June 15, 2012 Company Report

GS Retail (007070 KS) Retail

Daewoo Securities Co., Ltd. Well-positioned for outgrowth amid mature retail industry Mina Kim +822-768-4163 Initiate with a Buy call and TP of W31,000 [email protected]

We initiate coverage on GS Retail with a Buy rating and a target price of W31,000. Jieun Lee Our target price is derived by applying a target P/E of 15x to GS RetailÊs 2013F EPS. +822-768-3265 Our target P/E is the top-end of the trading multiple for the Korean retail sector over [email protected] the past 10-years. We believe a premium for GS Retail is justified, given: 1) GS RetailÊs core business, convenience stores, is likely to outgrow the domestic retail sector, 2) GS Retail can preserve stable operating margins thanks to its franchise business model, and 3) the companyÊs ample cash holdings can support future business opportunities, including external expansion through M&As. Since GS Buy (Initiate) RetailÊs listing on December 23, 2011 at W22,400 per share, it has outperformed Target Price (12M, W) 31,000 the KOSPI by 9.8%p. We believe the outperformance is a reflection of the Share Price (06/13/12, W) 24,500 marketÊs optimism on GS RetailÊs structural growth potential in the convenience Expected Return (%) 26.5 store segment, and expect the positive sentiment to continue in the future. EPS Growth (12F, %) 45.4 Market EPS Growth (12F, %) 19.4 Domestic convenience stores to see further growth P/E (12F, x) 13.9 Market P/E (12F, x) 9.3 The domestic industry was estimated at W10.1tr 2011, up 20.7% KOSPI 1,859.32 YoY. We forecast the domestic convenience store industry to post a CAGR of 15% Market Cap (Wbn) 1,887 over the next three years to reach W15.4tr by 2014. The primary drivers of growth Shares Outstanding (mn) 77 should come from: 1) consumers seeking convenience in shopping, 2) growing Avg Trading Volume (60D, '000) 98 Avg Trading Value (60D, Wbn) 2 demand for franchise businesses, and 3) reinforcement of product merchandising. Dividend Yield (12F, %) 1.2 The size of the domestic supermarket industry was W25.2tr in 2011, up 5.8% YoY, Free Float (%) 32.5 while the SSM (super supermarket) industry was W5.3tr in 2011, up 47.2% YoY. 52-Week Low (W) 19,350 We project the SSM sector will post a CAGR of 15% over the next three years to 52-Week High (W) 26,450 reach W8tr by 2014. Although the factors driving the growth of SSMÊs are similar Beta (12M, Daily Rate of Return) 0.04 to convenience stores, supermarkets should be limited by government regulations. Price Return Volatility (12M Daily, %, SD) 3.1 Foreign Ownership (%) 6.1 GS Retail is looking for new growth opportunities Major Shareholder(s) GS et al. (67.51%) Since GS Retail has sold off its department stores and discount store business to LG International (11.97%) Lotte Shopping in 2010, the company has been focusing on convenience stores and supermarkets. Going forward, the company is expected to seek new growth Price Performance drivers. The company is known to have submitted a LOI (letter of intent) to acquire (%) 1M 6M 12M Woongjin Coway, which is slated to be finalized shortly. We believe this acquisition Absolute 0.8 - - would be positive, as GS Retail could add new growth drivers from WoongjinÊs Relative 3.8 - - current rental business and devise a new business using WoonjinÊs sales network. Key Business GS GroupÊs retail subsidiary which operates CVS, supermarkets, H&B drugstores, etc.

§ Earnings & Valuation Metrics Share price KOSPI FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 125 (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 115 12/10 3,280 95 2.9 442 5,743 173 96 37.4 - - - 12/11 3,982 103 2.6 94 1,215 214 -263 6.7 19.1 1.4 9.2 105 12/12F 4,710 154 3.3 136 1,767 257 229 9.2 13.9 1.3 3.0 95

12/13F 5,416 179 3.3 158 2,057 289 95 10.0 11.9 1.2 2.9 85 12/14F 6,138 208 3.4 181 2,344 324 117 10.5 10.5 1.0 2.5 12/11 4/12 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.

I. Investment Summary...... 3 Initiate coverage with a Buy and TP of W31,000...... 3 Valuation: Premium to retail sector is justified ...... 3 Risks: Regulatory concerns and difficulties in improving profit margins ...... 3

II. Industry outlook (CVS and supermarkets)...... 4 1. Convenience store outlook...... 4 2. Japanese convenience store industry...... 5 3. Controversy over convenience store industry saturation...... 6 4. Supermarket industry outlook ...... 7 5. Domestic consumption outlook ...... 8

III. Revenues and earnings trajectory ...... 9 1. Revenue forecasts ...... 9 2. Profit forecasts ...... 9

IV. GS Retail’s business model...... 10 1. Revenue mix...... 10 2. Revenue/profit structure of franchise model ...... 11

V. Possible acquisition of Woongjin Coway ...... 12 Possible acquisition of Woongjin Coway – to be finalized shortly ...... 12 What GS Retail can get from the acquisition? ...... 12

VI. Valuation ...... 13

VII. Risks...... 15 1. Concerns of regulations in convenience store industry ...... 15 2. Concerns over regulations in supermarket industry ...... 15 3. Difficulties in improving profit margins ...... 15

VIII. Appendix...... 16

2 June 15, 2012 GS Retail

I. Investment Summary

Initiate coverage with a Buy call and TP of W31,000

Initiate coverage on We initiate coverage on GS Retail with a Buy rating and a target price of W31,000. Our GS Retail with a target price is derived by applying a target P/E of 15x to GS RetailÊs 2013F EPS. Our target Buy rating and TP of P/E is the top-end of the trading multiple for the Korean retail sector over the past 10-years. W31,000 Since GS RetailÊs listing on December 23, 2011 at W22,400 per share, it has outperformed the KOSPI by 9.8%p. We believe the outperformance is a reflection of the marketÊs optimism on GS RetailÊs structural growth potential in the convenience store segment, and expect the positive sentiment to continue in the future. Valuation: Premium to retail sector is justified

GS Retail should trade at We believe a premium for GS Retail is justified, given: 1) GS RetailÊs core business, a premium to Korean convenience stores, is likely to outgrow the domestic retail sector, 2) GS Retail can preserve retail sector stable operating margins thanks to its franchise business model, and 3) the companyÊs ample cash holdings can support future business opportunities, including external expansion through M&As. Currently, the Korean retail sector is trading at 10x 2012F EPS, a 18.4% premium to the KOSPI. We believe the premium is justified, given: (1) domestic consumption should continue to grow, and (2) a certain retail segments (such as home shopping, online shopping and convenience stores) should continue to outgrow GDP growth. Risks: Regulatory concerns and difficulties in improving profit margins

Regulatory risks in The governmentÊs regulation of convenience stores is relatively lighter than other retail convenience stores segments. We attribute this to the operating structure of convenience stores: most of the should remain relatively stores are run on a franchise model and owned by franchisees, not franchisers. In addition, low the government appears to look positively on the fact that franchisers provide a certain level of subsidies to franchisees. Meanwhile, the supermarket industry is likely to continue to suffer from regulatory risks. We believe the probability of the government loosening regulations on supermarkets to be low to protect small- to medium-sized enterprises. On the other hand, convenience stores would focus on product mix improvement to raise profit margins, especially reinforcing HMR (home meal replacement) products, but we believe the HMR product industry will see stagnant growth, as higher scalability and product quality improvements may be challenging under a fragmented market.

Figure 1. Post IPO performance Figure 2. RetailersÊ historical valuation

(12/23/11=100) (Mkt cap, Wtr) 15.0x 12.0x 120 GS Retail 35 KOSPI 9.0x 114 28

108 21 6.0x

102 14

3.0x 96 7

90 0 12/11 1/12 2/12 3/12 4/12 5/12 02 03 04 05 06 07 08 09 10 11 12

Note: Emart was split-off from Shinsegae in May 2011 Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

KDB Daewoo Securities Research 3 June 15, 2012 GS Retail

II. Industry outlook (CVS and supermarkets)

1. Convenience store outlook

Expect domestic CVS The size of the domestic convenience store industry was W10.1tr in 2011, up 20.7% YoY. industry to post a CAGR We forecast the domestic convenience store industry to post a CAGR of 15% over the next of 15% over the next three years to reach W15.4tr by 2014. The primary drivers of growth should come from: 1) three years consumers seeking convenience in shopping, 2) growing demand for franchise business, and 3) reinforcement of product merchandising. We expect the domestic convenience store industry to continue to post robust growth, supported mainly by consumers seeking convenience in shopping and increasing demand for HMR (home meal replacement). Recent trends indicate that a segment of Korean consumers are seeking convenience at the expense of price discounts. Moreover, demand for franchise businesses should continue to grow along with the accelerating retirement of baby-boom generation. Franchise business model is popular among retirees, as franchisees can obtain a variety of subsidies from franchisers for utilities expenses and logistics, along with profit guarantees. In exchange for such subsidies, franchisees pay a certain portion of revenues as a franchise fee. Lastly, the product mix at convenience stores is continuously improving. Although cigarette sales still account for the largest portion of convenience store revenues (~40%), the stores are adding more fresh food products to cater to the changing needs of consumers.

Figure 3. Market size trend of convenience stores Figure 4. Market share of convenience stores in 2011

(Wtr) (%) Others 3.2% 16 Market size (L) Expect 3yr CAGR of 15% 23 YoY growth (R) 8.3%

13 19 Family Mart 31.2%

10 15 Seven Eleven 26.6% As of 2011

7 11

GS25 4 7 30.5% 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F

Source: KOSTAT, KDB Daewoo Securities Research estimates Note: Based on number of convenience stores Source: Each company data, KDB Daewoo Securities Research

Figure 5. Market size growth forecasts of each retail division (Wtr) 400 Dept. store Disc. store Supermarket CVS 5yr CAGR Specialty store Non-store market 300 Traditional market 2.0%

200 15.0%

11.1% 100 16.1% 4.8% 5.2% 8.9% 0 2009 2010 2011 2012F 2013F 2014F

Source: KOSTAT, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 4 June 15, 2012 GS Retail

2. Japanese convenience store industry

Japanese CVS industry Japanese convenience store industry showed two stages of growth: hyper growth during showed exponential 1980~2002 and stagnant growth during 2002-2011. , the second largest Japanese revenue growth during convenience store operator, showed exponential store growth of 14.7% CAGR during 1980~2002, 1980~2002; However, while the company posted stagnant store growth of 2.9% CAGR during 2002~2011. revenue growth As customers who frequent convenience stores are less sensitive to pricing, convenience stagnated after 2002 stores are likely grow along with the rise in income levels. In the case of Japanese convenience stores, the industry started to show robust growth when GDP per capita in Japan reached ~US$10,000 and continued to show strong growth until it reached ~US$40,000. Since 2000, the convenience store industry has continued to account for 5~6% of the retail sector.

The convenience store industry in Japan is dominated by four major players who aggregately hold a market share of 83.4% in 2011 (Seven Eleven 28.9%, Lawson 21.9%, Family Mart 19% and 13.7%). The aggregate market share of the top four players went up from 69% in 2000 to the current level through market consolidation.

Based on the Japanese convenience store industry, the Korean convenience store industry appears to have room for further growth in line with increases in GDP per capita. However, market consolidation in Korea seems to have already taken place given the top three players already hold 88.5% of the market in 2011.

Figure 6. LawsonÊs store growth and JapanÊs GDP per capita Figure 7. KoreaÊs growth and KoreaÊs GDP per capita

(US$) (number of stores) (US$) (number of stores) 25,000 25,000 Number of stores increased CAGR of 17.4% during 50,000 CAGR of 2.9% during 12,500 CAGR of 14.7% during 1980~2002 2002~2011 from 7 to 1,620 from 1989~1995 1995~2011 20,000 20,000 40,000 GDP per capita (L) 10,000 GDP per capita (L) Number of stores (R) Number of stores (R) 15,000 15,000 30,000 7,500

20,000 5,000 10,000 10,000

10,000 2,500 5,000 5,000

0 0 0 0 80 83 86 89 92 95 98 01 04 07 10 89 92 95 98 01 04 07 10

Source: Lawson, IMF, KDB Daewoo Securities Research Source: KACS, IMF, KDB Daewoo Securities Research

Figure 8. Market share of JapanÊs convenience stores in 2011 Figure 9. JapanÊs CVS: number of stores and sales (2011)

Others # of stores M/S by # of stores Sales (Yen mn) M/S by sales 12.1% Seven-Eleven 13,232 28.9 2,947,606 36.5 Mini Stop Lawson 9,994 21.8 1,682,812 20.8 Seven-Eleven 4.5% 28.9% Family Mart 8,717 19.0 1,440,457 17.8 6,274 13.7 923,185 11.4 Mini Stop 2,042 4.5 322,043 4.0 Circle K Sunku Others 5,544 12.1 758,195 9.4 s 13.7% 1,634 3.6 216,713 2.7 Seicomart 1,102 2.4 171,106 2.1 Cocostore 837 1.8 115,367 1.4 POPLAR 700 1.5 90,725 1.1

Lawson Three F 704 1.5 103,414 1.3 Family Mart 19.0% 21.8% SAVEON 567 1.2 60,870 0.8 Total 45,803 100 8,074,298 100 Note: Based on number of convenience stores / Source: Each company data, Source: Each company data, Japanese Franchise Association, KDB Daewoo Japanese Franchise Association, KDB Daewoo Securities Research Securities Research

KDB Daewoo Securities Research 5 June 15, 2012 GS Retail

3. Controversy over convenience store industry saturation

With the explosive growth of convenience stores recently, questions have been raised about industry saturation. In addition, the top three convenience store franchises (Family Mart, GS Retail and Seven Eleven+) combined held 89% of the market, leaving little room for market consolidation or market share expansion.

The top three convenience store operators plan to open an aggregate of +3,000 stores in 2012, up 15% YoY. We see concerns of industry saturation stemming from comparison with the Japanese convenience store industry, which is considered mature. In Japan, there were 2,974 people per store in 2011, as opposed to 2,309 people per store in Korea..

Improving product mix However, we believe Korean convenience stores are at a different stage of growth could create more foot compared with the Japanese industry, as: 1) convenience store revenues per store is far traffic for Korean lower than that of Japan (W2.8bn per store in Japan and W0.5bn per store in Korea in 2011), convenience stores and 2) Korean convenience stores should see further improvement of merchandising. We believe both factors will improve with ongoing efforts by convenience stores and rising income levels.

Given Korean convenience stores offer less fresh foods and HMR (home meal replacement) than their Japanese counterparts, we believe an improved product mix will create more traffic for Korean convenience stores. In addition, given that convenience stores cater to consumers that seek convenience and are less sensitivity to pricing, rising incomes should continue to support the growth of convenience stores going forward.

Figure 10. KoreaÊs CVS penetration by total number of stores Figure 11. KoreaÊs CVS penetration by total sales

(number of stores, people) (Wtr) (Wmn) 30,000 Number of stores (L) 16.0 Total sales (L) 560 Capita per CVS (R) Sales per CVS (R) 546 24,000 12.8 540

19,930 520 18,000 9.6 522 520 16,634 514 517 507 504 499 12,237 503 12,000 6.4 505 500 500 496 8,384 494 5,825 4,865 483 6,000 6,647 3,893 3.2 480 2,886 478 5,299 2,105 4,383 1,749 474 3,450 2,309 1,919 0 0.0 460 99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F

Source: KACS, IMF, KDB Daewoo Securities Research Source: KACS, IMF, KDB Daewoo Securities Research

Figure 12. JapanÊs CVS penetration by total number of stores Figure 13. JapanÊs CVS penetration by total sales (number of stores) (people) (Wtr) (Wmn) 45,000 Number of stores (L) 4,000 125.0 Total sales (L) 3,050 Capita per CVS (R) Sales per CVS (R) 2,823

40,000 3,764 3,750 100.0 2,591 2,700 3,577 3,520 2,562 35,000 3,500 75.0 2,350 3,436 3,386 3,307 2,005 2,001 1,998 2,134 3,226 1,944 30,000 3,162 3,250 50.0 2,000 1,982 3,179 3,134 1,874 25,000 3,057 3,000 25.0 1,716 1,650 3,013 2,947 1,507 1,467 20,000 2,750 0.0 1,300 99 00 01 02 03 04 05 06 07 08 09 10 11 99 00 01 02 03 04 05 06 07 08 09 10 11

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

KDB Daewoo Securities Research 6 June 15, 2012 GS Retail

4. Supermarket industry outlook

Expansion of SSM The size of the domestic supermarket industry was W25.2tr in 2011, up 5.8% YoY. SSM format in supermarket (super supermarket) industry size was W5.3tr in 2011, up 47.2% YoY. We forecast the SSM industry industry to post a CAGR of 15% over the next three years to reach W8tr in 2014. Although the factors driving the growth of SSMÊs are similar to convenience stores, supermarkets should be limited by government regulations.

For now, the government appears intent on maintaining tight regulations on major retailers to protect small-sized retailers, through measures that include forced shut down of stores on holidays, limitations on operating hours and blocking M&As. However, we believe consumer demand for SSM will support SSM business only if the regulatory environment loosened. As 79% of the supermarket industry is made up of mom and pop stores (only 21% of stores are run by SSM operators), the market seems ripe for consolidation.

Figure 14. Market size trend of supermarket Figure 15. Number of stores of Big 4 supermarkets (Wtr) (%) (number of stores) 32 13 350 Market size (L) Expect 3yr CAGR of 4% Lotte Super YoY Growth (R) GS Supermarket Homeplus Express 28 10 280 Emart Everyday+Kim's Club

24 8 210

20 5 140

16 3 70

12 0 0 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F 2007 2008 2009 2010 2011

Source: KOSTAT, KDB Daewoo Securities Research estimates Source: Each company data, KDB Daewoo Securities Research

Figure 16. Sales trend of Big 4 supermarkets Figure 17. Market share of SSM in 2011

(Wbn) (%) Others 4,500 Emart Everyday+Kim's Club 38 11.6% Homeplus Express Kim's Club GS Supermarket Lotte Super + Emart 3,700 Lotte Super 33 33.5% Big 4 sales YoY growth 7.4%

2,900 28

As of 2011 2,100 23

Homeplus 1,300 18 Express 25.6%

500 13 GS Supermarket 2007 2008 2009 2010 2011 22%

Source: KOSTAT, KDB Daewoo Securities Research Note: Based on number of convenience stores Source: Each company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 7 June 15, 2012 GS Retail

5. Domestic consumption outlook

Domestic consumption We expect KoreaÊs GDP growth will gradually accelerate from 2H12 contrary to 1H12 when growth to gradually we have seen slowing growth on the back of external economic uneasiness and negative accelerate from 2H12 wealth effect. According to KDB Daewoo SecuritiesÊ economics research team, 2012 GDP growth is forecast at 3.2% (vs. 3.6% in 2011). While 1Q12 GDP growth was 2.8% YoY, we expect it to gradually pick up towards the end of the year (3% YoY in 2Q12, 3.3% YoY in 3Q12 and 3.5% YoY in 4Q12).

Domestic consumption growth is likely to undermine GDP growth in 2012. KDB Daewoo Securities economics research team forecasts 2012 domestic consumption growth at 2.8% YoY (vs. 2.7% YoY in 2011). The quarterly growth should be in line with that of GDP growth. While 1Q12 domestic consumption growth was just 1.6% YoY, we expect domestic consumption growth to improve to 2.8% YoY in 2Q12, 3% YoY in 3Q12 and 2.5% YoY in 4Q12.

Figure 18. Korean quarterly GDP trend Figure 19. Korean private consumption trend

(QoQ, %) (YoY, %) (QoQ, %) (YoY, %) 6 10 9 14 GDP QoQ growth (L) Private consumption QoQ growth (L) GDP YoY growth (R) Private consumption YoY growth (R) 6 10 3 6

3 6

0 2 0 2

-3 -2 -3 -2

-6 -6 -6 -6 02 03 04 05 06 07 08 09 10 11 12F 13F 02 03 04 05 06 07 08 09 10 11 12F 13F

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

Figure 20. Korean retail sales trend Figure 21. Korean Consumer Sentiment Index (CSI) trend

(%, YoY) (p) 60 Total retail sales 120 Consumer Sentiment Index Durable goods

40 110

20

100 0

90 -20

-40 80 07 08 09 10 11 12 07 08 09 10 11 12

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

KDB Daewoo Securities Research 8 June 15, 2012 GS Retail

III. Revenues and earnings trajectory

1. Revenue forecasts

Revenues to post a We forecast GS RetailÊs revenues will grow at a CAGR of 15.4% for the next three years to CAGR of 15.4% for the reach W6.1tr in 2014. Revenues in 2011 were broken down as 65% from convenience next three years stores, 33% from supermarkets and 2% from others. Such revenue structure is likely to continue for now.

We forecast GS RetailÊs convenience store division will grow at a CAGR of 15.8% for the next three years to reach W4tr in 2014. Such growth should be obtained with flat same store sales growth and a CAGR of 15.8% for new store openings (1,000 new store openings per year for the next three years).

We forecast GS RetailÊs supermarket division will grow at a CAGR of 15.6% for the next three years to reach W2tr in 2014. Similar to its convenience store growth, the main driver of growth should come from new store openings (a CAGR of 11.8% for new store openings or 30 per year for the next three years) with a CAGR of 4% for same store sales growth.

2. Profit forecasts

Net profit to post CAGR We forecast GS RetailÊs operating profit to grow at a CAGR of 26.3% to reach W207.6bn in of 24.6% for the next 2014, and its net profit to grow at a CAGR of 24.6% to reach W180.4bn in 2014. GS RetailÊs three years operating profit in 2011 was 2.6% (3.9% OP margin for convenience store division, 2.6% for supermarket division and -42%for others). We forecast its OP margin to improve to 3.4%, as: 1) the supermarket division is likely to see profit margins increase helped by better scalability, 2) donut business should see a decrease in operating loss with better efficiency, and (3) convenience store division should maintain current margins, as the business is run mainly on a franchise model. GS RetailÊs net profit margin in 2014 should also improve to 2.9% from 2.3% in 2011 on the back of operating margin expansion and increase in financial income.

Table 1. Revenues and operating profit forecasts (Wbn) 2010 2011 2012F 2013F 2014F Total revenues 3,280 3,982 4,710 5,416 6,138 CVS 2,089 2,595 3,117 3,575 4,033 Supermarket 1,112 1,310 1,515 1,761 2,023 Others 80 77 79 80 82 Total operating profit 95 103 150 179 208 CVS 84 102 122 140 158 Supermarket 29 34 42 52 64 Others -18 -33 -14 -13 -15 Total OP margin (%) 2.9 2.6 3.2 3.3 3.4 CVS 4.0 3.9 3.9 3.9 3.9 Supermarket 2.6 2.6 2.8 3.0 3.2 Others -22.5 -42.2 -17.7 -16.8 -18.1 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 9 June 15, 2012 GS Retail

IV. GS Retail’s business model

1. Revenue mix

GS RetailÊs revenue mix: In 2011, GS Retail posted revenues of W3.98tr, which consisted of W2.6tr (up 24.2% YoY, cigarettes 37%, foods 65% of total revenues) from convenience stores, W1.3tr (up 17.8% YoY, 33% of total 53%, household goods revenues) from supermarkets and W77bn (-3.7% YoY, 2% of total revenues) from other 5.5%, service 4.5% businesses (Mr. Donut). As the majority of GS RetailÊs revenues and growth is derived from convenience stores, we should place particular focus on this business.

In 2011, GS RetailÊs convenience store revenues consisted of cigarettes (37%), foods (53%), household goods (5.5%) and service (4.5%). A notable trend is the continuing decline in the share of cigarette sales to total revenues (41% in 2009 to 37% in 2011). This is a positive development as GP margin of cigarettes is much lower than the other products (~10% vs. ~30%). Meanwhile, the portion of fresh foods and HMR product sales rose to 21% in 2011 from 17% in 2009. Furthermore, GS Retail is expected to add more services (such as delivery pick up service, banking service, etc.) which despite lower profit margins, generate more foot traffic.

Figure 22. GS RetailÊs current/target revenue mix Figure 23. Revenue mix of total CVS industry

(%) (%) Cigarettes Foods Household goods Service Cigarette Beverage Milk Beer Snacks, Chewing gum Others 100.0 4.2 4.5 100 5.5 5.5 20.0 31.3 32.1 34.3 80.0 80

49.6 4.2 4.4 53.0 4.4 4.5 60.0 60 4.1 4.7 6.4 6.8 6.5 60.0 9.8 10.6 9.5 40.0 40

43.9 20.0 40.7 37.0 20 42.0 40.5 20.0 0.0 0 2009 2011 Target 2008 2009 2010

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

Figure 24. GS 25Ês store expansion Figure 25. GS SupermarketsÊ store expansion

(Number of stores) (%) (Number of stores) (%) 9,307 320 9,400 GS25 (L) 30 330 GS Supermarket (L) 50 YoY growth (R) 8,307 YoY growth (R) 290 260 7,550 7,307 25 260 38 230 6,307 205 5,700 20 190 25 5,026 138 3,915 3,850 3,388 15 120 103 13 88 2,856 85 2,399

2,000 10 50 0 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F

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

KDB Daewoo Securities Research 10 June 15, 2012 GS Retail

2. Revenue/profit structure of franchise model

99% is franchise model GS Retail runs 6,607 convenience stores and 240 supermarkets as of end-May. The number of convenience stores will rise to 7,307 (add 1,000 stores, up 15.9% YoY) as of end-2012 and 8,307 (add 1,000 stores, up 13.7% YoY) as of end-2013. The number of supermarkets is projected to rise to 290 by end-2013 from 230 as of end-2011.

While supermarkets are directly operated, most convenience stores are run as franchises. 99% of GS25 (GS RetailÊs convenience store franchise) are run on the franchise model. Among those franchisees, two types of franchise contracts exist depending on who pays the rents – the franchiser or franchisees. The subsidy or rebate level varies depending on the type of contract.

The graphs below show the revenues and profit structures of franchisees and the franchiser.

Figure 26. Profit/cost structure of franchisee

100% 7.0 Profit: sales x 7%

12.0 Loyalty 80% 11.0 Utility Rent Labor costs 60%

40% COGS 70.0

20%

0%

Source: Company data, KDB Daewoo Securities Research

Figure 27. Profit/cost structure of franchiser (GS Retail)

100% 4.0 Profit: sales x 4% Promotion 1.0 2.3 sales commission 2.5 Rent 90% Labor cost 2.7 3.0 Depreciation 4.5 Overhead costs 80%

70%

80.0 COGS

60%

50%

Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 11 June 15, 2012 GS Retail

V. Possible acquisition of Woongjin Coway

Possible acquisition of Woongjin Coway – to be finalized shortly

GS Retail to seek new Since GS Retail has sold off its department stores and discount store business to Lotte Shopping in growth drivers both 2010, the company has been focusing on convenience stores and supermarkets. Going forward, internally and externally the company is expected to seek new growth drivers, internally as well as externally. The company is known to have submitted a LOI (letter of intent) to acquire Woongjin Coway, which is slated to be finalized shortly. (Woongjin Group decided to sell its 28.4% stake in Woongjin Coway on the open market.) We believe this acquisition would be positive, as GS Retail could add new growth drivers from WoongjinÊs current rental business and devise a new business using WoonjinÊs sales network. The company has an extensive door-to-door sales network of 18,000 salespeople, and has 3.3mn rental customers and 5.5mn rental products. In 2011, Woongjin Coway is believed to have posted revenues of W1.7tr and an OP margin of 14%.

What GS Retail can get from the acquisition?

Armed with ample cash holdings from the sell-off of department stores and discount stores in 2010, GS Retail is set for expansion. Since internal growth has become more challenging in light of tighter regulatory environment, we believe GS Retail can attain external growth through the acquisition of Woongjin Coway. On top of Woongjin CowayÊs current rental business, GS Retail could expand the rental business to new product categories, such as major home electronic goods, such as TVs, refrigerators, and air conditioners.

Figure 28. Synergies expected from the deal

External growth opportunity

Existing rental business model + new rental products

Expand retail network by utilizing „cody‰ organization (~18,000 people)

Source: KDB Daewoo Securities Research

Figure 29. GS GroupÊs business structure

GSGS

OilOil refining/refining/ Main division ConstructionConstruction RetailRetail chemicalschemicals

Main subsidiaries GS E&C GS Caltex GS Retail GSHS

Source: KDB Daewoo Securities Research KDB Daewoo Securities Research 12 June 15, 2012 GS Retail

VI. Valuation

GS Retail deserves a premium valuation on robust convenience store growth GS Retail is trading at a We believe applying a premium earnings multiple to GS Retail is justified, given: 1) GS RetailÊs premium to the Korean main business, convenient stores, is likely to outgrow the domestic retail sector, 2) GS Retail retail sector can preserve stable operating margins thanks to a franchise business model, and 3) the companyÊs ample cash holding can support future business opportunities, including external expansion through M&As. At the moment, the Korean retail sector is trading at 10x 2012F EPS, which is 18.4% premium to the KOSPI. We attribute the sectorÊs premium to: 1) continuous growth of domestic consumption, and 2) structural growth of certain retail segments (including online shopping and convenience stores).

Target P/E of 15x We note a possible re-rating of GS Retail shares, if 1) the convenience store market displays forward earnings seems faster-than-expected pace of growth, and 2) GS Retail successfully adds new growth fair in valuing GS Retail engines. On the flip side, a de-rating of GS Retail shares is also possible, if 1) the convenience store market reaches saturation, and 2) new growth drivers disappoints.

Table 2. KDB Daewoo SecuritiesÊ retail sector coverage (W, Wbn, x) Company Rating Target price Current price Market cap 2012F P/E 2012F P/B 2012F EV/EBITDA GS Retail Buy 31,000 24,500 1,887 13.9 1.3 3.0 HDS Buy 209,000 134,000 3,136 8.3 1.1 5.7 Shinsegae Buy 333,000 220,500 2,171 9.0 1.0 4.7 Hi-Mart Buy 80,000 57,200 1,350 9.5 0.9 3.4 HDHS Buy 168,000 110,000 1,320 7.3 1.3 4.0 CJOS Trading Buy 214,000 168,700 1,046 9.8 2.4 5.5 Emart Trading Buy 290,000 247,500 6,899 11.2 1.2 5.8 GSHS Trading Buy 123,000 92,000 604 6.7 0.9 1.9 Note: Prices as of market close June 13, 2012 / Source: KDB Daewoo Securities Research estimates Table 3. Global retail peer group valuations EV/EBITDA (x) P/E (x) P/B (x) ROE (%) Company 11 12F 13F 11 12F 13F 11 12F 13F 11 12F 13F GS Retail 9.2 3.0 2.9 19.1 13.9 11.9 1.4 1.3 1.2 6.7 9.2 10.0 HDS 9.0 5.7 4.8 10.9 8.3 7.7 1.6 1.1 1.0 15.5 14.4 13.6 Shinsegae 8.7 4.7 3.8 1.3 9.0 8.1 1.2 1.0 0.9 75.9 11.6 11.5 Hi-Mart 8.4 3.4 3.0 12.3 9.5 7.3 1.3 0.9 0.8 11.6 9.5 11.3 HDHS 4.7 4.0 2.7 11.2 7.3 6.9 1.9 1.3 1.1 18.4 19.7 17.5 CJ O Shopping 12.6 5.5 5.0 18.1 9.8 8.3 4.9 2.4 1.9 25.4 27.0 25.0 Emart 14.4 5.8 5.2 25.4 11.2 9.9 1.4 1.2 1.1 5.6 10.6 10.9 GSHS 3.9 1.9 1.4 4.0 6.7 5.9 1.3 0.9 0.8 37.3 14.1 14.2 Domestic average 8.9 4.3 3.6 12.8 9.5 8.3 1.9 1.3 1.1 24.6 14.5 14.3 Circle K Sunkus (JP) 4.1 2.3 2.2 15.8 14.1 13.1 1.0 1.0 0.9 6.7 7.1 7.1 Seven & I (JP) 4.5 4.4 4.2 15.5 12.8 11.5 1.1 1.1 1.0 7.5 8.4 8.8 Lawson (JP) 5.2 4.7 4.4 21.0 15.4 13.7 2.5 2.3 2.1 12.0 15.5 16.3 Ministop (JP) 2.7 1.4 1.3 12.3 11.6 9.7 0.7 0.7 0.7 5.7 3.7 4.1 Family Mart (JP) 5.5 3.7 3.5 19.5 14.1 12.5 1.5 1.4 1.3 7.8 10.2 10.8 Wal-Mart (US) 6.4 7.5 7.2 14.3 13.4 12.3 3.2 2.9 2.6 22.5 21.9 22.0 (UK) 4.7 6.0 5.7 8.2 8.8 8.1 1.4 1.3 1.2 16.4 15.1 15.1 Costco (US) 11.0 9.3 8.4 24.5 22.8 20.2 3.0 3.0 2.7 12.8 13.5 14.2 Target (US) 5.2 7.3 6.9 13.0 13.2 11.8 2.4 2.2 2.1 18.7 17.4 18.5 Lifestyle (HK) 11.6 10.1 8.9 14.9 14.3 12.4 3.3 2.9 2.6 24.2 21.7 21.9 (US) 4.5 4.8 4.7 10.9 9.4 8.8 3.1 2.6 2.3 13.0 30.0 30.0 Metro (GR) 2.4 4.1 4.0 13.5 8.1 7.5 1.1 1.1 1.0 10.0 14.2 14.7 Safeway (US) 2.7 5.0 5.0 9.4 9.5 8.7 1.7 1.5 1.4 11.9 15.5 18.7 Global average 5.4 5.4 5.1 14.8 12.9 11.6 2.0 1.8 1.7 13.0 14.9 15.6 Note: Prices as of market close June 13, 2012 / Source: Bloomberg, KDB Daewoo Securities Research estimates KDB Daewoo Securities Research 13 June 15, 2012 GS Retail

Global Peer Group Valuation

Figure 30. Relative share price of Korean retailers Figure 31. Relative share price of US retailers

(-1Y=100) (-1Y=100) 125 Lotte Shopping Hyundai Department 135 Walmart Hyundai Home Shopping KOSPI Target Costco 110 125

95 115

80 105

65 95

50 85 6/11 8/11 10/11 12/11 2/12 4/12 6/12 6/11 8/11 10/11 12/11 2/12 4/12 6/12

Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research

Figure 32. Relative share price of overseas category killers Figure 33. Relative share price of overseas supermarkets

(-1Y=100) (-1Y=100) 180 Best Buy Radio Shack H.Gregg 180 Kroger Safeway Home Depot TJX Whole Foods Market Carrefour 160 Ahold 150 140

120 120

100 90

80 60 60

30 40 6/11 8/11 10/11 12/11 2/12 4/12 6/12 6/11 8/11 10/11 12/11 2/12 4/12 6/12

Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research

Figure 34. 2012F P/B-ROE Figure 35. 2012F P/E-EPS growth

(P/B, x) (P/E, x) Costco Lifestyle 3.0 25 Wal-Mart Costco Kroger 2.5 Lawson 20

Target CJOS Lawson Lifestyle 2.0 15 GS Retail Circle K Target Ministop Seven & I FamilyMart Safeway Wal-Mart 1.5 FamilyMart Hi-Mart 10 Safeway CJOS GS Retail Emart Tesco HDHS Kroger Metro Tesco HDHS Seven & I Metro HDS HDS 1.0 Circle K 5 Ministop Shinsegae GSHS Hi-Mart (ROE, %) (EPSG, %) 0.5 0 0 5 10 15 20 25 30 35 -10 0 10 20 30 40 50

Source: Thomson Reuters, KDB Daewoo Securities Research estimates Source: Thomson Reuters, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 14 June 15, 2012 GS Retail

VII. Risks

1. Concerns of regulations in convenience store industry

Regulation of CVS The governmentÊs regulation of convenience stores is relatively lighter than other retail industry is relatively segments. We attribute this to the operating structure of convenience stores: most of the lighter than other retail stores are run on a franchise model and owned by franchisees, not franchisers. In addition, segments the government appears to look positively on the fact that franchisers provide a certain level of subsidies to franchisees.

However, the Fair Trade Committee recently announced that it is considering a restriction on new convenience store openings within a 500m distance from an existing convenience store, in order to not impact the profitability of existing stores. The regulation is similar to one in the bakery industry, which has a similar rule to help preserve existing storesÊ profitability. We believe the probability of such regulation being introduced for convenience stores to be low, given: convenience storesÊ shut down rate is only 4% vs. 12% for average franchise business models.

2. Concerns over regulations in supermarket industry

Regulation of Meanwhile, the supermarket industry is likely to continue to suffer from regulatory risks. supermarket industry Currently, the supermarket industry accounts for 8.4% of the total retail market and SSM will remain as a risk accounts for 21% of the total supermarket industry. Current retail laws prevent new SSM openings within a 1km distance from an existing supermarket store and blocks SSM operators to take over small- to medium-sized supermarket chains. We believe the probability of the government loosening this regulation to be low to protect small- to medium-sized enterprises.

Table 4. Regulations for retail industry Regulation Target Remarks Shut-down twice per month GS Supermarket - Includes 70 stores out of 240 stores Limit opening of new stores GS Supermarket - Distance of opening new stores from the traditional market is limited to 1km (previously, 500m) Source: Financial Service Commission, KDB Daewoo Securities Research

3. Difficulties in improving profit margins

HMR product industry is Convenience stores are likely to focus on product mix improvement to raise profit margins, growing slower than especially reinforcing HMR (home meal replacement) products, which can generate both expected higher margins and foot traffic. GS Retail receives ~30% of HMR products from its subsidiaries and the remainder from small- to medium-sized independent producers. Contrary to market expectations, we believe the HMR product industry will see stagnant growth, as higher scalability and product quality improvements may be challenging under a fragmented market. Furthermore, the current situation does not appear likely to improve in the short term, as the entry of big players would draw the governmentÊs attention.

KDB Daewoo Securities Research 15 June 15, 2012 GS Retail

VIII. Appendix

GS Retail was established in 1971 as Goldstar Electric Engineering and initially sold wires and cables. They opened their first LG Supermarket in 1974, LG25 in 1990, LG Department Store in 1992, and LG Mart in 1996. After the acquisition of Lucky Chain in 1980, the company changed its name to LG Retail and expanded its business to department stores, discount stores, convenience stores, and other retail formats. As GS Holdings was separated from LG Group in 2004, it became the main stakeholder of LG Retail and changed its name to GS Retail. In April 2010, the company disposed of GS Square (department store) and GS Mart (discount store) to Lotte Square and Lotte Shopping, respectively, to expand its existing business and enter new business areas. Currently, GS Retail is focused on CVS, supermarkets, and H&B business. The company was listed on the KOSPI market in December 2011

Table 5. Company history Date Details Feb. 1971 Established as Goldstar Electric Engineering May 1974 Opened 1st LG Supermarket 1980 Merged Lucky Chain Dec. 1990 Opened 1st LG25 convenience store Jan. 1992 Opened 1st LG Department Store Nob. 1996 Opened 1st LG Mart Jul. 2002 Changed name to LG Retail Feb. 2005 Acquired Kolon Mart (10 stores for W43.5bn) Mar. 2005 Changed name to GS Retail Mar. 2007 Established a subsidiary: Fresh Serve (F/F business) Apr. 2007 Entered doughnut market: Mr. Doughnut May. 2007 Established overseas corporation: GS Retail (Property development and leasing service in Vietnam) Mar. 2008 Established a subsidiary: GS Net Vision (Advertisement agency) Jan. 2010 Established GS Square (Property development and leasing service) Apr. 2010 Disposed department store to Lotte Square and discount store to Lotte Shopping (Dept. store @ W520bn, disc. store @ W820bn) Dec. 2011 Listed on the Korea Stock Exchange Source: Company data, KDB Daewoo Securities Research

GS Holdings is mainly divided into construction, oil refining/chemicals, and retail. The retail division is divided into GS Retail (GS Holdings holds a 65.8% stake as of end-2011) and GS Home Shopping. GS Retail has three subsidiaries: GS (50% stake), Fresh Serve (100% stake), GS Net Vision (100% stake). GS Watsons operates H&B business, Fresh Serve operates fast food business, and GS Net Vision operates advertisements for LCD TV.

Figure 36. GS RetailÊs corporate structure (as of end-2011)

Huh, Chang Soo & Affiliates 45.3% 30.4%

GSGS GSGS E&CE&C (078930(078930 KS)KS) (006360(006360 KS)KS)

50.0% 65.8% 30.0% 70.0% 54.6% 100%

GS Retail GS Homeshopping GS Global GS Caltex GS Homeshopping GS EPS GS Global GS Sports (007070 KS) (028150(028150 KS)KS) (001250(001250 KS)KS)

100% 100% 50.0% 100% 50.0% GS Green Tech GS Power GS Watsons GS Shop T&M GS Bio

100% 100% 90.0% 100% 100% Seorabeol BNC Fresh Serve GS Teleservice PLS City Gas

50.0% 100% 100% 50.0% PCT Hae Yang City Gas GS Net vision GS Eco Metal

90.1% 99.7% 69.6% GS Nanotech GS Nextation DKT

50.0% 100% GS Park 24 Amco

100% 95.0% Sangji Ship GS Fuel Cell

50.0% 50.0% GS EcoMetal GS Bio

61.2% 33.3% GS Platech Sal de Vida Korea

100% Samil Polymer

Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 16 June 15, 2012 GS Retail

GS Retail (007070 KS/Buy/TP: W31,000)

Comprehensive Income Statement (Wbn) 12/09 12/10 12/11 12/12F 12/13F 12/14F 03/12 06/12F 09/12F 12/12F Revenues 2,885 3,280 3,982 4,710 5,416 6,138 1,047 1,178 1,272 1,214 Cost of Sales 2,226 2,591 3,136 3,705 4,254 4,815 829 926 1,000 949 Gross Profit 659 689 846 1,006 1,162 1,323 218 251 272 265 SG&A Expenses 567 609 752 855 982 1,115 207 214 214 221 Operating Profit (Adj) 92 80 94 150 179 208 11 38 58 44 Operating Profit 92 95 103 154 179 208 14 38 58 44 Non-Operating Profit 35 27 26 28 32 33 7 8 86 Net Financial Income 8 -12 -22 -15 -13 -10 0 -4 -4 -7 Net Foreign Currency Related Gains (Losses) 5 14000 0 0 00 Net Gains from Inv in Associates -6 -1 3 000 0 0 00 Other Non-Operating Profit 11 18 1 15 22 25 6 5 50 Pretax Profit from Continuing Operations 127 106 129 181 211 241 21 45 66 50 Income Tax 31 31 36 45 53 60 5 11 11 18 Profit from Continuing Operations 96 76 93 136 158 181 16 34 54 32 Profit from Discontinued Operations 29 367 0 000 0 0 00 Tax Effect 0 117 0 000 0 0 00 Net Profit 125 442 93 136 158 181 16 34 54 32 Controlling Interests 125 442 94 136 158 181 16 34 34 52 Non-Controlling Interests 0 00000 0 0 20 -20 Total Comprehensive Profit 125 426 90 136 158 181 16 34 54 32 Controlling Interests 125 426 90 136 158 181 16 34 34 52 Non-Controlling Interests 0 00000 0 0 20 -20 EPS (W) 1,620 5,743 1,215 1,767 2,057 2,344 206 442 442 678 EBITDA 166 173 214 257 289 324 45 64 84 64 Depreciation 63 79 101 81 83 85 28 20 20 12 Amortization 11 14 20 23 27 31 6 6 66 Profitability Gross Profit Margin (%) 22.9 21.0 21.3 21.4 21.5 21.6 20.8 21.4 21.4 21.8 Operating Profit Margin (%) 3.2 2.9 2.6 3.3 3.3 3.4 1.4 3.2 4.5 3.6 EBITDA Margin (%) 5.8 5.3 5.4 5.5 5.3 5.3 4.3 5.4 6.6 5.3 Net Profit Margin (%) 4.3 13.5 2.4 2.9 2.9 2.9 1.5 2.9 2.7 4.3 Growth Rate (YoY) Revenues (%) -10.4 13.7 21.4 18.3 15.0 13.3 19.6 20.1 16.5 17.4 Operating Profit (%) 37.2 3.2 8.4 49.3 16.5 15.9 86.2 47.3 19.6 105.4 EBITDA (%) -63.1 4.0 24.2 19.9 12.6 11.8 49.2 10.4 17.1 17.3 Net Profit (%) -63.5 254.5 -78.8 45.4 16.4 13.9 73.7 52.4 -21.3 175.8 EPS (%) -63.5 254.5 -78.8 45.4 16.4 13.9 73.7 52.4 -21.3 175.7 Other Ratios SG&A/Revenues (%) 19.7 18.6 18.9 18.2 18.1 18.2 19.8 18.2 16.8 18.2 Tax Rate (%) 24.5 28.7 27.7 25.0 25.0 25.0 24.1 25.0 17.3 35.5 Interest Coverage Ratio (%) 8.6 3.7 5.2 5.6 5.8 6.2 0.0 5.5 8.4 3.2 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 17 June 15, 2012 GS Retail

GS Retail (007070 KS/Buy/TP: W31,000)

Statement of Financial Condition (Wbn) 12/09 12/10 12/11 12/12F 12/13F 12/14F Current Assets 201 1,004 994 1,348 1,404 1,455 Cash and Cash Equivalents 15 38 30 307 286 255 AR & Other Receivables 76 55 69 94 108 122 Inventories 100 70 133 157 181 205 Other Current Assets 9 12 30 21 24 26 Non-Current Assets 2,220 1,592 2,001 1,940 2,154 2,373 Investments in Associates 4 81212 12 12 Property, Plant and Equipment 1,488 856 683 493 571 648 Intangible Assets 85 83 110 657 715 772 Other Non-Current Assets 541 518 577 772 849 934 Total Assets 2,421 2,596 2,994 3,287 3,559 3,828 Current Liabilities 749 738 957 1,015 1,064 1,110 AP & Other Payables 384 298 393 477 526 571 Short-term Financial Liabilities 276 257 507 305 305 305 Other Current Liabilities 89 183 57 233 233 234 Non-Current Liabilities 685 481 603 745 847 929 Long-term Financial Liabilities 497 249 404 494 594 674 Other Non-Current Liabilities 159 206 169 251 253 255 Total Liabilities 1,433 1,219 1,559 1,759 1,911 2,039 Controlling Interests 988 1,377 1,430 1,528 1,648 1,790 Capital Stock 77 77 77 77 77 77 Capital Surplus 330 156 156 156 156 156 Other Components of Equity 0 000 0 0 Retained Earnings 332 1,145 1,198 1,296 1,415 1,557 Non-Controlling Interests 0 040 0 0 Stockholders' Equity 988 1,377 1,435 1,528 1,648 1,790 Weighted Average Shares (Â000) 15,400 15,400 77,000 77,000 77,000 77,000 Activities Accounts Receivable Turnover (x) 61.1 84.0 122.2 70.5 53.9 53.5 Inventory Turnover (x) 32.5 38.6 39.3 32.5 32.1 31.9 Accounts Payable Turnover (x) 10.6 12.6 17.7 13.3 10.8 11.2 Net Working Capital Turnover (x) -10.3 -10.4 -14.2 -20.6 -22.3 -24.5 Total Asset Turnover (x) 1.3 1.3 1.4 1.5 1.6 1.7 Stabilities Cash Equivalents to Assets (%) 0.6 1.5 1.0 9.3 8.0 6.7 Current Ratio (%) 26.8 136.1 103.9 132.8 132.0 131.1 Debt to Equity Ratio (%) 145.1 88.6 108.7 115.2 116.0 113.9 Net Debt to Equity Ratio (%) 76.7 -26.2 10.3 -18.1 -11.8 -6.9 Profitabilities ROA (%) 5.5 17.6 3.3 4.3 4.6 4.9 ROE (%) 13.3 37.4 6.7 9.2 10.0 10.5 ROIC (%) 4.3 4.3 6.9 11.1 13.4 16.1 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 18 June 15, 2012 GS Retail

GS Retail (007070 KS/Buy/TP: W31,000)

Cash Flows (Wbn) 12/09 12/10 12/11 12/12F 12/13F 12/14F Cash Flows from Operating Activities 216 199 34 208 211 226 Net Profit 125 442 93 136 158 181 Additions and Deductions of Non-Cash Flows 95 -195 166 55 43 41 Depreciation 63 79 101 81 83 85 Amortization 11 14 20 23 27 31 Others -18 424 -38 -9 0 0 Changes in Working Capital -7 1 -124 34 20 10 Decrease (Increase) in AR & Other Receivables -16 10 -15 -15 -14 -14 Decrease (Increase) in Inventories -23 12 -63 -24 -24 -24 Increase (Decrease) in AP & Other Payables 46 12 47 58 49 45 Changes in Other Current Assets from Operating Activities -11 -34 -31 -2 -2 -2 Income Tax Paid 0 -49 -164 -1 0 0 Cash Flows from Investing Activities -369 81 -199 -20 -294 -298 Chg in Property, Plant and Equipment -166 -164 -183 0 -240 -160 Chg in Intangible Assets -11 -40 -43 0 0 0 Chg in Long-Term Financial Assets -3 -122 -3 0 0 0 Chg in Short-Term Financial Assets -1 -74 -1 -37 -38 -40 Other Investing Cash Flows -189 482 30 17 -15 -98 Cash Flows from Financing Activities 138 -259 158 89 62 42 Increase (Decrease) in Financial Liabilities 145 -202 246 140 100 80 Chg in Equity 0 000 0 0 Dividends Paid -8 -25 -39 -39 -39 -39 Other Financing Cash Flows 0 -33 -50 -13 0 0 Increase (Decrease) in Cash -16 20 -8 277 -21 -31 Beginning Balance 31 19 38 30 307 286 Ending Balance 15 38 30 307 286 255

EBITDA 166 173 214 257 289 324 (-) CAPEX 166 164 183 0 160 160 (-) Taxes on Pretax Profit from Continuing Operations 31 31 36 45 53 60 (-) Net Financial Expenses 8 -12 -22 -15 -13 -10 (-) Increase in Net Working Capital -7 1 -124 34 20 10 (=) FCF (Free Cash Flow) -83 96 -263 229 95 117

Per Share Data EPS (W) 1,620 5,743 1,215 1,767 2,057 2,344 (W) 12,202 16,804 17,141 18,912 21,320 24,060 CFPS (W) 12,902 34,754 2,782 3,151 3,490 3,849 DPS (W) 0 0 300 300 300 300 Valuation P/E (x) - -19.113.9 11.9 10.5 P/CR (x) - -8.37.8 7.0 6.4 P/B (x) - -1.41.3 1.2 1.0 EV/EBITDA (x) - -9.23.0 2.9 2.5 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 19 June 15, 2012 GS Retail

Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of CJ O Shopping as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with CJ O Shopping as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. We managed the IPO of Hi-Mart, which listed on June 29, 2011, but do not have any special interest in the Hi-Mart as of the publication date.

Buy Relative performance of 20% or greater (W) GS Retail Stock Trading Buy Relative performance of 10% or greater, but with volatility 40,000 Ratings Hold Relative performance of -10% and 10% 30,000

Sell Relative performance of -10% 20,000

Overweight Fundamentals are favorable or improving 10,000 Industry Neutral Fundamentals are steady without any material changes Ratings 0 6/10 12/10 6/11 12/11 6/12 Underweight Fundamentals are unfavorable or worsening * 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.

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.

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KDB Daewoo Securities Research 20 June 15, 2012 GS Retail

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Daewoo Securities Co. Ltd. () 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

Daewoo Securities (Europe) Ltd. Tokyo Representative Office Beijing Representative Office Tower 42, Level 41 7th Floor, Yusen Building Suite 2602, Twin Towers (East) 25 Old Broad Street 2-3-2 Marunouchi, Chiyoda-ku B-12 Jianguomenwai Avenue London EC2N 1HQ Tokyo 100-0005 Chaoyang District, Beijing 100022 United Kingdom Japan China Tel: 44-20-7982-8016 Tel: 81-3- 3211-5511 Tel: 86-10-6567-9699

Shanghai Representative Office Ho Chi Minh Representative Office Unit 13, 28th Floor, Hang Seng Bank Tower Centec Tower 1000 Lujiazui Ring Road 72-74 Nguyen Thi Minh Khai Street Pudong New Area, Shanghai 200120 Ward 6, District 3, Ho Chi Minh City China Vietnam Tel: 86-21-5013-6392 Tel: 84-8-3910-6000

KDB Daewoo Securities Research 21