Morning Focus

September 4, 2017

KOREA Morning Focus

Company News & Analysis Major Indices Close Chg Chg (%) Lotte Chemical (011170/Buy/TP: W600,000) KOSPI 2,357.69 -5.50 -0.23 Poised for a re-rating KOSPI 200 307.78 -0.50 -0.16 KOSDAQ 661.99 4.16 0.63 NCsoft (036570/Buy/TP: W600,000) IP competitiveness to drive both mobile and royalty revenues Turnover ('000 shares, Wbn) Volume Value KOSPI 277,015 4,669 Sector News & Analysis KOSPI 200 74,974 3,732 KOSDAQ 555,443 2,893 Auto (Neutral) August shipments: Weak production and inventory adjustments continue Market Cap (Wbn) Value Auto (Neutral) KOSPI 1,532,592 August US sales review - Sales remain weak; HMC's woes intensify KOSDAQ 225,244

KOSPI Turnover (Wbn) Buy Sell Net Foreign 1,471 1,395 76 Institutional 957 1,175 -218 Retail 2,175 2,071 104

KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 242 215 27 Institutional 114 124 -10 Retail 2,539 2,548 -8

Program Buy / Sell (Wbn) Buy Sell Net KOSPI 979 1,202 -224 KOSDAQ 90 99 -9

Advances & Declines Advances Declines Unchanged KOSPI 405 401 64 KOSDAQ 673 441 101

KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 2,324,000 8,000 431 KODEX LEVERAGE 15,755 -30 190 LG Electronics 83,600 2,100 160 Hynix 68,700 100 157 KODEX 200 30,810 0 124

KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value SillaJen 26,500 1,550 131 Posco Chemtech 33,150 150 74 Agabang 6,630 1,000 68 Celltrion 114,200 -900 56 GNI 10,400 1,790 40 Note: As of September 1, 2017

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.

Lotte Chemical

(011170 KS) Poised for a re-rating

Chemicals Earnings growth to gain further momentum in 2H17; Reiterate as our top pick Company Update September 4, 2017 Retain TP of W600,000: We maintain our Buy rating and target price of W600,000 on Lotte Chemical and continue to recommend the stock as our top pick in chemicals. After falling on ethane cracker concerns, the stock has been rebounding after June, driven by improving product spreads (MEG, etc.) in August and the resilience of the PE cycle despite the operation of several ethane crackers. (Maintain) Buy Poised for a re-rating: Even after the recent strong run, Lotte Chemical’s stock Target Price(12M, W) 600,000 remains deeply undervalued, currently trading at a P/E of 5.7x. We believe this is because worries over a cyclical downturn remain, as the ethane crackers due for Share Price (09/01/17, W) 403,000 operation in 2H17 have not entirely come online. We also think there are some concerns over the stock’s strong absolute returns. However, it should be noted that Expected Return 49% two of the three ethane crackers scheduled for operation in 2H17 are in premarketing, meaning their impact on supply/demand is already playing out. We hence see limited risks of a sharp downturn in the PE cycle. In addition, we do not view the recent stock OP (17F, Wbn) 3,019 rally as excessive, given that EPS is improving much faster than share prices. If the PE Consensus OP (17F, Wbn) 2,803 cycle remains robust further into 2H17, we expect Lotte Chemical to see a meaningful re-rating (valuation recovery). EPS Growth (17F, %) 32.7 Market EPS Growth (17F, %) 43.7 Earnings growth to gain further momentum: With supply/demand already tight, P/E (17F, x) 5.7 large US production disruptions caused by Hurricane Harvey are fueling rapid spread Market P/E (17F, x) 9.8 expansions in key products. Given that the impacted facilities are expected to return to KOSPI 2,357.69 normal after October, earnings look likely to improve faster than previously anticipated in 3Q-4Q17. While this is only a short-term issue, the company’s strong Market Cap (Wbn) 13,813 earnings power and cheap valuation should provide further positive momentum to Shares Outstanding (mn) 34 share prices. Free Float (%) 46.5 Foreign Ownership (%) 30.6 Limited ethane cracker impact; Harvey triggers sharp spread expansion Beta (12M) 0.82 Robust PE/MEG spreads: Of the three ethane crackers scheduled to come online in 52-Week Low 269,000 2H17, Dow Chemical’s and ExxonMobil’s PE plants have already begun premarketing, 52-Week High 407,000 while Chevron’s is also having some impact on supply/demand. Nevertheless, the PE cycle remains robust, and we expect improvements after 2H17, given limited supply (%) 1M 6M 12M pressures through 2020. Spreads of non-ethylene products, such as MEG and Absolute 5.9 10.6 47.3 butadiene, are also picking up, and we see these product cycles improving in the next Relative 8.8 -1.9 27.0 two to three years.

160 Lotte Chemical KOSPI 3Q-4Q17 OP to top consensus: We forecast Lotte Chemical’s 3Q17 operating profit at 140 W787.7bn, above the current consensus (W700bn). After contracting in July, PE spreads have been widening again since mid-August, pointing to sharp earnings growth in 120 September. In the near term, production disruptions triggered by Hurricane Harvey 100 are likely to push up spreads further through October. Hence, we are also raising our

80 4Q17 operating profit estimate to W784.4bn. 8.16 12.16 4.17 8.17

Mirae Asset Daewoo Co., Ltd.

[ Oil Refining/Chemicals/Renewables] FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Revenue (Wbn) 14,859 11,713 13,224 15,928 16,325 17,513 Yeon-ju Park +822-3774-1755 OP (Wbn) 351 1,611 2,544 3,019 3,236 3,521 [email protected] OP margin (%) 2.4 13.8 19.2 19.0 19.8 20.1

Minkyung Kim NP (Wbn) 147 993 1,836 2,437 2,664 2,914 +822-3774-1732 EPS (W) 4,285 28,957 53,561 71,088 77,722 85,020 [email protected] ROE (%) 2.3 14.2 21.7 23.3 20.7 18.8

P/E (x) 37.3 8.4 6.9 5.7 5.2 4.7 P/B (x) 0.9 1.1 1.4 1.2 1.0 0.8 Dividend yield (%) 0.6 1.0 1.1 1.0 1.0 1.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

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

September 4, 2017 Lotte Chemical

Table 1. Quarterly and annual earnings (Wbn) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17F 4Q17F 2016 2017F 2018F Revenue Total 2,684.5 3,441.1 3,426.6 3,671.4 3,996.0 3,853.3 4,063.4 4,014.9 13,223.6 15,927.6 16,324.9 Olefins 1,456.4 1,583.2 1,559.6 1,894.9 1,934.0 1,931.2 1,965.9 1,965.9 6,494.1 7,797.0 7,694.5 Aromatics 465.2 435.6 478.2 577.9 724.2 750.7 767.8 709.1 1,956.9 2,951.9 2,969.0 Titan 558.7 580.1 556.1 590.3 495.8 457.0 572.5 581.0 2,285.2 2,106.4 2,355.8 Advanced 653.0 650.8 646.9 705.0 709.6 757.1 758.9 1,950.7 2,930.6 3,305.6 Operating profit Totalmaterials 473.6 693.9 643.2 733.5 814.8 632.2 787.7 784.4 2,544.3 3,019.2 3,235.8 Olefins 372.9 436.2 423.2 479.3 595.1 398.4 481.7 457.5 1,711.6 1,932.8 1,914.3 Aromatics 10.8 48.7 25.8 56.7 102.4 113.7 133.1 119.6 142.0 468.7 479.4 Titan 89.8 152.5 125.6 144.7 69.2 52.7 74.5 116.2 512.6 312.6 412.4 Advanced 88.6 82.9 68.2 70.6 78.3 98.4 91.1 239.7 338.4 429.7 Pretax profit materials 458.6 657.0 609.1 762.7 863.8 686.3 843.6 842.7 2,487.4 3,236.4 3,506.6 Net profit 346.2 459.7 450.9 579.0 640.2 515.3 640.9 640.2 1,835.8 2,436.6 2,663.9 Source: Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research

NCsoft

(036570 KS) IP competitiveness to drive both mobile and royalty revenues Game Watch for potential royalty revenue growth Company Update While Lineage M remains a key determinant of NCsoft’s earnings, royalty revenue is another important driver of the company’s margins. Royalties from licensing September 4, 2017 intellectual property (IP) are a highly profitable source of income because of their expense-free nature. Indeed, NCsoft’s OP margin has generally mirrored its royalty

revenue.

(Maintain) Buy Up until 2016, publishing royalties from Tencent for the PC online game Blade & Soul (B&S) made up a big portion of NCsoft’s royalty revenue. This year, the performance of Netmarble Games’ Lineage II: Revolution (L2R) has emerged as a key driver of royalty Target Price(12M, W) 600,000 revenue. Netmarble Games released L2R in Southeast Asia in June and in Japan in August, and is planning additional launches in North America/Europe and China Share Price (09/01/17, W) 396,000 during 4Q17. Netmarble Games’ upcoming mobile title based on B&S IP is also expected to contribute to NCsoft’s royalty revenue. Expected Return 52% Given increasing competition in the mobile game market, we expect demand for popular IPs to continue, as games using well-known IPs offer advantages in terms of OP (17F, Wbn) 760 promotion and user attraction. We believe the recognition of the Lineage IP among local users was one factor behind the positive performance of L2R overseas. Consensus OP (17F, Wbn) 575

EPS Growth (17F, %) 103.4 Lineage M metrics improving again; PC titles also remain steady Market EPS Growth (17F, %) 43.8 Lineage M: We believe Lineage M’’s weekly metrics rose again in August. NCsoft P/E (17F, x) 15.7 actively takes advantage of the “early-month effect,” which refers to the tendency of Market P/E (17F, x) 9.8 revenue to increase after the first day of the month, when mobile payment limits are th KOSPI 2,357.69 refreshed. NCsoft is currently holding a sales event (“Pandora’s Box”) from August 30 to September 6th. The latest event, which enables users to win bonus rewards by Market Cap (Wbn) 8,688 chance, should positively contribute to item sales. Shares Outstanding (mn) 22 Forthcoming Lineage M events include the introduction of player-to-player (P2P) Free Float (%) 84.9 trading and content updates (“castle sieges”). As for the title’s overseas rollout, we Foreign Ownership (%) 39.0 expect a similar pattern to L2R, with an initial release in Taiwan, followed by Japan and Beta (12M) 0.14 China. 52-Week Low 218,000 52-Week High 416,000 PC online games: The internet café playtime of NCsoft’s major titles, including Lineage, has remained steady QoQ in 3Q17. The recent popularity of Bluehole’s (%) 1M 6M 12M PlayerUnknown’s Battlegrounds has caused some notable shifts in the internet café Absolute 8.0 44.5 44.3 game rankings, but NCsoft’s Lineage has seen only a minimal impact. We believe the Relative 11.0 28.2 24.4 release of Lineage M actually had a bigger impact on the PC game. As for Guild Wars 2, the planned release of an expansion pack in North America/Europe this fall is likely to 170 NCSOFT KOSPI lift earnings in 2H17. 150

130 Reaffirm Buy and TP of W600,000; Earnings growth plus inexpensive

110 valuation

90 We reaffirm our Buy call on NCsoft with a target price of W600,000. We expect a record

70 quarter in 3Q17 and see earnings growth continuing in 2018 on the back of new 8.16 12.16 4.17 8.17 releases (B&S Mobile) and stronger royalty revenue. And at a 2017F P/E of 15x, the stock is trading at a steep discount to global peers (average P/E of 26x). Mirae Asset Daewoo Co., Ltd.

[ Internet/Game/Advertising] FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Revenue (Wbn) 839 838 984 1,991 2,313 2,345 Jee-hyun Moon +822-3774-1640 OP (Wbn) 278 237 329 760 865 869 [email protected] OP margin (%) 33.1 28.3 33.4 38.2 37.4 37.1

NP (Wbn) 230 165 272 554 630 633 EPS (W) 10,486 7,542 12,416 25,256 28,712 28,843 ROE (%) 18.4 10.6 14.9 24.5 21.9 18.9

P/E (x) 17.4 28.2 19.9 15.7 13.8 13.7 P/B (x) 2.7 2.6 2.7 3.1 2.7 2.3 Dividend yield (%) 1.9 1.3 1.5 1.8 2.0 2.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates

September 4, 2017 NCsoft

Earnings trend and forecasts

Table 1. Quarterly and annual earnings trend and forecasts (Wbn, %) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17F 4Q17F 2015 2016 2017F Revenue 241 241 218 285 240 259 817 676 838 984 1,991 Lineage 79 94 84 118 51 34 35 48 313 375 169 Lineage II 17 19 21 20 18 17 18 20 63 77 73 Aion: Upheaval 20 18 16 18 13 11 12 14 74 72 50 Blade & Soul 54 49 40 39 45 39 41 43 114 182 168 Guild Wars 2 31 16 15 15 14 14 18 32 101 77 77 Mobile games 0 0 0 19 23 94 639 459 0 20 1,215 Other games 11 18 17 13 11 15 16 15 76 58 56 Royalties 29 27 24 42 64 36 38 45 99 122 183 Operating profit 76 86 65 102 30 38 398 294 237 329 760 OP margin 31.5 35.8 29.9 35.7 12.7 14.5 48.8 43.4 28.3 33.4 38.2 Net profit 66 90 48 67 17 31 291 214 166 271 553 Net margin 27.5 37.6 22.0 23.5 7.3 11.9 35.6 31.6 19.8 27.6 27.8 YoY Revenue 28.0 10.6 11.2 20.1 -0.6 7.5 275.5 137.7 -0.1 17.3 102.5 Lineage 19.5 10.5 7.1 42.4 -34.8 -64.2 -57.6 -59.3 18.9 20.0 -55.0 Lineage II 55.1 17.1 31.8 1.7 7.7 -12.6 -12.6 -1.0 5.8 22.5 -5.0 Aion: Upheaval 10.2 -12.4 -4.2 -3.6 -33.9 -38.5 -25.9 -21.0 -21.9 -2.7 -30.0 Blade & Soul 101.8 64.1 60.8 21.5 -17.5 -20.2 2.2 9.8 37.7 60.1 -8.0 Guild Wars 2 52.6 -29.3 -26.0 -60.2 -53.4 -14.7 15.0 115.3 17.4 -23.8 1.0 Mobile games 51,113.1 128,471.4 2,304.8 6,047.2 Other games -47.0 -22.1 3.3 -20.0 -1.5 -14.9 -8.3 14.5 13.0 -22.8 -3.9 Royalties 14.7 28.7 5.5 42.5 116.1 33.8 58.0 7.6 -27.9 23.7 49.5 Operating profit 68.9 28.4 28.7 35.8 -59.8 -56.4 511.8 188.6 -14.6 38.5 131.1 Net profit 86.1 56.3 56.3 58.1 -73.7 -65.9 507.8 220.4 -26.9 63.1 103.9 Notes: All figures are based on consolidated K-IFRS; net profit is attributable to controlling and non-controlling interests; Lineage M was released on June 21, 2017 and is included in mobile games; for Lineage M, we assumed daily average revenue of W7bn for 3Q17 and W5bn for 4Q17; royalties from outside developers using the company’s IP (e.g., Netmarble Games’ Lineage II: Revolution) are included in royalty revenue Source: Company data, Mirae Asset Daewoo Research estimates

Table 2. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Note 17F 18F 17F 18F 17F 18F Revenue 1,977 2,280 1,991 2,313 0.7 1.4 - Revised up royalty revenue estimate Operating profit 755 836 760 865 0.7 3.5 - Revised labor/marketing expense estimates Net profit 550 608 553 629 0.6 3.5 EPS 25,079 27,759 25,256 28,712 0.7 3.4 OP margin 38.2 36.7 38.2 37.4 Net margin 27.8 26.7 27.8 27.2 Notes: All figures are based on consolidated K-IFRS; net profit is attributable to controlling and non-controlling interests; EPS is based on net profit attributable to controlling interests Source: Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 2 September 4, 2017 NCsoft

Valuation

Table 3. 12-month target price calculation (Wbn, x, W) Category Value Notes Operating value (1) 14,214

2017F net profit attributable Applied

to controlling interests multiple Based on average 12-month forward Consolidated 592 24.0 14,214 P/E of peers Total shares issued, including 688,583 No. of shares (‘000) 21,939 treasury shares Target price 600,000 Rounded Note: Peer group includes Activision Blizzard and NetEase Source: Bloomberg, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 3

Auto Neutral (Maintain)

August shipments: Weak production and inventory adjustments continue  Domestic sales remain strong, led by new models Issue Comment  HMC/Kia’s overseas production remains weak; HMC’s exports hit hard by inventory September 4, 2017 adjustment  Persistent weakness in core markets points to limited prospects of recovery in 3Q17

Mirae Asset Daewoo Co., Ltd. 1. Domestic sales remain strong, led by new models [Auto/Tire] In August, domestic sales of the five major automakers increased 12.2% YoY. Growth Young-ho Park continued to be driven by new models and SUVs. By automaker, Hyundai Motor (HMC), Kia +822-3774-1743 Motors (Kia), and SsangYong posted strong gains. HMC recorded a 29.6% YoY rise, fueled by [email protected] sales of its new SUV Kona, as well as the continued strong sales of Grandeur. Kia’s sales were led by new models, including the compact SUV Stonic and the updated Sorento. SsangYong’s sales continued to be supported by its new SUVs, including the G4 Rexton and

Tivoli. Overall, sales were also boosted by a favorable comparison stemming from an extra

business/working day compared with the previous year and HMC/Kia’s production disruptions a year earlier.

2. HMC’s exports hit hard by inventory adjustment

In August, exports of the five major automakers expanded 24.3% YoY. The double-digit gain was partly attributable to an easy comparison, caused by an additional working day and last year’s production disruptions. Kia saw a 39.7% YoY jump in exports, helped by a cutback in overseas production and the inventory adjustment implemented in 1H17. In contrast, HMC’s exports remained flat YoY and declined in the double digits MoM, weighed by soft sales in key overseas markets (US) and the lagged impact of inventory adjustment.

HMC’s and Kia’s overseas production remained sluggish. US production continued to decline, affected by the weakness of the local car market and dwindling sales due to aging models. In Eastern Europe, production was hurt by fewer working days in the month resulting from a longer summer vacation.

HMC’s July-August global production is so far tracking below our 3Q17 forecast, while Kia’s is largely in line. We attribute the difference to the two automakers’ varying levels of overseas inventory adjustment. Kia’s production, after being heavily affected by inventory adjustment in 1H17, appears to have somewhat recovered. On the other hand, we believe HMC is only now beginning to see more pronounced inventory adjustment and production declines due to weak sales in core markets and the side-effects of its relatively low incentives.

Table 1. Actual production vs. 3Q17 forecasts (HMC and Kia) (units, %) July-Aug. preliminary (A) 3Q17 forecast (B) (A)/(B)*100

HMC Domestic 114,174 169,125 67.5 Exports 137,880 249,287 55.3 Korea total 252,054 418,412 60.2 Overseas total 417,886 666,605 62.7 Global shipments 669,940 1,085,017 61.7 Global retail sales (July) 354,677 1,141,030 31.1

Kia Domestic 84,638 131,540 64.3 Exports 166,408 233,120 71.4 Korea total 251,046 364,660 68.8 Overseas total 187,814 255,970 73.4 Global shipments 438,860 620,630 70.7 Global retail sales (July) 231,382 672,210 34.4

Source: Company data, Mirae Asset Daewoo Research estimates

September 4, 2017 Auto

3. Persistent weakness in core markets points to limited prospects of recovery in 3Q17

We see declining prospects of an operating earnings recovery in 3Q17, given the deepening slump in US sales, lack of marketability, and continued weak production in China. In particular, we believe expectations on HMC, which had a better prospect of recovery, should now be lowered.

Table 2. HMC’s and Kia’s global production/exports in August: HMC affected by inventory adjustment (units, %) Aug. 2017 July 2017 MoM Aug. 2016 YoY Jan.- Aug. 2017 Jan.- Aug. 2016 YoY

HMC Korea production Domestic 54,560 59,614 -8.5 42,112 29.6 458,957 441,115 4.0 Exports 48,660 89,220 -45.5 48,913 -0.5 657,531 641,416 2.5

Overseas 233,405 184,481 26.5 267,227 -12.7 1,751,794 2,009,493 -12.8

Global 336,625 333,315 1.0 358,252 -6.0 2,868,282 3,092,024 -7.2

Kia Korea production Domestic 41,027 43,611 -5.9 37,403 9.7 340,481 358,160 -4.9 Exports 79,106 87,302 -9.4 56,620 39.7 674,275 660,241 2.1

Overseas Domestic 102,607 85,207 20.4 126,506 -18.9 744,374 888,771 -16.2

Global 222,740 216,120 3.1 220,529 1.0 1,759,130 1,907,172 -7.8

Source: Company data, Mirae Asset Daewoo Research

For HMC, we expect operating earnings to slowly recover from 4Q17, aided by 1) new releases in China, 2) a pickup in emerging market margins, and 3) an improved product mix due to new rollouts in the domestic market. For Kia, we expect the weakness in operating earnings and share prices to ease on the back of 1) front-loading of inventory adjustments and a moderating production decline, and 2) the partial dissipation of uncertainties following the recent ordinary wage ruling.

Table 3. Domestic sales & exports of five major automakers in August: Favorable comparison and new model effects (units, %) Aug. 2017 July 2017 MoM Aug. 2016 YoY Jan.- Aug. 2017 Jan.- Aug. 2016 YoY

Domestic HMC 54,560 59,614 -8.5 42,112 29.6 458,957 441,115 4.0 Kia 41,027 43,611 -5.9 37,403 9.7 340,481 358,160 -4.9

GM 10,004 10,801 -7.4 12,773 -21.7 93,513 113,912 -17.9 (Chevrolet) Renault 7,001 7,927 -11.7 7,713 -9.2 67,810 61,982 9.4 Samsung SsangYong 8,255 8,658 -4.7 7,676 7.5 70,382 65,918 6.8

Total 120,847 130,611 -7.5 107,677 12.2 1,031,143 1,041,087 -1.0

Exports HMC 48,660 89,220 -45.5 48,913 -0.5 657,531 641,416 2.5 Kia 79,106 87,302 -9.4 56,620 39.7 674,275 660,241 2.1

GM 31,307 30,605 2.3 23,198 35.0 268,203 275,548 -2.7 (Chevrolet) Renault 12,468 17,815 -30.0 7,527 65.6 113,296 95,672 18.4 Samsung SsangYong 3,470 2,755 26.0 4,502 -22.9 23,101 33,531 -31.1

Total 175,011 227,697 -23.1 140,760 24.3 1,736,406 1,706,408 1.8

Source: KAMA, company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2

Auto Neutral (Maintain)

August US sales review – Sales remain weak; HMC’s woes intensify  August US light vehicle sales dip 1.8% YoY; SAAR continues decline Issue Comment  By automaker, GM and Toyota are standout gainers September 4, 2017  HMC/Kia continue to be affected by weak car demand and aging models

Mirae Asset Daewoo Co., 1. August US light vehicle sales dip 1.8% YoY; SAAR continues decline Ltd. [Auto/Tire] - In August, US light vehicle sales dipped 1.8% YoY, bringing the rate of decline from January to August to 2.7% YoY. Young-ho Park +822-3774-1743 - The seasonally adjusted annual rate (SAAR) fell 3.9% MoM and 6.3% YoY to 16.13 million, [email protected] slightly below expectations and the lowest monthly level since February 2014.

- Sales were likely hit hard by Hurricane Harvey during the last week of the month.

2. GM and Toyota are standout gainers

- By automaker, GM and Toyota stood out from the crowd, with sales up 7.5% and 6.8% YoY, respectively.

- GM posted its fourth straight month of recovery, with fleet sales (i.e., shipments to rental car companies) and customer retail sales both showing strength.

- Toyota also saw its third consecutive month of gains.

- Ford, Fiat Chrysler (FCA), Nissan, Honda, and HMC/Kia all recorded YoY declines.

3. HMC/Kia continue to be affected by weak car demand and aging models

- At HMC and Kia, US sales fell 24.6% and 1.7% YoY, respectively. HMC saw its US market share slip 1.1%p YoY to 3.7%.

- We believe ongoing double-digit YoY declines in car demand and aging models (including mid-sized SUVs) are continuing to weigh on sales.

- Meanwhile, average industry incentive per vehicle rose 12.7% YoY, indicating increasing market competition.

- HMC sharply increased its incentive spending (+25.6% YoY in August) in order to reduce the inventory that has built up due to the recent slump of the car market.

- Despite its continued inventory adjustments, Kia also continued to spend heavily on incentives due to older models lacking marketability.

- We expect marketability to gradually improve from 2018 onwards with the addition of more competitive cars and the rollout of more compact SUVs.

September 4, 2017 Auto

Table 1. US sales by automaker in August 2017 (‘000 units, %, %p) Sales 8/17 7/17 MoM 8/16 YoY 1/17-8/17 1/16-8/16 YoY M/S 8/17 7/17 MoM 8/16 YoY GM 276 226 21.9 256 7.5 1,916 1,963 -2.4 GM 18.6 16.0 2.6 17.0 1.6 Ford 209 199 4.9 213 -2.1 1,703 1,774 -4.0 Ford 14.1 14.1 0.0 14.1 0.0 FCA 177 163 9.0 198 -10.4 1,414 1,528 -7.5 FCA 11.9 11.5 0.5 13.1 -1.1 Toyota 228 222 2.5 213 6.8 1,605 1,625 -1.3 Toyota 15.3 15.7 -0.3 14.1 1.2 Honda 146 151 -3.3 150 -2.4 1,089 1,095 -0.5 Honda 9.8 10.7 -0.8 9.9 -0.1 Nissan 108 128 -15.6 125 -13.1 1,056 1,055 0.1 Nissan 7.3 9.1 -1.8 8.2 -0.9 HMC 54 52 3.6 72 -24.6 455 521 -12.7 HMC 3.7 3.7 0.0 4.8 -1.1 Kia 53 56 -5.5 54 -1.7 405 443 -8.4 Kia 3.6 4.0 -0.4 3.6 0.0 HMC+Kia 108 109 -1.1 126 -14.8 860 964 -10.7 HMC+Kia 7.2 7.7 -0.4 8.3 -1.1 Industry 1,485 1,417 4.8 1,513 -1.8 11,358 11,676 -2.7

SAAR 16.13 16.78 -3.9 17.21 -6.3 (mn units) Note: FCA = Fiat Chrysler Automobiles Source: Automotive News, Mirae Asset Daewoo Research

Table 2. HMC/Kia’s US sales by model in August 2017 (units, %) 8/17 7/17 MoM 8/16 YoY 1/17-8/17 1/16-8/16 YoY HMC Genesis 1,928 1,691 14.0 2,897 -33.4 14,513 23,552 -38.4 Sonata 10,866 10,648 2.0 14,888 -27.0 97,829 139,932 -30.1

Elantra 15,127 13,287 13.8 20,733 -27.0 128,666 137,668 -6.5

Santa Fe 11,474 12,749 -10.0 15,176 -24.4 84,235 86,948 -3.1

Tucson 9,757 11,257 -13.3 7,608 28.2 72,721 58,000 25.4

Kia Optima 7,072 7,933 -10.9 9,470 -25.3 74,722 80,317 -7.0 Forte 10,693 12,022 -11.1 8,307 28.7 81,461 71,352 14.2

Soul 14,151 12,961 9.2 12,253 15.5 80,228 95,938 -16.4

Sorento 8,934 9,734 -8.2 8,533 4.7 68,924 77,465 -11.0

Sportage 6,014 7,135 -15.7 6,888 -12.7 49,755 57,228 -13.1

Sedona 1,613 1,710 -5.7 5,147 -68.7 18,351 34,304 -46.5

Note: Genesis includes previous Genesis models, Equus, and G80/90 Source: Automotive News, Mirae Asset Daewoo Research

Table 3. US incentive spending by automaker (US$/unit, %) 8/17 (estimate) 7/17 MoM 8/16 YoY

GM 4,546 4,304 5.6 4,199 8.3 Ford 4,577 4,387 4.3 4,153 10.2 FCA 4,650 4,479 3.8 4,205 10.6 Toyota 2,876 2,861 0.5 2,412 19.2 Honda 2,226 2,046 8.8 1,620 37.4 Nissan 4,743 4,530 4.7 3,822 24.1 HMC 3,039 2,943 3.3 2,420 25.6 Kia 4,112 3,865 6.4 2,765 48.7 VW 3,723 3,567 4.4 3,936 -5.4 Daimler 4,973 4,922 1.0 4,371 13.8 BMW 5,103 4,831 5.6 6,480 -21.3 Industry avg. 3,799 3,638 4.4 3,370 12.7 Source: Automotive News, Mirae Asset Daewoo research

Mirae Asset Daewoo Research 2

Mirae Asset Daewoo Research Key Universe Valuations September 4, 2017

※All data as of close August 31, 2017, unless otherwise noted.

17F Earnings growth Mkt Cap Price P/E (x) P/B (x) ROE (%) Ticker Company Div Yield OP EPS (Wbn) (W) (%) 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 005930 Samsung Electronics 301,582 2,324,000 1.9 74.9 -2.2 90.8 3.9 8.9 8.6 1.5 1.3 20.0 17.6 000660 SK Hynix 50,014 68,700 0.9 280.1 -36.2 221.0 -37.2 5.3 8.4 1.5 1.3 33.6 16.9 005380 Hyundai Motor 31,500 143,000 2.8 3.2 10.3 -15.1 21.2 8.9 7.3 0.6 0.5 6.7 7.7 005490 POSCO 30,254 347,000 2.7 57.2 2.7 96.1 6.8 11.3 10.6 0.7 0.6 6.2 6.4 015760 KEPCO 27,669 43,100 1.9 -45.8 25.4 -52.4 25.5 8.3 6.6 0.4 0.4 4.7 5.8 051910 LG Chem 26,331 373,000 1.3 45.5 3.1 56.7 6.9 13.7 12.8 1.8 1.6 14.2 13.4 035420 NAVER 24,590 746,000 0.2 13.0 24.9 17.1 26.5 28.0 22.2 4.3 3.6 22.0 22.6 055550 Shinhan Financial Group 24,421 51,500 42.1 -5.1 23.5 -5.5 7.2 7.7 0.7 0.7 10.5 9.2 012330 Hyundai Mobis 23,460 241,000 1.5 -11.8 18.7 -10.6 14.8 8.6 7.5 0.8 0.7 9.2 9.7 105560 KB Financial Group 22,954 54,900 133.7 5.8 46.6 -5.6 6.8 7.2 0.7 0.6 10.2 9.0 032830 Samsung Life 22,600 113,000 - - - - 0.0 0.0 017670 SK Telecom 20,348 252,000 4.0 8.4 12.0 46.2 -17.7 8.3 10.1 1.1 1.0 14.8 11.4 034730 SK Holdings 19,032 270,500 1.4 6.3 14.2 157.8 12.7 9.7 8.6 1.3 1.1 14.3 14.4 096770 SK Innovation 17,430 188,500 3.8 -7.3 3.2 37.4 -5.0 7.7 8.1 1.0 0.9 13.0 11.5 090430 AmorePacific 16,895 289,000 0.6 -20.3 52.6 -25.3 58.9 41.8 26.3 4.8 4.2 12.0 17.1 033780 KT&G 15,445 112,500 3.4 4.7 4.9 -12.1 11.7 14.3 12.8 2.0 1.9 15.2 15.9 051900 LG Household & Health Care 14,884 953,000 0.8 5.4 9.6 13.4 9.0 26.2 24.0 5.6 4.7 23.6 21.8 003550 LG Corp. 14,443 83,700 1.6 37.3 1.7 65.0 -9.7 8.3 9.2 1.0 0.9 12.2 10.1 000270 Kia Motors 14,411 35,550 3.1 -22.8 16.4 -15.5 8.7 6.2 5.7 0.5 0.5 8.6 8.8 086790 Hana Financial Group 14,297 48,300 51.1 10.8 38.2 7.8 7.8 7.2 0.6 0.6 7.9 7.9 010950 S-Oil 13,960 124,000 4.8 -16.2 36.8 -3.3 23.9 12.4 10.0 2.2 2.0 17.9 20.7 011170 Lotte Chemical 13,813 403,000 1.0 18.7 7.2 32.7 9.3 5.7 5.2 1.2 1.0 23.3 20.7 066570 LG Electronics 13,681 83,600 0.5 108.0 24.6 2601.1 9.4 7.3 6.7 1.1 0.9 16.2 15.3 006400 Samsung SDI 13,547 197,000 0.5 - 786.0 223.1 35.0 19.6 14.5 1.2 1.1 6.5 8.3 251270 Netmarble Games Corporation 13,135 154,500 100.4 0.8 81.9 1.8 33.1 32.5 3.1 2.8 14.6 9.1 000810 Samsung F&M 12,791 270,000 - - - - 0.0 0.0 018260 Samsung SDS 12,690 164,000 0.5 16.2 7.4 10.1 10.3 24.8 22.5 2.3 2.1 9.6 9.8 002790 AmoreG 11,008 133,500 0.4 -30.7 42.8 -39.6 45.2 57.4 39.5 3.8 3.5 7.1 9.7 034220 LG Display 11,003 30,750 1.6 134.3 -27.6 141.7 -30.4 5.0 7.2 0.8 0.7 15.9 10.0 010130 Korea Zinc 9,624 510,000 1.7 23.7 7.2 17.0 13.2 13.9 12.3 1.6 1.4 12.0 12.4 036570 NCSOFT 8,688 396,000 1.8 131.1 13.9 103.4 13.7 15.7 13.8 3.1 2.7 24.5 21.9 024110 Industrial Bank of Korea 8,372 14,950 26.4 7.8 23.1 8.7 6.9 6.3 0.5 0.5 7.6 7.7 035720 Kakao Corp. 8,269 122,000 0.2 50.0 29.7 99.2 16.5 70.1 60.2 2.3 2.3 3.4 3.8 030200 KT 8,134 31,150 2.6 -3.4 0.7 1.2 1.8 11.3 11.1 0.6 0.6 6.2 6.0 009540 Hyundai Heavy Industries 8,103 143,000 -71.0 -39.3 605.2 -93.8 2.8 46.0 0.7 0.7 22.5 1.5 004020 Hyundai Steel 7,713 57,800 1.3 -1.3 6.4 11.7 1.9 8.4 8.3 0.5 0.4 5.6 5.5 023530 Lotte Shopping 7,668 243,500 0.8 -2.0 16.1 72.8 17.5 26.4 22.5 0.5 0.5 1.8 2.0 009150 Samsung Electro-Mechanics 7,469 100,000 0.6 1088.6 79.8 864.3 110.4 54.7 26.0 1.8 1.7 3.3 6.8 161390 Hankook Tire 7,271 58,700 0.7 -10.5 24.0 -10.2 19.9 9.3 7.7 1.1 1.0 12.7 13.7 021240 Coway 7,198 96,200 3.4 46.0 7.4 47.1 10.4 20.7 18.7 6.0 5.6 31.4 35.0 078930 GS Holdings 6,393 68,800 2.2 -5.3 10.4 -0.8 11.8 8.2 7.4 0.9 0.8 11.0 11.2 018880 Hanon Systems 6,326 11,850 - - - - 0.0 0.0 032640 LG Uplus 6,265 14,350 3.1 11.9 8.9 8.5 12.5 11.7 10.4 1.2 1.1 10.6 11.0 139480 Emart 6,202 222,500 0.7 8.0 18.3 9.8 - 15.0 0.8 5.3 5.7 088350 Hanwha Life 6,158 7,090 - - - - 0.0 0.0 009830 Hanwha Chemical 5,834 35,400 1.0 -2.1 19.2 24.4 2.6 6.2 6.1 1.0 0.8 16.6 14.8 086280 Hyundai Glovis 5,738 153,000 2.0 2.4 3.0 15.4 -0.9 9.8 9.9 1.5 1.3 16.1 14.4 005830 Dongbu Insurance 5,239 74,000 - - - - 0.0 0.0 042660 DSME 4,705 44,800 -5.6 1.0 - - - - 8.9 9.0 - - 097950 CJ CheilJedang 4,668 354,500 0.7 -5.8 12.9 -1.7 20.6 18.9 15.7 1.4 1.3 7.9 9.0 Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research Market Data September 4, 2017

※All data as of close September 1, 2017, unless otherwise noted.

Other Major Indices Economic Indicators Close Net Chg 1D (%) YTD (%) Close 1D ago 1M ago 1Y ago MSCI Korea* 491.89 -3.68 -0.74 28.98 USD/KRW 1,125.80 1,122.80 1,121.90 1,117.40 KOSPI 2,357.69 -5.50 -0.23 16.36 JPY100/KRW 1,022.94 1,017.44 1,016.81 1,081.18 KOSDAQ 661.99 4.16 0.63 4.74 EUR/KRW 1,341.11 1,335.63 1,326.70 1,246.91 Dow Jones* 21,948.10 55.67 0.25 10.39 3Y Treasury 1.75 1.75 1.73 1.33 S&P 500* 2,471.65 14.06 0.57 9.47 3Y Corporate 2.30 2.30 2.27 1.71 NASDAQ* 6,428.66 60.35 0.95 18.41 DDR2 1Gb* 1.22 1.23 1.23 0.94 Philadelphia Semicon* 1,114.31 10.62 0.96 22.81 NAND 16Gb* 2.95 2.95 2.97 1.62 FTSE 100* 7,430.62 65.36 0.89 3.52 Oil (Dubai)* 49.26 49.93 50.38 44.79 Nikkei 225 19,691.47 45.23 0.23 0.50 Gold* 1,318.50 1,310.40 1,266.60 1,307.90 Hang Seng* 27,970.30 -124.31 -0.44 26.27 Customer deposits (Wbn)* 23,297 23,904 24,316 21,739 Taiwan (Weighted) 10,594.82 9.04 0.09 14.26 Equity type BC (Wbn)(Aug. 30) 70,004 69,823 69,725 74,659 Note: * as of August 31, 2017 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 Samsung Electronics 55.49 LG Electronics 18.66 LG Electronics 36.93 Samsung Electronics 61.30 Hyundai Motor 23.40 SEMCO 16.72 Hanmi Pharm 26.75 Lotte Shopping 25.34 NCsoft 16.21 LG Innotek 15.96 NCsoft 24.01 Samsung F&M Insurance 25.00 Hynix 15.16 LG Display 15.25 KODEX KOSDAQ150 LEVERAGE 12.62 Hyundai Motor 17.92 Samsung F&M Insurance 11.83 NHN 13.83 Korea Petrochemical Ind. 10.11 KB Financial Group 14.02 KB Financial Group 11.74 Hyosung Corp. 12.99 POSCO 8.82 Hana Financial Group 11.37 Honam Petrochemical 8.41 GS Retail 10.59 Honam Petrochemical 8.28 Samsung Life Insurance 11.36 LG Uplus 8.06 LG Chem 10.19 Hyundai Mobis 8.28 NHN 10.75 Amore Pacific 6.91 SAMSUNG BIOLOGICS 9.89 Doosan Infracore 6.65 Hyundai Heavy Industries 8.90 Woori Bank 6.87 HYUNDAI ROBOTICS 4.11 KODEX 200 5.23 KT&G 8.26 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 Com2us 6.36 Posco Chemtech 3.36 Huons 2.63 Posco Chemtech 11.09 CJ E&M 5.38 ECOPRO 3.06 PS Tec. 2.22 CJ E&M 6.25 Silicon Works 5.37 Jusung Engineering 2.32 Amotech 2.21 Boryung Medience 2.22 Koentec 1.49 Celltrion 1.95 BH,LTD. 1.85 GOLFZON 1.83 Celltrion Healthcare 1.35 Amotech 1.52 Huons 1.55 Jenexine 1.68 NICE e-Banking Services 1.30 Hugel 1.44 SEOJIN SYSTEM 1.49 Celltrion 1.60 Medipost 1.25 SK Materials 1.44 HaanSoft 1.43 Com2us 1.55 L&F 1.23 Interflex 1.29 Kolon Life Science 1.34 CJ O Shopping 1.20 Innocell 1.16 Kolon Life Science 1.21 ViroMed 1.22 Medy-tox 1.17 BH,LTD. 1.05 ViroMed 1.15 Dongjin Semichem 1.12 Silicon Works 0.99 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 2,324,000 8,000 301,582 Celltrion 114,200 -900 14,005 Hynix 68,700 100 50,014 Celltrion Healthcare 47,850 50 6,541 Samsung Electronics (P) 1,905,000 20,000 35,087 Medy-tox 564,400 -4,700 3,193 Hyundai Motor 143,000 2,500 31,500 CJ E&M 75,600 -400 2,928 POSCO 347,000 3,500 30,254 Hugel 569,000 -11,000 2,429 KEPCO 43,100 200 27,669 LOEN 80,600 300 2,039 LG Chem 373,000 -6,000 26,331 Komipharm 36,800 -50 2,013 NHN 746,000 -9,000 24,590 ViroMed 126,000 1,500 2,010 SAMSUNG C&T 129,500 500 24,565 Posco Chemtech 33,150 150 1,958 Shinhan Financial Group 51,500 -500 24,421 SK Materials 181,500 -1,100 1,914 Source: Korea Exchange