2018 outlook

Auto Market cycle to improve modestly after bottoming

Young-ho Park +822-3774-1743 [email protected] Contents

[Summary] Sales volume to recover modestly in 2018;

new growth drivers to continue to attract attention 3

I. 2017 review 4

II. 2018 outlook 5

III. Long-term outlook 16

IV. Valuation 24

V. Investment strategy 27

VI. Top picks & stocks to watch 28 (161390 KS/Buy) Hyundai Motor (005380 KS/Trading Buy) Motors (000270 KS/Trading Buy) S&T Motiv (064960 KS/Buy)

[Summary] Sales volume to recover modestly in 2018; new growth drivers to continue to attract attention

Upgrade to Overweight: Sales volume to improve across EM; the conventional automotive market to display low growth; new growth drivers to continue to attract attention

(1st. Jan. 2001 =100) HMC, Kia world market share (R) Korea automobile representative stock index (L) (%)

3,000 Domestic 12 Investment full operation Global investment expansion Global high-growth period Expansion congestion period Limited expansion cycle

Growth High First China growth Fixed cost increase Abrupt drop China / US China / Emerging demand Limited recovery 11 factor export growth / raw materials in operation high growth emerging recession, rebounds, exchange in M/S, / won appreciation exchange rate rate instability → demand maturity, 2,400 deterioration, stable advanced eco-friendly/ growth of competitors market, intensifying smart car market 10 competition in China expansion

9 1,800

8

1,200 7

6 600

5

0 4 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 F17 F18 F19

Source: Thomson Reuters, Mirae Asset Daewoo Research

3| 2018 Outlook [Auto] Mirae Asset Daewoo Research I. 2017 review

Earnings recovery has • In 2H17, demand from major emerging markets, including Russia and Brazil, recovered on higher oil prices been delayed, due to • Meanwhile, growth of Chinese demand slowed, while US demand declined weak earnings from key • ’s (HMG) earnings recovery has been delayed due to: 1) the sharp fall in Chinese earnings; and 2) intense competition in the US market markets • Earnings deteriorations in key markets exceeded the pickup in earnings from emerging markets

Auto sales volume growth by major region (from January to October in 2017)

(%) 15 In 2H17, demand from major emerging markets recovered on higher oil 12 prices

9 Continued strong sales

6 Lower growth Lower growth due in sales to reduction in tax benefits 3 US demand decline (vs. previous peak)

0 Confusion after GST, Slight recovery in Lower growth in high growth in sales EMs' demand in -3 sales of 2nd-tier resumes 2H17 companies and imports -6 Brazil Eastern India Japan Other EMs Western Global China Korea North US Europe (including Europe America (including India) (including Russia) US)

Source: LMC Automotive, Mirae Asset Daewoo Research

4| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2018 outlook: Global demand

The “new normal” era: • During 2001-08, overall auto demand showed a CAGR at the 3% level on the back of zero interest rates in the US and motorization in China Overall auto demand • During 2010-16, demand CAGR reached the upper-4% level, driven by strong demand in emerging markets and growth to be limited recovery of demand in advanced economies amid market saturation • Growth is likely to slow to less than 3% going forward, due to Chinese market saturation/overall market maturation • On a positive note, global demand will likely be solid in 2H17, aided by: 1) an emerging market recovery; and 2) a pickup in demand ahead of the elimination of Chinese tax benefits for car purchase

Long-term global auto demand (SAAR)

Demand Global crisis stimulus in China

US zero interest rate, QE effect, motorization in China demand recovery in DMs

New normal, IT bubble, eurozone maturity growth cycle Strong auto demand growth in EMs Recovery in EMs, reduction in US

Source: LMC Automotive, Mirae Asset Daewoo Research

5| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2018 outlook: Global demand

Global auto demand to • Global auto demand is projected to grow 2.9% in 2018 (slower than in 2017) grow 2.9% in 2018; EM • Demand growth in key markets, including China, US, and Western European countries, is likely to remain weak turnaround vs. • Demand in Latin America (including Brazil) and Russia will likely recover markedly (+10% YoY) • The Indian market, which experienced a tax overhaul (arising from the introduction of GST), should continue to sluggishness in key grow rapidly markets • The emerging market turnaround is likely to continue amid inflationary conditions, including rising oil prices

Auto demand growth projections by region Long-term outlook for global auto demand

(%) (mn units) 20 EM turnaround likely to 120 Global continue to lift oil prices 16 17F 18F EMs Developed countries 15 100 10.7 10 9.3 9.1

80 5 3.9 2.9 2.6 1.8 0.7 0 60

Sluggishness in key markets, -1.9 -5 including Western Europe and China 40 Normalization of Renewed growth in EMs -10 - Despite Chinese market developed maturization, other EMs Strong growth countries 20 in EMs return to positive growth, -15 India's rapid growth South Eastern Other Japan Global Western Korea US China continues America Europe EMs Europe (included (including (including (including in others) 0 Brazil) Russia) India) 05 07 09 11 13 15 17F 19F 21F 23F

Source: IHS Automotive, industry data, Mirae Asset Daewoo Research Source: IHS Automotive, Mirae Asset Daewoo Research

6| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2018 outlook : US

Demand turned downward in 2017, as we had projected; in 2018, demand will likely weaken markedly, due to: 1) rate hikes; and 2) the end of the rapid light-truck growth period

US light vehicle SAAR US SAAR by vehicle type

(pt) (mn units) (mn units) (US$/gallon) 160 25 Consumer confidence index (L) 15 Cars (L) -Gasoline price should rise 6 140 SAAR (R) Light trucks (L) -Demand for light trucks has peaked 20 5 120 12 Gasoline price (R) 100 4 15 9 80 3 60 10 6 2 40 Aggregate demand growth 5 3 20 1 to slow in medium term 0 0 0 0 95 98 01 04 07 10 13 16 95 98 01 04 07 10 13 16 Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

US auto financing rates (48-month) US light vehicle demand forecasts

(%) (mn units) 12 20

10 18

8 16 Demand peaked in 2016; 14 6 interest rates 12 should rise from 4 end-2017 → Downturn in 2 10 demand in 2017 0 8 95 98 01 04 07 10 13 16 05 06 07 08 09 10 11 12 13 14 15 16 17F 18F 19F Source: Bloomberg, Mirae Asset Daewoo Research Source: Automotive News, IHS Automotive, Mirae Asset Daewoo Research

7| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2018 outlook: China

Aggregate demand • From January to October in 2017, China’s auto demand growth slowed to 4% YoY (based on CAAM’s light vehicle data) growth to decline in • Key culprits include: 1) a reduction in the scope of the government’s temporary purchase tax cut (10%  5%  7.5% in 2017); and 2) a high base of comparison, resulting from increased demand in 4Q16 2017; low growth to • In 2018, China’s auto demand is expected to fall by around 2% YoY, given that the temporary purchase tax cut is set continue in medium- to to be abolished long-term • Demand growth is likely to remain low from 2017 onwards • Tighter environmental regulations and registration restrictions in large cities should continue, while inland cities should remain the primary source of demand

China’s monthly light vehicle sales China’s light vehicle demand forecasts

('000 units) (%) (mn units) 3,500 2016 (L) 35 35 2017 (L) Previous outlook YoY (R) 3,000 30 30

25 Revised outlook 2,500 25 20 2,000

15 20 - Reduction in acquisition 1,500 tax cut or elimination 10 of exemption 15 - Strengthening of 1,000 environmental regulations 5 and limits to registration of vehicles in large cities 10 - Inland demand growth 500 0

0 -5 5 Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. 05 07 09 11 13 15 17F 19F 21F 23F

Source: CAAM, industry data, Mirae Asset Daewoo Research Source: IHS Automotive, industry data, Mirae Asset Daewoo Research

8| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2017 outlook: China

THAAD deployment issue • Amid strained Korea-China relations over the THAAD deployment issue, Chinese sales of HMC and Kia Motors have declined by 50% YoY since March 2017 is dissipating, leading to • Japanese automakers’ Chinese sales also showed a marked decline for six-eight months following 2H12, when the the recovery in Chinese territorial dispute over the Diaoyu (Senkaku) Islands peaked sales of HMC and Kia • Korean automakers have seen their Chinese sales recovering gradually since 2H17 onwards, backed by new SUV model launches and improving Korea-China relations • HMC is likely to show a faster-paced earnings recovery, compared with Kia (which is posting weak sales, due mainly to sluggish sales of existing models and the restructuring of its dealer channels)

YoY change in Chinese sales of Korean and Japanese automakers during political conflicts with China: Japan experienced a sharp drop in sales for eight-month period (%) 80 Japanese companies HMC Drop in Japanese auto Kia 60 sales, due to intensification in territorial dispute between China and Japan from Jul. 40 2012~Feb.2013

20

0

-20

-40 Kia Motors' YoY sales After Mar. 2017, THAAD deployment decrease sharply, due depressed Chinese purchases of to robust sales in Oct. -60 Korean goods → Sharp drop in sales of about 50% in Mar. and Apr. -80 11/1 11/5 11/9 12/1 12/5 12/9 13/1 13/5 13/9 Source: Marklines, Mirae Asset Daewoo Research

9| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2018 outlook: China

NEV scheme to present • There is a growing possibility that the implementation of the NEV credit scheme by the Chinese government will both risks and be delayed to 2019 • The early introduction of the NEV credit scheme would weigh on manufacturers of ICE vehicles (e.g., HMG) opportunities • A delay to the implementation of the scheme would buy some time for Korean automakers to prepare against full-fledged adoption • Under the scheme, credit points will be granted to fuel-cell electric vehicles (FCEV) from 2018; this should benefit HMG, which is ahead of rivals in the niche market

Current NEV credit scheme China’s NEV subsidy-cut schedule

150km≤R＜250km 205km≤R＜350km R≥350km ('000 RMB) BEV 0.012×R＋0.8 60 50km

10| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2018 outlook: Western Europe and emerging markets

Slowdown in W. Europe, rapid growth in India, marked signs of turnaround in major EMs  Positive for HMC and Kia Western Europe: Demand recovery coming to an end Eastern Europe (incl. Russia): Turnaround continues

(mn units) (mn units) 16 Given end to QE and Brexit effect, 5.5 Revised 15 Germany, France, UK, and other major outlook markets should see gradual slowdown 5.0 14 in sales 4.5 13 Previous 12 4.0 outlook 11 3.5 10 Turnaround in 9 3.0 Russian demand 8 2.5 05 06 07 08 09 10 11 12 13 14 15 16 17F 18F 19F 10 11 12 13 14 15 16 17F 18F 19F Source: LMC Automotive, IHS Automotive, Mirae Asset Daewoo Research Source: IHS Automotive, Mirae Asset Daewoo Research

Latin America (incl. Brazil): Recovery in economy/employment, India: Light vehicle demand to grow sharply in medium term consumption expected from 2H17 onwards (mn units) 2H17 (mn units) 6.5 Expected 5 Revised recovery in 6.0 Brazilian economy and 4 5.5 demand Previous Revised 5.0 3

4.5 2 - Since launch of Goods and Services Tax (GST) in July 2017, market turmoil has 4.0 Previous subsided in India 1 3.5 - India should see higher growth continuously in mid/long term 3.0 0 10 11 12 13 14 15 16 17F 18F 19F 05 06 07 08 09 10 11 12 13 14 15 16 17F 18F 19F Source: IHS Automotive, Mirae Asset Daewoo Research Source: IHS Automotive, Mirae Asset Daewoo Research

11| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2018 outlook: India

Introduction of GST to • Since the launch of the Goods and Services Tax (GST) in July 2017, market turmoil has subsided in India • Implementation of GST should help boost demand for compact cars in India boost compact-car • Kia Motors decided to establish a new plant in India (set to come online in 2H19), with the aim of expanding its demand in India - Kia set annual production capacity to 300,000 units to benefit • The newly-added capacity should meet growing car demand in India • Demand recovery in India should give impetus to overseas growth of HMC and Kia

HMC and Kia to expand their Indian production capacity in Projections for impacts of GST on car sales tax rates mid/long term Before After GST After GST (‘000 units) HMC’s sales to India

GST (July-early Sept. 2017) (Sept. 2017- ) 60 Total Total Gain+/ Total Gain+/ 50 tax rate tax rate loss- tax rate loss-

Length: Gasoline ＜1.2L 30% 29% 1% 29% 1% 40

＜4m Diesel ＜1.5L 31% 31% 0% 31% 0% 30 CNG/LPG 29% 28% 1% 28% 1% 20 Hybrid 29% 28% 1% 28% 1% 14 15 16 17 Length: Gasoline ＞1.2L 41% 43% -2% 45% -4%

＞4m Diesel ＞1.5L 43% 43% -1% 45% -3%

Length: Gasoline ＞1.2L 45% 43% 2% 48% -3%

＞4m/ Diesel ＞1.5L 47% 43% 4% 48% -2% ground SUV, sedan 51% 43% 8% 50% 1% clearance: Capacity: 300,000 units Initiation: 2H19 ＞170mm Hybrid (sedan) 30% 43% -14% 43% -14% Location: Anantapur HMC’s factory Total capital investment: capacity: 650,000 units Hybrid (SUV) 30% 43% -14% 43% -14% US$11bn Models to be produced: EVs 22% 12% 10% 12% 10% Small sedan/SUV Source: IHS Automotive, Industry data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

12| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2018 outlook: F/X and oil

Improving market • The recent appreciation of the won (versus the US dollar) is expected to adversely impact automakers with a conditions (e.g., oil traditional profit structure • However, an increased mix of local production and reduced revenue exposure to exports have allowed Korean prices) automakers to remain more resilient in the face of F/X rate changes • Korean automakers will likely see continued improvements in EM-bound sales and earnings through 2018 • Rising oil prices and improving market conditions in EMs bode well for HMC, with its compact car-focused product mix

Diminished earnings sensitivity to F/X rate changes: Improving HMC share price vs. oil prices sales in EMs (01/2008=100) (W'000) (US$/bbl) (W'000) 150 300 180 W/US$ rate (L) 300 WTI (L) Share price (R) Emerging currency index (L) Share price (L) 250 160 250 120

200 140 200 90

120 150 150

60

100 100 100

30 80 50 50

60 0 0 0 08 09 10 11 12 13 14 15 16 17 18 08 09 10 11 12 13 14 15 16 17 18

Source: Thomson Reuters, Mirae Asset Daewoo Research Source: Thomson Reuters, Mirae Asset Daewoo Research

13| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2017 outlook: HMG’s inventory trend and price discounts

Inventory and incentive levels to stabilize gradually in 2018 on strengthened new-model lineup

HMC’s inventory trend in major markets Kia’s inventory trend in major markets

(Month) (Month) Global avg. US Western Europe 8 Global avg. 8 US 7 7 Inventory levels rose again after Western Europe inventory destocking in 1H17; 6 Inventory adjustments continue 6 relocation of Santa Fe production to 5 → UPH (production per hour) adjustments, 5 reduce shipments in 2018 cutback in production 4 4 3 3 2 2 1 1 08 09 10 11 12 13 14 15 16 17 08 09 10 11 12 13 14 15 16 17

Source: Mirae Asset Daewoo Research Source: Respective companies’ and industry data, Mirae Asset Daewoo Research

Major carmakers’ car purchase incentives (price discounts) Car purchase incentives for major models of HMG and rivals in US in US (US$'000/unit) (US$'000/unit) 6 US Big-3 avg. Japan Big-3 avg. 6 Sonata Camry Santa fe HMC Kia 5 5 Sorento RAV4 CR-V

4 4

3 3

2 2

1 1

0 0 08 09 10 11 12 13 14 15 16 17 09 10 11 12 13 14 15 16 17 Source: Respective companies’ and industry data, Mirae Asset Daewoo Research Source: Respective companies’ and industry data, Mirae Asset Daewoo Research

14| 2018 Outlook [Auto] Mirae Asset Daewoo Research II. 2017 outlook: HMG’s earnings breakdown

Earnings to improve in 2018 on: 1) reversal of sluggish earnings at mainstay divisions; and 2) overall turnaround of EMs

HMC’s earnings breakdown by market and business: Earnings to improve in 2018, on dwindling impact of sluggish performances in key overseas markets and deteriorating financial earnings; and overall demand recovery in EMs (Wbn) 12,000 10,426 10,000

8,000 6,747 6,923 6,000 5,343

4,000

Note: Gross operating profit is the sum of Chinese operating profit and consolidated operating profit Source: Company data, Mirae Asset Daewoo Research Kia’s earnings breakdown by market and business: Earnings to pick up in 2018 on recovery in China earnings and turnaround of EMs

(Wbn) 5,000 4,454

4,000 2,876 3,000 2,115 2,000 1,458

1,000

Note: Gross operating profit is the sum of Chinese operating profit and consolidated operating profit Source: Kia Motor, Mirae Asset Daewoo Research

15| 2018 Outlook [Auto] Mirae Asset Daewoo Research III. Long-term outlook: Need for changes in mobility & evolutionary direction

• Changes in the mobility environment to address traffic accidents, air pollution, traffic congestion, and accessibility for the transportation-disadvantaged have become inevitable • Electrification, automation, and MaaS will gradually converge to provide more comprehensive solutions to these social issues

Social issues to prompt changes in mobility Evolutionary direction for mobility

Air pollution Electrification Tighter vehicle emission - "Diesel gate" scandal and China’s stimulus policies standards prompt automakers to accelerate their shift to green cars - Future market growth hinges on production cost cuts

Traffic accident 1.2m road traffic deaths per year Automation - Tighter safety regulations  rapid growth of ADAS market - Aggressive moves to commercialize ADAS to generate greater profits - Institutional/infrastructure development to determine the Accessibility pace of future growth 30% of the world’s population with no access to a car

Mobility-as-a-Service (MaaS) - Business model changes from ownership to sharing Traffic congestion - Various biz models (e.g., car sharing, car hailing services) Reduce time spent on travel & air pollution - Integration into on-demand autonomous mobility service over long term

Source: Mirae Asset Daewoo Research

16| 2018 Outlook [Auto] Mirae Asset Daewoo Research III. Long-term outlook: New mobility environment

New industrial ecosystem bound for convergence of MaaS, autonomous driving, and xEV

Mobility business (as is) Convergence of xEV and autonomous driving (2025)

Autonomous xEV Autonomous xEV

Mobility Mobility as a Service as a Service

Synergy between xEV, autonomous driving, MaaS (2050) Evolution of mobility business areas (2035)

Autonomous xEV Autonomous xEV

Mobility as a Service Mobility as a Service

Source: IHS Automotive, Mirae Asset Daewoo Research

17| 2018 Outlook [Auto] Mirae Asset Daewoo Research III. Long-term outlook: Three trends to gradually converge

Release of 3rd- Arrival of cost generation EV parity

Full-fledged convergence of partial autonomous driving & EV

Fast Partial integration Rapid penetration by partially autonomous Rapid penetration by fully with ADAS autonomous cars cars in autonomous cars functions mainstream

Convergence of fully autonomous cars and MaaS

On-demand autonomous mobility Demand for shared cars service to accelerate changes in driven by car sharing business mobility environment

2015 2020 2025 2030 2035 2040 Future

18| 2018 Outlook [Auto] Mirae Asset Daewoo Research III. Long-term outlook: EV market growth trend (~2025)

Arrival of cost parity

Release of 3rd- Mass-marketability

generation EV Penetration rate (%)

10 Large-scale investments - Full-fledged economies of scale - Affordable prices and - Next-generation battery technology marketability development - Metal prices stabilizing at lower level

- Validation of safety

VW: EUR20bn investments 5

- "Dieselgate" scandal - Development/deployment of - China policy stimulus exclusive platforms for EVs - Tesla Model 3 - 3G battery development/application - Improvements in system efficiency - Cost cuts via economies of scale

2015 2017 2020 2025

19| 2018 Outlook [Auto] Mirae Asset Daewoo Research III. Long-term outlook: EV market growth trend (~2025)

ADAS Growth driven by new core technologies (e.g., Advanced driver-assistance LiDAR sensors, HD map, V2X, HVI) Penetration of systems (ADAS) are a technology Self-driving-

Level 3 to improve the safety and related market

vehicles convenience of drivers on the size (US$bn) (%) road; the technology should serve as a basis for partially/fully autonomous driving

Growth driven by ADAS sensor/system companies “Self-driving EV” as standard hardware for new mobility

Full-fledged market penetration by partial autonomous cars

Mass-production of partial Rapid autonomous cars deployment of ADAS in new cars

20| 2018 Outlook [Auto] Mirae Asset Daewoo Research III. Long-term outlook: New vehicle sales vs. car sharing

Global automakers to • Fast-paced growth of the market for mobility as a service (MaaS) should continue for 15 years starting in 2020 continue to seek growth • Despite the slowdown in long-term growth potential of car-ownership demand, the automobile industry will likely enter a second period of strong growth in the medium/long term, supported by rapid growth of the car-sharing momentum in new business mobility ecosystem • Meanwhile, the automobile industry is projected to suffer from sluggish growth (or even contraction in top-line) through 2035 from 2040, due to: 1) slower growth of the MaaS market; 2) an accelerated reduction in new car demand for ownership; and 3) growing competition from other industries

3)Car 새로운-sharing 산업 생태계로 market 대체에 outlook 따라 기존 자동차업계는 저성장 재현 또는 쇠퇴할 전망

(US$tr) MaaS market size (a) (L) Mid-to-long-term low growth (%) 8.0 New car sales (b) (L) Converting business environment to MaaS, 200 (a)/(b)*100 (R) Existing car business decline New competition system, including ICT companies

160 6.0 Automobile industry second long-term growth period High growth of MaaS market Supplementation of low growth of 120 existing automobile (sales) business 4.0

80

2.0 40

0.0 0 21F 25F 30F 35F 40F 50F

Source: Strategy Analytics, IHS Automotive, Industry data, Mirae Asset Daewoo Research

21| 2018 Outlook [Auto] Mirae Asset Daewoo Research III. Long-term outlook: Auto stocks’ performances in new mobility environment

Growth momentum will likely reemerge in 2025-2035, preceded by share re-rating; promising players include GM, Daimler, BMW, and VW

(mn units) (pt) 160 Global new car demand (L) 280 MSCI World Automobiles Index (R) Car-sharing market 140 240

Fast-growing EMs in post-crisis period → 120 Recovery of DMs 200 (earnings turnaround effects)

100 160 Changes in industry ecosystem: Ownership  sharing Greater ‘economies of scale’ in 80 car-sharing market 120 → Renewed growth momentum for automakers

Partial autonomous driving 60 technologies 80 (Level 3 or lower) → Strong growth momentum for parts suppliers

40 40 2006 2016 20262026F 20362036F

Note: VW refers to Volkswagen Group Source: Thomson Reuters, Mirae Asset Daewoo Research

22| 2018 Outlook [Auto] Mirae Asset Daewoo Research HMG’s responses to new mobility

• 2020-2022: Mass-production of Level 3 vehicles - Wider application of Highway Driving Assist (HDA), which is more advanced than Level 2 - Automatic lane changes, highway entry/exit, interchange entry/exit Mass-production of autonomous cars • 2030: Mass-production of fully autonomous cars (Level 4 or higher)

• Recruited Lee Jin-woo, former R&D head of GM's driverless car project • Partnerships with Mobileye, Nvidia, Intel, Cisco (sensor fusion, AI, Connected cars and V2X) Key autonomous driving technologies • Two-pronged approaches: Standardized open platform/affordable autonomous cars (incl. connected cars, V2X) • Development of HD map, a key autonomous driving technology, via Hyundai MnSOFT

• Lineup expansion from 14 models in 2017 (HEV: 6, PHEV: 4, BEV: 3, FCEV: 1) to 31 models in 2020 (HEV: 10, PHEV: 11, BEV: 8, FCEV: 2) Lineup of eco-friendly cars • Slower increase in the share of PHEV, BEV, and FCEV in the xEV lineup vs. European peers (HEV, xEV) • Responses to fuel economy improvements (wider application of hybrid and rapid mass- production of FCEVs); xEV strategy focused on China

• Incorporation of EV platform and autonomous cars to car-sharing business in Western Europe (e.g., the Netherlands) • Car-sharing service in partnership with Hyundai Capital in April 2017 (to meet car rental MaaS strategies demand) - Deployment of EVs (e.g., IONIQ) against domestic rivals, such as SOCAR and Green Car • Distinctive free floating model (greater flexibility in pickup and returns)

23| 2018 Outlook [Auto] Mirae Asset Daewoo Research IV. Valuation: Traditional

Valuation declines in • Automakers centered on ICE vehicles and their OEM part suppliers have seen a decline in valuations since the automotive sector: global financial crisis In contrast, Chinese automakers have enjoyed an increase in market caps and valuations since 2016 Differentiation hinges on • • The robust medium- and long-term outlook for eco-friendly cars (autonomous cars, EVs) indicates technology will ability to ride growth be the differentiating factor in the automobile and component markets momentum over • Automakers, which have successfully responded to new mobility, will likely demonstrate growth momentum from medium and long term around 2020

MSCI World Automobiles Index: 12M forward PER MSCI ACWI Components Index: 12M forward PER

(x) 18 Global US Europe Japan Korea China 15

12

9

6

3

0 10 11 12 13 14 15 16 17 18 19 20 Source: Thomson Reuters, Mirae Asset Daewoo Research Source: Thomson Reuters, Mirae Asset Daewoo Research

24| 2018 Outlook [Auto] Mirae Asset Daewoo Research IV. Valuation: Comparison with global automakers

Global automakers’ earnings outlook (consensus) and valuation

OP (Wbn) OP margin (%) Net profit (Wbn) P/E (x) P/B (x) ROE (%) EV/EBITDA (x)

17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F HMC 5,221 6,117 5.4 6.1 4,324 5,687 9.8 7.4 0.6 0.6 6.3 7.8 10.3 8.8 Kia 1,033 2,211 1.9 4.1 1,520 2,470 8.8 5.4 0.5 0.5 5.6 8.8 3.7 2.5 Toyota 21,469 22,857 7.6 7.9 19,351 20,682 10.2 9.5 1.0 1.0 10.6 10.6 11.5 11.1 Nissan 7,113 7,520 5.9 6.1 6,031 6,423 6.9 6.4 0.7 0.7 11.6 11.3 2.3 2.3 Honda 8,738 9,251 5.8 6.0 6,821 7,374 9.4 8.7 0.8 0.8 9.1 9.3 8.1 7.7 GM 10,448 9,240 6.6 5.9 6,686 8,870 6.8 7.4 1.5 1.3 18.1 19.5 3.5 3.6 Ford 5,549 6,258 3.5 3.9 7,831 6,843 6.9 8.0 1.4 1.3 25.2 17.3 3.2 3.1 Daimler 18,391 17,776 8.8 8.2 12,705 12,642 7.6 7.7 1.2 1.1 16.0 14.6 2.5 2.4 VW 20,793 22,832 7.0 7.5 14,193 16,380 7.5 6.8 0.9 0.8 12.0 12.4 2.2 2.1 BMW 12,740 12,806 10.1 9.9 9,374 9,328 7.7 7.8 1.1 1.0 14.7 13.2 9.4 9.2 PSA 4,448 4,574 5.8 5.2 2,503 2,751 7.6 7.1 1.1 1.0 15.0 14.8 1.7 1.6 Renault 4,506 4,746 5.9 5.9 5,522 5,684 5.6 5.5 0.7 0.7 13.5 12.9 3.5 3.4 FCA 8,929 9,405 6.2 6.3 4,707 5,183 6.5 5.5 1.0 0.9 16.8 16.2 2.1 2.0 Note: Based on December 1st closing price; HMC’s P/E is based on total market cap (including preferred shares)/net profit; data for HMC and KMC are based on our estimates Source: Bloomberg, Mirae Asset Daewoo Research

Global automakers’ 2018F OP growth and P/E Global automakers’ P/B vs. ROE (2018F)

(%) 114% (x) P/B (x) 30 Operating profit YoY (L) 10 1.4 Ford GM P/E (R) 9 20 1.2 Daimler 8 Toyota BMW 10 7 1.0 PSA Honda FCA 6 0.8 VW 0 5 HMC Renault 0.6 Nissan -10 -11.6% 4 Kia ROE (%) 0.4 5 8 11 14 17 20 23 Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

25| 2018 Outlook [Auto] Mirae Asset Daewoo Research IV. Valuation: Comparison with global tire makers

Global tire makers’ earnings outlook (consensus) and valuation

OP (Wbn) OP margin (%) Net profit (Wbn) P/E (x) P/B (x) ROE (%) EV/EBITDA (x)

17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F 17F 18F Hankook Tire 850 1,213 12.4 15.9 664 933 9.8 7.0 1.0 0.9 10.7 13.5 5.7 4.1 Nexen Tire 199 232 9.8 10.8 138 160 8.3 7.2 0.9 0.8 11.1 11.5 5.2 4.8 -8 168 -0.3 5.2 -54 16 - 68.5 1.0 1.0 -5.0 1.4 17.0 9.2 Sumitomo 638 735 7.6 8.5 419 492 12.4 10.5 1.1 1.1 9.6 10.8 6.6 6.0 Yokohama 503 566 7.7 8.4 316 378 12.3 10.3 1.1 1.0 9.0 10.2 8.1 7.4 Toyo 484 549 12.4 14.3 247 328 11.7 8.7 1.8 1.5 18.0 19.7 5.0 4.6 Bridgestone 4,350 4,821 12.2 13.1 2,866 3,106 13.1 12.1 1.6 1.5 12.7 13.0 6.2 5.8 Goodyear 1,596 1,936 9.7 11.6 706 1,015 11.6 8.9 1.7 1.4 15.5 17.7 6.4 5.7 Cooper 292 319 9.5 10.0 181 193 11.5 10.2 1.6 1.4 13.9 13.8 4.9 4.6 Michelin 3,604 4,009 12.6 13.7 2,193 2,441 13.2 11.7 1.9 1.7 15.1 15.4 5.7 5.3

Note: Based on December 1st closing price; data for Hankook Tire are based on our estimates Source: Bloomberg, Mirae Asset Daewoo Research

Global tire makers’ 2018F OP growth and P/E Global tire makers’ P/B vs. ROE (2018F)

(%) (x) P/B(x) 30 OP growth (L) P/E (R) 14 1.8 Michelin 25 12 1.6 Toyo 20 10 Bridgestone Goodyear 8 1.4 15 Cooper 6 10 4 1.2 TTB Kumho Tire 5 Sumitomo expected 2 1.0 Yokohama 0 0 Hankook Tire 0.8 Nexen Tire ROE (%) 0.6 0 5 10 15 20 25 Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

26| 2018 Outlook [Auto] Mirae Asset Daewoo Research V. Investment strategy

Short-term plays: Hyundai • In 1H18, the auto industry will see a modest recovery in earnings momentum, backed by a turnaround in EM markets Mobis, Halla Holdings, • Over the medium term, however, investor sentiment for leading automakers should remain limited, due to intensifying Hyundai Motor global market competition and sluggish growth of the conventional car (internal-combustion engine) market Medium/Long-term plays: • Over the longer term, firms related to eco-friendly vehicles and ADAS technologies will likely enjoy a valuation uptrend Hankook Tire, part suppliers focused on high-growth • Short-term plays: , Halla Holdings, Hyundai Motor segments • Medium/long-term plays: Hankook Tire, automotive part suppliers focused on high-growth segments

Investment strategy and top picks

Medium term (4Q17-2018) Medium term (3Q18-2019) Medium/long term(2020-2024) Long term (2025-2035) Economic cycle Variables - Gradual increase in interest rates - Rising oil prices - Weakness in global demand (excl. - Demand recovery in EMs EMs such as India) - Stricter emission controls in Europe - Removal of China risks - Intensifying competition amid global (2021 CO2 target of 95g/km) - Increase in ratio of economically - Continued slowdown in key markets oversupply - End to Europe’s demand recovery active population in US (US, China) - Tighter environmental regulations in - Decline in demand for combustion - Demand growth to resume - HMC-Kia Motors’ new car effects Europe engines, especially in Europe - Signs of improvement in Hyundai - China’s NEV introduction - China’s aging society Motor Group’s governance structure - HMC-Kia Motors’ new powertrain adoption Paradigm trends - Tesla’s capacity additions - Regulatory authorities to reflect smar - EV market expansion and decrease - Growing adoption of ADAS option - Major automakers to initiate mass- t car-related equipment in car assessm in demand for traditional cars - Rise of autonomous vehicle and producing autonomous vehicles ent ratings (e.g. NHTSA, NCAP) -Full-fledged growth of autonomous connected car markets - Fast-paced green car market growth - Expansion of the ADAS/autonomous vehicle market -Tesla Model 3 mass production in China vehicle markets - Full-fledged growth of car sharing -Rise in tire prices; robust RE demand - Growth of RE market; improvement in -Expansion of EV market with the market tire product mix release of Gen-3 models Overall direction ↗ → ↗ → Outlook Auto Auto Neutral Auto + Auto Neutral Auto parts Neutral Auto parts Neutral Auto parts + Auto parts Neutral ADAS ADAS + ADAS + ADAS + Neutral (growth Eco-friendly cars Eco-friendly cars + Eco-friendly cars + Eco-friendly cars potential already reflected) Hyundai Mobis, Halla Holdings, Hankook Tire, Hanon Systems, Mando, New market leader/value chain Hyundai Motor Hanon Systems, Halla Holdings Hyundai Mobis, Hankook Tire

Source: Mirae Asset Daewoo Research

27| 2018 Outlook [Auto] Mirae Asset Daewoo Research Hankook Tire (161390)

Long-term buy

Investment points (Maintain) Buy • Global utilization will likely return to normal in 2018, after exceeding 95% in 2017 • Product mix improvement will continue on greater brand recognition, resulting from increasing OE supply to Target Price (12M, W) 71,400 overseas carmakers, robust light truck sales, and the increasing revenue contribution of high-margin UHPT • Revenue is expected to expand at an average annual rate of 9.5% through 2019, with the full-scale operation of the new Tennessee plant Share Price (12/4/17, W) 52,900 • In 1H18, raw material input prices will likely stabilize at a lower level, improving cost ratios and margin spreads Expected Return 35% • Our target price is based on a target EV/EBITDA of 5.9x and P/E of 10.3x (EV/EBITDA to improve sharply through end-2018) OP (17F, Wbn) 850 Risk factors Consensus OP (17F, Wbn) 876 • A temporary increase in fixed costs with the start of the Tennessee plant EPS Growth (17F, %) -23.9 Market EPS Growth (17F, %) 45.9 P/E (17F, x) 9.9 Market P/E (17F, x) 10.1 KOSPI 2,501.67

130 Market Cap (Wbn) 6,553 Hankook Tire FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F

Shares Outstanding (mn) 124 KOSPI Revenue (Wbn) 6,681 6,428 6,622 6,863 7,647 8,234 120 Free Float (%) 57.4 OP (Wbn) 1,032 885 1,103 850 1,213 1,349

Foreign Ownership (%) 40.1 110 OP margin (%) 15.4 13.8 16.7 12.4 15.9 16.4 Beta (12M) 0.37 NP (Wbn) 700 655 873 664 933 1,043 100 52-Week Low 52,700 EPS (W) 5,654 5,291 7,046 5,360 7,533 8,420 52-Week High 66,700 90 ROE (%) 16.6 13.6 15.8 10.7 13.5 13.3

(%) 1M 6M 12M 80 P/E (x) 9.3 8.9 8.2 9.9 7.0 6.3 Absolute -6.0 -13.8 -3.5 P/B (x) 1.4 1.1 1.2 1.0 0.9 0.8 70 Relative -3.9 -18.3 -24.0 16.11 17.3 17.7 17.11 Div.Yield (%) 0.8 0.9 0.7 0.8 0.9 0.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Hankook Tire, Mirae Asset Daewoo Research estimates

28| 2018 Outlook [Auto] Mirae Asset Daewoo Research Hankook Tire (161390)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 6,622 6,863 7,647 8,234 Current Assets 3,293 3,934 4,309 4,806 P/E (x) 8.2 9.9 7.0 6.3

Cost of Sales 4,045 4,470 4,749 5,071 Cash and Cash Equivalents 465 579 687 857 P/CF (x) 4.3 4.6 3.6 3.4

Gross Profit 2,577 2,393 2,898 3,163 AR & Other Receivables 1,181 1,436 1,568 1,548 P/B (x) 1.2 1.0 0.9 0.8

SG&A Expenses 1,474 1,543 1,685 1,815 Inventories 1,436 1,574 1,614 1,688 EV/EBITDA (x) 5.5 5.7 4.1 3.4

Operating Profit (Adj) 1,103 850 1,213 1,349 Other Current Assets 211 345 440 713 EPS (W) 7,046 5,360 7,533 8,420

Operating Profit 1,103 850 1,213 1,349 Non-Current Assets 6,329 6,292 6,424 6,566 CFPS (W) 13,535 11,536 14,617 15,723

Non-Operating Profit -11 -5 11 22 Investments in Associates 1,081 1,101 1,108 1,116 BPS (W) 48,036 52,294 59,427 67,347

Net Financial Income -39 -53 -60 -53 Property, Plant and Equipment 4,699 4,562 4,683 4,813 DPS (W) 400 400 500 500

Net Gain from Inv in Associates 45 39 57 59 Intangible Assets 146 208 212 215 Payout ratio (%) 5.6 7.4 6.6 5.9

Pretax Profit 1,092 845 1,224 1,371 Total Assets 9,622 10,226 10,734 11,372 Dividend Yield (%) 0.7 0.8 0.9 0.9

Income Tax 213 173 282 320 Current Liabilities 2,447 2,793 2,609 2,378 Revenue Growth (%) 3.0 3.6 11.4 7.7

Profit from Continuing Operations 879 671 942 1,052 AP & Other Payables 704 698 707 723 EBITDA Growth (%) 19.5 -11.4 28.3 7.8

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,253 1,611 1,403 1,155 Operating Profit Growth (%) 24.6 -22.9 42.7 11.2

Net Profit 879 671 942 1,052 Other Current Liabilities 490 484 499 500 EPS Growth (%) 33.2 -23.9 40.5 11.8

Controlling Interests 873 664 933 1,043 Non-Current Liabilities 1,214 941 741 620 Accounts Receivable Turnover (x) 6.4 5.7 5.5 5.7

Non-Controlling Interests 6 7 9 9 Long-Term Financial Liabilities 1,075 772 587 462 Inventory Turnover (x) 4.6 4.6 4.8 5.0

Total Comprehensive Profit 870 634 942 1,052 Other Non-Current Liabilities 139 169 154 158 Accounts Payable Turnover (x) 9.9 10.8 11.1 11.5

Controlling Interests 865 625 929 1,037 Total Liabilities 3,660 3,734 3,350 2,998 ROA (%) 9.2 6.8 9.0 9.5

Non-Controlling Interests 6 9 13 15 Controlling Interests 5,949 6,477 7,360 8,342 ROE (%) 15.8 10.7 13.5 13.3

EBITDA 1,606 1,423 1,825 1,967 Capital Stock 62 62 62 62 ROIC (%) 14.1 10.2 13.5 14.5

FCF (Free Cash Flow) 495 296 646 877 Capital Surplus 2,993 2,993 2,993 2,993 Liability to Equity Ratio (%) 61.4 57.5 45.4 35.8

EBITDA Margin (%) 24.3 20.7 23.9 23.9 Retained Earnings 2,951 3,515 4,399 5,380 Current Ratio (%) 134.6 140.8 165.2 202.1

Operating Profit Margin (%) 16.7 12.4 15.9 16.4 Non-Controlling Interests 12 15 24 32 Net Debt to Equity Ratio (%) 28.4 23.2 12.4 1.2

Net Profit Margin (%) 13.2 9.7 12.2 12.7 Stockholders' Equity 5,961 6,492 7,384 8,374 Interest Coverage Ratio (x) 24.2 15.7 22.8 30.4

Source: Hankook Tire, Mirae Asset Daewoo Research estimates

29| 2018 Outlook [Auto] Mirae Asset Daewoo Research Hyundai Motor (005380 KS)

Competitiveness on the rise in 2018

Investment points (Maintain) Trading Buy • In 2018, Hyundai Motor will likely see improvements in sales and utilization rates in major global markets, excluding the US; however, earnings downside will be limited in the US Target Price (12M, W) 177,000 • Hyundai Motor is set to enhance product competiveness through: 1) gradual expansion of SUV lineups (Kona and refreshed Santa Fe); 2) greater focus on strategic models in China; 3) establishment of eco-friendly lineup (PHEV, EV, FCEV) in the US and Europe Share Price (12/4/17, W) 160,500 • The broader application of new powertrains will help sharpen the firm’s competitiveness in 2019 • In 4Q17, operating profit will likely improve YoY, driven by brisk sales (excluding the US), inventory reductions Expected Return 10% and favorable comparisons (earnings were extremely weak in the same period a year ago)

OP (17F, Wbn) 5,221 Risk factors Consensus OP (17F, Wbn) 5,088 • R&D spending on next-generation technologies (eco-friendly/autonomous vehicles) and fixed costs will EPS Growth (17F, %) -20.0 inevitably rise in the medium term, limiting earnings turnaround potential Market EPS Growth (17F, %) 45.9 P/E (17F, x) 10.6 Market P/E (17F, x) 10.1 KOSPI 2,501.67

130 Market Cap (Wbn) 35,354 Hyundai Motor FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F 125 Shares Outstanding (mn) 285 KOSPI Revenue (Wbn) 89,256 91,959 93,649 97,251 100,913 105,386 120 Free Float (%) 65.8 OP (Wbn) 7,550 6,358 5,194 5,221 6,117 7,119 115 Foreign Ownership (%) 45.4 OP margin (%) 8.5 6.9 5.5 5.4 6.1 6.8 110 Beta (12M) 0.72 NP (Wbn) 7,347 6,417 5,406 4,324 5,687 6,541 105

52-Week Low 133,500 100 EPS (W) 25,735 22,479 18,938 15,148 19,920 22,912

52-Week High 170,000 95 ROE (%) 13.4 10.7 8.4 6.3 7.8 8.4 (%) 1M 6M 12M 90 P/E (x) 6.6 6.6 7.7 10.6 8.1 7.0 Absolute -0.6 -1.5 20.2 85 P/B (x) 0.8 0.7 0.6 0.6 0.6 0.6 80 Relative 1.6 -6.6 -5.3 16.11 17.3 17.7 17.11 Div.Yield (%) 1.8 2.7 2.7 2.5 2.9 3.1 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Hyundai Motor, Mirae Asset Daewoo Research estimates

30| 2018 Outlook [Auto] Mirae Asset Daewoo Research Hyundai Motor (005380 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 93,649 97,251 100,913 105,386 Current Assets 47,584 53,079 54,498 55,625 P/E (x) 7.7 10.6 8.1 7.0

Cost of Sales 75,960 78,939 81,237 84,125 Cash and Cash Equivalents 7,890 10,302 10,733 11,063 P/CF (x) 2.5 3.5 5.1 4.4

Gross Profit 17,689 18,312 19,676 21,261 AR & Other Receivables 6,366 6,841 7,142 7,436 P/B (x) 0.6 0.6 0.6 0.6

SG&A Expenses 12,496 13,091 13,558 14,142 Inventories 10,524 11,324 11,778 12,343 EV/EBITDA (x) 10.4 10.2 8.8 7.6

Operating Profit (Adj) 5,194 5,221 6,117 7,119 Other Current Assets 22,804 24,612 24,845 24,783 EPS (W) 18,938 15,148 19,920 22,912

Operating Profit 5,194 5,221 6,117 7,119 Non-Current Assets 79,468 80,401 82,009 85,858 CFPS (W) 59,146 45,405 31,702 36,198

Non-Operating Profit 2,113 593 1,786 1,898 Investments in Associates 18,070 19,279 20,401 21,561 BPS (W) 241,103 253,465 268,130 286,783

Net Financial Income 105 95 158 155 Property, Plant and Equipment 29,406 29,807 31,349 32,913 DPS (W) 4,000 4,000 4,600 5,000

Net Gain from Inv in Associates 1,729 860 1,603 1,728 Intangible Assets 4,586 4,905 5,494 5,999 Payout ratio (%) 14.5 17.8 15.8 15.1

Pretax Profit 7,307 5,814 7,903 9,017 Total Assets 178,836 184,305 187,382 192,559 Dividend Yield (%) 2.7 2.5 2.9 3.1

Income Tax 1,587 1,152 1,883 2,152 Current Liabilities 43,610 43,316 42,713 42,523 Revenue Growth (%) 1.8 3.8 3.8 4.4

Profit from Continuing Operations 5,720 4,662 6,020 6,864 AP & Other Payables 11,933 10,959 11,290 11,674 EBITDA Growth (%) -6.6 1.9 13.8 13.5

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 23,736 23,420 22,427 21,552 Operating Profit Growth (%) -18.3 0.5 17.2 16.4

Net Profit 5,720 4,662 6,020 6,864 Other Current Liabilities 7,941 8,937 8,996 9,297 EPS Growth (%) -15.8 -20.0 31.5 15.0

Controlling Interests 5,406 4,324 5,687 6,541 Non-Current Liabilities 62,882 64,783 63,944 63,662 Accounts Receivable Turnover (x) 21.0 21.5 21.3 21.2

Non-Controlling Interests 313 337 334 324 Long-Term Financial Liabilities 49,870 50,391 49,528 49,059 Inventory Turnover (x) 9.5 8.9 8.7 8.7

Total Comprehensive Profit 5,975 4,463 6,020 6,864 Other Non-Current Liabilities 13,012 14,392 14,416 14,603 Accounts Payable Turnover (x) 10.8 11.1 11.0 11.0

Controlling Interests 5,615 4,136 5,602 6,416 Total Liabilities 106,491 108,100 106,656 106,185 ROA (%) 3.3 2.6 3.2 3.6

Non-Controlling Interests 361 327 419 448 Controlling Interests 67,190 70,718 74,905 80,230 ROE (%) 8.4 6.3 7.8 8.4

EBITDA 8,552 8,716 9,923 11,258 Capital Stock 1,489 1,489 1,489 1,489 ROIC (%) 7.3 7.0 7.7 8.6

FCF (Free Cash Flow) -1,974 3,403 3,693 4,880 Capital Surplus 4,203 5,197 4,776 4,853 Liability to Equity Ratio (%) 147.2 141.9 132.1 122.9

EBITDA Margin (%) 9.1 9.0 9.8 10.7 Retained Earnings 64,361 67,058 71,665 76,913 Current Ratio (%) 109.1 122.5 127.6 130.8

Operating Profit Margin (%) 5.5 5.4 6.1 6.8 Non-Controlling Interests 5,155 5,487 5,820 6,144 Net Debt to Equity Ratio (%) 63.1 54.8 48.7 43.7

Net Profit Margin (%) 5.8 4.4 5.6 6.2 Stockholders' Equity 72,345 76,205 80,725 86,374 Interest Coverage Ratio (x) 19.1 15.1 17.7 21.0

Source: Hyundai Motor, Mirae Asset Daewoo Research estimates

31| 2018 Outlook [Auto] Mirae Asset Daewoo Research Kia Motors (000270 KS)

Negatives priced in & attractive valuation

Investment points (Maintain) Trading Buy • Kia Motors will likely make an earnings turnaround in 2018, driven by new model releases, especially in the SUV and minivan segments Target Price (12M, W) 38,000 • The product lineup will further expand, spanning SUV and eco-friendly vehicles (e.g., the release of Niro/Soul EV, as well as small SUVs and KX3 EV in China) Earnings turnaround is expected in EMs (e.g., Russia, South America, the Middle East), amid improving Share Price (12/4/17, W) 33,100 • business conditions (e.g., rising oil prices) • The firm has already recognized contingency reserves (W98bn), following the recent ordinary wage ruling Expected Return 15% • Attractively valued at a 2018F EV/EBITDA of 2.5x, P/E of 5.4x and P/B of 0.5x

OP (17F, Wbn) 1,033 Risk factors Consensus OP (17F, Wbn) 866 • Additional OEM production cuts in 2018, due to HMC’s and Kia’s weak performances in the US EPS Growth (17F, %) -44.8 • Profitability deterioration from the won’s appreciation Market EPS Growth (17F, %) 45.9

P/E (17F, x) 8.8 Market P/E (17F, x) 10.1 KOSPI 2,501.67

130 Market Cap (Wbn) 13,418 Kia Motors FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F

Shares Outstanding (mn) 405 120 KOSPI Revenue (Wbn) 47,097 49,521 52,713 54,203 54,288 56,673 Free Float (%) 62.0 OP (Wbn) 2,573 2,354 2,461 1,033 2,211 2,359 110 Foreign Ownership (%) 37.8 OP margin (%) 5.5 4.8 4.7 1.9 4.1 4.2 100 Beta (12M) 0.77 NP (Wbn) 2,994 2,631 2,755 1,520 2,470 2,686 52-Week Low 30,200 90 EPS (W) 7,385 6,489 6,795 3,751 6,093 6,627

52-Week High 41,300 80 ROE (%) 14.0 11.3 10.8 5.6 8.8 8.9 (%) 1M 6M 12M P/E (x) 7.1 8.1 5.8 8.8 5.4 5.0 70 Absolute -6.1 -15.6 -11.0 P/B (x) 0.9 0.9 0.6 0.5 0.5 0.4 60 Relative -4.0 -19.9 -29.9 16.11 17.3 17.7 17.11 Div.Yield (%) 1.9 2.1 2.8 3.3 3.6 3.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Kia Motors, Mirae Asset Daewoo Research estimates

32| 2018 Outlook [Auto] Mirae Asset Daewoo Research Kia Motors (000270 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 52,713 54,203 54,288 56,673 Current Assets 20,912 24,523 25,982 26,823 P/E (x) 5.8 8.8 5.4 5.0

Cost of Sales 42,282 44,832 43,801 45,975 Cash and Cash Equivalents 3,064 4,193 4,669 4,889 P/CF (x) 2.6 3.4 2.8 2.6

Gross Profit 10,431 9,371 10,487 10,698 AR & Other Receivables 3,165 3,599 3,758 3,899 P/B (x) 0.6 0.5 0.5 0.4

SG&A Expenses 7,970 8,337 8,276 8,339 Inventories 8,854 9,085 9,230 9,368 EV/EBITDA (x) 3.7 3.7 2.5 2.2

Operating Profit (Adj) 2,461 1,033 2,211 2,359 Other Current Assets 5,829 7,646 8,325 8,667 EPS (W) 6,795 3,751 6,093 6,627

Operating Profit 2,461 1,033 2,211 2,359 Non-Current Assets 29,977 30,738 31,932 33,343 CFPS (W) 14,993 9,803 11,677 12,564

Non-Operating Profit 981 698 1,031 1,167 Investments in Associates 12,659 13,175 13,290 13,570 BPS (W) 66,103 67,894 72,339 77,806

Net Financial Income 12 -24 27 29 Property, Plant and Equipment 13,493 13,750 14,905 16,102 DPS (W) 1,100 1,100 1,200 1,300

Net Gain from Inv in Associates 1,160 686 950 1,080 Intangible Assets 2,295 2,157 2,092 2,011 Payout ratio (%) 16.0 29.0 19.5 19.4

Pretax Profit 3,442 1,731 3,242 3,526 Total Assets 50,889 55,261 57,915 60,166 Dividend Yield (%) 2.8 3.3 3.6 3.9

Income Tax 687 211 772 840 Current Liabilities 16,247 18,708 19,951 20,114 Revenue Growth (%) 6.4 2.8 0.2 4.4

Profit from Continuing Operations 2,755 1,520 2,470 2,686 AP & Other Payables 8,504 8,272 8,530 8,778 EBITDA Growth (%) 9.8 -31.0 43.3 4.4

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 4,133 4,618 5,781 5,751 Operating Profit Growth (%) 4.5 -58.0 114.0 6.7

Net Profit 2,755 1,520 2,470 2,686 Other Current Liabilities 3,610 5,818 5,640 5,585 EPS Growth (%) 4.7 -44.8 62.4 8.8

Controlling Interests 2,755 1,520 2,470 2,686 Non-Current Liabilities 8,063 9,247 8,856 8,729 Accounts Receivable Turnover (x) 22.0 21.3 19.7 19.7

Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 3,938 3,928 3,652 3,560 Inventory Turnover (x) 6.4 6.0 5.9 6.1

Total Comprehensive Profit 2,818 1,377 2,470 2,686 Other Non-Current Liabilities 4,125 5,319 5,204 5,169 Accounts Payable Turnover (x) 7.0 7.1 6.7 6.7

Controlling Interests 2,818 1,377 2,470 2,686 Total Liabilities 24,310 27,956 28,807 28,843 ROA (%) 5.7 2.9 4.4 4.5

Non-Controlling Interests 0 0 0 0 Controlling Interests 26,579 27,305 29,107 31,324 ROE (%) 10.8 5.6 8.8 8.9

EBITDA 4,148 2,862 4,100 4,281 Capital Stock 2,139 2,139 2,139 2,139 ROIC (%) 12.0 5.3 9.5 9.7

FCF (Free Cash Flow) 1,716 3,804 1,658 2,097 Capital Surplus 1,716 1,947 1,720 1,731 Liability to Equity Ratio (%) 91.5 102.4 99.0 92.1

EBITDA Margin (%) 7.9 5.3 7.6 7.6 Retained Earnings 23,466 24,100 26,129 28,334 Current Ratio (%) 128.7 131.1 130.2 133.4

Operating Profit Margin (%) 4.7 1.9 4.1 4.2 Non-Controlling Interests 0 0 0 0 Net Debt to Equity Ratio (%) -2.0 -10.9 -11.1 -12.5

Net Profit Margin (%) 5.2 2.8 4.5 4.7 Stockholders' Equity 26,579 27,305 29,107 31,324 Interest Coverage Ratio (x) 17.7 5.3 12.1 13.1

Source: Kia Motors, Mirae Asset Daewoo Research estimates

33| 2018 Outlook [Auto] Mirae Asset Daewoo Research S&T Motiv (064960 KS)

Profitability-boosting growth to resume

Investment points (Maintain) Buy • Medium-term growth potential and profitability improvement - S&T Motiv will likely expand its GM-bound supply of core powertrain parts (e.g. oil pumps for engines, transmissions) over the medium to long term Target Price (12M, W) 62,300 - HMG-bound shipments of eco-friendly car parts (ISGs for hybrid vehicles and traction motors for EVs) will pick up Share Price (12/4/17, W) 47,000 - The high-margin defense business will likely see steady new demand, as well as replacement demand for key products • Revenue and operating profit to see double-digit growth in 2018 Expected Return 33% - S&T Motiv is likely to enter a rapid growth phase in 2018, after posting modest growth in 2017 - Consolidated operating profit are projected to increase at an annual rate of 13% through 2019, fueled by OP (17F, Wbn) 107 growing sales of high-margin core parts Consensus OP (17F, Wbn) 105 • The firm’s valuation looks attractive, given its high OP margin (9% levels) and net cash position EPS Growth (17F, %) 138.3 Market EPS Growth (17F, %) 45.9 Risk factors P/E (17F, x) 8.6 • Potential dissipation of replacement demand for assault rifles; potential weakening of its monopolistic supply Market P/E (17F, x) 10.1 position from 2020 onwards Worries about margins related to GM’s potential exit from Korea KOSPI 2,501.67 •

130 Market Cap (Wbn) 687 S&T Motiv FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F

Shares Outstanding (mn) 15 KOSPI Revenue (Wbn) 1,099 1,211 1,154 1,164 1,349 1,457 120 Free Float (%) 62.7 OP (Wbn) 69 123 72 107 122 132

Foreign Ownership (%) 14.4 110 OP margin (%) 6.3 10.2 6.2 9.2 9.0 9.1 Beta (12M) 0.76 NP (Wbn) 61 86 34 80 84 90 100 52-Week Low 42,450 EPS (W) 4,198 5,852 2,295 5,470 5,722 6,183 52-Week High 56,700 90 ROE (%) 11.2 13.8 5.0 11.3 10.9 10.8

(%) 1M 6M 12M 80 P/E (x) 10.0 14.7 21.3 8.6 8.2 7.6 Absolute 4.3 -1.4 8.9 P/B (x) 1.1 1.9 1.0 0.9 0.9 0.8 70 Relative 6.7 -6.5 -14.2 16.11 17.3 17.7 17.11 Div.Yield (%) 1.9 1.2 2.0 2.1 2.6 2.8 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: S&T Motiv, Mirae Asset Daewoo Research estimates

34| 2018 Outlook [Auto] Mirae Asset Daewoo Research S&T Motiv (064960 KS)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 1,154 1,164 1,349 1,457 Current Assets 716 763 839 905 P/E (x) 21.3 8.6 8.2 7.6

Cost of Sales 978 971 1,135 1,225 Cash and Cash Equivalents 196 215 269 317 P/CF (x) 6.9 5.1 4.6 4.2

Gross Profit 176 193 214 232 AR & Other Receivables 261 278 295 309 P/B (x) 1.0 0.9 0.9 0.8

SG&A Expenses 104 87 93 99 Inventories 142 151 156 162 EV/EBITDA (x) 6.4 4.3 3.6 3.1

Operating Profit (Adj) 72 107 122 132 Other Current Assets 117 119 119 117 EPS (W) 2,295 5,470 5,722 6,183

Operating Profit 72 107 122 132 Non-Current Assets 532 540 558 578 CFPS (W) 7,045 9,220 10,313 11,323

Non-Operating Profit -12 3 7 7 Investments in Associates 4 4 4 4 BPS (W) 46,542 49,946 54,664 59,648

Net Financial Income 1 1 2 2 Property, Plant and Equipment 495 501 516 535 DPS (W) 1,000 1,000 1,200 1,300

Net Gain from Inv in Associates 0 1 0 0 Intangible Assets 16 19 21 22 Payout ratio (%) 42.6 16.6 18.4 18.5

Pretax Profit 60 110 129 139 Total Assets 1,248 1,303 1,397 1,483 Dividend Yield (%) 2.0 2.1 2.6 2.8

Income Tax 26 22 34 37 Current Liabilities 369 366 374 375 Revenue Growth (%) -4.7 0.9 15.9 8.0

Profit from Continuing Operations 34 88 95 103 AP & Other Payables 222 232 239 243 EBITDA Growth (%) -34.9 40.2 11.8 8.6

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 0 0 0 0 Operating Profit Growth (%) -41.5 48.6 14.0 8.2

Net Profit 34 88 95 103 Other Current Liabilities 147 134 135 132 EPS Growth (%) -60.8 138.3 4.6 8.1

Controlling Interests 34 80 84 90 Non-Current Liabilities 91 91 96 96 Accounts Receivable Turnover (x) 4.6 4.5 4.9 5.0

Non-Controlling Interests 1 8 12 12 Long-Term Financial Liabilities 0 0 0 0 Inventory Turnover (x) 7.9 8.0 8.8 9.2

Total Comprehensive Profit 37 87 95 103 Other Non-Current Liabilities 91 91 96 96 Accounts Payable Turnover (x) 5.3 5.0 5.6 6.0

Controlling Interests 36 79 86 93 Total Liabilities 459 457 470 470 ROA (%) 2.8 6.9 7.1 7.1

Non-Controlling Interests 1 8 9 10 Controlling Interests 681 731 799 872 ROE (%) 5.0 11.3 10.9 10.8

EBITDA 97 136 152 165 Capital Stock 73 73 73 73 ROIC (%) 5.8 11.9 12.1 12.6

FCF (Free Cash Flow) 67 39 54 54 Capital Surplus 53 53 53 53 Liability to Equity Ratio (%) 58.2 54.0 50.6 46.5

EBITDA Margin (%) 8.4 11.7 11.3 11.3 Retained Earnings 531 582 651 724 Current Ratio (%) 194.3 208.4 224.6 241.6

Operating Profit Margin (%) 6.2 9.2 9.0 9.1 Non-Controlling Interests 108 116 128 140 Net Debt to Equity Ratio (%) -24.8 -25.4 -29.0 -31.3

Net Profit Margin (%) 2.9 6.9 6.2 6.2 Stockholders' Equity 789 847 927 1,012 Interest Coverage Ratio (x) 6,567.2 859.1 0.0 0.0

Source: S&T Motiv, Mirae Asset Daewoo Research estimates

35| 2018 Outlook [Auto] Mirae Asset Daewoo Research APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price Kia Motors(000270) 10/22/2017 Trading Buy 38,000 05/29/2016 Buy 174,000 01/18/2017 Hold 04/26/2016 Trading Buy 174,000 12/07/2016 Buy 46,000 01/26/2016 Buy 174,000 10/17/2016 Buy 51,000 01/13/2016 Buy 183,000 07/13/2016 Buy 53,000 10/11/2015 Buy 200,000 04/27/2016 Buy 63,000 S&T Motiv(064960) 10/31/2017 Buy 62,300 01/27/2016 Buy 59,000 07/30/2017 Buy 67,600 01/13/2016 Buy 61,000 03/30/2017 Buy 65,000 11/25/2015 Buy 72,000 08/07/2015 No Coverage Hyundai Motor(005380) 10/22/2017 Trading Buy 177,000 Hankook Tire(161390) 11/16/2017 Buy 71,400 07/26/2017 Trading Buy 173,000 09/18/2017 Buy 76,000 06/28/2017 Trading Buy 186,000 07/20/2017 Buy 82,000 05/25/2017 Trading Buy 178,000 05/01/2017 Buy 71,000 04/26/2017 Trading Buy 168,000 02/05/2017 Buy 72,500 04/13/2017 Trading Buy 158,000 11/02/2016 Buy 73,500 01/25/2017 Trading Buy 165,000 10/23/2016 Buy 71,000 01/11/2017 Trading Buy 172,000 08/17/2016 Buy 68,000 10/13/2016 Trading Buy 156,000 05/01/2016 Buy 65,000 07/26/2016 Buy 170,000 02/05/2016 Trading Buy 56,000 07/17/2016 Buy 164,000 05/03/2015 Hold

(W) Kia Motors (W) Hyundai Motor (W) S&T Motiv (W) Hankook Tire 80,000 250,000 100,000 100,000

200,000 80,000 80,000 60,000

150,000 60,000 60,000 40,000 100,000 40,000 40,000

20,000 50,000 20,000 20,000

0 0 0 0 Dec 15 Dec 16 Dec 17 Dec 15 Dec 16 Dec 17 Dec 15 Dec 16 Dec 17 Dec 15 Dec 16 Dec 17

36| 2018 Outlook [Auto] Mirae Asset Daewoo Research APPENDIX 1

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 Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 74.52% 12.50% 12.98% 0.00% Investment Banking Services 70.73% 19.51% 9.76% 0.00% * Based on recommendations in the last 12-months (as of September 30, 2017)

Disclosures As of the publication date, Mirae Asset Daewoo 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.

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

37| 2018 Outlook [Auto] Mirae Asset Daewoo Research APPENDIX 1

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the . Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo.

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38| 2018 Outlook [Auto] Mirae Asset Daewoo Research Mirae Asset Daewoo International Network

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39| 2018 Outlook [Auto] Mirae Asset Daewoo Research