November 15, 2019 Korea Morning Focus Company News & Analysis Korean Air (003490/Trading Buy/TP: W30,000) Downgrade rating Major Indices Market leadership vs. uncertainties over cargo cycle Close Chg Chg (%) KOSPI 2,139.23 16.78 0.79 Jeju Air (089590/Buy/TP: W30,000) KOSPI 200 283.93 2.65 0.94 The drawbacks of expansion KOSDAQ 663.31 1.46 0.22 Turnover ('000 shares, Wbn) KEPCO KPS (051600/Buy/TP: W41,000) Upgrade rating & raise TP Volume Value Renewed growth momentum KOSPI 515,903 6,080 KOSPI 200 79,373 3,570 Iljin Materials (020150/Buy/TP: W59,000) Lower TP KOSDAQ 1,348,564 5,252 Closer look reveals positive picture Market Cap (Wbn) Emart (139480/Buy/TP: W190,000) Value KOSPI 1,435,960 3Q19 review: Just the beginning KOSDAQ 235,158 NCsoft (036570/Buy/TP: W700,000) KOSPI Turnover (Wbn) Rally is in order Buy Sell Net Foreign 1,108 1,317 -209 SM Entertainment (041510/Buy/TP: W52,000) Raise TP Institutional 1,910 1,684 226 Back on track Retail 2,991 3,053 -62 KOSDAQ Turnover (Wbn) JYP Entertainment (035900/Buy/TP: W31,000) Raise TP Buy Sell Net High profitability confirmed Foreign 475 492 -17 Institutional 238 224 14 Hite Jinro (000080/Trading Buy/TP: W32,000) Raise TP Retail 4,514 4,479 35 New products are reinventing the industry Program Buy / Sell (Wbn) Buy Sell Net Nongshim (004370/Buy/TP: W320,000) KOSPI 1,518 1,468 50 Domestic weakness vs. overseas growth KOSDAQ 444 447 -3 Celltrion Healthcare (091990/Buy/TP: W70,000) Raise TP Advances & Declines 3Q19 earnings driven by US-bound Truxima exports Advances Declines Unchanged KOSPI 414 422 67 Seegene (096530/Buy/TP: W30,000) KOSDAQ 584 653 90 A departure from the past KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung F&M (000810/Trading Buy/TP: W270,000) Downgrade rating & Feelux 10,400 1,990 705 lower TP Samsung Electronics 52,800 300 630 Profit growth cycle not enough for stock to turn around NAVER 180,000 22,000 356 KODEX Leverage 13,100 190 168 Silicon Works (108320/Buy/TP: W44,000) Lower TP Nano Medics 9,790 690 167 Deeply undervalued KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Sector News & Analysis Price (W) Chg (W) Value CMG Pharm. 4,490 45 466 Display (Overweight) Sambon P&E 3,180 285 263 OLED update: Clear strategic direction Kukil Paper 6,280 430 179 HLB 137,300 -1,200 138 ITM Semiconductor 36,100 50 126 Note: As of November 14, 2019 This document is a summary of a report prepared by Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) and published on our website. Please review the compliance notices contained in the original report. Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Mirae Asset Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for informational purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose. Korean Air (003490 KS) Market leadership vs. uncertainties over cargo cycle Airlines 3Q19 review: OP of W96.4bn; Only airline to deliver operating profit For 3Q19, Korean Air posted revenue of W3.38tr (-3.8% YoY). While domestic revenue Results Comment grew 5.9% YoY, international and cargo revenues declined 1.0% and 6.8% YoY, November 15, 2019 respectively. In international, capacity grew 1.6% YoY, and load factor improved to 83.1%, supported by limited exposure to Japan routes (revenue contribution of 8%) and robust demand on long-haul routes (North America/Europe). Operating profit came in at W96.4bn (-76.0% YoY), which was below our estimate (Downgrade) Trading Buy (W174.1bn) and the market consensus (W177.6bn). That said, it is notable that Korean Air was the only domestic airline company to report operating profit. Fuel costs declined 4.9% YoY on the back of lower average fuel prices, but the increase in labor Target Price (12M, W) 30,000 expenses had a larger-than-expected impact on operating profit. Share Price (11/14/19, W) 25,700 Contrary to expectations, the hotel unit’s operating loss did not narrow. On a brighter note, the aerospace unit’s operating profit improved to W21.8bn, as deliveries of Expected Return 17% unmanned aircraft started to gather steam. Net loss attributable to controlling interests was W254bn, weighed down by 1) F/X-translation losses (W335.9bn) due to won depreciation and 2) net interest expenses (W140bn). OP (19F, Wbn) 240 Potential sources of earnings momentum Consensus OP (19F, Wbn) 300 1) Short-term earnings improvement: We look for a QoQ increase in operating profit EPS Growth (19F, %) - in 4Q19 (to W101.3bn), supported by the removal of the one-off labor expense increase Market EPS Growth (19F, %) -32.1 seen in 3Q19. Won depreciation is also moderating. P/E (19F, x) - However, uncertainties remain over the cargo downcycle, which could be protracted Market P/E (19F, x) 14.3 because of US-China trade disputes. Indeed, cargo revenue on North America and KOSPI 2,139.23 Europe routes declined more than 20% YoY in 3Q19. The earnings weakness on major routes may weaken expectations for margin improvement. Market Cap (Wbn) 2,438 Shares Outstanding (mn) 96 2) Robust long-haul/premium demand: Long-haul and premium markets continue to Free Float (%) 64.5 fare well. Indeed, passenger revenue on North America routes expanded 6% in 3Q19, driven by Korean Air’s joint venture with Delta Airlines. The premium segment Foreign Ownership (%) 19.4 continued to see relatively solid demand, which cushioned yields. Beta (12M) 1.09 52-Week Low 21,800 Meanwhile, we expect Korean Air to suffer supply disruptions, as defects were found 52-Week High 37,750 on three more B737NG aircraft (used for short-haul routes), and B737 MAX deliveries have been delayed due to the model’s grounding. We expect Korean Air to engage in (%) 1M 6M 12M legal disputes with Boeing over maintenance expenses and opportunity costs. Absolute 4.9 -22.5 -20.9 However, the airline should be able to reduce the impact of supply disruptions through Relative 1.4 -24.6 -23.6 adjustments to the B777 return schedule. 140 Korean Air KOSPI Downgrade to Trading Buy, but maintain TP of W30,000 120 We maintain our target price of W30,000 on Korean Air. However, we downgrade our rating to Trading Buy, as the upside potential implied in our target price has declined 100 to 17% following recent share price gains. While we believe our target price is within 80 reach, additional share price momentum will likely depend on cargo earnings improvements. 60 11.18 3.19 7.19 11.19 Mirae Asset Daewoo Co., Ltd. [ Transport/Energy] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 11,732 12,092 13,020 12,848 13,048 13,250 Jay JH Ryu +822-3774-1738 OP (Wbn) 1,121 940 640 240 557 795 [email protected] OP margin (%) 9.6 7.8 4.9 1.9 4.3 6.0 NP (Wbn) -565 792 -193 -712 -57 153 EPS (W) -7,171 8,631 -2,012 -7,417 -598 1,591 ROE (%) -27.2 29.4 -5.9 -26.8 -2.2 5.0 P/E (x) - 3.9 - - - 16.2 P/B (x) 1.2 0.9 1.1 1.0 0.9 0.7 Dividend yield (%) 0.0 0.7 0.8 1.0 1.0 1.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. Jeju Air (089590 KS) The drawbacks of expansion Airlines 3Q19 review: Japan weakness and higher expenses lead to larger-than- expected operating loss of W17.4bn Results Comment November 15, 2019 For 3Q19, Jeju Air reported consolidated revenue of W368.8bn (+5.3% YoY), exceeding our estimate (W350bn) and the consensus (W357.9bn). We had anticipated capacity growth to slow down, given market weakness. However, international and domestic capacity growth (+30.2% and +9.0% YoY, respectively) actually remained flat or expanded QoQ. Load factor dropped 4.5%p in international and 0.6%p in domestic. (Maintain) Buy International and domestic yields (dollar-based) fell more than expected, declining Target Price (12M, W) 30,000 22.2% and 12.1% YoY, respectively. This was largely because the carrier cut fares significantly to support load factor. As a result of lower yields, the carrier recorded an Share Price (11/14/19, W) 25,000 operating loss of W17.4bn (turn to loss YoY) in the quarter.