand its networks and services in Southeast and Central Asia. However, the company still lags behind domestic peers in global competitiveness.

Figure 191919.19 . 201420142014 ppparcelparcel delivery market share breakdown Figure 202020.20 . Parcel volume vs. parcel rate

(mn parcels) Other (W) 1,800 Volume (L) 2900 Dongbu 10.7% Rate (R) 3.7% 1,600 KG Yellow Cap 2800 3.3% CJ Korex 1,400 38.1% 2700 KGB 1,200 3.1% 1,000 2600 Logen 7.8% 800 2500 600 2400 Korea Post 400 8.9% 2300 200 Hyundai Hanjin Logistics 11.5% 0 2200 12.9% 06 07 08 09 10 11 12 13 14

Source: Company data, KDB Daewoo Securities Research Source: KILA, KDB Daewoo Securities Research

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Hanjin Transportation (002320 KS/Buy/TP: W60,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 1,5331,5331,533 1,6461,6461,646 1,7781,7781,778 1,8311,8311,831 Current Assets 385385385 584584584 591591591 612612612 Cost of Sales 1,4301,4301,430 1,5441,5441,544 1,6551,6551,655 1,7011,7011,701 Cash and Cash Equivalents 148 324 318 331 Gross Profit 103103103 102102102 123123123 130130130 AR & Other Receivables 212 233 244 251 SG&A Expenses 505050 565656 595959 616161 Inventories 6 6 7 7 Operating Profit (Adj) 535353 464646 646464 696969 Other Current Assets 19 21 22 23 Operating Profit 535353 464646 646464 696969 NonNonNon-Non ---CurrentCurrent Assets 1,5711,5711,571 1,4871,4871,487 1,5281,5281,528 1,6021,6021,602 NonNonNon-Non ---OperatingOperating Profit 777 737373 ---11-111111 ---12-121212 Investments in Associates 48 53 55 57 Net Financial Income -32 -32 -30 -31 Property, Plant and Equipment 1,017 1,084 1,123 1,195 Net Gain from Inv in Associates -2 8 10 10 Intangible Assets 19 19 18 17 Pretax Profit 60 119 53 57 Total Assets 1,9561,9561,956 2,0712,0712,071 2,1202,1202,120 2,2142,2142,214 Income Tax 18 26 11 11 Current Liabilities 580580580 647647647 650650650 699699699 Profit from Continuing Operations 42 93 42 46 AP & Other Payables 48 53 56 57 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 393 442 435 478 Net Profit 42 93 42 46 Other Current Liabilities 139 152 159 164 Controlling Interests 44 108 49 54 NonNonNon-Non ---CurrentCurrent Liabilities 590590590 575575575 584584584 589589589 Non-Controlling Interests -2 -15 -7 -8 Long-Term Financial Liabilities 427 396 396 396 Total Comprehensive Profit 848484 595959 424242 464646 Other Non-Current Liabilities 163 179 188 193 Controlling Interests 85 59 42 45 Total Liabilities 1,1701,1701,170 1,2231,2231,223 1,2341,2341,234 1,2881,2881,288 Non-Controlling Interests -2 0 0 0 Controlling Interests 775775775 845845845 889889889 938938938 EBITDA 90 85 107 118 Capital Stock 60 60 60 60 FCF (Free Cash Flow) -21 -9 36 5 Capital Surplus 72 72 72 72 EBITDA Margin (%) 5.9 5.2 6.0 6.4 Retained Earnings 468 569 613 662 Operating Profit Margin (%) 3.5 2.8 3.6 3.8 NonNonNon-Non ---ControllingControlling Interests 111111 333 ---4-444 ---12-121212 Net Profit Margin (%) 2.9 6.6 2.8 2.9 Stockholders' Equity 786786786 848848848 885885885 926926926

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 86 82 116 125 P/E (x) 14.9 5.0 11.0 10.1 Net Profit 42 93 42 46 P/CF (x) 6.7 6.3 4.6 4.2 Non-Cash Income and Expense 55 -7 75 82 P/B (x) 0.8 0.6 0.6 0.6 Depreciation 36 38 42 48 EV/EBITDA (x) 14.8 12.5 9.8 9.1 Amortization 1 1 1 1 EPS (W) 3,634 9,059 4,090 4,476 Others 18 -46 32 33 CFPS (W) 8,046 7,207 9,738 10,648 Chg in Working Capital -4 30 6 3 BPS (W) 65,204 71,038 74,733 78,815 Chg in AR & Other Receivables 8 -17 -11 -6 DPS (W) 400 400 400 400 Chg in Inventories 10 3 0 0 Payout ratio (%) 11.3 5.1 11.3 10.3 Chg in AP & Other Payables -7 2 1 0 Dividend Yield (%) 0.7 0.9 0.9 0.9 Income Tax Paid ---9 -999 ---37-373737 ---11-111111 ---11-111111 Revenue Growth (%) 2.2 7.4 8.0 3.0 Cash Flows from Inv Activities -20 23 -82 -121 EBITDA Growth (%) 15.4 -5.6 25.9 10.3 Chg in PP&E -106 -90 -80 -120 Operating Profit Growth (%) 32.5 -13.2 39.1 7.8 Chg in Intangible Assets 0 0 0 0 EPS Growth (%) - 149.3 -54.9 9.4 Chg in Financial Assets -22 149 -2 -1 Accounts Receivable Turnover (x) 7.4 7.7 7.8 7.7 Others 108108108 ---36-363636 000 000 Inventory Turnover (x) 218.8 268.6 270.5 268.5 Cash Flows from Fin Activities 14 -26 -47 2 Accounts Payable Turnover (x) 73.3 91.6 91.5 90.7 Chg in Financial Liabilities 53 19 -7 43 ROA (%) 2.2 4.6 2.0 2.1 Chg in Equity 0 0 0 0 ROE (%) 5.9 13.4 5.6 5.9 Dividends Paid -3 -5 -5 -5 ROIC (%) 3.2 3.0 4.1 4.3 Others ---36 -363636 ---40-404040 ---35-353535 ---36-363636 Liability to Equity Ratio (%) 148.9 144.2 139.5 139.1 Increase (Decrease) in Cash 80 176 -6 14 Current Ratio (%) 66.5 90.3 90.9 87.6 Beginning Balance 68 148 324 318 Net Debt to Equity Ratio (%) 85.3 60.5 57.8 58.4 Ending Balance 148148148 324324324 318318318 331331331 Interest Coverage Ratio (x) 1.6 1.3 1.8 1.9 Source: Company data, KDB Daewoo Securities Research estimates

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APPENDIX 1

Important Disclosures & Disclaimers 222-2---YearYear Rating and Target Price History

Company (((Code)(Code)Code)Code) DateDateDate RatingRatingRating Target PricePricePrice

Hanjin Transportation(002320) 10/28/2015 Buy 60,000 (W) Hanjin Transportation 80,000 No Coverage

60,000

40,000

20,000

0 Oct 13 Oct 14 Oct 15

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% 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 analyst’s 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.

Equity Ratings Distribution BuyBuyBuy Trading Buy HoldHoldHold SellSellSell 72.77% 13.86% 13.37% 0.00% * Based on recommendations in the last 12-months (as of September 30, 2015)

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

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 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. 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

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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.

Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

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