Holding Companies Lotte Group : Changes expected following holding company conversion

Spin-off/merger resolutions likely to pass, assuming 60-70% attendance To establish a holding company, four key Lotte Group affiliates—Lotte Overweight (Maintain) Confectionery, Lotte Shopping, , and Lotte Foods—are planning spin-offs and a merger , subject to approval of special resolutions at shareholders’ meetings (requiring the affirmative vote of two-thirds of the shareholders present Industry Report in person or by proxy, comprising at least one-third of total issued shares). August 29, 2017 Assuming a meeting attendance rate of 60-70% (based on historical examples), we believe all four Lotte affiliates will pass the resolutions (considering the stakes held by the largest shareholders and related parties). Mirae Asset Daewoo Co., Ltd. Holding company valued at between W4.1tr and W4.8tr We estimate the fair value of the new holding company between W4.1tr and W4.8tr. [Holding companies/IT services ] We present two sets of valuations, one that does not reflect brand royalties and one that does (based on a 20bp royalty rate, same as LG Corp.’s and SK Holdings’), as Dae -ro Jeong details regarding royalty rates or the timing of collection have not been released. +822 -3774 -1634 [email protected] Combined value of the four affiliates to increase slightly post-spinoff In assessing the fair values of the new holding company and the operating units of the four affiliates, we examined potential changes in each entity’s market capitalization before and after the spin-offs. Our analysis suggests that the combined market capitalization of the four affiliates will increase slightly after the spin-offs, by between 0.4% and 5.6%.

All existing circular shareholdings to be untied; new ones to be addressed within required time frame

With the upcoming spin-offs/merger, Lotte Group will unwind all 67 of its existing circular shareholding ties. But the changes will also give rise to 12 new circular shareholding structures and six new cross-shareholding structures, which will need to be untied within six months from the date of their establishment, as per the Monopoly Regulation and Fair Trade Act (MRFTA). Within that period (from October 2017 to March 2018), we think Chai rman Shin Dong-bin could directly purchase a 7.8% stake (roughly W312bn) in the holding company from group affiliates as a means to untangle the new circular/cross- shareholding structures and enhance his control over the group. Holding company requirements must be met within two years Lotte’s new holding company must satisfy certain requirements to legally qualify as a holding company within two years of the date of the spin-offs/merger (October 1, 2017). For certain subsidiaries, including the operating units of Lotte Shopping (17.9% stake), Lotte Chilsung (19.3%), and , the holding company needs to meet subsidiary ownership requirements (at least 20% stake for listed firms and 40% for unlisted firms). For this purpose, we think the holding company will r esort to tender offers (equity swaps) or additional share purchases. In addition, due to the ban on ownership of financial subsidiaries by non-financial holding companies under the MRFTA, the new holding company is likely to sell its stakes in financial affiliates, such as (93.8%) and (25.6%), to Hotel Lotte or other affiliates sitting outside of the holding company structure within the grace period.

Expected changes in market capitalization following spin-offs

(Wtr) Lotte Confectionery Lotte Shopping Lotte Chilsung Lotte Foods (Wtr) 10 Sum of four companies Investment business 16 Operating business 8 0.9 14 2.0 2.4 12 3.7 4.1 4.9 6 10

8 4 7.6 6.0 6.0 6 1.7 10.3 9.9 9.9 2 1.4 0.6 0.7 2.0 0.7 4 0.1 0.2 1.5 1.5 1.7 1.7 0.1 0.8 1.2 0.7 0.8 0.8 2 0 Current market Post-spin-off Post-spin-off Current market Post-spin-off Post-spin-off Current market Post-spin-off Post-spin-off Current market Post-spin-off Post-spin-off 0 cap (1) (2) cap (1) (2) cap (1) (2) cap (1) (2) Current market cap Post-spin-off… Post-spin-off…

Note: Based on closing price as of August 25; (1) does not reflect brand royalties, (2) reflects brand royalties (20bp rate); Source: Mirae Asset Daewoo Research

August 29, 2017 Holding Companies

In need of shareholders’ approval

Spin-off/merger resolutions likely to pass, assuming 60-70% attendance

Four key Lotte Group affiliates—Lotte Confectionery, Lotte Shopping, Lotte Chilsung Beverage, and Lotte Foods—are scheduled to hold extraordinary general meetings on August 29th to vote on resolutions required for holding company conversions. Under the resolution, the investment unit of Lotte Confectionery (a surviving entity) will merge with the spun-off investment units of Lotte Shopping, Lotte Chilsung, and Lotte Foods.

Mergers and spin-offs require the approval of a special resolution by a majority of shareholders. According to the Commercial Act, a special resolution requires the affirmative vote of two-thirds of the shareholders present in person or by proxy at a shareholders’ meeting, comprising at least one-third of total issued shares. In counting quorum, shares that do not carry voting rights are not included in issued shares.

At the shareholders’ meeting concerning the holding company conversion of Hyundai Heavy Industries (HHI), about 66.01% of shareholders were present in person or by proxy. At the meeting to vote on the merger between Cheil Industries and Samsung C&T, the attendance rate reached 83.57%. For controversial, highly-publicized merger/spin-off cases, we would expect the shareholders’ meeting attendance rate to be around 60-80%. In such cases, the group would need affirmative votes from 46.7-53.3% of shares with voting rights.

Assuming attendance rates of 60-70% (based on historical cases), we believe all four Lotte affiliates will be able to pass the resolutions, considering the stakes held by the largest shareholders and related parties. The largest shareholders and related parties (excluding Shin Dong-joo, who is against the spin-offs and merger, and related parties) hold 40.7% of voting shares in Lotte Confectionery, 51.9% in Lotte Shopping, 39.8% in Lotte Chilsung Beverage, and 43.0% in Lotte Foods.

Table 1. Quorum requirements for shareholders’ meeting Purpose For a meeting For resolution

Affirmative vote of majority of Ordinary Electing BOD/BOA and deciding their pay, Affirmative vote of at least one- members present in person resolution approving financial statements, etc. quarter of total issued shares or by proxy Alteration of memorandum, transfer of a Affirmative vote of at least Special whole (or part of a) business division, Affirmative vote of at least one- two-thirds of the members resolution dismissal of BOD/BOA, approval of third of total issued shares present in person or by proxy company split or merger Source: Mirae Asset Daewoo Research

Figure 1. Minimum stake s r equired to approve special resolution (varies by attendance rate) vs. major shareholders/related parties’ stake s

(%) 100 100 Stake needed for approval 90 Shareholder attendance Largest shareholder and affiliated persons 80 33.3 80 70 30.0 60 26.7 60 23.3 51.9 50 80% attendance 20.0 43.0 70% attendance 40.7 39.8 40 16.7 60% attendance 66.7 60.0 53.3 46.7 20 40.0 33.3

0 Case1 Case 2 Case 3 Case 4 Case 5 Case 6 Lotte Confectionery Lotte Shopping Lotte Chilsung Lotte Foods

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 August 29, 2017 Holding Companies

Table 2. Shareholders of Lotte Confectionery (affiliated persons: 62.73%) (Shares, %) Investment Business Name No. of shares Stake division division Lotte Aluminum 2,172,680 3,823,245 643,382 15.29 Lotte Japan 1,405,960 2,474,055 416,338 9.89 Shin Dong-bin 1,288,680 2,267,680 381,608 9.07 Daehong 464,620 817,587 137,585 3.27 Hotel Lotte 456,700 803,652 135,239 3.21 Shin Kyeok-ho 970,570 1,707,905 287,408 6.83 Shin Dong-joo 562,370 989,597 166,531 3.96 Shin Young-ja 358,730 631,255 106,228 2.52 Lotte Foundation 1,235,760 2,174,557 365,937 8.69 Treasury stock 0 0 0 0.00 NPS 572,824 1,007,993 169,627 4.03 Total shares 14,214,000 25,012,241 4,209,102 100.00 Source: DART, Mirae Asset Daewoo Research

Table 3. Shareholders of Lotte Shopping (affiliated persons: 58.46%) (Shares, %) Investment Name No. of shares Business division Stake division Shin Dong-bin 4,237,627 453,335 3,784,292 13.46 Hotel Lotte 2,781,947 297,608 2,484,339 8.83 Lotte E&C 300,019 32,096 267,923 0.95 Fujifilm Korea 2,474,543 264,723 2,209,820 7.86 Hotel Lotte Pusan 246,720 26,394 220,326 0.78 Lotte Confectionery 2,474,543 264,723 2,209,820 7.86 Lotte Chilsung Beverage 1,237,272 132,361 1,104,911 3.93 Lotte Data Communication 1,515,653 162,142 1,353,511 4.81 Seo Mi-kyung 30,531 3,266 27,265 0.10 Shin Yu-mi 28,903 3,092 25,811 0.09 Shin Dong-joo (after selling 5.5%) 2,505,000 267,981 2,237,019 7.95 Shin Kyeok-ho 293,877 31,438 262,439 0.93 Shin Young-ja 232,818 24,906 207,912 0.74 Chang Jae-young 950 102 848 0.00 Chang Sun-yoon 700 75 625 0.00 Yoo Joo-young 499 53 446 0.00 Lotte Samdong Welfare Foundation 47,888 5,123 42,765 0.15 Treasury stock 1,938,688 207,398 1,731,290 6.16 NPS 1,910,990 204,435 1,706,555 6.07 Total shares 31,490,892 3,368,845 28,122,047 100.00 Source: DART, Mirae Asset Daewoo Research

Table 4. Shareholders of Lotte Chilsung Beverage (affiliated persons: 52.86%) (Shares, %) Investment Business Name No. of shares Stake division division Lotte Confectionery 238,681 84,471 154,210 19.29 Lotte Aluminum 109,718 38,830 70,888 8.87 Hotel Lotte 73,280 25,934 47,346 5.92 Shin Dong-bin 70,620 24,993 45,627 5.71 Shin Dong-joo 35,070 12,412 22,658 2.83 Shin Young-ja 32,872 11,634 21,238 2.66 Shin Kyeok-ho 16,110 5,701 10,409 1.30 Lotte Foundation 77,650 27,481 50,169 6.28 Treasury stock 72 25 47 0.01 NPS 124,289 43,987 80,302 10.05 Total shares 1,237,203 437,857 799,346 100.00 Source: DART, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 August 29, 2017 Holding Companies

Table 5. Shareholders of Lotte Foods (affiliated persons: 50.17%) (Shares, %) Investment Business Name No. of shares Stake Division Division Lotte Chilsung Beverage 127,813 22,173 105,640 9.33 Lotte Confectionery 127,677 22,149 105,528 9.32 Hotel Lotte 122,013 21,166 100,847 8.91 Hotel Lotte Pusan 60,000 10,409 49,591 4.38 L2 Investment Company 59,401 10,305 49,096 4.34 Lotte Shopping 47,180 8,185 38,995 3.45 Lotte Chemical 13,354 2,317 11,037 0.98 Shin Dong-bin 26,899 4,666 22,233 1.96 Shin Dong-joo 26,899 4,666 22,233 1.96 Shin Young-ja 14,972 2,597 12,375 1.09 Shin Yu-mi 4,582 795 3,787 0.33 Lotte Foundation 56,160 9,742 46,418 4.10 Treasury stock 51 9 42 0.00 NPS 169,119 29,338 139,781 12.35 Total shares 1,369,436 237,566 1,131,870 100.00 Source: DART, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 4 August 29, 2017 Holding Companies

Fair value of a holding company

Lotte Group’s holding company conversion process will involve Lotte Confectionery’s investment unit (surviving entity) merging with the spun-off investment units of Lotte Shopping, Lotte Chilsung Beverage, and Lotte Foods.

Table 6. Four subsidiaries’ spin-offs and spin-off/merger ratios (no. of shares, W) Lotte Lotte Shopping’s Lotte Chilsung Lotte Foods’ Confectionery’s investment unit investment unit investment unit investment unit 1. No. of shares before spinoff 35,535,000 31,490,892 1,237,203 1,369,436 2. Spin-off ratio 0.7038762 0.1069784 0.3539094 0.1734773 3. No. of shares after spin-off 25,012,241 3,368,845 437,857 237,566 4. Intrinsic value 77,435 828,430 1,800,764 797,680 Asset value 67,638 472,593 1,666,655 687,877 Earnings value 83,967 1,065,655 1,890,170 870,882 5. Merger price (=4) 77,435 828,430 1,800,764 797,680 6. Merger ratio 1 10.6983579 23.2550881 10.3012487 7. Spin-off/merger ratio (2*6) 1 1.1444932 8.2301943 1.7870328 Note: Lotte Confectionery is considering a split of par value (W500 → W200) Source: DART, Mirae Asset Daewoo Research

Table 7. Lotte Group holding company breakdown (no. of shares) No. of shares of holding No. of Merger price Merger ratio company shares % Lotte Confectionery’s investment unit 25,012,241 W77,435 1 25,012,241 33.9% Lotte Shopping’s investment unit 3,368,845 W828,430 10.6983579 35,977,959 48.9% Lotte Chilsung’s investment unit 437,857 W1,800,764 23.2550881 10,119,268 13.8% Lotte Foods’ investment unit 237,566 W797,680 10.3012487 2,384,074 3.3% Holding company 73,493,542 100% Source: DART, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 August 29, 2017 Holding Companies

Table 8. Major shareholders of (Shares, %) Shareholders Post-spin off & pre-merger changes Post-merger changes Lotte Confectionary Lotte Shopping Lotte Chilsung Lotte Foods investment Lotte Holdings investment company investment company investment company company (Merging entity) (Merged entity 1) (Merged entity 2) (Merged entity 3)

# of shares % # of shares % # of shares % # of shares % # of shares % Shin Dong-bin 2,267,680 9.07 453,335 13.46 24,993 5.71 4,666 1.96 7,723,926 10.51 Shin Dong-joo 989,597 3.96 267,981 7.95 12,412 2.83 4,666 1.96 4,179,782 5.69 Shin Kyeok-ho 1,707,905 6.83 31,438 0.93 5,701 1.30 0 0.00 2,175,007 2.96 Shin Young-ja 631,255 2.52 24,906 0.74 11,634 2.66 2,597 1.09 1,193,093 1.62 Shin Yu-mi 0 0.00 3,092 0.09 0 0.00 795 0.33 42,092 0.06 Seo Mi-kyung 0 0.00 3,266 0.10 0 0.00 0 0.00 35,782 0.05 Lotte Foundation 2,174,557 8.69 0 0.00 27,481 6.28 9,742 4.10 2,912,170 3.96 Lotte Samdong Welfare 0 0.00 5,123 0.15 0 0.00 0 0.00 54,566 0.07 Foundation Hotel Lotte 803,652 3.21 297,608 8.83 25,934 5.92 21,166 8.91 4,792,742 6.52 Lotte Aluminum 3,823,245 15.29 0 0.00 38,830 8.87 0 0.00 4,723,923 6.43 Fujifilm Korea 0 0.00 264,723 7.86 0 0.00 0 0.00 2,819,605 3.84 Lotte Japan 2,474,055 9.89 0 0.00 0 0.00 0 0.00 2,613,608 3.56 Lotte Data Communication 0 0.00 162,142 4.81 0 0.00 0 0.00 1,727,003 2.35 Daehong 817,587 3.27 0 0.00 0 0.00 0 0.00 817,587 1.11 Lotte Hotel 0 0.00 26,394 0.78 0 0.00 10,409 4.38 388,158 0.53 Lotte E&C 0 0.00 32,096 0.95 0 0.00 0 0.00 341,855 0.47 L2 Investment Company 0 0.00 0 0.00 0 0.00 10,305 4.34 105,965 0.14 Lotte Chemical 0 0.00 0 0.00 0 0.00 2,317 0.98 23,822 0.03 Affiliated parties 15,689,533 62.73 1,572,104 46.67 146,986 33.57 66,664 28.06 36,670,686 49.90 Lotte Confectionery 0 0.00 264,723 7.86 84,471 19.29 22,149 9.32 Investment Company Lotte Shopping Investment 0 0.00 207,398 6.16 0 0.00 8,185 3.45 Company 8,937,708 12.16 Lotte Chilsung Beverage 0 0.00 132,361 3.93 0 0.00 22,173 9.33 Investment Company Lotte Foods Investment 0 0.00 0 0.00 0 0.00 9 0.00 Company Total outstanding shares 25,012,241 100.00 3,368,845 100.00 437,857 100.00 237,566 100.00 73,493,542 100.00 Source: DART, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 6 August 29, 2017 Holding Companies

Holding company valued at around W4tr

We estimate the fair value of the new holding company at W4.1tr or W4.8tr.

Lotte Group’s holding company is expected to be a pure holding company, with brand royalties, dividends, advisory fees, and lease income serving as major earnings sources. The holding company’s fair value could be calculated based on cash flows from the aforementioned income sources, the value of its stakes in listed/unlisted subsidiaries and marketable securities holdings.

We present two sets of valuations, one that does not reflect brand royalties and one that does (based on a 20bps royalty rate; the same as LG’ Corp.’s and SK Holdings’), as details regarding brand royalty rates or the timing of collection have not yet been released.

Table 9. Lotte Group’s holding company’s fair value calculation (Wbn) Case (1) Case (2) Detail

Operating value (1) 29 1,151

In-house business 0 0 Pure holding company Brand royalties 0 1,122 Royalty rate of 20bps; applied 10x after cost reduction Real estate investment 29 29 Investment value (2) 6,259 6,259 Listed subsidiaries 2,042 2,042 Based on market value Unlisted subsidiaries 4,218 4,218 Based on fair value Total asset value (3)=(1)+(2) 6,289 7,411

Based on expected balance sheet of Lotte Group ’s Net debt (4) -91 -91 holding company Net asset value (5)=(3)-(4) 6,380 7,502 Based on a 35% discount (the lower end of discount Fair market cap. 4,147 4,876 rates applied to LG Corp. (pure holding company) Discount rate 35.0% 35.0% # of shares outstanding (‘000 shares) 73,494 73,494 Based on common shares Per share NAV 56,426 66,349

Fair price 56,000 66,000 Current price - - Re-listing is scheduled for October 30, 2017 Upside - - Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 7 August 29, 2017 Holding Companies

Table 10. Lotte Group’s holding company’s value of investment securities (no. of shares, Wbn) No. of total No. of holding Book 100% Appraised shares Stake Remark company shares value value value outstanding Listed subsidiary 1,569

Lotte Shopping’s operating unit 28,122,047 5,046,021 17.9% 5,957 1,069 Appraised value of operating Lotte Chilsung operating unit 799,346 154,210 19.3% 1,675 323 units Lotte Food’s operating unit 1,131,870 250,164 22.1% 800 177 Unlisted subsidiary 2,989 4,110 Korea Seven 36,227,634 24,503,848 67.6% 187 664 449 Daehong Communications 40,000 17,600 44.0% 75 256 113 Fair value 481,024 261,861 54.4% 204 450 245 Lotte Station Building 3,600,000 1,490,400 41.4% 280 676 280 Lotte Asset Development 40,302,235 24,372,719 60.5% 112 186 112 Lotte.com 6,127,081 3,911,096 63.8% 31 48 31 6,020,000 5,117,000 85.0% 26 31 26 Book value Lotte Incheon Development 8,000,000 3,000,000 37.5% 15 40 15 Lotte Incheon Town 2,000,000 700,001 35.0% 4 10 4 Lotte International 895,489 247,915 27.7% 93 335 93 Lotte Card 74,740,061 70,088,853 93.8% 1,000 1,703 1,597 Based on the appraised value in Lotte Capital 33,297,512 8,536,058 25.6% 106 1,076 276 the registration statement; Lotte Member 2,462,242 2,311,510 93.9% 36 53 50 required to sell within two years Other 820 820

No. of share Book 100% Appraised Marketable securities Ownership Remark holdings value stake value Listed firms 472 473

Cheil Worldwide 64,250 0.06% 1 2,249 1 Market value

Other 471 471 Book value

Unlisted firms 104 108 BaekHak Beverage 7,382,400 86.06% 46 58 50 Fair value

Other 58 58 Book value Source: DART, Mirae Asset Daewoo Research

Figure 2. Lotte Group’s revenue outlook Figure 3. Lotte holding company’s operating earnings outlook

(Wtr) (Wtr) 100 300

251.0 80 250 226.3 80 74 217.9 67 68 65 192.8 59 200 60 55 48 150 40 40 37 32 27 28 29 100 19 20 15 17 50 33.1

0 0 '01 '03 '05 '07 '09 '11 '13 '15 '17F '17F(3 months) '18F '19F '20F '21F

Source: FTC, Mirae Asset Daewoo Research Source: DART, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 8 August 29, 2017 Holding Companies

Table 11. Lotte Card FCFE and valuation (discounted cash flow model) (Wbn) 2014 2015 2016 2017F Valuation Target value Korea Seven Revenue 2,616 3,313 3,703 4,073

Operating profit 35 43 47 51 Target P/E

Net profit 25 10 41 44 15.0 663.5

Daehong Revenue 337 382 405 428 Operating profit 17 20 21 22 Target P/E

Net profit 16 15 16 17 15.0 256.5 Lotteria Revenue 1,133 1,123 1,125 1,127 Target Net borrowings Operating profit 25 -2 6 7 EV/EBITDA 150.3

Net profit 20 -13 -9 -8 12.0 449.7 Source: Mirae Asset Daewoo estimates

Table 52. Lotte Card’s equity cash flow and equity value (DCF) (Wbn) Estimates 2017F 2018F 2019F 2020F 2021F Net profit (A) 131 148 172 187 201 Additional capital accumulation to meet target leverage ratio (B) -27 -108 -101 -95 -88 Equity cash flow (C=A+B) 104 40 71 93 113 Present value factor (discount rate: 10.03%) 0 0 0 0 0 Present value of equity cash flow 99 35 56 66 73 Present value of the explicit forecast period cash flows (D) 330 Present value of continuing value (E) 1,373 Equity value (F=D+E) 1,703 Note: Assumed a perpetual growth rate at 1% Source: DART

Table 13. Lotte Card earnings and forecast (Wbn) 2014 2015 2016 2017F 2018F 2019F 2020F 2021F Ⅰ. Revenue 1,608.6 1,625.8 1,643.5 1,716.8 1,802.4 1,883.5 1,959.7 2,031.1 Credit sales 861.1 869.0 881.7 957.3 1,027.9 1,093.1 1,152.8 1,207.0 Financial instrument sales 538.2 544.7 540.6 549.3 556.9 563.1 570.4 578.9 Others 209.3 212.1 221.2 210.3 217.6 227.3 236.5 245.1 Ⅱ. SG&A 1,409.0 1,451.1 1,501.9 1,544.0 1,607.8 1,656.9 1,713.0 1,766.3 Ⅲ. Operating profit 199.6 174.7 141.6 172.7 194.5 226.7 246.7 264.8 Ⅳ. Non-operating profit -0.2 1.7 2.7 - - - - - Non-operating sales 1.7 3.3 4.1 - - - - - Non-operating expenses -2.0 -1.5 -1.4 - - - - - Ⅴ. Net profit before tax 199.4 176.5 144.3 172.7 194.5 226.7 246.7 264.8 Ⅵ. Tax -51.3 -42.2 -37.7 -41.3 -46.6 -54.4 -59.2 -63.6 Ⅶ. Net profit 148.1 134.3 106.6 131.4 147.9 172.3 187.5 201.1 Source: DART

Mirae Asset Daewoo Research 9 August 29, 2017 Holding Companies

Post-spin-off market cap analysis

Combined value of four affiliates to slightly increase post-spin-off

By estimating the market caps of the investment and operating units of the four affiliates and assessing the fair values of the new holding company and the operating units of the four affiliates, we have projected potential changes in each entity’s market capitalization post-spin-off.

Our analysis suggests that the combined market cap of the four affiliates will increase slightly after the spin-offs, by between 0.4% and 5.6%.

Table 64. Four affiliates’ market caps based on spin-off ratios (Wbn) Market cap Spin-off ratio Investment unit Operating unit Lotte Confectionery 0.7038762 2,793 1,966 827 Lotte Shopping 0.1069784 8,503 910 7,593 Lotte Chilsung Beverage 0.3539094 1,888 668 1,220 Lotte Foods 0.1734773 813 141 672 Total 13,997 3,685 10,312 Note: Based on August 25th closing prices. Source: Mirae Asset Daewoo Research

Table15. Fair value assessment for four subsidiaries’ investment units (Wbn, no. of shares) No. of shares Fair value (1) Fair value (2) Merger price Merger ratio % Holding company’s fair value 4,147 4,876 73,493,542 100%

Lotte Confectionery ’s 1,411 1,660 W77,435 1 25,012,241 34.0% investment unit Lotte Shopping ’s investment 2,030 2,387 W828,430 10.6983579 35,977,959 49.0% unit Lotte Chilsung’s investment unit 571 671 W1,800,764 23.2550881 10,119,268 13.8% Lotte Foods’ investment unit 135 158 W797,680 10.3012487 2,384,074 3.2% Note: Based on August 25th closing prices; fair value (1) does not reflect brand royalties; fair value (2) reflects brand royalties (20bps) Source: Mirae Asset Daewoo Research

Table 16. Fair value assessment for four subsidiaries’ operating units (Wbn) Target Investment Fair value 2017F EBITDA Net debt EV/EBITDA value Lotte Confectionery’s operating unit 1,477 236 8.0 0 408 Lotte Shopping’s operating unit 5,957 857 8.0 2,141 3,037 Lotte Chilsung operating unit 1,675 235 9.0 500 939 Lotte Foods’ operating unit 800 126 7.0 0 85 Total 9,910 Note: Based on our 2017 forecasts and the market consensus Source: Mirae Asset Daewoo Research

Figure 4. Expected changes in market cap post-spin-off

(Wtr) 16 Operating unit Investment unit

14

12 3.7 4.1 4.9

10

8

6 10.3 9.9 9.9 4

2

0 Current Mkt cap. After spin-off(1) After spin-off(2)

Note: Based on August 25 th closing prices; fair value (1) does not reflect brand royalties; fair value (2) reflects brand royalties (20bps) Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 10 August 29, 2017 Holding Companies

As for Lotte Confectionary, the intrinsic value of the investment unit was estimated at a lower level than the unit’s market-cap value, as a higher spin-off ratio was assigned to the unit. Meanwhile, the intrinsic value of the operating unit was estimated at a far higher level than the unit’s market-cap value. Overall, the company’s combined market cap will likely increase by 3.4% (not reflecting brand royalties) or 12.3% (reflecting brand royalties, at a 20bp rate) after spinoff. For Lotte Shopping, the intrinsic value of the investment unit was estimated at a higher level than the unit’s market-cap value, as a lower spin-off ratio was assigned to the unit. Meanwhile, the intrinsic value of the operating unit was estimated at a lower level than the unit’s market-cap value. Overall, the company’s combined market cap will likely decrease 6.1% (not reflecting brand royalties) or 1.9% (reflecting brand royalties, at a 20bp rate) after spinoff. For Lotte Chilsung, the intrinsic value of the investment unit was estimated at a lower level than the unit’s market-cap value, while the intrinsic value of the operating unit was estimated at a far higher level than the unit’s market-cap value. Overall, the company’s combined market cap will likely increase by 19% (not reflecting brand royalties) or 24.3% (reflecting brand royalties, at a 20bp rate) after spinoff. For Lotte Foods, the intrinsic value of the investment unit was estimated at a higher level than the unit’s market-cap value, and the intrinsic value of the operating unit was also estimated at a higher level than the unit’s market-cap value. Overall, the company’s combined market cap will likely increase 14.9% (not reflecting brand royalties) or 17.8% (reflecting brand royalties, at a 20bp rate) after spinoff. The expected changes in market cap before and after spinoff is subject to change, as the timing and rate of brand royalties should affect the estimation of intrinsic value. Furthermore, the value of each investment unit was estimated based on our 2017F earnings, while actual earnings could be affected by the post-spinoff business reorganization Table 17. Expected changes in market cap before and after spinoff (Wbn) Investment unit Operating unit Combined value (1) Combined value (2)

Intrinsic value (1) Intrinsic value (2) Intrinsic value Value of Value of Market investment investment Company Market Market cap unit (1) unit (2) Change Change cap (a) Change Change cap (b) Change (a)+(b) + value of + value of operating operating unit unit Lotte 1,966 1,411 -28.2% 1,660 -15.6% 827 1,477 +78.6% 2,793 2,888 +3.4% 3,137 +12.3% Confectionary Lotte Shopping 910 2,030 +123.2% 2,387 +162.4% 7,593 5,957 -21.5% 8,503 7,988 -6.1% 8,345 -1.9% Lotte Chilsung 668 571 -14.5% 671 +0.5% 1,220 1,675 +37.3% 1,888 2,246 +19.0% 2,347 +24.3% Lotte Foods 141 135 -4.7% 158 +12.1% 672 800 +19.0% 813 935 +14.9% 958 +17.8% Total 3,685 4,147 +12.5% 4,876 +32.3% 10,312 9,910 -3.9% 13,997 14,057 +0.4% 14,786 +5.6% Note: Based on closing price as of August 25; (1) does not reflect brand royalties, (2) reflects brand royalties (20bp rate) Source: Mirae Asset Daewoo Research

Figure 5. Expected changes in market cap before and after spinoff

(Wtr) Lotte Confectionery (Wtr) Lotte Shopping (Wtr) Lotte Chilsung Beverage (Wtr) Lotte Foods 4 Operating business 10 Operating business 3 Operating business 1.0 Operating business Investment business Investment business Investment business Investment business 0.1 0.2 8 0.9 0.8 3 0.1 2.0 2.4 2 0.6 0.7 1.7 6 0.6 1.4 2 0.7 2.0 4 7.6 0.4 0.8 0.8 1 0.7 6.0 6.0 1 1.7 1.7 1.5 1.5 2 1.2 0.2 0.8 0 0 0 0.0 Current market Post-spin-off Post-spin-off Current market Post-spin-off Post-spin-off Current market Post-spin-off Post-spin-off Current market Post-spin-off Post-spin-off cap (1) (2) cap (1) (2) cap (1) (2) cap (1) (2)

Note: Note: Based on closing price as of August 25; (1) does not reflect brand royalties, (2) reflects brand royalties (20bp rate) Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 11 August 29, 2017 Holding Companies

Unwinding of new cross/circular shareholding

Upcoming spinoffs/merger to reduce Lotte Group’s circular shareholding ties from 67 to 18; Chairman Shin Dong-bin to purchase 7.8% stake in the holding company as a means to untangle the remainder

The Lotte Group has reduced the number of its circular shareholding ties from 416 in 2Q16 to 67. With the upcoming spinoffs/merger, Lotte Group will unwind all 67 of its existing circular shareholding ties. But the changes will also give rise to 12 new circular shareholding structures and six new cross-shareholding structures, which will need to be untied within six months from the date of their occurrence, as per the Monopoly Regulation and Fair Trade Act (MRFTA).

Within that period (from October 2017 to March 2018), we think Chairman Shin Dong-bin could directly purchase a 7.8% stake (which would be worth roughly W312bn in the event that the value of the holding company is estimated at W4tr) in the holding company from group affiliates as a means to untangle the new circular/cross-shareholding structures and enhance his control over the group.

Table 18. New circular shareholding of Lotte Group Subsidiar Subsidiary No. Subsidiary 1 Subsidiary 2 Subsidiary 3 Subsidiary 4 Notes y 5 6 Lotte Daehong →Lotte 1 → Lotteria → Daehong → Lotte Holdings Holdings Holdings (1.1%, approx. 54.4% 12.5% 1.1% W44 bn ) Lotte Lotte Data 2 → Daehong → → Lotte Holdings Holdings Communication 44.0% 28.5% 2.4% Lotte Data Lotte Lotte Data Communication 3 → Lotteria → → Lotte Holdings → Holdings Communication Lotte Holdings 54.4% 34.5% 2.4% (2.4%, approx. Lotte Lotte Data Lotte W94bn) 4 → Lotteria → Daehong → → Holdings Communication Holdings 54.4% 12.5% 2.4% 2.4%

Lotte 5 → Lotteria → Korea Fujifilm → Lotte Holdings Holdings 54.4% 2.1% 3.8% Lotte 6 → Lotte Corp. → Korea Fujifilm → Lotte Holdings Holdings Korea Fujifilm → 27.7% 56.8% 3.8% Lotte Holdings Lotte Lotte Lotte (3.8%, approx. 7 → → Lotte Corp. → Korea Fujifilm → Holdings Logistics Holdings W1,53.6bn) 18.9% 13.7% 56.8 3.8% Lotte Korea Lotte 8 → Lotteria → Lotte Logistics → Lotte Corp. → → Holdings Fujifilm Holdings 54.4% 17.3% 13.7 56.8% 3.8% Lotte Data Lotte 9 → Communicat → Lotte E&C → Lotte Holdings Holdings ion 7.7% 5.3% 0.5%

Lotte Lotte Data Lotte 10 → Lotteria → → Lotte E&C → Holdings Communication Holdings Lotte E&C → Lotte 54.4% 34.5% 5.3% 0.5% Holdings (0.5%, approx. Lotte Lotte Data Lotte 11 → Daehong → → Lotte E&C → W18.8bn) Holdings Communication Holdings 44.0% 28.5% 5.3% 0.5%

Lotte Lotte Data Lotte 12 → Lotteria → Daehong → → Lotte E&C → Holdings Communication Holdings 54.4% 12.5% 28.5% 5.3% 0.5% Source: DART, Mirae Asset Daewoo Research Note: Based on the assumption that Lotte Holdings’ market cap stands at W4tr

Mirae Asset Daewoo Research 12 August 29, 2017 Holding Companies

Table 19. New cross shareholding of Lotte Group Subsidiary1 Subsidiary2 Subsidiary3 Notes 1 Lotte Holdings → Daehong → Lotte Holdings 44% 1.1%

Lotte Data 2 Lotte Holdings → → Lotte Holdings Communication Cross shareholding to be 7.7% 2.4% addressed automatically after the resolution of 3 Lotte Holdings → Korea Fujifilm → Lotte Holdings circular shareholding 5% 3.8% 4 Lotte Holdings → Lotte E&C → Lotte Holdings 3.3% 0.5% 5 Lotte Holdings → Lotte Chilsung Beverage → Lotte Holdings Cross shareholding arising 0.0% (591 19.3% from the distribution of shares ) treasury shares (before 6 Lotte Holdings → Lotte Foods → Lotte Holdings spinoff) to the operating 0% (91 22.1% subsidiary shares ) Source: DART, Mirae Asset Daewoo Research

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Holding company requirements

Holding company requirements must be met within two years

Lotte’s new holding company must satisfy certain requirements to legally qualify as a holding company within two years (the grace period can be extended for two additional years in case approval from the Fair Trade Commission is obtained) from the date of the spinoff/merger (October 1st, 2017).

▶ Set to acquire additional stakes to meet the minimum subsidiary shareholding requirement and sell stakes in non-subsidiary affiliates

For certain subsidiaries, including the operating units of Lotte Shopping (17.9% stake), Lotte Chilsung Beverage (19.3%), and Lotte Confectionary, the holding company needs to meet subsidiary ownership requirements (at least 20% stake for listed firms and 40% for unlisted firms). For this purpose, we think the holding company will resort to tender offers (equity swaps) or additional share purchases. Meanwhile, the holding company is also forecast to sell its stakes in non-subsidiary affiliates, like Lotte Engineering & Construction (3.3%) and Lotte International (27.7%), to Hotel Lotte or other affiliates sitting outside the holding company structure within the grace period.

▶ Stakes in financial companies

Due to the ban on ownership of financial subsidiaries by non-financial holding companies under the MRFTA, the group is likely to dispose of the holding company’s stakes in 10 financial subsidiaries, including Lotte Card, Lotte Capital, and Lotte Insurance, to Hotel Lotte or other affiliates sitting outside the holding company structure within the grace period. The group is also required to sell stakes in non-affiliated financial companies, such as BNK Financial Group, within the grace period.

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Table 20. Requirements for Lotte Holdings to legally qualify as holding company Requirements Details Review Met or not Remarks Assets worth more than Total asset: W5.3tr Met - W100bn For holding The sum of stakes in company subsidiaries owned by a establishment/c holding company must Sum of stakes in subsidiaries: W3.62tr Met - onversion exceed % of the holding company’s asset value: 68.24% 50% of the holding company’s asset value The requirement is expected to be met Lotte E&C: 3.3%, Lotte International: 27.7% No shareholding of through additional stake acquisition/sale, Fujifilm Korea: 5.0%, and Lotte Logistics: 18.9% affiliates, excluding Unmet spin-off, merger, or merger following Lotte Data Communication: 7.7%, Igis I: 1.8% subsidiaries spin-offs, within the grace period (two Lotte Logistics: 7.2%, Lotte Accelerator: 16.7% years) [Listed] Lotte Foods: 22.1% [Unlisted] Lotte Station Building: 41.4%, Daehong Communications: 44.0% Lotte Nestle: 50.0%, Lotteria: 54.4% Met - Lotte Asset Development: 60.5%, Lotte.com 63.8% Stakes in subsidiaries: At Korea Seven: 67.6%, Lotte Giants: 85.0% least 20% for listed firms BaekHak Beverage: 86.1%, Lotte Members 93.9% and 40% for unlisted firms CH Beverage 100%, MJA Wine: 100%

Chung -Buk Soju 100%, [Listed] The requirement is expected to be met Lotte Shopping: 17.9%, Lotte Chilsung Beverage: through additional stake acquisition/sale, 19.3% Unmet spin-off, merger, or merger following [Unlisted] spin-offs, within the grace period (two To legally qualify Lotte Incheon Development: 37.5%, Lotte Incheon years) as holding Town: 35.0% company (1) Woori Home Shopping: Lotte Rental 8.6% (2) Lotte Himart: Lotte Rental 4.9% The requirement is expected to be met (3) Lotte Data Communication Second-tier subsidiaries are through additional stake acquisition/sale, Lotte Holding Company 2.3%, Lotte Shopping 4.8% not allowed to own stakes Unmet spin-off, merger, or merger following Lotte E&C 5.3%, Canon Korea Business Solutions in domestic affiliates spin-offs, within the grace period (two 5.6% years) Lotte Station Building 0.2%, Lotte PS Net 31.3% Hyundai Info Tech 59.7% Debt -to -equity ratio of 200% Total liabilities: W675bn, total capital: W4.62tr Met - or less Liability to equity ratio: 14.60% (1) Financial affiliates Lotte Card, Lotte Capital, Lotte Insurance, EB Card, Card, Hanpaysys, Busan Hanaro, Gyeonggi Smartcard, The requirement is expected to be met Incheon Smart Card, Lotte Members through additional stake acquisition/sale, No shareholding of financial (2) Non-affiliated financial companies owned by Unmet spin-off, merger, or merger following subsidiaries holding companies spin-offs, within the grace period (two BNK Financial Group, Shinhan Financial Group, KB years) Securities, Mirae Asset Daewoo, KTB Investment & Securities, SPARX Asset Management Korea Source: DART, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 15 August 29, 2017 Holding Companies

Figure 6. Korea Lotte Group corporate governance (after holding company conversion)

Source: Mirae Asset Daewoo Research

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Figure 7. Japan Lotte Group corporate governance

Source: Mirae Asset Daewoo Research

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Other issues

Table 21. Expected appraisal rights exercise prices in case of merger after division (W, Wbn) Lotte Lotte Lotte Chilsung Lotte Foods Confectionery Shopping Beverage Current prices (1) 196,500 270,000 1,526,000 594,000 Expected exercise prices (2) 204,062 231,404 1,511,869 633,128 Expected exercise prices/current prices -3.7% +16.7% +0.9% -6.2% Limit on appraisal rights exercise 550 1,650 450 200 No. of appraisal rights exercise shares within the 2,695,259 7,130,387 297,645 315,892 limit % of total issued shares 19.0% 22.6% 24.1% 23.1% Note: Closing price as of August 25 th 2017, Source: DART, Mirae Asset Daewoo Research

Table 22. Lotte Group’s holding company conversion schedule Date

Resolution by Board of Directors 4/26/2017 Merger agreement 4/26/2017 Book closure 5/31 2017 Start 6/1 2017 Book closure End 6/8 2017 Notice of shareholder Start 8/14 2017 intent to exercise appraisal rights End 8/28 2017 Shareholders’ meeting 8/29 2017 Start 8/29 2017 Exercise of appraisal rights End 9/18 2017 Effective date of merger 10/1 2017 Merger registration 10/2 2017 New share allotment 10/27 2017 Suspension of trading (tentative) 9.28 ~ Date before listing change Re-listing/listing change (tentative) 10/23 2017 Listing of new shares 10/30 2017 Source: DART, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 18 August 29, 2017 Holding Companies

APPENDIX 1

Important Disclosures & Disclaimers

Equity Ratings Distribution Buy Trading Buy Hold Sell 69.67% 17.06% 13.27% 0.00% * Based on recommendations in the last 12-months (as of June 30, 2017)

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Mirae Asset Daewoo Research 19 August 29, 2017 Holding Companies

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