Hotel Shilla (008770.KS) Core business value remains intact

We believe that Hotel Shilla’s DFS and hotel divisions both turned to the red Company Comment │ Apr 9, 2020 in 1Q20, with operating losses likely to worsen in 2Q20. However, we adhere to a Buy rating, believing that: 1) the one-off peculiar disruptions being Refer to page 2 for ESG index/event tables caused by the Covid-19 crisis will not impinge upon core business value; and 2) higher Chinese online market consumption will rise once the Covid-19 crisis eases; and 3) Korea-China relations are improving. Buy (maintain) TP W105,000 (lower) CP (20/04/08) W73,800 Sector Retail Near-term operating losses to expand, but maintain Buy rating from Kospi/Kosdaq 1,807.14 / 607.37 mid-term view Market cap (common) US$2,374.18mn Reflecting the impact of the Covid-19 crisis, we downwardly adjust 2020E and Outstanding shares (common) 39.2mn 2021F EPS for Hotel Shilla by 70% and 6%, respectively, lowering our target 52W high (’19/04/30) W115,000 low (’20/03/23) W61,800 P/E from 25x to 20x amid DFS industry uncertainties. But, believing that: 1) the Average trading value (60D) US$61.34mn one-off peculiar disruptions being caused by the Covid-19 crisis will not Dividend yield (2020E) 0.47% impinge upon core business value; and 2) Chinese online market consumption Foreign ownership 25.8% will rise once the Covid-19 crisis eases; and 3) Korea-China relations are Major shareholders improving, we have changed the the base year for EPS for use in calculating our Samsung Life & 5 others 17.3% TP from 2020 to 2021. Reflecting such, we lower our TP by 16% from NPS 12.7% W125,000 to W105,000. Share perf 3M 6M 12M Looking at Hotel Shilla’s DFS arm, business conditions are likely to worsen q-q Absolute (%) -24.2 -8.7 -24.9 Relative (%p) -9.7 3.4 -8.2 in 2Q20 as Chinese reseller activity is being hampered by both China’s full ban on foreign traveler entry and Korea’s self-isolation rules for entering travelers. 2019 2020E 2021F 2022F Although Incheon Airport has announced a 20% reduction in DFS lease fees, Sales 5,717 5,042 6,445 6,971 this benefit is to be overshadowed by a likely roughly 95% drop in sales versus Chg 21.3 -11.8 27.8 8.2 the pre-crisis level. Meanwhile, given that a high portion of the firm’s hotel OP 296 126 321 349 guests are Koreans, the hotel division should benefit from higher domestic Chg 41.5 -57.5 155.3 8.8 travel demand in line with the gradual easing of the Covid-19 crisis in Korea. OPM 5.2 2.5 5.0 5.0 NP 170 61 203 224 EPS 4,317 1,539 5,172 5,708 1Q20 preview: Operating losses inescapable for DFS and hotel arms Chg 54.0 -64.3 236.0 10.4 On a consolidated basis, we expect Hotel Shilla to post 1Q20 sales of W787.8bn P/E 21.0 47.9 14.3 12.9 (-41% y-y) and operating losses of W281 (TTL y-y), with both figures falling P/B 4.0 3.1 2.6 2.2 well wide of consensus. EV/EBITDA 7.5 7.2 4.4 3.9 ROE 20.2 6.4 19.1 17.8 The DFS division should book sales of W726.4bn (-41% y-y) and operating Debt/equity 283.6 254.9 202.1 182.9 losses of W21.9bn (TTL y-y). Amid the Covid-19 crisis, sales at Hotel Shilla’s Net debt 238 124 47 -73 downtown and airport DFSs have plunged 25% and 63% y-y, respectively. In Unit: Wbn, %, won, x particular, the airport DFS is to record hefty operating losses due to minimum Note 1: NP excludes minority interests guaranteed rent payment conditions at domestic and international airports. For Note 2: EPS, P/E, P/B, ROE based on NP (excl minority interests) the hotel division, we see sales of W61.4bn (-48% y-y) and operating losses of Source: NH I&S Research Center estimates W6.1bn (TTL y-y). Occupancy rates appear to be clocking at around 10% at the firm’s Seoul hotel, 50~60% at its Jeju hotel, and 50~60% at its Shilla Stay chain. Of note, hotel players tend to carry high fixed costs, including labor and lease expenses.

1Q19 preview (Unit: Wbn, %) 1Q20E 1Q19 2Q19 3Q19 4Q19 2Q20F Actual y-y q-q Estimate Consen Sales 1,343 1,355 1,475 1,544 788 -41.4 -49.0 1,505 1,252 567 JY Lee, Analyst OP 82 79 57 78 -28 TTL TTL 66 28 -32 822)768-7654, [email protected] OPM 6.1 5.8 3.9 5.0 -3.6 4.4 2.3 -5.7 Pre-tax profit 67 68 38 54 -39 TTL TTL 54 21 -44 Jiyoon Jung, RA 822)768-7705, [email protected] NP (excl minority interests) 52 52 28 38 -29 TTL TTL 32 16 -33 Note: K-IFRS consolidated; Source: FnGuide, NH I&S Research Center estimates Hotel Shilla www.nhqv.com

Summary

Founded in May 1973, Hotel Shilla engages in DFS and hotel & leisure businesses. The company has 11 DFSs at home and abroad, and manages Hotel Shilla Seoul, Hotel Shilla Jeju, Shilla Stay, JinJi Lake Shilla Hotel, and Geoje Samsung Hotel. In 2019, Hotel Shilla reported sales of W5,717.3bn (+21% y-y), which broke down as DFS 91% and hotel & leisure 9%. The company plans to secure mid/long-term growth via overseas business expansion and the construction of Korean traditional house-style hotels. We suggest a Buy rating and a TP of W105,000.

Share price drivers/earnings momentum Downside risks

Ÿ Improvement in Korea-China relations Ÿ Worsening of Korea-China relations Ÿ Easing of Covid-19 crisis Ÿ Lingering of Covid-19 pandemic Ÿ Growth of Chinese online market Ÿ Stricter enforcement of e-commerce laws in China Ÿ Domestic DFS operators’ greater bargaining power Ÿ Changes in domestic DFS operators and DFS systems

Cross valuations (Unit: x, %) Historical valuations (Unit: x, %)

P/E P/B ROE Company Valuations 2018 2019 2020E 2021F 2022F 2020E 2021F 2020E 2021F 2020E 2021F Lagardere SCA 10.6 7.4 1.1 1.1 6.9 11.0 P/E 27.3 21.0 47.9 14.3 12.9 Shinsegae 9.1 6.6 0.5 0.5 5.9 7.4 P/B 4.0 4.0 3.1 2.6 2.2 HDS 6.6 5.4 0.3 0.3 5.1 5.7 P/S 0.6 0.6 0.6 0.4 0.4 ROE 15.4 20.2 6.4 19.1 17.8 ROIC 17.4 16.7 5.8 14.7 15.4 Source: FnGuide, Bloomberg, NH I&S Research Center Source: Bloomberg, NH I&S Research Center

ESG index (Unit: %, Wbn, years, hours, ‘000TJ, mn tCO2e, mn tons)

BOD composition Human resources 2017 2018 2019 Lee Bu-jin CEO, and management committee chairman Inside Portion of female employees 47.3 47.9 48.1 Han In-kyu President Inside Portion of contract workers 19.8 21.3 20.0 Kim Joon-whan - Inside Avg service period per employee 6.5 7.0 7.2 Internal trading committee chairman, and remuneration Jung Jin-ho Outside Avg training hours per employee - - - committee chairman Kim Won-yong Audit committee chairman Outside Moon Jae-woo - Outside Environment 2017 2018 2019 Oh Young-ho - Outside Energy consumption N/A N/A N/A Greenhouse gas emissions N/A N/A N/A Recycled water consumption N/A N/A N/A Recycled waste N/A N/A N/A Source: Hotel Shilla, NH I&S Research Center

ESG events

– Hotel Shilla Seoul obtained an Eco Mark from Korea Environmental Industry and Technology Institute for its setup of integrated 2017.07 environmental system E – Offered EV driving experience service on Jeju Island in order to encourage eco-friendly activities and provide guests with driving 2019.02 experience for Hyundai Motors’ EVs S 2019.10 – Set up social contribution program that supports restaurant owners on Jeju Island G 2020.02 – Established independent department in charge of monitoring legal compliance Source: Hotel Shilla, NH I&S Research Center

2 Hotel Shilla www.nhqv.com

Earnings forecasts (IFRS consolidated) (Unit: Wbn, won, x, %) 2019 2020E 2021F 2022F Sales - Revised 5,717 5,042 6,445 6,971 - Previous - 6,377 6,810 7,228 - Change - -20.9 -5.4 -3.6 OP - Revised 296 126 321 349 - Previous - 317 347 354 - Change - -60.4 -7.5 -1.5 OPM - Revised 5.2 2.5 5.0 5.0 EBITDA 515 427 673 732 NP (excl minority interests) 170 61 203 224 EPS - Revised 4,317 1,539 5,172 5,708 - Previous - 5,049 5,499 5,669 - Change - -69.5 -5.9 0.7 P/E 21.0 47.9 14.3 12.9 P/B 4.0 3.1 2.6 2.2 EV/EBITDA 7.5 7.2 4.4 3.9 ROE 20.2 6.4 19.1 17.8 Note: EPS, P/E, P/B, and ROE based on NP (excl minority interests) Source: NH I&S Research Center estimates

Relative valuation (Unit: Wbn, x, won, shr) Value (Wbn) Value/share (won) Remarks Operating value (a) 4,066 103,593 2021F figures applied, given that the current conditions look abnormal 2021F NP 203 5,180 due to Covid-19 P/E X 20.0 X 20.0 DFS sector average EV (a) 4,066 103,593 2021F P/E of 20.0x Outstanding shares (shr) 39,248,121 39,248,121 Source: NH I&S Research Center estimates

3 Hotel Shilla www.nhqv.com

Quarterly income statement snapshot (IFRS consolidated) (Unit: Wbn) 1Q19 2Q19 3Q19 4Q19P 2019 1Q20E 2Q20F 3Q20F 4Q20F 2020E Sales 1,343.2 1,354.9 1,475.3 1,544.0 5,717.3 787.8 566.8 1,789.2 1,898.3 5,042.1 y-y (%) 19% 15% 21% 29% 21% -41% -58% 21% 23% -12% DFS 1,225.2 1,226.5 1,338.6 1,410.9 5,201.2 726.4 462.8 1,646.0 1,751.0 4,586.2 y-y (%) 21% 16% 22% 32% 23% -41% -62% 23% 24% -12% In-city DFS 721.0 756.1 856.4 940.5 3,274.0 540.8 340.2 1,113.3 1,222.7 3,217.0 y-y (%) 24% 23% 37% 51% 34% -25% -55% 30% 30% -2% Airport DFS 504.2 470.4 482.2 470.4 1,927.2 185.7 122.6 532.6 528.4 1,369.2 y-y (%) 17% 6% 3% 4% 8% -63% -74% 10% 12% -29% Domestic 229.4 211.4 218.9 218.4 878.1 103.2 42.3 229.8 251.2 626.5 y-y (%) 21% 3% 5% 8% 9% -55% -80% 5% 15% -29% Overseas 274.8 259.0 263.3 252.0 1,049.1 82.4 80.3 302.8 277.2 742.7 y-y (%) 13% 10% 2% 2% 7% -70% -69% 15% 10% -29% Hotel & Leisure 118.0 128.4 136.7 133.1 516.2 61.4 104.0 143.2 147.3 455.9 y-y (%) 6% 7% 8% 10% 8% -48% -19% 5% 11% -12% Seoul 34.2 42.7 41.6 45.4 163.9 6.8 27.8 42.8 48.6 126.0 y-y (%) 1% 8% 5% 7% 5% -80% -35% 3% 7% -23% Jeju 16.5 19.2 24.2 18.0 77.9 9.9 14.4 24.9 19.8 69.0 y-y (%) 1% -1% 2% 24% 5% -40% -25% 3% 10% -11% Shilla Stay 30.2 34.2 37.4 38.6 140.4 16.6 25.7 40.4 43.2 125.9 y-y (%) 5% 8% 12% 10% 9% -45% -25% 8% 12% -10% Others 3.6 1.0 3.9 1.0 9.5 2.9 0.8 4.3 1.1 9.1 y-y (%) 9% 150% 8% -23% 10% -20% -20% 10% 10% -5% Leisure 33.5 31.3 29.6 30.1 124.5 26.8 34.1 32.3 32.8 126.0 y-y (%) 14% 9% 11% 8% 11% -20% 9% 9% 9% 1% OP 81.7 79.2 57.4 77.6 295.9 -28.1 -32.5 89.9 96.4 125.7 y-y (%) 85% 14% -16% 182% 41% TTL TTL 57% 24% -57% OPM 6% 6% 4% 5% 5% -4% -6% 5% 5% 2% DFS 82.2 69.8 45.1 70.1 267.2 -21.9 -35.6 77.0 87.6 107.0 y-y (%) 73% 9% -24% 179% 36% TTL TTL 71% 25% -60% Domestic 77.6 71.2 51.2 58.3 258.3 -12.9 -26.8 77.9 88.4 126.7 y-y (%) 55% 2% -9% 119% 27% TTL TTL 52% 52% -51% Overseas 4.6 -1.4 -6.1 -8.2 -11.1 -9.1 -8.8 -0.9 -0.8 -19.6 y-y (%) TTP DR TTL DE DE TTL DE DR DR DE Hotel & Leisure -0.5 9.4 12.3 7.5 28.7 -6.1 3.1 12.9 8.8 18.7 y-y (%) RR 71% 43% 213% 119% RR -67% 5% 18% -35% Pre-tax profit 66.5 67.8 37.6 53.8 225.6 -39.3 -43.7 78.6 85.2 80.7 y-y (%) 60% 5% -43% TTP 53% TTL TTL 109% 58% -64% Pre-tax margin 5% 5% 3% 3% 4% -5% -8% 4% 4% 2% NP (excl minority interests) 51.9 52.1 27.7 38.0 169.7 -29.5 -32.8 59.6 63.9 61.2 y-y (%) 64% -1% -41% TTP 54% TTL TTL 115% 68% -64% NPM 4% 4% 2% 3% 3% -4% -6% 3% 3% 1% Note: IFRS consolidated Source: NH I&S Research Center estimates

4 Hotel Shilla www.nhqv.com

STATEMENT OF COMPREHENSIVE INCOME Valuation / Profitability / Stability (Wbn) 2019/12A 2020/12E 2021/12F 2022/12F 2019/12A 2020/12E 2021/12F 2022/12F Sales 5,717 5,042 6,445 6,971 Price/Earnings (x) 21.0 47.9 14.3 12.9 Growth (%) 21.3 -11.8 27.8 8.2 Price/Book Value (x) 4.0 3.1 2.6 2.2 COGS 3,301 3,018 3,703 4,027 Price/Gross Cash Flow (x) 7.0 7.6 4.7 4.3 Gross Profit 2,417 2,024 2,742 2,944 Price/Sales (x) 0.6 0.6 0.4 0.4 Gross margin (%) 42.3 40.1 42.5 42.2 EV/EBITDA (x) 7.5 7.2 4.4 3.9 SG&A 2,121 1,898 2,421 2,595 EV/EBIT (x) 13.0 24.3 9.3 8.2 Operating Income 296 126 321 349 Fully diluted EPS (won) 4,317 1,539 5,172 5,708 Growth (%) 41.5 -57.5 155.3 8.8 BVPS (won) 22,979 24,165 28,915 34,190 Operating margin (%) 5.2 2.5 5.0 5.0 Sales PS (won) 145,671 128,467 164,223 177,610 EBITDA 515 427 673 732 ROE (%) 20.2 6.4 19.1 17.8 Non-Operating Profit -70 -45 -51 -51 ROA (%) 5.8 1.7 5.9 6.1 Financial Income(Costs) -27 -9 -11 -13 ROIC (%) 16.7 5.8 14.7 15.4 Other Non-Operating Profit -43 -36 -39 -38 Dividend Yield (%) 0.4 0.5 0.5 0.5 Gains(Losses) in Associates, Subsidiaries and JVs 0 0 0 0 Payout Ratio (%) 7.7 21.4 6.4 5.8 Pre-tax Profit from Cont. Op. 226 81 270 298 Total Cash Dividend (Wbn) 13 13 13 13 Income Taxes 56 20 67 74 Cash DPS (won) 350 350 350 350 Profit from Continuing Op. 169 61 203 224 Net debt(cash)/ equity (%) 25.9 12.8 4.1 -5.4 Net Profit 169 61 203 224 Debt/ equity (%) 283.6 254.9 202.1 182.9 Growth (%) 53.6 -64.2 234.9 10.3 Interest-Bearing Debts (Wbn) 1,562 1,542 1,524 1,461 Net margin (%) 3.0 1.2 3.1 3.2 Current Ratio (%) 119.3 123.3 134.1 129.4 Net Profit of Parent 170 61 203 224 Total shares (mn) 40 40 40 40 Net Profit to Non-Controlling 0 0 0 0 Par value (won) 5,000 5,000 5,000 5,000 Other Comprehensive Income -2 0 0 0 Share price (won) 90,800 73,800 73,800 73,800 Total Comprehensive Income 168 61 203 224 Market Cap (Wbn) 3,604 2,934 2,934 2,934

STATEMENT OF FINANCIAL POSITION CASH FLOW STATEMENT (Wbn) 2019/12A 2020/12E 2021/12F 2022/12F (Wbn) 2019/12A 2020/12E 2021/12F 2022/12F Cash and Cash Equivalents 508 642 717 742 Operating Cash Flow 404 466 547 623 Accounts Receivables 124 109 96 123 Net Profit 169 61 203 224 Total Current Assets 1,716 1,600 1,574 1,809 Depreciation & Amortization 219 301 352 383 Tangible Assets 675 742 870 961 + Loss(Gains) from Subs 4 0 0 0 Investment Assets 257 226 199 254 + FC translation loss(profit) -3 0 0 0 Non-Current Assets 1,811 1,831 1,920 2,059 Gross Cash Flow 511 382 622 681 Assets 3,527 3,431 3,494 3,868 - Incr. (Decr.) in WC -44 104 -8 16 Short-Term Debt 419 399 381 384 Investing Cash Flow -93 -299 -441 -522 Account Payables 433 382 337 431 + Decr. In Tangible Assets 0 0 0 0 Current Liabilities 1,438 1,298 1,174 1,398 - Incr. In Tangible Assets (capex) -66 -352 -468 -466 Long-Term Debt 1,143 1,143 1,143 1,076 + Disp.(Acq.) of Inv. Assets -5 31 27 -55 Long-Term Allowance 10 9 8 10 Free Cash Flow 338 114 79 157 Non-Current Liabilities 1,170 1,166 1,164 1,103 Net Cash Flow 311 167 106 101 Liabilities 2,608 2,464 2,338 2,501 Financing Cash Flow -87 -33 -31 -77 Capital Stock 200 200 200 200 Equity Financing 0 0 0 0 Capital Surplus 197 197 197 197 Debt Financing -87 -33 -31 -77 Retained Earnings 627 674 864 1,075 Incr.(Decr.) in Cash 226 134 75 25 Non-Controlling Interests Equity 0 0 0 0 Ending Cash and Cash Equivalents 508 642 717 742 Shareholders' Equity 920 967 1,156 1,367 Net Debt (Cash) 238 124 47 -73

5 Hotel Shilla www.nhqv.com

Rating and TP update Hotel Shilla (008770.KS) Disparity ratio (%) Date Rating TP Avg Max/Min (won) Closing Price Target price(12M) 2020.04.09 Buy W105,000(12M) - - 200,000 2020.01.16 Buy W125,000(12M) -32.7% -13.2% 2019.10.28 Hold W90,000(12M) -5.4% - 160,000 2019.04.26 Buy W155,000(12M) -43.4% -25.8% 120,000 2018.12.27 Buy W120,000(12M) -28.7% -10.8% 80,000 2018.05.04 Buy W160,000(12M) -37.9% -17.5% 40,000

0 '18.4 '18.8 '18.12 '19.4 '19.8 '19.12 '20.4

NH Investment & Securities stock ratings 1. Rating based on a stock’s forecasted absolute return over a period of 12 months from the date of publication.

l Buy: Greater than +15% l Hold: -15% to +15% l Sell: Less than -15% 2. Regarding listed companies under NH I&S’ coverage, our stock ratings break down as follows (as of Apr 3, 2020).

l NH I&S’ stock rating distribution Buy Hold Sell 75.3% 24.2% 0.5%

- The stock rating on an individual company can change at irregular intervals. Our stock rating distribution is calculated on a weekly basis.

Compliance notice

l NH I&S does not have a stake greater than or equal to 1% in Hotel Shilla as of the preparation date. l NH I&S has not provided this material to any institutional investor or other third party in advance. l The analyst and his/her spouse do not own any securities of Hotel Shilla as of the preparation date. l NH I&S is an issuer and liquidity provider of ELWs taking ‘Hotel Shilla’ as an underlying asset. l This report correctly reflects the analyst’s opinion and was written without any external influence or intervention.

Disclosures The research is based on current public information that NH I&S considers reliable, but NH I&S does not represent it as accurate or complete and it should not be relied on as such. Furthermore, the research does not take into account particular investment objectives, financial situations or individual client needs, and NH I&S is in no way legally responsible for future returns or loss of original capital. All materials in this report are the intellectual property of NH I&S. Copying, distributing, transmitting, transforming or lending of this material without NH I&S' consent is prohibited.

6