December 13, 2012 Industry Report
Logistics (Overweight)
Daewoo Securities Co., Ltd. Winner takes all Jay JH Ryu +822-768-4175 Oversupply to end; Top-tier firms to gain market share [email protected]
Almost two decades of oversupply has taken its toll on the logistics industry, cutting freight rates in half. In the next five to ten years, however, we expect the oversupply situation to ease as the market becomes increasingly consolidated.
Among the various segments of the logistics industry, warehousing and parcel delivery are anticipated to post the strongest recoveries. Warehousing margins are already improving on the back of recent supply shortages and geographic barriers to
entry. Parcel delivery rates have plunged since the early 2000s, but we expect the segment to experience the logistics industryÊs fastest market consolidation on the back of M&A efforts (which have been underway for the past five years), shutdowns of underperformers, and the strengthening cost competitiveness of top-tiers. In 2013, CJ Korea Express (Korex) will merge with CJ GLS, and the merged entityÊs Seoul metropolitan area parcel terminal will be completed in 2014, accelerating consolidation. Meanwhile, trucking remains in a state of oversupply due to an increase in the number of trucks since the 1998 Asian financial crisis. Over the long term, however, the trucking business is also likely to see a steady recovery on the expansion of the logistics market and limited supply. The third-party logistics (3PL) segment, which accounts for about 60% of the logistics industry, is anticipated to continue to grow, aided by: 1) policy support and 2) the consolidation of the logistics market. The merger between Korex (an asset-based business utilizing its own transportation and shipping equipment) and CJ GLS (a non- asset-based business) should give rise to a company well-equipped to adapt to the changing market environment. Hyundai Glovis is expected to shift its business focus from second-party logistics (2PL) to 3PL. The growing presence of large logistics firms will likely expand the overall size of the market, and top-tier firms are anticipated to see their top-line growth accelerate amid industry restructuring. In our view, Korex will benefit the most from the aforementioned market changes; thus, we maintain our Buy call with a target price of W150,000. In addition, we initiate our coverage of Hyundai Glovis with a Buy rating and a target price of W300,000.
Logistics industry outlook by business type
2nd-tier firms Falling rates Oversupply forced out of the market Stevedoring Stevedoring LandLand transporttransport
IncreasesIncreases inin ratesrates && profitabilityprofitability Top-tier companies: Gaining M/S
Warehousing ParcelParcel deliverydelivery
Source: KDB Daewoo Securities Research
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
I. Investment summary ...... 3 1. Riding out a period of oversupply ...... 3 2. Logistics companies with dominant market positions to prevail eventually...... 4
II. The history and structure of the logistics industry...... 5 1. A history of the logistics industry...... 5 2. Oversupply has led to stagnant freight rates ...... 6 3. Truck subcontracting and brokers...... 8
III. Winner-take-all market to emerge ...... 10 1. Economic slowdown to weigh on logistics industry ...... 10 2. Size matters...... 12 3. Large logistics firms to prevail...... 13
IV. Will 3PL rise? ...... 14 1. What is 3PL? ...... 14 2. Conditions for 3PL development and support measures...... 15
V. Overseas expansion is a must, not an option...... 17 1. Overseas expansion to drive strong growth ...... 17 2. Current status of domestic companies’ overseas expansion ...... 19
VI. Restructuring underway in parcel delivery market...... 20 1. Parcel delivery market restructuring in Japan...... 20 2. Take a long-term perspective on the opening of the postal service market...... 21 3. Parcel delivery market: 2012~2014 ...... 24
VII. Look out for the larger players...... 27 1. Korex and Glovis: Strengths and weaknesses ...... 27 2. Bound to cross paths...... 28
VIII. Taking stock of the five forces and risks...... 29 1. Five forces analysis...... 29 2. Policy risk: Restrictions on parent-subsidiary deals ...... 30 3. Selective overseas market entry...... 31
Hyundai Glovis (086280 KS)...... 32
CJ Korea Express (000120 KS)...... 35
2
December 13, 2012 Logistics
I. Investment summary
1. Riding out a period of oversupply
The logistics sector has The logistics sector has been overlooked by investors due to its supply glut and low been overlooked by profitability. Indeed, a large number of independent contractors have entered the market investors since the Asian financial crisis, and most of them remain small in size and suffer from low margins.
However, an increasing number of small and less profitable companies are being forced out of the market. This trend is most prominent in the parcel delivery segment. As restructuring, Profit deterioration is which began in earnest in 2007, has been accelerating recently, competition is expected to driving small and less ease going forward, leading to an improvement in profitability. In our view, competition is profitable companies out unlikely to intensify further as large conglomerates (e.g., Samsung Group, Shinsegae) have of the market already withdrawn from the market and entry barriers (e.g., costs) are high. While rates are unlikely to rise sharply in light of the B2C segmentÊs high price sensitivity (owing to an increase in small- to mid-sized internet-based operators), we believe that they will stabilize. And we believe that top-tier players will lead an ASP uptrend starting in 2014.
Some segmentsÊ Certain segments are already displaying improvement in profits. In particular, some profitability is improving warehousing companies based in Seoul and the neighboring areas are seeing sharp improvement in margins on the back of their favorable locations. The supply of well-located warehouses and terminals is not meeting demand currently due to: 1) a lack of investment in the past three~four years, 2) high land prices, and 3) the governmentÊs land development regulations (greenbelt). Thanks to the supply shortage, Korea Integrated Freight Terminal, KorexÊs warehousing/terminal subsidiary, is reporting OP margins near 50%.
Trucking and Meanwhile, competition remains intense in the trucking and stevedoring segments with stevedoring segments to restructuring proceeding slowly and rates stagnating or even falling by over 50% in the past improve as well decade. Surging oil prices have depressed operatorsÊ profitability rapidly. The Korea Trucking AssociationÊs recurrent strikes are primarily attributable to this margin deterioration. However, we expect these segments to experience full-scale restructuring over the next three~five years, which should lead top-tier companies to cement their dominance.
Figure 1. Logistics industry trends by business type
01 02 03 04 05 06 07 08 09 10 11 12
Warehousing/ Rising land price/slowdown in capital Recovery of Continuous oversupply, stagnating market growth terminal expenditure profitability
nd Parcel delivery Growing competition Fall in profitability 22nd-tier-tier firms:firms: forcedforced outout ofof thethe marketmarket Top-tier companiesÊ ` M/S ↑
Land transport nd Continuous oversupply Freight rate stagnation, deteriorated profitability due to rise in oil price 2 -tier firms: forced (Trucking) out of the market
Operation of new Stevedoring Oversupply/falling rates DeterioratedDeteriorated profitabilityprofitability Demand recovery, stabilizing rates port
Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 3 December 13, 2012 Logistics
2. Logistics companies with dominant market positions to prevail eventually
Keys to success We expect logistics companies with dominant market positions to prevail eventually amid industry restructuring. Keys to success in the industry include: 1) extensive networks at home and abroad, 2) a stable customer base, and 3) steady investments. We believe that Hyundai Glovis and Korex meet these conditions.
Hyundai Glovis: strong As for Hyundai Glovis, our recommendation is based on: 1) the growth of the firmÊs captive customer base and customer (the Hyundai-Kia Automotive Group (HKAG)), 2) its expansion in the 3PL market, overseas networks and 3) its capital power, which we think is sufficient to support aggressive investments (e.g., car carrier purchases) if necessary. We initiate our coverage on Hyundai Glovis with a Buy rating, and a target price of W300,000. We find Hyundai GlovisÊ current share price attractive (adjusted P/E of 12.9x, including the earnings of the companyÊs subsidiaries). The company will likely be able to quell concerns over its growth slowdown through: 1) expansion in the 3PL market, 2) penetration into the Chinese market, and 3) the expansion of overseas subsidiaries.
Korex: the largest asset- Under the CJ Group umbrella, Korex, KoreaÊs largest asset-based logistics firm with based logistics firm in unrivaled 3PL market dominance, is expected to: 1) forge contracts with CJ Group affiliates Korea and 2) achieve rapid top-line growth via a merger with CJ GLS or the acquisition of a foreign firm. We maintain our Buy call on Korex with a target price of W150,000. We project KorexÊs 4Q operating profit to come in short of market expectations and lower than the 3Q figure. However, we note that, stripping away the tax refund the company received in 2H (two- thirds recognized in 3Q; one-third in 4Q), the companyÊs 4Q and 3Q operating profit numbers would be similar. Tepid 4Q earnings should be attributable to losses at the stevedoring business (Port of Busan). However, losses at the stevedoring division will likely shrink gradually, as the company is making rigorous improvement efforts, including cutting rental payments to the port. In addition, concerns over the companyÊs valuation are also likely to ease thanks to improvement in ROE arising from higher financial leverage and asset turnover ratio.
Table 1. Key valuations P/E (x) P/B (x) Ticker Rating Current Price (W) Target Price (W) % Upside 13F 14F 13F 14F Hyundai Glovis 086280 KS Buy 218,000 300,000 37.6 17.6 15.4 3.8 3.1 Korex 000120 KS Buy 97,500 150,000 53.8 17.6 14.4 1.0 1.0 Note: Closing prices as of December 11, 2012 Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 4 December 13, 2012 Logistics
II. The history and structure of the logistics industry
1. A history of the logistics industry
The logistics market is The logistics industry began its modernization in the 1980s, aided by: 1) the enactment of expanding apace with relevant laws, including the Distribution Industry Modernization Act and the Monopoly economic growth Regulation and Fair Trade Act, and 2) improvements to the domestic logistics business environment. A large amount of infrastructure has been built since exports began to expand full swing in the late 1980s (e.g., the Sinseondae Terminal at the Port of Busan, the Jungbu Expressway, and the Port of Gunsan) from yen appreciation.
Freight volume continued to increase during the 1990s after the launch of the WTO, and the establishment of diplomatic relations between Korea and China. The Korean government built Incheon International Airport (IIA), complex logistics terminals, and a national network of expressways to improve the nationÊs logistics systems. During the 1990s, a two-port system (Port of Busan and Port of Gwangyang) was established, and construction of the Sinseondae Terminal and the Jungbu Expressway were completed as well. During this period, the domestic parcel delivery industry started to blossom. Hanjin Express launched its parcel delivery service (brand name: Pabalma) in 1992, as did Korea Express and Hyundai Logistics.
In the 2000s, the government steadily improved KoreaÊs logistics infrastructure by building and expanding the Port of Incheon (in 2001), the Korea Train eXpress (KTX; in 2004), and the Pusan Newport International Terminal. Most notably, overall freight volume significantly expanded on the back of a jump in freight volume from China.
The Korean logistics market grew from W15tr in 1990 to W128tr in 2008, in line with economic growth and the expansion of KoreaÊs infrastructure. We project the Korean logistics market to reach W130tr in 2012. In this paper, we focus on the ground logistics business (excluding air transportation and shipping). We estimate the Korean ground logistics market will reach W50tr in 2012.
Figure 2. Revenue trend of domestic logistics companies
(Wtrn) Period of continuous growth Steady improvement in infrastructure (%,YoY) 135 30 -Launch of WTO; establishment -Contruction of Incheon International Airport, 120 ofdiplomatic ties with China start of KTX service 25 105 20 Global Crisis 90 15
75 10
60 5 Revenues of domestic logistics companies (L) 45 0 Growth (R) 30 -5
15 -10
0 -15 90 92 94 96 98 00 02 04 06 08 10
Source: Statistics Korea, KDB Daewoo Securities Research
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2. Oversupply has led to stagnant freight rates
Frequent changes to Frequent policy changes have led to minimal improvement in the domestic ground logistics government policy have business. The Korean government faces a dilemma: protect small businesses, while also resulted in oversupply facilitating accurate vehicle registrations and market consolidation. As such, the government has repeatedly implemented a cycle of regulation followed by deregulation.
The number of market participants surged in the late 1990s as the market became deregulated and Asian financial markets were roaring. The resulting oversupply has dragged down the logistics industry for a long time.
The number of trucks and new logistics companies has increased in step with the increase in market participants. But limited market expansion has led to a decrease in freight rates. During 1997~2002, the number of container trucks in Korea saw a CAGR of 10.7%, outpacing the growth of freight volume (+3.2%). As such, freight volume per vehicle declined at an average annual rate of 6.6%.
The freight rates for ground carriers since 2005 show the severity of oversupply. For example, freight rates for a 20ft container transported between Busan and the Seoul metropolitan area (round-trip) have only edged up from W580,000 in 1Q05 to W660,000 in 1Q12. This increase appears very minimal given that oil prices rose 23% during that period. During that time, the monthly net profit per container truck deteriorated from W750,000 to W660,000. The figure would show further deterioration if we adjust for inflation.
Figure 3. Number of registered trucks Figure 4. Number of domestic logistics companies
('000) (%, YoY) ('000) (%, YoY) 400 Number of registered trucks (L) 21 350 Number of logistics companies (L) 18 Growth (R) Growth (R) 350 18 300 15
300 15 250 12 250 12 200 9 200 9 150 6 150 6
100 3 100 3
50 0 50 0
0 -3 0 -3 95 97 99 01 03 05 07 09 11 95 97 99 01 03 05 07 09
Source: Statistics Korea, KDB Daewoo Securities Research Source: Statistics Korea, KDB Daewoo Securities Research
Figure 5. Container freight rates in Busan and Seoul metro area Figure 6. Monthly average net income by vehicle type (per owner)
(W'000) (Wmn) 900 20ft freight rate 4.0 Container 40ft freight rate BCT 3.5 Tank truck 800 Cargo type 3.0
700 2.5
2.0 600
1.5 500 1.0
400 0.5 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12
Source: Korea Transport Institute, KDB Daewoo Securities Research Source: Korea Transport Institute, KDB Daewoo Securities Research KDB Daewoo Securities Research 6 December 13, 2012 Logistics
Maritime freight rates As in the ground transportation segment, freight rates have fallen for maritime operations plunged (i.e., stevedoring and shipping). According to industry data, Korean export stevedoring rates fell to W40,000/TEU in 2011. Domestic rates seem far lower than international rates; rates in the Port of Busan are up to 77% lower than those at overseas ports (e.g., Shanghai, Tokyo, and Hong Kong).
Table 2. Stevedoring rates at major ports (WÂ000/TEU) Busan Shanghai Tianjin Qingdao Tokyo Kaohsiung Singapore Hong Kong Import/export 45 105 85 85 170 99 105 200 Transshipment 70 56 25 25 128 115 200 120 Notes: US$/W=1,152; figures based on 2011 Source: Industry data, Korea Logistics Business Directory 2012, KDB Daewoo Securities Research
Figure 7. Container traffic trend Figure 8. Bulk traffic trend
('000 TEU) (mn tonnes) 25,000 140,000 Container traffic Anthracite Bituminous coal 120,000 20,000 Iron ore 100,000
15,000 80,000
60,000 10,000
40,000 5,000 20,000
0 0 00 01 02 03 04 05 06 07 08 09 10 11 00 01 02 03 04 05 06 07 08 09 10 11
Source: Statistics Korea, KDB Daewoo Securities Research Source: Statistics Korea, KDB Daewoo Securities Research
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3. Truck subcontracting and brokers
Market oversupply In order to fully understand the state of ground logistics, one must first grasp the complex boosts subcontracting relationships between the segmentÊs various players. The aforementioned increase in the demand number of small logistics companies has facilitated a rise in subcontracting. Large carriers (or brokers) that signed contracts with shippers subcontracted shipments to individual carriers. As shippers had to use trucks registered under large carriers due to damages liability reasons, individual carriers registered their trucks under large carriers, creating discrepancies between the „actual‰ owners and the legal owners of vehicles.
Figure 9. Structure of cargo transport business
Truck transport network of big shippers
TrucksTrucks ownedowned byby carrierscarriers Big shipper LargeLarge carrierscarriers (company) TrucksTrucks (long-term(long-term contracts)contracts) If truck shortage occurs
TrucksTrucks BrokerBroker 11 (long-(long- & & short-termshort-term contracts)contracts)
Small shipper If truck shortage occurs
TrucksTrucks BrokerBroker 22 (long-(long- & & short-termshort-term contracts)contracts)
Source: Industry data, KDB Daewoo Securities Research
Figure 10. Structure of transport brokering business (1) Figure 11. Structure of transport brokering business (2)
Trucks owned by carriers
Carrier Trucks Carrier (contract basis) Shipper Trucks registered (logistics subsidiary) under carriers Carrier Shipper Trucks registered Trucks registered (logistics subsidiary) under carriers under other carriers TrucksTrucks (contract(contract basis)basis) Broker TrucksTrucks Broker (contract(contract basis)basis) Broker TrucksTrucks registeredregistered Broker (Specialized in trucks) underunder otherother carrierscarriers TrucksTrucks registeredregistered underunder otherother carrierscarriers Two-stage transaction Three-stage transaction Four-stage transaction Three-stage transaction
Source: Industry data, KDB Daewoo Securities Research Source: Industry data, KDB Daewoo Securities Research
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Since truck owners (actual) were unable to directly enter contracts with large shippers, brokers stepped in, cutting the fees paid to truck owners. As truck owners had to go through several brokers frequently, they received only 60~70% of the fees originally paid by the shipper.
To improve the working conditions of small truck owners, the government amended the Trucking Transport Business Act in 2004 and introduced the franchise trucking business, in which franchisers utilize computer networks to hire trucks. By banning brokers from entering contracts with multiple franchisers, the government aimed to prevent multiple brokers from getting involved in a single contract. Meanwhile, brokering by agents outside the franchise network is allowed by law. However, such government efforts appear to have barely improved the operating environment for small truckers, as franchisers seem no different from large brokers.
Currently, two-thirds of trucks are estimated to be operating on a subcontract basis. Surely, subcontracting has its own merits, such as efficient personnel and vehicle management. However, small truck owners become easily subjected to unfavorable contract terms given the oversupply situation.
The Korea Trucking Association went on a nationwide strike in 2003 as freight rates continued to decline. Since then, the government has come up with various measures to ease oversupply, restricting increases in the number of transportation trucks and subsidizing gas prices. Meanwhile, the strike this year ended in just four days, as both parties agreed to raise the rate by 9.9%.
Figure 12. Trucking franchise business structure
ShipperShipper ShipperShipper ShipperShipper
BrokerBroker BrokerBroker Broker
FranchiserFranchiser
Trucks Trucks Trucks Truck owner capacity > 5 tonnes 1 < capacity <≤5 1 ≤ capacity
Source: Industry data, KDB Daewoo Securities Research
Table 3. Truck subcontracting system Merits Demerits - Lower operating costs - Lack of transparency in transactions and contracting - Easier management for shippers - Lack of applicable laws ( lack of government support) - Easier personnel (driver) management for carriers - Multi-stage shipping structure - Serves market needs more effectively - Possible fraud - Unfavorable contract terms for truck owners Source: Industry data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 9 December 13, 2012 Logistics
III. Winner-take-all market to emerge
1. Economic slowdown to weigh on logistics industry
Economic downturn and The logistics industry is set to experience minimal growth when demand starts to stagnate, oversupply in the in our view. As yet, the market remains small relative to GDP (compared to in advanced logistics market economies), suggesting further room for growth. Over the long term, however, the industry is anticipated to expand modestly, at a rate similar to the GDP growth rate.
Unlike previous demand contractions triggered by financial crises, we expect more structural and prolonged demand declines in the future. As such, the logistics industry, already in oversupply, is likely to undergo major restructuring.
Large logistics firms are outpacing their smaller rivals in revenue growth (listed companies). Given the low operating leverage of the logistics business, this suggests that large firms are pushing down margins on the back of their economies of scale.
Figure 13. Revenue growth of domestic logistics companies vs. GDP growth trend
(%) 30 Revenues growth of logistics companies
25 GDP growh of Korea
20
15
10
5
0
-5
-10
-15 00 01 02 03 04 05 06 07 08 09 10 11
Source: Statistics Korea, Bloomberg, KDB Daewoo Securities Research
Figure 14. Revenue growth trends
(%, YoY) 60 1st-tier companies' revenue growth 50 2nd-tier companies' revenue growth
40
30
20
10
0
-10
-20
-30 03 04 05 06 07 08 09 10 11
Source: Company data, KDB Daewoo Securities Research
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Among the various segments of the logistics industry, logistics facilities (warehouses and terminals) and parcel delivery have seen the sharpest declines in oversupply. Although accurate data are hard to come by (since the registration of warehousing businesses began just this year), logistics facilities have been in short supply since 2010. We believe that the subprime mortgage crisis and the financial crisis that struck the global economy in 2007~2009 caused investments in logistics facilities to decrease.
The parcel delivery segment is also anticipated to pick up strongly after restructuring. The segment, which had suffered from plunging rates and intensifying competition since the early 2000s, has recently started to recover, with top-tier firms such as Korex and CJ GLS visibly gaining market share. We believe that parcel delivery firms will enjoy rapid profitability growth starting in 2015.
Meanwhile, the recovery of stevedoring is anticipated to be the slowest among logistics segments. Rates have declined by more than 50% over the past five years, as sluggish container freight traffic and the newly constructed Pusan Newport International Terminal have caused an oversupply situation. Eventually, however, the stevedoring segment is forecast to undergo restructuring, possibly after 2018, when the construction of a logistics complex is completed.
Figure 15. Structure of the logistics industry by business type
2nd-tier firms Falling rates Oversupply forced out of the market Stevedoring Stevedoring LandLand transporttransport
IncreasesIncreases inin ratesrates && profitabilityprofitability Top-tier companies: Gaining M/S
Warehousing ParcelParcel deliverydelivery
Source: KDB Daewoo Securities Research
Figure 16. Revenues of major stevedoring companies
(Wbn) 1,400 Intergis Sun Kwang 1,200 KCTC Sebang 1,000
800
600
400
200
0 02 03 04 05 06 07 08 09 10 11
Source: Company data, KDB Daewoo Securities Research
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2. Size matters
The gap between large The main causes of the underperformance of second-tier firms are their small sizes, and small logistics firms slowing demand, and oversupply. Indeed, only 80 logistics firms had over 300 staff as of to widen 2010 (1% of total logistics companies). In fact, a whopping 96% of logistics companies were small distributors (1~9 staff), but they accounted for a meager 17% of the total revenues.
In Germany and the UK, the average number of staff per logistics firm was 13~14 people as of 2007 (vs. only 3~4 people in Korea), and revenues per capita were W230~260mn (vs. W100mn). With the Korean logistics market swamped with small firms, competition is fierce and margins are low.
Table 4. Korean cargo carriers (classified by number of cargo trucks) Less than 10 trucks 10~50 50~100 100~200 200~300 Over 300 Total # of companies 2,769 2,231 678 212 34 23 5,947 Proportion (%) 46.6 37.5 11.4 3.6 0.6 0.4 100.0 Note: Figures based on 2006 data Source: Logistics statistics report, KDB Daewoo Securities Research
Table 5. European cargo carriers (classified by the number of cargo trucks) Classification Belgium Denmark Finland France Germany Netherlands Sweden UK # of companies 8,172 7,045 14,339 37,037 41,325 7,173 19,371 86,300 1~5 trucks 68.3 83.7 95.8 81.6 83.1 56.8 91.0 83.0 Proportion 6~10 11.6 9.3 2.1 5.6 9.7 20.9 6.0 8.0 (%) over 11 20.1 5.3 1.1 12.8 7.2 21.7 3.0 9.0 Note: Figures based on 1990 data Source: „Analysis of trucking transport business efficiency‰ (thesis), KDB Daewoo Securities Research
Figure 17. No. of domestic logistics firms and revenue breakdown Figure 18. Companies with over 300 employees
(%) 1~9 employees 10~99 employees 100~299 employees Over 300 employees (%) 100 50 Number of companies (L) 10 90 % of total logistics companies (R) 40 8 80
70 30 6 60 20 4 50
40 10 2 30 20 0 0 Railroad Road Parcel Pipeline Water Air transport Warehouse 10 transport haulage transport transport transport & transport 0 transport service Companies Revenues provider
Note: Figures based on 2010 data Note: Figures based on 2010 data Source: Statistics Korea, KDB Daewoo Securities Research Source: Statistics Korea, KDB Daewoo Securities Research
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3. Large logistics firms to prevail
Consolidation set to We expect the Korean logistics market to see increasing consolidation, with large logistics accelerate firms taking up significant market shares. As consolidation means stronger economies of scale and lower costs, this trend should help the market to expand steadily. As consolidation progresses, mid-sized shippers are anticipated to flock to large logistics companies, although they appear to have a long way go in terms of service quality, etc. compared to firms operating in advanced economies.
Firms recently designated by the government as comprehensive logistics companies include affiliates of large conglomerates, such as Hyundai Glovis, Korex, Hanjin, Pantos Logistics, and CJ GLS. Other top-tier firms include Hyundai Parcel Delivery Service, Dongbang Transport Logistics (heavy cargo transportation), Sebang Heavy Cargo Transportation (stevedoring), Hansol CSN, and Sun Kwang (forwarding)
2PL vs. 3PL Comprehensive logistics firms can be largely categorized as: 1) 2PL (second-party logistics: logistics services provided by a subsidiary/affiliate to a parent company) or 3PL (third-party logistics: logistics services for non-affiliated parties), and 2) asset-based (direct ownership of transportation equipment) or non-asset-based (consignment).
2PL service providers can post steady profits thanks to the stable nature of intercompany transactions (involving a parent company and its subsidiaries). However, if a 2PL firm is too reliant on its parent, its earnings growth could be limited by its parent companyÊs performance. Meanwhile, 3PL service providers can achieve stable growth if they successfully diversify their client bases on the back of strong competitiveness.
Asset-based vs. Non- Asset-based businesses need to incur steady capex, but, if they achieve economies of scale, asset-based they can secure price competitiveness. Non-asset-based businesses have lower capex needs, but they also have limited operating leverage. For 2PLs, the non-asset-based model seems more advantageous (Hyundai Glovis), while for 3PLs, the asset-based model (Korex) appears more useful.
As of 2011, the Korean logistics market grew to roughly W118tr, with the top ten firms accounting for 14% of total revenues. In a typical consolidated market, the proportion of revenues contributed by the top ten players is over 50%, and as high as 70~80%. Thus, consolidation is still underway in the Korean logistics market. This means that companies with strong competitiveness have opportunities to grow.
Table 6. Top ten Korean logistics companies (Wbn) Rank Name Revenues Main businesses Comments 1 Hyundai Glovis 7,547.8 Transportation brokerage, shipping, 3PL Affiliate of Hyundai Motor 2 Korex 2,244.1 3PL, parcel delivery, Stevedoring Affiliate of CJ Group 3 Pantos Logistics 1,253.9 Forwarding Affiliate of LG Group 4 Samsung Electronics Logitech 1,219.7 Forwarding Subsidiary of Samsung Electronics 5 Hanjin Corp 1,191.9 3PL, parcel delivery, Stevedoring Affiliate of Hanjin Group 6 CJ GLS 1,046.2 Forwarding Affiliate of CJ Group 7 Hyundai Logistics 786.2 Parcel delivery Affiliate of Hyundai Group 8 Hansol CSN 357.1 Forwarding Affiliate of Hansol Group 9 DHL Korea 331.9 Forwarding, Parcel delivery German company 10 Daewoo Logistics 306.5 Fowarding, 3PL Affiliate of Posco Group Note: Figures based on 2011 data Source: Company data, KDB Daewoo Securities Research
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IV. Will 3PL rise?
1. What is 3PL?
KoreaÊs 3PL market is As mentioned above, 3PL stands for third-party logistics. It also refers to a provider of underdeveloped relative outsourced logistics services. Meanwhile, 1PL refers to a companyÊs in-house logistics to in major advanced management, whereas 2PL refers to intercompany logistics services provided by a economies subsidiary to a parent.
KoreaÊs 3PL utilization rate has risen steeply from 25% in 2002 to 56% in 2011. However, the rate is still below the levels of Europe (80%), the US (78%), Japan (70%), and Australia (60%). Accordingly, KoreaÊs 3PL market still has much room for growth.
Table 7. Classification of logistics companies by shipper type Type Target shipper Comments Desired effects 1PL Shipper itself In-house logistics - 2PL Parent company Subsidiary logistics Cost-saving effect for parent company Independent logistics, (generally) one-year contracts, Overall logistics cost reduction; cost reduction for 3PL Independent third party outsourcing logistics companies as well 4PL Independent third party 3PL + comprehensive logistics/IT consulting Overall logistics cost saving; management rationalization Source: Industry data, KDB Daewoo Securities Research
Figure 19. 3PL utilization rates by country Figure 20. 3PL utilization rate in Korea
(%) (%) 70 100 Utilization rate of 3PL firms Utilization rate of 3PL firms
60 56.0 80.0 78.0 80 52.1 70.0 48.2 50 46.3
56.0 60 40
30 40
20 20 10
0 0 Europe US Japan Korea 08 09 10 11
Note: Figures as of 2011 Note: Figures as of 2011 Source: Korea Logistics Business Directory 2012, Source: Korea Logistics Business Directory 2012, KDB Daewoo Securities Research KDB Daewoo Securities Research
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2. Conditions for 3PL development and support measures
Korean companies utilize Shifting to 3PL reduces logistics costs for companies. In Korea, logistics costs as a 3PL less than companies percentage of GDP exceed 10% (vs. below 9% in the US and Japan). CompaniesÊ logistics in advanced economies, costs as a percentage of their revenues stand at 9%, about twice those of Japan. although shifting to 3PL The 3PL utilization rate remains low in Korea for the following reasons. First, companies are reduces logistics costs afraid of the leakage of confidential information (e.g., customers, raw material providers) by 3PL providers. Second, demand for more timely and trustworthy logistics has grown in line with the development of just-in-time (JIT) supply chains. If 3PL fails to provide timely delivery, companies would often face difficulties in clarifying where the responsibility lies. Thus, large companies usually assign logistics tasks to their subsidiaries (2PLs).
Figure 21. % of 3PL in total logistic costs (advanced countries and Korea)
(Logistics costs/GDP, %) 12 Korea 11 Germany Italy 10 France UK 9 Japan Brazil 8 US
7 China Argentina 6 India R2 = 0.4343 5 (3PL costs/logistics costs, %) 4 6 8 10 12 14 16 18 20
Source: Industry data, KDB Daewoo Securities Research
Figure 22. % of logistics costs in GDP by country Figure 23. % of logistics costs in total revenues by country
(%) (%) 14 US Japan Korea 14 US Japan Korea
13 12 12 10 11
10 8
9 6 8 4 7
6 2 01 02 03 04 05 06 07 08 09 99 01 03 05 07 09
Source: Korea Transport Institute, KDB Daewoo Securities Research Source: Korea International Trade Association, KDB Daewoo Securities Research
KDB Daewoo Securities Research 15 December 13, 2012 Logistics
Government supports Currently, the government is providing various measures to boost the 3PL market, including expansion of the 3PL tax incentives. Previously, companies with 3PL logistics costs over 50% of total logistics market costs had been awarded tax benefits (3% of net YoY increases in 3PL logistics costs). However, the incentive was too weak and had been criticized for benefiting only large manufacturers.
In 2012, the government expanded the beneficiaries of the incentive to companies that have operated for over one year with 3PL accounting for over 30% of their total logistics costs. The revised measure is expected to raise the percentage of companies eligible for tax credits from 11.4% to 23.2% and boost the 3PL market from W1.1tr to W2tr. In addition, tax deferrals for SMEs were revived. Accordingly, SMEs that have operated for more than one year and transferred their logistics operations are able to defer their transfer gains tax payments. Thus, companies are expected to increasingly turn to 3PLs for their logistics needs.
In addition to providing support for shippers, the government has accredited specialized logistics companies that offer integrated logistics services in an effort to boost the 3PL market. The government aims to differentiate certified logistics companies and ease shippersÊ concerns about outsourcing their logistics operations. So far, about 30 companies have been certified, including Korex, CJ GLS, Hyundai Glovis, Hanjin, Hansol CSN, Hyundai Logistics, Dongbang, Sebang, and Pantos Logistics.
Korean logistics firms Despite the governmentÊs support, companies have not made rigorous efforts to improve must come up with their competitiveness. At a large electronics company in Korea, about 50% of annual measures to enhance logistics costs (W4.2tr as of 2010) were paid to overseas companies in 2010. We attribute their competitiveness the weak competitiveness of domestic players to their: 1) lack of overseas networks and 2) inability to provide comprehensive consulting services.
3PL market continues On a positive note, however, the domestic 3PL market is growing steadily. In our view, this slow but steady growth growth is attributable to the fact that small- and mid-sized manufacturers are increasingly outsourcing logistics. At Korex, over 9,500 of the companyÊs clients generate less than W100bn in revenues annually. In addition, the percentage of revenues from the companyÊs largest customer stands at just 7%. Thus, KorexÊs dependence on a handful of large customers is decreasing rapidly.
Figure 24. % 3PL in total revenues at Hyundai Glovis and Korex
(%) 90 80.2 Hyundai Glovis 76.3 80 Korex
70 65.3
60 48.7 50 42.5 42.0 39.2 41.2 40
30 18.8 16.8 14.8 15.2 14.0 15.6 20 11.2 11.8 10
0 05 06 07 08 09 10 11 1H12
Notes: 3PL revenues of Hyundai Glovis include non-related party revenues; 3Q12 3PL revenues (excluding non-related revenues)/total revenues: 11.7% Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 16 December 13, 2012 Logistics
V. Overseas expansion is a must, not an option
1. Overseas expansion to drive strong growth
Overseas expansion Investors are paying keen attention to whether domestic logistics companies (e.g., Korex) schemes draw mixed will succeed in overseas markets. While domestic companies might be able to improve their reactions top lines and expand their overseas networks by entering overseas markets, half-baked global expansion and investment plans could lead to significant financial losses.
However, logistics companies are currently facing a more pressing need to enter overseas markets than manufacturing companies. First, the logistics market is unlikely to stay immune from an anticipated long-term economic slump. Second, logistics firms are currently unable to secure more orders from existing clients due to their lack of overseas networks. Third, overseas operations could further boost top-line growth.
Overseas markets offer Currently, KoreaÊs logistics companies cannot fully handle a large companyÊs export volume, clear incentives as they are incapable of carrying out logistics services in import markets. Meanwhile, DHL Korea and Schenker Korea, subsidiaries of two leading overseas players, are generating solid annual Korean revenues of W330bn and W220bn, respectively.
In particular, most of the leading logistics companies in Korea, excluding parcel delivery companies (e.g., Korex, Hanjin, Hyundai Logistics) and traditional asset-based companies, are largely dedicated to providing logistics services to their parent companies. Considering that the two aforementioned overseas companies do not have 2PL operations, their strong performances are mostly based on their extensive overseas network, in our view.
Global logistics companies have achieved growth through M&As and overseas expansion. DPWN (DHLÊs parent company) has grown into a leading 3PL by merging with overseas companies and is now evolving into a 4PL.
Table 8. Revenues of major logistics companies in Korea (Wbn) Rank Name Revenues Comments 1 Hyundai Glovis 7,547.8 Affiliate of Hyundai Motor 2 Korex 2,244.1 Affiliate of CJ Group 3 Pantos Logistics 1,253.9 Affiliate of LG Group 4 Samsung Electronics Logitech 1,219.7 Subsidiary of Samsung Electronics 5 Hanjin Corp. 1,191.9 Affiliate of Hanjin Group 6 CJ GLS 1,046.2 Affiliate of CJ Group 7 Hyundai Logistics 786.2 Affiliate of Hyundai Group 8 Hansol CSN 357.1 Affiliate of Hansol Group 9 DHL Korea 331.9 Foreign company 10 Daewoo Logistics 306.5 Affiliate of POSCO Group 11 Schenker Korea 220.4 Foreign company Note: Figures as of 2011 Source: Company data, KDB Daewoo Securities Research
Among global players, Deutsche Post DHL (DP DHL) is a prime example of a logistics company that has achieved growth by expanding its global network. Deutsche Post, GermanyÊs postal service provider, has acquired overseas companies since the 1990s, and gained global prominence by acquiring DHL in 2002 and the UKÊs Exel in 2005. Taking note of ChinaÊs growth potential, DP DHL established a joint venture with Sinotrans in 2003.
KDB Daewoo Securities Research 17 December 13, 2012 Logistics
Figure 25. Global logistics companiesÊ growth stages
E n co tr Competencies m y p o e f t ito r E s n co tr m y p o e f tit E o n rs co tr m y Turning into p o e f t Supply chain technology- & ito rs management knowledge- E n consulting based business co tr m y p o e f Tech- & knowledge-based t Tech- & knowledge-based ito Globalization consulting rs consulting Horizontal diversification RegionalRegional diversificationdiversification FunctionalFunctional diversificationdiversification PeriodPeriod ofof buildingbuilding upup competenciescompetencies Period ~1970s 1970s 1980s~1990s 2000s
Simple cargo transport- Business diversification Globalization of logistics Transforming from asst- based business (searching for synergy) infrastructure based logistics business to administration (network/scale expansion value-added business through M&As) through 3PL consulting
Source: Hyundai Research Institute, KDB Daewoo Securities Research
Table 9. Global network expansion of DP DHL Service areas Actions 1999 Entered the forwarding market and - Acquired Danzas (freight forwarding company in Switzerland) strengthened air forwarding business - Acquired AEI (largest air forwarding company in North America) 2001 Strengthened financial services unit - Acquired PB Capital Corporations (US) - Acquired DHL (Germany) Strengthened international special 2002 - Acquired 100% stake in DHL (international special delivery service unit) delivery services Strengthened international special 2003 - By consolidating DP, DHL, and DB, the entity solidified its position as a logistics company delivery services - Acquired Airborne (US): Non-air units, including postal and financial services Strengthened operations in China - Established JV with Sinotrans 2005 Strengthened 3PL services - Acquired Exel (Global 3PL company based in the UK) 2006 Strengthened financial services - Acquired BHW Holding AG (Germany) Strengthened outsourcing - US, Europe: Williams Lea (process outsourcing) 2008 Reorganized logistics unit - DHL Express, DHL Global Forwarding/Freight, DHL Exel Supply Chain/Corporate Information Solutions 2009 Restructured the logistics sector - Consolidated the logistics unit into Deutsche Post DHL Source: Korea Maritime Institute, KDB Daewoo Securities Research
Table 10. Global network expansion of Agility Service areas Actions 2003 Strengthened marine transport capacity - M&A with Maritime & Mercantile International (MMI) 2005 Expansion into global logistics market - M&As with Al Bateen Investment Co., Bin Jabr Group, Transoceanic Shipping Co., GeoLogistics Strengthened logistics services in - M&As with LEP International Pty, LEP International NZ, MedGroup, Medorient & MedLogistics UK, Egypt 2007 Europe and Africa Leader Group, Synergy Shipping, Synergy Logistics, World Transportation Services 2007 Strengthened service in the US - Opened San Diego branch 2008 Providing value-added logistics services - Created Agility Abu Dhabi (JV with Mubadala Development Company, Al Bateen Investment Co.) Source: Korea Maritime Institute, KDB Daewoo Securities Research
KDB Daewoo Securities Research 18 December 13, 2012 Logistics
2. Current status of domestic companies’ overseas expansion
In our view, given the high barriers to entry, establishing overseas subsidiaries (2PLs) to serve parent companiesÊ logistics needs is the most effective means of expanding abroad. Indeed, Hyundai Glovis and CJ GLS have entered overseas markets by establishing subsidiaries.
If demand from parent companies is insignificant, M&As could be the next best option. So far, most of the M&A deals inked by domestic logistics companies have been between parcel delivery companies. Recently, Korex announced its plans to grow via M&As. The company aims to become a global player by expanding its customer base and taking care of a parent companyÊs overseas logistics operations. Currently, Korex lags behind Hyundai Glovis, CJ GLS, and Hyundai Logistics in terms of its proportion of overseas revenues.
Figure 26. Overseas M&A road map of Korex 2017~20 2014~16 Formation of global SCM partnership 2012~13 Global network expansion based on Vision strong links with Asia Asia-oriented overseas expansion
Other Other Other China Japan Europe China Japan Europe China Japan Europe Americas Americas Americas Region Other Middle East Other Middle East Other Middle East SE Asia NA SE Asia NA SE Asia NA Asia Africa Asia Africa Asia Africa
Forward- Contract Express Forward- Contract Express Forward- Contract Express Other SCM Other SCM Other SCM ing logistics parcel ing logistics parcel ing logistics parcel Project Working with shippers (port and parcel delivery business)
Primary Secondary Source: Company data, KDB Daewoo Securities Research
Figure 27. Overseas revenue trends of major logistics companies
(Wbn) (%) 2,400 Overseas revenues (L) 45
2,100 Overseas revenues/total revenues (R) 40 35 1,800 30 1,500 25 1,200 20 900 15 600 10
300 5
0 0 Hanjin Corp. Hyundai Logistics CJ GLS Korex Hyundai Glovis
Source: Company data, press information, KDB Daewoo Securities Research
KDB Daewoo Securities Research 19 December 13, 2012 Logistics
VI. Restructuring underway in parcel delivery market
1. Parcel delivery market restructuring in Japan
In Japan, the logistics Global logistics companies have experienced oversupply and intense competition over the industry is being past 15 years. However, oversupply is steadily easing, with the parcel delivery segment consolidated due to taking the lead. In Japan, the logistics industry is being consolidated due to slowing growth slowing growth and and weakening profitability. This trend is most prominent in the parcel delivery market. weakening profitability Before entering into a low-growth phase, JapanÊs parcel delivery market was dominated by three major players (e.g., Yamato Transport, Sagawa Global Logistics, and Nippon Express) with Japan Post running a distant fourth. However, the marketÊs growth rate fell into the single digits in the 1990s and has stayed below 5% since 2000 (the rate has recently turned negative). Nippon Express and second-tier players saw their market shares plunge during 2004~2008. Since then, their market shares continued to decline and are now standing at negligible levels.
Meanwhile, the market shares of Yamato Transport and Sagawa Global Logistics improved by 10%p each in the past decade to 42.2% and 37.4%, respectively (as of FY2011). Indeed, a protracted period of low growth gave rise to the winner-take-all environment. As of 2010, 26 local companies are operating in the Japanese parcel delivery market. Among them, Fukuyama Transporting, the sixth-largest player, claims a 3.8% market share. The combined market share of the 20 companies trailing Fukuyama is a meager 0.5%. In light of the negative growth of the Japanese parcel delivery market, an increasing number of small companies are expected to be forced out of the market going forward.
Table 11. Japanese parcel delivery companies (mn units, %) Service provider Name of delivery service # of parcels M/S By truck Yamato Transport - 1,348.8 42.2 Sagawa Express Hikyaku 1,194.0 37.4 Japan Post Yu-Pack 346.8 10.9 Nippon Express Pelican 46.9 1.5 Seino Transportation Kangaroo 118.3 3.7 Fukuyama Transporting Fukutsu 122.7 3.8 Other (20) 15.8 0.5 Subtotal (26) 3,193.3 100.0 By airplane Subtotal (45) 26.5 100.0 Total 3,219.8 - Note: Figures as of 2010 Source: MLIT (Japan), Korea Logistics Business Directory 2012, KDB Daewoo Securities Research Figure 28. Market shares of Japanese parcel delivery companies Figure 29. Japanese parcel delivery market trends
(%) Yamato Transport Sagawa Express (bn units) (%, YoY) 45 Nippon Express Japan Post 3.6 Parcel traffic of Japanese market (L) Growth (R) 12 Other 40 3.2 10 2.8 35 8 30 2.4 6 25 2.0 4 20 1.6 2 15 1.2 0 10 0.8
5 0.4 -2
0 0.0 -4 01 02 03 04 05 06 07 08 09 10 11 00 01 02 03 04 05 06 07 08 09 10
Source: Company data, industry data, KDB Daewoo Securities Research Source: Industry data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 20 December 13, 2012 Logistics
In Korea, the parcel delivery market, which had started with a handful of players in the 1990s, saw the entries of Korea Post and large companies in the late 1990s~early 2000s. Delivery rates fell markedly thereafter, leading to full-scale market consolidation in 2006. Delivery rates fell from an average of around W4,700 per package in 1997 to W3,500 in 2000 and W2,500 in 2007.
Falling delivery rates required parcel delivery companies to endeavor to achieve economies of scale, leading to sweeping industry restructuring. CJ GLS acquired Samsung HTH in 2006 and Sagawa Express Korea in 2008. Aju Logistics, which had been acquired by the Dongwon Group in 2007, closed its doors in 2008. Furthermore, Shinsegae Dream Express (Sedex) was acquired by Hanjin Express in 2008.
In 2011, the CJ Group acquired Korex, heralding changes in the industry landscape. Since the combined market of the CJ GroupÊs affiliate CJ GLS and Korex was as high as 35% at that time, expectations of a delivery rate hike were running high. However, Korex is currently focusing on market share expansion, rather than a rate hike.
Indeed, Korex has not pushed through a rate hike, as: 1) the company has pursued a market share expansion strategy based on cost reductions arising from the commencement of operations at its Munpyeong-dong Hub Terminal in 2011, and 2) lower delivery rates are crucial to attract B2C customers, which account for a high proportion of the Korean delivery market. Indeed, B2C customers are typically sensitive to rate hikes. As such, delivery rates will likely continue to determine the competitiveness of parcel delivery companies.
Table 12. Parcel delivery breakdown (%) Country B2B B2C C2C Total Korea 10.0 70.0 20.0 100 Japan 40.0 40.0 20.0 100 Source: Industry data, KDB Daewoo Securities Research
2. Take a long-term perspective on the opening of the postal service market
Another issue that attracted attention in 2012 was the partial opening of the Korean postal service market arising from the implementation of the KORUS FTA. This development is significant in that it is likely to mark the beginning of the privatization of the Korean postal service market. The Korean postal service market was estimated at W1.9tr in 2010. The postal service market segment that has been opened up to parcel delivery companies encompasses packages with postal rates of W2,700 (or higher) and/or weights exceeding 350g. This market segment is estimated at W340bn (W195.9bn for letters; W141.2bn for non-letters).
However, the entry of parcel delivery companies into the postal service market is unlikely to boost their earnings markedly in the short term, and it should be seen as just another revenue source. Even if a parcel delivery company with a parcel delivery market share of 10% also controls 10% of the postal service market segment, its annual revenues and operating profit would increase by only W30bn and W1.5~2bn, respectively.
In the case of Japan, Yamato HoldingsÊ Kuroneko mail delivery surged to 2.2bn pieces of mail in FY2012, which was 1.5 times its parcel delivery volume. However, mail delivery revenues were equivalent to less than 20% of parcel delivery revenues. The companyÊs OP margin has remained flat at around 5% even since its entry into the postal service market.
Although the rate of W2,700 per unit is higher than the average rate, parcel delivery companies are still taking a cautious approach and striving to first assess the profitability in the postal service market segment. However, we believe that top-tier players will advance into the market full swing when it expands markedly.
KDB Daewoo Securities Research 21 December 13, 2012 Logistics
Figure 30. Revenue and traffic trends of ordinary mail
(Wbn) (mn units) 1,400 Ordinary mail revenues (L) 7,000 Ordinary mail traffic (R) 1,200 6,000
1,000 5,000
800 4,000
600 3,000
400 2,000
200 1,000
0 0 00 01 02 03 04 05 06 07 08 09 10
Source: Statistics Korea, KDB Daewoo Securities Research
Figure 31. Yamato TransportÊs parcel delivery & Kuroneko mail traffic Figure 32. Yamato TransportÊs parcel & Kuroneko mail revenues
(mn units)Parcel traffic (L) (%) (JPYbn)Parcel delivery revenues (L) (%) 2,500 Kuroneko mail traffic (L) 80 1,000 Kuroneko mail revenues (L) 25 Parcel/Kuroneko mail traffic (R) Kuroneko mail/parcel delivery revenues (R)
2,000 70 800 20
1,500 60 600 15
1,000 50 400 10
500 40 200 5
0 30 0 0 05 06 07 08 09 10 11 12 05 06 07 08 09 10 11 12
Source: Company data, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research
In the long term, the partial opening of the Korean postal service market could trigger industry restructuring, as it may be the beginning of a complete opening of the postal service market. The US Postal Service (USPS) faced the greatest challenge in its 237 year history on September 30th, as it failed to repay a US$5.6bn debt to the US Treasury Department due to excessive cost burdens. In Germany, both the postal service and financial markets are completely privatized. Japan has also partially privatized its postal service market in order to raise efficiency. In the US, however, the privatization of the postal service market has been delayed, bringing the USPSÊ excessive cost structure and inefficiency to the fore.
In Korea, losses at Korea PostÊs parcel delivery business are expanding. We believe that this increase in losses despite revenue growth is attributable to the serviceÊs failure to achieve economies of scale due to rising fixed costs. It is necessary to closely watch whether the partial opening of the Korean postal service market will lead to a complete opening and higher efficiency.
KDB Daewoo Securities Research 22 December 13, 2012 Logistics
Table 13. Privatization status of postal service businesses in Germany, Japan, and US Postal service Financial business Stances Timeline for privatization (service provider) (service provider) Germany - Separation of postal and financial businesses Private company Private company 1989~2005 - Simultaneous privatization (full privatization) (full privatization) Japan - Separation of postal and financial businesses Public company Public company 2003~2017 - Gradual privatization (partial privatization) (full privatization) US - Separation of postal and financial business Government organization - Opposition to postal service privatization - - (USPS) - USPS discontinued financial business in 1966 Source: Industry data, KDB Daewoo Securities Research
Figure 33. Revenue and operating loss trends of Korea PostÊs parcel delivery division
(Wbn) 400 Revenues Operating profit 300
200
100
0
-100
Operating loss increase -200 07 08 09 10
Source: Board of Audit and Inspection of Korea, KDB Daewoo Securities Research
KDB Daewoo Securities Research 23 December 13, 2012 Logistics
3. Parcel delivery market: 2012~2014
1) Steady market expansion
Korean parcel delivery We expect parcel delivery volume to continue to rise for the time being, although the Korean market to expand economy is entering into a low-growth phase. This is because online shopping tends to expand when the overall consumer market contracts, as evidenced by developments during steadily on online the economic slowdown in 2009. Indeed, KoreaÊs per-capita parcel delivery volume rose to shopping demand 26 packages in 2009, exceeding JapanÊs figure for the first time. This robust volume is due growth to the high population density of the Seoul metro area and KoreaÊs advanced online shopping infrastructure. Since this trend is likely to continue, we believe that this figure could rise to over 30 packages as early as 2014~15.
Figure 34. Parcel traffic per person (Japan vs. Korea) Figure 35. Proportion of online shopping sales out of total retail sales
(units) (%) 40 Parcel traffic per person (Japan) 7 Online shopping/total retail sales
Parcel traffic per person (Korea) 6 30 5
20 4
3 10 2
0 1 04 05 06 07 08 09 10 11 05 06 07 08 09 10 11 12
Source: Statistics Korea, industry data, KDB Daewoo Securities Research Source: Statistics Korea, KDB Daewoo Securities Research
2) 2012: Synergies hold the key Korex has strived to lower delivery rates through cost reductions since the company was acquired by CJ Group. Meanwhile, CJ GLS has seen its parcel delivery volume growth exceed the market average thanks to synergies arising from the sharing of some terminals with Korex. Still, there is still a long way to go before complete integration is achieved; indeed, the integration of IT and payment systems (and eventually a merger between the two companies) has yet to take place. However, rising market shares indicate that synergies between Korex and CJ GLS are starting to make their mark.
Figure 36. Combined M/S of Korex and CJ GLS; KorexÊs parcel delivery unit price trend
(W) (%) 2,500 Parcel unit price of Korex (L) 45 Korex + CJ GLS M/S (R) 2,450 40 35 2,400 30 2,350 25 2,300 20 2,250 15
2,200 10
2,150 5
2,100 0 07 08 09 10 11 12
Note: M/S is based on traffic; 2012 figures are cumulative until end-3Q Source: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 24 December 13, 2012 Logistics
3) 2013: Benefits of joint operations by Korex and CJ GLS In 2013, we expect Korex and CJ GLS to start joint operations. Even so, expectations of a rate hike are still warranted, in our view. Joint terminal operations should enhance both companiesÊ parcel delivery volume by 20~30% by reducing the coverage areas of delivery personnel (while increasing efficiency). In addition, delivery vehiclesÊ driving distances should decrease, leading to a reduction in fuel expenses. Accordingly, delivery personnel with their own vehicles should see their revenues increase and their expenses decline. Both Korex and CJ GLS are likely to be able to achieve market share expansion and reduce costs (on commission expense declines).
In addition, joint terminal operations should enable Korex and CJ GLS to solidify their market dominance by attracting more vehicle-owning delivery personnel through incentives or by lowering per-box commissions. In fact, the two companies could combine both strategies according to market conditions. In this report, we assumed that joint operations will boost efficiency by 20% (vs. market expectations of more than 30%). Based on our conservative assumptions, vehicle-owning delivery personnel would see revenue growth of 20~40%.
Figure 37. Increased parcel delivery route efficiency due to joint operations of Korex and CJ GLS
KorexKorex parcel parcel CJCJ GLSGLS trucktruck parcelparcel trucktruck
KorexKorex CJCJ GLSGLS parcelparcel trucktruck parcelparcel trucktruck
District: Yeouido District: W. Yeouido District: E. Yeouido
Source: KDB Daewoo Securities Research
Table 14. Cost structure of parcel delivery truck owner List % Impact of 50% decrease in driving distances Fuel costs 36.5 Down by 50% Other 26.5 Down by 30% Repair costs 12.4 Down by 50% Insurance 7.8 No change Truck subcontracting costs 6.1 No change Car payments 4.9 No change Tire related cost 3.9 Down by 30% Taxes and public utilities charges 1.3 Down by 30% Tolls 0.5 Down by 30% Brokerage fees 0.1 No change Parking fees 0.1 Down by 30% Total 100 Source: KDB Daewoo Securities
KDB Daewoo Securities Research 25 December 13, 2012 Logistics
Table 15. Net income of truck owners under joint operation scenarios After joint operations After joint operations Before joint operations (Scenario 1) (Scenario 2) Monthly income (WÊ000) 2,960 3,550 3,200 Monthly delivery volume (boxes) 4,877 5,852 5,852 Consignment fee (W/box) 607 607 546 Expenses (WÊ000) 860 570 570 Fuel costs 310 160 160 Repair costs 110 50 50 Other 440 360 360 Net income 2,100 2,980 2,630 Note 1: Assuming that joint operations will increase parcel delivery efficiency by 20% Note 2: Scenario 1 assumes no change in consignment fee (truck ownerÊs income to be maximized) Note 3: Scenario 2 assumes a 10% decline in consignment fees (combination of higher truck ownerÊs income and parcel delivery companyÊs cost reduction) Note 4: Consignment fee is for collecting and delivering parcels Source: KDB Daewoo Securities Research
4) 2014: Korex to complete construction of a mega terminal Korex is currently constructing a new mega terminal in Gwangju, Gyeonggi province (Seoul metro area). When construction is completed in 2014, the parcel delivery market will likely see restructuring pick up the speed. The mega terminal will be three to four times the size of the Munpyeong-dong Hub Terminal, which has already allowed the company to secure solid cost competitiveness. The operation of the mega terminal is expected to cut costs, given that: 1) most companies (including online shopping malls) that generate B2C parcel delivery demand are concentrated in the Seoul metro area; and 2) nearly half of their delivery destinations are located in the capital region.
The new terminal should enable the company to provide same-day delivery service in the Seoul metro area, which will likely boost demand from online shopping mall companies. Since Korex will likely become the only same-day delivery service provider, the company should be able to solidify its competitive edge further.
Same-day delivery services are expected to allow the company to push through a rate hike, which would drive up the companyÊs blended ASP. Although some competitors are constructing or have already constructed new terminals, nothing will be superior in size and location to KorexÊs Gwangju terminal, in our view. Therefore, the Gwangju terminal will likely enable Korex to gain the upper hand in terms of competition.
Table 16. Terminal projects Gyeonggi-do Gwangju Mega-hub Terminal Munpyeong-dong Hub Terminal Scale 139,000m2 (42,000 pyeong) 35,000m2 (11,000 pyeong) Overview Investment W159bn W100bn Operation date December 2013 2H11 - Same-day delivery service within the Seoul metro area and - Cost reductions through automation and load factor improvement Effect market share gains - Network optimization - Building a wide one hub/four sub parcel terminal network Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 26 December 13, 2012 Logistics
VII. Look out for the larger players
1. Korex and Glovis: Strengths and weaknesses
Larger players to take We believe the Korean logistics industry will be dominated by the larger players that are able center stage to withstand the prolonged period of overcapacity and come out stronger at the other end. As such, we expect larger logistics providers to see overall market share gains. We highlight two industry players: Korex, an asset-based 3PL provider, and Hyundai Glovis, which is expected to branch out from 2PL to 3PL.
While both companies are among the leading logistics providers in Korea in terms of revenues, they differ in terms of target market and asset characteristics. This means that they have different competitive advantages. More recently, however, both companies have been focusing on addressing their relative weaknesses.
Korex has a relatively weak overseas network. The company has only five overseas subsidiaries, whereas Hyundai Glovis has eleven. More specifically, its lack of experience abroad, virtual lack of a forwarding network spanning domestic and overseas operations, and poor price competitiveness have led the company to recently consider M&As with foreign players in an effort to expand and improve its overseas network. Given the high efficiency of its legacy assets, we believe building overseas capacity would further boost its cost competitiveness, thus solidifying its market position.
Hyundai Glovis, on the other hand, has an outsized exposure to the exports and output growth of HKAG (although recent top-line growth has been very strong). Recognizing the limitations to growth once the automakerÊs Brazil plant goes into full operations, the company is currently advancing into the once-ignored 3PL market. Having stayed on top of the domestic logistics ecosystem for so long, we expect the company to enter the 3PL market without issue. Although the companyÊs scarcity of assets implies limited upside to margins, we believe it could tap its overseas network to gain orders from its existing domestic and foreign clients, mainly in the forwarding business.
Table 17. Comparison of two logistics companies Main market Asset structure Main business Strength - Domestic and global network, likely to Hyundai Glovis 2PL Non-asset based Freight forwarding secure supply from parent company Korex 3PL Asset-based Transport - Holding huge amount of assets Source: KDB Daewoo Securities Research
Table 18. SWOT analyses of Hyundai Glovis and Korex SWOT Hyundai Glovis Korex - Stable growth on the back of captive demand - Owns equipment and assets for transport Strength from parent company - Well-established client network - Low operating risks Weakness - Non-asset based, lack of operating leverage - Lack of stable client base Opportunity - Entry into 3PL & retail markets - Entry into overseas markets - Restrictions on intercompany deals between - Continued competition putting downside Threat parent companies and subsidiaries pressures on margins Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 27 December 13, 2012 Logistics
2. Bound to cross paths
Only a handful of large As Hyundai Glovis and Korex improve on their weaknesses, we believe the two are bound to players will make it to cross paths in the 3PL market as serious competitors, mostly in 1) the traditional 3PL market, the top 2) export/import logistics, and 3) overseas markets (China, Southeast Asia, US, and Europe). We believe Korex will stand out in the traditional 3PL market, while Hyundai Glovis will outperform in exports and imports. On the overseas front, we see Korex gaining an upper hand in Asia (especially in light of its upcoming merger with CJ GLS) and Hyundai Glovis taking leadership in developed markets.
That being said, given that these markets are projected to continue growth for some time on favorable government policies, and that building relationships between cargo owners and logistics providers takes time, we do not expect to see any extreme competition in the near term. However, the market is likely to mature within the next decade, after which it will be interesting to see which player succeeds in building on its strengths and overcoming its shortcomings.
Figure 38. Matrix of major logistics companies
Non-asset based Hansol Samsug CSN Electronics Logitech Hyundai Hyundai Glovis Logistics
CJ GLS
한진 Hanjin Corp. Korex
0 1020304050607080 Asset-based
2PL 3PL
Source: KDB Daewoo Securities Research
KDB Daewoo Securities Research 28 December 13, 2012 Logistics
VIII. Taking stock of the five forces and risks
1. Five forces analysis
1) Customers’ negotiating power: Likely to weaken in the long term Cargo owners (logistics providersÊ key customers) have held the strongest leverage in the industry over the past 15 years and still continue to do so. The reason why cargo owners had so much clout was because of the industryÊs prevalent oversupply. However, we believe cargo owners will slowly lose their negotiating power in the coming years, largely due to more constrained supply and industry consolidation facilitated by the market share gains of top-tier players. Indeed, the influence of cargo owners has notably dwindled in the warehousing sector and is gradually weakening in the courier segment. On the other hand, cargo owners still have considerable clout in stevedoring, which is still in a state of overcapacity, while we expect to see a more balanced relationship in trucking. For these two markets, we expect logistics firms to steadily regain their negotiating power in trucking within the next five years and in stevedoring in the next ten years.
2) Suppliers’ negotiating power: Likely to strengthen in the long term Across the supply chain (equipment, fuel, etc.), we believe the most important supplier group is truck owners, especially given that only 50% of couriers have their own trucks. Since early 2000, the number of truck owners has increased significantly, undercutting their negotiating power. However, we believe the situation will reverse over time, likely forcing logistics firms to provide some incentives to truck owners. Such efforts already seem to be underway, a prime example being KorexÊs tuition aid to the children of courier truck owners. In contrast, trucking operators do not have much negotiating clout due to structural overcapacity, which partly explains the frequent strikes staged by the Korea cargo transport workers union. In the long run, we believe trucking operatorsÊ negotiating power will be restored together with industry consolidation, but this will likely take some time.
As KoreaÊs logistics industry progresses, we believe the most important player in the supply chain will be IT service providers. In this area, Samsung SDS currently has the strongest negotiating power and has been expanding its standing with a recent W100bn investment in its logistics system and its takeover of EXE consulting (IT solution provider for Korex). In the long run, we see the company gaining further negotiating power as logistics players transition into the 4PL market.
3) No viable alternative In our view, there are currently no practical or viable alternatives to logistics providers. Although there have been worries over possible substitutes (most notably KTX), we believe a real potential threat in the long term could arise from the transition from land transport to coastal and air transport. Still, we have not so far seen any compelling alternative that may threaten the existence of conventional logistics providers cost-wise.
4) Potential market entry of conglomerates Up to this point, the largest new entrant into the logistics market has probably been Korea Post, which has built a strong presence in the courier industry. Korea PostÊs surprisingly low prices at the time of its entry pushed market rates down further, triggering an industry-wide restructuring. Looking forward, we think 2PL providers from large conglomerates could pose new entrant threats in the 3PL market. Potential competitors are Hyundai Glovis, Samsung
KDB Daewoo Securities Research 29 December 13, 2012 Logistics
Electronics Logitech, and Pantos Logistics. These companies currently offer forwarding services, leveraging the captive demand from their parent companies, and could potentially penetrate the 3PL market on the back of their financing power. Indeed, Hyundai Glovis has already unveiled its plans to expand into the 3PL business.
That being said, even large conglomerates could face significant entry barriers in the asset- based logistics industry, such as 1) massive funding needs; 2) finding suitable land; and 3) building a solid network with forwarders. We believe that, while conglomerates are likely to enter the 3PL market, they are unlikely to do so on a stand-alone basis, as illustrated by the CJ GroupÊs acquisition of Korex. Therefore, we believe 2PL providers from conglomerate groups will consider buying existing logistics players as a way to enter the market.
5) Market competition Logistics firms have had to endure fierce market competition for years and still to this day suffer from the repercussions. However, as suggested by the pickup in several sub- industries, market competition seems to be generally receding. Still, the potential entry of new players, especially conglomerates, in the 3PL market represents a serious threat. But until then, we expect industry consolidation to pick up speed, helping to ease market competition.
Table 19. Five forces analysis Current Shot-term Long-term Comments status outlook outlook Bargaining power of buyers ++ - -- Oversupply is easing Strengthening bargaining power of IT Bargaining power of suppliers -- - ++ solution providers Threat of substitutes ------No significant substitute exists Possible entry of conglomerates into 3PL Threat of new competition - + ++ market Oversupply easing vs. entry of Intensity of competition ++ + -- conglomerates Source: KDB Daewoo Securities Research
2. Policy risk: Restrictions on parent-subsidiary deals
Tougher regulations on Looking forward, we believe industry players that are part of large conglomerate groups will parent-subsidiary deals not be able to avoid tougher government regulations in the long term, especially Hyundai present a downside risk Glovis, which is mostly reliant on the 2PL business. Looking at the logistics affiliates of major Korean conglomerates, intercompany transactions account for 83% of total revenues (as of 2010) and the majority of outside deals were made through closed negotiations.
In particular, Hyundai Glovis generates 87% of its sales (as of 2011) from group affiliates, which makes the company particularly vulnerable to regulations on intercompany transactions with its parent. The expected levy of a gift tax on wealth transferred through parent-subsidiary intercompany deals next year is also likely to heighten pressures at the group level. Korex, which had been an independent logistics provider, will see its exposure to these types of transactions grow following its expected merger with CJ GLS (which currently has a 30% exposure). Against this backdrop, we believe both Hyundai Glovis and Korex will have to further expand their proportions of 3PL business. Fortunately, second-tier domestic firms do not yet have strong competitiveness, suggesting that, once the 3PL market grows, top-tier players will eventually benefit.
KDB Daewoo Securities Research 30 December 13, 2012 Logistics
3. Selective overseas market entry
Overseas M&As should Looking ahead, we expect to see a rush of aggressive overseas M&As, as domestic logistics be carefully thought firms recognize that it is critical to advance abroad in order to continue growing. But ill- through conceived acquisitions could cause long-term side effects. Recently, Korex made an attempt to buy the US forwarder Phoenix International at over W500bn, three years ahead of schedule. Although the deal eventually fell through due to price disagreements, the attempt sent a positive signal to investors by demonstrating 1) Asian firmsÊ commitment to forging M&A deals and 2) a reluctance to overpay.
In order for domestic logistics firms to expand their low ROEs, we believe it is important for them to sift out companies with above-10% ROE and set clear ROIC targets to keep their eagerness to expand abroad from translating into reckless mistakes. And it goes without saying that a company seeking an M&A must ensure the following: 1) a well-devised financing plan, 2) manageable levels of debt, and 3) stable earnings from both domestic and foreign clients through careful post-takeover management. If these conditions are properly met without compromising shareholder value, we believe forays into overseas markets will be widely viewed as positive by the market.
Table 20. 2PL intercompany transactions at major conglomerates (parent-subsidiary) (Wbn,%) 2008 2009 2010 Total revenues 3,144 3,206 4,551 Total intercompany transactions 2,543 2,455 3,775 Intercompany transaction proportion 81.0 77.0 83.0 Private contract proportion 100.0 99.0 99.0 Total external transaction 601 751 776 External transaction proportion 19.0 23.0 17.0 Private contract proportion 96.0 97.0 95.0 Source: Fair Trade Commission press release (Nov. 9, 2011), KDB Daewoo Securities Research
Table 21. Gift tax on wealth transferred through intercompany deals at conglomerates (parent-subsidiary) Description Majority shareholders who own a 3% or more stake in affiliates whose intercompany deals account for Target 30% or more of total revenues Tax rate After-tax operating profit x (intercompany revenue exposure – 30%) x (ownership stake – 3%) x gift tax rate Date Scheduled to take effect in 2013 (starting with 2012 earnings) Source: Fair Trade Commission press release (Nov. 9, 2011), KDB Daewoo Securities Research
Figure 39. % of parent-subsidiary intercompany logistics deals (2011)
(%) Share of intercompany transactions 100
80
60
40
Gov't regulatory guideline: 30% 20
0 Samsung Hyundai Glovis CJ GLS Hyundai Korex Hanjin Corp. Korex + Electronics Logistics CJ GLS Logitech
Source: Fair Trade Commission, press release, KDB Daewoo Securities Research
KDB Daewoo Securities Research 31 December 13, 2012 Logistics
Hyundai Glovis (086280 KS)
Buy (Initiate) Expecting aggressive business expansion
Target Price (12M, W) 300,000 Initiate coverage with Buy rating and TP of W300,000 Share Price (12/11/12, W) 218,000 Expected Return (%) 37.6 Slowing growth of existing business to be offset by new momentum EPS Growth (12F, %) 34.7 Expecting aggressive business expansion Market EPS Growth (12F, %) 10.1 P/E (12F, x) 20.3 Market P/E (12F, x) 10.5 We initiate our coverage on Hyundai Glovis with a Buy rating and a target price of KOSPI 1,964.62 W300,000. Using a residual income model, we derived our target price using an Market Cap (Wbn) 8,175 adjusted P/E of 17.7x (based on end-2013 earnings estimates, including subsidiary Shares Outstanding (mn) 38 earnings). We based our recommendation on: 1) the growth of Hyundai GlovisÊ Avg Trading Volume (60D, '000) 70 captive customer (Hyundai-Kia Automotive Group (HKAG)), 2) the firmÊs expansion Avg Trading Value (60D, Wbn) 16 into third-party logistics (3PL) capitalizing on its extensive overseas networks, and Dividend Yield (12F, %) 0.9 Free Float (%) 34.7 3) the firmÊs capital power, which we think is sufficient to make aggressive 52-Week Low (W) 172,500 investments in businesses (e.g., car carriers) if necessary. We find Hyundai GlovisÊ 52-Week High (W) 245,000 current share price (adjusted P/E of 12.9x) attractive. The stockÊs P/E could decline Beta (12M, Daily Rate of Return) 0.80 if the companyÊs growth rate decreases. Still, we expect the companyÊs shares to Price Return Volatility (12M Daily, %, SD) 2.1 see a stable rise, aided by: 1) the inclusion of earnings at subsidiaries in the Foreign Ownership (%) 25.9 companyÊs consolidated numbers, and 2) the companyÊs expansion into new Major Shareholder(s) business areas. Ui-seon Jeong, et al.(65.27%) National Pension Service (8.08%) Hyundai Glovis has shown remarkable top-line and profit growth, largely fueled by HKAGÊs overseas expansion and growing market share as well as by Hyundai Price Performance SteelÊs capacity expansion. However, we expect the companyÊs 2PL-related (%) 1M 6M 12M growth momentum to slow, except for in certain segments (such as car carriers). Absolute 0.9 7.7 3.3 Relative -2.2 2.4 -1.5 We do not expect this slowdown to be as rapid as the market forecast, considering: 1) the aforementioned expansion into 3PL, and 2) the companyÊs launch of completely built-up unit (CBU) transportation to China. We think the firmÊs existing business units could also grow their freight volume on the back of productivity improvements and business expansion by overseas subsidiaries.
We anticipate the domestic 3PL market will continue to grow in 2013. And we feel that Hyundai Glovis has to focus on its 3PL business given the governmentÊs restrictions on conglomeratesÊ parent-subsidiary intercompany transactions. Hyundai Glovis is a top-tier logistics firm, and we think it will capitalize on its existing networks and capital power to make aggressive investments to expand its market share. We believe this will drive second-tier companies out of the market, and we project this realignment will directly and indirectly help top-tier firms like Hyundai Glovis.
Share price Earnings & Valuation Metrics 120 KOSPI FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 110 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 100 12/10 5,834 273 4.7 233 6,216 257 -445 23.7 24.0 5.0 23.2
90 12/11 7,548 340 4.5 302 8,058 368 66 23.6 23.8 5.1 20.4 12/12F 9,413 458 4.9 407 10,854 473 15 25.2 20.1 4.6 18.3 80 12/13F 11,026 559 5.1 465 12,392 601 198 23.2 17.6 3.8 14.1 70 12/14F 12,235 640 5.2 531 14,168 686 289 21.8 15.4 3.1 12.0 12/11 4/12 8/12 12/12 Notes: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 32 December 13, 2012 Logistics
Table 22. Valuation: Residual Income Model (Wbn, W, %, x) 2012 2013 2014 2015 2016 Debt (beginning) 653 774 774 858 1,063 Equity (beginning) 1,108 1,313 1,313 1,455 2,256 Net income 317 424 424 485 626 Capital charge (66) (79) (79) (87) (135) Excess earnings (1) 345 345 398 0 Discount factor 0.9 0.9 0.9 0.8 0.6 PV of excess earnings 1,346 (1) 307 334 350 355 ROE 25.2% 23.2% 21.8% 21.3% 20.8% CV 10,274 PV of CV 7,685 Equity (beginning) 1,108 Operating asset value Beta 0.52 (adjusted) Non-operating asset 1,039 Risk Premium 6.0% value Debt 447 Risk Free Rate 2.9% Shareholder value 11,338 COE 6.0% Outstanding shares(Â000) 37,500 Perpetual Growth 3.0% Target price 300,000 Sustainable ROE 20.0% Current price 218,000 Target P/B 4.3 Upside potential 37.6 Target P/E 21.2 Source: KDB Daewoo Securities Research
Table 23. Quarterly earnings forecasts (Wbn, %, %p) 2011 2012F 4Q12F Growth 2011 2012F 2013F 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QF QoQ YoY Revenues 1,628 1,857 1,945 2,117 2,236 2,376 2,339 2,462 5.2 16.3 7,548 9,413 11,026 Operating profit 77 90 85 88 111 115 112 119 6.4 35.4 340 458 559 Pretax profit 90 94 89 102 125 130 120 136 13.4 33.6 374 510 613 Net profit 71 75 68 89 92 114 98 103 4.6 15.3 302 407 465 OP margin 4.7 4.8 4.4 4.2 5.0 4.8 4.8 4.9 0.1 0.7 4.5 4.9 5.1 Pretax margin 5.5 5.0 4.6 4.8 5.6 5.5 5.1 5.5 0.4 0.7 5.0 5.4 5.6 NP margin 4.3 4.0 3.5 4.2 4.1 4.8 4.2 4.2 0.0 0.0 4.0 4.3 4.2 Note: Based on non-consolidated K-IFRS / Source: Company data, KDB Daewoo Securities Research
Table 24. Earnings by segment (Wbn) 2011 2012 2011 2012F 2013F 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QF Domestic Revenues 262 287 286 315 297 319 309 343 1,150 1,268 1,338 Logistics Gross profit 20 24 24 25 22 27 19 27 92 95 113 GP margin (%) 7.5 8.2 8.5 7.9 7.5 8.3 6.3 7.9 8.0 7.5 8.4 International Revenues 512 577 603 685 696 785 747 772 2,377 3,000 3,287 Logistics Gross profit 35 42 45 40 47 62 53 53 162 215 251 GP margin (%) 6.9 7.3 7.5 5.8 6.8 7.9 7.0 6.9 6.8 7.2 7.6 CKD Revenues 798 923 986 1,025 1,131 1,140 1,153 1,210 3,732 4,634 5,675 Gross profit 76 80 92 109 111 97 103 113 357 424 547 10. GP margin (%) 9.6 8.6 9.3 9.8 8.5 8.9 9.4 9.6 9.1 9.6 7 Merchandise Revenues 57 69 71 93 112 133 130 137 290 512 725 Gross profit 5 5 6 5 6 7 10 7 20 30 36 GP margin (%) 8.1 7.7 7.9 5.3 5.6 4.9 7.8 5.2 7.0 5.9 4.9 Total Revenues 1,628 1,857 1,945 2,118 2,236 2,377 2,339 2,462 7,548 9,413 11,026 Gross profit 136 151 167 179 186 192 185 201 632 764 946 GP margin (%) 8.3 8.1 8.6 8.4 8.3 8.1 7.9 8.2 8.4 8.1 8.6 Note: Based on non-consolidated K-IFRS / Source: Company data, KDB Daewoo Securities Research
KDB Daewoo Securities Research 33 December 13, 2012 Logistics
Hyundai Glovis (086280 KS/Buy/TP: W300,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 7,548 9,413 11,026 12,235 Current Assets 2,008 2,485 2,964 3,451 Cost of Sales 6,916 8,649 10,079 11,169 Cash and Cash Equivalents 495 593 749 994 Gross Profit 632 764 946 1,065 AR & Other Receivables 1,053 1,314 1,539 1,707 SG&A Expenses 297 314 388 426 Inventories 401 500 585 649 Operating Profit (Adj) 335 450 559 640 Other Current Assets 58 73 85 94 Operating Profit 340 458 559 640 Non-Current Assets 1,182 1,543 1,664 1,786 Non-Operating Profit 35 52 54 61 Investments in Associates 100 100 100 100 Net Financial Income -1 -3 -1 -6 Property, Plant and Equipment 596 909 993 1,082 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 27 29 30 31 Pretax Profit 374 510 613 701 Total Assets 3,190 4,028 4,628 5,237 Income Tax 72 103 148 170 Current Liabilities 1,542 1,999 2,179 2,315 Profit from Continuing Operations 302 407 465 531 AP & Other Payables 767 957 1,120 1,243 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 695 942 942 942 Net Profit 302 407 465 531 Other Current Liabilities 80 100 117 130 Controlling Interests 302 407 465 531 Non-Current Liabilities 218 232 243 251 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 0 0 0 0 Total Comprehensive Profit 320 425 482 549 Other Non-Current Liabilities 214 228 240 248 Controlling Interests 320 425 482 549 Total Liabilities 1,760 2,230 2,422 2,566 Non-Controlling Interests 0 0 0 0 Controlling Interests 1,430 1,798 2,205 2,672 EBITDA 368 473 601 686 Capital Stock 19 19 19 19 FCF (Free Cash Flow) 66 15 198 289 Capital Surplus 154 154 154 154 EBITDA Margin (%) 4.9 5.0 5.5 5.6 Retained Earnings 1,127 1,478 1,868 2,316 Operating Profit Margin (%) 4.5 4.9 5.1 5.2 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) 4.0 4.3 4.2 4.3 Stockholders' Equity 1,430 1,798 2,205 2,672
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 223 200 311 411 P/E (x) 23.8 20.1 17.6 15.4 Net Profit 302 407 465 531 P/CF (x) 21.4 19.0 16.2 14.2 Non-Cash Income and Expense 80 68 136 155 P/B (x) 5.1 4.6 3.8 3.1 Depreciation 30 18 37 41 EV/EBITDA (x) 20.4 18.3 14.3 12.1 Amortization 4 5 5 5 EPS (W) 8,058 10,854 12,392 14,168 Others -5 3 0 0 CFPS (W) 8,956 11,462 13,501 15,405 Chg in Working Capital -122 -175 -141 -106 BPS (W) 37,411 47,182 58,011 70,421 Chg in AR & Other Receivables -279 -244 -225 -169 DPS (W) 1,500 2,000 2,200 2,500 Chg in Inventories -181 -99 -86 -64 Payout ratio (%) 18.6 18.4 17.8 17.7 Chg in AP & Other Payables 355 178 164 123 Dividend Yield (%) 0.8 0.9 1.0 1.1 Income Tax Paid -38 -100 -148 -170 Revenue Growth (%) 29.4 24.7 17.1 11.0 Cash Flows from Inv Activities -101 -140 -64 -67 EBITDA Growth (%) 43.5 28.5 26.9 14.2 Chg in PP&E -132 -181 -120 -130 Operating Profit Growth (%) 24.6 34.9 22.0 14.4 Chg in Intangible Assets -6 -6 -6 -6 EPS Growth (%) 29.6 34.7 14.2 14.3 Chg in Financial Assets 0 1 0 0 Accounts Receivable Turnover (x) 8.5 8.2 8.0 7.8 Others 38 45 63 70 Inventory Turnover (x) 24.3 20.9 20.3 19.8 Cash Flows from Fin Activities 86 38 -92 -99 Accounts Payable Turnover (x) 15.5 12.6 12.3 12.0 Chg in Financial Liabilities 116 203 0 0 ROA (%) 11.1 11.3 10.7 10.8 Chg in Equity 0 0 0 0 ROE (%) 23.6 25.2 23.2 21.8 Dividends Paid -26 -56 -75 -83 ROIC (%) 21.7 22.4 22.6 23.3 Others -4 -108 -17 -17 Liability to Equity Ratio (%) 123.1 124.1 109.9 96.1 Increase (Decrease) in Cash 208 98 156 245 Current Ratio (%) 130.2 124.3 136.0 149.1 Beginning Balance 286 495 593 749 Net Debt to Equity Ratio (%) 13.9 19.1 8.5 -2.2 Ending Balance 495 593 749 994 Interest Coverage Ratio (x) 31.0 37.3 33.6 38.4 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 34 December 13, 2012 Logistics
CJ Korea Express (000120 KS)
Buy (Maintain) Focus on long-term growth
Target Price (12M, W) 150,000 Maintain Buy call; TP of W150,000 Share Price (12/11/12, W) 97,500 Expected Return (%) 53.8 4Q earnings miss expected due to weakened stevedoring business EPS Growth (12F, %) 20.6 Valuation burden to ease from improved long-term ROE Market EPS Growth (12F, %) 10.1 P/E (12F, x) 21.9 Market P/E (12F, x) 10.5 We maintain our Buy call on CJ Korea Express (Korex), with a target price of KOSPI 1,964.62 W150,000. We expect KorexÊs share of the logistics market, especially in regards Market Cap (Wbn) 2,224 to parcel delivery, to expand on the back of its significant transportation capacity, Shares Outstanding (mn) 23 as well as its planned operational integration with CJ GLS. We expect this Avg Trading Volume (60D, '000) 96 improved market position will lead to ROE growth. The companyÊs current Avg Trading Value (60D, Wbn) 10 valuation (P/B of 1.0x) might appear lofty, but we believe this valuation burden will Dividend Yield (12F, %) 0.0 ease over the long term with ROE growth. Free Float (%) 36.1 52-Week Low (W) 62,100 We project KorexÊs 4Q operating profit at W35.1bn, falling short of market 52-Week High (W) 122,000 expectations. However, stripping away the tax refund the company received in 2H Beta (12M, Daily Rate of Return) 0.79 (two-thirds recognized in 3Q; one-third in 4Q), the companyÊs 3Q and 4Q operating Price Return Volatility (12M Daily, %, SD) 2.4 profits would both be around W30bn. We think the stevedoring unit will remain Foreign Ownership (%) 4.0 sluggish through 4Q even though the quarter has traditionally been a strong Major Shareholder(s) season, darkening the outlook for 4Q earnings. We attribute the sluggishness of CJ CheilJedang et al. (40.17%) the stevedoring business to the economic slump, as well as major carriers Treasury stock (23.77%) switching their port of call to Pusan Newport International Terminal. However, we Asiana Airlines et al. (12.39%) project the companyÊs 4Q operating profit could grow by more than W30bn if Price Performance Korex reduces the scale of its business and commission expenses paid to ports. (%) 1M 6M 12M Absolute -17.0 43.6 32.7 Investors are concerned that the companyÊs trading P/B might not stay over 1x Relative -20.2 38.4 27.9 given the companyÊs low ROE (around 5%) and a recent surge in shares. However, we expect KorexÊs ROE to improve steadily going forward, as the company: 1) has room to increase its financial leverage (its debt-to-equity ratio is excessively low), and 2) can increase asset turnover by undertaking leveraged acquisitions of overseas companies. In addition, we expect KorexÊs stronger pricing power will boost profitability. As such, we advise investors to focus more on potential long- term improvement than near-term earnings.
One other concern regarding Korex is that its likely merger with CJ GLS might negatively affect shareholders. But we do not expect CJ Group to take any actions to dilute the value of Korex given that CJ Group spent almost W2tr to buy the firm.
We are concerned, however, that overhang risks related to the companyÊs shares of Asiana Airlines and Daewoo E&C could emerge after March 2013. Korex could sell its stakes depending on its capex plans, as the companyÊs book value related to these shares is more than 20% lower than current share prices.
Share price Earnings & Valuation Metrics 170 KOSPI FY Revenue OP OP Margin NP EPS EBITDA FCF ROE P/E P/B EV/EBITDA 150 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 130 12/10 2,464 174 7.1 98 4,300 213 -247 4.9 21.9 1.1 15.0
110 12/11 2,588 123 4.7 85 3,703 199 -165 3.9 20.3 0.8 12.1 12/12F 2,817 156 5.5 102 4,467 212 -81 4.5 21.8 1.0 14.0 90 12/13F 3,231 206 6.4 127 5,550 251 7 5.3 17.6 1.0 11.9 70 12/14F 3,787 253 6.7 155 6,781 301 25 6.1 14.4 1.0 10.0 12/11 4/12 8/12 12/12 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
KDB Daewoo Securities Research 35 December 13, 2012 Logistics
Table 25. Earnings forecast revisions (Wbn, %) Previous Revised % change Comments 12F 13F 12F 13F 12F 13F Revenues 2,814 3,225 2,817 3,231 0.1 0.2 Operating profit 164 217 156 206 -4.9 -5.1 - Lowering 2012~13F: continuous weakness Pretax profit 134 170 127 153 -4.9 -10.1 of stevedoring Net profit 96 129 91 116 -5.1 -10.2 EPS(W) 4,595 6,031 4,467 5,550 -2.8 -8.0 Note: Based on consolidated K-IFRS Source: KDB Daewoo Securities Research
Table 26. Quarterly earnings forecasts (Wbn, %, %p) 2011 2012F 4Q12 growth 2011 2012F 2013F 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QF QoQ YoY Revenues 611 633 628 716662 713 697 745 6.8 4.0 2,588 2,817 3,231 Operating profit 18 43 37 27 38 43 40 35 -11.9 32.3 123 156 206 Pretax profit 7 33 17 -14 30 35 32 30 -5.9 TTB 43 127 153 Net profit 4 22 18 37 21 22 25 23 -7.9 -38.7 81 91 116 OP margin 3.0 6.8 6.0 3.7 5.8 6.0 5.7 4.7 -1.0 1.0 4.8 5.5 6.4 Pretax margin 1.1 5.2 2.7 -1.9 4.5 4.9 4.6 4.1 -0.5 6.0 1.7 4.5 4.7 NP margin 0.7 3.4 2.8 5.2 3.2 3.1 3.6 3.1 -0.5 -2.1 3.1 3.2 3.6 YoY parcel traffic growth (%) 14.3 11.5 8.8 7.2 8.7 16.0 20.2 20.0 -0.2 12.8 10.3 16.3 17.3 Notes: Based on consolidated K-IFRS; 3Q11 figures are based on Kumho GroupÊs internal accounting standards Source: KDB Daewoo Securities Research
Figure 40. P/B band
(W'000) 210 2.0x 180
150 1.4x 120 1.1x 90 0.8x 60 0.5x 30
0 04 06 08 1012F 12
Source: KDB Daewoo Securities Research
Daewoo Securities Research 36
December 13, 2012 Logistics
CJ Korea Express (000120 KS/Buy/TP: W150,000)
Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F (Wbn) 12/11 12/12F 12/13F 12/14F Revenues 2,588 2,817 3,231 3,787 Current Assets 813 909 1,191 1,610 Cost of Sales 2,353 2,556 2,905 3,394 Cash and Cash Equivalents 231 323 511 816 Gross Profit 235 260 326 394 AR & Other Receivables 505 526 611 716 SG&A Expenses 110 114 120 141 Inventories 15 15 18 21 Operating Profit (Adj) 125 147 206 253 Other Current Assets 39 34 40 47 Operating Profit 123 156 206 253 Non-Current Assets 2,783 2,979 3,116 3,265 Non-Operating Profit -79 -29 -53 -63 Investments in Associates 98 95 95 94 Net Financial Income 36 25 42 52 Property, Plant and Equipment 1,509 1,576 1,552 1,528 Net Gain from Inv in Associates 0 -2 -1 -1 Intangible Assets 560 649 740 827 Pretax Profit 44 127 153 190 Total Assets 3,595 3,888 4,307 4,875 Income Tax 35 36 37 46 Current Liabilities 590 638 700 776 Profit from Continuing Operations 9 91 116 144 AP & Other Payables 231 241 280 328 Profit from Discontinued Operations 72 0 0 0 Short-Term Financial Liabilities 224 257 257 257 Net Profit 81 91 116 144 Other Current Liabilities 135 140 163 191 Controlling Interests 85 102 127 155 Non-Current Liabilities 740 884 1,115 1,453 Non-Controlling Interests -4 -11 -11 -11 Long-Term Financial Liabilities 616 701 920 1,246 Total Comprehensive Profit 58 101 126 154 Other Non-Current Liabilities 57 111 117 125 Controlling Interests 62 112 137 165 Total Liabilities 1,331 1,523 1,815 2,229 Non-Controlling Interests -4 -11 -11 -11 Controlling Interests 2,213 2,324 2,461 2,626 EBITDA 199 212 251 301 Capital Stock 114 114 114 114 FCF (Free Cash Flow) -165 -81 7 25 Capital Surplus 2,195 2,198 2,198 2,198 EBITDA Margin (%) 7.7 7.5 7.8 7.9 Retained Earnings 367 466 593 748 Operating Profit Margin (%) 4.7 5.5 6.4 6.7 Non-Controlling Interests 52 42 31 20 Net Profit Margin (%) 3.3 3.6 3.9 4.1 Stockholders' Equity 2,265 2,366 2,492 2,646
Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/11 12/12F 12/13F 12/14F 12/11 12/12F 12/13F 12/14F Cash Flows from Op Activities 163 208 135 156 P/E (x) 20.3 21.8 17.6 14.4 Net Profit 81 91 116 144 P/CF (x) 10.8 13.3 12.9 11.0 Non-Cash Income and Expense 185 164 135 157 P/B (x) 0.8 1.0 1.0 1.0 Depreciation 57 49 25 24 EV/EBITDA (x) 12.1 14.0 12.0 10.0 Amortization 17 17 20 24 EPS (W) 3,703 4,467 5,550 6,781 Others -14 -37 -11 -11 CFPS (W) 6,961 7,344 7,534 8,863 Chg in Working Capital -38 -54 -79 -99 BPS (W) 93,466 94,431 96,476 99,890 Chg in AR & Other Receivables -70 -46 -85 -105 DPS (W) 0 0 0 0 Chg in Inventories -1 -1 -3 -3 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables -11 -4 39 48 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -65 7 -37 -46 Revenue Growth (%) 5.0 8.8 14.7 17.2 Cash Flows from Inv Activities 85 -203 -125 -125 EBITDA Growth (%) -6.5 6.4 18.4 19.7 Chg in PP&E -136 -127 0 0 Operating Profit Growth (%) -29.3 27.0 32.0 22.9 Chg in Intangible Assets -122 -111 -111 -111 EPS Growth (%) -13.9 20.6 24.3 22.2 Chg in Financial Assets -4 12 0 0 Accounts Receivable Turnover (x) 5.3 5.7 5.9 6.0 Others 346 23 -14 -14 Inventory Turnover (x) 177.6 189.4 197.1 197.9 Cash Flows from Fin Activities -117 87 178 273 Accounts Payable Turnover (x) 13.3 14.6 15.2 15.3 Chg in Financial Liabilities -59 28 0 0 ROA (%) 2.2 2.4 2.8 3.1 Chg in Equity 0 0 0 0 ROE (%) 3.9 4.5 5.3 6.1 Dividends Paid 0 0 0 0 ROIC (%) 3.5 4.2 5.5 6.4 Others -58 -34 -42 -52 Liability to Equity Ratio (%) 58.8 64.4 72.9 84.3 Increase (Decrease) in Cash 132 92 188 305 Current Ratio (%) 137.7 142.4 170.1 207.5 Beginning Balance 99 231 323 511 Net Debt to Equity Ratio (%) 25.9 26.4 26.3 25.6 Ending Balance 231 323 511 816 Interest Coverage Ratio (x) 2.5 3.9 4.9 4.9 Source: Company data, KDB Daewoo Securities Research estimates
KDB Daewoo Securities Research 37 December 13, 2012 Logistics
Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.
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 analystÊs 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.
(W) HYUNDAIGLOVIS (W) CJ Korea Express 350,000 200,000 300,000 250,000 150,000 200,000 100,000 150,000 100,000 50,000 50,000 0 0 12/10 6/11 12/11 6/12 12/12 12/10 6/11 12/11 6/12 12/12
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 AnalystÊs 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 Korean language. 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 banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.
Daewoo Securities Research 38
December 13, 2012 Logistics
Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the „Order‰), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as „Relevant Persons‰). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.
KDB Daewoo Securities International Network
Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office Two International Finance Centre 600 Lexington Avenue 34-3 Yeouido-dong, Yeongdeungpo-gu Suites 2005-2012 Suite 301 Seoul 150-716 8 Finance Street, Central New York, NY 10022 Korea Hong Kong United States Tel: 82-2-768-3026 Tel: 85-2-2514-1304 Tel: 1-212-407-1022
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