Korea Morning Focus

May 3, 2019 Korea Morning Focus

Company News & Analysis Major Indices Close Chg Chg (%) SK Networks (001740/Buy/TP: W7,000) KOSPI 2,212.75 9.16 0.42 Margin gains through business synergies are critical KOSPI 200 286.12 1.20 0.42 KOSDAQ 760.38 5.64 0.75 Lotte Data Communication (286940/Buy/TP: W63,000) HIT merger to create additional business opportunities Turnover ('000 shares, Wbn) Volume Value GS Retail (007070/Buy/TP: W48,000) KOSPI 358,951 5,027 1Q19 review: Convenience stores showing signs of improvement KOSPI 200 83,515 3,482 KOSDAQ 769,128 4,248

DGB Financial Group (139130/Buy/TP: W12,000) Market Cap (Wbn) Underlying earnings power enhanced by business diversification Value KOSPI 1,467,463 BNK Financial Group (138930/Buy/TP: W8,900) KOSDAQ 260,785 Full confidence will be recovered after 4Q results, but the current KOSPI Turnover (Wbn) performance is not that bad Buy Sell Net Foreign 1,531 1,463 68 Sector News & Analysis Institutional 1,269 1,252 17 Retail 2,186 2,288 -102 Airlines (Overweight) KOSDAQ Turnover (Wbn) China route allocation results: LCC share increases to 28.1% Buy Sell Net Foreign 370 303 68 Institutional 176 192 -17 Retail 3,674 3,714 -39

Program Buy / Sell (Wbn) Buy Sell Net KOSPI 1,246 1,137 109 KOSDAQ 332 266 66

Advances & Declines Advances Declines Unchanged KOSPI 515 289 81 KOSDAQ 842 340 89

KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 45,900 50 395 Hynix 80,700 1,700 249 KODEX Leverage 13,530 115 193 Dongsung Pharm. 28,150 0 187 KODEX 200 Futures 6,845 -50 155 Inverse 2X

KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Hyundai IT 18,400 1,800 404 Optomagic CO. 5,270 1,020 229 KRTNet Corporation 5,090 690 154 Crystal New Material 2,630 605 129 PROSTEMICS 6,750 420 82 Note: As of May 02, 2019

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SK Networks (001740 KS) Margin gains through business synergies are critical Rental 1Q19 review: Margins remain subdued Results Comment For 1Q19, SK Networks (SKN) delivered consolidated revenue of W3.3tr (-5.6% May 3, 2019 YoY, -7.4% QoQ) and operating profit of W35bn (+42.5% YoY, -31.1% QoQ), which was slightly behind the consensus (W39bn). By business segment, the ICT and energy retail divisions saw profits decline QoQ on unfavorable comparisons, and the trading division also remained soft, hurt by fewer transactions in the Middle East. On the other hand, the car-life division posted strong top-line growth thanks to the AJ Rent-a-Car (Maintain) Buy acquisition. SK Magic also continued top-line growth on the back of an increased number of accounts. On the non-operating side, interest expenses increased due to 1) Target Price (12M, W) 7,000 changes in lease accounting standards from 2019 and 2) the AJ Rent-a-Car acquisition.

Share Price (05/02/19, W) 5,790 Car rental market to consolidate into two-player game; business synergies yet to materialize Expected Return 21% In 1Q19, the car-life division’s revenue and operating profit surged to W428bn (+75% YoY, +47.6% QoQ) and W21bn (+184.7% YoY, 42.4% QoQ), respectively, as a result of

the AJ Rent-a-Car acquisition. Rental fleet increased from 108,000 units at end-4Q18 to OP (19F, Wbn) 177 191,000 units at end-1Q19 (111,000 units for SK Rent-a-Car and 80,000 units for AJ Consensus OP (19F, Wbn) 209 Rent-a-Car), narrowing the gap with current market leader Lotte Rental (211,000 units). That said, we have yet to see any signs of business synergies. No decisions have been EPS Growth (19F, %) 47.4 made regarding the integration of SK Rent-a-Car and AJ Rent-a-Car, but our Market EPS Growth (19F, %) -17.0 expectation is that SKN will merge its car-life division into AJ Rent-a-Car through an P/E (19F, x) 134.5 equity swap. Market P/E (19F, x) 12.0 KOSPI 2,212.75 SKN has driven industry margins down by pursuing an aggressive unit-oriented growth strategy. However, as the market consolidates around two players and competition Market Cap (Wbn) 1,437 eases, this could prompt the company to shift its focus to profitability, leading to Shares Outstanding (mn) 248 margin improvements across the car rental industry. We also see strong potential for Free Float (%) 56.5 merger synergies, given how little overlap there is in their businesses (SKN focuses on Foreign Ownership (%) 14.2 individual long-term rentals, while AJ Rent-a-Car focuses on corporate/short-term Beta (12M) 0.53 rentals). In the long run, we believe the merged entity could play a crucial role in SK 52-Week Low 4,255 Group’s mobility business. 52-Week High 6,430 SK Magic to continue top-line growth, driven by increasing accounts (%) 1M 6M 12M Absolute -3.2 31.0 0.7 SK Magic’s rental accounts have continued to grow, rising 19.4% YoY to around 1.6mn Relative -4.7 24.1 14.0 at end-1Q19. For 2019, the company has set a target of 1.87mn accounts, up 20% YoY. We also expect SK Magic’s overseas expansion to pick up speed. The company took 120 SK Networks KOSPI over SKN’s global growth business for W10bn in January and plans to advance into 110 Southeast Asia. 100 90 Reaffirm Buy and TP of W7,000 80 We reaffirm our Buy rating and target price of W7,000 on SKN. We believe margin 70 gains through business synergies, in addition to top-line growth, are critical for the 60 4.18 8.18 12.18 4.19 stock to move higher.

Mirae Asset Daewoo Co., Ltd.

[ Advanced Materials/Metals] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 12,905 15,202 13,986 13,404 13,815 13,285 Jaekwang Rhee +822-3774-6022 OP (Wbn) 155 143 138 177 209 209 [email protected] OP margin (%) 1.2 0.9 1.0 1.3 1.5 1.6

NP (Wbn) -82 33 7 11 36 36 EPS (W) -329 135 29 43 143 143 ROE (%) -3.3 1.4 0.3 0.5 1.5 1.5

P/E (x) - 49.4 178.0 134.5 40.5 40.5 P/B (x) 0.7 0.7 0.5 0.6 0.6 0.6 Dividend yield (%) 1.4 1.8 2.3 2.1 2.1 2.1 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

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.

May 3, 2019 SK Networks

Table 1. Quarterly and annual earnings (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19P 2Q19F 3Q19F 4Q19F 2018 2019F 2020F Revenue 3,477 3,432 3,530 3,547 3,284 3,324 3,351 3,445 13,986 13,404 13,815 ICT 1,267 1,152 1,262 1,505 1,252 1,190 1,190 1,260 5,185 4,892 4,900 Energy retail 360 359 397 319 287 331 331 331 1,436 1,280 1,324 Trading 1,419 1,452 1,370 1,191 1,077 1,100 1,100 1,100 5,431 4,377 4,400 SK Magic 148 162 167 180 181 191 195 200 656 767 922 Car-Life 244 246 268 290 428 449 465 483 1,048 1,825 2,001 Walkerhill 55 62 70 70 62 63 70 70 257 266 268 Operating profit 25 21 41 51 35 45 46 51 138 177 209 ICT 19 17 21 34 17 19 19 20 92 74 77 Energy retail 4 3 2 12 5 7 7 7 21 24 26 Trading 18 14 14 1 2 4 4 4 46 16 18 SK Magic 6 7 14 24 15 15 16 16 51 62 74 Car-Life 7 8 12 14 21 25 26 27 41 98 112 Walkerhill (2) 0 2 (1) 1 0 0 2 0 3 3 Shared costs (28) (28) (23) (33) (25) (25) (25) (25) (112) (100) (100) Pretax profit 3 3 16 38 1 6 7 12 60 25 52 Net profit 1 0 (7) 13 (6) 4 5 8 7 11 36 Note: Net profit is attributable to controlling interests Source: Mirae Asset Daewoo Research estimates

Table 2. Global peer group performance and valuation (Wbn, x, %)

Market Revenue Operating profit OP margin P/E P/B ROE EV/EBITDA

cap 18 19E 18 19E 18 19E 18 19E 18 19E 18 19E 18 19E SK Networks 1,439 13,986 14,285 138 207 1.0 1.5 48.7 15.2 0.5 0.6 0.3 4.0 8.7 6.7 Major domestic rental companies WJ Coway 6,384 2,707 2,940 520 557 19.2 19.0 15.3 15.9 4.9 5.0 33.8 33.8 7.6 8.4 Cuckoo 965 419 540 68 89 16.1 16.6 23.1 17.5 2.1 2.3 9.5 14.1 6.2 7.7 Homesys Average 17.7 17.8 19.2 16.7 3.5 3.7 21.7 23.9 6.9 8.1 Major global rental car companies Hertz 1,805 10,460 11,413 486 621 4.7 5.4 - 36.7 1.1 1.5 (17.4) 5.6 5.2 29.7 Avis 3,215 10,041 10,805 867 919 8.6 8.5 7.2 9.4 4.1 4.2 33.4 55.6 4.9 19.8 Sixt 5,315 3,806 4,143 507 516 13.3 12.5 7.6 19.5 1.6 3.2 37.2 17.2 5.2 7.1 Europcar 1,541 3,805 3,864 485 436 12.7 11.3 9.1 7.1 1.4 1.2 16.2 16.8 11.1 12.3 Average 9.8 9.4 8.0 18.2 2.1 2.5 17.3 23.8 6.6 17.2 Major domestic trading companies POSCO 2,282 25,174 25,986 473 557 1.9 2.1 14.5 7.7 0.8 0.7 5.4 9.4 9.2 8.3 International LG International 715 9,988 10,459 166 201 1.7 1.9 - 5.8 0.5 0.6 (6.1) 10.3 8.8 7.7 Hyundai Corp. 311 4,714 4,673 51 55 1.1 1.2 - 8.5 1.2 0.9 (2.6) 11.5 11.5 9.9 GS Global 220 4,059 56 1.4 9.9 - 0.5 - 5.5 - 8.6 - Average 1.5 1.7 12.2 7.3 0.8 0.7 0.6 10.4 9.5 8.6 Major Japanese trading companies Mitsubishi 50,458 75,841 169,211 4,184 6,036 5.5 3.6 8.1 7.6 0.9 0.8 10.9 11.6 13.9 11.8 Marubeni 14,349 75,569 80,584 769 1,605 1.0 2.0 6.4 5.9 0.9 0.7 14.0 12.7 17.9 13.4 Itochu 32,914 116,519 112,672 3,618 4,248 3.1 3.8 6.2 6.0 1.0 0.9 17.9 15.7 12.0 11.2 Mitsui 32,457 69,884 64,822 2,565 2,864 3.7 4.4 7.2 7.1 0.7 0.7 10.1 9.9 15.7 15.3 Sumitomo 20,644 48,380 53,977 2,304 2,865 4.8 5.3 7.2 6.2 0.9 0.7 12.5 12.1 14.2 11.8 Average 3.6 3.8 7.0 6.6 0.9 0.8 13.1 12.4 14.8 12.7 Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research

Lotte Data Communication (286940 KS) HIT merger to create additional business opportunities

1Q19 review: Consolidated OP falls 2.9% YoY to W5.6bn For 1Q19, Lotte Data Communication announced consolidated revenue of W186.5bn Company Report (+1.4% YoY), operating profit of W5.6bn (-2.9% YoY), and net profit attributable to [게시 날짜] controlling interests of W4.9bn (-9.4% YoY). The YoY decline in operating profit was mainly due to the company’s consolidated subsidiary Hyundai Information Technology (HIT), which suffered wider operating losses on weaker revenue and data center depreciation expenses (W4.5bn). On a non- (Maintain) consolidated basis, revenue and operating profit grew to W161.5bn (+5.7% YoY) and Buy W8.7bn (+13.0% YoY), respectively. Despite unfavorable seasonality, we believe the company performed well, aided by revenue growth from the addition of affiliates Target Price(12M, W) 63,000 (including Lotte Chemical), and higher labor pricing. HIT meger to strengthen competitiveness and create various opportunities Share Price (05/02/19, W) 49,750 On April 10th, Lotte Data Communication’s board approved a resolution to merge HIT (59.7% stake) into the company. The merger ratio has been set at 1:0.0462799 for Lotte Expected Return 27% Data Communication (surviving entity): HIT (merging entity). As part of the merger, the company will issue new shares equal to 7.8% of its total shares outstanding. Because the deal is, by law, a small-scale merger, the board’s approval will substitute for shareholders’ consent. No appraisal rights will be offered. OP (19F, Wbn) 45 Consensus OP (19F, Wbn) 46 As HIT was already a consolidated subsidiary, the merger is unlikely to cause any material changes in the company’s financial statements. However, we view the deal as EPS Growth (19F, %) 10.6 positive from a business efficiency and competitiveness perspective. 1) We believe the Market EPS Growth (19F, %) -17.0 merger will allow the company to improve its cost competitiveness by saving P/E (19F, x) 20.4 administrative expenses and enhance efficiency through better human and physical resource management. 2) By internalizing HIT’s competitive strength in SOC projects Market P/E (19F, x) 12.0 (railway, airports, ports, etc.), the company is likely to capture related business KOSPI 2,212.75 opportunities in non-affiliate and overseas markets. 3) We also expect data-based businesses, like cloud and big data, to gather momentum, fueled by the integration of Market Cap (Wbn) 711 data center/IT infrastructure operating capabilities. Shares Outstanding (mn) 14 Currently, a fourth data center dedicated to cloud (5,000 pyeong; W49.5bn invested) is Free Float (%) 24.0 being built in Yongin, Gyeonggi Province, with construction due to be completed in Foreign Ownership (%) 1.9 December 2020. With data center demand expected to grow alongside the Beta (12M) 0.17 proliferation of cloud services, we expect the company to expand its cloud business 52-Week Low 25,850 and earnings by leveraging its experience in operating affiliates’ cloud systems at its existing data centers (Seoul, Daejeon, and Yongin) and strengthening its partnerships 52-Week High 51,300 with global companies like Amazon Web Services (AWS), Microsoft, Oracle, and IBM. (%) 1M 6M 12M Maintain Buy and TP of W63,000; Biggest beneficiary of Lotte Group’s IT Absolute 0.6 38.6 0.0 spending Relative -1.0 31.3 0.0 We maintain our Buy call on Lotte Data Communication with a target price of W63,000. The stock is currently trading at a 2019F P/E of 20.4x. As the only IT services firm under 190 Lotte Data Communication KOSPI Lotte Group’s umbrella, Lotte Data Communication should deliver steady revenue 170 growth of more than 10% annually through 2025, backed by the group’s aggressive IT 150 spending. 130 110 Lotte Group is pursuing a digital transformation to identify new growth opportunities, 90 with plans to invest W50tr in its domestic and overseas businesses over the next five 70 years. Among the group’s investment plans, Lotte Data Communication will likely take 4.18 8.18 12.18 4.19 charge of most IT infrastructure projects (smart factories, smart logistics systems, etc.), which should drive continued earnings improvements. Mirae Asset Daewoo Co., Ltd.

[ Analyst] FY (12) 12/15 12/16 12/17 12/18 12/19F 12/20F Revenue (Wbn) 0 0 149 812 910 1,016 Dae-ro Jeong +822-3774-1634 OP (Wbn) 0 0 5 39 45 54 [email protected] OP Margin (%) - - 3.4 4.8 4.9 5.3

NP (Wbn) 0 0 2 26 35 39 EPS (W) 0 0 1,139 2,205 2,439 2,702 ROE (%) 0.0 0.0 1.0 9.6 9.6 9.9

P/E (x) - - - 16.1 20.4 18.4 P/B (x) - - - 1.4 1.9 1.8 Dividend Yield (%) - - - 1.8 1.3 1.3 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

GS Retail (007070 KS) 1Q19 review: Convenience stores showing signs of improvement Retail 1Q19 review: Convenience store division performs strongly on gross margin improvements Results Comment For 1Q19, GS Retail reported consolidated revenue of W2.08tr (+4.4% YoY) and May 3, 2019 operating profit of W21.4bn (-0.9% YoY), which was slightly below our estimate and the consensus. The earnings miss was due to 1) weakness in the supermarket division caused by the consumer shift to online shopping, and 2) higher expenses in the other category (which includes new businesses). The convenience store division saw a sharp increase in operating profit YoY, helped by 1) gross margin improvements from (Maintain) Buy merchandising integration and 2) cost savings. Convenience stores: Operating profit grew 34.6% YoY to W26.8bn. Same-store sales Target Price (12M, W) 48,000 (SSS) grew 1% (+1% for general items). Even as traffic declined due to unfavorable weather conditions (fine dust, etc.), operating profit improved markedly thanks to gross margin improvements (W3bn gain) from 1) merchandising integration and 2) Share Price (05/02/19, W) 39,100 private brands. Looking to 2Q19, we expect traffic to pick up, aided by favorable seasonality and the rollout of JUUL e-cigarettes. Expected Return 23% Supermarkets: The supermarket division posted an operating loss of W4.8bn, hurt by 1) less traffic amid the consumer shift to online shopping, and 2) a decline in ticket (-2%) caused by pricing competition. Labor expense pressures from minimum wage OP (19F, Wbn) 210 hikes also continued. We believe the supermarket business will remain under pressure Consensus OP (19F, Wbn) 205 for some time, as the ongoing migration to online shopping is likely to intensify pricing competition. EPS Growth (19F, %) 23.4 Better positioned Market EPS Growth (19F, %) -17.0 P/E (19F, x) 20.2 We believe GS Retail is better positioned than other retailers in 2019. Convenience stores are the only channel insulated from the move to online spending. This does not Market P/E (19F, x) 12.0 mean all convenience stores will benefit, given persistent overcapacity and slowing KOSPI 2,212.75 growth. We believe top-tier players that can improve store competitiveness and have scale are better positioned. Market Cap (Wbn) 3,011 Shares Outstanding (mn) 77 In 2Q19, we expect GS Retail’s traffic to pick up. Along with 7-Eleven, GS Retail will begin selling JUUL e-cigarettes in Seoul next month. As one of the first convenience Free Float (%) 34.1 stores to roll out the e-cigarettes, GS Retail is likely to see a traffic recovery (following Foreign Ownership (%) 21.5 negative growth in 1Q19) and stronger cigarette sales. Beta (12M) 0.32 In addition, we project gross margin gains from merchandising integration to 52-Week Low 29,750 continue. In late 2018, GS Retail integrated its SKUs and systems between the 52-Week High 43,950 supermarket and convenience store divisions. Merchandising integration effects should gather steam this year, driving continued improvements in convenience store (%) 1M 6M 12M operating profit. Absolute 2.0 4.3 -2.6 Maintain Buy and TP of W48,000 Relative 0.3 -1.2 10.3 We maintain our Buy rating and target price of W48,000 on GS Retail. The 1Q19 results 130 GS Retail KOSPI showed the potential for improvement in the convenience store business. We believe 120 GS Retail has a more attractive valuation than its rivals and is also better positioned 110 than other convenience stores and retailers in general, as 1) convenience stores are 100 the only channel free from the transition to online spending, and 2) the sale of JUUL e- cigarettes is likely to drive traffic growth at the retailer’s convenience stores. 90 Merchandising integration, which had limited effects in 2018, should also drive gross 80 margins and operating profit higher. 70 4.18 8.18 12.18 4.19

Mirae Asset Daewoo Co., Ltd.

[ Retail] FY (Dec.) 12/15 12/16 12/17 12/18 12/19F 12/20F Revenue (Wbn) 6,273 7,402 8,267 8,692 8,979 9,197 Myoungjoo Kim +822-3774-1458 OP (Wbn) 226 218 166 180 210 226 [email protected] OP margin (%) 3.6 2.9 2.0 2.1 2.3 2.5

NP (Wbn) 164 274 118 121 149 158 EPS (W) 2,133 3,562 1,535 1,566 1,933 2,057 ROE (%) 9.5 14.5 5.9 5.9 7.0 7.1

P/E (x) 25.2 13.4 26.3 25.9 20.2 19.0 P/B (x) 2.3 1.8 1.5 1.5 1.4 1.3 Dividend yield (%) 1.6 2.3 1.5 1.6 1.7 1.7 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

DGB Financial Group (139130 KS) Underlying earnings power enhanced by business diversification Banks 1Q19 review: Net profit of W103.8bn Results Comment For 1Q19, DGB Financial Group (DGBFG) reported consolidated net profit attributable May 3, 2019 to controlling interests of W103.8bn (+13.1% YoY, -1.1% QoQ), topping the Bloomberg consensus (W97.9bn) by 6.0% and the FnGuide consensus (W100.6bn) by 3.2%.

Major one-off items in the quarter included: 1) W4.5bn (after tax) in loss provision reversals at Hi Investment & Securities; 2) W5.4bn (after tax) in gains from the sale of (Maintain) Buy DGB Life Insurance’s office building; 3) W1.3bn in previously unpaid bonuses for retired executives at Daegu Bank; and 4) W1.5bn in naming right expenses. As a major Target Price (12M, W) 12,000 non-one-time item, the group recognized W3.2bn in depreciation expenses related to Daegu Bank’s new headquarters construction, remodeling, and IT center construction. Share Price (05/02/19, W) 8,460 Overall, solid profits (including one-offs) from non-bank subsidiaries helped cushion the impact of Daegu Bank’s higher SG&A expenses on net profit. Excluding one-off Expected Return 42% items, we estimate net profit was at the mid-W90bn level.

Solid core income growth, supported by Hi Investment & Securities acquisition NP (19F, Wbn) 340 Consensus NP (19F, Wbn) 330 In 1Q19, bank net interest margin (NIM) slipped 5bps QoQ to 2.19%, dragged down by accounting changes in credit card commissions (IFRS 15) and merchant fee cuts. EPS Growth (19F, %) -11.3 DGBFG has a high exposure to floating rate loans tied to yields on short-term bank Market EPS Growth (19F, %) -17.0 debentures. Given the decline in short-term bank debenture yields in April, and local P/E (19F, x) 4.2 competition in lending for SMEs with high credit quality, we forecast DGBFG’s NIM to Market P/E (19F, x) 12.0 fall 3bps QoQ in 2Q19 and another 1bp QoQ in 3Q19, before stabilizing in subsequent KOSPI 2,212.75 quarters. Meanwhile, won-denominated loans grew a mere 0.9% QoQ, due to maturing group loans for interim payments. For the full year, we forecast won- Market Cap (Wbn) 1,431 denominated loan growth at 4.3%. Group net interest income and net commission Shares Outstanding (mn) 169 income came in at W351.6bn (+2.7% YoY, -0.9% QoQ) and W63.7bn (+176.8% YoY, Free Float (%) 89.4 +21.0% QoQ), respectively, supported by the Hi Investment & Securities acquisition. Foreign Ownership (%) 62.5 Credit costs remained contained at W46.4bn (-3.7% YoY, -34.6% QoQ). SG&A expenses Beta (12M) 0.46 increased YoY to W220.2bn (+45.1% YoY, -30.8% QoQ) due to the aforementioned 52-Week Low 8,050 factors, pushing up the cost-to-income ratio to 55.1% (+9.0%p YoY, -38.9%p QoQ). New 52-Week High 12,050 NPL formation (bank) remained benign, at W81.9bn (+8.8% YoY, -46.0% QoQ), or 88bps (%) 1M 6M 12M (annualized; +5bps YoY, -77bps QoQ) of total credit. Absolute -0.8 -6.7 -29.5 Compelling valuation and dividends Relative -2.4 -11.6 -20.2 DGBFG’s CET1 ratio improved 11bps QoQ to 9.91% at end-1Q19. We expect dividend 110 DGB Financial Group KOSPI payout ratio to increase to 19.9% in 2019, 21.2% in 2020, and 22.4% in 2021, given the 100 group’s enhanced earnings power, robust CET1 ratio (highest among regional financial 90 holding companies), and management’s commitment to gradually raise the payout

80 ratio. Based on current share prices, we estimate dividend yield at 4.7% for 2019, 5.3%

70 for 2020, and 5.8% for 2021. We maintain our Buy rating and target price of W12,000 on DGBFG, in light of its compelling valuation and dividends. 60 4.18 8.18 12.18 4.19

Mirae Asset Daewoo Co., Ltd. Fiscal year-end 12/16 12/17 12/18 12/19F 12/20F 12/21F Net interest inc. (Wbn) 1,202 1,275 1,394 1,420 1,473 1,540 [ Banks/Credit Cards] Net non-interest inc. (Wbn) 20 -6 -63 209 245 242 Operating profit (Wbn) 387 411 334 501 554 575 Heather Kang +822-3774-1903 Net profit (Wbn) 288 302 384 340 359 369 [email protected] EPS (W) 1,702 1,787 2,268 2,011 2,125 2,184

EPS growth (%) -9.8 5.0 26.9 -11.3 5.7 2.8 P/E (x) 5.0 4.7 3.7 4.2 4.0 3.9 P/PPOP (x) 2.5 2.4 2.7 2.0 1.9 1.8

P/B (x) 0.39 0.36 0.34 0.32 0.29 0.27 ROE (%) 8.0 8.0 9.5 7.8 7.7 7.3 Dividend yield (%) 3.5 4.0 4.3 4.7 5.3 5.8 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

BNK Financial Group (138930 KS) Full confidence will be recovered after 4Q results, but the current performance is not that bad Banks 1Q19 review: Net profit of W177.1bn Company Report For 1Q19, BNK Financial Group reported net profit attributable to controlling interests May 2, 2019 of W177.1bn (-14.5% YoY, TTB QoQ), 6.6% above the Bloomberg consensus (W166.2bn) and 5.4% above FnGuide consensus (W168.1bn).

One-offs for 1Q19 include: 1) a reversal of provisions for large-scale NPL at Busan Bank (reclassification of the asset quality after the end of capital impairment); and 2) gains (Maintain) Buy on NPL sale of W24.6bn (versus W53bn in 1Q18).

Target Price (12M, W) 8,900 Distributed recording of SG&A expenses to reduce earnings volatility; new NPL formation contracted Share Price (04/30/19, W) 7,010 Net interest margins (NIM) for both Busan Bank and Kyongnam Bank contracted 8bps QoQ to 2.16% and 2.03%, respectively. While the decline in net interest spread Expected Return 27% resulting from lower interest rates on new loans (due to the increase in lower-risk loans) and higher funding rates brought down their NIMs by two to three bps, the change in the accounting practice for credit card commissions (under IFRS 15) and NP (19F, Wbn) 523 credit card commission cuts for merchants dragged down the NIMs by five to six bps. Consensus NP (19F, Wbn) 527 Won-denominated loans increased at both Busan Bank (1.6% QoQ) and Kyongnam Bank (0.7% QoQ). Group net interest income fell 4.1% YoY and 5% QoQ to W557.9bn, EPS Growth (19F, %) 4.1 due to fewer operating days and lower NIM. We forecast BNKFG’s NIM will trend Market EPS Growth (19F, %) -17.0 downward through 2Q19 and stabilize from 3Q19 and onwards. The group’s full-year P/E (19F, x) 4.4 net interest income is anticipated to drop from the 2018 level. Meanwhile, group SG&A Market P/E (19F, x) 12.0 expenses jumped 9.9% YoY (-24.7% QoQ) to W308.1bn in 1Q19, due to the distributed KOSPI 2,203.59 recognition of wage hikes and incentives, which it had traditionally recorded in 4Q in an effort to reduce earnings volatility. Combined new NPL formation at Busan Bank Market Cap (Wbn) 2,285 and Kyongnam Bank contracted markedly to W77.3bn (-71.7% YoY, -81.1% QoQ). Shares Outstanding (mn) 326 Free Float (%) 84.8 Glimmer of hope Foreign Ownership (%) 52.6 In 4Q17 and 4Q18, BNKFG suffered a net loss mainly due to massive credit costs. We Beta (12M) 0.76 believe that the quality of BNKFG’s corporate loans and its credit costs, as well as the 52-Week Low 6,640 shipbuilding equipment market, could turn around starting in 2H19, in light of: 1) 52-Week High 10,500 regional economic conditions (affected by the shipbuilding equipment market); 2) (%) 1M 6M 12M domestic shipbuilders’ 2018 orders; and 3) the time (typically one to 1.5 years) taken Absolute 4.9 -7.8 -32.9 from shipbuilding order placement to shipbuilding equipment delivery. In 2019, we Relative 1.9 -15.7 -23.4 expect BNKFG to begin reducing the level of profit contraction in 4Q, compared with other quarters. 110 BNK Financial Group KOSPI 100 Maintain Buy and TP of W8,900 90 We believe the stock is undervalued, given its current price (2019F P/B of 0.29x and P/E 80 of 4.4x) and 2019 dividend yield projection (4.6%). We think that the stock’s 70 undervaluation will meaningfully ease, thanks to higher 4Q earnings visibility. 60 50 4.18 8.18 12.18 4.19

Mirae Asset Daewoo Co., Ltd. Fiscal year ending 12/16 12/17 12/18 12/19F 12/20F 12/21F Net interest inc. (Wbn) 2,140 2,281 2,344 2,262 2,357 2,443 [Banks/Credit Cards] Net non-interest inc. (Wbn) 72 -5 173 282 305 315 Operating profit (Wbn) 712 594 750 777 842 878 Heather Kang +822-3774-1903 Net profit (Wbn) 502 403 502 523 558 583 [email protected] EPS (W) 1,539 1,237 1,540 1,603 1,711 1,790 EPS growth (%) -20.6 -19.6 24.6 4.1 6.7 4.6 P/E (x) 4.6 5.7 4.6 4.4 4.1 3.9 P/PPOP (x) 2.1 2.0 1.8 1.8 1.7 1.6 P/B (x) 0.34 0.32 0.30 0.29 0.27 0.26 ROE (%) 7.9 5.8 6.8 6.8 6.9 6.8 Dividend yield (%) 3.3 3.3 4.3 4.6 5.0 5.4 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

Airlines Overweight (Maintain)

China route allocation results: LCC share increases to 28.1%  China route allocation results: China passenger market to expand by W400-500bn Issue Comment  Jeju Air, T’way Air, and Eastar Jet to benefit; Air Busan also achieves meaningful win May 3, 2019  Our top pick remains Jeju Air; Watch for profit gains and better utilization

China route allocation results: China passenger market to expand by Mirae Asset Daewoo Co., W400bn Ltd. [Transport/Energy] - On May 2nd, the Ministry of Land, Infrastructure and Transport (MOLIT) announced the

Jay JH Ryu results of traffic right allocations for China routes. The number of passenger routes +822-3774-1738 increased by 15.8% from 57 to 66, while the number of weekly flights increased by 31.0% [email protected] from 449 to 588.

- Theoretically, this should expand the China passenger market by roughly W400bn.

- The share of low-cost carriers (LCC) in total China route capacity rose from 10.5% to 28.1%. In absolute terms, LCCs’ China route capacity surged nearly 250%.

- We estimate this boosts LCCs’ revenue potential by around W300bn.

- Additional services by Chinese airlines could cause some worries over competition, but we believe the impact will be limited, given that domestic LCCs are focused on outbound flights and that foreign LCCs’ share in the domestic market has largely remained stagnant. Jeju Air, T’way Air, and Eastar Jet to benefit; Air Busan also achieves meaningful win - By airline, we believe Jeju Air, T’way Air, and Eastar Jet are the biggest beneficiaries of the route expansion. - Jeju Air was allocated 35 weekly flights across nine routes, including four weekly flights between Incheon and Beijing (Daxing) and seven weekly flights between Jeju and Beijing. The airline captured 25% of the total traffic rights distributed and 19% of traffic rights in Category 1. - T’way Air was allotted 35 weekly flights across nine routes, including three weekly flights between Incheon and Beijing (Daxing), and seven weekly flights between Daegu and Beijing. The airline claimed 25% of total traffic rights distributed and 14% of traffic rights in Category 1. - Eastar Jet was allocated 27 weekly flights across six routes, including seven weekly flights between Incheon and Shanghai and seven weekly flights between Jeju and Shanghai. In terms of quality, the airline gained the most, taking 33% of traffic rights distributed in Category 1. - Air Busan was handed 18 weekly flights across five routes, including six weekly flights between Incheon and Shenzhen. The results were meaningful in that the airline won rights to its first service out of Incheon, particularly the valuable Incheon-Shenzhen route. Maintain Jeju Air as our top pick; Watch for profit gains and better utilization - We maintain Jeju Air (089590 KS/Buy/TP: W47,000/CP: W40,700) as our top pick in airlines. While the carrier’s results in Category 1 fell short of expectations (more than seven weekly flights), we still think the carrier performed relatively well overall, capturing 25% of total traffic rights distributed (no. 1) and 19% of traffic rights in Category 1 (no. 2). In addition, based on the launch of regular services from Jeju to China (which had been limited before), we believe the carrier will actively try to establish an inbound route from China. - We expect the latest traffic right allocations to add W70-80bn and W10bn to Jeju Air’s revenue and operating profit, respectively. We also believe the new traffic rights will allow the carrier to maximize its fleet operation (given the relatively short distance to China), leading to better operational efficiency overall.

Mirae Asset Daewoo Research Key Universe Valuations May 3, 2019

※All data as of close April 30, 2019, unless otherwise noted.

19F Earnings growth Mkt Cap Price P/E (x) P/B (x) ROE (%) Ticker Company Div Yield OP EPS (Wbn) (W) (%) 19F 20F 19F 20F 19F 20F 19F 20F 19F 20F 005930 Samsung Electronics 274,013 45,900 3.1 -54.2 38.9 -46.7 34.7 14.3 10.6 1.2 1.1 8.8 11.1 000660 SK Hynix 58,750 80,700 1.9 -78.7 60.6 -78.6 55.5 17.6 11.3 1.1 1.1 6.9 10.1 005380 Hyundai Motor 29,593 138,500 2.9 40.1 30.5 139.2 15.0 10.8 9.4 0.5 0.5 5.1 5.7 068270 Celltrion 26,486 207,000 - - - - 0.0 0.0 051910 LG Chem 25,343 359,000 1.7 -3.8 47.4 -1.3 48.7 19.3 13.0 1.5 1.4 8.3 11.4 012330 Hyundai Mobis 23,070 237,000 1.5 9.1 10.2 27.0 7.4 9.6 9.0 0.7 0.7 7.5 7.6 005490 POSCO 22,145 254,000 4.3 -16.7 1.8 69.3 2.3 7.7 7.6 0.5 0.5 6.5 6.3 051900 LG H&H 21,756 1,393,000 0.8 12.5 9.5 15.3 10.4 27.6 25.0 5.9 5.1 19.9 18.8 055550 Shinhan Financial Group 21,410 45,150 12.5 3.1 10.5 0.7 6.1 6.1 0.6 0.5 9.4 8.8 017670 SK Telecom 20,308 251,500 4.0 5.8 9.8 -34.9 53.0 10.0 6.5 0.8 0.7 8.8 12.5 035420 NAVER 20,107 122,000 0.3 -15.1 26.3 -31.4 68.6 45.1 26.8 2.9 2.6 8.2 12.5 028260 Samsung C&T 19,538 103,000 1.9 5.4 20.1 -4.2 20.7 15.5 12.8 0.7 0.7 5.2 5.9 105560 KB Financial Group 19,526 46,700 9.7 3.8 10.8 4.0 5.8 5.5 0.5 0.5 9.3 9.0 000270 Kia Motors 18,201 44,900 1.8 20.5 19.7 54.5 16.7 10.2 8.7 0.6 0.6 6.3 7.0 034730 SK Holdings 18,153 258,000 1.9 25.1 10.0 5.4 8.6 8.8 8.1 1.0 0.9 12.3 12.0 015760 KEPCO 18,007 28,050 1.4 - 11.5 - 20.7 14.7 12.1 0.3 0.2 1.7 2.1 018260 Samsung SDS 17,139 221,500 1.3 11.2 12.8 12.9 12.7 24.1 21.4 2.6 2.4 11.4 11.7 096770 SK Innovation 16,921 183,000 4.4 -7.3 6.3 -14.0 6.6 12.1 11.3 0.9 0.8 7.7 7.9 032830 Samsung Life 16,880 84,400 - - - - 0.0 0.0 006400 Samsung SDI 16,366 238,000 0.4 16.8 45.7 -1.0 42.4 24.1 16.9 1.3 1.2 5.6 7.5 000810 Samsung F&M 14,568 307,500 - - - - 0.0 0.0 033780 KT&G 13,798 100,500 4.2 15.1 7.2 18.2 7.6 12.8 11.9 1.5 1.4 12.8 12.9 003550 LG Corp. 13,097 75,900 3.0 19.4 13.3 7.4 13.6 6.7 5.9 0.7 0.6 10.6 11.0 066570 LG Electronics 12,568 76,800 1.0 7.1 20.0 23.7 39.9 9.0 6.5 0.9 0.8 10.3 12.9 090430 AmorePacific 12,422 212,500 0.6 6.0 20.7 6.9 22.4 35.0 28.6 3.1 2.9 7.8 8.9 036570 NCsoft 11,452 522,000 1.2 38.5 25.2 49.9 18.3 18.3 15.4 3.5 2.9 23.9 23.3 086790 Hana Financial Group 11,079 36,900 8.6 8.1 9.5 8.2 4.5 4.2 0.4 0.4 9.0 9.1 251270 Netmarble 10,758 126,000 0.3 44.7 60.1 49.8 43.7 38.7 27.0 2.3 2.1 6.0 8.1 091990 Celltrion Healthcare 10,662 74,400 87.4 59.9 33.6 53.5 48.6 31.7 5.2 4.6 11.1 15.2 010950 S-Oil 10,335 91,800 3.4 91.9 60.5 185.0 86.8 14.6 7.8 1.5 1.3 10.8 18.0 035720 Kakao 10,258 123,000 0.1 100.3 168.6 125.0 156.5 89.2 34.8 2.0 1.9 2.2 5.5 011170 Lotte Chemical 9,272 270,500 3.9 -15.9 14.9 -7.2 13.8 6.0 5.3 0.7 0.6 11.5 11.9 009540 HHI 9,130 129,000 - 594.6 - - - 76.7 0.8 0.8 - 1.0 010130 Korea Zinc 8,435 447,000 2.5 8.9 6.0 19.1 2.4 13.4 13.1 1.3 1.2 9.7 9.3 024110 Industrial Bank of Korea 8,308 14,450 5.4 3.9 2.0 3.3 5.3 5.1 0.4 0.4 8.3 8.1 009150 Samsung Electro-Mechanics 8,030 107,500 1.0 -19.1 28.9 -17.5 31.2 15.4 11.7 1.5 1.4 10.7 12.6 030200 KT 7,181 27,500 4.0 2.0 3.0 28.2 5.6 8.1 7.7 0.5 0.5 6.5 6.6 034220 LG Display 7,031 19,650 - - - - - 22.1 0.5 0.5 - 2.3 018880 Hanon Systems 6,779 12,700 - - - - 0.0 0.0 032640 LG Uplus 6,484 14,850 4.4 -2.9 11.7 2.0 18.2 13.2 11.2 0.9 0.9 7.0 7.9 004020 Hyundai Steel 6,118 45,850 1.6 2.5 16.1 42.1 23.3 10.8 8.8 0.3 0.3 3.3 3.8 086280 Hyundai Glovis 6,038 161,000 2.0 8.8 2.2 20.2 8.7 11.5 10.6 1.3 1.2 11.8 11.7 000720 Hyundai E&C 5,824 52,300 1.0 24.6 6.1 20.7 0.6 12.7 12.6 0.9 0.8 7.2 6.8 Hyundai Heavy Industries 267250 5,546 340,500 5.4 78.7 2.1 154.0 4.5 8.1 7.8 0.6 0.6 8.6 8.5 Holdings 010140 SamsungHvyInd 5,368 8,520 - - - - - 69.4 0.7 0.7 - 1.2 128940 Hanmi Pharmaceutical 5,121 441,000 0.1 37.5 -0.2 141.7 -12.3 85.1 97.0 6.6 6.2 8.2 6.8 023530 Lotte Shopping 5,078 179,500 2.9 6.5 3.9 - 10.5 12.6 11.4 0.4 0.4 3.4 3.7 035760 CJ ENM 4,906 223,700 - - - - 0.0 0.0 005830 DB Insurance 4,878 68,900 - - - - 0.0 0.0 139480 Emart 4,823 173,000 1.2 14.5 3.0 -5.0 6.3 11.3 10.6 0.6 0.5 5.1 5.2 Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research Market Data May 3, 2019

※All data as of close May 02, 2019, unless otherwise noted.

Other Major Indices Economic Indicators Close Net Chg 1D (%) YTD (%) Close 1D ago 1M ago 1Y ago MSCI Korea* 450.46 -6.36 -1.39 5.02 USD/KRW 1,163.80 1,158.20 1,132.70 1,067.50 KOSPI 2,212.75 9.16 0.42 10.09 JPY100/KRW 1,044.38 1,037.02 1,016.70 971.38 KOSDAQ 760.38 5.64 0.75 13.60 EUR/KRW 1,303.75 1,295.33 1,269.30 1,279.88 Dow Jones* 26,430.14 -162.77 -0.61 13.30 3Y Treasury 1.73 1.70 1.71 2.24 S&P 500* 2,923.73 -22.10 -0.75 16.48 3Y Corporate 2.20 2.17 2.18 2.84 NASDAQ* 8,049.64 -45.75 -0.57 20.76 DDR2 1Gb* 1.06 1.06 1.06 1.34 Philadelphia Semicon* 1,543.48 -12.70 -0.82 32.45 NAND MLC 64G* 2.55 2.55 2.36 3.74 FTSE 100* 7,385.26 -32.96 -0.44 9.67 Oil (Dubai)* 71.63 71.09 67.23 70.05 Nikkei 225 22,258.73 -48.85 -0.22 13.79 Gold* 1,284.20 1,285.70 1,288.40 1,306.80 Hang Seng* 29,699.11 -193.70 -0.65 18.18 Customer deposits (Wbn)* 25,807 27,013 24,960 28,270 Taiwan (Weighted) 11,004.49 36.76 0.34 15.18 Equity type BC (Wbn)(Apr. 29) 83,016 82,545 85,384 81,736 Note: * as of April 30, 2019 Source: KSDA, FnGuide, 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 TIGER200 56.78 Samsung Electronics 21.04 Kakao 13.76 TIGER200 56.72 Hynix 40.57 KT&G 20.59 Samsung Heavy Ind. 12.06 Korea Gas Corp. 38.49 Samsung Engineering 21.76 SEMCO 18.67 Hyundai Mobis 10.22 KODEX 200 Futures Inverse 2X 23.11 LG Electronics 14.58 Celltrion 14.88 Samsung Electronics 9.82 SEMCO 10.50 SK Telecom 11.77 Woongjin Coway 14.06 LG Uplus 8.60 Celltrion 9.16 LG Uplus 10.87 LG Chem 11.73 LG Innotek 8.41 KEPCO 8.04 Hotel Shilla 10.32 POSCO 9.97 Hyundai Heavy Industries 6.87 Samsung Biologics 7.66 Shinhan Financial Group 8.80 NHN 8.21 KT&G 6.67 Hotel Shilla 7.62 GS Construction 8.29 Korea Gas Corp. 5.98 LG Chem 6.48 Hynix 6.83 Samsung Heavy Ind. 7.78 LG Display 5.93 Hanmi Pharm 6.32 Hanwha 4.92 Source: KSDA, FnGuide

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 Ace Technology 5.59 Winix 12.64 Wi-Sol 4.20 ViroMed 11.23 Wi-Sol 4.70 SillaJen 3.80 CJ ENM 3.71 Ace Technology 3.35 Emerson Pacific 4.43 PearlAbyss 3.08 Jinsung T.E.C. 2.30 KMP 3.16 Mezzion Pharma 3.76 ViroMed 3.01 SM 1.98 UniTest 2.96 ECOPRO 2.65 Medy-tox 2.79 ANA Pass 1.77 Kolon Life Science 2.62 BH,LTD. 2.48 Alteogen 2.66 Medy-tox 1.65 MC Nex 2.45 ECOPROBM 2.38 S Net 2.46 Oscotec 1.61 Jenexine 2.27 Kaon Media 2.37 HLB 2.07 Wysiwyg Studios 1.59 Chunbo 2.05 Partrion 2.12 Posco Chemtech 1.85 Nas Media 1.35 Celltrion Healthcare 2.01 Dongjin Semichem 2.01 Anterogen 1.76 Nepes 1.33 Silicon Works 1.70 Source: KSDA, FnGuide

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 45,900 50 274,013 Celltrion Healthcare 74,400 -1,200 10,662 Hynix 80,700 1,700 58,750 CJ ENM 223,700 4,800 4,906 Samsung Electronics (P) 37,200 0 30,611 SillaJen 63,800 -1,600 4,497 Hyundai Motor 138,500 0 29,593 ViroMed 249,800 -10,500 3,986 Celltrion 207,000 -5,000 26,486 Posco Chemtech 57,100 -200 3,482 LG Chem 359,000 -2,000 25,343 HLB 84,100 200 3,300 Hyundai Mobis 237,000 4,500 23,070 Medy-tox 555,100 -4,000 3,228 Samsung Biologics 337,000 -3,000 22,298 Studio Dragon 92,400 600 2,592 POSCO 254,000 -1,000 22,145 PearlAbyss 171,000 -3,300 2,226 LG Household & Health Care 1,393,000 -29,000 21,756 Celltrion 59,300 -100 2,020 Source: Korea Exchange