SK Holdings (034730 KS ) Watch for SK Biopharmaceuticals’ IPO

Share repurchase reignites investor interest, triggering re-rating Conglomerates After announcing a 3.52mn share repurchase program (5% of total shares outstanding; W718.1bn) on October 1 st , SK Holdings has so far bought back 670,000 shares (19.1% of the total repurchase), or a daily average of 67,329 shares (30.7% of daily average Company Report trading volume). Once the repurchase is complete, the company’s treasury share October 21, 2019 holdings will increase to 25.7% (existing 20.7% plus the newly acquired 5.0%). We believe the latest share repurchase has reignited investor interest in SK Holdings’ stock, which had been trading at a steep discount to historical levels. Indeed, the stock had fallen by as much as 30% after March (vs. -6% for the KOSPI over the same period), causing its discount to NAV to widen to 55%, above the historical upper band of 40%. (Maintain) Buy Recently, however, the stock’s discount rate has been narrowing materially.

Target Price (12M, W) 300,000 All eyes on massive share repurchase; Sign of ownership restructuring? (1) Potential utilization of treasury shares: Likely to incur taxes Share Price (10/18/19, W) Of the 25.7% in treasury share holdings, 1) 15.7% came from the 2015 merger between 241,000 the company and SK C&C; 2) 5% was acquired between September and November 2015; and 3) 5% will come from the latest repurchase program. The initial 15.7% Expected Return 24% stemmed from the 31.8% stake in SK Holdings owned by SK C&C, which was later converted into treasury shares during the two companies’ merger in August 2015. At the time, SK Holdings was allowed to defer paying corporate taxes on capital gains on a portion of the shares held by SK C&C as part of the group’s 2007 holding company OP (19F, Wbn) 4,718 conversion, in accordance with the Restriction of Special Taxation Act (taxes estimated Consensus OP (19F, Wbn) - at around W400bn). If SK Holdings decides to utilize (exchange) or unload (sell or retire ) those treasury shares, it will be required to pay the corporate taxes that were deferred. EPS Growth (19F, %) -51.4 Market EPS Growth (19F, %) -29.5 (2) Potential merger between SKT’s investment unit and SK Holdings: Shareholder approval is crucial P/E (19F, x) 15.6 Talks of a merger between SK Holdings and the investment unit of SK Telecom (SKT; 017670 Market P/E (19F, x) 13.3 KS/Buy/TP: W335,000/CP: W238,500) have been sparked by the need to elevate the status of KOSPI 2,060.69 SK Hynix (000660 KS/Buy/TP: W110,000/CP: W77,400) within the holding company structure from a second-tier to a first-tier subsidiary (which would boost SK Holdings’ dividend income Market Cap (Wbn) 16,957 and exempt SK Hynix from third-tier subsidiary regulations). However, at current share prices, Shares Outstanding (mn) 71 a merger between SKT’s investment unit (which would own a 20.1% stake in SK Hynix) and SK Free Float (%) 48.7 Holdings through a spin-off (or a spin-off into a wholly-owned subsidiary) would significantly Foreign Ownership (%) 26.3 dilute the ownership of controlling shareholders and specially related parties in the combined company (by around 11.8%p). Furthermore, a long SK Holdings-short SKT trade stemming Beta (12M) 0.90 from dynamics related to major shareholders’ interests could affect actual share prices, 52-Week Low 192,500 casting doubt on whether shareholders would approve such a spin-off/ merger at a special 52-Week High 281,500 shareholders meeting (recall Hyundai Motor Group’s [HMG] failed attempt to overhaul its ownership structure). (%) 1M 6M 12M * Assuming an 80% attendance rate, at least 55.3% of votes from shareholders present Absolute 13.9 -9.9 -10.4 would be required. Relative 14.5 -3.2 -6.6 ** Stakes held by specially related parties (voting shares): 39.7% in SK Holdings and 30.1% in SKT 110 SK Holdings KOSPI SK Biopharmaceuticals set to file for preliminary IPO review 100 We maintain our Buy rating and target price of W300,000 on SK Holdings. We believe 90 wholly-owned subsidiary SK Biopharmaceuticals, which is currently seeking an IPO, will 80 also drive SK Holdings’ stock higher. While the company’s filing of a preliminary IPO 70 review looks imminent, the US FDA’s decision on the antiepileptic drug cenobamate is expected to come out in November. Against this backdrop, we believe the value of SK 60 10.18 2.19 6.19 10.19 Holdings’ SK Biopharmaceuticals stake, which is currently priced at a discount in the company’s market value, will attract increasing attention. Meanwhile, SK Holdings plans to pay out special dividends using its proceeds from SK Biopharmaceuticals’ IPO, Mirae Asset Daewoo Co., Ltd. creating a virtuous cycle in which an increase in enterprise value leads to an increase in shareholder value. [ Conglomerates/Software ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 82,730 90,613 101,502 99,649 110,278 112,726 Dae -ro Jeong +822 -3774 -1634 OP (Wbn) 5,281 5,745 4,688 4,718 5,996 6,099 [email protected] OP margin (%) 6.4 6.3 4.6 4.7 5.4 5.4

NP (Wbn) 766 1,677 2,253 1,096 1,280 1,406 EPS (W) 10,794 23,650 31,767 15,452 18,042 19,819 ROE (%) 6.0 12.5 14.9 6.3 6.9 7.2

P/E (x) 21.3 12.0 8.2 15.6 13.4 12.2 P/B (x) 1.2 1.4 1.1 0.9 0.9 0.8 Dividend yield (%) 1.6 1.4 1.9 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

October 21, 2019 SK Holdings

Share repurchase reignites investor interest, triggering re-rating

After announcing a 3.52mn share repurchase program (5% of total shares outstanding; W718.1bn) on October 1 st , SK Holdings has so far bought back 670,000 shares (19.1% of the total repurchase), or a daily average of 67,329 shares (30.7% of daily average trading volume). Once the repurchase is complete, the company’s treasury share holdings will increase to 25.7% (existing 20.7% plus the newly acquired 5.0%).

We believe the latest share repurchase has reignited investor interest in SK Holdings’ stock, which had been trading at a steep discount to historical levels. Indeed, the stock had sold off 30% after March, causing its discount to NAV to widen to 55%, above the historical upper band of 40%. Recently, however, the stock’s discount rate has been narrowing materially.

Table 1. Share repurchase program Content Notes

No. of shares 3,520,000 common shares 5% of total shares outstanding Based on the closing price as of Sept. 30, 2019; amount may vary Amount Approximately W718.1bn depending on actual purchase prices Oct. 2, 2010 – Jan. 1, 2020 Repurchase period 62 trading days (three months) Holding period Article 176, Paragraph 2 -6 of the Capital Markets Act Six months or longer (estimate) enforcement decree Purpose Enhancing shareholder value - Method Open market Through SK Securities Date of resolution Oct. 1, 2019 BOD resolution Source: DART, Mirae Asset Daewoo Research

Table 2. Avg. daily trading volume (ADTV) and buyback % (estimated) (No. of shares, %)

Jan.-Sep. 2019 2019 avg. January February March April May June July August Sept. ADTV (A) 102,677 110,167 111,001 84,083 103,558 101,246 74,978 76,644 148,403 114,010 Avg. daily buyback order estimate during the buyback Total stock purchases/buyback period = 3,520,000 shares/62 days = 56,774 shares/day period (B)

(B)/(A) 56,774 shares/102,677 shares = Approximately 55.3% Source: Mirae Asset Daewoo Research

Figure 1. Daily trading volume and stock buybacks (current: Figure 2. Daily buyback % (current: 30.7%/day) 67,329 shares/day)

(%) 50 46.5 44.3 41.8 39.4 40 37.0 36.2 33.2 33.5% 28.8 30 23.2

20

10 5.1

0 10/2 10/4 10/7 10/8 10/10 10/11 10/14 10/15 10/16 10/17

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

Mirae Asset Daewoo Research 2 October 21, 2019 SK Holdings

All eyes on massive share repurchase; Sign of ownership restructuring?

(1) Potential utilization of treasury shares: Likely to incur taxes

Of the 25.7% in treasury share holdings, 1) 15.7% came from the 2015 merger between the company and SK C&C; 2) 5% was acquired between September and November 2015; and 3) 5% will come from the latest repurchase program. The initial 15.7% stemmed from the 31.8% stake in SK Holdings owned by SK C&C, which was later converted into treasury shares during the two companies’ merger in August 2015. At the time, SK Holdings was allowed to defer paying corporate taxes on capital gains on a portion of the shares held by SK C&C as part of the group’s 2007 holding company conversion, in accordance with the Restriction of Special Taxation Act (taxes estimated at around W400bn). If SK Holdings decides to utilize (exchange) or unload (sell or retire) those treasury shares, it will be required to pay the corporate taxes that were deferred.

Table 3. Shareholding structure of largest shareholder and related parties (No. of shares, %, Wbn) Voting Shareholder name No. of shares Stake Stake value Notes rights Chey Tae-won 12,975,472 18.4 24.8 3,127 Chey Ki-won 4,820,000 6.9 9.2 1,162 Chey Jae-won 1,660,000 2.4 3.2 400 Chey Jong-hyun Scholarship Foundation 101,000 0.1 0.2 24 Chey Shin-won, etc. 1,201,643 1.7 2.3 290 Related parties total (1) 20,758,115 29.5 39.7 5,003 Treasury stock (2) 18,055,950 25.7 - 4,351 (1) SK Holdings -SK C&C merger From the 2015 merger b etween the company and SK C&C; 11,021,674 15.7 - 2,656 (Aug. 3, 20 15) potential exchange /retirement likely to incu r taxes (2) Repurchase (Sept. 1 -Nov. 1, 2015) 3,514,276 5.0 - 847 (3) Repurchase plan 673,288 shares repurchased (19.1% of the total repurchase) 3,520,000 5.0 - 848 (Oct. 2, 2019-Jan. 1, 2020) as of Oct. 18 2019 Total no. of shares outstanding (1)+(2)+(3) 70,360,297 100.0 100.0 16,957 Note: Based on Oct. 18, 2019 data Source: DART, Mirae Asset Daewoo Research Figure 3. Stock repurchase history and plan

Source: DART, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 October 21, 2019 SK Holdings

(2) Potential merger between SKT’s investment unit and SK Holdings: Shareholder approval is crucial

Talks of a merger between SK Holdings and the investment unit of SKT have been sparked by the need to elevate the status of SK Hynix within the holding company structure from a second-tier to a first-tier subsidiary (which would boost SK Holdings’ dividend income and exempt SK Hynix from third-tier subsidiary regulations). However, at current share prices, a merger between SKT’s investment unit (which would own a 20.1% stake in SK Hynix) and SK Holdings through a spin-off (or a spin-off into a wholly-owned subsidiary) would significantly dilute the ownership of controlling shareholders and specially related parties in the combined company (by around 11.8%p). Furthermore, a long SK Holdings-short SKT trade stemming from dynamics related to major shareholders’ interests could affect actual share prices, casting doubt on whether shareholders would approve such a spin-off/merger at a special shareholders’ meeting

Figure 4. Potential merger between SKT’s investment unit and SK Holdings

Source: DART, Mirae Asset Daewoo Research

Table 4. SKT spin-off scenario (investment unit and business unit) (No. of shares, %) Pre-spin-off Post-spin-off (surviving) Post-spin-off (new) Shareholder SKT SKT investment unit SKT business unit No. of shares Stake No. of shares Stake No. of shares Stale SK Holdings 21,624,120 26.8 12,671,056 26.8 8,953,064 26.8 Treasury stock 8,875,883 11.0 5,200,989 11.0 3,674,894 11.0 Total no. of shares 80,745,711 100.0 47,314,454 100.0 33,431,257 100.0 outstanding Note: Further discussion/analysis is needed regarding the utilization of treasury stock to facilitate a spin-off. Source : DART , Mirae Asset Daewoo Research

Table 5. SKT’s spin-off ratio and SK Holdings-SKT merger ratio (estimated) (Wbn) SKT investment unit SKT business unit SK Holdings SKT business unit

Ent. value 11,308 7,990 Share price 241,000 238,500

Spin-off ratio 0.59 0.41 Merger ratio 1.00 0.99

Note: Based on Oct. 18, 2019 closing prices Source : Mirae Asset Daewoo Research

Table 6. Shareholding changes following SK Holding-SKT merger (No. of shares, %, %p) Pre-merger Post-merger SK Holdings SKT investment unit SK Holdings+ SKT investment unit . Ownership No. of shares Stake (1) No. of shares Stake No. of shares Stake (2) Voting rights change (1) -(2) Chey Tae-won 12,975,472 18.4 58 0.0 12,975,530 11.1 -7.4 15.9 Chey Ki-won 4,820,000 6.9 0 0.0 4,820,000 4.1 -2.7 5.9 Chey Jae -won 1,660,000 2.4 0 0.0 1,660,000 1.4 -0.9 2.0 Chey Jong-hyun Scholarship Foundation 101,000 0.1 0 0.0 101,000 0.1 -0.1 0.1 Chey Shin -won, etc. 1,201,643 1.7 0 0.0 1,201,643 1.0 -0.7 1.5 Related parties total 20,758,115 29.5 58 0.0 20,758,173 17.7 -11.8 25.5 SK Holdings 18,055,950 25.7 12,671,056 26.8 30,595,564 26.1 Treasury - SKT’s investment unit 0 0.0 5,200,989 11.0 5,147,037 4.4 30.5% Total no. of shares outstanding 70,360,297 100.0 47,314,454 100.0 117,183,938 100.0 - 100.0 Source : DART, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 4 October 21, 2019 SK Holdings

Mergers and spin-offs are subject to the approval of a special resolution, requiring affirmative votes from two-thirds of the shareholders present and at least one-third of total issued shares (Article 434 of the Commercial Act). High-profile deals in recent years have yielded shareholder meeting attendance rates of around 70-80%, meaning the approval of the spin-off/merger will require affirmative votes from 46.7-53.3% of shares with voting rights.

Specially related parties currently hold a 39.7% stake in SK Holdings and a 30.1% stake in SKT.

Table 7. Quorum requirements for shareholders’ meeting Purpose Meeting Resolution

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

Figure 5. SK Holdings’ shareholders’ meeting attendance

(%) 100 86 87.6 88.5

80

60

40

20

0 16 17 18

Source: Press reports, Mirae Asset Daewoo Research

Table 8. Stakes held by the largest shareholder and related parties: SKT and SK Hynix (No. of shares, %, Wbn) SKT No. of shares Stake Voting rights Stake value SK Hynix No. of shares Stake Voting rights Stake value

SK Holdings 21,624,120 26.8 30.1 5,157 SKT 146,100,000 20.1 21.4 11,308

Chey Tae -won and Park J un g-ho and 1,351 0.0 0.0 0 1,132 0.0 0.0 0 others others Treasury stock 8,875,883 11.0 - 2,117 Treasury shares 44,000,570 6.0 - 3,406

Total no. of shares Total No. of shares 80,745,711 100.0 100.0 19,258 728,002,365 100.0 100.0 56,347 outstanding outstanding Note: Based on Oct. 18, 2019 closing prices Source: DART, Mirae Asset Daewoo Research

Figure 6. Minimum % required for special resolution approval (varies by attendance rate) vs. voting rights of SK Group’s specially related parties

% needed for approval (%) 100 100 Shareholder attendance 90 Largest shareholder and related parties 80 33.3 80 70 30.0 60 26.7 Attendance: 60 50 23.3 80% 20.0 70% 40 16.7 39.7 66.7 60.0 30.1 53.3 46.7 20 40.0 33.3

0 Case1 Case 2 Case 3 Case 4 Case 5 Case 6 SK Holdings SKT

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 5 October 21, 2019 SK Holdings

HMG’s withdrawal of spin-off/merger plan

HMG announced that it had scrapped its plan (announced on March 28, 2018) to spin off Hyundai Mobis’s (012330 KS/Buy/TP: W295,000/CP: W241,000) module and A/S businesses and merge them with Hyundai Glovis (086280 KS/Buy/TP: W200,000/CP: W148,000), given the uncertainty surrounding approval on the Hyundai Mobis side.

In a previous note, we noted that the main issue complicating HMG’s restructuring plan was the long-short trade dynamics created by the perceived interests of major shareholders in their planned stock transactions/swaps with group affiliates (swap between merged Hyundai Glovis shares held by major shareholders and surviving Hyundai Mobis shares held by Kia Motors, Hyundai Steel, and the merged Hyundai Glovis), rather than the controversy over the fairness of the spin-off/merger ratios. Investors recognized that the higher the share price of the merged Hyundai Glovis and the lower the share price of the surviving Hyundai Mobis, the more favorable it would be for major shareholders; most built their positions accordingly, resulting in pressure on Hyundai Mobis shares. This, in turn, gave rise to doubts and frustration among Hyundai Mobis shareholders over the plan, reducing the chances of a deal being approved. As long as such long-short dynamics are at play, we doubt a new merger ratio more favorable to Hyundai Mobis shareholders would make a difference, in terms of both share price and the chances of shareholder approval. Several civic groups have also pointed out that the dynamics of major shareholders’ interests could potentially encourage the overvaluation of the surviving entity and undervaluation of the spun-off entity.

Figure 7. HMG’s of spin-off/merger plan (announced March 28, 2018)

▶

Source: Hyundai Mobis, Mirae Asset Daewoo Research

Figure 8. Minimum % required for special resolution approval (varies by attendance rate) vs. voting rights of HMG’s specially related parties

(%) 100 100 % needed for approval 90 Largest shareholder and related parties Shareholder attendance 80 33.3 80 70 30.0 60 26.7 Attendance: 60 23.3 50 51.4 80% 20.0 70% 40 16.7 66.7 31.0 60.0 53.3 46.7 20 40.0 33.3

0 Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Hyundai Mobis Hyundai Glovis

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 6 October 21, 2019 SK Holdings

SK Biopharmaceuticals set to file for preliminary IPO review

Retain Buy with TP of W300,000

We maintain our Buy rating and target price of W300,000 on SK Holdings. We believe wholly-owned subsidiary SK Biopharmaceuticals, which is currently seeking an IPO, will also drive SK Holdings’ stock higher. While the company’s filing of a preliminary IPO review looks imminent, the US FDA’s decision on the antiepileptic drug cenobamate is expected to come out in November. Against this backdrop, we believe the value of SK Holdings’ SK Biopharmaceuticals stake, which is currently priced at a discount in the company’s market value, will attract increasing attention. Meanwhile, SK Holdings plans to pay out special dividends using its proceeds from SK Biopharmaceuticals’ IPO, creating a virtuous cycle in which an increase in enterprise value leads to an increase in shareholder value.

Figure 9. SK Biopharmaceuticals and SK Pharmteco are currently valued at W2.2tr (based on SK Holdings’ market value) vs. our combined estimate of W6.3tr

(Wtn) 30

25

7.4 20 8.6

16.1

15 3.4 Fair value of Sk 1.8 Biopharmaceuticals + 10 1.8 SK Biotek not relected in current market cap 2.6 0.9 5 2.3 3.0 4.0 2.2 0 SK Holdings market + Net debt (parent) - Stakes in listed - SK E&S - SK Siltron - Other unlisted - IT services, etc. - Brand royalties/other - Treasury stock Remainder Bio businesses' fair cap subsidiaries subsidiaries value

Source: Mirae Asset Daewoo Research

Figure 10. SK Group’s biotech business portfolio Figure 11. SK Pharmteco’s revenue

(Wbn) 800 AMPAC Korea/Ireland

600

400

200

0 17 18 19F

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

Mirae Asset Daewoo Research 7 October 21, 2019 SK Holdings

Table 9. SK Biopharmaceuticals’ out-licensing deal with a European partner (Feb. 14, 2019) Notes

Counterparty Arvelle Therapeutics Region 32 countries in Europe US$530mn + royalties ① Up-front payment: US$100mn (non-refundable) Value ② Milestones: Eligible to receive up to US$430mn upon the achievement of regulatory and commercial milestones ③ Recurring royalties: Based on net revenue Warrant Eligible to acquire a stake in Arvelle Therapeutics B.V. (which controls Arvelle Therapeutics) Source: DART, Mirae Asset Daewoo Research

Table 10. Biopharmaceuticals’ drug pipeline Item Indication Ph1 Ph2 Ph3 NDA Notes Expected to gain approval from US FDA in March 2019 Solriamfetol Narcolepsy Projected to generate royalty income starting in 2019 Announced out -licensing deal in Europe in Feb. 2019 Cenobamate Epilepsy Expected to gain approval from US FDA in Nov. 2019 Carisbamate Rare epilepsy Irritable bowel Relenopride syndrome SKL13865 ADHD SKL20540 Schizophrenia Parkinson’s YKP10461 disease SKL-PSY/FZ-016 Bipolar disorder Source: Company data , Mirae Asset Daewoo Research

Table 11. SK Pharmteco’s capacity overview Date of Planned Capacity 2020- Factory Country establishment/ expansion Business areas Notes (m³) (m³) acquisition (m³) Daedeok Korea 1999 160 160 R&D (pilot/clinical trial products)

APIs for AIDS and hepatitis C treatments; aiming Sejong Korea Oct. 2017 160 480 640 API production to complete capacity expansion by 2020 (160,000 liters ‰ 640,000 liters) APIs for Bristol -Myers Squibb’s Swords Ireland Jun. 2017 82 18 100 Valued-added API production cardiovascular/hepatitis treatments and for a large customer’s blockbuster diabetes drug APIs More than 60 clinical pipeline items and AMPAC US Jul. 2018 598 102 700 (development, clinical studies, differentiated competitiveness stemming from commercialization) specialized API production technology Total 1,000 600 1,600

Source: Company data, Mirae Asset Daewoo Research

Figure 13. SK Biopharmaceuticals’ cenobamate: Seizure Figure 12. UCB’s Vimpat sales incidence reduction

(%) (Wtr) 60 Vimpat Cenobamate 1.4 55.0 1.2 1.2

50 1.2 1.1

30% 1.0 40 36.8 0.9 0.8 30 0.7 24.0 0.6 0.6 0.5 20 18.4 0.4 10 0.2

0 0.0 Placebo Candidate 12 13 14 15 16 17 18

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

Mirae Asset Daewoo Research 8 October 21, 2019 SK Holdings

Table 12. SK Holdings’ valuation (Wbn, W)

2019F Notes

1. Operating value 5,079

In-house businesses 3,782

IT services 1,790 Based on 2018-19F EBITDA and EV/EBITDA of 10.0x Semiconductor modules, etc. 1,992 Based on 2018-19F NOPAT and P/E of 15.0x Based on royalty rate of 20bps; applied 10.0x after Brand royalty income 1,274 reflecting costs Real estate (SK Holdings) 23 As of end- 2Q19 2. Value of investment assets 28,648

Listed subsidiaries 12,390 Based on market value Unlisted subsidiaries 16,258 Based on book value and fair value 3. Total asset value (1+2) 33,726

Net borrowings (-) 7,430 Net borrowings as of end-2Q19 + share buyback (5%) Treasury stock 4,352 Reflecting share buyback (5%) 4. NAV 30,648

Market cap 17,041

Discount to NAV 44.4%

5. No. of shares outstanding (‘000 shares) 70,926 Total shares outstanding (common and preferred) NAV per share 432,105

6. Theoretical TP 302,474 30% discount to per-share NAV TP 300,000

Current price 241,000 As of Oct. 18, 2019 Upside potential 24.5% Source: Mirae Asset Daewoo Research

Table 13. Value of investment securities (Wbn, W) Current Value Stake BV Notes price (2019F) Listed subsidiaries 12,390 As of Oct. 18, 2019

SK Innovation 33.4% 3,073 163,000 5,034 SK Telecom 26.8% 5,081 238,500 5,157

SK Networks 39.1% 706 5,080 493

SKC 41.0% 549 42,150 649

SK Materials 49.1% 470 187,000 968

SM Core 52.2% 8,400 88

Unlisted subsidiaries 6,754 16,258 Based on fair value and book value SK Siltron 51.0% 626 2,595 Based on 2018F EV/EBITDA of 10.0x

15x NOPAT for power generation , 10x SK E&S 90.0% 2,600 4,831 NOPAT for city gas SK Biopharmaceuticals 100.0% 479 4,000 Based on expect IPO price SK Biotek 100.0% 336 2,320 Based on 2019F P/E of 20x

SK E&C 44.5% 545 345 Based on K-OTC trading price

SK Shipping 16.3% 22 22 Based on book value

SK Forest 100.0% 61 61 Based on book value

Based on book value and the value of Other - 2,084 2,084 stakes in ESR and Eureka Source: DART, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 9 October 21, 2019 SK Holdings

Figure 14 . NAV discount has been shrinking since the share buyback decision (Oct. 1, 2019)

(%) 60

50

40

30

20

10

0 10/15 4/16 10/16 4/17 10/17 4/18 10/18 4/19 10/19 Source: WISEfn, Mirae Asset Daewoo Research

Figure 15. Relative share performance comparison Figure 16. DPS and payout ratio

SK Holdings LG Corp. Hanwha Corp. (1/1/19=100) (W) (%) Doosan Corp. CJ Corp. Samsung C&T 120 6,000 100 Lotte Corp. DPS (L) Dividend payout ratio (R) Special dividend 110 5,000 80 100 4,000 90 53.9 60 5,000 3,000 44.8 4,000 5,000 5,000 80 3,700 3,400 32.5 36.9 40 2,000 23.1 70 22.3 22.4 2,000 19.4 20 60 1,000 1,500

50 0 0 1/19 4/19 7/19 10/19 13 14 15 16 17 18 19F 20F

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

Figure 17. SK Group’s ownership structure

Source: DART, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 10 October 21, 2019 SK Holdings

Table 14. 3Q19 preview (Wbn, %) 3Q19F Growth 3Q18 2Q19 Mirae Asset Consensus QoQ YoY Daewoo Revenue 26,776 25,148 24,399 24,909 -3.0 -8.9 OP 1,466 1,165 1,101 1,095 -5.5 -24.9 NP (controlling) 497 117 147 309 25.1 -70.4 OP margin 5.5 4.6 4.5 4.4 -0.1 -1.0 Net margin (controlling) 1.9 0.5 0.6 1.2 0.1 -1.3 Source: Company data, FnGuide , Mirae Asset Daewoo Research

Table 15. Quarterly and annual earnings and forecasts (Wbn, %) 2018 2019F 3Q19F growth 2020F 1Q 2Q 3Q 4Q Annual 1Q 2Q 3QF 4QF Annual QoQ YoY Revenue 24,615 25,232 26,776 24,879 101,502 25,549 25,148 24,399 24,553 99,649 110,278 -3.0 -8.9 Operating profit 1,581 1,634 1,466 7 4,688 1,285 1,165 1,101 1,167 4,718 5,996 -5.5 -24.9 Equity-method 668 1,037 1,067 893 3,665 255 197 132 201 785 1,075 -33.3 -87.7 Pretax profit 2,017 2,177 2,245 1,090 7,528 1,297 874 844 1,269 4,283 5,980 -3.5 -62.4 Net profit 1,555 1,585 1,625 1,386 6,151 981 485 607 913 2,986 3,620 25.1 -62.7 Net profit (controlling) 661 531 497 564 2,253 460 117 147 371 1,096 1,280 25.1 -70.4 Source: Company data, Mirae Asset Daewoo Research

Table 16. Earnings of SK Holdings’ major consolidated subsidiaries (Wbn, %) 2018 2019F 3Q19F growth 2020F 1Q 2Q 3Q 4Q Annual 1Q 2Q 3QF 4QF Annual QoQ YoY SK E&S Revenue 2,131 1,301 1,159 1,876 6,468 2,212 1,320 1,218 1,893 6,642 6,852 -7.8 5.0 (90%) Gas 1,335 628 528 1,073 3,564 1,321 699 536 1,090 3,645 3,735 -23.3 1.4 Power generation 796 674 631 803 2,904 891 621 682 803 2,997 3,116 9.7 8.0

OP 261 97 26 65 448 290 79 50 78 497 541 -37.2 94.1

OP margin 12.2 7.5 2.2 3.4 6.9 13.1 6.0 4.1 4.1 7.5 7.9 -1.9 1.9

Net profit 188 105 27 118 439 188 95 38 94 414 454 -60.5 39.5

SMP (W/kWh) 94.8 89.4 90.4 105.8 95.1 109.9 85.9 81.0 88.4 91.3 97.2 5.4 0.1

Power Generation 3,744 3,744 3,744 3,744 3,744 3,744 3,744 3,744 3,744 3,744 3,744 0 0 Capacity SK Siltron Revenue 298 325 353 371 1,346 382 390 398 404 1,574 1,701 2.2 12.9 (51.0%) OP 87 91 104 98 380 101 89 92 112 394 450 3.5 -11.4 OP margin 29.3 28.0 29.5 26.5 28.3 26.6 22.9 23.1 27.6 25.0 26.4 0.3 -6.4

EBITDA 112 124 145 126 528 153 140 133 139 565 598 -5.0 -8.2

Net profit 67 71 76 72 286 75 61 64 78 279 325 4.9 -15.5 SK E&C Revenue 1,507 1,795 1,451 1,682 6,436 1,713 1,901 1,738 1,791 7,143 7,600 -8.6 19.8 (44.5%) OP 58 99 3 -73 87 63 66 27 29 185 206 -58.7 953.1 OP margin 3.9 5.5 0.2 -4.3 1.3 3.7 3.5 1.6 1.6 2.6 2.7 -1.9 1.4

Net profit 50 44 23 -48 69 54 53 28 11 146 161 -47.6 19.6 SK Shipping Revenue 397 408 407 425 1,636 417 414 412 435 1,678 1,745 -0.5 1.3 (16.3%) OP 33 15 16 24 88 24 28 26 28 106 138 -4.9 68.7 OP margin 8.3 3.7 3.8 5.8 5.4 5.8 6.7 6.4 6.4 6.3 7.9 -0.3 2.5

Net profit 0 -21 -22 -45 -88 -21 -8 -35 -40 -104 7 RR RR SK Innovation Revenue 12,166 13,438 14,959 13,948 54,511 12,849 13,104 13,044 13,095 52,091 57,401 -0.5 -12.8 (33.4%) OP 712 852 836 -279 2,120 331 498 329 480 1,638 2,540 -33.8 -60.6 OP margin 5.8 6.3 5.6 -2.0 3.9 2.6 3.8 2.5 3.7 3.1 4.4 -1.3 -3.1

Net profit 458 499 444 227 1,629 196 147 219 369 931 1,602 49.0 -50.7

SK Telecom Revenue 4,182 4,154 4,186 4,352 16,874 4,335 4,437 3,392 4,577 16,741 18,079 -23.6 -19.0 (26.8%) OP 326 347 304 225 1,202 323 323 329 307 1,282 1,406 2.0 8.3 OP margin 7.8 8.4 7.3 5.2 7.1 7.4 7.3 9.7 6.7 7.7 7.8 2.4 2.4

Net profit 695 917 1,031 485 3,128 379 263 308 315 1,265 1,796 17.0 -70.1 Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 11 October 21, 2019 SK Holdings

SK Holdings (034730 KS/Buy/TP: W300,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F (Wbn) 12/18 12/19F 12/20F 12/21F Revenue 101,502 99,649 110,278 112,726 Current Assets 37,128 36,136 43,613 45,164 Cost of Sales 91,851 90,184 99,824 102,040 Cash and Cash Equivalents 6,783 10,663 10,257 12,040 Gross Profit 9,651 9,465 10,454 10,686 AR & Other Receivables 12,164 12,005 13,642 13,723 SG&A Expenses 4,963 4,747 4,459 4,587 Inventories 8,993 8,875 10,085 10,145 Operating Profit (Adj) 4,688 4,718 5,996 6,099 Other Current Assets 9,188 4,593 9,629 9,256 Operating Profit 4,688 4,718 5,996 6,099 Non-Current Assets 82,329 85,056 87,923 87,261 Non-Operating Profit 2,840 -435 -16 566 Investments in Associates 19,218 19,218 19,218 19,218 Net Financial Income -834 -559 0 0 Property, Plant and Equipment 39,716 38,724 42,869 43,416 Net Gain from Inv in Associates 3,665 785 1,075 1,699 Intangible Assets 16,191 15,307 13,949 12,737 Pretax Profit 7,528 4,283 5,980 6,665 Total Assets 119,457 121,192 131,536 132,425 Income Tax 1,925 1,294 2,360 2,649 Current Liabilities 30,008 23,198 28,937 26,023 Profit from Continuing Operations 5,604 2,989 3,620 4,015 AP & Other Payables 12,497 12,333 14,015 14,098 Profit from Discontinued Operations 547 -3 0 0 Short-Term Financial Liabilities 8,525 10,517 10,527 10,528 Net Profit 6,151 2,986 3,620 4,015 Other Current Liabilities 8,986 348 4,395 1,397 Controlling Interests 2,253 1,096 1,280 1,406 Non-Current Liabilities 38,561 43,144 44,406 44,468 Non-Controlling Interests 3,898 1,890 2,341 2,610 Long-Term Financial Liabilities 29,185 33,891 33,891 33,891 Total Comprehensive Profit 6,030 3,419 3,620 4,015 Other Non-Current Liabilities 9,376 9,253 10,515 10,577 Controlling Interests 2,300 1,341 1,251 1,388 Total Liabilities 68,569 66,342 73,343 70,492 Non-Controlling Interests 3,730 2,078 2,369 2,627 Controlling Interests 16,628 18,024 19,029 20,158 EBITDA 10,559 11,821 13,207 13,765 Capital Stock 15 15 15 15 FCF (Free Cash Flow) 1,581 -1,516 4,361 1,658 Capital Surplus 5,536 5,917 5,917 5,917 EBITDA Margin (%) 10.4 11.9 12.0 12.2 Retained Earnings 12,217 12,986 13,989 15,119 Operating Profit Margin (%) 4.6 4.7 5.4 5.4 Non-Controlling Interests 34,260 36,825 39,165 41,775 Net Profit Margin (%) 2.2 1.1 1.2 1.2 Stockholders' Equity 50,888 54,849 58,194 61,933

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/18 12/19F 12/20F 12/21F 12/18 12/19F 12/20F 12/21F Cash Flows from Op Activities 7,857 1,672 14,361 8,658 P/E (x) 8.2 15.6 13.4 12.2 Net Profit 6,151 2,986 3,620 4,015 P/CF (x) 1.6 1.6 1.4 1.3 Non-Cash Income and Expense 5,625 8,007 8,488 9,232 P/B (x) 1.1 0.9 0.9 0.8 Depreciation 4,538 5,626 5,854 6,454 EV/EBITDA (x) 7.5 7.4 6.5 6.3 Amortization 1,333 1,478 1,357 1,212 EPS (W) 31,767 15,452 18,042 19,819 Others -246 903 1,277 1,566 CFPS (W) 166,037 154,996 170,721 186,780 Chg in Working Capital -1,736 -8,202 3,529 -3,023 BPS (W) 247,186 266,883 281,037 296,968 Chg in AR & Other Receivables 464 228 -1,377 -68 DPS (W) 5,000 5,000 5,000 5,000 Chg in Inventories -1,071 307 -1,210 -60 Payout ratio (%) 4.5 9.3 7.6 6.9 Chg in AP & Other Payables -566 -680 1,215 60 Dividend Yield (%) 1.9 2.1 2.1 2.1 Income Tax Paid -1,513 -1,381 -2,360 -2,649 Revenue Growth (%) 12.0 -1.8 10.7 2.2 Cash Flows from Inv Activities -10,182 -2,163 -14,501 -6,599 EBITDA Growth (%) -7.3 12.0 11.7 4.2 Chg in PP&E -5,756 -3,133 -10,000 -7,000 Operating Profit Growth (%) -18.4 0.6 27.1 1.7 Chg in Intangible Assets -913 -264 0 0 EPS Growth (%) 34.3 -51.4 16.8 9.8 Chg in Financial Assets 1,468 2,834 -4,501 401 Accounts Receivable Turnover (x) 9.7 9.8 10.2 9.8 Others -4,981 -1,600 0 0 Inventory Turnover (x) 11.8 11.2 11.6 11.1 Cash Flows from Fin Activities 1,930 1,831 -266 -275 Accounts Payable Turnover (x) 9.9 10.1 10.5 10.0 Chg in Financial Liabilities 4,609 6,698 10 0 ROA (%) 5.4 2.5 2.9 3.0 Chg in Equity 519 381 0 0 ROE (%) 14.9 6.3 6.9 7.2 Dividends Paid -1,511 -1,541 -276 -276 ROIC (%) 5.7 4.7 5.9 4.9 Others -1,687 -3,707 0 1 Liability to Equity Ratio (%) 134.7 121.0 126.0 113.8 Increase (Decrease) in Cash -363 3,880 -406 1,783 Current Ratio (%) 123.7 155.8 150.7 173.6 Beginning Balance 7,146 6,783 10,663 10,257 Net Debt to Equity Ratio (%) 51.7 61.4 51.0 45.7 Ending Balance 6,783 10,663 10,257 12,040 Interest Coverage Ratio (x) 4.4 6.8 0.0 0.0 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 12 October 21, 2019 SK Holdings

APPENDIX 1

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

Company (Code) Date Rating Target Price (W) SK Holdings SK Holdings (034730) 08/15/2019 Buy 300,000 500,000 02/15/2019 Buy 400,000 400,000 10/31/2018 After 1yr 10/31/2017 Buy 390,000 300,000 08/15/2017 Buy 350,000 200,000

100,000

0 Oct 17 Oct 18 Oct 19

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.

Equity Ratings Distribution & Investment Banking Services Buy Trading Buy Hold Sell Equity Ratings Distribution 84.57% 9.88% 5.55% 0.00% Investment Banking Services 82.76% 6.90% 10.34% 0.00% * Based on recommendations in the last 12-months (as of September 30, 2019)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of SK Holdings as an underlying asset; other than this, Mirae Asset Daewoo has no other special interests in the covered companies.

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 Korea Exchange. 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

Mirae Asset Daewoo Research 13 October 21, 2019 SK Holdings

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. 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 Mirae Asset Securities (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 report is distributed in Hong Kong by Mirae Asset Securities (HK) Limited, 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.

Mirae Asset Daewoo Research 14 October 21, 2019 SK Holdings

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Mirae Asset Daewoo Research 15