October 5, 2018

Korea Morning Focus

Sector News & Analysis Major Indices Close Chg Chg (%) Securities (Overweight) KOSPI 2,274.49 -35.08 -1.52 From average to “edge” KOSPI 200 291.78 -4.75 -1.60 KOSDAQ 789.00 -5.99 -0.75

Economy & Strategy Update Turnover ('000 shares, Wbn) Volume Value Fixed Income Monthly KOSPI 304,578 7,461 External uncertainties easing KOSPI 200 105,137 5,703 KOSDAQ 516,196 3,647

Market Cap (Wbn) Value KOSPI 1,522,077 KOSDAQ 262,857

KOSPI Turnover (Wbn) Buy Sell Net Foreign 1,995 2,521 -526 Institutional 1,562 1,625 -63 Retail 3,868 3,287 581

KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 394 395 -2 Institutional 236 225 11 Retail 3,014 3,017 -3

Program Buy / Sell (Wbn) Buy Sell Net KOSPI 1,679 1,907 -228 KOSDAQ 235 203 33

Advances & Declines Advances Declines Unchanged KOSPI 257 587 54 KOSDAQ 332 874 63

KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Electronics 44,700 -1,000 510 DongsungPharm 28,900 4,950 413 Hynix 70,000 -1,700 401 KODEX KOSDAQ150 16,305 -175 272 LEVERAGE Amore Pacific 227,500 -37,000 234

KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value SillaJen 95,200 3,800 298 FOODNAMOO 34,000 -9,350 135 Emerson Pacific 10,900 850 116 HLB 109,000 -3,800 99 NATURECELL 15,100 -200 87 Note: As of October 04, 2018 Mirae Asset Daewoo Research 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.

Securities Overweight (Maintain)

From average to “edge”

 The brokerage industry is starting to deviate from average profitability and profit models  Firms with good capital efficiency and cost control are continuously delivering ROEs well Issue Comment above the industry average October 5, 2018  Capital increases and improving capital utilization are creating an oligopoly  For large brokers with cost discipline, the level of efficiency of their increased capital will be a key driver of share prices Mirae Asset Daewoo Co., Ltd. [Securities/Insurance] Disintegration of the average model

Gil-won Jeong +822-3774-1675 The profitability or profit models of brokerage firms have generally exhibited little or no [email protected] differentiation, as firms have commonly relied on commission-oriented, uniform profit models while experiencing margin pressures from intense competition and high fixed costs.

As such, investment strategies for brokerage stocks were fairly straightforward. Investors simply adjusted sector weights depending on market conditions, and any differentiation in

stock valuations was essentially meaningless.

However, brokerage firms’ recent financial performances show the industry is starting to deviate from this average model.

Looking at the top 15 brokers by equity capital during the most recent 29 quarters, we identified several firms that have continuously delivered ROEs (based on operating profit) above the industry average. Korea Investment & Securities (KIS), Meritz Securities, and Kiwoom Securities recorded above-industry average ROEs for 25, 27, and 28 quarters, respectively, far more times than the sector average (13 quarters). In some cases, their ROEs outperformed the quarterly industry average by more than 20-30%p. Characteristics that set them apart are the specialization (Kiwoom Securities), transformation (Meritz Securities), and diversification (KIS) of their profit models. Such firms at the edges also trade at a high premium to the sector average (over 0.5x relative to sector P/B).

Figure 1. Number of times ROE outperformed industry average (during the past 29 quarters) and relative P/B

(times) (x) 30 Number of times ROE outperformed industry 1.8 average (L) 25 Relative P/B compared with sector (R) 1.5

20 1.2

15 0.9

10 0.6

5 0.3

0 0.0 A B C D E F G H I J K L M N Source: FISIS, Mirae Asset Daewoo Research For brokerage firms, recurring ROE can be summed up as: (net operating revenue – SG&A expenses)/equity capital. This can be further divided into two components: 1) net operating revenue/equity capital, and 2) SG&A expenses/equity capital. The higher the former and the lower the latter, the better.

Figure 2 shows the number of times these two components were better than industry averages during the most recent 29 quarters; quadrant “B” is the most ideal combination.

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.

October 5, 2018 Securities

Notably, brokers with large capital are concentrated in quadrant “C” because of their limited differentiation in the latter component. Conversely, brokers with small capital are skewed toward quadrant “A” due to their lack of distinction in the former component. This suggests that from an investment perspective, a key factor to consider is the potential for differentiated improvement in net operating revenue in the case of large brokers, and SG&A reductions in the case of smaller ones. We believe firms located at the edges (far from the averages) within each category, or those in or closer to quadrant B, offer the most compelling investment opportunities.

Figure 2. Distribution of recurring ROE components (number of times each component was better than the average during the past 29 quarters)

(Net operating revenue/equity capital) 30

25

20

15

10

5

0 0 5 10 15 20 25 30 (SG&A expenses/equity capital)

Source: FISIS, Mirae Asset Daewoo Research

Rise of oligopoly and importance of capital

Another notable development is market oligopoly, or the concentration of profitability and equity capital. The Herfindahl-Hirschman Index (HHI) for equity capital has gradually risen from 550 to 650 as a result of larger brokers aggressively carrying out M&As and expanding their capital.

The HHI for net operating revenue has also climbed from 450 to 560. For financial firms, profitability is usually determined by the utilization of equity capital. However, this had not been the case for the brokerage industry, which was highly cyclical and depended heavily on commission income (which is unrelated to capital utilization). The fact that the HHIs for equity capital and net operating revenue are rising at the same time suggests a correlation between capital utilization and profitability is emerging.

Figure 3. HHI trends (net operating revenue and equity capital)

700 HHI(Net operating revenue) HHI(Equity) 600

500

400

300 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 2Q18

Source: FISIS, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research October 5, 2018 Securities

In the past, brokerage firms struggled with a vicious cycle of similar profit levels and profit models leading to dependence on the industry cycle and intense price competition, which, in turn, resulted in average ROEs. But now, that average model is disintegrating, and the variance in profitability is widening.

The key factor determining profitability is also changing. For the brokerage industry, ROIC represents how much capital and SG&A expenses (specifically labor) are covered by net operating revenue. SG&A used to be an important factor under the traditional brokerage business model. However, that model has become increasingly ineffective, making capital a more critical component.

In sum, we believe how well a firm utilizes its capital to specialize or diversify its profit model will determine whether it receives an above-average valuation. A necessary condition for this is the increase of capital (i.e., sizing up), an area where brokerage firms have been making progress. A sufficient condition is the consistent delivery of above-average profitability through a more sophisticated profit model. The difference between average and “edge” will ultimately provide compelling ideas for long-short trades.

Mirae Asset Daewoo Research

Fixed Income Monthly External uncertainties easing

October yield outlook and bond investment strategy

■ Developed markets: Improved sentiment to limit downside to yields

Fixed Income Report For developed markets, we expect improvement in overall investor sentiment to limit downside to yields. The preference for safe havens should ease on the back of the US October 4, 2018 Fed’s upward adjustment to its GDP growth forecast and expectations surrounding the US mid-term elections in November. In the eurozone, rising consumer prices should drive upward adjustments to inflation expectations. We also see sentiment improving on the back of waning political uncertainties and F/X volatility in emerging economies. Mirae Asset Daewoo Co., Ltd.

[Fixed Income Strategy] We do not believe Italy’s expansionary fiscal policy will have a lasting impact, as the likelihood of Italy expanding fiscal spending has already been reflected in the market

Hyeyoung Koo since May, as evidenced by the flight of foreign capital and yield hikes. In our view , +822 -3774 -1357 given the primary fiscal balance, Italy can afford to expand its fiscal spending. [email protected] Accordingly, we believe Italy risks will be short-lived.

Min -hyung Kim +822 -3774 -1830 ■ Emerging markets: A gradual decline in F/X volatility [email protected] For emerging markets, we believe country-specific risks are gradually easing. Turkey’s

monetary tightening is reducing F/X volatility, while rising international oil prices are helping to improve Russia’s and South Africa’s fundamental economic conditions. As a result, the widening Emerging Market Bond Index (EMBI) spread should gradually stabilize. From a trading standpoint, we find Mexico and India to be attractive.

■ Domestic: Wariness about BOK rate hikes; Recovery in KTB-UST yield correlation Three-year KTB yields exceeded 2.0% in September, reflecting the renewed possibility of the BOK raising its key rate within the year. The market will likely remain cautious about the BOK’s rate moves for the rest of the year, given: 1) the high likelihood of the key rate differential between the US and Korea widening to 100bps by end-2018; and 2) the possibility of a rate hike at the November MPC meeting , in line with the government’s posture. Accordingly, three-year KTB yields shoul d see downside support over the 2.0% level in the run-up to the November meeting.

Meanwhile, despite the recovery in the correlation between KTB and UST yields, the 10-year UST-KTB yield differential remains above 70bps, an unprecedented level. ( The 40bps readings in December 2004 and December 2016 were the previous post-2001 highs.) Amid easing external uncertainties, we recommend guarding against the possibility of the 10-year UST-KTB yield differential narrowing, considering that 10-year KTBs generally move in sync with 10-year USTs.

10-year UST, German Bund, and KTB yield trends

(%) (%) 1.5 10Y Bund yield (L) 10Y UST yield (R) 10Y KTB yield (R) 3.5

3.0 1.0

2.5 0.5 2.0

0.0 1.5

-0.5 1.0 1/15 7/15 1/16 7/16 1/17 7/17 1/18 7/18

Source: Infomax, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research Key Universe Valuations October 5, 2018

※All data as of close October 02, 2018, unless otherwise noted.

18F Earnings growth Mkt Cap Price P/E (x) P/B (x) ROE (%) Ticker Company Div Yield OP EPS (Wbn) (W) (%) 18F 19F 18F 19F 18F 19F 18F 19F 18F 19F 005930 286,944 44,700 3.2 20.3 0.1 27.2 7.5 6.5 6.0 1.3 1.1 22.2 20.0 000660 SK Hynix 50,960 70,000 1.4 62.2 2.4 59.2 4.1 3.0 2.9 1.0 0.8 40.5 30.2 068270 36,428 290,500 - - - - 0.0 0.0 207940 34,803 526,000 4.5 277.0 - 375.1 672.1 141.5 8.6 8.1 1.3 5.9 005490 POSCO 23,933 274,500 2.9 19.3 3.5 21.5 10.4 7.1 6.4 0.5 0.5 7.6 7.9 028260 Samsung C&T Corporation 23,616 124,500 1.6 26.8 7.7 96.0 2.2 19.0 18.6 0.9 0.9 5.4 5.2 105560 KB Financial Group 23,456 56,100 22.1 5.0 8.1 3.7 6.5 6.2 0.6 0.6 10.3 10.0 051910 LG Chem 23,260 329,500 1.8 -17.7 17.4 -10.5 21.2 14.8 12.2 1.5 1.3 10.5 11.7 017670 SK Telecom 22,568 279,500 3.6 -13.2 5.1 29.7 4.8 6.7 6.4 0.9 0.8 17.0 15.2 055550 21,766 45,900 23.2 2.2 16.6 2.6 6.4 6.2 0.6 0.6 9.9 9.4 096770 SK Innovation 20,620 223,000 3.6 -8.0 -6.3 -3.8 -2.0 10.3 10.5 1.1 1.0 11.1 10.4 034730 SK Holdings 19,912 283,000 1.4 4.6 7.0 26.5 6.1 9.5 8.9 1.2 1.1 14.5 13.6 032830 Samsung Life 19,300 96,500 - - - - 0.0 0.0 015760 KEPCO 17,622 27,450 - - - - - 21.2 0.3 0.3 - 1.2 018260 Samsung SDS 17,217 222,500 1.1 24.5 13.4 31.7 12.1 24.7 22.0 2.8 2.6 12.0 12.3 006400 Samsung SDI 16,779 244,000 0.4 498.4 44.8 15.7 47.3 22.6 15.3 1.4 1.3 6.5 9.0 010950 S-Oil 15,142 134,500 3.4 10.1 29.0 -23.3 55.1 16.4 10.6 2.4 2.1 14.2 21.0 086790 13,856 46,150 24.8 9.6 18.1 9.7 5.7 5.2 0.5 0.5 9.7 9.7 033780 KT&G 13,729 100,000 4.2 -15.7 21.0 -16.8 13.7 14.2 12.5 1.7 1.6 12.5 13.8 000810 Samsung F&M 13,478 284,500 - - - - 0.0 0.0 003550 LG Corp. 12,493 72,400 1.8 0.5 8.3 -23.0 10.4 6.9 6.3 0.7 0.6 10.9 10.8 091990 Celltrion Healthcare 12,099 86,100 45.8 63.6 39.9 27.0 49.1 38.6 6.2 5.5 13.5 15.1 066570 LG Electronics 11,292 69,000 1.0 29.4 15.2 -9.5 36.7 8.0 5.8 0.8 0.7 11.2 13.6 009150 Samsung Electro-Mechanics 10,345 138,500 0.6 205.4 29.8 264.9 28.5 18.2 14.2 2.2 1.9 13.1 14.9 011170 Lotte Chemical 8,809 257,000 4.1 -19.6 -0.8 -14.0 4.5 4.6 4.4 0.7 0.6 15.7 14.6 024110 8,708 15,550 24.2 6.2 20.5 6.0 5.7 5.3 0.5 0.5 8.9 8.8 010130 Korea Zinc 7,944 421,000 2.4 -8.6 2.9 -1.2 9.5 12.8 11.7 1.2 1.1 10.1 10.3 030200 KT 7,781 29,800 3.4 4.0 -1.1 37.6 14.9 11.9 10.3 0.6 0.5 5.4 5.8 000720 Hyundai E&C 7,661 68,800 0.7 9.7 15.9 171.2 14.2 14.0 12.3 1.2 1.1 8.4 9.3 032640 LG Uplus 7,619 17,450 3.2 0.5 13.8 -3.5 14.9 14.4 12.6 1.1 1.1 8.8 8.8 004020 7,219 54,100 1.4 1.1 2.5 8.3 7.0 9.3 8.7 0.4 0.4 4.6 4.7 034220 LG Display 6,798 19,000 2.6 ------0.5 0.5 - - 139480 Emart 5,854 210,000 0.8 -5.8 18.1 -28.5 7.9 13.3 12.3 0.7 0.7 5.3 5.6 023530 Lotte Shopping 5,771 204,000 2.5 15.7 26.5 - - - 12.2 0.5 0.4 - 3.7 036460 KOGAS 5,640 61,100 1.6 25.0 10.6 - 8.1 8.1 7.5 0.7 0.6 8.6 8.6 128940 5,311 466,500 0.1 -1.8 108.0 -14.0 129.7 102.2 44.5 6.9 6.0 7.1 14.6 005830 DB Insurance 5,168 73,000 - - - - 0.0 0.0 078930 GS Holdings 5,092 54,800 3.3 -8.0 4.8 -2.6 5.3 5.4 5.1 0.6 0.6 11.8 11.3 097950 CJ CheilJedang 4,923 327,000 0.9 17.3 - 181.4 - 4.6 1.0 27.2 0.0 088350 Hanwha Life 4,577 5,270 - - - - 0.0 0.0 086280 4,575 122,000 2.5 -5.1 5.6 -37.4 29.3 10.7 8.3 1.1 1.0 10.4 12.6 006360 GS E&C 4,231 54,100 0.6 242.8 -25.8 - -16.1 6.2 7.4 1.2 1.0 19.9 15.4 029780 Samsung Card 4,206 36,300 -33.2 -16.8 -8.9 3.9 11.9 11.5 0.6 0.6 1.5 1.5 003670 POSCO Chemtech 4,129 69,900 0.5 -10.4 17.2 26.9 11.2 31.4 28.2 5.6 4.8 19.0 18.3 271560 Orion 3,922 99,200 0.7 137.1 7.7 34.4 9.7 22.6 20.6 2.7 2.4 12.5 12.3 071050 Korea Investment Holdings 3,912 70,200 - - - - 0.0 0.0 028050 3,851 19,650 232.3 59.9 - 79.3 35.5 19.8 3.4 2.9 10.0 15.6 005940 NH Investment & Securities 3,799 13,500 - - - - 0.0 0.0 001450 Hyundai M&F 3,750 41,950 - - - - 0.0 0.0 012750 S1 3,462 91,100 3.0 1.3 5.5 0.2 5.7 24.1 22.8 2.4 2.3 11.6 11.6 Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research Market Data October 5, 2018

※All data as of close October 04, 2018, unless otherwise noted.

Other Major Indices Economic Indicators Close Net Chg 1D (%) YTD (%) Close 1D ago 1M ago 1Y ago MSCI Korea* 488.23 -10.51 -2.11 -11.90 USD/KRW 1,116.40 1,110.90 1,113.50 1,146.70 KOSPI 2,274.49 -35.08 -1.52 -8.27 JPY100/KRW 975.15 974.43 1,002.39 1,020.42 KOSDAQ 789.00 -5.99 -0.75 -2.89 EUR/KRW 1,282.02 1,286.03 1,293.50 1,350.87 Dow Jones* 26,828.39 54.45 0.20 8.07 3Y Treasury 2.07 2.02 1.92 1.89 S&P 500* 2,925.51 2.08 0.07 8.52 3Y Corporate 2.51 2.46 2.39 2.43 NASDAQ* 8,025.09 25.54 0.32 14.53 DDR2 1Gb* 1.28 1.28 1.30 1.23 Philadelphia Semicon* 1,372.40 1.53 0.11 6.58 NAND 16Gb* 2.82 2.82 2.82 2.99 FTSE 100* 7,510.28 35.73 0.48 -1.80 Oil (Dubai)* 83.29 82.88 76.18 54.45 Nikkei 225 23,975.62 -135.34 -0.56 2.00 Gold* 1,198.30 1,202.40 1,201.60 1,273.70 Hang Seng* 27,091.26 -35.12 -0.13 -11.22 Customer deposits (Wbn)* 26,099 27,250 25,680 23,140 Taiwan (Weighted) 10,718.91 -145.03 -1.33 0.08 Equity type BC (Wbn)(Oct. 1) 82,822 82,796 82,290 71,557 Note: * as of October 02, 2018 Source: KSDA, Wisefn, 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 S-Oil 14.83 Samsung Electronics 195.96 Samsung Electronics 60.15 KODEX LEVERAGE 63.26 Hyundai Elevator 10.00 Hynix 80.67 SEMCO 41.50 Amore Pacific 62.66 NCsoft 9.88 SEMCO 75.45 KODEX 200 Futures Inverse 2X 26.37 38.40 SK C&C 9.75 POSCO 41.88 Shinhan Financial Group 15.20 29.73 SHINSEGAE INTERNATIONAL 8.74 Amore Pacific 40.98 Netmarble 12.83 POSCO 22.91 Daelim Industrial 8.67 LG Chem 39.65 HYUNDAI ROTEM 11.50 KODEX 200 17.96 SAMSUNG BIOLOGICS 7.99 LG Household & Health Care 29.59 Samsung Heavy Ind. 10.95 Honam Petrochemical 15.47 7.81 KOREA AEROSPACE 15.72 Hana Financial Group 10.86 LG Chem 12.68 LG Uplus 7.56 Netmarble 13.55 Hyundai Eng. & Cosnt. 9.99 KODEX KOSDAQ150 LEVERAGE 12.55 Korea Investment Holdings 7.24 Hotel Shilla 13.01 KODEX INVERSE 9.95 S-Oil 12.37 Source: KSDA, Wisefn

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 SillaJen 16.53 Cafe24 Corp. 13.01 BH,LTD. 6.54 Celltrion Healthcare 13.48 Posco Chemtech 5.72 Medy-tox 11.96 CJ O Shopping 6.19 FOODNAMOO 10.77 Innocell 4.68 Celltrion Healthcare 9.80 ECOPRO 3.80 NAU IB Capital 7.36 Jtuen Entertainment 3.77 CJ O Shopping 6.46 YG Entertainment 3.68 Paradise 3.89 ECOPRO 3.54 SKPI 5.25 Medy-tox 3.63 Nowcom 2.62 ViroMed 2.94 Com2us 5.17 Cafe24 Corp. 3.20 Posco Chemtech 2.50 HLB 2.92 Emerson Pacific 5.06 Seoul Semiconductor 2.74 SMC 2.36 STCUBE 2.18 FOODNAMOO 4.93 Com2us 2.73 2.16 KANGSTEM BIOTECH 1.83 BH,LTD. 2.94 Kolon TissueGene(Reg.S) 2.46 Gentro 1.93 Jenexine 1.79 Paradise 2.84 SillaJen 2.43 Jenexine 1.92 Source: KSDA, Wisefn

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 44,700 -1,000 286,944 Celltrion Healthcare 86,100 -900 12,099 Hynix 70,000 -1,700 50,960 SillaJen 95,200 3,800 6,647 Celltrion 290,500 2,000 36,428 CJ O Shopping 252,800 -200 5,543 SAMSUNG BIOLOGICS 526,000 11,000 34,803 HLB 109,000 -3,800 4,239 Samsung Electronics (P) 36,450 -600 32,937 Posco Chemtech 69,900 900 4,129 Hyundai Motor 124,500 -4,000 26,602 NANOS 7,800 -140 3,829 POSCO 274,500 -19,500 23,933 ViroMed 231,700 -3,300 3,697 SAMSUNG C&T 124,500 -1,500 23,616 Medy-tox 557,500 -29,500 3,154 KB Financial Group 56,100 1,600 23,456 Studio Dragon 110,400 300 3,095 LG Chem 329,500 -23,500 23,260 Kolon TissueGene(Reg.S) 45,750 1,050 2,789 Source: Korea Exchange