July 14, 2014

KOREA

Company News & Analysis Major Indices Close Chg Chg (%) Hana Financial Group (086790/Buy/TP: W51,000) KOSPI 2,002.84 2.34 0.12 2Q14 preview: Results to beat consensus KOSPI 200 259.17 0.30 0.12 KOSDAQ 559.32 3.48 0.63

Economy & Strategy Update Turnover ('000 shares, Wbn) Fixed Income Weekly Volume Value KOSPI 323,818 3,580 Yields remain low KOSPI 200 56,199 2,659 KOSDAQ 283,996 1,960

Market Cap (Wbn) Value KOSPI 1,196,159 KOSDAQ 135,568

KOSPI Turnover (Wbn) Buy Sell Net Foreign 1,119 934 186 Institutional 662 908 -246 Retail 1,777 1,701 76

KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 99 110 -11 Institutional 137 98 39 Retail 1,719 1,740 -22

Program Buy / Sell (Wbn) Buy Sell Net KOSPI 671 602 69 KOSDAQ 16 23 -7

Advances & Declines Advances Declines Unchanged KOSPI 429 386 68 KOSDAQ 495 431 70

KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value 1,306,000 -2,000 229 KODEX LEVERAGE 11,625 55 171 Hynix 49,300 -450 132 KODEX INVERSE 7,730 -15 93 Hyundai Motor 228,500 4,500 85

KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Com2us 89,500 600 139 Gamevil 114,900 10,300 92 Daum Communications 119,900 6,500 75 Iriver 8,380 450 65 Tovis 12,450 550 53 Note: As of July 14, 2014

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Hana Financial Group (086790 KS) 2Q14 preview: Results to beat consensus

2Q14 preview: Net profit of W362bn (+56.2% YoY, +103.8% QoQ) We forecast Hana Financial Group (HFG) to post 2Q earnings of W362.1bn (+56.2 % Banks YoY, +103.8% QoQ), which would beat the market consensus estimate by 8.8%. We are still fine-tuning our estimates to reflect extraordinary items. Earnings were likely hindered by additional impairment losses on the National Happiness Fund (W13bn), as Earnings Preview well as provisions against Dongbu Steel (W10bn), KT ENS (W15bn), and other July 14, 2014 corporations (W20bn) after the regular credit-risk assessment of large corporations. However, gains from F/X translation (W100bn) and the equity-stake disposal of SK Hynix (W45bn) are expected to have offset the losses. Stripping away one-off items, we estimate recurring quarterly net profit in 2Q to be W300bn. (Maintain) Buy Loan growth is forecast to reach 1.0% QoQ and 3.1% YTD, short of the company’s 8% Target Price (12M, W) 51,000 full-year target. We believe the group does not want to deteriorate margins by aggressively extending loans, hence the slower-than-expected loan growth. However, since net interest margin (NIM) is expected to have remained fl at in 2Q, asset growth Share Price (07/11/14, W) 36,250 should lead to net interest income increasing 1.9% QoQ. Selling, general, and administrative (SG&A) expenses are expected to have increased 4.8% QoQ due to Expected Return 41% enterprise resource planning-related expenses at Hana Daetoo Securities.

Going forward: Synergy with KEB OP (14F, Wbn) 1,373 A key focus point is whether the company’s earnings generation will recover. The Consensus OP (14F, Wbn) 1,474 market expected synergy and leverage effects after the merger with K orea Exchange EPS Growth (14F, %) 19.2 Bank (KEB); however, HFG was unable to realize economies of s cale. We ascribe this to Market EPS Growth (14F, %) 17.7 the extraordinary increase in SG&A expenses, as well as an unfavorable macro environment, which has forced the bank to set aside sequentially meaningful P/E (14F, x) 9.4 provisioning expenses against distressed legacy assets. We are thus unlikely to see Market P/E (14F, x) 11.6 significant synergy effects in the short term, as these problems will take some time to KOSPI 1,988.74 resolve.

Market Cap (Wbn) 10,509 However, now that the Financial Supervisory Service has given its approval, some Shares Outstanding (mn) 290 synergy can be expected after KEB Card is spun off and then integrated with Hana SK Free Float (%) 89.3 Card. In addition, HFG’s management recently expressed interest in an earlier-than- Foreign Ownership (%) 66.6 expected merger of the two banks. Although there has been some backlash from KEB’s Beta (12M) 1.22 labor union, an earlier-than-expected merger could build synergy. 52-Week Low 33,450 52-Week High 43,900 Fundamentals to improve: Maintain Buy and TP of W51,000 We maintain our Buy call on HFG and target price of W51,000 . Our target price (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M corresponds to a 2014F P/B of 0.7x. Our investment theses are as follows: 1) stabilizing Absolute -6.3 -11.6 7.9 NIM combined with accelerated loan growth should boost the top line in 2014. 2) HFG Relative -5.1 -13.8 1.9 shares have come down to an attractive level, trading at a 2014F P/B of 0.50x. We attribute the recent share price pullback to concerns over the troubled Don gbu Group 140 Hana Financial Group KOSPI (to which HFG has the greatest exposure among listed banks). Creditors and Dongbu 130 Steel have signed a voluntary agreement, but we cannot rule out the possibility of 120 Dongbu Steel entering a corporate workout. Thus, while we believe provisions against 110 the firm should be limited in 2Q, it will ultimately depend on how Dongbu Steel’s 100 restructuring goes. 90 80 7.13 11.13 3.14 7.14 FY (Dec.) 12/11 12/12 12/13 12/14F 12/15F 12/16F Total OP (Wbn) 4,419 7,233 6,130 6,298 6,628 7,033

PPOP (Wbn) 2,312 3,420 2,284 2,471 2,646 2,852 Daewoo Securities CCo.,o., Ltd. Net OP (Wbn) 1,732 1,981 1,165 1,373 1,660 1,798

[Banks] Pretax NP (Wbn) 1,716 1,958 1,270 1,536 1,823 1,964 NP (Wbn) 1,222 1,602 934 1,113 1,345 1,452 Jason Kim EPS (W) 5,029 6,593 3,221 3,839 4,641 5,007 +822-768-4178 [email protected] BPS (W) 57,935 64,696 68,756 72,778 76,491 80,496 P/E (x) 7.1 5.3 13.6 9.4 7.8 7.2 Yong-uk Ku P/B (x) 0.6 0.5 0.6 0.5 0.5 0.5 +822-768-4494 ROE (%) 9.5 10.8 5.2 5.4 6.2 6.4 [email protected] ROA (%) 0.7 0.7 0.3 0.4 0.4 0.4

Joong-han Kim Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests +822-768-4152 Source: Company data, KDB Daewoo Securities Research estimates [email protected] Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURESDISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

Fixed Income Weekly Yields remain low

Bond yields remain low despite global economic recovery

Global bond yields have retreated again. We expected that a rebound in global yields would gradually push domestic yields higher. However, global yields have remained Fixed Income Report persistently low, with US economic data suggesting only a partial recovery. July 14, 2014 We believe that global yields will remain depressed until doubts facing major economies (e.g., the US, Europe, China, etc.) lift, and the US starts to tighten its monetary policy

Daewoo Securities CCo.,o., Ltd. full swing. The turning point will likely be around end-3Q or early 4Q, when US tapering should be completed and liquidity injections in Europe are set to pick up. This means that [Fixed Income] the 10-year UST yield is projected to stay below 2.7% over the next one or two months.

Yeo-sam Yoon Even if a single cut materializes, uptrend in yields is unlikely to emerge +822-768-4022 [email protected] In line with our expectations, the BOK lowered its 2014 GDP growth estimate to 3.8% . Although the revision was not particularly earthshaking, an overwhelming number of Dave Byun market watchers are still anticipating a rate cut in August. Although we are uncertain if +822-768-4174 trimming the base rate is the right approach for the economy , we have taken into [email protected] account the possible August cut in the formulation of our strategy.

In our view, if the central bank does decide to lower the base rate, only one cut is likely for 2014. However, given that the possibility of t wo cuts still lingers, and that it is expected to take some time for the base rate to be normalized, any rise in yields should be limited in 3Q. We believe that KTB yields will show a meaningful rebound only if 3Q domestic indicators are confirmed to be solid and pressure for global tightening rises with the completion of QE programs. Expecting the bond market to be bullish until the August MPC meeting, we recommend that investors maintain positive durations.

Market attention is now shifting to whether yields will fall further and the timing of the eventual shift to an uptrend. If market participants start to firmly believe that the BOK will push through two rate cuts by year-end, the three-year KTB yield could fall below the base rate even before the August MPC meeting.

However, most bond investors are still cautious ab out betting on two rate cuts. Generally speaking, when investors believe that the rate will be slashed only once, a cut is followed by a rebound in yields. Although the likelihood of two round s of cuts may rise following this week’s release of the government’s 2H economic policy plans , we believe that the economy would need to a suffer a massive slowdown (significant enough to warrant the creation of a supplementary budget) for a second cut to take place.

August rate ccutut decision will depend on President ParkPark’’’’ss approval rating

(%) (%) 65 President Park's approval rating (L) 3Y KTB yield (R) 3.1

60 3.0

55 2.9

50 2.8

45 2.7

40 2.6

35 2.5 10/13 11/13 12/13 1/14 2/14 3/14 4/14 5/14 6/14 7/14 8/14

Source: Gallup Korea, KOFIA, KDB Daewoo Securities Research

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

Key Universe Valuations July 14, 2014

※All data as of close July 11, 2014, unless otherwise noted.

14F Earnings growth Mkt Cap Price P/E (x) P/B (x) ROE (%) Ticker Company Div Yield OP EPS (Wbn) (W) (%) 14F 15F 14F 15F 14F 15F 14F 15F 14F 15F 005930 Samsung Electronics 192,373 1,306,000 1.2 -14.3 -6.8 -10.0 -6.3 8.3 8.8 1.3 1.1 17.1 13.9 005380 Hyundai Motor 50,333 228,500 0.9 5.2 3.2 -0.2 6.1 7.7 7.2 1.1 0.9 15.2 14.1 000660 SK Hynix 35,224 49,300 32.5 -1.7 16.9 -2.4 10.3 10.5 2.1 1.8 23.1 18.4 012330 27,208 279,500 0.7 9.1 13.2 10.7 9.9 7.2 6.5 1.1 1.0 17.3 16.2 035420 NAVER 26,601 807,000 0.1 73.8 21.4 -54.9 23.5 39.4 31.9 9.6 7.4 37.6 33.0 005490 POSCO 26,200 300,500 2.7 24.2 29.6 48.0 44.4 12.9 8.9 0.6 0.6 4.8 6.7 015760 KEPCO 24,748 38,550 0.2 284.6 21.9 3587.3 53.4 11.2 7.3 0.5 0.4 4.3 6.3 055550 22,074 46,550 - - - - 0.0 0.0 000270 Motors 21,971 54,200 1.4 1.9 8.3 -3.4 7.6 6.0 5.5 0.9 0.8 16.8 15.6 032830 Samsung Life 19,880 99,400 - - - - 0.0 0.0 017670 SK Telecom 19,298 239,000 3.9 5.5 7.6 19.0 2.2 9.9 9.7 1.1 1.1 13.8 12.9 051910 LG Chem 19,053 287,500 1.4 7.3 38.5 14.6 39.1 14.7 10.5 1.7 1.5 11.9 14.8 105560 KB Financial Group 13,793 35,700 - - - - 0.0 0.0 033780 KT&G 12,741 92,800 3.4 5.9 2.3 37.3 4.8 16.3 15.5 2.1 2.0 14.3 14.0 009540 Hyundai Heavy 12,730 167,500 1.2 -64.4 373.2 -32.4 410.6 67.6 13.2 0.7 0.7 1.1 5.4 000810 Samsung F&M 12,625 266,500 - - - - 0.0 0.0 066570 LG Electronics 12,028 73,500 0.3 51.3 24.5 252.5 76.1 21.3 12.1 1.1 1.0 5.2 8.5 034220 LG Display 11,575 32,350 -23.6 -27.7 31.8 -19.1 20.6 25.5 1.0 1.0 5.2 4.0 000830 Samsung C&T 11,216 71,800 0.7 40.6 30.7 110.4 27.8 22.6 17.7 1.0 0.9 4.6 5.6 003550 LG Corp. 10,819 62,700 1.6 19.9 8.3 11.5 7.2 10.7 10.0 0.9 0.8 8.5 8.5 086790 Hana Financial Group 10,610 36,600 - - - - 0.0 0.0 086280 10,200 272,000 0.6 8.0 10.7 12.7 11.1 18.8 16.9 3.7 3.1 21.2 19.8 096770 SK Innovation 9,293 100,500 3.2 -34.8 97.8 -12.4 95.7 14.7 7.5 0.6 0.6 4.0 7.6 023530 Lotte Shopping 9,274 294,500 0.5 -1.6 8.8 5.5 12.8 11.1 9.9 0.5 0.5 5.0 5.4 034730 SK C&C 8,800 176,000 0.7 16.9 9.9 142.2 15.8 19.2 16.6 2.7 2.4 17.8 17.6 004020 8,228 70,600 0.7 66.3 8.3 -11.6 9.3 9.9 9.0 0.6 0.6 6.1 6.3 010130 Korea Zinc 8,057 427,000 1.2 15.6 17.8 23.8 16.0 14.5 12.5 1.7 1.5 12.6 13.0 003600 SK Holdings 8,007 170,500 1.5 29.0 34.3 316.9 21.3 6.9 5.7 0.6 0.6 9.7 10.7 030200 KT 7,925 30,350 -93.8 3926.9 - - - 5.6 0.7 0.6 - 12.1 006400 Samsung SDI 7,585 166,500 0.9 - 208.5 147.3 17.6 24.3 20.7 1.0 1.0 4.3 4.9 161390 7,160 57,800 0.8 7.7 9.2 12.2 10.5 8.6 7.8 1.5 1.3 19.2 17.8 021240 Coway 7,103 92,100 2.0 12.8 12.8 13.4 13.1 25.5 22.6 5.9 5.2 27.5 26.8 035250 7,028 32,850 2.7 27.0 11.7 24.4 17.5 19.0 16.2 2.4 2.2 14.1 15.2 000720 Hyundai E&C 6,848 61,500 0.8 10.8 17.5 9.9 24.0 12.4 10.0 1.3 1.1 10.8 12.0 139480 Emart 6,593 236,500 0.6 -5.8 10.1 -7.7 15.1 15.3 13.3 0.9 0.9 6.3 6.7 010950 S-Oil 6,158 54,700 2.5 -24.8 186.8 5.0 107.7 21.0 10.1 1.2 1.1 5.7 11.3 010140 Samsung Heavy 6,026 26,100 1.9 -77.5 288.7 -75.0 295.3 38.2 9.7 0.9 0.9 2.7 10.1 011170 Lotte Chemical 5,690 166,000 0.6 -0.4 77.4 21.2 87.7 16.3 8.7 0.9 0.8 5.4 9.5 088350 Hanwha Life 5,541 6,380 - - - - 0.0 0.0 036460 KOGAS 5,520 59,800 2.5 0.4 7.5 - 12.0 14.5 12.9 0.6 0.6 4.2 4.6 001800 Orion 5,317 890,000 0.3 2.2 4.7 3.7 14.4 35.2 30.7 4.3 3.8 12.9 13.2 011210 Hyundai Wia 4,824 187,500 0.3 10.2 14.2 14.2 10.6 10.1 9.2 1.8 1.5 19.2 17.7 042660 DSME 4,804 25,100 1.2 -7.8 67.2 -0.6 80.8 18.0 9.9 0.9 0.9 5.3 9.0 097950 CJ CheilJedang 4,594 350,500 0.5 10.7 16.6 78.0 25.4 24.3 19.4 1.6 1.5 7.0 8.3 047050 Daewoo International 4,407 38,700 2.2 131.6 23.4 134.5 26.6 13.6 10.7 1.8 1.6 13.7 15.5 009150 Samsung Electro-Mechanics 4,355 58,300 1.3 -39.6 68.1 -28.2 49.1 19.1 12.8 1.1 1.0 5.6 8.0 078930 GS Holdings 4,070 43,800 3.1 -10.0 42.5 -22.3 49.9 14.9 10.0 0.6 0.6 4.2 6.2 008770 3,984 101,500 0.3 81.2 18.8 920.7 15.7 36.8 31.8 5.2 4.5 15.1 15.2 032640 LG Uplus 3,947 9,040 2.2 14.7 13.7 16.6 22.4 12.1 9.9 0.9 0.9 7.8 9.0 047040 Daewoo E&C 3,899 9,380 - 12.7 - 27.2 13.0 10.2 1.3 1.2 10.9 12.3 Source: KDB Daewoo Securities Research

Market Data July 14, 2014

※All data as of close July 11, 2014, unless otherwise noted.

Other Major Indices Economic Indicators Close Net Chg 1D (%) YTD (%) Close 1D ago 1M ago 1Y ago MSCI Korea* 452.60 -2.19 -0.48 2.28 USD/KRW 1,012.20 1,011.20 1,017.40 1,144.70 KOSPI 2,002.84 2.34 0.12 1.81 JPY100/KRW 996.11 995.91 992.39 1,131.97 KOSDAQ 559.32 3.48 0.63 12.70 EUR/KRW 1,380.74 1,376.55 1,382.95 1,463.10 Dow Jones* 16,985.61 78.99 0.47 3.31 3Y Treasury 2.59 2.61 2.82 2.94 S&P 500* 1,972.83 9.12 0.46 7.69 3Y Corporate 3.00 3.02 3.23 3.40 NASDAQ* 4,419.03 27.57 0.63 6.66 DDR2 1Gb* 1.84 1.84 1.81 1.40 Philadelphia Semicon* 646.56 3.92 0.61 22.51 NAND 16Gb* 2.85 2.85 2.84 2.98 FTSE 100* 6,718.04 -20.41 -0.30 0.00 Oil (Dubai)* 106.02 106.68 105.09 103.01 Nikkei 225 15,216.47 -86.18 -0.56 -4.35 Gold* 1,324.30 1,316.50 1,253.50 1,245.90 Hang Seng* 23,176.07 -365.31 -1.55 -0.70 Customer deposits (Wbn)* 14,747 14,500 14,649 17,095 Taiwan (Weighted) 9,565.12 75.14 0.79 11.06 Equity type BC (Wbn)(Jul. 10) 79,657 79,731 80,431 91,953 Note: * as of July 11, 2014 Source: KSDA, Wisefn, DRAMeXchange, MSCI

KOSPI Top 10 Foreign Net Buy / Net Sell (Wbn) KOSPI Top 10 Institutional Net Buy / Net Sell (Wbn) Net Buy Net Sell Net Buy Net Sell Samsung Electronics 45.95 Glovis 13.36 KODEX LEVERAGE 29.61 Samsung Electronics 34.30 Hyundai Motor 38.25 SK Energy 9.32 Korea Zinc 15.53 Hynix 26.98 Hyundai Mobis 37.68 GS Construction 9.20 Korea Gas Corp. 13.74 NCsoft 26.41 KEPCO 32.34 LG Chem 7.14 LG Chem 12.86 Hyundai Motor 26.38 Shinhan Financial Group 12.54 NHN Entertainment 6.15 Glovis 8.10 DSME 17.10 Hynix 10.95 Mando 5.86 Mando 6.80 Hyundai Mipo Dockyard 16.28 Hana Financial Group 9.88 5.44 Kangwon Land 5.59 KODEX INVERSE 15.53 Hyundai Eng. & Cosnt. 9.87 CJ Corp. 5.40 Amore Pacific 5.20 12.49 POSCO 8.16 LG Electronics 4.86 CJ Corp. 4.50 Hana Financial Group 11.77 SK Telecom 6.39 Amore Pacific 4.69 HYUNDAI ROTEM 4.42 Samsung Heavy Ind. 10.79 Source: KSDA, Wisefn

KOSDAQ Top 10 Foreign Net Buy / Net Sell (Wbn) KOSDAQ Top 10 Institutional Net Buy / Net Sell (Wbn) Net Buy Net Sell Net Buy Net Sell Finetec 4.72 Gamevil 6.69 CJ E&M 5.65 ViroMed 2.13 NaturalendoTech 4.46 CJ E&M 5.77 Daum Communications 5.57 Tes 1.48 i-SENS 3.03 Partrion 3.25 INICIS 2.87 Tovis 1.18 Cell Biotech 1.53 STC 1.84 KEBT 2.68 IGLOO SECURITY 1.13 Eugene Corporation 1.17 SM 1.38 Mobilians 2.35 Techno Semichem 1.05 Nowcom 1.04 YG Entertainment 1.04 NaturalendoTech 2.33 i-SENS 1.00 KEBT 0.93 Paradise 1.03 ISC 2.04 Seoul Semiconductor 0.99 Dongsuh 0.85 SundayToz 0.98 Paradise 1.91 KT Submarine 0.95 INICIS 0.81 Silicon Works 0.88 Medy-tox 1.90 Finetec 0.85 Com2us 0.75 LiHOM-CUCHEN 0.88 KH Vatec 1.65 Halim 0.72 Source: KSDA, Wisefn

KOSPI Top 10 by Market Cap (Wbn) KOSDAQ Top 10 by Market Cap (Wbn) Close (W) Chg (W) Mkt Cap Close (W) Chg (W) Mkt Cap Samsung Electronics 1,306,000 -2,000 192,373 Celltrion 44,850 0 4,643 Hyundai Motor 228,500 4,500 50,333 Paradise 39,700 50 3,610 Hynix 49,300 -450 35,224 Seoul Semiconductor 40,550 -550 2,364 Hyundai Mobis 279,500 7,500 27,208 CJ O Shopping 355,900 3,600 2,209 NHN 807,000 2,000 26,601 CJ E&M 47,000 1,350 1,820 POSCO 300,500 500 26,200 GS Home Shopping 262,300 2,700 1,721 KEPCO 38,550 1,750 24,748 Dongsuh 16,800 250 1,675 Samsung Electronics (P) 1,053,000 13,000 24,044 Daum Communications 119,900 6,500 1,626 Shinhan Financial Group 46,550 550 22,074 POSCO ICT 7,750 100 1,178 Kia Motors 54,200 200 21,971 SK Broadband 3,565 5 1,055 Source: