Jeju Air (089590 KS) Ready for takeoff

Initiate coverage with Buy and target price of W45,000 Airlines We initiate our coverage on with a Buy rating and a target price of W45,000. Our investment recommendation is premised on the following points: 1) In our view, Jeju Air is best positioned to benefit from the fast-growing low-cost carrier (LCC) Initiation Report market. 2) The carrier is expanding its market position on the back of lower pricing. 3) It November 5, 2015 is also less vulnerable to external headwinds thanks to its solid balance sheet.

Our target price of W45,000 was derived by using a residual income model (COE of 8.2%) and is equivalent to a 2016F P/E of 18.8x and a 2016F P/B of 3.1x. We believe our (Initiate) Buy target valuation is highly achievable, given the stock’s high ROE (2015F-17F average of 22.3%) and EPS growth (3-year CAGR of 28.2%). Target Price (12M, W) 45,000 Key risks are 1) stiffer competition and 2) unfavorable moveme nts in oil prices and F/X. In developed markets, the entry of competitors (such as “ultra” LCCs in the US) has Share Price (11/04/15, W) - increased the size of the market, leading to stronger earnings for most carriers. Meanwhile, Jeju Air has very little foreign currency-denominate d debt and is therefore Expected Return - less vulnerable to F/X-translation losses. As for oil, we expect prices to remain stable.

A perfect mix of top-line growth and cost savings OP (15F, Wbn) 58 1) Strong market growth and market share gains: We see plenty of room for growth in Consensus OP (15F, Wbn) 68 the LCC market. In terms of total available seat kilometers (ASK), the LCC segment still EPS Growth (15F, %) 60.8 accounts for less than 20% of the domestic airline market, compared to over 30% in Market EPS Growth (15F, %) 19.7 developed markets. By 2020, Jeju Air plans to expand its fleet to 40 aircraft (average o f four aircraft per annum, or 15% CAGR ) from 20 currently, which should support P/E (15F, x) - continuous market share gains. Market P/E (15F, x) 12.0 KOSPI 2049.41 2) Potential for cost savings: Jeju Air’s cost per ASK (CASK) has fallen about 7% on average annually, mainly due to economy of scale effects fr om fleet expansion. Over the Market Cap (Wbn) - long term, the rate of decline could somewhat slow as oil prices move up, but we believe Shares Outstanding (mn) - unit cost excluding fuel will drop nearly 2-3% per year. Free Float (%) - Foreign Ownership (%) - 3) Ancillary revenue growth: While Jeju Air’s fares are lower than those of traditional Beta (12M) - airliners, the carrier has seen revenue from ancillary services—such as advance seat 52-Week Low - assignments, in-flight meals, and duty-free sales—increase to 6.9% of overall revenue in 1H15. Because these services have much lower COGS ratios, higher anci llary revenue 52-Week High - should drive higher earnings. (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M Focus on long-term growth rather than near-term earnings Absolute - - - Relative - - - For 3Q15, we see revenue and operating profit coming in at W157.5bn (+9.7% YoY) and W16.5bn (-1.0% YoY), respectively, weighed by 1) the continued im pact of MERS, and 2) increased heavy maintenance costs due to the return of leased aircraft. In 4Q15, however, we expect revenue to grow 18% YoY and operating profit to return to positive growth YoY (+9.9% YoY to W10.8bn).

Looking to 2016, we forecast revenue growth to recover to 23%. That said, net profit is likely to stall temporarily due to higher oil prices and taxes. In the long term, we expect the carrier to maintain its status as a growth stock, generating revenue and operating profit growth of 16% and 28.9% CAGR (2014-2020), respectively.

Daewoo Securities CCo.,o., Ltd. FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 341 434 511 601 736 873 [Transportation/Energy] OP (Wbn) 2 17 30 58 74 88

Jay JH Ryu OP margin (%) 0.6 3.9 5.9 9.7 10.1 10.1 +822-768-4175 NP (Wbn) 5 20 32 61 62 71 [email protected] EPS (W) 239 893 1,454 2,339 2,391 2,755 ROE (%) 17.0 47.8 49.6 31.1 18.2 17.5 Choong-hyun Kim +822-768-4126 P/E (x) [email protected] P/B (x) ------Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

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

November 5, 2015 Jeju Air

C O N T E N T S

I. Valuation 3 Initiate coverage with Buy and target price of W45,000 3

II. Airline and LCC market outlook 4 1. LCCs lead growth of airline sector; Note growth potential of Northeast Asia 4 2. LCCs’ business strategy: Low cost, high load factor 6 3. Emergence of ULCCs 9

III. Three merits of Jeju Air 11 1. Unrivalled cost improvement potential 11 2. Strong growth potential of ancillary revenue 14 3. Strong financial position 15

IV. Earnings outlook 16 Revenue to show a CAGR of 18.4% over the next three years 16 3Q15 preview: Lingering MERS impact and increased maintenance costs to affect OP 17

V. Risks 18 1. Possibility of intensifying competition 18 2. F/X and fuel costs 20

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November 5, 2015 Jeju Air

I. Valuation

Initiate coverage with Buy and target price of W45,000

We initiate our coverage on Jeju Air with a Buy rating and a target price of W45,000. Our target price of W45,000 was derived by using a residual income model (COE of 8.2%) and is equivalent to a 2016F P/E of 18.8x and a 2016F P/B of 3.1x. We believe our target valuation is highly achievable, given the stock’s high ROE (2015F-17F average of 22.3%) and EPS growth (3-year CAGR of 28.2%).

Once LCCs’ combined share of the domestic airline market (currently 16% based on ASK) reaches 30% (probably in 2020), the segment’s growth will likely slow, and Jeju Air’s earnings may gradually trend down. Nevertheless, we also see upside to the company’s growth outlook in light of ’s open-skies policy the high population density of Northeast Asian countries.

Table 111.1. Valuation: Residual income method (Wbn) 2015F2015F2015F 2016F2016F2016F 2017F2017F2017F 2018F2018F2018F 2019F2019F2019F 2020F2020F2020F 2021F2021F2021F Revenue 601 736 873 997 1,122 1,246.5 1,402 (Growth) 17.7% 22.5% 18.5% 14.3% 12.5% 11.1% 12.5% Net profit 61 62 71 85 100 111.5 125 (% of revenue) 10.1% 8.4% 8.2% 8.5% 8.9% 8.9% 8.9% Equity 310 372 443 528 629 740 865 (Growth) 286.9% 20.0% 19.2% 19.2% 19.0% 17.7% 16.9% ROE forecast 31.1% 18.2% 17.5% 17.5% 17.3% 16.3% 15.5% Cost of equity 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% ROE spread 22.9% 10.0% 9.3% 9.4% 9.2% 8.1% 7.4% Residual income 71 37 41 50 58 60 64 Terminal value 985985985

NPV of FCFF 388 Beta 1.0

PV of terminal value 449 Risk premium 6.0%

Current book value 80 Risk-free rate 2.0%

Equity value 980 COE 8.2%

Shares outstanding 22,007 Target forward P/B 3.13.13.1

Target price (W) 45,000 Target forward P/E 18.818.818.8

Current price (W) - Target PEG 0.70.70.7

Source: KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

II. Airline and LCC market outlook

1. LCCs lead growth of airline sector; Note growth potential of Northeast Asia

It has been almost 10 years since LCCs first hit the Korean market. Contrary to initial concerns that LCCs would eat into the industry’s profits, they in fact played an important role in growing the size of the market. Indeed, cheaper flights attracted new customers who previously shied away from flying, with passenger traffic surging from 36mn in 2005 to 60mn in 2014.

On the basis of their solid performance in the domestic market (with a stable market share of around 50% for domestic routes), LCCs are now increasingly looking to expand overseas. Their market share in short-haul international routes is around 20%, and the revenue share of international routes is likely to rise in tandem with the LCC market’s continued expansion. The main target of that expansion is Northeast Asia, due to the short route distances and LCCs’ low penetration in this region.

Figure 111.1. Passenger traffic trendtrendtrend:trend : LCCLCCLCCsLCC sss vs. FSCFSCFSCsFSC sss Figure 222.2. Passenger RPK trendtrendtrend:trend : LCCLCCLCCsLCC sss vs. FSCFSCFSCsFSC sss

(mn passengers) (mn RPK) FSCs 45 FSCs 120,000 LCCs LCCs 40 100,000 35

30 80,000

25 60,000 20

15 40,000

10 20,000 5

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

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

Figure 333.3. LCC M/S on shortshort----haulhaul international routes Figure 444.4. LCC. LCC M/S on domestic routeroutessss

(%) (%) 30 Total LCC M/S 60 Domestic route M/S Korea LCC M/S Foreign LCC M/S 25 55

20 50

15 45

10 40

5 35

0 30 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15

Source: IIA, KAC, KDB Daewoo Securities Research Source: IIA, KAC, KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

The market penetration of LCCs in Northeast Asia (based on seats) stands at 16%, which is 12%p lower than the worldwide average and 38%p lower than the penetration rate in Southeast Asia, the largest market for LCCs. At present, the LCC market in Northeast Asia is showing patterns similar to the early stage of LCC growth in developed markets around 15 years ago.

Broadly speaking, the LCC segment tends to take off when more people perceive flying as a normal activity and not as a special, novel experience. We believe Northeast Asia offers environments that are favorable for LCC expansion.

In Korea, the rise in demand for short-haul flights (mainly on China routes) is allowing LCCs to expand market share aggressively. Profitability is also improving, with all LCCs continuing to grow after turning to profit in 2013.

FiguFiguFigureFigu re 555.5. LCC M/S by region ((inin terms of seatsseatsseats)seats )))

(%) 60 LCC M/S 54

50

40 36 33 29 28 30 26

20 16 12 9 9 10

0 Southeast Europe Latin North World ANZ Northeast China Middle East Africa Asia America America Asia

Source: Diio/Innovata 2015, Jeju Air, KDB Daewoo Securities Research

Figure 666.6. LCC M/S: Europe vs. US Figure 777.7. Chinese international travel trend

(%) (mn passengers) (%) 45 Europe (domestic) 140 International departures (L) 45 US (domestic) 39.6 41 39.4 38.1 40 YoY (R) 40 120 34 35 35.8 35 32 35 30.5 30.7 30.6 30.7 31.4 29.5 28.6 29.3 100 30 28.5 30 25.5 26.9 25 22.7 25.1 80 21.4 21.9 25 20.4 22.5 18.4 19.1 20 16.5 60 20 15 15 40 10 8.2 10 4.9 20 5 5

0 0 0 01 03 05 07 09 11 13 15 00 02 04 06 08 10 12 14

Source: CAPA, KDB Daewoo Securities Research Source: CEIC, KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

2. LCCs’ business strategy: Low cost, high load factor

LCCs and their larger counterparts deploy different business models. For large-sized carriers, increasing passenger traffic is paramount, and codeshare agreements and transfers (through which they can charge differential rates) are among their major strategies. For LCCs, however, the focus is on increasing the load factor and cutting costs. LCCs have a lower passenger yield than large-sized carriers (which focus on attracting profitable passengers), but this helps them attract demand.

In order to increase the load factor, LCCs must focus on high-demand routes. Indeed, LCCs operated on six of last year’s 10 highest-traffic routes. With regard to costs, steady cost cuts have helped LCCs to turn to profit since 2013. Jeju Air’s CASK has fallen steadily and now stands at a record low of W67/km. LCCs’ operating profit averaged W1.4bn in 2014, up from an operating loss of W500mn in 2010.

Figure 888.8. International route passenger yyield:ield: FSCFSCssss vs. LCCLCCssss Figure 999.9. Domestic route passenger yyield:ield: FSCFSCssss vs. LCCLCCssss

(W/km) (W/km) Korean Air Asiana Airlines 110 Jeju Air 220 Jin Air Jeju Air

100 200

90 180

80 160

70 140

60 120

50 100

40 80 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

Figure 101010.10 . International routerouteroute L/F: FSCFSCssss vs. LCCLCCssss Figure 111111.11 . Domestic route L/F: FSCFSCssss vs. LCCLCCssss

(%) (%) Korean Air Asiana Airlines 90 Korean Air Asiana Airlines 100 Jin Air Jeju Air Jin Air Jeju Air 88 95 86 90 84 85 82

80 80

78 75 76 70 74 72 65

70 60 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

For LCCs, a common method to cut costs is using an identical aircraft model for all routes. Southwest Airlines operates on domestic routes only, and flies only B-737 aircrafts. This single model strategy helps airlines to save on lease and maintenance expenses. Most Korean LCCs also use a single aircraft model (B-737).

Table 222.2. IIInternationalInternational routes operated by Korean LCCs (2014) RankRankRank Routes Jin AAAirAiririr Jeju Air Air BusanBusanBusan TTT’T’’’waywaywayway Eastar JetJetJet 111 HKGHKGHKG- HKG ---ICNICNICNICN 000 000 000

222 BKKBKKBKK- BKK ---ICNICNICNICN 000 000 000 000

3 HND-GMP

444 NRTNRTNRT- NRT ---ICNICNICNICN 000 000

5 PVG-ICN

6 TPE-ICN

777 KIXKIXKIX- KIX ---ICNICNICNICN 000 000 000 000

888 MNLMNLMNL- MNL ---ICNICNICNICN 000

999 TAOTAOTAO- TAO ---ICNICNICNICN 000

10 SIN-ICN

Notes: Ranking is in terms of traffic (inbound and outbound) Source: Air Portal, KDB Daewoo Securities Research

Table 333.3. LCCLCCLCCsLCC sss’’’’ fleetfleetfleet size vs. earnings (no. of aircraft, Wbn) 201020102010 201120112011 201220122012 201320132013 201420142014

Jeju Air 7 8 12 13 17 Air 6 7 9 11 14 Jin Air 5 7 9 11 13 T’way 4 4 5 6 9 5 5 7 9 10 TotalTotalTotal 272727 313131 424242 505050 636363 Revenue 505 727 1006 1248 1483 Operating profit -15 -13 -14 35 88 Revenue/fleet 18.7 23.5 23.9 25.0 23.5 OP/fleet -0.5 -0.4 -0.3 0.7 1.4 Source: Company data, KDB Daewoo Securities Research

Figure 121212.12 . JejuJejuJeju AirAirAir’Air ’’’ss CASKCASKCASK

(W/km) (%) 200 CASK (L) 100 YoY (R) 180 80

160 60

140 40

120 20

100 0

80 -20

60 -40 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15

Source: Company data, KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

Table 444.4. Fleets of Korean LCCs Jin AAAirAiririr Jeju Air Eastar JetJetJet TTT’T’’’waywaywayway Air BusanBusanBusan

B-737 14 20 12 10 5 A-320 - - - - 3 A-321 - - - - 6 B-777 2 - - - - TotalTotalTotal 161616 202020 121212 101010 141414 Source: Company data, KDB Daewoo Securities Research

Table 555.5... AirAsiaAirAsia’’’’ss fleet AirAsia AirAsia XXX (((long(longlonglong----haulhaul operationoperation)))) Current New orders Current New orders A320 80 310 - - A330 - - 21 72 A350 - 10

Total 80 310 21 82 Source: Company data, KDB Daewoo Securities Research

Figure 131313.13 . Revenue trendtrendtrend:trend : Jin Air vs. Jeju Air Figure 141414.14 . Operating profit trendtrendtrend:trend : Jin: Jin Air vs. Jeju Air

(Wbn) (Wbn) 600 Jeju Air 40 Jeju Air Jin Air Jin Air 30 500 20 400 10

300 0

-10 200 -20 100 -30

0 -40 07 08 09 10 11 12 13 14 1H15 07 08 09 10 11 12 13 14 1H15

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

Figure 151515.15 . Domestic routes as a % of routes operated (2014) Figure 161616.16 . FFFleetsFleetsleetsleets of US airlines

Proportion of domestic routes AA 257 98% Delta 128

United 305 69% 66% 59% 56% Southwest 690

JetBule

Alaska 143

Allegiant Air B-737 A-320 A-330 B-757 Spirit B-777 Other United Delta AA JetBlue Southwest

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

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November 5, 2015 Jeju Air

3. Emergence of ULCCs

In countries with thriving LCC segments, consumers’ top consideration in selecting airline tickets is price. A case in point is the US market, where Southwest Airlines has grown to become one of the country’s biggest airlines. Now that LCCs have taken root, the US market is seeing the emergence of a new “ultra” LCC (ULCC) model. Major ULCCs include Spirit Airlines and Allegiant Air.

As their name implies, ULCCs are able to charge very low fares because of tight cost control. ULCCs incur 20% lower costs than LCCs, and have the lowest cost per available seat miles (CASM) in the US airline industry. This is the case even when excluding fuel expenses, which take the lion’s share of airline costs. By cutting costs as much as possible, ULCCs can focus their energy on lowering prices.

Figure 171717.17 . CCCASMCASMASMASM trendtrendtrend Figure 181818.18 . CCCASMCASMASMASM excludexcludinginginging fuel costcostssss

(cents/ASM) CASM (cents/ASM) CASM excluding fuel cost

12.4 12.3 9.8 9.3 11.9 9.0 11.0 10.9 8.3 9.7 7.8 7.17 8.5 8.3 5.8 5.6

United Delta AA Southwest JetBlue Alaska Allegiant Spirit United Delta AA Southwest JetBlue Alaska Allegiant Spirit Air Air

Source: Bloomberg, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

Two points in particular should be noted: 1) ULCCs’ low-price strategy has been working well. Spirit Airlines and Allegiant Air have seen their revenues expand at CAGRs of 16.1% and 14.5%, respectively, from 2008 to 2014. Furthermore, their passenger load factors have been hovering at around the high 80% to low 90% levels. 2) Cannibalization has not occurred. Indeed, ULCCs are growing the size of the overall airline market, just as LCCs did before them.

Figure 191919.19 . PassePassePassengerPasse ngerngernger traffic before and after Spirit Airlines

Source: Spirit Airlines, KDB Daewoo Securities Research

Figure 202020.20 . Number of complaints by airline Figure 21. Revenue trend of US ULCCs

(US$mn) 2,000 Spirit Airlines 1,800 Allegiant Air 1,600 1,400 1,200 1,000 800 600 400 200 0 08 09 10 11 12 13 14 Source: US Department of Transportation, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research

Figure 22. L/F trend of US ULCCs

(%) 95 Spirit Airlines Allegiant Air

90

85

80 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 Source: Bloomberg, KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

III. Three merits of Jeju Air

1. Unrivalled cost improvement potential

1) Economies of scale

Fuel and rental expenses account for nearly half of Jeju Air’s total costs. The costs of aircraft, maintenance, and fuel are difficult to cut, as all LCCs in the market use similar aircraft and the price of jet fuel fluctuates in real time. However, when taking unit cost and economies of scale into consideration, Jeju Air has strong cost reduction potential.

Typically, an airline’s negotiating power with suppliers (aircraft makers, maintenance companies, oil refineries, etc.) increases in line with the size of its fleet. Jeju Air, which operates 20 aircraft, plans to double its fleet by 2020, leading to cost reductions from increased bargaining power.

In 2016, Jeju Air is expected to introduce six new aircraft, thus lowering maintenance per aircraft by 3-5%. Furthermore, the airline’s lease payment per aircraft has been falling at an annual rate of 1-2% for the past seven years. We expect cost reduction to expand through 2020.

Figure 23. Jeju Air’s mmmaintenancemaintenance expenseexpense/ASK/ASK/ASK/ASK trtrtrendtr endendend Figure 24. Jeju Air’s rrrentalrental expenseexpense/ASK/ASK/ASK/ASK trendtrendtrend

(W/km) Maintenance expense/ASK (W/km) 10.0 11.5 Rental expense/ASK 11.3 8.9 9.0 11.0 8.0 7.1 6.8 10.6 7.0 6.6 6.6 6.7 10.5 10.2 6.0 10.1 10.1 5.0 10.0 9.7 4.0 9.5 3.0 2.0 9.0 1.0 0.0 8.5 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

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

Figure 25. Jeju AirAir’s’s’s’s costcostcost breakdown Figure 26. Jeju Air’s CASKCASKCASK trend

Other Salary (W/km) (%) 10% 12% 200 CASK (L) 100 Commissions Depreciation YoY (R) 2% 2% 180 80

Airport expense 160 60 16% Rental expense 14% 140 40

120 20

Maintenance 100 0 10% 80 -20 Fuel expense 34% 60 -40 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15

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

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November 5, 2015 Jeju Air

2) Increasing direct sales

To reduce commission expenses, LCCs generally try to raise the proportion of tickets sold directly (not via travel agencies). However, as the domestic travel market is highly dependent on travel agencies, the proportion of direct sales at Jeju Air is estimated at just 60% for domestic routes and 40% for international routes.

The company will likely make efforts to increase the proportion of direct sales over the long term. Direct sales for international routes are expected to rise in line with increased mobile ticket sales. In addition, the company should be able to reduce commissions by shifting to an incentive-based payment system for travel agencies.

Figure 27. Jeju Air’s cccommissioncommissionommissionssss expense trend

(Wbn) 3.0 Commission 2.6 2.5 2.2 2.3 2.1 2.0 1.6 1.5

1.0 0.7

0.5

0.0 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

Source: Company data, KDB Daewoo Securities Research

Figure 28. Jeju Air’s cccommissioncommissionommissionssss/ASK/ASK/ASK/ASK trendtrendtrend Figure 29. Jeju Air’s cccommissioncommissionommissionssss////rrrrevenueevenue trendtrendtrend

(W/km) Commissions/ASK (%) Commissions/revenue 1.6 1.5 2.0 1.9 1.8 1.4 1.4 1.8 1.7 1.4 1.3 1.6 1.5 1.2 1.4 1.1 1.4 1.0 1.2 0.8 1.0

0.6 0.8 0.6 0.5 0.4 0.3 0.4 0.2 0.2 0.0 0.0 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

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

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November 5, 2015 Jeju Air

3) Market share expansion

Jeju Air is able to offer low fares because of its low costs. In 2014, the company’s international passenger yield (revenue/RPK) was W64, 18-35% lower than the levels of full-service carriers (FSCs). The company’s strong competitiveness in fares has directly boosted market share. Its share of domestic routes has risen to 15% (from 8.5% in 2010), and it maintains a firm lead in the share of international routes (6%). In light of its fleet expansion plans (net increase of four planes in 2016), the company is expected to maintain its market leadership going forward.

Despite the low fares, Jeju Air achieves a higher OP margin (estimated at 10.5% in 2015) than FSCs. The OP margin level appears especially robust considering that the company secures its fleet under an operating lease, which bears high operating expenses. We believe Jeju Air will remain cost competitive going forward on the back of further route and fleet expansion.

Figure 30. International route passenger yyield:ield: FSCFSCssss vs. LCCLCCssss Figure 31. Domestic routerouteroute passenger yyield:ield: FSCFSCssss vs. LCCLCCssss

(W/km) Korean Air Asiana Airlines (W/km) Korean Air Asiana Airlines 110 Jin Air Jeju Air 220 Jin Air Jeju Air

100 200

90 180

80 160

70 140

60 120

50 100

40 80 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

2. Strong growth potential of ancillary revenue

Airlines’ ancillary revenue includes in-flight duty-free sales and mileage sales to credit card companies. LCCs also generate revenue from sales of pre-order in-flight meals and baggage surcharges. Some LCCs also generate revenue from preferred seat selection, adjacent seat purchase, baggage packaging, and airport lounge services.

Globally, airlines’ combined ancillary revenue has grown at a CAGR of 22% over the past five years to US$50bn. Mileage sales via credit card firms account for the lion’s share (31%), followed by baggage surcharges (22%) and sales of tour products (13%). While the proportion of ancillary revenue out of total revenue stands at 0.3-17.3% at FSCs, the proportion is 1.1-38.7% at LCCs. Spirit Airlines enjoys the largest revenue contribution (38.7%) from ancillary items.

Figure 323232.32 . AAAncillaryAncillary revenue as a % of total revenue (2014)

Allegiant AirAsia X AirAsia Group United Airways Frontier Virgin America Delta TAP Portugal WestJet Air Greenland Airlines Rex Regional Express % of total revenue (%) Garuda 0 5 10 15 20 25 30 35 40 45

Source: CARTRAWLER, IdeaWorksCompany, KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

Jeju Air generates ancillary service revenue from all stages of flight: pre-flight, departure, onboard, and arrival. In 1H15, ancillary service revenue—which tends to grow in tandem with passenger traffic—represented 6.9% of Jeju Air’s total revenue (cumulative), up from a mere 0.9% in 2010. Although the amount is small, at around W35bn per year, ancillary services are believed to be highly profitable, given their extremely low COGS (excluding a few arrival-related services). Looking ahead, ancillary services are likely to become a stable profit source for the airline as passenger traffic continues to grow

Figure 33. Jeju AirAir’’’’ss aaancillaryancillary revenue as a % of total revenue and when excludexcludinginginging cargo service

(%) 8 % of ancillary revenue % of ancillary revenue (excluding cargo service) 7 6.9

6 5.4 5 4.6

4 3.1 3.6 2.8 3 2.6 2 1.4 1.8 0.9 1.4 1 0.7 0 10 11 12 13 14 1H15

Source: Company data, KDB Daewoo Securities Research

3. Strong financial position

Jeju Air posted a debt-to-equity ratio of 194.4% for 1H15. Most of its debts are non-interest- bearing liabilities such as provisioning for aircraft repair/maintenance (W42.2bn); borrowings are very small, at W8.3bn, with interest expenses almost negligible. The low debt ratio is attributable to the firm’s aircraft operating lease (instead of capital lease). As of end-2Q15, the firm was slated to pay W302.7bn in operating lease payments. Even after making those payments, the firm is anticipated to deliver a stable year-end debt-to-equity ratio of 169%, thanks to robust earnings and an increase in capital.

Korean airlines tend to have weak financial positions and thus unstable bottom lines (due to F/X translation gains/losses and interest expenses). Weak financials are not a concern when the industry is in an up-cycle, but once operating profits begin to decline, liquidity risk picks up rapidly. Jeju Air’s strong financial position makes it relatively immune to such risks.

Over the long term, as its fleet grows to over 20 aircraft (meaning greater negotiating power), Jeju Air will able to finance its aircraft with capital leases. Capital leases are cheaper than operating leases, but a firm must have a stable financial position to enter into a capital lease agreement. Strong financials—a prerequisite to capital lease agreements—help reduce interest expenses and strengthen cash generation capabilities.

Figure 34. DDDebtDebt ratioratioss of Korean airlines

(%) 1,000 Korean Air 900 Asiana Airlines Jeju Air 800 Jin Air 700 600 500 400 300 200 100 0 10 11 12 13 14 1H15

Source: KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

IV. Earnings outlook

Revenue to show a CAGR of 18.4% over the next three years

We expect Jeju Air’s revenue to expand 66.0% over the three-year period between 2015 and 2018, assuming four new aircraft are added to the fleet each year. Revenue growth will likely peak in 2017 (W872.5bn), and then start to slow (W1.25tr in 2020F).

Operating profit is also projected to pick up sharply, rising from W58bn in 2015 to W87.7bn in 2017 and W104.9bn in 2018. OP margin is forecast to improve from 5.8% in 2014 to 9.6% in 2015 and 10.5% in 2018, and then stabilize at around 10%. To be sure, various factors will affect the firm’s bottom line, including oil prices and F/X rates. KDB Daewoo Securities projects the Dubai oil price to average US$54/bbl this year, US$55/bbl in 2016, and US$65/bbl in 2017, and forecasts the US$/W rate to average 1,139 in 2015, 1,220 in 2016, and 1,200 in 2017.

Table 666.6. AAAnnualAnnual earnings (Wbn, %) 201020102010 201120112011 201220122012 201320132013 201420142014 2015F2015F2015F 2016F2016F2016F 2017F2017F2017F RRReReeevenuevenue 158158158 258258258 341341341 434434434 511511511 601601601 736736736 873873873 -Domestic 84 118 143 160 186 206 261 318 -International 72 136 188 259 302 356 425 501 -Other 1 4 10 15 23 39 49 54 SG&A 26 33 39 44 58 66 80 93 Operating profit ---6 -666 141414 222 171717 303030 585858 747474 888888 Pretax profit -11 17 5 20 32 68 82 94 Net profit ---11 -111111 171717 555 202020 323232 616161 626262 717171 OP margin -3.9 5.4 0.6 3.9 5.8 9.6 10.0 10.1 Pretax margin -7.1 6.5 1.5 4.5 6.3 11.4 11.1 10.8 Net margin -7.1 6.5 1.5 4.5 6.3 10.1 8.4 8.2 International RPK (%) 232.6 82.5 59.8 44.3 25.3 26.2 22.6 15.4 International ASK (%) 202.1 76.3 62.7 40.4 22.9 27.7 22.5 15.0 International L/F (%) 77.6 80.3 78.9 81.1 82.7 81.7 81.8 82.0 International yield (%) -3.5 4.5 -12.6 -5.9 -6.8 0.0 0.0 2.0 Domestic RPK (%) 26.5 29.4 16.1 9.1 18.2 24.5 28.4 18.4 Domestic ASK (%) 12.5 25.2 16.0 8.7 15.9 26.5 28.0 18.0 Domestic L/F (%) 86.5 89.5 89.6 89.9 91.8 90.4 90.7 90.9 Domestic yield (%) -1.1 7.8 4.8 2.4 -1.8 -10.9 -1.5 3.0 Dubai oil ($/bbl) 78 106 109 105 97 54 55 65 Jet fuel price 90 126 127 123 113 68 67 78 US$/W rate 1,156 1,108 1,127 1,095 1,053 1,139 1,220 1,200 Source: KDB Daewoo Securities Research estimates

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3Q15 preview: Lingering MERS impact and increased maintenance costs to affect OP

In 3Q15, we estimate that Jeju Air’s revenue expanded just 9.7% YoY to W157.5bn. International passenger RPK growth is forecast to have slowed to 20.9% YoY, vs. 33.1% YoY in 2Q15, and load factor for the quarter is projected at 84% (vs. 87% in 3Q14). Due to the continued impact of MERS as well as falling yields (resulting from a drop in fuel surcharges), indicators are unlikely to be as robust as they were in previous strong seasons.

We forecast 3Q operating profit to inch down to W16.5bn (vs. W16.7bn in 3Q14), weighed by increased heavy maintenance costs due to the return of leased aircraft. OP margin is thought to have deteriorated to 10.5%, vs. 11.6% in 3Q14.

In 4Q15, we expect revenue to grow 18% YoY and operating profit to return to positive growth (+9.9% YoY to W10.8bn). Although operating profit is likely to fall on a QoQ basis in 4Q, YoY growth should enter an upswing due to 1) the diminishing impact of MERS and 2) the slowing decline in yield.

Table 777.7. 3Q153Q15FFFF preview (Wbn, %) 3Q15F Growth 3Q143Q143Q14 2Q152Q152Q15 KDB Daewoo Consensus YoYYoYYoY QoQQoQQoQ Revenue 144 142 158 176 9.7 10.6 Operating profit 17 9 17 29 -1.0 82.0 OP margin 11.6 6.4 10.5 16.5 -1.1 4.1 Pretax profit 17 14 20 32 16.8 39.7 Net profit 17 11 17 25 -0.7 49.5 Notes: Based on consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates

Table 888.8. Quarterly and annual earnings (Wbn, %) 1Q141Q141Q14 2Q142Q142Q14 3Q143Q143Q14 4Q144Q144Q14 1Q151Q151Q15 2Q152Q152Q15 3Q15F 4Q15F 201420142014 2015F2015F2015F 2016F2016F2016F RRReReeevenuevenue 119119119 116116116 144144144 133133133 144144144 142142142 158158158 156.5156.5156.5 511511511 601601601 736736736 -Domestic 36 45 55 49 42 51 595959 54 186 206 261 -International 79 66 81 77 93 83 898989 91 302 356 425 -Other 5 6 7 7 8 9 999 12 23 39 49 SG&A 12 15 15 16 18 15 171717 17 58 66 80 Operating profit 555 ---1-111 171717 101010 222222 999 171717 10.810.810.8 303030 585858 747474 Pretax profit 7 -2 17 9 21 14 202020 14 32 68 82 Net profit 777 ---2-222 171717 999 212121 111111 171717 111111 323232 616161 626262 OP margin 4.6 -1.2 11.6 7.4 15.0 6.4 10.510.510.5 6.9 5.8 9.6 10.0 Pretax margin 5.6 -1.7 11.8 7.1 14.6 9.9 12.512.512.5 8.6 6.3 11.4 11.1 Net margin 5.6 -1.7 11.8 7.1 14.6 7.9 10.710.710.7 7.3 6.3 10.1 8.4 International RPK (%) 25.6 37.2 17.5 23.5 25.2 35.4 20.520.520.5 24.3 25.3 26.2 22.6 International ASK (%) 28.3 34.2 16.0 15.6 20.8 38.3 24.824.824.8 27.3 22.9 27.7 22.5 International L/F (%) 81.9 80.7 85.1 82.9 84.9 79.0 82.182.182.1 81.0 82.7 81.7 81.8 International yield (%) -8.0 -11.9 -7.9 1.4 -5.0 -7.0 ---9.0-9.09.09.0 -5.0 -6.8 0.0 0.0 Domestic RPK (%) 8.3 4.0 22.1 39.4 32.5 26.7 22.022.022.0 19.3 18.2 24.5 28.4 Domestic ASK (%) 0.8 6.5 22.3 33.3 35.4 25.1 24.324.324.3 23.2 15.9 26.5 28.0 Domestic L/F (%) 92.9 91.3 92.7 90.5 90.9 92.4 91.091.091.0 87.6 91.8 90.4 90.7 Domestic yield (%) -0.2 -3.2 -2.0 -1.8 -11.6 -11.2 ---12.5-12.512.512.5 -8.3 -1.8 -10.9 -1.5 Dubai oil ($/bbl) 104 106 101 75 53 61 505050 53 97 54 55 Jet fuel price 121 121 119 91 68 76 626262 65 113 68 67 US$/W rate 1,070 1,029 1,027 1,087 1,100 1,097 1,1701,1701,170 1,190 1,053 1,139 1,220 Source: KDB Daewoo Securities Research estimates

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V. Risks

1. Possibility of intensifying competition

One of the major risks facing Jeju Air is the possibility of intensifying competition. This year, based on the cumulative number of passengers as of end-September, the company has a 10.6% share of the overall travel market, with Jin Air and having shares of 7.6% and 7.4%, respectively. With Asiana Airlines recently filing for government approval to launch a new LCC (Air ), we anticipate the number of domestic LCCs to rise to six airlines.

Despite concerns over competition, however, the company’s market share expansion has been robust. Although Jin Air is quickly catching up with Jeju Air in terms of domestic flights, Jeju Air’s market share in international flights stands at an impressive 6.1%.

In light of the market’s recent growth and examples from advanced overseas markets, we not anticipate the emergence of new LCCs to seriously intensify competition over the long term. In the US, for example, existing players’ earnings continued to improve even after the emergence of ULCCs.

Figure 35. KoreaKoreannnn LLLCCLCCCCCC M/SM/SM/S ononon dddomesticdomestic routeroutessss Figure 36. KoreaKoreannnn LCCLCCLCC traffic on domestic routes

(%) ('000 passengers) 18 Air Busan 900 Air Busan Eastar Jet Eastar Jet 800 16 Jeju Air Jeju Air Jin Air Jin Air 700 T'way 14 T'way 600

12 500

10 400 300 8 200 6 100

4 0 1/10 1/11 1/12 1/13 1/14 1/15 1/10 1/11 1/12 1/13 1/14 1/15

Source: IIA, KAC, KDB Daewoo Securities Research Source: IIA, KAC, KDB Daewoo Securities Research

Figure 38. KoreaKorean nnn LCCLCCLCC traffic on shortshortshort- short ---haulhaulhaulhaul International Figure 37. KoreaKoreannnn LCCLCCLCC M/S on shortshortshort-short ---haulhaulhaulhaul International routeroutessss routerouteroutesroute sss

(%) ('000 passengers)) 8.0 Air Busan 300 Air Busan 천 Eastar Jet Eastar Jet 270 7.0 Jeju Air Jeju Air Jin Air 240 Jin Air 6.0 T'way T'way 210 5.0 180

4.0 150 120 3.0 90 2.0 60 1.0 30 0.0 0 1/10 1/11 1/12 1/13 1/14 1/15 1/10 1/11 1/12 1/13 1/14 1/15

Source: IIA, KAC, KDB Daewoo Securities Research Source: IIA, KAC, KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

Spirit Airlines, a major ULCC, is anticipated to see its operating profit increase at a CAGR of 42.2% from 2013 to 2015, with OP margin expected to reach 22.4% in 2015. In spite of that, existing LCCs’ growth and profitability have remained intact. In particular, Southwest and JetBlue will likely see their operating profits grow at CAGRs of 67.8% and 49.7%, respectively, aided by the easing of route regulations. The market’s expansion has allowed LCCs to continue delivering earnings growth despite the emergence of ULCCs.

Figure 39. SouthwestSouthwest:: Revenue vs. OPOPOP margin Figure 40. Spirit AirlinesAirlines:::: Revenue vs. OP margin

(US$mn) (%) (US$ mn) (%) 20,000 Revenue (L) 25 7,000 Revenue (L) 20 OP margin (R) 19,500 OP margin (R) 18 6,000 19,000 20 16 5,000 14 18,500 15 12 18,000 4,000 10 17,500 3,000 10 8 17,000 2,000 6 16,500 5 4 1,000 16,000 2 15,500 0 0 0 12 13 14 15F 12 13 14 15F

Source: Bloomberg, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

2. F/X and fuel costs

1) Fuel costs: Oil prices to stabilize at low levels

Fuel expenses are difficult to cut, as all LCCs use similar aircraft and jet fuel prices fluctuate in real time. Of note, fuel costs account for a higher percentage of total costs at LCCs than at FSCs, meaning LCCs display higher earnings sensitivity to oil prices.

Assuming Jeju Air consumes 1.85mn bbls of jet fuel in 2015, a US$1 rise in the price of jet fuel will drive up operating expenses by US$1.85mn (W2.1bn, based on the 2015 average US$/W rate assumption of 1,139), or 3.6% of the company’s 2015F operating profit (excluding the effect of fuel surcharges). In 2016, we forecast the average jet fuel price to fall by 1.1% YoY to US$67. However, fuel expenses will likely expand by W42.3bn, as fuel consumption should increase YoY to 2.29mn bbls.

We do not believe that oil prices will rise sharply in the long term. We expect the average WTI crude price to climb 7.8% from US$51/bbl in 2015 to US$55/bbl in 2016. Oil prices are likely to stabilize at low levels, which will be favorable to LCCs.

2) F/X

For airlines, won weakness typically drives down operating profit and F/X translation gains due to 1) US dollar-denominated expenses (which are higher than US dollar-denominated revenue) and 2) massive US dollar-denominated debt arising from aircraft leases.

Jeju Air is no exception. The company has a net operating liability of US$180mn in terms of the US dollar, meaning a rise of W10 in the US$/W rate drive down annual operating profit by W1.8bn.

However, the impact of the US$/W rate on the company’s F/X translation gains/losses is minimal. In addition, given that the company was in a net asset position in terms of the US dollar (W56bn in assets vs. W12bn in liabilities) as of end-1H15, a W5% rise in the US$/W rate (won weakness) would lead to F/X translation gains of W2bn.

Figure 41. Jet fuel price trend FigurFigurFigureFigur e 42. US$/W rate trend

(US$/bbl) (US$/W) 140 Jet fuel 1,250 F/X rate 1,225 128 130 123 124 1,235 121 1,215 120 119 1,200 121 1,205 1,170 110 116 1,190 100 1,150 1,122 90 91 1,112 76 1,100 80 1,100 1,097 70 67 1,084 1,070 1,087 68 67 68 60 65 66 1,050 1,062 62 50 1,029 1,027 40 1,000 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16F 3Q16F 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16F 3Q16F

Source: Bloomberg, KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

Table 999.9. SSSensitivitySensitivity to ato a W10 change in the US$/W rate Jeju Air Net operating liability US$bn 0.2 Operating profit Wbn 1.8 Foreign currency liabilities US$bn -0.03 Pretax profit Wbn 1.5 Net profit Wbn 1.3 Source: KDB Daewoo Securities Research

Table 101010.10 . SSSensitivitySensitivity to a US$1 change in the price of jet fuel Jeju Air Oil consumption mn bbl 1.9 Operating profit US$mn 1.9 F/X rate US$/W 1,200 Pretax profit Wbn 2.2 Net profit Wbn 1.8 Source: KDB Daewoo Securities Research

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November 5, 2015 Jeju Air

Jeju Air (089590 KS/Buy/TP: W45,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 511511511 601601601 736736736 873873873 Current Assets 178178178 405405405 460460460 515515515 Cost of Sales 423423423 476476476 582582582 692692692 Cash and Cash Equivalents 78 286 311 338 Gross Profit 888888 125125125 154154154 181181181 AR & Other Receivables 17 20 25 29 SG&A Expenses 585858 666666 808080 939393 Inventories 5 6 8 9 Operating Profit (Adj) 303030 585858 747474 888888 Other Current Assets 78 93 116 139 Operating Profit 303030 585858 747474 888888 NonNonNon-Non ---CurrentCurrent Assets 868686 130130130 192192192 260260260 NonNonNon-Non ---OperatingOperating Profit 222 101010 888 666 Investments in Associates 0 0 0 0 Net Financial Income 4 4 6 6 Property, Plant and Equipment 32 57 121 190 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 8 7 6 4 Pretax Profit 32 68 82 94 Total Assets 264264264 535535535 652652652 775775775 Income Tax 0 8 20 23 Current Liabilities 136136136 169169169 209209209 248248248 Profit from Continuing Operations 32 61 62 71 AP & Other Payables 38 45 56 67 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 3 12 13 14 Net Profit 32 61 62 71 Other Current Liabilities 95 112 140 167 Controlling Interests 32 61 62 71 NonNonNon-Non ---CurrentCurrent Liabilities 484848 565656 717171 848484 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 313131 616161 626262 717171 Other Non-Current Liabilities 48 56 71 84 Controlling Interests 31 61 62 71 Total Liabilities 184184184 225225225 280280280 332332332 Non-Controlling Interests 0 0 0 0 Controlling Interests 808080 310310310 372372372 443443443 EBITDA 38 66 92 119 Capital Stock 110 140 140 140 FCF (Free Cash Flow) 56 37 31 34 Capital Surplus 0 139 139 139 EBITDA Margin (%) 7.4 11.0 12.5 13.6 Retained Earnings -30 31 93 164 Operating Profit Margin (%) 5.9 9.7 10.1 10.1 NonNonNon-Non ---ControllingControlling Interests 000 000 000 000 Net Profit Margin (%) 6.3 10.1 8.4 8.1 Stockholders' Equity 808080 310310310 372372372 443443443

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities 60 69 111 134 P/E (x) - - - - Net Profit 32 61 62 71 P/CF (x) - - - - Non-Cash Income and Expense 11 11 30 48 P/B (x) - - - - Depreciation 7 6 16 30 EV/EBITDA (x) - - - - Amortization 2 2 2 1 EPS (W) 1,454 2,339 2,391 2,755 Others 2 3 12 17 CFPS (W) 1,932 2,762 3,546 4,612 Chg in Working Capital 15 -2 33 31 BPS (W) 3,639 11,961 14,352 17,107 Chg in AR & Other Receivables 4 -7 -5 -5 DPS (W) 0 0 0 0 Chg in Inventories -1 -1 -2 -1 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 9 0 0 0 Dividend Yield (%) - - - - Income Tax Paid 000 ---5-555 ---20-202020 ---23-232323 Revenue Growth (%) 17.7 17.6 22.5 18.6 Cash Flows from Inv Activities -5 -42 -88 -108 EBITDA Growth (%) 52.0 73.7 39.4 29.3 Chg in PP&E -4 -32 -80 -100 Operating Profit Growth (%) 76.5 93.3 27.6 18.9 Chg in Intangible Assets -2 0 0 0 EPS Growth (%) 62.8 60.9 2.2 15.2 Chg in Financial Assets 6 -5 -9 -8 Accounts Receivable Turnover (x) 37.2 34.8 34.9 33.9 Others ---5 -555 ---5-555 111 000 Inventory Turnover (x) 114.2 108.4 108.8 105.8 Cash Flows from Fin Activities 0 181 1 1 Accounts Payable Turnover (x) 55,353.7 28,574.7 28,627.2 27,888.7 Chg in Financial Liabilities 3 9 1 1 ROA (%) 14.4 15.2 10.4 10.0 Chg in Equity 0 168 0 0 ROE (%) 49.6 31.1 18.2 17.5 Dividends Paid 0 0 0 0 ROIC (%) 115.3 133.5 75.3 54.8 Others ---3 -333 444 000 000 Liability to Equity Ratio (%) 229.2 72.6 75.3 75.0 Increase (Decrease) in Cash 57 209 25 27 Current Ratio (%) 131.0 240.0 219.5 207.6 Beginning Balance 21 78 286 311 Net Debt to Equity Ratio (%) -129.5 -99.7 -91.9 -84.8 Ending Balance 787878 286286286 311311311 338338338 Interest Coverage Ratio (x) 0.0 2,447.3 1,838.0 Source: Company data, KDB Daewoo Securities Research estimates

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November 5, 2015 Jeju Air

APPENDIX 1

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

Company (Code) DateDateDate RatingRatingRating Target Price (W) Jeju Air(089590) 11/05/2015 Buy 45,000 Jeju Air 49,000

48,000

47,000

46,000 45,000 44,000

43,000 Nov 13 Nov 14 Nov 15

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ─), Target price ( ▬), Not covered ( ■), Buy ( ▲), Trading Buy ( ■), Hold ( ●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

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

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

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

Disclaimers This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the . If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment

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November 5, 2015 Jeju Air

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Beijing Representative Office Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers Room 38T31, 38F SWFC Suite 2103, Saigon Trade Center B-12 Jianguomenwai Avenue 100 Century Avenue 37 Ton Duc Thang St,

Chaoyang District, Beijing 100022 Pudong New Area, Shanghai 200120 Dist. 1, , China China Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000 Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLC PT. Daewoo Securities Indonesia 2401B, 24th Floor, East Tower, Twin Towers #406, Blue Sky Tower, Peace Avenue 17 Equity Tower Building Lt.50 B-12 Jianguomenwai Avenue, 1 Khoroo, Sukhbaatar District Sudirman Central Business District Jl.

Chaoyang District, Beijing 100022 14240 Jendral Sudirman Kav. 52-53, Jakarta Selatan China Mongolia Indonesia 12190 Tel: 86-10-6567-9699 Tel: 976-7011-0807 Tel: 62-21-515-1140

KDB Daewoo Securities Research 24