[Korea] Travel Retail

Hotel Shilla Buy (008770 KS) (Maintain)

Additional negatives to be limited TP: W100,000 Upside: 42.2%

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

2Q20 review Larger-than-expected operating loss  For 2Q20, reported consolidated revenue of W523bn (-61.4% YoY) and an operating loss of W63.4bn (turn to loss YoY).  The operating loss was larger than the market expectation.  The weak results were attributable to: 1) disappointing sales of unsold duty-free inventory to third parties overseas; and 2) increased commission fees following a recovery in small daigou.  A QoQ rise in the discount rate given to large-scale daigou also contributed to the weak results.

Additional negatives to be Despite lingering uncertainties, additional negatives to be limited limited  Hotel Shilla suffered a significant operating loss for the second straight quarter despite sharp rent cuts (W56bn; about four months’ worth) at Incheon International Airport (IIA).  Store traffic failed to recover amid the lingering impact of COVID-19.  Due to the prolonged effects of the pandemic, uncertainty still surrounds the recovery outlook.  That said, we believe additional negatives beyond COVID-19 are limited.  Despite the pandemic, sales to daigou are proving resilient, showing that demand for Korean cosmetics and duty-free channels remains solid.

Accumulate on weakness Maintain Buy and TP of W100,000  We see no additional negatives aside from COVID-19.  Hotel Shilla’s stock is trading at a 2021F P/E of 16.0x. Valuation does not look demanding, assuming a normalization in business conditions in 2021.  We believe the current share price reflects all COVID-19-related uncertainties and sluggish earnings. Near-term share price weakness is possible, given the weak 2Q20 results and persistent uncertainties.  We recommend taking any correction as an opportunity to accumulate shares.

Key data Current price (7/31/20, W) 70,300 Market cap (Wbn) 2,759 160 Hotel Shilla KOSPI OP (20F, Wbn) -149 Shares outstanding (mn) 40 140

120 Consensus OP (20F, Wbn) -120 Free float (%) 77.2

100 EPS growth (20F, %) - Foreign ownership (%) 21.3

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

60 Market P/E (20F, x) 15.8 52-week low (W) 61,800 7.19 11.19 3.20 7.20 KOSPI 2,249.37 52-week high (W) 108,500

Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2016 2017 2018 2019 2020F 2021F Absolute -1.0 -19.6 -10.7 Revenue (Wbn) 3,715 3,515 4,714 5,717 3,475 6,876 Relative -7.2 -24.2 -19.6 OP (Wbn) 79 73 209 296 -149 308 OP margin (%) 2.1 2.1 4.4 5.2 -4.3 4.5 NP (Wbn) 28 25 110 170 -180 176 EPS (W) 696 632 2,758 4,243 -4,501 4,395 ROE (%) 4.0 3.8 15.4 20.2 -21.8 21.7 P/E (x) 69.2 134.3 27.7 21.4 - 16.0 P/B (x) 2.5 4.4 3.5 3.5 3.4 2.8 Dividend yield (%) 0.7 0.4 0.5 0.4 0.5 0.5 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. August 3, 2020 Hotel Shilla

Table 1. 2Q20 review (Wbn, %, %p) 2Q20 Growth

2Q19 1Q20 Mirae Asset Actual Consensus YoY QoQ Daewoo Revenue 1,355 944 523 535 657 -61.4 -44.6 OP 79 -67 -63 -56 -53 TTR RR OP margin (%) 5.8 - - NP 52 -74 -68 -54 -55 TTR RR Note: NP is attributable to owners of the parent. Source: DataGuide; company data, Mirae Asset Daewoo Research

Table 2. Earnings forecast revisions (Wbn, %) Previous Revised % chg. Notes 2020F 2021F 2020F 2021F 2020F 2021F Revenue 5,113 6,689 3,475 6,876 -32.0 2.8 Lowered 2H20 OP 31 303 -147 308 TTR 1.7 estimates to reflect OP margin (%) 0.6 4.5 -4.2 4.5 -4.8 0.0 prolonged impact of COVID-19 NP -43 182 -181 176 RR -3.0 Note: NP is attributable to owners of the parent. Source: DataGuide, Mirae Asset Daewoo Research

Table 3. Earnings and forecasts (consolidated) (Wbn) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20F 4Q20F 2018 2019 2020F 2021F Revenue 1,126 1,175 1,220 1,193 1,343 1,355 1,475 1,544 944 523 809 1,200 4,714 5,717 3,475 6,876 Duty-free 1,014 1,055 1,094 1,072 1,225 1,227 1,339 1,411 849 439 704 1,062 4,234 5,201 3,055 6,324 Downtown 581 613 626 621 721 756 856 941 559 394 579 791 2,441 3,274 2,322 3,835 Airport 432 442 468 451 504 470 482 470 290 46 125 271 1,793 1,927 732 2,488 Hotel/leisure 112 120 127 121 118 128 137 133 94 84 105 138 480 516 421 553 COGS 594 600 631 637 753 741 861 887 588 292 474 735 2,462 3,301 2,090 3,970 COGS ratio (%) 53 51 52 53 56 55 58 57 62 56 59 61 52.2 57.7 60 58 SG&A 487 505 521 529 509 534 557 580 422 295 378 438 2,042 2,121 1,534 2,599 OP 44 69 68 27 82 79 57 78 -67 -63 -44 26 209 296 -147 308 Duty-free 48 64 59 25 82 70 45 70 -49 -47 -39 23 196 267 -112 281 Hotel/leisure -3 6 9 2 -1 9 12 8 -18 -16 -4 3 13 29 -35 28 Pretax profit 42 65 66 -25 67 68 38 54 -93 -82 -55 3 147 226 -227 234 NP 32 53 47 -21 52 52 28 38 -74 -68 -42 2 110 170 -181 176 YoY (%) Revenue 10 31 14 127 19 15 21 29 -30 -61 -45 -22 34 21 -39.2 97.9 OP 342 303 124 77 85 14 -16 182 TTR TTR TTR -66 186 41 TTR TTB NP 1,074 1,668 275 -402 64 -1 -41 TTB TTR TTR TTR -94 336 54 TTR TTB Note: NP is attributable to owners of the parent. Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 August 3, 2020 Hotel Shilla

Hotel Shilla (008770 KS)

Income statement (summarized) Balance sheet (summarized) (Wbn) 2018 2019 2020F 2021F (Wbn) 2018 2019 2020F 2021F Revenue 4,714 5,717 3,475 6,876 Current assets 1,272 1,716 1,410 1,901 Cost of revenue 2,462 3,301 2,090 3,970 Cash & equivalents 282 508 472 459 Gross profit 2,252 2,416 1,385 2,906 AR & other receivables 203 266 207 319 SG&A expenses 2,042 2,121 1,534 2,599 Inventory 704 849 660 1,019 OP (adj.) 209 296 -149 308 Other current assets 83 93 71 104 OP 209 296 -149 308 Non-current assets 1,032 1,811 1,780 1,856 Non-operating profit -62 -70 -80 -74 Investments in associates 34 48 37 57 Net financial income -8 -27 -29 -35 PP&E 697 675 654 637 Net income from associates 0 0 0 0 Intangible assets 48 56 60 44 Pretax profit 147 226 -229 234 Total assets 2,304 3,527 3,190 3,757 Income tax 37 56 -49 58 Current liabilities 1,003 1,438 1,356 1,749 Profit from continuing operations 110 169 -180 176 AP & other payables 350 507 394 608 Profit from discontinued operations 0 0 0 0 Short-term financial liabilities 160 419 564 527 NP 110 169 -180 176 Other current liabilities 493 512 398 614 Attributable to owners 110 170 -180 176 Non-current liabilities 536 1,170 1,103 1,114 Attributable to minority interests 0 0 0 0 Long-term financial liabilities 499 1,143 1,082 1,082 Total comprehensive income 110 168 -175 176 Other non-current liabilities 37 27 21 32 Attributable to owners 110 168 -175 176 Total liabilities 1,539 2,608 2,458 2,864 Attributable to minority interests 0 0 0 0 Equity attributable to owners 764 920 731 894 EBITDA 284 515 86 540 Capital stock 200 200 200 200 FCF 76 338 -71 203 Capital surplus 197 197 197 197 EBITDA margin (%) 6.0 9.0 2.5 7.9 Retained earnings 475 627 434 596 OP margin (%) 4.4 5.2 -4.3 4.5 Minority interests 1 0 0 0 Net margin (%) 2.3 3.0 -5.2 2.6 Shareholders' equity 765 920 731 894

Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2018 2019 2020F 2021F 2018 2019 2020F 2021F Operating cash flow 154 404 95 403 P/E (x) 27.7 21.4 - 16.0 NP 110 169 -180 176 P/CF (x) 10.6 7.1 73.6 5.6 Non-cash income/expenses 178 341 218 326 P/B (x) 3.5 3.5 3.4 2.8 Depreciation 62 205 217 217 EV/EBITDA (x) 12.0 9.0 45.9 7.3 Amortization 12 15 18 15 EPS (W) 2,758 4,243 -4,501 4,395 Other 104 121 -17 94 CFPS (W) 7,201 12,764 955 12,535 Chg. in working capital -117 -44 15 -53 BPS (W) 21,722 25,591 20,877 24,940 Chg. in AR & other receivables -16 -28 24 -52 DPS (W) 350 350 350 350 Chg. in inventory -230 -139 191 -359 Dividend payout ratio (%) 11.8 7.7 -7.2 7.4 Chg. in AP & other payables 43 150 -99 183 Dividend yield (%) 0.5 0.4 0.5 0.5 Income tax -23 -70 30 -58 Revenue growth (%) 34.1 21.3 -39.2 97.9 Cash flow from investing activities -103 -93 -137 -297 EBITDA growth (%) 95.9 81.3 -83.3 527.9 Chg. in PP&E -71 -65 -165 -200 OP growth (%) 186.3 41.6 - - Chg. in intangible assets 0 0 -15 0 EPS growth (%) 336.4 53.8 - - Chg. in financial assets 20 7 51 -97 AR turnover (x) 54.8 52.4 31.7 56.3 Other -52 -35 -8 0 Inventory turnover (x) 8.0 7.4 4.6 8.2 Cash flow from financing activities -245 -87 -8 -99 AP turnover (x) 9.4 9.2 5.4 9.3 Chg. in financial liabilities -211 903 84 -37 ROA (%) 4.9 5.8 -5.4 5.1 Chg. in equity 0 0 0 0 ROE (%) 15.4 20.2 -21.8 21.7 Dividends -13 -13 0 -13 ROIC (%) 18.7 17.3 -8.3 13.9 Other -21 -977 -92 -49 Debt-to-equity ratio (%) 201.1 283.6 336.3 320.5 Chg. in cash -193 226 -36 -13 Current ratio (%) 126.9 119.3 104.0 108.7 Beginning balance 474 282 508 472 Net debt-to-equity ratio (%) 46.3 112.2 156.9 124.6 Ending balance 282 508 472 459 Interest coverage ratio (x) 11.3 7.5 -3.6 6.4 Source: Company data, Mirae Asset Daewoo Research estimates

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Appendix 1

Important disclosures and disclaimers Two-year rating and TP history

Company Date Rating TP (W) (W) Hotel Shilla Hotel Shilla (008770) 04/27/20 Buy 100,000 200,000 02/02/20 Trading Buy 100,000 10/28/19 Buy 100,000 150,000 10/01/19 Buy 110,000 100,000 08/07/18 No Coverage 04/29/18 Buy 170,000 50,000

0 Aug 18 Aug 19 Aug 20

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

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

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

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

Analyst certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director, or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading, and private client divisions. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws, and accounting principles, and no person whose receipt or use of this report would violate any laws or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person, and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates, and their directors, officers, employees, and agents

Mirae Asset Daewoo Research 4 August 3, 2020 Hotel Shilla

do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views, and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates, and their directors, officers, employees, and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making, or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo. For further information regarding company-specific information as it pertains to the representations and disclosures in this Appendix 1, please contact [email protected] or +1 (212) 407-1000.

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