July 31, 2019 Korea Daily Focus

Company News & Analysis LG Electronics (066570/Buy/TP: W89,900) Lower TP Disappointing 2Q19 results

Samsung SDI (006400/Buy/TP: W350,000) Time to shake off doubts over growth

S1 (012750/Buy/TP: W120,000) Operating profit growth offsets higher labor expenses

Nongshim (004370/Buy/TP: W340,000) Compelling valuation, at P/B of 0.7x

Green Cross (006280/Hold) 2Q19 OP beats consensus

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LG Electronics (066570 KS ) Disappointing 2Q19 results

Technology 2Q19 review: Weaker-than-expected OP of W652.3bn (-15.4% YoY, -27.6% QoQ) Results Comment For 2Q19, LG Electronics (LGE) announced revenue of W15.63tr (+4.1% YoY, +4.8% QoQ) July 31, 2019 and operating profit of W652.3bn (-15.4% YoY, -27.6% QoQ), missing our estimates by 1.9% (vs. W15.93tr) and 28.0% (vs. W905.5bn), resp ectively. The market was expecting revenue of W15.99tr and operating profit of W702.3bn. By business division, the company recorded: 1) an operating loss of W313bn for mobile (Maintain) Buy communications (MC; OP margin of -19.4%; vs. our previous estimate of W177.3bn loss); 2) operating profit of W205.6bn for home entertainment (HE; OP margin of 5.6%; Target Price (12M, W) ▼ 89,900 vs. our previous estimate of W359.8bn); 3) operating profit of W717.5bn for home appliance & air solution (H&A; OP margin of 11.8%; vs. our previous estimate of Share Price (07/30/19, W) 67,500 W681.4bn); 4) an operating loss of W55.8bn for vehicle component solutions (VS; OP margin of -3.9%; vs. our previous estimate of W29.6bn loss); and 5) operating profit of Expected Return 33% W58.1bn for B2B (OP margin of 8.6%; vs. our previous estimate of W55.1bn).

TVs key to earnings and MC key to share prices; A challenging 2H19 OP (19F, Wbn) 2,385 Looking to 3Q19, we forecast revenue of W15.97tr (+2.2% YoY, +3.5% QoQ) and Consensus OP (19F, Wbn) 2,690 operating profit of W540.8bn (-27.8% YoY, -17.1% QoQ). Excluding LG Innotek, we expect sluggish operating profit of W420.4bn (-33.5% YoY, -34.4% QoQ) due to TV EPS Growth (19F, %) -20.9 margins. TV competition is intensifying at a time when demand remains weak. Sales of Market EPS Growth (19F, %) -25.0 OLED TVs, which have higher margins, will be key to a recovery, but panel P/E (19F, x) 12.4 supply/demand looks likely to improve in 4Q19. Market P/E (19F, x) 12.3 KOSPI 2,038.68 For the smartphone business, we expect operating loss to narrow, as marketing spending should decline (unlike in 2Q19) in the absence of new releases. Also positive Market Cap (Wbn) 11,046 is the relocation of the Pyeongtaek smartphone plant to Vietnam, which is set to be Shares Outstanding (mn) 181 completed in 4Q19. LGE expects the move to reduce annual costs by W50-100bn. Free Float (%) 65.6 Foreign Ownership (%) 34.5 For the VS business, order backlog is likely to grow to W55tr by year-end, but prospects Beta (12M) 1.25 of a margin recovery appear limited, given the continued increase in R&D expenses. One bright spot is the home appliance business . Despite unfavorable seasonality, we 52-Week Low 59,400 expect the H&A division to post 3Q19 OP margin of 8.6%, supported by the steady mix 52-Week High 82,600 of new products, such as electric dryers, A9 cordless vacuums, stylers, and air purifiers. (%) 1M 6M 12M Absolute -14.9 -0.1 -10.2 Maintain Buy, but lower TP to W89,900 Relative -11.0 8.1 1.0 We remain Buy on LGE but lower our target price to W89,900 (from W99,500) , which is based on a P/B of 1.0x (vs. 1.1x previously) our 12-month forward BPS of W89,995. At 110 LG Electronics KOSPI present, the stock is trading at a P/B of just 0.7x. LGE boasts strong, world-class 100 competitiveness in home appliances. However, worries about 2H19 earnings remain. 90

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Mirae Asset Daewoo Co., Ltd.

[ Telecom Equipment/Electronic FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Components ] Revenue (Wbn) 55,367 61,396 61,342 63,153 68,154 72,478

Wonjae Park OP (Wbn) 1,338 2,469 2,703 2,385 3,123 3,524 +822 -3774 -1426 OP margin (%) 2.4 4.0 4.4 3.8 4.6 4.9 [email protected] NP (Wbn) 77 1,726 1,240 982 1,782 2,028

EPS (W) 425 9,543 6,858 5,428 9,852 11,216

ROE (%) 0.7 13.7 9.0 6.6 11.1 11.4

P/E (x) 121.4 11.1 9.1 12.4 6.9 6.0 P/B (x) 0.8 1.4 0.8 0.8 0.7 0.6

Dividend yield (%) 0.8 0.4 1.2 1.1 1.2 1.2

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

Samsung SDI (006400 KS ) Time to shake off doubts over growth

Technology No reason to doubt mid/large-sized battery growth; Maintain TP of W350,000 Company Report We maintain our Buy call and target price of W350,000 on Samsung SDI. We think it is time to shake off any remaining doubts over the growth of the mid/large-sized battery July 31, 2019 business.

We believe investors should focus on the quality of earnings in 2H19. Samsung SDI’s robust profit growth has so far been driven by: 1) cylindrical batteries; and 2) electronic (Maintain) Buy materials. From 3Q19, we expect mid/large-sized batteries to account for the majority of overall earnings growth. In 2H19, we forecast revenue to grow to W1.46tr (+66.6% HoH) for EV batteries and W980bn (+156.5% HoH) for ESS. As revenue expands, the Target Price (12M, W) 350,000 mid/large-sized battery unit should turn to an operating profit in 3Q19, contributing to overall profits. Share Price (07/30/19, W) 237,000 ESS demand recovering faster than anticipated Expected Return 48% ESS demand is recovering faster than anticipated. In 2Q19, Samsung SDI’s ESS revenue improved 20.1% QoQ to W210bn. We believe domestic ESS demand has been

recovering since June, and ESS demand in the US and Europe has also been growing OP (19F, Wbn) 874 rapidly. For 3Q19, we forecast ESS revenue of W380bn (+80% QoQ). The recovery in Consensus OP (19F, Wbn) 798 domestic ESS demand should begin to gather momentum in August, while demand overseas should continue to grow, driven by renewable energy plus ESS projects. EPS Growth (19F, %) 14.1 Market EPS Growth (19F, %) -25.0 EV batteries to become profitable in 2020 P/E (19F, x) 20.9 We expect the EV battery business to reach breakeven in 4Q19 and turn a full-year Market P/E (19F, x) 12.3 operating profit in 2020. Losses should narrow significantly in 2H19, helped by: 1) KOSPI 2,038.68 leverage effects resulting from a lower percentage of R&D and depreciation expenses; and 2) an increase in the mix of lower-priced material input. Market Cap (Wbn) 16,297 Shares Outstanding (mn) 70 If the EV battery unit indeed breaks even in 4Q19, this would call for a valuation re- Free Float (%) 73.6 rating, as it would indicate that the level of revenue the company needs to break even Foreign Ownership (%) 43.6 on a quarterly basis is much lower than those of domestic and overseas competitors . Beta (12M) 1.23 The company’s more favorable margin structure compared to rivals allows room for 52-Week Low 201,000 capex in the medium and long term and increases the potential to lower prices, which , 52-Week High 261,000 in turn, is supportive of market share expansion.

(%) 1M 6M 12M Cash cows still doing well; Watch for positive feedback loop Absolute 0.2 3.9 3.9 The small-sized battery and electronic materials units are continuing to deliver robust Relative 4.7 12.5 16.9 earnings despite weakness in end-markets. We expect polymer batteries (for smartphones) to continue to deliver strong earnings, fueled by ’

120 Samsung SDI KOSPI (SEC; 005930 KS/Buy/TP: W56,000/CP: W46,550) growing sales of mid/low-range 110 smartphones. Furthermore, battery capacity per device is likely to increase with the 100 introduction of 5G and foldable smartphones. We also look for continued robust

90 earnings in cylindrical batteries, backed by an increase in the mix of high-output products (21700) and the rise of the cylindrical EV battery market. The electronics 80 materials unit should be supported by earnings growth in OLED materials amid the 70 7.18 11.18 3.19 7.19 full-fledged OLED production of Chinese companies. The cash generated from cash cow businesses should enable investments in mid/large-sized batteries , leading to a positive feedback loop. Mirae Asset Daewoo Co., Ltd.

[ Display/Batteries ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 5,201 6,347 9,158 10,705 13,009 15,611 Chuljoong Kim +822 -3774 -1464 OP (Wbn) -926 117 715 874 1,230 1,476 [email protected] OP margin (%) -17.8 1.8 7.8 8.2 9.5 9.5

NP (Wbn) 219 657 701 800 1,076 1,244 EPS (W) 3,117 9,338 9,962 11,365 15,289 17,669 ROE (%) 2.0 6.0 6.0 6.4 8.0 8.6

P/E (x) 35.0 21.9 22.0 20.9 15.5 13.4 P/B (x) 0.7 1.2 1.3 1.3 1.2 1.1 Dividend yield (%) 0.9 0.5 0.5 0.4 0.4 0.4 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

S1 (012750 KS ) Operating profit growth offsets higher labor expenses Software 2Q19 review: Above-consensus OP of W59.1bn (+32.9% YoY) For 2Q19, S1 announced revenue of W545.4bn (+10.3% YoY), operating profit of Results Comment W59.1bn (+32.9% YoY), and net profit attributable to controlling interests of W44.8bn July 31, 2019 (+44.9% YoY). Operating profit exceeded the consensus by 11.8%. The solid operating results were driven by: 1) over 10% revenue growth in both security systems and building management; 2) the early recognition of revenue increases from contract renewals in integrated security; and 3) a decline in SG&A expenses due to overhead efficiency. (Maintain) Buy It is particularly worth noting that the increase in labor expenses (which began in 2Q18 due to wage hikes and hiring caused by the introduction of the 52-hour workweek) was Target Price (12M, W) 120,000 fully offset by the improvement in operating profit. 1) Security systems: Revenue of W438.7bn (+10.4% YoY), OP of W45bn (+29.3% YoY; Share Price (07/30/19, W) 100,500 estimate) Systems revenue grew 6.2% YoY to W269.3bn. Net subscriber additions were 11,173, Expected Return 19% and ARPU was W111,000. Product sales revenue rose 4.3% YoY to W72.9bn. Order backlog stood at W200bn. We expect revenue to continue to improve in 3Q-4Q19. OP (19F, Wbn) 209 Consensus OP (19F, Wbn) 211 Integrated security and other revenue expanded 30.4% YoY to W96.5bn, supported by the early recognition of revenue increases from contract renewals (which typically take EPS Growth (19F, %) 52.9 place in the third quarter). Market EPS Growth (19F, %) -25.0 2) Building management: Revenue of W146.8bn (+16.6% YoY), OP of W13.9bn (+38.8% P/E (19F, x) 24.2 YoY; estimate) Market P/E (19F, x) 12.3 KOSPI 2,038.68 Revenue and margins expanded YoY on the back of broader management coverage and revenue from facility improvements. Market Cap (Wbn) 3,819 3) Other: Cash assets totaled W340bn at end-2Q19. The co mpany plans to increase the Shares Outstanding (mn) 38 number of unmanned stores using its solutions from 50 currently to 100 by year-end. Free Float (%) 63.3 Foreign Ownership (%) 55.1 Reaffirm Buy and TP of W120,000; Watch for new channels and products Beta (12M) 0.36 We reaffirm our Buy rating and target price of W120,000 on S1. The late st earnings results should quell concerns about a slowdown in profit growth due to rising 52-Week Low 84,300 expenses. We believe the focus should now be on the potential for a gradual margin 52-Week High 105,500 recovery and new business opportunities. At present, the stock is trading at a 2019F P/E of 24.2x (vs. 22-28x since 2017). (%) 1M 6M 12M Absolute 3.0 -3.4 16.5 In our view, the domestic security services market has stronger growth potential than in the past, as it is expanding beyond physical security (i.e., protection of personal Relative 7.6 4.6 31.0 safety and property) to information security (i.e., preventing the theft of core

110 competitiveness). Security service providers that offer products targeting these various S1 KOSPI consumer needs should be able to capture a wide range of business opportunities, as 100 well as new subscribers, leading to further improvements in operating earnings.

90 To this end, S1 signed a memorandum of understanding (MOU) with LG Uplus (032640 KS/Buy/TP: W19,000/CP: W13,000) to work together across telecom and security 80 services and launched bundled packages with the telco in July. As such, we expect the company to see a gradual increase in new subscribers in both the B2B and B2C space. 70 7.18 11.18 3.19 7.19 Backed by its dominant market share, we believe S1 will ramp up its telecom/security tie-ups and release a variety of new products through new channels, resulting in further penetration of the domestic security services market. Mirae Asset Daewoo Co., Ltd.

[ Conglomerates/Software ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 1,830 1,942 2,018 2,135 2,280 2,441 Dae -ro Jeong +822 -3774 -1634 OP (Wbn) 206 203 199 209 224 242 [email protected] OP margin (%) 11.3 10.5 9.9 9.8 9.8 9.9

NP (Wbn) 141 143 103 157 171 185 EPS (W) 3,698 3,772 2,710 4,145 4,501 4,860 ROE (%) 13.5 12.4 8.3 12.1 12.4 12.6

P/E (x) 23.7 28.4 37.1 24.2 22.3 20.7 P/B (x) 2.7 3.0 2.7 2.6 2.4 2.3 Dividend yield (%) 1.4 2.3 2.5 2.7 2.9 2.9 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

Nongshim (004370 KS ) Compelling valuation, at P/B of 0.7x

Food & Beverage Key takeaways from Q&A session 1) 2Q19 preview : For 2Q19, Nongshim’s management guided a 5.0% rise in revenue Earnings Preview and a 68.4% increase in operating profit (W10.9bn; OP margin of 1.9%). Despite robust operating profit growth, the company said earnings were negatively affected by the July 30, 2019 contraction of the domestic instant noodle market and increased SG&A spending due to new product releases and ongoing competition in existing products.

2) Instant noodle market outlook : Despite new product releases (e.g., seasonal products and product extensions), the company estimated the domestic i nstant noodle (Maintain) Buy market contracted more than 1% in 2Q19 (in value terms) due to the absence of hit products. According to the company, Paldo gained ground thanks to its sea sonal promotion for Bibimmyeon, while Ottogi (007310 KS/Buy/TP: W960,000/CP: W647,000) Target Price (12M, W) 340,000 and Nongshim maintained their market shares and Samyang Food (003230 KS/CP: W63,500) slightly lost share. For 2H19, the company projected the market to hold Share Price (07/30/19, W) 231,500 steady rather than decline further, supported by a variety of new products and product renewals set to be released. Expected Return 47% 3) Possibility of price hikes : Instant noodle prices depend on macro variables (international wheat prices, F/X rates, and oil prices) and the competitive landscape. Raw material costs are stable for now and do not justify price hikes. And given Ottogi’s OP (19F, Wbn) 93 low pricing strategy for Jin Ramen ( is 30-40% more expensive based on Consensus OP (19F, Wbn) 99 actual selling prices) and intense competition among the market’s four major players, price hikes are unlikely in 2019. That said, the company believes the price gap with fast EPS Growth (19F, %) 4.5 food will enable steady price increases over the long term. Market EPS Growth (19F, %) -25.0 4) Growth strategy in the US : The US instant noodle market displayed a CAGR of 2.9% P/E (19F, x) 16.0 from 2014 to 2018. The US market was valued at US$1.25bn in 2018 (57% for packaged Market P/E (19F, x) 12.3 instant noodles and 43% for cup instant noodles). Nongshim is the market’s no. 3 KOSPI 2,038.68 player, with a 19% market share. Rather than focusing on volume growth in the US, Nongshim is seeking to increase the sales mix of premium products and raise prices Market Cap (Wbn) 1,408 for existing products. For 2Q19, the company guided a 10% increase in US revenue. Shares Outstanding (mn) 6 In the US, Nongshim plans to: 1) broaden its product offerings (localized products, Shin Free Float (%) 49.6 Ramyun Black, non-fried instant noodles, cup instant noodles, and new products); 2) Foreign Ownership (%) 20.1 increase vendors in the central and eastern regions; and 3) move into large modern Beta (12M) 0.33 trade channels (e.g., 7-Eleven in 1H19). In the long term, the company is looking to 52-Week Low 214,000 grow by constructing a new plant on the East Coast to meet demand from the East Coast, Canada, and Mexico. The project is still in the initial stages, and it will take time 52-Week High 313,500 to decide production capacity, the number of production lines, and the type of product (%) 1M 6M 12M (packaged or cup instant noodles) Absolute -8.9 -16.7 -20.6 5) Vietnam market outlook : The Vietnam market (worth US$1bn) is driven by the Relative -4.7 -9.9 -10.7 convenience store channel and cup instant noodles. Nongshim built a lo cal sales network in 2018 and began generating revenue in 1Q19. Factoring in consumer

110 Nongshim KOSPI purchasing power and product selling prices, Nongshim focuses its social media 100 marketing on Shin Ramyun and Neoguri. Nongshim first plans to secure distribution

90 channels and then expand its product lineup and launch localized products over the long term. 80

70 Maintain Buy and TP of W340,000; P/B of 0.7x looks attractive 60 Nongshim’s stock has fallen to a 2019-20F P/B of 0.7x, the lowest level since 2000. 7.18 11.18 3.19 7.19 While it is showing lackluster growth in the domestic instant noodle market, Nongshim is growing into a global brand in overseas markets. We believe the stock will find Mirae Asset Daewoo Co., Ltd. strong downside support thanks to its low valuation and overseas growth potential.

[ F&B ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 2,217 2,208 2,236 2,330 2,414 2,499 Woon -mok Baek +822 -3774 -1679 OP (Wbn) 90 96 89 93 101 107 [email protected] OP margin (%) 4.1 4.3 4.0 4.0 4.2 4.3

NP (Wbn) 199 91 84 88 94 98 EPS (W) 32,764 14,905 13,858 14,477 15,472 16,191 ROE (%) 11.6 5.0 4.5 4.6 4.7 4.8

P/E (x) 10.1 23.8 18.4 16.0 15.0 14.3 P/B (x) 1.1 1.1 0.8 0.7 0.7 0.6 Dividend yield (%) 1.2 1.1 1.6 1.7 1.7 1.9 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

Green Cross (006280 KS ) 2Q19 OP beats consensus

Healthcare 2Q19 review: OP beats consensus Results Comment For 2Q19, Green Cross reported consolidated revenue of W359.6bn (+5.2% YoY) and July 31, 2019 operating profit of W19.6bn (+47.5% YoY). Revenue was in line with the consensus, but operating profit was better than expected. The discontinuation of insulin distribution (which generated quarterly revenue of roughly W15bn) and delays in chicken pox vaccine exports had raised concerns over top line, but revenue met the consensus thanks to the growth of vaccines and strong exports. (Maintain) Hold Revenue slipped 0.1% YoY for plasma derivatives and 6.3% YoY for ETC drugs, but Target Price (12M, W) - vaccine revenue grew 8.4% YoY on a surge in sales of the HPV vaccine Gardasil (from W11.4bn to W19bn). In exports, growth was driven by revenue from the influenza Share Price (07/30/19, W) 107,000 vaccine GC Flu, which jumped 66% YoY from W24.7bn in 2Q18 to W40.9bn in 2Q19. OP margin gained 1.6%p YoY to 5.5%, aided by increased exports of high-margin Expected Return - products and efficient SG&A spending.

At the net level, however, the company swung to a loss of W9.4bn, hurt by: 1) OP (19F, Wbn) 53 additional tax payments following a regular tax audit; 2) W5.9bn in penalties imposed Consensus OP (19F, Wbn) 55 on subsidiary Green Cross MS by the Korea Fair Trade Commission; and 3) W5bn in impairments on tangible assets. EPS Growth (19F, %) -75.4 Market EPS Growth (19F, %) -25.0 US launch of IVIG could come in late 2021 P/E (19F, x) 147.5 In November 2015, Green Cross filed for approval of its 5% IVIG product with the US Market P/E (19F, x) 12.3 FDA, fueling expectations on a potential entry into the US market. However, the KOSPI 2,038.68 company has had some difficulties gaining approval, receiving complete response Market Cap (Wbn) 1,250 letters (CRL) from the US FDA on two separate occasions . In response, the company Shares Outstanding (mn) 12 has decided instead to seek approval for its 10% IVIG, which is currently in a US phase Free Float (%) 44.5 3 trial. The company plans to file for approval in late 2020 with a targeted launch i n late Foreign Ownership (%) 19.8 2021. While this means the release of the company’s 5% IVIG will likely be pushed back Beta (12M) 0.88 to late 2022, it should be noted that the 10% IVIG market is more than five times larger than the 5% IVIG market. (10% IVIG and 5% IVIG account for 71% and 14% of the 52-Week Low 103,500 market, respectively.) 52-Week High 202,000

(%) 1M 6M 12M Maintain Hold Absolute -11.9 -18.9 -41.2 We maintain our Hold rating on Green Cross. In China, the company filed for approval Relative -8.0 -12.3 -33.9 of GreenGene F (hemophilia) in May 2019, which is expected to come through sometime in 1H20. Yesterday, the company also filed for Chinese approval of 130 Green Cross KOSPI Hunterase. We are also optimist ic on the shingles vaccine currently being developed by 110 the company’s subsidiary Curevo, given the market potential and competitive dynamics. Still, we believe it will take some time for earnings to meaningfully improve. 90 Valuation also looks expensive, at a 2020F P/E of 38.1x. 70

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Mirae Asset Daewoo Co., Ltd.

[ Biotech/Healthcare ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 1,198 1,288 1,335 1,347 1,417 1,503 Taehee Kim +822 -3774 -6813 OP (Wbn) 78 90 50 53 58 66 [email protected] OP margin (%) 6.5 7.0 3.7 3.9 4.1 4.4

NP (Wbn) 63 53 34 8 33 39 EPS (W) 5,388 4,556 2,946 725 2,805 3,301 ROE (%) 6.5 5.2 3.3 0.8 3.1 3.5

P/E (x) 29.1 49.6 46.2 147.5 38.1 32.4 P/B (x) 1.8 2.5 1.5 1.1 1.1 1.1 Dividend yield (%) 0.8 0.6 0.7 1.0 1.0 1.1 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