Jeju Air (089590 KS ) Fears of rights issue come to pass

Airlines W170bn rights offering to cause 32% share dilution Company Report Yesterday, Jeju Air announced its decision to issue 12.14mn new shares, representing May 22, 2020 46% of its current shares outstanding. The new shares will be offered to e xisting shareholders (20% to the employee stock ownership association) on a basis of 0.37 th th shares for each share held. The subscription period will run from July 14 to July 15 , and any shares unsubscribed by existing shareholders will be offered to the public. The record date for the rights offering will be June 10th , 2020 , and the new shares will be (Downgrade) Sell listed on August 4, 2020.

Target Price (12M, W) 17,000 The offering is expected to raise roughly W170bn, of which W67.8bn will be used on debt repayment and W102.2bn on working capital. The expected offering price is Share Price (05/21/20, W) 19,600 W14,000 per share, but the final price will be determined based on the first reference price (June 5 th ) and the second reference price (July 9 th ). Expected Return -13% More fundraising may be needed by year-end if current conditions continue As of end-1Q20, Jeju Air held cash and cash equivalents of W68bn (W99bn when OP (20F, Wbn) -174 including short-term financial assets). We believe the carrier has reduced its monthly Consensus OP (20F, Wbn) -181 cash outflow from over W50bn to W30-40bn currently by deferring some payments (leases, etc.) and furloughing its employees. Nevertheless, we still expect the carri er to EPS Growth (20F, %) - essentially run out of cash by the end of 2Q20. Market EPS Growth (20F, %) 27.1 P/E (20F, x) - The airline industry is currently suffering from the worst downturn in its history. In Market P/E (20F, x) 13.4 2Q20, we forecast Jeju Air’s international passenger traffic to plunge 87.6% YoY, driving KOSPI 1,998.31 down overall revenue to W84.1bn (-73.1% YoY). While the rate of revenue decline is likely to slow beginning in 3Q20, the carrier could face renewed funding pressures by Market Cap (Wbn) 517 the end of the year if current travel restrictions continue. Shares Outstanding (mn) 26 Free Float (%) 33.0 Key points to watch going forward include: 1) a recovery in industry conditions; 2) Foreign Ownership (%) 3.1 additional stress following the acquisition; and 3) the success of the rights Beta (12M) 1.86 offering, which could determine additional support from the government. In light of industry conditions and the carrier’s earnin gs outlook, we would not rule out the 52-Week Low 12,000 possibility of some shares going unsubscribed. The Eastar Jet acquisition could also put 52-Week High 36,900 further pressure on consolidated earnings in the near term (a factor we have not (%) 1M 6M 12M reflected in our estimates). Jeju Air is currently set to receive W170bn in government Absolute -1.0 -16.1 -43.1 funds for the acquisition. If the carrier’s rights offering proves a success, it is unlikely Relative -6.9 -11.9 -41.3 that the government would provide massive aid to fund working capital for some time.

120 Jeju Air KOSPI Downgrade to Sell; TP of W17,000 100 We present a target price of W17,000 (based on RIM valuation), which accounts for the 80 dilution caused by the rights offering. With our target price implying 13.2% downside 60 to the current share price, we downgrade our rating from Hold to Sell. Even based on

40 earnings estimates for 2022, which is when operating conditions are expected to fully

20 return to normal, we estimate the stock’s P/E would expand from 10x to 15x following 5.19 9.19 1.20 5.20 the share issue, which could spark worries about valuation.

Mirae Asset Daewoo Co., Ltd.

[ Transport/Energy ] FY (Dec.) 12/17 12/18 12/19 12/20F 12/21F 12/22F Revenue (Wbn) 996 1,259 1,384 809 1,080 1,183 Jay JH Ryu +822 -3774 -1738 OP (Wbn) 101 101 -33 -174 67 101 [email protected] OP margin (%) 10.1 8.0 -2.4 -21.5 6.2 8.5

NP (Wbn) 78 71 -33 -221 29 58 EPS (W) 2,954 2,689 -1,257 -6,827 753 1,505 ROE (%) 25.8 19.9 -9.4 -73.9 10.1 17.5

P/E (x) 12.0 12.5 - - 26.0 13.0 P/B (x) 2.8 2.3 2.2 2.7 2.5 2.1 Dividend yield (%) 1.7 1.9 0.0 0.0 0.0 0.0 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

May 22, 2020 Jeju Air

Table 1. Earnings forecast revisions (Wbn, %) Previous Revised % chg. Notes 20F 21F 20F 21F 20F 21F Revenue 809 1,080 809 1,080 - - Operating profit -174 67 -174 67 RR - Pretax profit -262 28 -255 39 RR 38.5 Net profit -227 21 -221 29 RR 38.5 Lower interest expenses following rights offering EPS (KRW) -8,602 794 -6,827 753 RR -5.2 Notes: Based on consolidated K-IFRS; net profit is attributable to controlling interests Source: Mirae Asset Daewoo Research estimates

Table 2. Quarterly and annual earnings (Wbn, %) 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20F 3Q20F 4Q20F 2019 2020F 2021F 2022F Revenue 393 313 369 309 229 84 223 273 1,384 809 1,080 1,183 Domestic 49 61 62 58 36 34 50 52 229 171 200 196 International 315 221 271 220 193 24 167 189 1,027 572 790 888 Other 29 31 36 32 0 26 6 32 127 65 90 98 Operating profit 57 -27 -17 -45 -66 1.0 -50 -4 -33 -174 67 101 Pretax profit 55 -39 -40 -24 -114 -72 -57 -12 -47 -255 39 77 Net profit (controlling) 42 -29 -30 -17 -101 -65 -46 -10 -33 -221 29 58 OP margin (%) 14.5 -8.8 -4.7 -14.6 -28.7 -64.8 -22.3 -1.5 -2.4 -21.5 6.2 8.5 Pretax margin (%) 14.1 -12.4 -10.9 -7.7 -49.9 -85.5 -25.8 -4.4 -3.4 -31.6 3.6 6.5 Net margin (%) 10.7 -9.4 -8.2 -5.3 -49.9 -85.5 -25.8 -4.4 -3.4 -31.6 3.6 6.5 International RPK growth (%, YoY) 30.9 20.0 27.6 18.2 -42.6 -87.6 -38.3 -18.7 24.1 -45.7 25.1 10.4 International ASK growth (%, YoY) 34.0 30.8 30.2 18.4 -26.5 -83.3 -30.0 -20.0 28.0 -39.4 13.7 12.0 International L/F (%,) 88.3 81.3 83.1 82.8 68.8 60.0 75.0 85.6 84.5 75.7 83.4 82.2 International yield growth (%, YoY) -4.9 -5.3 -17.2 -19.7 -0.6 -20.0 -10.0 -5.0 -10.5 -8.5 11.2 2.0 Domestic RPK growth (%, YoY) 3.8 1.6 8.4 7.8 -29.0 -39.9 -17.5 -12.6 5.4 -24.5 12.8 -0.6 Domestic ASK growth (%, YoY) 2.3 4.1 9.0 6.5 -20.3 -30.0 -10.0 -10.0 5.5 -17.4 5.0 0.0 Domestic L/F (%) 94.8 93.3 92.6 94.7 84.6 80.0 85.0 92.0 93.9 85.8 92.2 91.6 Domestic yield growth (%, YoY) 3.1 -3.9 -6.4 -0.2 -5.3 -15.0 -10.0 -5.0 -2.1 -9.0 3.6 -1.5 Jet fuel (U S$/bbl) 77 80 77 76 57 41 57 57 78 53 57 57 US$/W rate 1,125 1,167 1,193 1,176 1,195 1,200 1,200 1,200 1,165 1,199 1,200 1,200 Notes: Yield growth is based on won-denominated yield; based on consolidated K-IFRS; net profit refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research

Table 3. Valuation: RIM (Wbn) 2020F 2021F 2022F 2023F 2024F 2025F 2026F Revenue 809 1,080 1,183 1,183 1,242 1,304 1,404 (Growth) -41.6% 33.5% 9.5% 0.0% 5.0% 5.0% 7.7% Net profit (ex-minority interest) -221 29 58 58 61 65 70 (% of revenue) -27.4% 2.7% 4.9% 4.9% 4.9% 5.0% 5.0% Equity (ex-minority interest) 274 303 361 407 456 508 564 (Growth) -15.8% 10.6% 19.1% 12.9% 12.0% 11.4% 11.1% Forecast ROE -73.9% 10.1% 17.5% 15.1% 14.1% 13.5% 13.1% COE 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% ROE spread -82.1% 1.9% 9.3% 6.9% 6.0% 5.3% 4.9% Residual income -225 6 34 28 27 27 28 Terminal value 385 NPV of FCFF -63 Beta 1.0 PV of terminal value 175 Risk premium 6.0% Current book value 325 Risk-free rate 2.0% Equity value 451 COE 8.2% Shares outstanding 26,357 Target P/B (12MF) 2.4 TP (W) 17,000 Current price (W) 19,600 Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 May 22, 2020 Jeju Air

Figure 1. US$/W rate trend Figure 2. CASK trends

1,300 (W/ASK) 70 CASK CASK (ex-fuel costs)

1,250

60 1,200

1,150 50

1,100 40 1,050

1,000 30 15 16 17 18 19 20 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20 Source: Bloomberg, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research estimates

Figure 3. Revenue by route Figure 4. Ancillary revenue trends

(Wbn) (Wbn) (%) 400 Irregular Russia Oceania 35 Ticket-related (L) Commissions (L) 16 Southeast Asia China Japan % of revenue (R) 350 Domestic 30 14 300 12 25 250 10 20 200 8 15 150 6 10 100 4

50 5 2

0 0 0 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19 1Q20

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

Figure 5. Korean LCCs’ M/S on short-haul international routes Figure 6. Japan route revenue contribution

(%) (Wbn) Total passenger revenue (L) Japan route revenue (L) (%) 14 400 Japan route % (R) 35 Eastar Jet 31 350 12 Jeju Air 30 26 26 26 300 24 10 23 25 T'way Air 250 8 18 20 200 6 13 15 150 11 4 10 100 2 50 5

0 0 0 11 12 13 14 15 16 17 18 19 20 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 Source: IIA, KAC, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 3 May 22, 2020 Jeju Air

Jeju Air (089590 KS/Sell/TP: W17,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/19 12/20F 12/21F 12/22F (Wbn) 12/19 12/20F 12/21F 12/22F Revenue 1,384 809 1,080 1,183 Current Assets 456 492 565 634 Cost of Sales 1,247 881 875 931 Cash and Cash Equivalents 30 37 63 101 Gross Profit 137 -72 205 252 AR & Other Receivables 57 50 61 69 SG&A Expenses 170 102 138 151 Inventories 17 15 18 20 Operating Profit (Adj) -33 -174 67 101 Other Current Assets 352 390 423 444 Operating Profit -33 -174 67 101 Non-Current Assets 1,012 852 808 801 Non-Operating Profit -14 -81 -28 -24 Investments in Associates 0 0 0 0 Net Financial Income -23 -32 -28 -23 Property, Plant and Equipment 285 133 93 89 Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 29 22 17 13 Pretax Profit -47 -255 39 77 Total Assets 1,468 1,343 1,373 1,435 Income Tax -14 -34 10 19 Current Liabilities 557 658 677 587 Profit from Continuing Operations -33 -221 29 58 AP & Other Payables 112 99 121 136 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 140 290 229 85 Net Profit -33 -221 29 58 Other Current Liabilities 305 269 327 366 Controlling Interests -33 -221 29 58 Non-Current Liabilities 586 412 393 487 Non-Controlling Interests 0 0 0 0 Long-Term Financial Liabilities 430 257 237 312 Total Comprehensive Profit -40 -221 29 58 Other Non-Current Liabilities 156 155 156 175 Controlling Interests -40 -221 29 58 Total Liabilities 1,142 1,070 1,070 1,074 Non-Controlling Interests 0 0 0 0 Controlling Interests 325 274 303 361 EBITDA 133 -15 152 169 Capital Stock 132 192 192 192 FCF (Free Cash Flow) 42 -37 113 111 Capital Surplus 90 199 199 199 EBITDA Margin (%) 9.6 -1.9 14.1 14.3 Retained Earnings 106 -116 -87 -29 Operating Profit Margin (%) -2.4 -21.5 6.2 8.5 Non-Controlling Interests 0 0 0 0 Net Profit Margin (%) -2.4 -27.3 2.7 4.9 Stockholders' Equity 325 274 303 361

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/19 12/20F 12/21F 12/22F 12/19 12/20F 12/21F 12/22F Cash Flows from Op Activities 84 -37 153 171 P/E (x) - - 26.0 13.0 Net Profit -33 -221 29 58 P/CF (x) 4.7 - 5.0 4.5 Non-Cash Income and Expense 182 206 123 111 P/B (x) 2.2 2.7 2.5 2.1 Depreciation 158 152 80 65 EV/EBITDA (x) 9.2 - 4.3 3.2 Amortization 8 7 5 4 EPS (W) -1,257 -6,827 753 1,505 Others 16 47 38 42 CFPS (W) 5,663 -465 3,942 4,390 Chg in Working Capital -15 -24 39 44 BPS (W) 12,425 7,171 7,925 9,430 Chg in AR & Other Receivables 1 4 -6 -4 DPS (W) 0 0 0 0 Chg in Inventories -5 2 -3 -2 Payout ratio (%) 0.0 0.0 0.0 0.0 Chg in AP & Other Payables 14 0 0 0 Dividend Yield (%) 0.0 0.0 0.0 0.0 Income Tax Paid -28 34 -10 -19 Revenue Growth (%) 9.9 -41.5 33.5 9.5 Cash Flows from Inv Activities -132 -46 -46 -64 EBITDA Growth (%) -2.9 - - 11.2 Chg in PP&E -41 0 -40 -60 Operating Profit Growth (%) - - - 50.7 Chg in Intangible Assets -6 0 0 0 EPS Growth (%) - - - 99.9 Chg in Financial Assets -20 4 -6 -4 Accounts Receivable Turnover (x) 35.4 25.5 32.8 30.8 Others -65 -50 0 0 Inventory Turnover (x) 97.8 51.3 66.0 62.0 Cash Flows from Fin Activities -146 148 -81 -69 Accounts Payable Turnover (x) 1,659.8 1,533.0 1,464.3 1,337.0 Chg in Financial Liabilities 443 -22 -81 -69 ROA (%) -2.7 -15.8 2.1 4.1 Chg in Equity 0 170 0 0 ROE (%) -9.4 -73.9 10.1 17.5 Dividends Paid -17 0 0 0 ROIC (%) -4.1 -19.8 7.7 12.4 Others -572 0 0 0 Liability to Equity Ratio (%) 351.4 390.8 353.5 297.8 Increase (Decrease) in Cash -193 8 26 37 Current Ratio (%) 81.9 74.8 83.4 108.0 Beginning Balance 223 30 37 63 Net Debt to Equity Ratio (%) 159.5 91.7 46.2 8.3 Ending Balance 30 37 63 101 Interest Coverage Ratio (x) -1.3 -5.2 2.2 4.0 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 4 May 22, 2020 Jeju Air

APPENDIX 1

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

Company (Code) Date Rating Target Price (W) Jeju Air Jeju Air (089590) 05/21/2020 Sell 17,000 80,000 05/12/2020 Hold - 04/07/2020 Buy 23,000 60,000 02/12/2020 Buy 30,000 12/18/2019 Buy 36,000 40,000 10/09/2019 Buy 30,000 20,000 08/07/2019 Buy 33,000

07/09/2019 Buy 40,000 0 05/07/2019 Buy 50,000 May 18 May 19 May 20 04/05/2019 Buy 47,000 01/14/2019 Buy 45,000 11/06/2018 Buy 50,000 08/07/2018 Buy 60,000 06/21/2018 Buy 62,000 05/08/2018 Buy 65,000

Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price (─), Target price (▬), Not covered ( ■), Buy (▲), Trading Buy (■), Hold (●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset Daewoo Co., Ltd., we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 82.04% 12.57% 5.39% 0.00% Investment Banking Services 80.77% 11.54% 7.69% 0.00% * Based on recommendations in the last 12-months (as of March 31, 2020)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

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

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. 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.

Mirae Asset Daewoo Research 5 May 22, 2020 Jeju Air

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

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Mirae Asset Daewoo Research 6 May 22, 2020 Jeju Air

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Mirae Asset Daewoo Research 7