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Home , Air Seoul, Asiana Airlines, Korean Air

[Korea] December 2, 2020

Korean Air Buy (003490 KS ) (Upgrade)

The birth of a mega carrier TP: W32,000 ▲ Upside: 21.4%

Mirae Asset Daewoo Co., Ltd. Jay JH Ryu [email protected]

Upgrade to Buy Upgrade from Hold to Buy and raise TP from W22,000 to W32,000 ó We derived our target price on by applying a P/B of 1.6x (25% discount to the stock’s peak multiple) to our consolidated BPS estimate of W19,589. ó We view our target P/B of 1.6x as achievable, given the industry’s turnaround potential and the strength of the cargo sector. ó We revise up our 2021 operating profit forecast by 48% , factoring in the arrival of vaccines and the likely recovery in passenger demand.

Hanjin KAL ’s share issuance is Court clears way for KAL ’s share issuance to KDB cleared ó On Dec. 1, a court rejected a request to stop Hanjin KAL from issuing new shares to Korea Development Bank (KDB). ó The ruling clears the way for Korean Air to buy shares of (W1.5tr) by raising W2.5tr through a share issuance. ó Korean Air will own a 63.9% stake in Asiana Airlines if the latter’s stock sale is completed as scheduled in Jun. 2021.

Watch for synergies Birth of a mega carrier (third largest in Asia ’s passenger market ) ó The combination of the two carriers would create a mega carrier with a combined fleet of 245 aircraft (up from Korean Air’s current 164). ó Based on 2019 earnings, the combined company would become the world’s third largest cargo carrier and the world’s 11 th largest (Asia’s third largest) passenger carrier. ó We could see cost savings through increased buyer power and route efficiencies.

Shareholder value to recover Shareholder value to recover on additional asset sales and robust air cargo business ó In addition to the planned share issuance, Korean Air plans to sell its in-flight meal business, Songhyun-dong land, and ownership in Wangsan Leisure Development. ó If all of these sales are successful, we expect to see cash inflow of nearly W1.5tr and a rise in net asset value. ó We expect shareholder value to recover on the back of 1) enhanced liquidity and 2) cash flow generation from the cargo segment.

Key data

Current price (12/1/20, W) 26,350 Market cap (Wbn) 4,590 140 Korean Air KOSPI OP (20F, Wbn) 63 Shares outstanding (mn) 175 120 Consensus OP (20F, Wbn) 121 Free float (%) 68.0 100

80 EPS growth (20F, %) - Foreign ownership (%) 12.2

60 P/E (20F, x) - Beta (12M) 1.58

40 Market P/E (20F, x) 17.7 52-week low (W) 11,373 11.19 3.20 7.20 11.20 KOSPI 2,634.25 52-week high (W) 26,950

Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute 32.1 51.1 27.3 Revenue (Wbn) 12,092 13,012 12,683 7,495 7,762 7,959 Relative 13.7 18.5 0.9 OP (Wbn) 940 671 257 63 518 589

OP margin (%) 7.8 5.2 2.0 0.8 6.7 7.4 NP (Wbn) 792 -168 -629 -579 89 153 EPS (W) 7,152 -1,455 -5,432 -4,112 265 439 ROE (%) 29.4 -5.1 -22.1 -19.6 1.9 2.6 P/E (x) 4.0 - - - 99.5 60.0 P/B (x) 0.9 1.1 1.0 1.4 1.6 1.5 Div. yield (%) 0.7 0.7 0.0 0.0 0.0 0.0 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimat es Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. December 2, 2020 Korean Air

figure 1. Ownership structure

(29.2%) (60.0%)

(63.9%)

(44.2%) (100%)

Air Seoul

Source: Company data, Mirae Asset Daewoo Research

Table 1. Expected balance sheet after acquisition of Asiana Airlines (Wbn) (End-2021F) Notes Total assets 40,207 Current assets 7,925 Cash & equivalents 4,525 Non-current assets 32,282 PP&E 27,976 Total liabilities 32,703 Current liabilities 13,207 Short-term financial liabilities 9,215 Non-current liabilities 19,496 Long-term financial liabilities 14,285 Total equity 7,504 Equity attributable to the owners 6,814 63.9% stake Shares (mn) 348 Post-issuance (W2.5tr) BPS (W) 19,589 Note: Estimates for Asiana Airlines are based on consensus figures. Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 December 2, 2020 Korean Air

Table 2. Global rankings (post-acquisition) Rank (2019) International cargo RTKs International passenger RPKs 1 13,024 299,496 2 Emirates 12,052 Ryanair 185,405 3 Korean Air + Asiana Airlines 11,922 Qatar Airways 172,591 4 10,930 162,962 5 FedEx 8,851 160,731 6 Lufthansa 7,223 British Air 151,935 7 7,180 Air 143,347 8 7,000 141,353 9 UPS 6,228 Turkish Airline 131,106 10 Air 6,146 126,533 11 5,651 Korean Air + Asiana Airlines 125,200 12 China Southern 5,482 Cathay Pacific 119,328 13 5,334 KLM 109,476 14 AirBridgeCargo 5,168 Singapore Air 109,462 15 United Airlines 4,231 EasyJet 99,854 Source: IATA , Mirae Asset Daewoo Research

Table 3. Fleet overview (Units) (End-3Q20) Model Korean Air Asiana Airlines Total A380 10 6 16 A330 29 15 44 B747-400 2 - 2 B747-8I 10 - 10 Medium/large aircraft B747 - 1 1 B767 - 5 5 A350 - 10 10 B777 43 9 52 B787-9 10 - 10 A320/321 - 21 21 A321neo - 1 1 Small aircraft B737-800/900 27 - 27 A220 (CS300) 10 - 10 Passenger aircraft (total) 141 68 209 B747F 4 11 15 B767F - 1 1 Cargo aircraft A350F - 1 1 B747-8F 7 - 7 B777F 12 - 12 Cargo aircraft (total) 23 13 36 Total 164 81 245 Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 December 2, 2020 Korean Air

Table 4. 4Q20 preview (Wbn, %, %p)

4Q20F Growth 4Q19 3Q20 Mirae Asset Daewoo Consensus YoY QoQ Revenue 3,041 1,595 1,793 1,878 -41.0 12.4 OP 119 -31 75 93 -37.0 TTB OP margin (%) 3.9 -2.0 4.2 5.0 0.3 6.2 Pretax profit 176 -22 79 290 -55.3 TTB NP 85 -29 59 226 -30.9 TTB Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, WISEfn, Mirae Asset Daewoo Research

Table 5. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 20F 21F 20F 21F 20F 21F Revenue 7,595 7,583 7,495 7,762 -1.3 2.4 Upgraded traffic/rate estimates OP 87 351 63 518 -27.4 47.7 Lowered F/X rate estimates Pretax profit -1,227 -179 -694 81 RR TTB Reflected F/X gains/losses NP -1,068 -138 -579 89 RR TTB EPS (W) -7,582 -785 -4,112 265 RR TTB Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Mirae Asset Daewoo Research

Table 6. Quarterly and annual earnings (Wbn, %) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20F 2019 2020F 2021F Revenue 3,131 3,122 3,186 3,041 2,427 1,728 1,547 1,793 12,683 7,495 7,762 OP 231 -64 68 119.1 -83 110 -39 75 257 63 518 Pretax profit -132 -464 -373 176 -980 231 -25 79 -734 -694 81 NP -118 -367 -228 85 -732 123 -29 59 -629 -579 89 OP margin (%) 7.4 -2.1 2.1 3.9 -3.4 6.4 -2.5 4.2 2.0 0.8 6.7 Pretax margin (%) -4.2 -14.9 -11.7 5.8 -40.4 13.4 -1.6 4.4 -5.8 -9.3 1.0 Net margin (%) -3.7 -11.7 -7.1 2.9 -30.4 6.8 -2.1 3.6 -5.0 -7.7 1.1 Int’l passenger RPK growth (%, YoY) 1.8 4.2 2.9 5.9 -29.4 -93.6 -92.4 -85.0 3.7 -75.9 -3.1 Int’l passenger L/F (%) 80.3 82.5 83.1 83.6 73.3 39.1 30.1 83.6 82.4 63.3 73.2 Jet fuel price (US$/bbl) 77 81 75 75 65 33 45 52 77 49 52 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent; as 3Q20 figures were calculated by subtracting 1H data from 3Q YTD figures, slight discrepancies with actual figures may exist Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 4 December 2, 2020 Korean Air

Figure 2. Korean Air’s international passenger traffic growth Figure 3. Korean Air’s cargo traffic growth

(%, YoY) (%, YoY) 20 20 16 0 12 8 -20 4

-40 0 -4 -60 -8 -12 -80 -16 -100 -20 3Q13 3Q14 3Q15 3Q16 3Q17 3Q18 3Q19 3Q20 3Q13 3Q14 3Q15 3Q16 3Q17 3Q18 3Q19 3Q20

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 4. Jet fuel price trend Figure 5. IT product export growth

(US$/bbl) (%, YoY) 100 160 Semiconductors Mobile phones Displays 90 120 80 70 80 60 50 40 40 0 30 20 -40 10 0 -80 3/16 10/16 5/17 12/17 7/18 2/19 9/19 4/20 11/20 10 11 12 13 14 15 16 17 18 19 20

Source: Bloomberg, Mirae Asset Daewoo Research Source: KITA, Mirae Asset Daewoo Research

Figure 6. Korean Air revenue by passenger route Figure 7. P/B band chart

(W) 3% 3% 1% 6% 6% Americas 70,000 10% 8% 24% Europe Southeast Asia 60,000 13% 1% 13% China 6% Japan 50,000 11% 18% 19% Domestic 10% Oceania 40,000

22% 21% 30,000 1.5x 1.3x 20,000 1.1x 47% 0.9x 28% 30% 10,000 0.7x

0 3Q18 3Q19 3Q20 14 15 16 17 18 19 20

Source: Company data, Mirae Asset Daewoo Research Source: WISEfn, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 December 2, 2020 Korean Air

Korean Air (003490 KS)

Income statement (summarized) Balance sheet (summarized) (Wbn) 2019 2020F 2021F 2022F (Wbn) 2019 2020F 2021F 2022F Revenue 12,683 7,495 7,762 7,959 Current assets 3,575 3,359 5,586 6,604 Cost of revenue 11,139 6,758 6,476 6,584 Cash & equivalents 816 1,332 3,287 4,205 GP 1,544 737 1,286 1,375 AR & other receivables 754 445 505 526 SG&A expenses 1,287 674 768 786 Inventory 713 420 477 498 OP (adj.) 257 63 518 589 Other current assets 1,292 1,162 1,317 1,375 OP 257 63 518 589 Non-current assets 23,439 21,248 20,182 19,291 Non-operating profit -991 -757 -437 -415 Investments in associates 7 4 5 5 Net financial income -562 -472 -341 -319 PP&E 21,310 18,949 17,893 17,020 Net income from associates 0 -1 20 20 Intangible assets 295 265 238 214 Pretax profit -734 -694 81 174 Total assets 27,014 24,608 25,768 25,895 Income tax -112 -104 -16 5 Current liabilities 8,777 7,407 7,285 7,387 Profit from continuing operations -623 -591 98 169 AP & other payables 285 168 190 199 Profit from discontinued operations 0 4 0 0 Short-term financial liabilities 5,269 5,339 4,939 4,939 NP -623 -587 98 169 Other current liabilities 3,223 1,900 2,156 2,249 Attributable to owners -629 -579 89 153 Non-current liabilities 15,456 13,833 12,518 12,373 Attributable to minority interests 6 -7 9 16 Long-term financial liabilities 11,786 10,831 9,296 9,011 Total comprehensive income -681 -596 98 169 Other non-current liabilities 3,670 3,002 3,222 3,362 Attributable to owners -683 -586 92 159 Total liabilities 24,233 21,240 19,803 19,760 Attributable to minority interests 3 -10 6 10 Equity attributable to owners 2,656 3,252 5,841 5,994 EBITDA 2,340 1,952 2,201 2,286 Capital stock 480 877 1,745 1,745 FCF 1,151 251 1,886 1,639 Capital surplus 720 1,514 3,146 3,146 EBITDA margin (%) 18.4 26.0 28.4 28.7 Retained earnings -346 -963 -874 -721 OP margin (%) 2.0 0.8 6.7 7.4 Minority interests 125 116 125 141 Net margin (%) -5.0 -7.7 1.1 1.9 Shareholders' equity 2,781 3,368 5,966 6,135

Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2019 2020F 2021F 2022F 2019 2020F 2021F 2022F Operating cash flow 2,334 676 2,486 2,439 P/E (x) - - 99.5 60.0 NP -623 -587 98 169 P/CF (x) 1.0 1.8 4.2 4.2 Non-cash income/expenses 3,276 2,668 1,987 2,000 P/B (x) 1.0 1.4 1.6 1.5 Depreciation 2,054 1,859 1,656 1,673 EV/EBITDA (x) 7.8 9.8 6.9 6.1 Amortization 29 30 27 24 EPS (W) -5,432 -4,112 265 439 Other 1,193 779 304 303 CFPS (W) 22,910 14,777 6,236 6,217 Chg. in working capital -367 -1,441 296 168 BPS (W) 22,936 18,549 16,739 17,178 Chg. in AR & other receivables -23 378 -56 -20 DPS (W) 0 0 0 0 Chg. in inventory -237 205 -56 -21 Dividend payout ratio (%) 0.0 0.0 0.0 0.0 Chg. in AP & other payables 67 -104 16 6 Dividend yield (%) 0.0 0.0 0.0 0.0 Income tax -8 -16 16 -5 Revenue growth (%) -2.5 -40.9 3.6 2.5 Cash flow from investing activities -1,595 480 -686 -832 EBITDA growth (%) -3.4 -16.6 12.8 3.9 Chg. in PP&E -1,178 -213 -600 -800 OP growth (%) -61.7 -75.5 722.2 13.7 Chg. in intangible assets -1 0 0 0 EPS growth (%) - - - 65.7 Chg. in financial assets -592 445 -86 -32 AR turnover (x) 18.0 13.4 17.6 16.6 Other 176 248 0 0 Inventory turnover (x) 15.6 13.2 17.3 16.3 Cash flow from financing activities -1,447 -630 135 -710 AP turnover (x) 63.6 43.3 52.4 49.0 Chg. in financial liabilities 1,261 -886 -1,935 -285 ROA (%) -2.4 -2.3 0.4 0.7 Chg. in equity -227 1,191 2,500 0 ROE (%) -22.1 -19.6 1.9 2.6 Dividends -77 -39 0 0 ROIC (%) 1.1 -0.3 3.4 3.3 Other -2,404 -896 -430 -425 Debt-to-equity ratio (%) 871.5 630.7 332.0 322.1 Chg. in cash -688 516 1,955 917 Current ratio (%) 40.7 45.4 76.7 89.4 Beginning balance 1,504 816 1,332 3,287 Net debt-to-equity ratio (%) 552.0 425.0 173.5 148.7 Ending balance 816 1,332 3,287 4,205 Interest coverage ratio (x) 0.4 0.1 1.2 1.4 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 6 December 2, 2020 Korean Air

Appendix 1

Important disclosures and disclaimers Two-year rating and TP history

Company Date Rating TP (W) (W) Korean Air Korean Air (003490) 12/01/20 Buy 32,000 40,000 11/06/20 Hold 22,000 09/16/20 Trading Buy 22,000 30,000 11/15/19 Trading Buy 25,087 08/15/19 Buy 25,087 20,000 07/11/19 Buy 31,777 10,000 04/16/19 Buy 37,631

01/11/19 Buy 35,959 0 06/29/18 Buy 32,614 Dec 18 Dec 19 Dec 20

Stock ratings Sector ratings Buy Expected 12-month performance: +20% or greater Overweight Expected to outperform the market over 12 months Trading Buy Expected 12-month performance: +10% to +20% Neutral Expected to perform in line with the market over 12 months Hold Expected 12-month performance: -10% to +10% Underweight Expected to underperform the market over 12 months Sell Expected 12-month performance: -10% or worse

Rating and TP history: Share price (─), TP (▬), Not Rated ( ■), Buy (▲), Trading Buy (■), Hold (●), Sell ( ◆) * Our investment rating is a guide to the expected return of the stock over the next 12 months. * Outside of the official ratings of Mirae Asset Daewoo Co., Ltd., analysts may call trading opportunities should technical or short-term material developments arise. * The TP was determined by the research analyst through valuation methods discussed in this report, in part based on estimates of future earnings. * TP achievement may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Ratings distribution and investment banking services Buy Trading Buy Hold Sell Ratings distribution 73.62% 14.11% 11.04% 1.23% Investment banking services 72.22% 11.11% 16.67% 0.00% * Based on recommendations in the last 12 months (as of September 30, 2020)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of Korean Air as an underlying asset; other than this, Mirae Asset Daewoo has no other special interests in the covered companies.

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 divisions. 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.

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 . 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 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

Mirae Asset Daewoo Research 7 December 2, 2020 Korean Air

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. For further information regarding company-specific information as it pertains to the representations and disclosures in this Appendix 1, please contact [email protected] or +1 (212) 407-1000.

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Mirae Asset Daewoo Research 8 December 2, 2020 Korean Air

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