Korea Morning Focus

February 4, 2020 Korea Morning Focus

Company News & Analysis Major Indices Close Chg Chg (%) LG Chem (051910/Buy/TP: W500,000) Raise TP KOSPI 2,118.88 -0.13 -0.01 Battery poised for a re-rating; Maintain as our top pick KOSPI 200 285.05 0.52 0.18 KOSDAQ 646.85 4.37 0.68 NCsoft (036570/Buy/TP: W910,000) Watch for potential earnings surprise in 1Q20 Turnover ('000 shares, Wbn) Volume Value Industrial Bank of Korea (024110/Buy/TP: W14,000) Lower TP KOSPI 827,336 8,069 More exposed to low interest rates than peers due to lack of portfolio KOSPI 200 109,045 5,224 KOSDAQ 1,177,906 6,082 diversification Market Cap (Wbn) BNK Financial Group (138930/Buy/TP: W8,300) Lower TP Value ROE to fall on continued NIM contraction KOSPI 1,427,133 KOSDAQ 234,040 DGB Financial Group (139130/Buy/TP: W9,000) Lower TP KOSPI Turnover (Wbn) Outsized impact of falling bond yields Buy Sell Net Foreign 2,029 2,337 -308 Economy & Strategy Update Institutional 2,051 1,881 170 Retail 3,914 3,796 118 Fixed Income Monthly KOSDAQ Turnover (Wbn) Coronavirus outbreak may not necessarily prompt rate cuts Buy Sell Net Foreign 933 779 154 Institutional 309 235 75 Retail 4,808 5,037 -229

Program Buy / Sell (Wbn) Buy Sell Net KOSPI 1,904 1,973 -69 KOSDAQ 913 737 176

Advances & Declines Advances Declines Unchanged KOSPI 295 573 38 KOSDAQ 638 629 80

KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 57,200 800 1,293 KODEX 200 Futures 6,465 -15 552 Inverse 2X KODEX Leverage 13,505 5 517 Digital Power 7,400 1,470 357 Communication Hynix 94,700 1,200 346

KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Welcron 6,600 -1,930 375 OKONG Corp. 8,150 -1,450 214 ECOPROBM 64,000 11,100 182 Cheil Bio 8,400 250 116 HLB 96,700 4,000 116 Note: As of February 03, 2020

This document is a summary of a report prepared by Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) and published on our website. Please review the compliance notices contained in the original report. Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Mirae Asset Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for informational purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose.

LG Chem (051910 KS) Battery poised for a re-rating; Maintain as our top pick Chemicals Battery poised for a re-rating; Raise TP and maintain as our top pick Company Report EV market to accelerate on Tesla effects: While LG Chem’s stock has made modest February 4, 2020 gains on the back of Tesla’s recent rally, we believe the company’s battery business is still undervalued and on track for a full-fledged re-rating. Tesla’s strong performance has been driven by the electric vehicle (EV) maker’s robust sales in Europe, and by expectations that the launch of the Model Y and startup of the Chinese plant will make it even more competitive in 2020. This inevitably means traditional automakers will (Maintain) Buy have to ramp up their EV strategies.

Target Price (12M, W) ▲ 500,000 Batteries deserve high valuation: There are only a limited number of battery suppliers due to the industry’s high entry barriers, and leading battery makers are making Share Price (02/03/20, W) 350,000 meaningful advances. In China, market leader CATL has been the only battery supplier to continuously expand its market share. This has led to a sharp rise in share price and Expected Return 43% a high valuation (2020F P/E of 57x) for the Chinese company, which we believe reflects the sophisticated technology and extensive experience in volume production required to make batteries. OP (19F, Wbn) 896 Raise TP and maintain as our top pick: We raise our target price on LG Chem by 9% to Consensus OP (19F, Wbn) 1,061 W500,000 and maintain the stock as our top pick. We adjusted up our valuation of the EPS Growth (19F, %) -78.7 EV battery business from W23tr to W28tr (from 2023F EV/EBITDA of 5x to 6x). With Market EPS Growth (19F, %) -34.6 CATL’s market value rising to W52tr, we see upside potential to LG Chem’s value, given P/E (19F, x) 79.3 its stronger growth potential and technology. Market P/E (19F, x) 14.8 4Q19 review: ESS-related expenses weigh on earnings; Management KOSPI 2,118.88 considering a number of options, including battery spin-off Market Cap (Wbn) 24,707 4Q19 operating loss of W27.5bn: For 4Q19, LG Chem posted an operating loss of Shares Outstanding (mn) 78 W27.5bn, missing the consensus. This was largely attributable to around W300bn in Free Float (%) 64.3 ESS-related one-off expenses. Stripping away this item, earnings were actually better Foreign Ownership (%) 38.5 than market expectations. The EV battery unit neared the breakeven point. Beta (12M) 1.10 52-Week Low 289,000 Conference call highlights: On its earnings call, LG Chem reaffirmed its 2020 guidance for EV batteries and said that it expects yields at its European battery plant to 52-Week High 394,500 normalize in 2H20. Regarding the rumored spin-off of the battery business, the (%) 1M 6M 12M company said that it was considering a number of ways to enhance shareholder value. Absolute 12.5 5.6 -4.9 Relative 15.6 -0.4 -1.1 Quarterly earnings to improve after bottoming in 1Q20 OP to remain sluggish (W66bn) in 1Q20 but improve in subsequent quarters: We 110 LG Chem KOSPI expect earnings to remain sluggish in 1Q20. In particular, chemical earnings are likely 100 to worsen materially on a sharp decline in chemical spreads, coupled with some 90 production disruptions caused by the coronavirus outbreak. In batteries, the operation 80 of the new European line in 1Q20 should widen related losses. That said, absent one- 70 off items, we believe the chemicals unit will still be able to deliver a mid-single-digit OP

60 margin even under current spread levels. Battery earnings should also gradually 1.19 5.19 9.19 1.20 improve from 2Q20 as yields pick up. Overall, we expect quarterly earnings to improve after hitting a bottom in 1Q20. Mirae Asset Daewoo Co., Ltd.

[Chemicals/Oil Refining/EV Batteries] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 20,659 25,698 28,183 28,625 37,832 43,239 Yeon-ju Park +822-3774-1755 OP (Wbn) 1,992 2,928 2,246 896 1,286 2,776 [email protected] OP margin (%) 9.6 11.4 8.0 3.1 3.4 6.4 Jongsoo Lee NP (Wbn) 1,281 1,945 1,473 313 762 1,844 +822-3774-1380 EPS (W) 17,336 24,854 18,812 4,005 9,734 23,555 [email protected] ROE (%) 9.5 12.9 8.9 1.8 4.4 10.0 P/E (x) 15.1 16.3 18.4 79.3 36.0 14.9 P/B (x) 1.4 1.9 1.6 1.4 1.5 1.4 Dividend yield (%) 1.9 1.5 1.7 0.6 1.1 1.7 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

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

February 4, 2020 LG Chem

Table 1. Quarterly and annual earnings (Wbn) 1Q19 2Q19 3Q19 4Q19P 1Q20F 2Q20F 3Q20F 4Q20F 2019P 2020F 2021F Revenue 6,639.1 7,177.4 7,347.3 7,461.2 8,140.6 8,967.3 10,091.7 10,632.4 28,625.0 37,832.0 43,238.9 Chemicals 3,748.8 3,936.4 3,964.8 3,898.0 4,391.8 4,416.9 4,482.1 4,457.1 15,548.0 17,747.9 17,639.0 Advanced materials 1,233.5 1,253.5 1,217.9 1,201.1 809.2 809.2 809.2 809.2 4,906.0 3,236.7 3,236.7 Battery 1,650.1 2,009.4 2,210.2 2,480.6 2,541.8 3,391.8 4,527.9 5,125.3 8,350.3 15,586.8 21,033.6 Red bio 143.5 154.0 165.9 164.4 157.9 169.4 182.5 180.8 627.8 690.6 759.6 Green bio 228.0 169.6 93.7 98.8 240.0 180.0 90.0 60.0 590.1 570.0 570.0 Operating 275.4 267.5 380.3 -27.5 66.0 262.9 396.6 560.2 895.6 1,285.7 2,775.7 profit Chemicals 398.6 382.2 321.2 315.8 129.3 262.7 310.8 310.1 1,417.8 1,012.9 1,312.4 Advanced materials 3.6 19.0 32.8 8.3 3.9 3.9 3.9 3.9 63.7 15.4 26.2 Battery -147.9 -128.0 71.2 -249.6 -65.3 18.0 93.2 272.6 -454.3 318.6 1,396.9

Red bio 11.8 10.9 16.1 -1.6 3.2 3.4 3.6 3.6 37.2 13.8 15.2 Green bio 38.2 9.1 -11.1 -15.3 45.0 25.0 -15.0 -30.0 20.9 25.0 25.0 Pretax profit 279.6 192.9 243.9 -155.5 9.0 198.6 324.9 483.5 560.9 1,016.0 2,458.5

Net profit 194.5 68.1 128.6 -77.6 6.8 148.9 243.6 362.6 313.5 762.0 1,843.9 Source: Company data, Mirae Asset Daewoo Research estimates

Table 2. TP calculation (Wbn, mn shares, W, %) 19F EBITDA Target EV/EBITDA (x) Value Operating value Chemicals 1,572.9 5.0 7,864.5 Discount to market avg. due to macro uncertainties I&E materials 224.4 5.0 1,122.0 Discount to market avg. in light of limited growth potential Battery (small) 427.9 6.0 2,567.3 Premium to market avg. given growth potential Battery (EV) 28,004.7 6x 2023F EBITDA Battery (ESS) 950.0 3x 2020F EBITDA Green bio 420.0 Acquisition price Red bio 1,100.0 2016 avg. market cap Total 42,028.5 Net debt 5,832.0 2Q19 Market cap of preferred shares 1387.0 EV 34,809.5 No. of shares outstanding (mn) 69.4 Target price (W) 501,577.7 Source: Mirae Asset Daewoo Research estimates

Table 3. EV battery business earnings forecast (Wbn, %) 20F 21F 22F 23F Revenue 9,970 14,407 18,418 27,296 Operating profit 199 1,153 1,473 2,184 OP margin 2 8 8 8 Depreciation 909 1,084 1,784 2,484 EBITDA 1,108 2,236 3,257 4,667 EV/EBITDA 25 6 Value 27,704 28,005 Source: Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 2

NCsoft (036570 KS) Watch for potential earnings surprise in 1Q20

Game Massive updates of Lineage 2M (January) and Lineage M (February) Company Report Lineage 2M’s first large-scale update (“Philosophers of the Ivory Tower”) was launched nd February 4, 2020 on January 22 . We believe the addition of new regions, quests, hunting grounds, and skills has helped attract new players while enhancing the loyalty of existing players.

On January 29th, Lineage M began pre-registrations for its High Elf update (scheduled for February 12th). The update will include a revamped elf class, class changes, and TJ’s (Maintain) Buy coupons. As for the PC title Lineage, the effects of the game’s 21st anniversary update in 4Q19 Target Price (12M, W) 910,000 appear to be continuing in 1Q20.

Share Price (02/03/20, W) 640,000 Lineage 2M’s January revenue tops expectations For 1Q20, we project NCsoft’s revenue and operating profit to grow to W692bn (+92.9% Expected Return 42% YoY) and W301bn (+279.1% YoY), respectively. We assume Lineage 2M’s 1Q20 daily average revenue at W3.5bn. OP (19F, Wbn) 525 For 2020 as a whole, we are modeling daily average revenue of W2.1bn for Lineage M Consensus OP (19F, Wbn) 518 and W2.8bn for Lineage 2M (Korea).

EPS Growth (19F, %) 10.5 As of January, both titles are tracking above our assumptions. Based on data from Market EPS Growth (19F, %) -34.6 Sensor Tower, the January daily average revenue of the two titles appears to have P/E (19F, x) 25.7 exceeded our expectations. Market P/E (19F, x) 14.8 KOSPI 2,118.88 In 4Q19, Lineage 2M recorded daily average revenue of W4.9bn (W4.3bn just in December). We forecast the January figure to fall only 6.8% MoM to W4bn. Market Cap (Wbn) 14,051 Shares Outstanding (mn) 22 Watch for share repurchase in 2020 and overseas launch/new release Free Float (%) 81.9 momentum in 2H20 Foreign Ownership (%) 51.5 NCsoft’s stock has been setting new records, driven by continued foreign buying. We Beta (12M) 0.23 believe this is because investors expect the company to deliver positive earnings, 52-Week Low 430,500 irrespective of the external environment. 52-Week High 655,000 NCsoft is set to release its 4Q19 results on February 12th. We expect the company to (%) 1M 6M 12M report improved earnings (on Lineage 2M effects) and also confirm the continuation of Absolute 13.3 23.1 35.0 robust revenue trends into 2020. But investors will mainly be focused on the timeline Relative 16.4 16.1 40.4 of Lineage 2M’s overseas launch (expected in 2H20) and the release schedule for new titles (Aion 2 and Blade & Soul 2). 150 NCsoft KOSPI In 2018, NCsoft repurchased 658,000 shares (W237.5bn). Given that the company has 130 in the past repurchased shares once every two years, and that earnings are likely to 110 improve further, we see a strong chance of a buyback occurring in 2020. We reiterate

90 our Buy rating and target price of W910,000.

70 1.19 5.19 9.19 1.20

Mirae Asset Daewoo Co., Ltd.

[Internet] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 984 1,759 1,715 1,737 2,666 2,882 Chang-kwean Kim +822-3774-1614 OP (Wbn) 329 585 615 525 1,143 1,497 [email protected] OP margin (%) 33.4 33.3 35.9 30.2 42.9 51.9 NP (Wbn) 272 441 418 462 923 1,106 EPS (W) 12,416 20,104 19,061 21,069 42,046 50,398 ROE (%) 14.9 19.1 16.4 18.2 29.7 27.7 P/E (x) 19.9 22.3 24.5 25.7 15.2 12.7 P/B (x) 2.7 3.4 3.7 3.8 3.6 2.9 Dividend yield (%) 1.5 1.6 1.3 1.1 0.9 0.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Industrial Bank of Korea (024110 KS) More exposed to low interest rates than peers due to lack of portfolio diversification Banks 4Q19 preview: Above-consensus net profit of W339.3bn Company Report For 4Q19, we project Industrial Bank of Korea (IBK) to post consolidated net profit of February 3, 2020 W339.3bn (+12.3% YoY, -10.9% QoQ), which is 2.5-6.2% above the recently lowered consensus (W319.3bn based on Bloomberg; W330.9bn based on FnGuide). Other than seasonal factors, we do not believe there were any major one-off items. We believe total loans grew 0.8% QoQ (+6.8% YTD), with SME loans likely growing 0.9% (Maintain) Buy QoQ (+7.3% YTD). We estimate net interest margin (NIM) slipped 6bps QoQ to 1.75%, hurt by the sharp decline in market interest rates and ultra-low-rate loan programs for Target Price (12M, W) ▼ 14,000 self-employed borrowers. We expect net interest income of W1.42tr (-1.9% YoY, -1.8% QoQ) and net commission income of W113.1bn (-4.0% YoY, +0.2% QoQ). Share Price (01/31/20, W) 10,750 For 2020, we forecast loan growth of 6.3% and NIM of 1.74% (-10bps YoY). We expect net interest income to remain flat YoY amid an increase in SG&A and provisioning Expected Return 30% expenses, leading to a 5.0% YoY fall in net profit (to W1.62tr).

We believe IBK is more exposed to the current ultra-low interest rate environment NP (19F, Wbn) 1,700 than its peers, which have more diversified portfolios and are able to defend their Consensus NP (19F, Wbn) 1,681 group-level earnings through the strengths of their non-banking subsidiaries (solid fundamentals, ownership expansion, M&As, overseas expansion, etc.). EPS Growth (19F, %) -4.5 Market EPS Growth (19F, %) -34.6 Dividends: Once unrivaled, but not anymore P/E (19F, x) 4.2 Based on the current share price, we estimate DPS at W690 in 2019, W700 in 2020, and Market P/E (19F, x) 14.8 W730 in 2021, which translate into dividend yields of 6.4%, 6.5%, and 6.8%, KOSPI 2,119.01 respectively. While still attractive, the yields are not as high as they once were, when Market Cap (Wbn) 6,204 IBK’s dividend yields were unrivaled among peers. Shares Outstanding (mn) 675 Cut TP to W14,000 Free Float (%) 46.6 Foreign Ownership (%) 19.5 We lower our net profit forecasts for 2019-21 by 3.5%, 7.20%, and 9.2%, respectively, in Beta (12M) 0.76 light of: 1) the record-low base rate; 2) the sharp decline in market interest rates; and 52-Week Low 10,700 3) increased SME loan provisioning amid an economic downturn. As IBK generates 52-Week High 14,700 93% of its core earnings from net interest income, it is more difficult for the bank to defend earnings amid falling interest rates compared to its peers. We also believe the (%) 1M 6M 12M public nature of the bank’s business and the recent equity issue to the government Absolute -8.9 -18.3 -24.6 should be viewed as discount factors. We thus cut our target price from W16,000 Relative -5.5 -21.9 -21.5 (target P/B of 0.47x) to W14,000 (target P/B 0.41x).

110 Industrial Bank of Korea KOSPI 100

60 1.19 5.19 9.19 1.20

Mirae Asset Daewoo Co., Ltd. Fiscal year-end 12/16 12/17 12/18 12/19F 12/20F 12/21F Net interest inc. (Wbn) 4,876 5,260 5,632 5,745 5,754 6,035 [Banks/Credit Cards] Net non-interest inc. (Wbn) 64 340 626 544 592 604 Operating profit (Wbn) 1,533 2,028 2,396 2,310 2,230 2,294 Heather Kang +822-3774-1903 Net profit (Wbn) 1,158 1,501 1,754 1,700 1,615 1,668 [email protected] EPS (W) 1,763 2,282 2,666 2,546 2,393 2,471

EPS growth (%) 0.7 29.4 16.8 -4.5 -6.0 3.3 P/E (x) 6.1 4.7 4.0 4.2 4.5 4.4 P/PPOP (x) 2.2 1.8 1.6 1.6 1.6 1.5

P/B (x) 0.39 0.36 0.34 0.32 0.30 0.28 ROE (%) 6.6 8.0 8.6 7.7 6.8 6.7 Dividend yield (%) 4.5 5.7 6.4 6.4 6.5 6.8 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

BNK Financial Group (138930 KS) ROE to fall on continued NIM contraction

Banks 4Q19 preview: Net profit of W44.9bn Company Report For 4Q19, we forecast BNK Financial Group (BNKFG) to post net profit attributable to February 3, 2020 controlling interests of W44.9bn (turning to profit YoY, -74.8% QoQ), 4.8% above the Bloomberg consensus (W42.8bn). While net interest income was likely weighed down by net interest margin (NIM) contraction amid lower bond yields, we believe net profit was supported by: 1) the 2019 quarterly distribution of retroactive wage increases and performance-based incentives (which were previously booked in the fourth quarter); (Maintain) Buy and 2) lower credit costs compared to 4Q17 and 4Q18.

Target Price (12M, W) ▼ 8,300 Declining bond yields and continued NIM contraction; ROE to fall In 4Q19, we estimate NIM fell 5bps QoQ to 1.98% at Busan Bank and 9bps QoQ to Share Price (01/31/20, W) 6,750 1.81% at Kyongnam Bank, pressured by a sharp fall in bond yields, along with lower interest rates on new loans (due to a higher mix of quality loans). We believe won- Expected Return 23% denominated loans grew 1.2% QoQ (+5.6% YTD) at Busan Bank, but slipped 0.6% QoQ (+0.8% YTD) at Kyongnam Bank as a result of the repayment of group loans for interim

payment. We estimate group net interest income fell to W534.7bn (-8.9% YoY, -2.4% NP (19F, Wbn) 574 QoQ), hurt by the continued sharp decline in NIM. With upward revisions to the loss Consensus NP (19F, Wbn) 581 given default (LGD) and probability of default (PD) values, we estimate credit costs amounted to W153.9bn (-15.7% YoY, +63.2% QoQ), or 76bps of total credit (annualized; EPS Growth (19F, %) 14.3 -18bps YoY, +29bps QoQ), sharply up from the 1Q-3Q19 levels. Market EPS Growth (19F, %) -34.6 P/E (19F, x) 3.8 For 2020, we forecast loan growth of 4.8% at Busan Bank and 3.3% at Kyongnam Bank Market P/E (19F, x) 14.8 and expect strategic efforts to increase mid-rated loans in order to cushion margins. KOSPI 2,119.01 We forecast 2020 NIM of 1.97% (-9bps YoY) at Busan Bank and 1.80% (-13bps YoY) at Kyongnam Bank. While the group’s credit finance arm could partially offset the Market Cap (Wbn) 2,200 negative impact of falling bond yields, we still expect 2020 group net interest income Shares Outstanding (mn) 326 to slid to W2.18tr (-0.7% YoY) and ROE to fall to 6.5% (-0.7%p YoY). Free Float (%) 84.4 Foreign Ownership (%) 52.1 Cut TP to W8,300 (from W8,900) Beta (12M) 1.10 We believe BNKFG is undervalued, given its current valuation (P/B of 0.25x and P/E of 52-Week Low 6,370 4.0x based on our 2020 estimates) and expected dividend yield (5.2%). However, with 52-Week High 7,890 the entire banking (financial holding company) sector trading at a discount due to (%) 1M 6M 12M structural headwinds, such as falling bond yields and macro concerns, we believe more Absolute -11.9 -3.6 -8.2 visibility on NIM stabilization is needed for the stock’s undervaluation to meaningfully Relative -8.6 -7.9 -4.4 ease. Reflecting a steeper-than-anticipated NIM decline and our expectation of lackluster 4Q19 earnings, we are reducing our 2019-21 net profit estimates by 2.9%,

120 BNK Financial Group KOSPI 1.2%, and 4.5%, respectively, and lowering our target price from W8,900 to W8,300

110 (target P/B of 0.33x).

100

80 1.19 5.19 9.19 1.20

Mirae Asset Daewoo Co., Ltd. Fiscal year-end 12/16 12/17 12/18 12/19F 12/20F 12/21F Net interest inc. (Wbn) 2,140 2,281 2,344 2,193 2,177 2,272 [Banks/Credit Cards] Net non-interest inc. (Wbn) 72 -5 173 362 414 387 Operating profit (Wbn) 712 594 750 821 842 860 Heather Kang +822-3774-1903 Net profit (Wbn) 502 403 502 574 555 568 [email protected] EPS (W) 1,539 1,237 1,540 1,761 1,702 1,742

EPS growth (%) -20.6 -19.6 24.6 14.3 -3.3 2.3 P/E (x) 4.4 5.5 4.4 3.8 4.0 3.9 P/PPOP (x) 2.0 1.9 1.8 1.8 1.8 1.7

P/B (x) 0.32 0.31 0.29 0.27 0.25 0.23 ROE (%) 7.9 5.8 6.8 7.2 6.5 6.2 Dividend yield (%) 3.4 3.4 4.4 5.2 5.2 5.5 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

DGB Financial Group (139130 KS) Outsized impact of falling bond yields

Banks 4Q19 preview: Net profit of W48.2bn Company Report For 4Q19, we expect DGB Financial Group (DGBFG) to deliver consolidated net profit February 3, 2020 attributable to controlling interests of W48.2bn (-54.1% YoY, -31.7% QoQ), slightly above the Bloomberg consensus (W47bn). In 4Q18, DGBFG recognized roughly W160bn in bargain purchase gains related to its Hi Investment & Securities acquisition and booked massive early retirement expenses and credit costs using the gains as a buffer. In 4Q19, we believe the group recorded around W17bn in one-off gains from (Maintain) Buy the sale of Hi Asset Management and Hyundai Futures.

Target Price (12M, W) ▼ 9,000 Steep fall in NIM We estimate bank net interest margin (NIM), which contracted 22bps through the first Share Price (01/31/20, W) 6,500 three quarters of 2019, declined another 9bps QoQ to 1.93% in 4Q19. Daegu Bank has a relatively high exposure to floating-rate loans, especially those tied to yields on Expected Return 38% short-term AAA bank debentures (30% are tied to three-month yields, 16% to six- month yields, and 47% to 12-month yields). Therefore, the bank has the highest NIM

sensitivity to fluctuations in short-term yields. We originally anticipated DGBFG’s NIM NP (19F, Wbn) 320 to bottom as early as 2Q20 and rebound in subsequent quarters, as short-term bank Consensus NP (19F, Wbn) 320 debenture yields had remained stable before the new coronavirus broke out. However, bond yields have recently started to fall again. EPS Growth (19F, %) -16.5 Market EPS Growth (19F, %) -34.6 In 4Q19, won-denominated loans likely grew a robust 4.0% QoQ (+10.5% YTD), P/E (19F, x) 3.4 supported by: 1) efforts to expand household loans as part of a portfolio restructuring Market P/E (19F, x) 14.8 strategy; and 2) the introduction of a dedicated sales force targeting quality SMEs in KOSPI 2,119.01 the Seoul metropolitan area. Despite solid performances from DGB Capital and Hi Investment & Securities, we believe the plunge in bank NIM had a bigger impact on Market Cap (Wbn) 1,099 earnings. We estimate 4Q19 group net interest income shrank to W348.9bn (-1.6% YoY, Shares Outstanding (mn) 169 -0.7% QoQ). Free Float (%) 90.3 Foreign Ownership (%) 52.1 Lower TP to W9,000, but maintain Buy Beta (12M) 1.10 We believe DGBFG is undervalued, given its current valuation (P/B of 0.23x and P/E of 52-Week Low 6,500 3.6x based on our 2020 estimates) and expected dividend yield (6% level). However, 52-Week High 8,860 with the entire banking (financial holding company) sector trading at a discount due to (%) 1M 6M 12M structural headwinds, such as falling bond yields and macro concerns, we believe more Absolute -8.7 -13.7 -25.1 visibility on NIM stabilization is needed for the stock’s undervaluation to meaningfully Relative -5.3 -17.5 -22.1 ease. In light of a steeper-than-anticipated NIM decline and our expectation of lackluster 110 DGB Financial Group KOSPI 100 4Q19 earnings, we are revising down our 2019-21 net profit estimates by 4.1%, 4.6%, and 1.7%, respectively, and cutting our target price from W9,600 (target P/B of 0.36x) 90 to W9,000 (target P/B of 0.34x). 80

60 1.19 5.19 9.19 1.20

Mirae Asset Daewoo Co., Ltd. Fiscal year-end 12/16 12/17 12/18 12/19F 12/20F 12/21F Net interest inc. (Wbn) 1,202 1,275 1,394 1,406 1,435 1,514 [Banks/Credit Cards] Net non-interest inc. (Wbn) 20 -6 -63 131 175 182 Operating profit (Wbn) 387 411 334 436 474 519 Heather Kang +822-3774-1903 Net profit (Wbn) 288 302 384 320 302 329 [email protected] EPS (W) 1,702 1,787 2,268 1,894 1,788 1,945

EPS growth (%) -9.8 5.0 26.9 -16.5 -5.6 8.8 P/E (x) 3.8 3.6 2.9 3.4 3.6 3.3 P/PPOP (x) 1.9 1.9 2.1 1.8 1.7 1.5

P/B (x) 0.30 0.28 0.26 0.24 0.23 0.21 ROE (%) 8.0 8.0 9.5 7.4 6.5 6.6 Dividend yield (%) 4.6 5.2 5.5 6.2 6.5 7.1 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

Fixed Income Monthly Coronavirus outbreak may not necessarily prompt rate cuts

DM: Monitoring the coronavirus outbreak’s impact on the economic trajectory Fixed Income Report At the same time the economy is showing signs of a recovery (with global leading February 3, 2020 economic indicators rising), the coronavirus outbreak is adding a new element of uncertainty to the economic path forward. Developed market (DM) bond yields have declined sharply, reflecting fears over the Mirae Asset Daewoo Co., Ltd. economic consequences of the coronavirus outbreak. And further downside could

[Fixed Income Strategy ] emerge if real economic indicators deteriorate further.

With the economic recovery uncertain, we expect DMs to maintain accommodative monetary policies that are favorable to financial markets. The US Fed is continuing to provide liquidity in the short-term money market and is likely to maintain an

accommodative stance to support a recovery in inflation. This bodes well for liquidity

conditions in financial markets, in our view.

EM: Selective approach is needed The Indian economy is in need of stimulus, but rate cuts appear unlikely due to rising inflationary pressures. On a positive note, the rupee remains steady, despite the delayed economic recovery. Meanwhile, Indonesia is seeing a strong inflow of foreign capital, driven by 1) expectations for additional rate cuts and 2) President Joko Widodo's labor and regulatory reforms (omnibus bill). We remain positive on Indonesian government bonds, in light of 1) the rupiah’s low volatility and 2) the likelihood of further bond yield declines owing to rate cut expectations. Meanwhile, Russia looks attractive, as it has ample room for monetary and fiscal policy maneuvering and will likely focus on boosting GDP growth in 2020.

Domestic: Rate cut expectations growing, but decision will not be easy Risk aversion has intensified in the wake of the coronavirus outbreak, putting Korea’s economic recovery in doubt. In the view of the market, therefore, the case for rate cuts has likely strengthened.

However, the BOK will not have an easy task in deciding whether to cut the rate at the February MPC meeting. First, it is too early to predict what impact the coronavirus outbreak will have on the economy. In addition, the January MPC statement emphasized the need to comprehensively consider factors affecting the stability of the financial system—such as real estate prices and household debt—when making rate decisions. Accordingly, we expect the BOK to take a cautious app roach to additional rate cuts.

10Y UST, Bund, and KTB yields

(%) (%) 3.5 10Y UST yield (L) 10Y KTB yield (L) 10Y Bund yield (R) 1.6

1.2 3.0 0.8

2.5 0.4

0.0 2.0

-0.4 1.5 -0.8

1.0 -1.2 1/15 7/15 1/16 7/16 1/17 7/17 1/18 7/18 1/19 7/19 1/20

Source: Infomax, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research Key Universe Valuations February 4, 2020

※All data as of close January 31, 2020, unless otherwise noted.

19F Earnings growth Mkt Cap Price P/E (x) P/B (x) ROE (%) Ticker Company Div Yield OP EPS (Wbn) (W) (%) 19F 20F 19F 20F 19F 20F 19F 20F 19F 20F 005930 Samsung Electronics 341,472 57,200 2.5 -53.2 41.0 -46.6 37.2 17.8 13.0 1.5 1.4 8.7 11.1 000660 SK Hynix 68,942 94,700 1.1 -87.0 169.0 -85.4 160.5 30.3 11.6 1.4 1.2 4.8 11.6 035420 NAVER 29,254 177,500 0.2 -24.7 37.5 -36.2 28.5 70.7 55.0 4.2 4.0 7.6 9.1 005380 Hyundai Motor 26,388 123,500 3.2 52.1 39.6 103.3 59.0 11.4 7.1 0.5 0.5 4.3 6.6 051910 LG Chem 24,707 350,000 0.6 -60.1 43.5 -78.7 143.1 87.4 36.0 1.6 1.5 1.8 4.4 012330 Hyundai Mobis 21,730 228,000 2.2 16.5 18.7 23.0 29.3 9.6 7.4 0.7 0.6 7.2 8.6 068270 Celltrion 21,368 166,500 - - - - 0.0 0.0 028260 Samsung C&T 20,392 107,500 1.9 -21.5 23.4 -38.7 11.0 19.6 17.6 0.8 0.8 4.9 5.1 006400 Samsung SDI 19,529 284,000 0.4 -35.4 91.7 -49.2 112.2 56.1 26.4 1.6 1.5 2.9 5.9 051900 LG H&H 19,523 1,250,000 0.8 13.2 11.5 14.0 15.6 25.1 21.7 5.4 4.5 19.9 19.5 005490 POSCO 18,702 214,500 4.7 -27.4 6.4 31.6 22.7 8.4 6.8 0.4 0.4 5.1 6.0 055550 Shinhan Financial Group 18,636 39,300 12.2 4.1 9.9 0.0 5.4 5.4 0.5 0.4 9.1 8.4 017670 SK Telecom 18,289 226,500 4.4 7.3 -3.5 -60.6 68.2 14.8 8.8 0.7 0.7 5.4 8.8 105560 KB Financial Group 18,233 43,850 6.3 4.4 9.2 3.4 5.5 5.3 0.5 0.4 9.0 8.5 034730 SK Holdings 16,288 231,500 2.2 -2.8 21.5 -36.6 11.0 11.5 10.3 0.9 0.8 8.2 8.3 000270 Kia Motors 16,255 40,100 2.2 73.6 26.7 58.0 32.0 8.9 6.7 0.6 0.5 6.5 8.0 015760 KEPCO 16,081 25,050 - - - - - 131.2 0.2 0.2 - 0.2 018260 Samsung SDS 14,818 191,500 1.3 12.8 6.7 17.0 8.3 20.1 18.6 2.2 2.0 11.7 11.5 036570 NCsoft 14,051 640,000 0.9 -14.6 117.7 10.5 99.6 30.4 15.2 4.5 3.6 18.2 29.7 035720 Kakao 13,767 159,500 0.1 179.1 115.5 220.9 96.5 81.1 41.3 2.6 2.4 3.2 6.1 032830 Samsung Life 13,580 67,900 - - - - 0.0 0.0 003550 LG Corp. 12,044 69,800 3.6 -28.0 45.0 -18.4 16.8 8.1 6.9 0.6 0.6 8.1 8.9 096770 SK Innovation 11,419 123,500 5.2 -42.8 18.2 -68.7 92.4 22.4 11.6 0.6 0.6 2.8 5.4 090430 AmorePacific 11,166 191,000 0.6 -8.4 18.7 -0.9 19.1 33.9 28.5 2.8 2.6 7.2 8.1 066570 LG Electronics 10,621 64,900 1.2 -9.9 9.3 -97.5 4049.2 375.0 9.0 0.8 0.7 0.2 8.6 086790 Hana Financial Group 9,968 33,200 -0.8 7.4 8.7 0.6 4.1 4.0 0.3 0.3 8.8 8.3 000810 Samsung F&M 9,949 210,000 - - - - 0.0 0.0 009150 Samsung Electro-Mechanics 9,337 125,000 0.9 -30.6 16.2 -21.6 20.6 18.9 15.6 1.6 1.5 9.7 10.2 010950 S-Oil 8,275 73,500 0.4 -13.3 197.8 -54.2 948.9 72.6 6.9 1.3 1.1 1.8 17.3 091990 Celltrion Healthcare 8,060 56,000 - 144.5 435.7 165.0 131.5 49.6 4.5 4.3 3.7 9.3 009540 KSOE 7,997 113,000 - 88.1 - -39.1 32.6 53.5 0.7 0.7 2.1 1.3 251270 Netmarble 7,777 90,700 1.8 57.7 14.5 36.9 35.6 26.0 1.6 1.5 4.9 6.3 010130 Korea Zinc 7,105 376,500 2.9 9.2 6.9 23.3 3.5 10.9 10.5 1.0 1.0 10.0 9.6 030200 KT 6,463 24,750 4.4 -2.4 -1.1 -7.8 21.0 10.2 8.4 0.4 0.4 4.7 5.5 011170 Lotte Chemical 6,427 187,500 5.6 -46.0 12.7 -54.7 32.3 9.0 6.8 0.5 0.5 5.5 6.9 024110 Industrial Bank of Korea 6,147 10,650 -3.6 -3.5 -4.5 -6.0 4.2 4.5 0.3 0.3 7.7 6.8 032640 LG Uplus 5,698 13,050 5.0 -11.8 10.9 -16.7 15.0 14.2 12.3 0.8 0.8 5.8 6.4 018880 Hanon Systems 5,552 10,400 - - - - 0.0 0.0 034220 LG Display 5,385 15,050 ------0.5 0.5 - - 086280 Hyundai Glovis 5,363 143,000 2.4 23.4 -0.1 14.9 15.2 10.7 9.3 1.1 1.0 11.1 11.6 Hyundai Heavy Industries 267250 4,357 267,500 6.9 -1.6 92.1 74.3 199.2 9.3 3.1 0.5 0.5 6.0 16.5 Holdings 029780 Samsung Card 4,269 36,850 -5.7 8.1 -0.3 7.5 12.4 11.5 0.6 0.6 1.5 1.6 000720 Hyundai E&C 4,187 37,600 1.3 12.4 10.9 42.6 -6.7 7.7 8.3 0.6 0.6 8.3 7.3 010140 Samsung Heavy Industries 4,145 6,580 - - - - - 42.0 0.6 0.6 - 1.7 071050 Korea Investment Holdings 3,683 66,100 - - - - 0.0 0.0 004020 Hyundai Steel 3,663 27,450 2.7 -53.6 23.0 -97.9 2611.5 438.7 16.2 0.2 0.2 0.0 1.3 004990 LOTTE Corporation 3,583 34,150 2.3 91.0 11.9 198.2 20.3 6.6 5.5 0.4 0.4 7.5 8.3 011070 LG Innotek 3,562 150,500 0.2 53.0 13.4 -37.3 196.2 34.8 11.8 1.6 1.4 4.7 12.8 003670 POSCO Chemical 3,550 58,200 0.7 -14.2 26.4 -22.5 -18.1 33.6 41.0 3.5 3.3 12.0 8.4 008770 Hotel Shilla 3,544 90,300 0.4 41.5 7.3 53.6 28.2 21.3 16.6 3.5 2.9 20.0 21.1 Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research Market Data February 4, 2020

※All data as of close February 03, 2020, unless otherwise noted. Other Major Indices Economic Indicators Close Net Chg 1D (%) YTD (%) Close 1D ago 1M ago 1Y ago MSCI Korea* 448.28 -8.67 -1.90 -5.33 USD/KRW 1,187.80 1,183.50 1,156.90 1,111.60 KOSPI 2,118.88 -0.13 -0.01 -2.59 JPY100/KRW 1,096.21 1,086.68 1,065.53 1,021.36 KOSDAQ 646.85 4.37 0.68 -4.03 EUR/KRW 1,317.33 1,305.76 1,292.66 1,272.50 Dow Jones* 28,256.03 -603.41 -2.09 -0.99 3Y Treasury 1.29 1.30 1.27 1.80 S&P 500* 3,225.52 -58.14 -1.77 -0.99 3Y Corporate 1.88 1.90 1.86 2.25 NASDAQ* 9,150.94 -147.99 -1.59 0.65 DDR4 8Gb* 3.43 3.38 3.03 5.94 Philadelphia Semicon* 1,789.93 -65.87 -3.55 -5.19 NAND MLC 64G* 2.50 2.50 2.40 2.59 FTSE 100* 7,286.01 -95.95 -1.30 -4.19 Oil (Dubai)* 58.45 57.76 67.27 61.82 Nikkei 225 22,971.94 -233.24 -1.01 -1.00 Gold* 1,582.90 1,583.50 1,523.10 1,319.70 Hang Seng* 26,312.63 -136.50 -0.52 -7.82 Customer deposits (Wbn)* 28,719 30,223 27,338 28,208 Taiwan (Weighted) 11,354.92 -140.18 -1.22 -6.16 Equity type BC (Wbn)(Jan. 30) 85,477 86,303 87,668 88,467 Note: * as of January 31, 2020 Source: KSDA, FnGuide, DRAMeXchange, MSCI

KOSPI Top 10 Foreign Net Buy / Net Sell (Wbn) KOSPI Top 10 Institutional Net Buy / Net Sell (Wbn) Net Buy Net Sell Net Buy Net Sell Samsung Biologics 14.83 Samsung Electronics 91.11 Hynix 68.32 KODEX Leverage 62.67 LG Chem 9.53 Hynix 52.81 KODEX 200 Futures Inverse 2X 65.05 Hanjin KAL 10.88 NC Soft 9.45 KODEX 200 45.48 Samsung Electronics 60.33 NC Soft 9.84 Shinhan Leverage WTI Futures Celltrion 7.71 SK Energy 30.92 KODEX 200 40.84 7.93 ETN(H) KODEX 200 Futures Inverse 2X 6.01 NAVER 23.29 LG Chem 23.38 Huvis 7.76 KB Financial Group 5.05 POSCO 20.90 NAVER 18.16 KODEX USD Futures Leverage 7.30 Feelux 3.85 Samsung Electronics (P) 17.89 TIGER200 15.94 Samsung Biologics 6.57 TIGER SYNTH-CHINA A Hana Financial Group 3.81 TIGER200 16.80 Samsung SDI 14.66 5.99 LEVERAGE ORION 3.63 SK C&C 10.62 SEMCO 9.53 SK Telecom 5.77 Kakao 3.19 LG Household & Health Care 10.46 SK C&C 8.83 KB Financial Group 5.44 Source: KSDA, FnGuide

KOSDAQ Top 10 Foreign Net Buy / Net Sell (Wbn) KOSDAQ Top 10 Institutional Net Buy / Net Sell (Wbn) Net Buy Net Sell Net Buy Net Sell HLB 17.29 Celltrion Healthcare 16.61 Celltrion Healthcare 8.57 ITM Semiconductor 3.91 MC Nex 8.19 OSSTEM IMPLANT 6.25 ViroMed 3.74 ECOPROBM 2.61 Alteogen 5.43 SFA Semicon 2.13 AfteecaTV 3.18 NHN KCP 2.09 Energy Solutions 4.28 ENVIONEER 2.07 Energy Solutions 2.85 Se Gyung Hi Tech 1.59 Nepes 3.77 Hugel 2.03 Studio Dragon 2.80 i-Scream Edu 1.45 S&STECH 3.34 Wonik IPS 1.89 Hugel 2.74 Leeno 1.44 SillaJen 3.14 Olipass 1.85 Paradise 2.60 COWIN 1.40 OE Solutions 3.07 Seoyon Electronics 1.58 Wonik IPS 2.59 Tovis 1.25 AfteecaTV 3.00 Koh Young 1.33 Techwing 2.52 Ace Technology 1.22 RFHIC 2.98 Cheil Bio 1.29 Tes 2.45 YES Technology 1.20 Source: KSDA, FnGuide

KOSPI Top 10 by Market Cap (Wbn) KOSDAQ Top 10 by Market Cap (Wbn) Close (W) Chg (W) Mkt Cap Close (W) Chg (W) Mkt Cap Samsung Electronics 57,200 800 341,472 Celltrion Healthcare 56,000 -1,200 8,060 Hynix 94,700 1,200 68,942 HLB 96,700 4,000 4,133 Samsung Electronics (P) 47,750 250 39,293 CJ ENM 137,600 -600 3,017 Samsung Biologics 479,500 -5,000 31,726 PearlAbyss 182,300 700 2,374 NAVER 177,500 -2,000 29,254 Studio Dragon 84,000 1,700 2,360 Hyundai Motor 123,500 -1,500 26,388 KMW 51,700 2,150 2,059 LG Chem 350,000 12,500 24,707 Medy-tox 329,000 4,100 1,913 Hyundai Mobis 228,000 -1,500 21,730 Hugel 433,000 -4,300 1,870 Celltrion 166,500 1,500 21,368 ViroMed 81,000 3,800 1,735 Samsung C&T 107,500 -1,000 20,392 Wonik IPS 34,850 500 1,711 Source: Korea Exchange