2018 Outlook

Food & Beverage 10 issues; implications

Woon-mok Baek Susie Hong (82-2) 3774-1679 (82-2) 3774-1853 [email protected] [email protected]

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

I. 10 issues 3

II. Earnings determinant comparison: 2017 vs. 2018 18

III. Valuation 20

IV. Top Picks 21 CJ CheilJedang, Orion, KT&G,

[Conclusion] To turn around in 2018, overcoming Chinese headwinds 30 I. 10 issues: 1) China eases restrictions on Korean pop culture

Exports likely to recover • Exports are divided into direct overseas sales and local production/sales  Firms are increasingly shifting to local gradually from production/sales • Exports were likely sluggish in 2017, amid THAAD impact; adverse effects of China’s regulations on hallyu, or the November (after Korean wave, should peak around March-September bottoming in March- • THAAD impact will likely ease gradually, thanks to improved diplomatic relations between Korea and September) China (in November) • China-bound exports will likely rebound in 2018, and local production/sales should also gradually stabilize

F&B export growth Growth in F&B exports to China

(US$mn) (%) (US$mn) (%) 400 F&B exports - worldwide (L) 60 100 F&B exports to China (L) 150 YoY (R) YoY (R)

300 40 75 100

200 20 50 50

100 0 25 0

0 -20 0 -50 05 06 07 08 09 10 11 12 13 14 15 16 17 18 05 06 07 08 09 10 11 12 13 14 15 16 17 18

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

3| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 1) China eases restrictions on Korean pop culture

China-bound export trends for major items

Ramen exports Beer exports

(US$mn) (US$mn) 14 Ramen exports to China 6 Beer exports to China 12 5

10 4 8 3 6 2 4 2 1 0 0 00 02 04 06 08 10 12 14 16 18 00 02 04 06 08 10 12 14 16 18

Infant formula exports Laver exports

(US$mn) (US$mn) 16 Infant formula exports to China 9 Seaweed exports to China

12 6

8

3 4

0 0 00 02 04 06 08 10 12 14 16 18 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Source: KITA, Mirae Asset Daewoo Research

4| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 1) China eases restrictions on Korean pop culture

Reason why Korean F&B • F&B market cycle: Infancy  rapid growth  mature growth  maturity firms cannot give up on • The timing of overseas market penetration (exports) and product releases should vary, depending on the development of a country’s F&B market the Chinese market • F&B consumption grows rapidly when GDP per capita reaches US$5,000-15,000 (China’s current level) • Key factors to success overseas: Product strength, brand, localization, and distribution network

F&B market cycle: Focus should be on rapidly growing markets (GDP per capita of US$5,000-15,000)

Infancy Rapid growth Mature growth Maturity

Income (GDP per capita) US$3,000-10,000 Higher than US$30,000 Less than US$3,000 US$10,000-30,000 Ć Interest in wellness leads to Ć Food industry and modern Ć Population aging/growth of Ć Traditional markets > Modern strong growth of health food retail grow rapidly single-person households Ć Markets focused on items that Ć Growth of frozen/refrigerated Ć Increasing awareness of food Ć Healthy HMR Market features do not require refrigeration food and PLs safety Ć Disease prevention through Ć SellerÊs market Ć New channels (convenience Ć Restaurant industry expands healthy eating stores, online) rapidly Ć Expansion of China market

GDP per capita Vietnam Hanoi/Ho Chi Minh China Beijing/Shanghai Korea Japan US (2016) US$2,000 US$5,000 US$8,000 US$17,000 US$26,000 US$35,000 US$57,000

Food consumption trend Basics/food materials Convenience food Functional food/non-essential food

Source: Mirae Asset Daewoo Research

5| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 1) China eases restrictions on Korean pop culture

• Precedent of KT&G Historical examples of - In 2013, US sanctions against Iran led to a sharp depreciation in the Iranian rial and steep rise in the price of Korean cigarettes, prompting traders to temporarily suspend imports Korean companies - As the issue was largely political and unrelated to product safety, KT&G’s cigarette exports to Iran eventually overcoming political returned to prior levels two years later, after the sanctions were lifted • Another example is the export recovery that took place after Japan’s nuclear disaster turmoil - Due to the accident, Korea imposed restrictions on food product imports from Japan, which led to a decline in food trade between the two countries from 2012 to 2015 - Trade has been picking up since 2016, although the recovery has been slow, due to a combination of politics and concerns over product safety Case 1: KT&G’s cigarette exports recovery (US sanctions against Case 2: F&B exports recovery to Japan Iran in 2013) (2013~15, after nuclear disaster) (Wbn) Export (direct) amount (L) (%) (US$mn) (%) 120 80 1000 YoY (R) 45 F&B exports to Japan (L) YoY (R)

2013 US sanctions 100 60 800 vs. Iran 30 Two-year recovery period 80 40

600 15 60 20

400 0 40 0

200 -15 20 -20

0 -30 0 -40 00 02 04 06 08 10 12 14 16 18F 00 02 04 06 08 10 12 14 16 18 Source: Company data, Mirae Asset Daewoo Research Source: KITA, Mirae Asset Daewoo Research

6| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 1) China eases restrictions on Korean pop culture

Korean F&B firms’ • Korean F&B firms’ efforts to shrug off THAAD impact strategy of boosting - Efforts to improve fundamentals of Chinese subsidiaries; more prudent investment approach, cost savings (e.g., labor, logistics) exports - New product roll-out; aggressive move into traditional trade (TT) channels in third-fifth tier cities and online markets • Aggressive forays into Southeast Asian markets - Recent sharp increases in exports to India, Vietnam, Indonesia

Korean F&B firms’ strategy of overcoming THAAD impact Growth in F&B exports to Southeast Asia

(US$mn) (%) F&B exports to Southeast Asia (L) 1) The THAAD event to serve as an opportunity for F&B firms to 160 150 reassess and reboot their China businesses YoY (R)

2) Endeavors to improve fundamentals of Chinese subsidiaries 140 120

3) Cost-control efforts (e.g. labor, logistics) 120 90

4) Aggressive new product rollouts 100 60 5) Securing intermediate traders that can reach mom-and-pop stores in 80 third/fourth-tier cities 30 6) Improving partnership with Chinese local traders 60

0 7) Aggressive foray into China’s online market 40

-30 8) Thorough inventory and cash management 20

9) Expanding exports to Southeast Asian markets 0 -60 (e.g., Vietnam, India, Indonesia) 00 02 04 06 08 10 12 14 16 18

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

7| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 1) China eases restrictions on Korean pop culture

When will China-related • Orion: A recovery in shelf space will likely take some time; revenue is unlikely to recover to 2016 levels (i.e., stocks recover? before the Chinese government’s move to ban Korean pop culture) until 2019 • Nongshim: The company has pushed through price hikes; a recovery in shelf space will likely take some time; revenue is likely to recover to 2016 levels in 2018 • Maeil Dairy: Restoring relationships with local sales agents is urgently needed; concerns exist over the introduction of China’s new infant formula registration rules in 2018

Orion’s China sales growth Nongshim’s China sales growth Maeil Dairy’s China sales growth

(Wbn) (%) (Wbn) (Wbn) (Wbn) (%) 1500 China revenue (L) 90 200 China revenue (L) 15 50 Infant formula exports (L) 120 YoY (R) China operating profit (R) YoY (R) 75

1200 10 40 60 150 80

45 900 5 30

30 100 40

600 20 15 0

0 50 0 300 -5 10 -15

0 -30 0 -10 0 -40 00 02 04 06 08 10 12 14 16 18F 10 11 12 13 14 15 16 17F 18F 19F 12 13 14 15 16 17F 18F 19F

Source: Company data, KITA, Mirae Asset Daewoo Research

8| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 2) Price hike

Price hike is unlikely to • Price hikes are a key driver of earnings growth; F&B firms have traditionally raised ASP via price hikes for existing occur in 2018, given cost products and new product launches • F&B product prices increased by 3-5% annually in 2011-14, outpacing CPI growth stabilization • In 2015-17, F&B product prices climbed at a CAGR of only 1%, due to lower costs (stemming from the fall in grain prices and stable F/X rates) • In 2018, a price hike is unlikely to occur, given stable costs • In order for F&B stocks climb, prices that exceed CPI growth are needed

Processed food CPI growth Growths of producer price index (PPI) and food CPI

(15=100) (%) (%) 18 Processed food CPI growth 105 Processed food CPI (L) 20 F&B PPI growth YoY (R) 16

14 95 15 12

10 85 10 8

6 75 5

4

65 0 2

0

55 -5 -2 05 06 07 08 09 10 11 12 13 14 15 16 17 18 06 07 08 09 10 11 12 13 14 15 16 17

Source: KOSIS, Mirae Asset Daewoo Research Source: KOSIS, Mirae Asset Daewoo Research

9| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 3) F&B retail channel shifts

• Household demographic shifts (increase in single/two-person households) and the shift toward price-, F&B retail channel shifts: convenience-, and self-oriented consumption patterns have led to a decline in hypermarkets‘ food sales Convenience stores ↑ • Convenience stores and online channels have delivered rapid growth, thanks to robust HMR sales and high Online ↑ accessibility • Online sales of processed foods are growing in line with higher penetration of social media and improvement in Hypermarkets ↓ product quality (for some items, over 50% of sales are generated via online channels) • F&B margins: Online > local markets > convenience stores > hypermarkets • The decline of hypermarkets and growth of online malls/convenience stores have driven up F&B firms’ profits Revenue growth by retail channel Food revenue growth (hypermarket vs. convenience store)

(%) (%) 30 2013 2014 2015 2016 22 CVS Hypermarket

25 18

20 14

15 10

10 6

5 2

0 -2 -5 CVS Online Home SSM Department Hypermarket shopping store -6 2013 2014 2015 2016 2017 Source: KOSIS, Mirae Asset Daewoo Research Note: Jan. 2017~Sept. 2017 Source: MOTIE, Mirae Asset Daewoo Research

10| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 4) PB products

NB vs. PB • National brand (NB, manufacturers’ brands) vs. private brand (PB, retailers’ brands) • PBs were driven by hypermarkets in 2008-11 and convenience stores in 2013-17 (% of PB products: 4%  28%) • % of PB products: 28% for convenience stores > 26% for SSM > 22% for hypermarkets • Large F&B manufacturers prefer NBs, as manufacturers’ margins on PB products are small, due to low prices • Reasons behind success of PB products: Decent quality/taste and low prices % of PB products out of major retailers’ total products at home Combined PB product revenues of top three hypermarkets, and abroad (2014) supermarkets, and convenience stores

(%) (W) 3.2tr 270bn 160bn 100 Top 3 SSM Top 3 Supermarket 2008 Top 3 CVS 80

60 5.8tr 880bn 800bn

2011 40

25.9 25.6 18.8 20 5.6tr 1.3tr 2.6tr

2013 0

Source: KOCA, Nielsen, Local press, Mirae Asset Daewoo Research Source: KDI, Local press, Mirae Asset Daewoo Research

11| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 5) Marketing campaigns

Marketing campaigns • F&B firms’ long-term strategy: Steady reduction of production costs, while keeping SG&A expenses largely steady intensified in 2015-17, • Factors that drive up SG&A expenses: Market share competition amid stagnant sales volume, consumer demand for diverse products, and new product launches but will likely ease in • Factors that lowers SG&A expenses: Retail channel shifts, increase in PB products, and cost-reduction efforts 2018 • In 2015-17, marketing campaigns for beer, ramen, and HMR products intensified, leading to higher SG&A and lower OP margin • In 2018 and beyond, marketing activities will likely focus on new products to tighten SG&A, raising OP margin OP margins of processed food (CJCJ vs. Daesang) and ramen SG&A-to-revenue ratios of beer companies (Nongshim vs. Ottogi) businesses (%) (%) 40 15 16 17F 18F 8.0 15 16 17F 18F

7.0 38

6.0 36 5.0

34 4.0

3.0 32

2.0

30 1.0

28 0.0 HiteJinro Lotte Chilsung OB CJCJ Daesang Nongshim Ottogi

Note: As OB is not listed, we did not forecast the company’s 2017-18 ratios Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

12| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 6) International grain prices

Grain prices to continue • Determinants for international grain prices: 1) real demand; 2) production; and 3) speculative demand trending down through • Grain prices remained on a downtrend in 2012-17, backed by increased production amid favorable climate conditions 1H18 • In light of high inventory levels, international grain prices are unlikely to rebound sharply until 1H18 • Protracted grain price downtrend  economic slowdown  slower price increases  muted earnings growth  share price declines • Grain price increases are positive for share performance in earlier stages of the uptrend

Prospects for grain supply/demand dynamics in 2017-18 International grain price trend

(%) (%) (Index) (%) 12 Production growth (L) 26 600 International grain prices (L) 100 Consumption growth (L) YoY (R) Inventory turnover (R) 500 75 8 22

400 50

4 18 300 25

200 0 0 14

100 -25

-4 10 0 -50 05 07 09 11 13 15 17F 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Source: USDA, Mirae Asset Daewoo Research Source: Thomson Reuters, Mirae Asset Daewoo Research

13| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 7) Growth in single-person households

Growth in single-person • Consumption patterns are poised to change, amid a surge in single-person households (26.9% in 2013  34.3% in households to drive up 2035) • Single-person households spend more (per capita) on food than two-person households long-term growth of • Growth in single-person households has led to: 1) an increase in HMR and convenience/ready-to- processed foods and eat/processed food consumption; and 2) rapid expansion of convenience store/online mall channels HMR • CJCJ, Ottogi, Pulmuone, and Deasang’s HMR earnings are growing sharply • Lotte Foods and Food are expanding investments in HMR

F&B firms’ strategies for single-person household growth HMR market strategies (CJCJ)

Increase in single-person households Main HMR categories

• Diversifying consumption • Increasing consumption of • Rice • Side dishes patterns imported products • Consumption of diverse • Consumption of luxury 1) Cooked rice, 2) frozen rice 1) Soup, 2) meat, 3) kimchi items in small amounts products • Divergence of consumption • Access to product (low-end vs. high-end) information via social media • Noodles • Snacks • Shopping via convenience Refrigerated noodles Frozen (chicken, hot dogs, etc.) store and online channels (mainly at convenience stores)

Current Target Companies’ strategic shifts ① High-quality products ① Customer-oriented • Smaller portions and more attractive packaging HMR ② Mass- product development • Greater focus on taste in product development ② • Sale of imported products upon high demand (even competing ones) capabilities production/tight quality Technological innovation • Introduction of cost-efficient products control ③ Integrated production • High utilization of social media for marketing, launch of online ③ Strong brand power infrastructure products

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

14| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 8) Population aging

Per-capita food • Aging society (7-14% of the population aged 65 or older), aged society (14-20%), and super-aged society (20%+) consumption is declining • Older generation: Decline in per-capita food spending vs. more disposable income (assets) amid population aging • Items like plain milk, snacks, beer, ice cream, juice, and canned tuna are largely consumed by people aged 10-39 • In Japan, F&B shipments have declined since 1995 on population aging • It is necessary for food companies to launch new products that can appeal to people aged 40-69 (in terms of both health and taste); the health and senior-friendly food market will likely expand

Korea’s pace of population aging and F&B shipment index Korea’s senior-friendly food market trend

(%) (2010=100) (Wbn) 16 % of population aged 65 or older in Korea (L) 120 1000 Korea F&B shipment index (R)

800 13 100

600

10 80

400

7 60 200

4 40 0 85 90 95 00 05 10 15F 20F 11 12 13 14 15 16P 17F

Source: KOSIS, Mirae Asset Daewoo Research Source: MAFRA, aT, Mirae Asset Daewoo Research

15| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 9) HNB cigarettes and low-malt beer

HNB cigarettes and low- • Philip Morris International (PMI) launched its heat-not-burn (HNB) cigarette, iQOS in June 2017 malt beer to replace • As of October 2017, iQOS accounted for 14.6% of the overall cigarette market in Japan; as of 3Q17, iQOS’s market share was 2.5% in Korea traditional cigarettes • KT&G unveiled its HNB device “LiL” and sticks “FiiT” and beer, respectively • In Japan, cheaper types of beer (e.g., low-malt beers and so-called third beers) began to grow in the mid-1990s, as the country entered a prolonged recession; Hite Jinro launched its low-malt beer FiLite this year • HNB cigarettes and low-malt beer might change the landscape of the cigarette and beer markets

M/S of iQOS in Japan Japan’s beer market trends

(%) (mn cases) 12 600 New Genre Happoshu Beer 10 500

8 400

6 300

4 200

2 100

0 0 3Q15 1Q16 3Q16 1Q17 3Q17 91 93 95 97 99 01 03 05 07 09 11 13 15

Source: PMI, Mirae Asset Daewoo Research Source: Asahi Breweries, Mirae Asset Daewoo Research

16| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research I. 10 issues: 10) Survival and sustainable growth

Requirements for • Strength: Oligopolistic market, consumers’ strong preference to domestic food products, expansive domestic survival and sustainable distribution network, and robust cash/real estate holdings growth: 1) Overseas • Threats: Stagnant consumption volume, demographic changes, strengthening safety regulations, increase in PB products and imports expansion, 2) M&As, and • Opportunities: China’s growth, steady income growth in Korea, increase in consumer preferences to high-end 3) fundamental products, popularity of new products improvements • Strategies for sustainable growth: Overseas expansion, aggressive M&As, and fundamental improvements (focus on core businesses) Companies that have maintained growth via M&As: Companies that have achieved growth via fundamental Dongwon Industries, SPC Samlip, and Dongwon F&B Improvement: CJCJ, Ottogi, and Dongwon F&B (Wbn) (Wbn) (Wbn) 3,000 Dongwon Industries 160 Dongwon F&B 350 SPC Samlip Ottogi Dongwon F&B 140 CJCJ 300 2,500 120 250

2,000 100 200 80 1,500 150 60 1,000 100 40

500 20 50

0 0 0 01 03 05 07 09 11 13 15 17F 01 03 05 07 09 11 13 15 17F

Source: Company data, Mirae Asset Daewoo Research Note: Data for CJ CheilJedang are for its processed food earnings Source: Company data, Mirae Asset Daewoo Research

17| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research II. Earnings determinant comparison: 2017 vs. 2018

2017 2018

- China-bound exports are likely to recover in 2018, while Japan-bound export - Amid the Chinese government’s move to ban on Korean pop culture, in growth should accelerate 2017, China-bound exports have declined, while Japan-bound exports Exports - Export markets will continue to diversify to include Southeast Asia, the Middle have recovered East, and Eastern Europe; some firms are moving from exports to local - Export destinations diversified to Southeast Asia and the Middle East production - The scope of product price hikes in 1H fell short of expectations - The effects of price hikes in 2017 should linger through 1H18 - Prices for mainstay products (e.g. ramen, bread, canned tuna, dining-out, - Price hikes are possible for those products of which prices remained unchanged beverages, cooking oil, and sugar) have been raised in 2017 Product prices (P) - Producers attempted to raise ASPs via new product launches and the - Recent FX rate and grain price trends should limit upside to product prices introduction of premium products - Producers should target ASP hikes via new product launches and the - Recent FX rate and grain price trends have limited upside to product introduction of premium products prices - Shipments should grow by 1% levels in 2018 - Shipments of items mainly consumed by those under 40 should continue to see - Shipment growth is projected to be in the 2% range for 2017 contraction (e.g., ramen, beer, milk, ice cream, instant coffee, juice, fermented - Shipments of items mainly consumed by those under 40 shrank (e.g., Shipments, paste, and condiments) ramen, beer, milk, ice cream, instant coffee, juice) consumption (Q) - In contrast, shipments of HMRs, processed food, dietary supplements, - Meanwhile, shipments of HMRs, processed food, dietary supplements, water/coffee, and convenience food should continue to expand water/coffee, and convenience food continued to expand - New product releases, overseas expansion, and M&As should help boost shipments - US$/W stayed at around 1,100 in 2017, having no significant impact on - US$/W is expected to remain stable, at 1,100 in 2018 share prices and earnings - F/X rate trends will likely have no material impact on earnings and shares of - Stable F/X rate trend has almost no impact on F&B shares F&B firms in 2018 US$/W rate - The impact on earnings has decreased as exports have grown and - The impact on earnings will likely decrease going forward, in line with export businesses have become better prepared for F/X volatility growth and improvement in the ability of companies to deal with F/X volatility - W/RMB and JPY/W have also become important, due to domestic players’ - F/X volatility might increase, in light of likely US rate hikes overseas expansion - Grain prices remained stable in 2017, having no impact on share prices - Grain prices are projected to remain stable in 1H18, but pick up slightly in 2H18 - Stable grain supply/demand dynamics expected for 2017-18 - Seeding reductions likely in 2018-19, amid protracted grain price downtrend Raw material prices - Favorable weather conditions and high inventory levels have contributed - Prices unlikely to rebound sharply, as inventory levels remain high to price stabilization - The strength of any pickup will depend on the occurrence of unpredictable - Efforts to reduce raw material costs continued weather events - Changes in retail structure accelerated, with convenience stores and - Changes in retail structure will accelerate, with convenience stores and online online channels expanding at the expense of hypermarkets channels expanding at the expense of hypermarkets - Overall marketing (ads/promotions) increased, to adapt to changes in - SG&A control is expected, due to tepid earnings in 2015-17 SG&A retail structure - Marketing will be focused on new, rather than existing, products - Marketing focused on new, rather than existing, products - Marketing competition for beer, HMR, dairy products, and beverages should - Marketing competition for ramen, beer, and HMR remained fierce intensify - Positives: Price hikes, stable F/X rate trend, solid consumption growth - Positives: Eased adverse effects of THAAD impact; a pickup in China-bound - Negatives: China-bound exports dipped amid THAAD impact, higher exports; stable F/X rates; possible declines in SG&A expenses Conclusion marketing spending amid intensifying competition - Negatives: Price hikes unlikely; a slight rebound in grain prices likely - Share prices corrected, as positive earnings variables (e.g., price hikes, - Earnings determinants to turn positive in 2018, although the effects are likely to Source: Mirae Asset Daewoo Researchexports) generally lost momentum for 2018 vary by company 18| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research II. Earnings determinant comparison: 2017 vs. 2018

Earnings to pull out of a • 2011-14: Quantum leap: Ultra-strong earnings determinants slump (seen in 2015-17) • 2015-16: China shock; the scope of hikes in product prices falling short of market expectations; key determinants turned unfavorable (due to higher SG&A expenses)  sluggish earnings in 2018 • Key variables for 2018 - Improved political relations between Korea and China could drive a recovery in exports; SG&A control is expected, due to sluggish earnings over the past three years • 2018 outlook: Earnings will likely stage a rebound (albeit slight) in 2018 , following three years of slump

2018 earnings determinants Earnings determinants 2013 2014 2015 2016 1H17 2H17 1H18 2H18 Earnings determinants

- Top-line factors 1) Earnings ++△ - △ + △ + (1) Product prices determinants (2) Shipments Exports ++---- △ +

(3) Exports Price (P, ASP) ++- -△ --△

Shipments, ++△△ ++△△ - Bottom-line factors consumption (Q) (1) F/X rates FX (US$/W) ++++△△△△

(2) Grain prices Grain prices ++△△△△△ - (3) SG&A expenses SG&A + △ ---△△△

Investment keys 2) Expected earnings ++△△ --△ + - Earnings determinants to turn 3) Valuation ------favorable in 2H 4) Expected share ++△ ---△ + - Bottom-up approach performance

5) Conclusion ++△△△△△ +

Note: + = positive, ᇞ = neutral, and - = negative Source: Mirae Asset Daewoo Research

19| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research III. Valuation

Valuation burden • In 2012-15, F&B valuations surged on: 1) superior earnings stability; 2) expansion into the Chinese market; and 3) underperformance of industrial goods stocks, causing controversy on overvaluation • Since 2016, valuation has declined, due to the China shock and weak earnings; although Korea’s F&B P/E has fallen below the global F&B P/E, it is still hovering above the KOSPI P/E • The F&B sector’s valuation burden should remain intact in 2018

Gap between Korea’s F&B P/E and global F&B P/E Gap between F&B P/E and KOSPI P/E

(x) (x) (x) (x) 25 P/E gap (Korea-global) (R) 8 25 F&B P/E - KOSPI P/E (R) 15 Korean F&B P/E (L) F&B P/E (L) Global F&B P/E (L) KOSPI P/E (L)

20 4 20 10

15 0 15 5

10 -4 10 0

5 -8 5 -5 05 06 07 08 09 10 11 12 13 14 15 16 17 18 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Source: Thomson Reuters, Mirae Asset Daewoo Research Source: Thomson Reuters, Mirae Asset Daewoo Research

20| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research IV. Top Picks

Investment points & Risks

Investment points Risks

- Most competitive player in the domestic processed food market - Bio resources (overseas animal feed): Difficulties in market (new product releases, HMR lineup expansion) monitoring

CJ CheilJedang - On-going, successful overseas investments (e.g., Brazil, US, China and Southeast Asia) - Processed food: Need to cut marketing expenses - Foodstuff: Recovery from weakness driven by price hikes and cost stabilization - Large-scale capex & M&As in Korea and abroad - 2018 outlook: Lysine and methionine businesses will likely turn profitable

- Orion is making moves to overcome the China risks, including: ㆍ Making fundamental and system improvements (cost cuts, workforce reassignment, shorter distribution cycle) - Continued weakness in Chinese confectionery market Orion ㆍ Releasing new products (20 new and expanded products in 2018) - Intensifying competition with Chinese and global players ㆍ Broadening its presence in the traditional trade channel; expanding into the online channel; and extending geographic coverage

- Broader presence in new markets  Cigarette exports will likely increase 10.3% in 2018 - Destructive competition in e-cigarette market (vs. iQOS, Glo) ㆍ Competitive factors: attractive prices, flavored (capsule) and slim cigarettes - Higher taxes on e-cigarettes KT&G - Competitive HNB device “LiL” and sticks “FiiT” ㆍ Price competitiveness, flavored cigarettes, nationwide distribution networks, aggressive marketing

- Easing competition for a larger share of the domestic ramen market  - Continued competition with Ottogi in ramen market Lower marketing pressure - Difficulties in creating a new blockbuster product in in the

Nongshim - 2018 outlook: Steady release of trend-setting products domestic ramen market - Strong market share gains in US ramen market (15-17%, No. 3) - Recovery in Japan (nuclear crisis) and China (THAAD crisis)

Source: Mirae Asset Daewoo Research

21| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research CJ CheilJedang (097950)

Bellwether stock for F&B sector in 2018

Investment points (Maintain) Buy • The most competitive player in the domestic processed food market (market share gains in key products, new product releases, HMR lineup expansion) Target Price (12M, W) 450,000 • On-going, successful overseas investments (e.g., Brazil, US, China and Southeast Asia) • Foodstuff (sugar, flour, and cooking oil): Recovery driven by price hikes and cost stabilization Share Price (11/3/17, W) 373,500 • 2018 outlook: Lysine and methionine businesses will likely turn profitable, thanks to price hikes (5~10%) • Divestment of stakes in Life Insurance & likely disposal of the healthcare business to finance food- related investments in Korea and abroad Expected Return 20%

OP (17F, W bn) 816 • Risk factors Consensus OP (17F, W bn) 837 • Bio resources (overseas animal feed): Difficulties in market monitoring EPS Growth (17F, %) 46.4 • Processed food: Need to cut marketing expenses Market EPS Growth (17F, %) 46.4

P/E (17F, x) 13.4

Market P/E (17F, x) 10.5

KOSPI 2,557.97

130 Market Cap (W bn) 4,919 CJ CheilJedang FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Shares O utstanding 14 KOSPI Revenue (W bn) 11,702 12,924 14,563 16,405 18,290 19,900 (m n) 120 Free Float (%) 59.1 OP (W bn) 580 751 844 816 938 1,006 Foreign Ownership (%) 26.2 110 OP margin (%) 5.0 5.8 5.8 5.0 5.1 5.1

Beta (12M) 0.30 NP (W bn) 92 189 276 404 352 373 100 52-W eek Low 335,000 EPS (W ) 6,369 13,073 19,044 27,883 24,284 25,703

52-W eek High 390,500 90 ROE (%) 3.1 6.2 8.4 11.4 9.2 9.0

(%) 1M 6M 12M80 P/E (x) 48.1 28.9 18.8 13.4 15.4 14.5 Absolute 5.4 9.2 3.2 P/B (x) 1.4 1.7 1.5 1.4 1.3 1.2 70 Relative -1.4 -5.2 -20.016.10 17.2 17.6 17.10 Div.Yield (%) 0.7 0.7 0.7 0.7 0.7 0.7 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: CJ CheilJedang, Mirae Asset Daew oo Research estimates

22| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research CJ CheilJedang (097950)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 14,563 16,405 18,290 19,900 Current Assets 4,881 5,343 5,632 6,165 P/E (x) 18.8 13.4 15.4 14.5

Cost of Sales 11,275 12,864 14,337 15,613 Cash and Cash Equivalen 644 564 380 461 P/CF (x) 4.0 4.3 4.1 3.9

Gross Profit 3,288 3,541 3,953 4,287 AR & Other Receivables 2,198 2,479 2,725 2,954 P/B (x) 1.5 1.4 1.3 1.2

SG&A Expenses 2,444 2,725 3,015 3,281 Inventories 1,280 1,444 1,587 1,727 EV/EBITDA (x) 9.6 10.4 9.7 9.4

Operating Profit (Adj) 844 816 938 1,006 Other Current Assets 759 856 940 1,023 EPS (W) 19,044 27,883 24,284 25,703

Operating Profit 844 816 938 1,006 Non-Current Assets 10,886 11,636 12,220 12,527 CFPS (W) 90,425 86,854 91,121 95,567

Non-Operating Profit -316 -162 -336 -338 Investments in Associates 195 214 235 256 BPS (W) 242,224 261,425 281,977 305,238

Net Financial Income -161 -182 -197 -202 Property, Plant and Equipm 7,281 7,849 8,411 8,662 DPS (W) 2,500 2,500 2,500 2,500

N et Gain from Inv in As s ociat 1 -1 11 11 Intangible Assets 2,334 2,337 2,291 2,259 Payout ratio (%) 9.1 6.9 7.4 6.7

Pretax Profit 528 654 602 668 Total Assets 15,766 16,979 17,852 18,692 Dividend Yield (%) 0.7 0.7 0.7 0.7

Income Tax 175 190 172 190 Current Liabilities 4,699 4,937 5,231 5,530 Revenue Growth (%) 12.7 12.6 11.5 8.8

Profit from Continuing Opera 354 464 431 478 AP & Other Payables 1,613 1,639 1,676 1,769 EBITDA Growth (%) 11.3 -0.7 10.7 5.0

Profit from Discontinued Ope 0 0 0 0 Short-Term Financial Liab 2,612 2,763 2,967 3,121 Operating Profit Growth (%) 12.4 -3.3 15.0 7.2

Net Profit 354 464 431 478 Other Current Liabilities 474 535 588 640 EPS Growth (%) 45.7 46.4 -12.9 5.8

Controlling Interests 276 404 352 373 Non-Current Liabilities 5,007 5,703 5,905 6,005 Accounts Receivable Turno 8.0 7.6 7.6 7.6

Non-Controlling Interests 78 60 79 105 Long-Term Financial Liab 4,094 4,674 4,774 4,774 Inventory Turnover (x) 12.2 12.0 12.1 12.0

Total Comprehensive Profit 384 341 431 478 Other Non-Current Liabilit 913 1,029 1,131 1,231 Accounts Payable Turnover 11.5 11.5 12.7 13.5

Controlling Interests 307 224 252 280 Total Liabilities 9,706 10,641 11,137 11,535 ROA (%) 2.4 2.8 2.5 2.6

Non-Controlling Interests 77 117 179 198 Controlling Interests 3,409 3,689 3,987 4,324 ROE (%) 8.4 11.4 9.2 9.0

EBITDA 1,375 1,366 1,512 1,588 Capital Stock 72 72 72 72 ROIC (%) 5.2 4.8 5.7 5.8

FCF (Free Cash Flow) -45 -274 -136 282 Capital Surplus 924 926 926 926 Liability to Equity Ratio (%) 160.1 167.9 165.9 161.2

EBITDA Margin (%) 9.4 8.3 8.3 8.0 Retained Earnings 2,567 2,926 3,224 3,561 Current Ratio (%) 103.9 108.2 107.7 111.5

Operating Profit Margin (%) 5.8 5.0 5.1 5.1 Non-Controlling Interests 2,651 2,649 2,728 2,833 Net Debt to Equity Ratio (%) 93.3 101.2 102.1 96.2

Net Profit Margin (%) 1.9 2.5 1.9 1.9 Stockholders' Equity 6,060 6,338 6,715 7,157 Interest Coverage Ratio (x) 4.7 4.1 4.4 4.6 Source: CJ CheilJedang, Mirae Asset Daewoo Research estimates

23| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research Orion (271560)

Post-THAAD developments Investment points (Maintain) Buy • China subsidiary’s revenue began to recover in 3Q17 and will likely return to pre-THAAD (2016) levels in 2019 Target Price (12M, W) 150,000 • Orion is making strategic moves to overcome China risks, including: - Making fundamental and system improvements (cost cuts, workforce reassignment, shorter distribution cycle) Share Price (11/7/17, W) 116,000 - Releasing new products (20 new and expanded products in 2018) - Broadening its presence in the traditional trade channel; expanding into the online channel (which has lower Expected Return 29% commissions and thus higher margins); and extending geographic coverage - Expanding into non-confectionary segments (nuts, jerky) OP (17F, W bn) 153 • Strong growth potential with high profitability: Fundamental improvements (Korea), market growth (Vietnam), Consensus OP (17F, W bn) 1,525 and completion of restructuring (Russia) EPS Growth (17F, %) - Market EPS Growth (17F, %) 46.4 Risk factors P/E (17F, x) 24.0 • Continued weakness in the Chinese confectionery market; intensifying competition with Chinese and global Market P/E (17F, x) 20,174.0 players KOSPI 2,545.44 Market Cap (W bn) 4,586 150 FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Shares O utstanding Orion KOSPI 40 140 Revenue (W bn) - - - 1,225 2,184 2,454 (m n) Free Float (%) 59.5 130 OP (W bn) - - - 153 319 369

Foreign Ownership (%) 44.6 120 OP margin (%) - - - 12.5 14.6 15.0 Beta (12M) 0.77 NP (W bn) - - - 95 217 250 110 52-W eek Low 80,500 EPS (W ) - - - 4,826 5,497 6,336 100 52-W eek High 116,500 ROE (%) - - - 7.5 15.8 15.9 90 (%) 1M 6M 12M P/E (x) - - - 24.0 21.1 18.3 80 Absolute 19.6 0.0 0.0 P/B (x) - - - 3.6 3.1 2.7 70 Relative 12.5 0.0 0.016.11 17.3 17.7 17.11 Div.Yield (%) - - - 0.5 0.7 0.7 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Orion, Mirae Asset Daew oo Research estimates

24| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research Orion (271560)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue - 1,225 2,184 2,454 Current Assets - 484 677 890 P/E (x) - 24.0 21.1 18.3

Cost of Sales - 634 1,092 1,225 Cash and Cash Equivalen - 348 532 727 P/CF (x) - 11.3 11.1 9.7

Gross Profit - 591 1,092 1,229 AR & Other Receivables - 87 91 103 P/B (x) - 3.6 3.1 2.7

SG&A Expenses - 438 773 860 Inventories - 49 52 59 EV/EBITDA (x) - 23.7 11.6 10.1

Operating Profit (Adj) - 153 319 369 Other Current Assets - 0 2 1 EPS (W) - 4,826 5,497 6,336

Operating Profit - 153 319 369 Non-Current Assets - 1,845 1,907 1,989 CFPS (W) - 10,256 10,481 11,914

Non-Operating Profit - -23 -23 -21 Investments in Associates - 10 11 12 BPS (W) - 32,242 37,139 42,674

Net Financial Income - -8 -11 -14 Property, Plant and Equipm - 1,750 1,811 1,898 DPS (W) - 600 800 800

N et Gain from Inv in As s ociat - 0 0 0 Intangible Assets - 33 33 27 Payout ratio (%) - 24.9 14.6 12.6

Pretax Profit - 130 296 348 Total Assets - 2,329 2,584 2,879 Dividend Yield (%) - 0.5 0.7 0.7

Income Tax - 35 78 97 Current Liabilities - 610 655 681 Revenue Growth (%) - - 78.3 12.4

Profit from Continuing Opera - 95 217 250 AP & Other Payables - 180 189 212 EBITDA Growth (%) - - 98.6 11.9

Profit from Discontinued Ope - 0 0 0 Short-Term Financial Liab - 415 450 450 Operating Profit Growth (%) - - 108.5 15.7

Net Profit - 95 217 250 Other Current Liabilities - 15 16 19 EPS Growth (%) - - 13.9 15.3

Controlling Interests - 95 217 250 Non-Current Liabilities - 408 423 474 Accounts Receivable Turno - 14.1 24.5 25.3

Non-Controlling Interests - 0 0 0 Long-Term Financial Liab - 400 415 465 Inventory Turnover (x) - 25.3 43.3 44.1

Total Comprehensive Profit - 110 217 250 Other Non-Current Liabilit - 8 8 9 Accounts Payable Turnover - 3.5 5.9 6.1

Controlling Interests - 103 205 236 Total Liabilities - 1,018 1,079 1,155 ROA (%) - 4.1 8.8 9.2

Non-Controlling Interests - 6 12 14 Controlling Interests - 1,274 1,468 1,687 ROE (%) - 7.5 15.8 15.9

EBITDA - 215 427 478 Capital Stock - 20 20 20 ROIC (%) - 6.3 13.0 14.2

FCF (Free Cash Flow) - -373 178 188 Capital Surplus - 1,196 1,196 1,196 Liability to Equity Ratio (%) - 77.6 71.7 67.0

EBITDA Margin (%) - 17.6 19.6 19.5 Retained Earnings - 95 289 507 Current Ratio (%) - 79.4 103.3 130.7

Operating Profit Margin (%) - 12.5 14.6 15.0 Non-Controlling Interests - 37 37 37 Net Debt to Equity Ratio (%) - 35.6 22.1 10.9

Net Profit Margin (%) - 7.8 9.9 10.2 Stockholders' Equity - 1,311 1,505 1,724 Interest Coverage Ratio (x) - 13.2 17.0 14.8 Source: Orion, M irae Asset Daewoo Research estim ates

25| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research KT&G (033780)

Three competitive advantages of LiL and FiiT

Investment points (Maintain) Buy • KT&G’s cigarette exports are projected to grow 10.3% YoY in 2018, supported by its expansion into new markets (e.g., Southeast Asia, Africa and Latin America) Target Price (12M, W) 145,000 - Brisk exports are driven by robust price competitiveness, consumer curiosity for newly released slim-type and capsule-type cigarettes, such as Esse Change Competitive advantages of heat-not-burn (HNB) cigarettes LiL and FiiT Share Price (11/3/17, W) 107,000 • - Competitive pricing (versus foreign-brand products) - Flavored cigarettes (menthol, fruit, coffee, etc.) Expected Return 36% - Nationwide distribution network combined with aggressive marketing • KT&G ranks at the top in valuation attractiveness among the world’s top-ten cigarette producers, with shares OP (17F, W bn) 1,523 currently trading at a 2018-2019F P/E of 11-12x Consensus OP (17F, W bn) 1,525 Risk factors EPS Growth (17F, %) -12.9 • Intensification of competition from rival HNB cigarettes (e.g., PMI’s iQOS and BAT’s Glo), increases in taxes on Market EPS Growth (17F, %) 46.4 e-cigarettes P/E (17F, x) 13.7

Market P/E (17F, x) 10.5

KOSPI 2,557.97

130 Market Cap (W bn) 14,690 KT&G FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Shares O utstanding 137 125 Revenue (W bn) 4,113 4,170 4,503 4,786 5,008 5,228 (m n) KOSPI 120 Free Float (%) 73.8 OP (W bn) 1,172 1,366 1,470 1,523 1,603 1,680 115 Foreign Ownership (%) 53.5 OP margin (%) 28.5 32.8 32.6 31.8 32.0 32.1 110 Beta (12M) -0.03 NP (W bn) 826 1,036 1,231 1,072 1,198 1,284 105

52-W eek Low 95,500 100 EPS (W ) 6,013 7,544 8,968 7,808 8,726 9,352

52-W eek High 120,500 95 ROE (%) 15.1 17.5 18.6 15.0 15.8 15.4 (%) 1M 6M 12M90 P/E (x) 12.7 13.9 11.3 13.7 12.3 11.4

Absolute 1.4 2.9 -5.385 P/B (x) 1.8 2.2 1.9 1.9 1.8 1.6 80 Relative -5.1 -10.7 -26.616.10 17.2 17.6 17.10 Div.Yield (%) 4.5 3.3 3.6 3.6 3.8 4.0 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: KT&G, Mirae Asset Daew oo Research estimates

26| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research KT&G (033780)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 4,503 4,786 5,008 5,228 Current Assets 6,621 6,174 6,891 7,706 P/E (x) 11.3 13.7 12.3 11.4

Cost of Sales 1,797 1,927 2,000 2,090 Cash and Cash Equivalen 851 785 1,326 1,898 P/CF (x) 8.1 8.8 8.5 8.1

Gross Profit 2,706 2,859 3,008 3,138 AR & Other Receivables 1,222 1,292 1,320 1,376 P/B (x) 1.9 1.9 1.8 1.6

SG&A Expenses 1,236 1,336 1,404 1,457 Inventories 2,265 2,333 2,403 2,509 EV/EBITDA (x) 7.2 7.7 7.0 6.4

Operating Profit (Adj) 1,470 1,523 1,603 1,680 Other Current Assets 2,283 1,764 1,842 1,923 EPS (W) 8,968 7,808 8,726 9,352

Operating Profit 1,470 1,523 1,603 1,680 Non-Current Assets 3,192 3,300 3,390 3,452 CFPS (W) 12,431 12,112 12,519 13,256

Non-Operating Profit 118 -31 26 73 Investments in Associates 56 60 62 65 BPS (W) 53,709 55,051 60,467 66,048

Net Financial Income 31 40 44 58 Property, Plant and Equipm 1,602 1,660 1,713 1,733 DPS (W) 3,600 3,900 4,100 4,300

N et Gain from Inv in As s ociat 2 5 0 0 Intangible Assets 105 100 105 100 Payout ratio (%) 37.1 46.0 43.2 42.3

Pretax Profit 1,588 1,492 1,629 1,753 Total Assets 9,813 9,475 10,281 11,158 Dividend Yield (%) 3.6 3.6 3.8 4.0

Income Tax 362 421 432 470 Current Liabilities 2,153 1,626 1,659 1,750 Revenue Growth (%) 8.0 6.3 4.6 4.4

Profit from Continuing Opera 1,226 1,071 1,197 1,283 AP & Other Payables 196 207 213 223 EBITDA Growth (%) 6.5 3.3 5.1 4.5

Profit from Discontinued Ope 0 0 0 0 Short-Term Financial Liab 146 60 60 80 Operating Profit Growth (%) 7.6 3.6 5.3 4.8

Net Profit 1,226 1,071 1,197 1,283 Other Current Liabilities 1,811 1,359 1,386 1,447 EPS Growth (%) 18.9 -12.9 11.8 7.2

Controlling Interests 1,231 1,072 1,198 1,284 Non-Current Liabilities 541 564 594 614 Accounts Receivable Turno 4.2 4.2 4.2 4.3

Non-Controlling Interests -5 -1 -1 -1 Long-Term Financial Liab 116 115 125 125 Inventory Turnover (x) 2.1 2.1 2.1 2.1

Total Comprehensive Profit 1,227 1,095 1,197 1,283 Other Non-Current Liabilit 425 449 469 489 Accounts Payable Turnover 17.3 18.0 18.0 18.3

Controlling Interests 1,231 1,090 1,196 1,282 Total Liabilities 2,694 2,190 2,253 2,364 ROA (%) 13.3 11.1 12.1 12.0

Non-Controlling Interests -4 5 2 2 Controlling Interests 7,045 7,230 7,973 8,740 ROE (%) 18.6 15.0 15.8 15.4

EBITDA 1,628 1,681 1,766 1,846 Capital Stock 955 955 955 955 ROIC (%) 27.8 25.7 25.5 25.9

FCF (Free Cash Flow) 1,336 375 1,003 1,070 Capital Surplus 510 484 484 484 Liability to Equity Ratio (%) 37.9 30.1 28.1 26.9

EBITDA Margin (%) 36.2 35.1 35.3 35.3 Retained Earnings 6,009 6,198 6,941 7,708 Current Ratio (%) 307.5 379.8 415.3 440.4

Operating Profit Margin (%) 32.6 31.8 32.0 32.1 Non-Controlling Interests 73 55 55 54 Net Debt to Equity Ratio (%) -31.8 -23.8 -28.8 -33.2

Net Profit Margin (%) 27.3 22.4 23.9 24.6 Stockholders' Equity 7,118 7,285 8,028 8,794 Interest Coverage Ratio (x) 218.6 257.7 368.7 374.8 Source: KT &G, M irae Asset Daewoo Research estim ates

27| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research Nongshim (004370)

Strong in US, and recovering in China and Japan

Investment points (Maintain) Buy • Nongshim maintains solid pricing power and should be able to raise prices further for ramen products, which continue to sell at relatively low price levels Target Price (12M, W) 420,000 • Ramen market share rebounded in mid-2017, after sliding for three years • Competition in the Korean ramen market will likely ease, which should bring down the company’s marketing spend Share Price (11/3/17, W) 338,500 • In 2018, the company will continue to roll out trendy new products, reflecting forecasts for changes in consumer tastes Expected Return 24% • In particular, the company is posting stronger-than-expected growth in the US, ranking third, with a market share of 15-17%, based on the expansion of sales regions and channels OP (17F, W bn) 105 • Exports to Japan are recovering, following Japan’s nuclear disaster; the company is also overcoming Consensus OP (17F, W bn) 109 headwinds (resulting from the THAAD impact) from China EPS Growth (17F, %) -49.8 Risk factors Market EPS Growth (17F, %) 46.4 • Competition with Ottogi in the ramen market might remain fierce going forward P/E (17F, x) 20.6 • Increasing difficulties in making new hit products in Korea Market P/E (17F, x) 10.5

KOSPI 2,557.97

130 Market Cap (W bn) 2,059 Nongshim FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F 12/19F Shares O utstanding 6 KOSPI Revenue (W bn) 2,042 2,182 2,217 2,246 2,332 2,413 (m n) 120 Free Float (%) 49.6 OP (W bn) 74 118 90 105 119 128 Foreign Ownership (%) 20.7 110 OP margin (%) 3.6 5.4 4.1 4.7 5.1 5.3

Beta (12M) -0.09 NP (W bn) 65 117 199 100 105 112 100 52-W eek Low 290,500 EPS (W ) 10,687 19,291 32,764 16,449 17,209 18,422

52-W eek High 367,000 90 ROE (%) 4.3 7.4 11.6 5.5 5.5 5.7

(%) 1M 6M 12M80 P/E (x) 23.6 22.8 10.1 20.6 19.7 18.4 Absolute -1.3 4.2 12.3 P/B (x) 1.0 1.6 1.1 1.1 1.0 1.0 70 Relative -7.6 -9.6 -12.916.10 17.2 17.6 17.10 Div.Yield (%) 1.6 0.9 1.2 1.2 1.2 1.2 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Nongshim, Mirae Asset Daew oo Research estimates

28| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research Nongshim (004370)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) Forecasts/Valuations (Summarized)

(Wbn) 12/16 12/17F 12/18F 12/19F (Wbn) 12/16 12/17F 12/18F 12/19F 12/16 12/17F 12/18F 12/19F

Revenue 2,217 2,246 2,332 2,413 Current Assets 1,057 1,089 1,197 1,306 P/E (x) 10.1 20.6 19.7 18.4

Cost of Sales 1,504 1,497 1,549 1,600 Cash and Cash Equivalen 179 198 272 349 P/CF (x) 5.8 9.6 9.4 9.1

Gross Profit 713 749 783 813 AR & Other Receivables 223 226 235 243 P/B (x) 1.1 1.1 1.0 1.0

SG&A Expenses 624 644 664 685 Inventories 169 172 178 185 EV/EBITDA (x) 8.6 8.0 7.0 6.3

Operating Profit (Adj) 90 105 119 128 Other Current Assets 486 493 512 529 EPS (W) 32,764 16,449 17,209 18,422

Operating Profit 90 105 119 128 Non-Current Assets 1,424 1,444 1,440 1,441 CFPS (W) 56,886 35,291 35,922 37,336

Non-Operating Profit 143 28 23 25 Investments in Associates 0 0 0 0 BPS (W) 307,539 317,823 331,230 345,849

Net Financial Income 7 12 6 8 Property, Plant and Equipm 1,092 1,110 1,104 1,103 DPS (W) 4,000 4,000 4,000 4,000

N et Gain from Inv in As s ociat 0 0 0 0 Intangible Assets 59 62 61 60 Payout ratio (%) 11.6 23.1 22.1 20.7

Pretax Profit 233 133 142 153 Total Assets 2,481 2,534 2,638 2,748 Dividend Yield (%) 1.2 1.2 1.2 1.2

Income Tax 34 33 38 41 Current Liabilities 549 552 572 591 Revenue Growth (%) 1.6 1.3 3.8 3.5

Profit from Continuing Opera 199 100 105 112 AP & Other Payables 279 283 294 304 EBITDA Growth (%) -11.6 7.4 6.9 5.0

Profit from Discontinued Ope 0 0 0 0 Short-Term Financial Liab 40 35 35 35 Operating Profit Growth (%) -23.7 16.7 13.3 7.6

Net Profit 199 100 105 112 Other Current Liabilities 230 234 243 252 EPS Growth (%) 69.8 -49.8 4.6 7.0

Controlling Interests 199 100 105 112 Non-Current Liabilities 130 116 119 122 Accounts Receivable Turno 10.2 10.0 10.1 10.1

Non-Controlling Interests 0 0 0 0 Long-Term Financial Liab 59 45 45 45 Inventory Turnover (x) 13.0 13.2 13.3 13.3

Total Comprehensive Profit 177 86 105 112 Other Non-Current Liabilit 71 71 74 77 Accounts Payable Turnover 5.3 5.3 5.4 5.3

Controlling Interests 178 86 103 111 Total Liabilities 679 668 691 712 ROA (%) 8.1 4.0 4.0 4.2

Non-Controlling Interests -1 0 1 1 Controlling Interests 1,789 1,852 1,934 2,023 ROE (%) 11.6 5.5 5.5 5.7

EBITDA 175 188 201 211 Capital Stock 30 30 30 30 ROIC (%) 7.0 7.1 8.0 8.7

FCF (Free Cash Flow) 164 70 111 112 Capital Surplus 121 121 121 121 Liability to Equity Ratio (%) 37.7 35.8 35.5 35.0

EBITDA Margin (%) 7.9 8.4 8.6 8.7 Retained Earnings 1,721 1,798 1,880 1,969 Current Ratio (%) 192.4 197.3 209.4 221.2

Operating Profit Margin (%) 4.1 4.7 5.1 5.3 Non-Controlling Interests 13 13 13 13 Net Debt to Equity Ratio (%) -29.0 -30.5 -33.9 -37.0

Net Profit Margin (%) 9.0 4.5 4.5 4.6 Stockholders' Equity 1,802 1,865 1,947 2,036 Interest Coverage Ratio (x) 26.9 25.0 33.2 35.9 Source: Nongshim, Mirae Asset Daewoo Research estimates

29| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research [Conclusion] To turn around in 2018, overcoming Chinese headwinds

(80=100) 2H18 2018~2019 7,000 Korea F&B index (L) - Recovery from China Shock - Overseas expansion KOSPI index (R) - M&A (domestic,overseas) Share price - Improvement in fundamentals 1H18 increase 6,000

Share 2017 5,000 bottoming- 2H15~2017 out Earnings - China Shock - Slowdown in China consumption Share growth - China's restriction on Korean industries bottoming 4,000 (or businesses) - Decline in F&B valuation Earnings rebound 3,000 Growth in Chinese sales Weak Strong exports earnings Lower SG&A 2,000 Recovering from China shock; Exports 1,000 recovery Ban on Hallyu; Higher SG&A 0 80 85 90 95 00 05 10 15 20

Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research

30| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research Coverage overview

Target Price Current Price Company Ticker Rating (12M, W) (11/7/17, W)

CJ CheilJedang 097950 KS Buy 450,000 370,500

Orion 271560 KS Buy 150,000 116,000

KT&G 033780 KS Buy 145,000 113,000

Nongshim 004370 KS Buy 420,000 334,000

Maeil Daries 267980 KQ Buy 100,000 76,400

Lotte Foods 002270 KS Buy 800,000 576,000

Dongwon F&B 049770 KS Buy 300,000 210,000

Ottogi 007310 KS Buy 1,000,000 749,000

Lotte Chilsung 005300 KS Buy 2,200,000 1,270,000

Daesang 001680 KS Buy 36,000 23,050

Dongwon Industries 006040 KS Buy 370,000 322,000

HiteJinro 000080 KS Trading Buy 29,000 25,600

Source: Company data, Mirae Asse t Daewoo Research

31| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research APPENDIX 1

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

Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price CJ CheilJedang(097950) 10/13/2017 Buy 450,000 KT&G(033780) 06/19/2017 Buy 145,000 08/04/2017 Buy 430,000 04/03/2017 Buy 128,000 06/13/2017 Buy 460,000 10/27/2016 Buy 140,000 05/11/2017 Buy 440,000 06/01/2016 Buy 155,000 01/31/2017 Buy 460,000 10/22/2015 Buy 140,000 02/04/2016 Buy 500,000 Nongshim(004370) 12/05/2016 Buy 420,000 10/19/2015 Buy 530,000 11/01/2016 Buy 370,000 Orion(271560) 11/06/2017 Buy 150,000 08/17/2016 Buy 430,000 09/15/2017 Buy 120,000 11/30/2015 Buy 500,000 08/14/2017 Buy 110,000 11/15/2015 Buy 450,000 07/07/2017 Buy 100,000 09/09/2015 Buy 430,000

(W) CJ CheilJedang (W) Orion (W) KT&G (W) Nongshim

600,000 200,000 200,000 600,000

500,000 500,000 150,000 150,000 400,000 400,000

300,000 100,000 100,000 300,000

200,000 200,000 50,000 50,000 100,000 100,000

0 0 0 0 Nov 15 Nov 16Nov Nov 15 17 Nov 16Nov Nov 15 17 Nov 16Nov Nov 15 17 Nov 16 Nov 17

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.

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Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 74.52% 12.50% 12.98% 0.00% Investment Banking Services 70.73% 19.51% 9.76% 0.00% * Based on recommendations in the last 12-months (as of September 30, 2017)

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 . 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 Korean language. 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 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.

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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.

Distribution United Kingdom: This report is being distributed by (UK) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: Mirae Asset Daewoo is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This report is distributed in the U.S. by Mirae Asset Securities (USA) Inc., a member of FINRA/SIPC, to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934, as amended. All U.S. persons that receive this document by their acceptance hereof represent and warrant that they are a major U.S. institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae Asset Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Mirae Asset Securities (USA) Inc. Mirae Asset Securities (USA) Inc. accepts responsibility for the contents of this report in the U.S., subject to the terms hereof, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through Mirae Asset Daewoo. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Mirae Asset Securities (HK) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Mirae Asset Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

34| 2018 Outlook [Food & Beverage] Mirae Asset Daewoo Research Mirae Asset Daewoo International Network

Mirae Asset Daewoo Co., Ltd. () Mirae Asset Securities (HK) Ltd. Mirae Asset Securities (UK) Ltd. Global Equity Sales Team Suites 1109-1114, 11th Floor 41st Floor, Tower 42 Mirae Asset Center 1 Building Two International Finance Centre 25 Old Broad Street, 26 Eulji-ro 5-gil, Jung-gu, Seoul 04539 8 Finance Street, Central London EC2N 1HQ Korea Hong Kong United Kingdom China Tel: 82-2-3774-2124 Tel: 852-2845-6332 Tel: 44-20-7982-8000

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