One-Asia Morning Focus

April 1, 2020 One-Asia Morning Focus

Today’s reports Waskita Karya (WSKT IJ/Trading Buy/TP: IDR550) Upgrade rating/Lower TP – FY19 review & model update POSCO Chemical (003670 KS/Trading Buy/TP: W70,000) – Artificial graphite anode material capex announced Banks – Early adoption of final Basel III reforms: Capital regulations eased

Global performance monitor: Two-day change (%) Asia xJPN World EM World DM Korea Japan China Taiwan HK India Indonesia Singapore Thailand Index -1.55 -1.19 2.50 0.83 -2.39 -0.71 -0.22 -2.09 -0.45 -1.95 -1.78 1.42 Growth -0.13 -1.20 3.39 1.64 -1.55 -0.56 0.16 -1.90 -0.75 0.47 -1.69 0.69 Value -1.54 -1.62 3.18 -0.14 -3.30 -0.90 -0.62 -2.30 -0.15 -4.64 -1.86 2.20 Semicon. & equip. -1.67 -1.61 2.78 -0.56 -3.06 -1.58 0.01 -7.47 N/A N/A N/A N/A Tech hardware & equip. -1.41 -1.39 1.93 -1.22 0.00 -3.06 0.45 -2.14 5.90 N/A -2.33 N/A Comm. & prof. services -1.07 -1.07 1.85 -0.81 -4.41 -1.01 1.48 N/A -0.24 1.20 N/A N/A Software & services -2.96 -2.66 4.08 1.83 -0.91 -1.39 0.76 -2.24 -0.80 N/A 2.57 N/A Media & entertainment -1.18 -1.15 2.68 2.79 2.57 -1.15 2.41 -1.52 -2.95 N/A 0.47 N/A Consumer goods -2.27 -2.20 0.02 -0.40 -3.21 -2.89 -3.57 -3.81 -1.87 -0.62 N/A 0.38 Consumer services -2.83 -2.30 0.15 -2.05 -1.03 -2.26 -0.66 -4.03 1.05 -4.83 4.25 3.04 F&B & tobacco -1.60 -0.86 2.81 1.64 -1.73 -0.34 2.43 -5.42 4.75 -3.24 0.79 -0.43 Food & staples retailing 0.05 -0.30 2.31 4.53 0.24 0.59 1.73 -1.33 4.06 N/A 2.19 0.67 Retailing 1.03 0.90 2.06 -0.03 -1.50 1.10 2.87 -5.58 -6.21 -1.80 -2.60 5.35 HH & personal products -0.68 -0.63 2.68 -0.38 -1.18 0.25 2.25 N/A 5.94 5.51 N/A N/A Pharma & life sciences -0.52 -0.67 4.40 16.73 0.57 -1.00 2.66 -0.10 4.98 17.57 N/A N/A Autos & parts -4.12 -4.13 -1.39 1.14 -5.01 -2.90 -0.71 -2.60 -6.30 -5.41 N/A N/A Transportation -1.51 -1.51 1.00 2.10 -4.13 -0.93 -2.34 -2.02 1.55 -3.33 -4.00 0.44 Capital goods -2.22 -2.05 0.07 2.04 -3.72 -1.45 0.59 -3.38 -3.59 N/A -0.95 N/A Materials -1.53 -0.54 1.90 0.82 -1.99 -1.41 -0.61 N/A 1.44 -1.85 N/A 2.63 Real estate -2.18 -2.01 1.22 3.97 -1.13 -1.84 5.08 -1.98 -1.99 -9.58 -1.79 3.16 Energy -2.19 -1.27 1.76 -1.39 0.09 -0.18 1.69 -1.36 4.17 4.88 3.50 2.22 Banks -2.73 -1.69 -0.31 -1.71 -6.87 -0.56 -0.76 -2.41 -5.39 -4.00 -2.76 2.47 Diversified financials -2.07 -2.56 1.65 4.40 -3.61 -1.23 -3.95 -1.15 -10.00 N/A 2.14 -3.12 Telecom services -1.72 -1.23 0.90 0.90 -1.86 -1.07 -0.82 -2.21 -2.67 1.57 -0.70 1.54 Utilities -1.39 -0.58 2.54 2.99 0.45 -1.20 1.32 -1.95 0.66 0.91 N/A 0.44 Key thematic ETFs: Change (%) Market movers Mkt cap US dollar total returns (%) Robotics & AI (Global X) Name Ctry Sector (US$mn) 1D 1M 3M 6M 1Y 3Y Cloud Computing (Global X) Top seven performers Lithium & Battery (Global X) Celltrion Healthcare KR Healthcare 10,607 30.8 38.1 60.8 83.6 31.5 NA Internet of Things (Global X) Celltrion KR Healthcare 25,351 24.5 34.4 20.2 44.1 23.9 155.1 Digitalisation (iShares) Bharat Petroleum IN Energy 9,063 15.0 -24.9 -35.6 -33.2 -20.6 -25.8 FinTech (Global X) Unilever Indonesia ID Consumer staples 16,958 13.0 -6.6 -26.3 -31.5 -33.9 -27.0 Genomics & Biotech (Global X) Britannia Industries IN Consumer staples 8,549 8.6 -13.7 -16.2 -14.5 -19.6 38.6 Health & Wellness (Global X) Genting Singapore SG Consumer disc. 5,861 7.8 -17.0 -29.2 -23.8 -34.5 -27.0 Ageing Population (iShares) ITC Ltd IN Consumer staples 27,948 7.8 -17.0 -31.7 -38.0 -45.9 -44.5 EM Consum Growth (iShares) Bottom seven performers Clean Energy (iShares) Nan Ya Plastics TW Materials 14,345 -1.7 -19.6 -25.5 -19.5 -24.5 -8.1 Water Resources (Invesco) United Microelectronics TW Information tech. 5,314 -2.2 -10.7 -17.7 4.5 24.4 26.2 Agribusiness (iShares) Pegatron TW Information tech. 5,007 -2.3 -7.4 -15.9 10.2 18.5 -22.7 Global Infrastructure (iShares) Ayala Land PH Real estate 8,738 -2.3 -21.9 -33.5 -37.0 -29.7 -6.6 ESG US Leaders (iShares) Chang Hwa Bank TW Financials 6,290 -2.4 -17.8 -16.8 -9.7 10.7 24.5 2D 10D Maxis MY Commun. services 9,685 -2.4 -2.8 -3.8 -5.5 -2.0 -5.3 (5) 0 5 10 15

MediaTek TW Information tech. 17,219 -2.8 -8.9 -26.8 -8.9 21.5 69.1

This publication contains summaries of reports prepared by Mirae Asset Daewoo Co., Ltd. and/or its non-US affiliates (“Mirae Asset Daewoo”). Please review the compliance notices contained in the original reports. 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.

April 1, 2020 One-Asia Morning Focus

MSCI valuations (DM, EM, Asia ex-JP)

14 12M forward P/E (x) 18 2.0 12M trailing P/B (x) 2.8

17 2.6 13 1.8 16 2.4 12 15 1.6 2.2 14 11 1.4 2.0 13 10 1.2 12 1.8

9 11 1.0 1.6 Apr-19 Jul-19 Oct-19 Jan-20 Apr-19 Jul-19 Oct-19 Jan-20 MSCI Asia ex-JP (L) MSCI World EM (L) MSCI World DM (R) MSCI Asia ex-JP (L) MSCI World EM (L) MSCI World DM (R)

MSCI 12M forward P/E (x) Currencies (vs. USD) Value Change (%) Korea Vietnam 12 1D 3M YTD 20 11 KRW 1,224.4 1.14 5.88 5.88 18 10 CNY 7.1 0.08 1.55 1.87 9 16 JPY 108.1 -0.10 -0.83 -0.54 8 14 IDR 16,337.5 1.22 17.33 17.68

7 12 HKD 7.8 0.04 -0.43 -0.49 6 TWD 30.2 -0.02 0.61 0.80 10 Apr-19 Jul-19 Oct-19 Jan-20 Apr-19 Jul-19 Oct-19 Jan-20 SGD 1.4 -0.46 5.61 5.90 THB 32.7 0.22 9.10 9.10 Indonesia India INR 75.6 1.04 6.03 5.94 16 19 PHP 51.0 -0.02 0.70 0.70

14 17 MYR 4.3 0.02 5.50 5.92 VND 23,632.5 0.04 1.99 1.99 12 15 Commodities 10 13 Latest Change (%) 8 11 Apr-19 Jul-19 Oct-19 Jan-20 close 1D 3M YTD Apr-19 Jul-19 Oct-19 Jan-20 Crude oil (US$/bbl) 25.1 -4.7 -60.4 -63.0 Hong Kong China Thermal coal (US$/tonne) 67.6 0.0 -2.3 1.0 17 13 Iron ore (US$/tonne) 88.5 -0.1 6.9 -3.3 16 12 Copper (US$/tonne) 4,774.0 -0.0 -17.9 -22.4 15 Nickel (US$/tonne) 11,225.0 0.0 -25.1 -19.8 14 11 Tin (US$/tonne) 14,355.0 1.6 -11.8 -14.8 13 Gold (US$/ozt) 1,623.9 -1.6 10.7 6.9 10 12 Palm oil (INR/tonne) 721.7 0.0 1.6 -17.1

11 9 Soybean oil (c/lb) 26.7 1.3 -11.6 -22.3 Apr-19 Jul-19 Oct-19 Jan-20 Apr-19 Jul-19 Oct-19 Jan-20 Corn (US$/bu) 3.4 -0.8 -11.2 -15.4 Wheat (US$/bu) 5.7 0.4 13.6 2.2

Source: FactSet, Mirae Asset Daewoo Research (updated on 4/01/20 at 23:00 KST)

Waskita Karya (WSKT IJ) FY19 review & model update

Horrendous FY19 revenue and net profit achievement

WSKT booked a net profit of IDR938bn in FY19, plunging by 76.3% YoY at only 38%/40% run-rates against our/consensus’ estimates. Revenue stood at IDR31.4tr, also far below Construction expectations at 73%/82% run-rates against ours/consensus’. In addition to revenue underachievement, we overestimated the after-tax divestment gain of Solo-Ngawi and Ngawi- Kertosono by c.IDR300bn as we used higher P/B multiple of 1.5x (vs. actual P/B multiple of Company Report 1.25x, assuming book value of IDR1.6tr, ignoring government’s cash compensation in FY21). These caused major net profit deviation from our forecasts. March 31, 2020 Gross margin stabilizes at c.18%, expecting it to be maintained between 18-19%

Gross margin slipped to 17.9% in FY19 (-0.3ppt YoY). Going forward, as WSKT will still (Upgrade) Trading Buy participate in Contractor Pre-Financing projects (30% of WSKT’s new order book are turnkey projects), we expect gross margin level in FY20-21 to stay at 18-19%. Higher gross margin from operating toll road will also help sustain consolidated gross margin. Target Price (12M, IDR) 550 Leverage can be maintained.. Share Price (3/30/20, IDR) 476 IDR22tr payment from turnkey projects, coupled with IDR16tr and IDR6tr cash inflow from progress payment projects and State Asset Management Agency (Lembaga Manajemen Aset Expected Return 15.5% Negara/LMAN), surely helped WSKT to successfully contain its leverage. Accordingly, gross/net gearing can be maintained below 2.5x (2.4x/2.1x in FY19). In FY20, we expect leverage to increase due to deduction on retained earnings as the result of PSAK 71 implementation. However, if the targeted cash inflow from all project payments (c.IDR35tr) can

successfully be obtained, we believe leverage level can stay below 3.0x. Consensus Net Profit (20F, IDRbn) 1,952 NP Mirae Asset vs. consensus (20F, %) -57.1 ..but wont’be enough to support FY20 revenue growth EPS Growth (20F, %) -10.6 Construction burn rate (exc. WSBP) fell sharply from 40% in FY18 to 29% in FY19. With P/E (20F, x) 7.7 barely maintained leverage, we have no reason to significantly improve our burn rate assumption. By assuming FY20-21 burn rate at 35%, we revise down our FY20-21 revenue Industry P/E (Current, x) 9.3 target by 19% and 16% to IDR29.3tr (-6.5% YoY) and IDR31.7tr (+8.0% YoY), respectively. Benchmark P/E (20F, x) 10.2 Market Cap (IDRbn) 6,461.2 Toll road divestments: failure is still not an option, but timing matters Shares Outstanding (mn) 13,574.0 In FY20, we assume WSKT to divest Becakayu and WTTR. In FY21, however, WSKT must Free Float (%) 34.0 divest one-third of its majority- and minority-owned toll roads in order to maintain FY20 net profit. Failure to divest will force Waskita Toll Road (WTR) to book IDR1.9tr and IDR2.6tr net Beta (Adjusted, 24M) 1.7 loss in FY20-21. Divestment timing is also important, especially in FY21. In our base case, we 52-Week Low (IDR) 394 assume the divestments will take place in 1H21. If the divestments are completed by the end 52-Week High (IDR) 2,230 of FY21, there will be additional c.IDR1.2tr net loss. In terms of valuation, this time we assume even more conservative P/B multiple of 1.25x (from 1.5x). All in all, we expect FY20 net profit (%) 1M 6M 12M to drop by 10.6% YoY to IDR838bn, while FY21 net profit will grow by 6.3% YoY. For Absolute -47.7 -69.1 -74.3 calculation details, please refer to pages 4-7. Relative -31.1 -42.8 -44.6 Upgrade to Trading Buy with lower TP of IDR550, solely due to cheap valuation

(D-1yr=100) JCI WSKT We cut our TP from IDR1,150 to IDR550 (FY20F P/E of 8.9x, -1.1 SD of 7-year mean) due to: 130 1) lower FY20-21 net profit assumptions; and, 2) risk of postponed construction projects and 110 toll road divestments due to COVID-19 pandemic. However, the recent rapid and substantial 90 correction in share prices provides some upside potential. Thus, we upgrade our 70 recommendation to Trading Buy, with 15.5% upside potential. Investors should always bear in 50 mind that unlike other SOE contractors, WSKT poses strong inherent divesment risk. WSKT is 30 10 currently trading at FY20F P/E of 7.7x (-1.3 SD of 7-year mean). 4/19 6/19 8/19 10/19 12/19 2/20

12/16 12/17 12/18 12/19 12/20F 12/21F FY (Dec.) PT. Mirae Asset Sekuritas Indonesia Revenue (IDRbn) 23,788 45,213 48,789 31,387 29,352 31,695

Property Gross Profit (IDRbn) 3,968 9,464 8,863 5,605 5,324 5,843 Op. Profit (IDRbn) 3,180 7,360 7,195 4,233 4,179 4,607

Joshua Michael Net Profit (IDRbn) 1,713 3,882 3,963 938 838 891 +62-21-5088-7000 (ext.: 169) EPS (IDR) 147 286 292 69 62 66 [email protected] BPS (IDR) 953 1,032 1,326 1,317 1,277 1,334

P/E (x) 3.2 1.7 1.6 6.9 7.7 7.2 P/B (x) 0.5 0.5 0.4 0.4 0.4 0.4 ROA (%) 2.8 4.0 3.2 0.8 0.6 0.6

ROE (%) 15.5 27.7 22.0 5.2 4.8 4.9 Dividend Yield (%) 3.8 9.9 12.0 15.3 3.6 3.2 Net gearing (%) 67.4 169.3 186.2 211.6 251.1 253.6 Note: NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Sekuritas Indonesia Research estimates

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

POSCO Chemical (003670 KS/Trading Buy) Announcement of artificial graphite anode material Advanced Materials capex  POSCO Chemical announces artificial graphite anode material capex Issue Comment  Implications: 1) Diversification of battery material products, 2) higher margins of needle April 1, 2020 coke  Revenue to be around W190-210bn

Mirae Asset Daewoo Co., Ltd. POSCO Chemical announces artificial graphite anode material capex [ Metals & Mining/Machinery] On March 30th, POSCO Chemical announced that it will invest W217.7bn from March 2020

Jaekwang Rhee through June 2024 to build an artificial graphite anode material facility with annual capacity +822-3774-6022 of 16,000 tonnes. According to media reports, the company in early March successfully [email protected] developed an artificial graphite anode material with a capacity of 350mAh/g and particle

size of 16㎛.

Anode materials, which generate electricity by storing lithium ions during charging and

releasing them during discharging, determine battery capacity and life. Because of their longer life span and better output than natural graphite anode materials, artificial graphite anode materials are increasingly being used in electric vehicles (EVs). That said, artificial graphite anode materials have lower capacity and require larger spending (roughly double) than natural graphite anode materials. Implications: 1) Diversification of battery material products, 2) higher margins of needle coke

1) Diversification of battery material products: POSCO Chemical is currently the only domestic battery materials supplier that produces both cathode materials and natural graphite anode materials. We believe the addition of artificial graphite anode materials will diversify the company’s battery material product portfolio and thus enhance its marketing power. POSCO Chemical plans to expand its cathode material capacity from 15,000 tonnes (as of end-2019) to 59,000 tonnes by 2022, and also increase its natural graphite cathode material capacity from 44,000 tonnes to 74,000 tonnes.

2) Higher margins of needle coke: Given that needle coke, a raw material used in artificial graphite anode materials, is produced by subsidiary PMC Tech (annual capacity of 60,000 tonnes), POSCO Chemical is unlikely to have any trouble sourcing the raw material. The current price of artificial graphite anode materials is US$9,800-11,200/tonne (for high end), and the price of PMC Tech’s needle coke is US$700-750/tonne; as such, we believe vertical integration will lead to higher margins for needle coke. Of note, POSCO Chemical should be able to internally source 100% of its needle coke needs, considering that it takes around 1.7 tonnes of needle coke to make one tonne of artificial graphite anode materials. Revenue to be around W190-210bn

Given the investment timeline, we believe the latest capex will begin to generate revenue in 2025. Assuming full operation, we estimate the 16,000-tonne artificial graphite anode material facility will bring in revenue of around W190-210bn, based on current F/X rates and prices, and be able to produce enough supplies for roughly 400,000 50kWh EVs. We estimate demand for EV-use anode materials was 70,000 tonnes in 2019. We forecast that figure to reach 800,000 tonnes (50% CAGR) by 2025, driven by growth of the EV market and increasing battery capacity.

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.

Banks

Early adoption of final Basel III reforms: Capital regulations eased to aid banks’ role in supporting

economy

Industry Report March 31, 2020 Certain final Base III reforms to be introduced early The Financial Services Commission (FSC) and Financial Supervisory Service (FSS) said on March 30th that the final Basel III reforms for improving corporate lending regulations (such as credit risk calculation) will be implemented in 2Q20 (beginning with the Mirae Asset Daewoo Co., Ltd. calculation of BIS ratios at end-June 2020), more than 18 months earlier than originally planned (January 1st, 2022). The reforms subject to early implementation are the credit

[Banks/Credit Cards] risk* framework revisions, which will be adopted first for domestic banks and bank holding companies that have completed the necessary preparations (system setup,

Heather Kang etc.). +822-3774-1903 The revised operational risk framework of Basel III will take effect in January 2022 as [email protected] scheduled, in light of the time needed for financial companies to prepare for the new

rules.

*Banks’ BIS ratios are calculated by dividing equity capital by risk-weighted assets. As risk-weighted assets represent the sum of a bank’s credit, operational, and market risks, a decline in credit risks increases its BIS

capital ratio. Credit risks from loans and securities investments typically account for 80-90% of banks’ risk- weighted assets. Expected benefits: BIS ratios to rise, especially for banks with a high percentage of corporate loans The final Basel III reforms lower the risk weight applied to SME loans and the loss given default (LGD) of certain corporate loans. The implementation of these rules will sharply increase BIS ratios (more than +1%p group-wide and more than +2-3%p for banks based on CET1 ratio), especially for banks with a high percentage of corporate loans, freeing up room to expand funding to businesses. From a domestic standpoint, we believe the reforms will allow banks to faithfully perform their role in supporting the economy amid the COVID-19 outbreak, i.e., increasing funding to the real economy and participating in financial market stabilization programs. From a global standpoint, we believe the reforms will help banks better secure overseas funding and expand overseas by aligning domestic bank regulations with international standards and improving their BIS ratios. Share price volatility to continue for some time, but good buying opportunity from a long-term perspective Shares across the banking (financial) sector have plunged, as the spread of COVID-19 has fueled worries about liquidity and credit risks. While it is still unknown how long the outbreak will last and what its impact will be, we believe the recent sell-off—which has pushed valuations to below financial crisis levels—is excessive, given policymakers’ wide-ranging support (fiscal and monetary stimulus, as well as financial aid for SMEs and micro businesses) and the improved fundamentals of banks (financial holding companies) under our coverage. Share price volatility may continue for some time due to heightened uncertainties, but we think current share prices offer a good opportunity to buy on weakness or gradually accumulate shares from a medium- and long-term perspective. Our 2020 dividend yield forecasts for banks (financial holding companies) under our coverage are around 6-9%. To support the corporate credit and money market fund markets and prop up demand in the stock market, the government announced that it will establish a bond market stabilization fund and a securities market stabilization fund that will involve the participation of financial companies. For the securities market stabilization fund, the government added that it will consider a number of support measures for participating financial companies (e.g., loosening capital regulations by easing risk weights applied to investments in the fund, providing tax benefits to mitigate investment losses, etc.). Financial authorities have also revealed that in addition to the early adoption of the final Basel III reforms, they plan to review a more flexible approach to capital regulations on financial companies. While some may be against banks (financial holding companies) playing a role in the public sector, we believe it is necessary to reduce systemic risks during economic and liquidity crises. It is also important to keep in mind that their involvement will be accompanied by policy support, such as looser capital regulations and tax benefits.