Regional Industry Focus Refining (Overweight) / Petrochemical (Neutral) Refer to important disclosures at the end of this report

DBS Group Research . Equity 16 Oct 2018

Divergent earnings between KOSPI: 2,129.7 refining and petrochemical KOSDAQ: 707.4 Analyst • Positive earnings surprise likely for refiners on Regional Research Team oil price hikes, refining margins rebound, [email protected] favourable FX Top pick • However, disappointing earnings for 12-mth Company Price Rating Mkt Cap Target petrochemical players expected, affected by US- 11 Oct ( KRW bn) Price (KRW) China trade disputes (KRW)

• Top pick: S-Oil S-OIL 129,000 14,523 175,000 BUY (010950 KS) Overweight on refining due to oil price fluctuation and strong Our coverage 2H18 earnings outlook. There were concerns that earnings SK Innovation 206,000 19,048 285,000 BUY would weaken in 3Q18, due to high inventory valuation gains in (096770 KS) 2Q18. However, the sector’s 3Q earnings should sharply exceed LG Chem previous estimates, underpinned by the lag of increased oil price, 307,000 21,672 470,000 BUY refining margins rebound, favourable foreign exchange rates (051910 KS) (the KRW’s depreciation), and paraxylene (PX) margins surge since Aug. We expect further earnings improvements for the Lotte Chemical 268,000 9,186 400,000 BUY sector in 4Q18, in view of strong oil prices and refining margins, (011170 KS) average PX margins rise. Petrochemical to underperform as its margins took a hit from Kumho Petrochemical 81,600 2,486 135,000 BUY trade war. On the other hand, we expect petrochemical (011780 KS) companies to report weaker-than-expected earnings in 3Q18. China’s demand for petrochemical imports has continued to Lotte Fine decrease amid the ongoing US-China trade war. Petrochemical Chemical 46,300 1,195 75,000 BUY (004000 KS) companies should suffer the burden of increased cost as the positive effect from input of low-priced materials seen in 2Q18 Korea has dissipated. ASPs have also declined for key products like Petrochemical 164,000 1,066 230,000 HOLD synthetic resins and synthetic rubber. In 4Q18, costs should (006650 KS) continue to rise on oil price surges. We expect only some Huchems Fine products, such as aromatics and phenol chains, to remain strong Chemical 23,150 946 31,000 BUY in 4Q18. (069260 KS)

S-Oil deserves premium over peers on strong earnings Hyosung momentum. We like S-Oil as our top pick. The company’s 3Q18 Chemical 128,500 410 220,000 BUY earnings should exceed market expectations, backed by the lag (298000 KS) of increased oil price and the weaker KRW. Earnings momentum is expected to continue with the effect of its capacity expansion Source: Bloomberg Finance L.P., DBS Bank for the residue upgrading complex (RUC)/olefin downstream complex (ODC) to be reflected from 4Q18 as well as the International Maritime Organisation’s stricter sulphur cap on vessel fuels from 2020. We expect S-Oil to trade at a premium over its regional peers.

ed-KK/ sa-LEY / CS / AH Industry Focus Refining (Overweight) / Petrochemical (Neutral)

Lotte Kumho Lotte Fine Korea Huchems Fine Hyosung Company SK Innovation S-Oil LG Chem Chemical Petrochemical Chemical Petrochemical Chemical Chemical Code (096770 KS) (010950 KS) (051910 KS) (011170 KS) (011780 KS) (004000 KS) (006650 KS) (069260 KS) (298000 KS) Accounting (K-IFRS (K-IFRS (K-IFRS (K-IFRS (K-IFRS (K-IFRS (K-IFRS (K-IFRS (K-IFRS standards consolidated) consolidated) consolidated) consolidated) consolidated) consolidated) consolidated) consolidated) consolidated) BUY BUY BUY BUY BUY BUY HOLD BUY BUY Rating Retained Retained Retained Retained Retained Retained Retained Retained Retained 285,000 175,000 470,000 400,000 135,000 75,000 230,000 31,000 220,000 TP (KRW) Raised Raised Retained Lowered Lowered Lowered Lowered Lowered Lowered Upside (%) 38.3 35.7 53.1 49.3 65.4 62.0 40.2 33.9 71.2 Revised Revenue 14,132.3 6,535.7 7,303.8 4,274.8 1,477.4 370.6 666.5 205.8 476.1 estimates OP 840.6 422.0 604.5 536.0 134.7 46.0 92.3 40.6 38.9 (KRW bn) NP 650.4 363.2 402.0 445.8 118.1 47.7 71.7 33.5 24.7 Previous Revenue 14,253.6 6,547.4 7,250.1 4,319.8 1,484.4 368.3 666.4 201.2 468.5 estimates OP 834.8 467.3 597.3 562.6 144.1 53.8 99.8 39.4 44.7 (KRW bn) NP 636.4 379.2 400.9 462.3 123.3 52.8 77.2 32.6 29.4 Revenue 14,225.2 6,351.7 7,177.2 4,410.0 1,484.4 355.2 667.2 203.0 473.4 Consensus OP 748.1 352.8 629.7 638.6 137.0 53.9 101.1 39.4 40.1 (KRW bn) NP 498.8 281.2 439.8 494.4 119.7 53.2 78.2 30.2 23.9 Revenue -0.9 -0.2 0.7 -1.0 -0.5 0.6 0.0 2.3 1.6 Difference OP 0.7 -9.7 1.2 -4.7 -6.5 -14.4 -7.5 3.0 -13.0 (%) NP 2.2 -4.2 0.3 -3.6 -4.2 -9.6 -7.2 2.6 -16.0 Revenue 20.2 25.4 14.2 7.1 22.6 19.8 26.8 14.6 11.7 (YoY, %) OP -12.8 -23.7 -23.5 -30.0 133.3 56.6 10.1 5.9 -6.9 NP -6.6 -8.9 -26.3 -29.4 108.4 50.6 7.8 16.0 6.0 Revenue 5.2 8.9 3.6 -1.3 2.5 4.3 2.1 2.5 7.6 (QoQ, %) OP -1.3 4.8 -14.1 -23.6 -12.2 -37.1 -14.7 -14.9 3.7 NP 26.9 122.5 -18.5 -23.0 -32.7 -30.4 -14.4 -7.7 39.5

Page 2 Regional Company Focus Huchems Fine Chemical Bloomberg: 069260 KS, Reuters: 069260.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 16 Oct 2018

BUY, KRW23,150 KOSPI: 2,129.7 Earnings may slow in 2019, but (Closing price as of 11/10/18) dividend merit is clear Price Target 12-mth: KRW31,000 (prev. KRW35,000) • Weak downstream market conditions fuel concerns Reason for Report: 3Q18 earnings preview over earnings slowdown in 2019 Potential catalyst: Improvements in TDI market conditions • While DNT business may be affected by depressed TDI Where we differ: We are slightly more conservative than the market prices, MNB and carbon credit businesses to fare well Analyst next year Regional Research Team • Retain BUY, TP lowered to KRW31,000 [email protected] 3Q18 earnings to meet expectations. Although the prices of Price Relative some downstream products, such as toluenediisocyanate (TDI),

35,000 130 methylene diphenyl diisocyanate (MDI), have recently declined, 30,000 120 Huchems Fine Chemical’s 3Q18 earnings are estimated to be in 25,000 110 line with market projections, reflecting the selling prices of the 20,000 100 15,000 90 previous month. 10,000 80 5,000 70 Woes over DNT business for 4Q18, amid sluggish TDI prices. A 0 60 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 further downtrend in TDI prices of late has led to concerns that Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) the company’s dinitrotoluene (DNT) earnings could slow down Forecasts and Valuation in 4Q18. However, we also expect earnings improvements FY Dec (KRW bn) 2017A 2018F 2019F 2020F from the sale of carbon credits in 4Q18. Revenue 715.8 808.4 779.3 802.5 EBITDA 182.8 194.6 154.0 165.9 Downstream TDI market unlikely to be as bad as feared in Operating profit 152.6 165.7 125.8 137.6 Pre-tax Profit 147.2 160.8 123.3 135.6 2019. For 2019, we forecast TDI prices to drop further, due to Net Profit 110.1 121.3 92.9 102.2 TDI capacity expansion at BASF (Germany) and Wanhua (China). Net Pft (Pre Ex.) 110.1 121.3 92.9 102.2 However, the downtrend in TDI prices is likely to be more Net Pft Attributable to modest than feared. Meanwhile, Huchems’ mononitrobenzene Controlling Interest 114.4 121.1 92.9 102.2 (MNB, MDI material) business should see increased shipments EPS (KRW) 2,798 2,962 2,272 2,499 EPS Pre Ex. (KRW) 2,692 2,968 2,272 2,499 in 2H19, backed by Kumho Mitsui Chemicals’ MDI production EPS Gth (%) 165.3 5.9 -23.3 10.0 capacity expansion. Also, carbon credit prices should remain EPS Gth Pre Ex (%) 175.8 10.2 -23.4 10.0 steady next year with an upward bias. Diluted EPS (KRW) 2,798 2,962 2,272 2,499 Net DPS (KRW) 1,500 1,500 1,350 1,350 BV Per Share (KRW) 14,020 15,844 16,634 17,798 Solid dividend likely for 2018. In view of concerns over 2019 PE (X) 8.8 7.8 10.2 9.3 earnings decline and valuation correction for its domestic and PE Pre Ex. (X) 9.1 7.8 10.2 9.3 overseas peers, we lower our TP for Huchems to KRW31,000, P/Cash Flow (X) 5.6 5.5 7.8 7.3 which is equivalent to a P/BV of 1.95x. The company is likely to EV/EBITDA (X) 4.2 3.1 3.7 3.2 Net Div Yield (%) 6.1 6.5 5.8 5.8 maintain its current dividend levels (current dividend yield at P/Book Value (X) 1.8 1.5 1.4 1.3 6.5%), given the still solid earnings estimates for 2018. Net Debt/Equity (X) CASH CASH CASH CASH ROE (%) 20.5 19.6 13.9 14.4 At A Glance Issued Capital (m shrs) 40.88 Earnings Rev (%): 3.9 (12.1) (0.4) Mkt. Cap (KRWbn/US$m) 946/828 Consensus EPS (KRW): 2,962 2,859 2,771 Other Broker Recs: B : 9 S : 1 H : 0 Major Shareholders Taekwang and 7 others (%) 43.5 ICB Industry: Chemicals Free Float (%) 33.35 ICB Sector: Materials Avg. Daily Vol. (‘000) 131 Principal Business: Huchems Fine Chemical Corp. develops and provides fine chemical products. The main products include polyurethane, ammonium nitrate, nitric acid, and ammonia.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ed-KK/ sa-LEY / CS / AH Company Focus Huchems Fine Chemical

Earnings preview Unit: KRW bn, % Vs. our previous Our estimates y-o-y q-o-q Vs. consensus estimates estimates ‘18.09F ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06A Diff. (%) ‘18.09F Diff. (%) Revenue 205.8 201.2 2.3 179.6 14.6 200.9 2.5 203.0 1.4 OP 40.6 39.4 3.0 38.3 5.9 47.6 (14.9) 39.4 2.9 NP 33.5 32.6 2.6 28.9 16.0 36.3 (7.7) 30.2 11.0 Margin (%) OP margin 19.7 19.6 21.3 23.7 19.4 Net margin 16.3 16.2 16.1 18.1 14.9 Difference (ppts) OP margin 0.1 (1.6) (4.0) 0.3 Net margin 0.1 0.2 (1.8) 1.4 Note: Based on consolidated K-IFRS Source: Huchems Fine Chemical, DBS Bank

Revision to annual earnings forecasts

(KRW bn) Previous Revised Diff. (%, ppts) 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F Revenue 817.2767.5772.9808.4779.3802.5(1.1)1.53.8 Operating profit 158.6142.7138.3165.7125.8137.64.5(11.8)(0.5) OP margin (%) 19.418.617.920.516.117.11.1(2.5)(0.7) EBITDA 180.6171.2166.0194.6154.0165.97.8(10.0)0.0 EBITDA margin (%)22.122.321.524.119.820.72.0(2.5)(0.8) Net profit 116.8105.7102.6121.392.9102.23.9(12.1)(0.4) Note: Based on consolidated K-IFRS Source: Huchems Fine Chemical, DBS Bank

Page 4 Company Focus Huchems Fine Chemical

BALANCE SHEET INCOME STATEMENT

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRWbn) 2016 2017 2018F 2019F 2020F Current Assets 319.3 505.7 608.2 628.8 646.0 Revenue 598.2 715.8 808.4 779.3 802.5 Cash & Short-term 185.5 371.6 460.1 483.6 503.7 Growth (%) (0.4) 19.6 12.9 (3.6) 3.0 investment Accounts Receivable 96.7 88.9 103.7 101.3 98.9 Operating Profit 76.9 152.6 165.7 125.8 137.6 Inventories 27.2 30.9 30.0 29.3 28.6 Growth (%) 76.4 98.5 8.6 (24.1) 9.4 Fixed assets 429.6 375.8 336.1 335.4 343.5 EBITDA 111.1 182.8 194.6 154.0 165.9 Non-operating Investment Assets 154.8 124.2 95.8 99.7 103.8 (17.7) (5.4) (4.9) (2.6) (2.0) Gains/Losses Tangible Assets 262.0 243.8 233.0 229.2 233.8 Net Interest Income (2.6) (1.7) 4.7 5.0 5.6 Intangible Assets 12.8 7.8 7.2 6.5 5.9 Foreign Currency Gains 0.2 (2.1) 0.6 0.0 0.0 Total Assets 748.9 881.6 944.3 964.2 989.5 Equity Method Gains (2.8) 6.1 (2.4) 0.4 0.4 Current Liabilities 139.1 172.9 164.6 152.5 150.4 Pre-tax Profit 59.1 147.2 160.8 123.3 135.6 Accounts Payable 88.6 101.3 107.0 104.6 102.1 Net Profit 39.9 110.1 121.3 92.9 102.2 Net profit attributable to Short-term Debts 29.4 36.8 22.6 12.6 12.6 43.1 114.4 121.1 92.9 102.2 controlling interest Non-current Liabilities 116.4 109.8 106.4 106.8 87.2 Growth (%) 16.6 175.8 10.2 (23.4) 10.0 Long-term Debts 111.0 105.8 96.4 96.4 76.4 NOPLAT 51.9 114.1 125.1 94.8 103.7 Total Liabilities 255.6 282.8 271.0 259.3 237.6 (+) Dep 34.2 30.1 28.9 28.2 28.3 Capital Stock 40.9 40.9 40.9 40.9 40.9 (-) Wc (36.7) (26.0) 8.1 (0.8) (0.8) Capital Surplus 181.8 185.3 188.5 188.5 188.5 (-) Capex 17.6 19.5 26.1 23.4 32.1 Earned Surplus 314.3 408.7 472.3 503.9 550.9 OpFCF 105.2 150.8 119.8 100.5 100.7 Capital Adjustment (43.9) (53.9) (46.8) (46.8) (46.8) 3 Yr CAGR & Margins Treasury Stock (44.2) (49.8) (41.2) (41.2) (41.2) Revenue growth(3Yr) (9.1) (0.0) 10.4 9.2 3.9 Total Equity 493.3 598.8 673.3 704.9 751.9 OP growth(3Yr) 8.8 42.5 56.1 17.8 (3.4) Invested capital 412.0 335.7 279.8 275.8 280.4 EBITDA growth(3Yr) 3.8 26.9 34.4 11.5 (3.2) Net debt / (cash) (45.1) (228.9) (341.1) (374.6) (414.7) NP growth(3Yr) (7.4) 42.5 52.5 32.5 (2.4) ROA 5.5 13.5 13.3 9.7 10.5 OP margin (%) 12.9 21.3 20.5 16.1 17.1 ROE 8.3 20.5 19.6 13.9 14.4 EBITDA margin (%) 18.6 25.5 24.1 19.8 20.7 ROIC 13.2 30.5 40.6 34.1 37.3 NP margin (%) 6.7 15.4 15.0 11.9 12.7

CASH FLOW KEY INDICATOR

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRW,x,%) 2016 2017 2018F 2019F 2020F Operating cash flow 115.5 156.4 154.3 121.9 131.3 Per share Data (w) Net Profit 39.9 110.1 121.3 92.9 102.2 EPS 1,055 2,798 2,962 2,272 2,499 Depr. & Amort. 34.2 30.1 28.9 28.2 28.3 BPS 11,750 14,020 15,844 16,634 17,798 Chg in Working Capital 13.3 (1.3) 7.5 0.8 0.8 DPS 500 1,500 1,500 1,350 1,350 Chg in Accounts (15.3) 1.9 (12.5) 2.4 2.4 Valuation (x,%) Receivable Chg in inventories 3.6 (6.9) 0.9 0.7 0.7 PER 20.6 8.8 7.8 10.2 9.3 Chg in Accounts Payable 32.2 6.7 14.8 (2.5) (2.4) PBR 1.8 1.8 1.5 1.4 1.3 Investing cash flow (58.0) (171.5) (19.3) (42.3) (51.8) EV/EBITDA 7.6 4.2 3.1 3.7 3.2 Chg in Short-term 32.1 (54.5) 62.7 (15.1) (15.8) Dividend yield 2.3 6.1 6.5 5.8 5.8 Investments Chg in Long-term 27.1 1.4 (19.6) (1.7) (1.8) PCR 7.9 5.6 5.5 7.8 7.3 Investment Securities Capex (17.6) (19.5) (26.1) (23.4) (32.1) PSR 1.5 1.4 1.2 1.2 1.2 Disposal of Tangible & 0.0 (0.2) 0.1 (0.3) (0.3) Stabilities (%) Intangible Assets Financing cash flow (51.0) 15.5 (62.7) (71.3) (75.2) Liabilities Ratio 51.8 47.2 40.2 36.8 31.6 Chg in debt (30.6) 40.4 (14.8) (10.0) (20.0) Net debt/Equity CASH CASH CASH CASH CASH Chg in Equity (19.3) (19.3) (57.5) (61.3) (55.2) Net debt/EBITDA CASH CASH CASH CASH CASH Dividend Payout 19.3 19.3 57.5 61.3 55.2 Current ratio 229.5 292.5 369.6 412.4 429.5 Chg in Cash 5.8 0.2 72.4 8.3 4.4 Interest coverage ratio 29.2 87.6 n/a n/a n/a Gross cash flow 112.3 178.9 172.7 121.1 130.5 Interest/revenue 1.2 1.1 0.5 0.5 0.4 (-) Chg in WC (36.7) (26.0) 8.1 (0.8) (0.8) Asset Structure (-) Capex 17.6 19.5 26.1 23.4 32.1 IC 54.8 40.4 33.5 32.1 31.6 (+) Disposal of Assets 0.0 (0.2) 0.1 (0.3) (0.3) Cash + IC(%) 45.2 59.6 66.5 67.9 68.4 Free Cash Flow 131.4 185.1 138.7 98.3 99.0 Capital Structure (-) Other Investments (27.1) (1.4) 19.6 1.7 1.8 Debt/Asset 22.2 19.2 15.0 13.4 10.6 Free Cash 158.5 186.6 119.1 96.5 97.1 Equity/Asset 77.8 80.8 85.0 86.6 89.4 Source: KTBDBS Investment Bank & Securities *Asset = Equity + Debt, P/E is derived by using diluted EPS. Note: ResultsResults are are consolidated consolidated This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, KTB Investment & Securities does not warrant or guarantee the accuracy or completeness of this document*Asset = and Equity has no + liability Debt, for P/E its content.is derived The investment by using should diluted be made EPS. based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of KTB Investment & Securities Co. and thus, it may not be reproduced, distributed or modified without the prior consent of KTB InvestmentThis report & Securitieshas been Co. prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, DBS Bank does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of DBS Bank and thus, it may not be reproduced, distributed or modified without the prior consent of DBS Bank.

Page 5 Regional Company Focus Hyosung Chemical Bloomberg: 298000 KS, Reuters: 298000.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 16 Oct 2018

BUY, KRW128,500 KOSPI: 2,129.7 Capacity expansion to pay off (Closing price as of 11/10/18) • Despite solid key product prices, 3Q18 earnings to Price Target 12-mth: KRW220,000 (prev. KRW235,000) disappoint due to increased cost from higher LPG price Reason for Report: 3Q18 earnings preview • Direct LPG sourcing through PDH/PP facilities in Potential catalyst: Stabilisation of LPG prices Vietnam to ease input price burden Where we differ: We are more optimistic than the market on FY18/20F EPS • Expect share price momentum recovery upon LPG Analyst price stabilisation Regional Research Team • Retain BUY, TP lowered to KRW220,000 [email protected] Weaker 3Q18 likely due mainly to higher raw material price (LPG). Despite strength in the prices of Hyosung Chemical’s key Price Relative products (polypropylene [PP], terephthalic acid [TPA], nitrogen 250,000 140 trifluoride [NF3]) in 3Q18, the company’s 3Q18 earnings should 130 200,000 120 fall short of our previous expectations, due to higher prices of 150,000 110 LPG (propane dehydrogenation [PDH] material). Nonetheless, 100 100,000 90 margins for NF3 and TPA are expected to improve in the 80 50,000 70 quarter. 0 60 Downward revision to earnings for 4Q18 amid unfavourable 13-Jul-18 27-Jul-18 10-Aug-18 24-Aug-18 7-Sep-18 21-Sep-18 5-Oct-18 Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) seasonality. The prices of key products should remain relatively Forecasts and Valuation solid in 4Q18. However, earnings estimates for the company FY Dec (KRW bn) 2017A 2018F 2019F 2020F are likely to be revised down for 4Q18, due to seasonality, Revenue 1,667.3 1,835.9 1,883.1 2,304.5 including strong LPG demand in the winter season and higher EBITDA 278.8 289.1 302.9 357.5 oil prices. Operating profit 108.8 119.1 130.4 177.5 Pre-tax Profit 68.1 77.9 89.6 141.5 PDH/PP capacity expansion in Vietnam to prepare the company Net Profit 52.1 63.0 69.0 109.0 for entry into Southeast Asian markets. Due to massive Net Pft (Pre Ex.) 52.1 63.0 69.0 109.0 investments to build PDH/PP facilities in Vietnam, the Net Pft Attributable to company’s debt level should increase over the next three years. Controlling Interest 52.1 63.0 69.0 109.0 Demand growth for PP is expected to be solid on the back of EPS (KRW) n/a 19,734 21,637 34,164 EPS Pre Ex. (KRW) n/a 19,734 21,637 34,164 wider adoption of automotive lightweight materials. Through EPS Gth (%) n/a n/a 9.6 57.9 these investments, the company should be laying the EPS Gth Pre Ex (%) n/a n/a 9.6 57.9 foundation for its advance into Southeast Asian markets that Diluted EPS (KRW) n/a 19,734 21,637 34,164 Net DPS (KRW) na 2,960 3,246 5,125 are showing sharp demand growth. Raw material input prices BV Per Share (KRW) 110,905 127,041 146,514 177,262 should also be low in the region. In particular, the company PE (X) n/a 6.5 5.9 3.8 can also secure distribution margins by directly sourcing LPG. PE Pre Ex. (X) n/a 6.5 5.9 3.8 Once LPG prices stabilise, the company’s share price P/Cash Flow (X) n/a n/a n/a n/a EV/EBITDA (X) n/a 5.0 5.5 4.2 momentum should start to recover. Net Div Yield (%) n/a 2.3 2.5 4.0 TP lowered in light of industry-wide correction. We nudge P/Book Value (X) n/a 1.0 0.9 0.7 down our TP for Hyosung Chemical to KRW220,000, which Net Debt/Equity (X) 3.7 3.7 3.7 2.8 ROE (%) n/a 0.2 0.1 0.2 implies a P/BV of 1.5x, considering its profit decline in 2H18 and the valuation correction for domestic/overseas peers. Earnings Rev (%): (9.8) (8.4) (8.6) Consensus EPS (KRW): 18,892 24,743 31,618 At A Glance Other Broker Recs: B : 5 S : 0 H : 0 Issued Capital (m shrs) 3.19 ICB Industry: Chemicals Mkt. Cap (KRWbn/US$m) 410/359 ICB Sector: Materials Major Shareholders Principal Business: Hyosung Chemical operates as a chemical Cho Hyun-joon and 11 others (%) 43.6 products manufacturing company. The company produces and sells Free Float (%) 50.13 optical films, polypropylene, polyester fibres, commercialising Avg. Daily Vol.(‘000) 30 polyketone, and other products.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ed-KK/ sa-LEY / CS / AH Company Focus Hyosung Chemical

Earnings preview Unit: KRW bn, % Vs. our previous Our estimates y-o-y q-o-q Vs. consensus estimates estimates ‘18.09F ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06A Diff. (%) ‘18.09F Diff. (%) Revenue 476.1 468.5 1.6 426.1 11.7 442.3 7.6 473.4 0.6 OP 38.9 44.7 (13.0) 41.8 (6.9) 37.5 3.7 40.1 (3.0) NP 24.7 29.4 (16.0) 23.3 6.0 17.7 39.5 23.9 3.3 Margin (%) OP margin 8.2 9.5 9.8 8.5 8.5 Net margin 5.2 6.3 5.5 4.0 5.0 Difference (ppts) OP margin (1.4) (1.6) (0.3) (0.3) Net margin (1.1) (0.3) 1.2 0.1 Note: Based on consolidated K-IFRS Source: Hyosung Chemical, DBS Bank

Revision to annual earnings forecasts

(KRW bn) Previous Revised Diff. (%, ppts) 2018F2019F2020F2018F2019F2020F2018F2019F2020F Revenue 1,804.3 1,852.1 2,239.0 1,835.9 1,883.1 2,304.51.71.72.9 Operating profit 127.8138.3190.2119.1130.4177.5(6.8)(5.7)(6.7) OP margin (%) 7.17.58.56.56.97.7(0.6)(0.5)(0.8) EBITDA 297.8310.8370.2289.1302.9357.5(2.9)(2.6)(3.4) EBITDA margin (%)16.516.816.515.716.115.5(0.8)(0.7)(1.0) Net profit 69.875.3119.263.069.0108.9(9.8)(8.4)(8.6) Note: Based on consolidated K-IFRS Source: Hyosung Chemical, DBS Bank

Page 7 Regional Company Focus Korea Petrochemical Bloomberg: 006650 KS, Reuters: 006650.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 16 Oct 2018

HOLD, KRW164,000 KOSPI: 2,129.7 Lower NCC margins weighing on (Closing price as of 11/10/18) overall profitability Price Target 12-mth: KRW230,000 (prev. KRW250,000) • Disappointing 3Q18 amid sluggish downstream Reason for Report: 3Q18 earnings preview demand from US-China trade dispute Potential catalyst: Higher margins from NCC • Margins for key products to continue to be pressured Where we differ: We have more conservative view than the market by oil price increases in 4Q18 Analyst • Improvements in industry conditions is key to recovery Regional Research Team [email protected] • Maintain HOLD, TP lowered to KRW230,000

3Q18 earnings to take a hit from trade war between US and Price Relative China. Korea Petrochemical’s 3Q18 earnings should fall short of 400,000 410 market expectations, due to weak demand from downstream 350,000 360 industries facing the US-China trade war. Amid sluggish market 300,000 310 250,000 conditions for high-density polyethylene (HDPE), the ethylene 260 200,000 chain has also weakened. 210 150,000 100,000 160 50,000 110 Absence of planned maintenance for 4Q18 not sufficient to 0 60 offset margin deterioration from oil price hikes. Margin Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) deterioration is likely to persist for Korea Petrochemical’s key products in 4Q18, due to oil price increases. While the fact that Forecasts and Valuation the lack of scheduled maintenance works for the quarter may FY Dec (KRW bn) 2017A 2018F 2019F 2020F limit earnings downside, increased cost burden from stronger oil Revenue 1,779.4 2,578.6 2,620.0 2,607.4 prices should still heavily weigh on 4Q18 earnings. EBITDA 379.3 506.7 473.7 452.7 Operating profit 284.2 386.4 359.0 330.2 Pre-tax Profit 280.1 402.4 373.0 344.2 Recommend range-trading strategy. We lower our TP for Korea Net Profit 214.5 300.4 272.3 251.2 Petrochemical to KRW230,000, which implies a P/BV of 0.85x, in Net Pft (Pre Ex.) 214.5 300.4 272.3 251.2 response to the valuation correction for its domestic and Net Pft Attributable to overseas peers. Capacity expansion at crackers (Korea, the Controlling Interest 214.3 300.4 272.3 251.2 Middle East, China, etc.) should serve as a discount factor for the EPS (KRW) 32,972 46,219 41,887 38,653 company’s share price in the long term. However, its share price EPS Pre Ex. (KRW) 32,993 46,219 41,887 38,653 could rebound once external factors, such as the trade war, start EPS Gth (%) -21.2 40.2 -9.4 -7.7 to stabilise. We recommend investors to trade within a certain EPS Gth Pre Ex (%) -21.4 40.1 -9.4 -7.7 price range. Diluted EPS (KRW) 32,972 46,219 41,887 38,653 Net DPS (KRW) 4,000 6,000 6,000 6,000 At A Glance BV Per Share (KRW) 225,773 268,153 304,040 336,693 Issued Capital (m shrs) 6.50 PE (X) 8.0 3.5 3.9 4.2 PE Pre Ex. (X) 8.0 3.5 3.9 4.2 Mkt. Cap (KRWbn/US$m) 1,066/933 P/Cash Flow (X) 4.6 2.2 2.8 2.8 Major Shareholders EV/EBITDA (X) 5.1 2.1 1.9 1.8 Lee Sun-kyu and 12 others (%) 40.2 Net Div Yield (%) 1.5 3.7 3.7 3.7 Free Float (%) 43.59 P/Book Value (X) 1.2 0.6 0.5 0.5 Avg. Daily Vol. (‘000) 64 Net Debt/Equity (X) 0.1 CASH CASH CASH ROE (%) 15.5 18.6 14.6 12.0

Earnings Rev (%): (6.5) (9.4) (11.5) Consensus EPS (KRW): 47,316 47,529 46,445 Other Broker Recs: B : 15 S : 0 H : 3

ICB Industry: Chemicals ICB Sector: Materials Principal Business: Korea Petrochemical manufactures chemical products such as high density polyethylene and polypropylene. The company also produces basic organic chemicals including ethylene, propylene, and mixed C4s.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ed-KK/ sa-LEY / CS / AH Company Focus Korea Petrochemical

Earnings preview Unit: KRW bn, % Vs. our previous Our estimates y-o-y q-o-q Vs. consensus estimates estimates ‘18.09F ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06A Diff. (%) ‘18.09F Diff. (%) Revenue 666.5 666.4 0.0 525.8 26.8 652.8 2.1 667.2 (0.1) OP 92.3 99.8 (7.5) 83.8 10.1 108.3 (14.7) 101.1 (8.7) NP 71.7 77.2 (7.2) 66.5 7.8 83.7 (14.4) 78.2 (8.4) Margin (%) OP margin 13.9 15.0 15.9 16.6 15.1 Net margin 10.8 11.6 12.6 12.8 11.7 Difference (ppts) OP margin (1.1) (2.1) (2.7) (1.3) Net margin (0.8) (1.9) (2.1) (1.0) Note: Based on consolidated K-IFRS Source: Korea Petrochemical, DBS Bank

Revision to annual earnings forecasts

(KRW bn) Previous Revised Diff. (%, ppts) 2018F2019F2020F2018F2019F2020F2018F2019F2020F Revenue 2,585.5 2,598.6 2,586.2 2,578.6 2,620.0 2,607.4(0.3)0.80.8 Operating profit 415.0397.6375.0386.4359.0330.2(6.9)(9.7)(12.0) OP margin (%) 16.115.314.515.013.712.7(1.1)(1.6)(1.8) EBITDA 535.3510.5492.9506.7473.7452.7(5.3)(7.2)(8.2) EBITDA margin (%)20.719.619.119.718.117.4(1.1)(1.6)(1.7) Net profit 321.4300.5284.0300.4272.3251.2(6.5)(9.4)(11.5) Note: Based on consolidated K-IFRS Source: Korea Petrochemical, DBS Bank

Page 9 Company Focus Korea Petrochemical

BALANCE SHEET INCOME STATEMENT

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRWbn) 2016 2017 2018F 2019F 2020F Current Assets 428.3 411.7 580.3 675.6 756.1 Revenue 1,596.4 1,779.4 2,578.6 2,620.0 2,607.4 Cash & Short-term 97.1 9.7 136.2 225.9 308.0 Growth (%) (7.6) 11.5 44.9 1.6 (0.5) investment Accounts Receivable 190.3 223.0 262.0 265.3 264.3 Operating Profit 343.0 284.2 386.4 359.0 330.2 Inventories 138.7 174.2 177.3 179.5 178.9 Growth (%) 26.5 (17.1) 35.9 (7.1) (8.0) Fixed assets 1,335.4 1,558.9 1,615.5 1,730.2 1,836.3 EBITDA 407.4 379.3 506.7 473.7 452.7 Non-operating Investment Assets 168.9 164.0 167.3 174.1 181.2 17.2 (4.1) 16.0 14.0 14.0 Gains/Losses Tangible Assets 1,161.2 1,389.2 1,442.6 1,550.5 1,649.6 Net Interest Income (1.2) (3.0) (0.8) 0.4 0.4 Intangible Assets 5.3 5.7 5.6 5.6 5.6 Foreign Currency Gains 1.9 (2.6) (0.6) 0.0 0.0 Total Assets 1,763.6 1,970.6 2,195.7 2,405.8 2,592.4 Equity Method Gains 7.5 7.4 8.7 4.0 4.0 Current Liabilities 318.9 260.2 255.9 248.7 238.8 Pre-tax Profit 360.2 280.1 402.4 373.0 344.2 Accounts Payable 111.1 111.2 161.2 163.3 162.7 Net Profit 272.9 214.5 300.4 272.3 251.2 Net profit attributable to Short-term Debts 128.5 80.0 25.0 15.0 5.0 272.1 214.3 300.4 272.3 251.2 controlling interest Non-current Liabilities 151.7 237.2 191.2 175.3 159.6 Growth (%) 35.9 (21.4) 40.1 (9.4) (7.7) Long-term Debts 58.0 141.5 86.5 66.5 46.5 NOPLAT 259.9 217.6 288.5 262.0 241.0 Total Liabilities 470.6 497.4 447.1 424.0 398.3 (+) Dep 64.4 95.1 120.3 114.8 122.6 Capital Stock 41.0 41.0 41.0 41.0 41.0 (-) Wc (7.0) 81.0 (8.6) 2.9 (1.7) Capital Surplus 264.3 264.3 264.3 264.3 264.3 (-) Capex 262.7 318.3 163.0 222.7 221.6 Earned Surplus 984.4 1,173.7 1,449.1 1,682.3 1,894.6 OpFCF 68.5 (86.6) 254.4 151.2 143.7 Capital Adjustment (3.7) (5.8) (5.8) (5.8) (5.8) 3 Yr CAGR & Margins Treasury Stock (3.6) (3.6) (3.6) (3.6) (3.6) Revenue growth(3Yr) (6.7) (4.7) 14.3 18.0 13.6 Total Equity 1,293.1 1,473.2 1,748.6 1,981.9 2,194.1 OP growth(3Yr) 167.4 59.6 12.5 1.5 5.1 Invested capital 1,242.5 1,545.0 1,579.7 1,687.4 1,781.5 EBITDA growth(3Yr) 93.6 53.7 14.8 5.2 6.1 Net debt / (cash) 89.4 211.8 (24.7) (144.4) (256.5) NP growth(3Yr) 81.2 49.8 14.4 (0.1) 5.4 ROA 16.6 11.5 14.4 11.8 10.1 OP margin (%) 21.5 16.0 15.0 13.7 12.7 ROE 23.6 15.5 18.6 14.6 12.0 EBITDA margin (%) 25.5 21.3 19.7 18.1 17.4 ROIC 22.9 15.6 18.5 16.0 13.9 NP margin (%) 17.1 12.1 11.7 10.4 9.6

CASH FLOW KEY INDICATOR

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRW,x,%) 2016 2017 2018F 2019F 2020F Operating cash flow 322.6 227.9 423.3 384.2 375.8 Per share Data (w) Net Profit 360.2 280.1 353.8 272.3 251.2 EPS 41,867 32,972 46,219 41,887 38,653 Depr. & Amort. 64.4 95.1 120.3 114.8 122.6 BPS 197,046 225,773 268,153 304,040 336,693 Chg in Working Capital (15.4) (79.9) (21.6) (2.9) 1.7 DPS 4,000 4,000 6,000 6,000 6,000 Chg in Accounts (36.1) (36.9) (41.6) (3.3) 1.0 Valuation (x,%) Receivable Chg in inventories (2.5) (36.0) (3.3) (2.3) 0.7 PER 6.6 8.0 3.5 3.9 4.2 Chg in Accounts Payable 40.0 2.3 41.7 2.1 (0.6) PBR 1.4 1.2 0.6 0.5 0.5 Investing cash flow (278.0) (306.3) (172.4) (225.9) (225.1) EV/EBITDA 4.6 5.1 2.1 1.9 1.8 Chg in Short-term (10.0) 10.0 (10.1) (0.4) (0.4) Dividend yield 1.5 1.5 3.7 3.7 3.7 Investments Chg in Long-term 0.0 2.0 1.2 (1.9) (2.1) PCR 4.1 4.6 2.2 2.8 2.8 Investment Securities Capex (262.7) (318.3) (163.0) (222.7) (221.6) PSR 1.1 1.0 0.4 0.4 0.4 Disposal of Tangible & (2.6) (0.3) 0.4 0.0 0.0 Stabilities (%) Intangible Assets Financing cash flow (91.9) 1.1 (134.7) (69.0) (69.0) Liabilities Ratio 36.4 33.8 25.6 21.4 18.2 Chg in debt (74.0) 35.0 (110.0) (30.0) (30.0) Net debt/Equity 6.9 14.4 CASH CASH CASH Chg in Equity (18.5) (24.7) (24.7) (39.0) (39.0) Net debt/EBITDA 21.9 55.8 CASH CASH CASH Dividend Payout 18.5 24.7 24.7 39.0 39.0 Current ratio 134.3 158.2 226.7 271.7 316.7 Chg in Cash (47.3) (77.4) 116.3 89.3 81.6 Interest coverage ratio 282.9 93.8 513.8 n/a n/a Gross cash flow 433.5 374.0 490.3 387.1 374.1 Interest/revenue 0.2 0.2 0.0 n/a n/a (-) Chg in WC (7.0) 81.0 (8.6) 2.9 (1.7) Asset Structure (-) Capex 262.7 318.3 163.0 222.7 221.6 IC 82.4 89.9 83.9 80.8 78.5 (+) Disposal of Assets (2.6) (0.3) 0.4 0.0 0.0 Cash + IC(%) 17.6 10.1 16.1 19.2 21.5 Free Cash Flow 175.1 (25.6) 336.3 161.5 154.1 Capital Structure (-) Other Investments (0.0) (2.0) (1.2) 1.9 2.1 Debt/Asset 12.6 13.1 6.0 3.9 2.3 Free Cash 175.2 (23.6) 337.5 159.7 152.0 Equity/Asset 87.4 86.9 94.0 96.1 97.7 Source: KTB DBS Investment Bank & Securities *Asset = Equity + Debt, P/E is derived by using diluted EPS. Note: Results Results are areconsolidated consolidated This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information*Asset = and Equity data obtained + Debt, from sourcesP/E is wederived consider reliable.by using However, diluted KTB Investment EPS. & Securities does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of KTB Investment & Securities Co. and thus, it may not be reproduced, distributed or modified without the prior consent of KTB Investment & Securities Co. This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, DBS Bank does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of DBS Bank and thus, it may not be reproduced, distributed or modified without the prior consent of DBS Bank.

Page 10 Regional Company Focus Kumho Petrochemical Bloomberg: 011780 KS, Reuters: 011780.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 16 Oct 2018

BUY, KRW81,600 KOSPI: 2,129.7 Solid earnings expected in 2H18 (Closing price as of 11/10/18) despite slower growth Price Target 12-mth: KRW135,000 (prev. KRW145,000) • 3Q18 to see weaker profit q-o-q despite strong Reason for Report: 3Q18 earnings preview phenol margins Potential catalyst: Tight phenol chain supply-demand dynamics • However, earnings to remain stable in 4Q18, on Where we differ: We are more optimistic than the market strong seasonality for energy business Analyst • Expect solid phenol margins, amid continued Regional Research Team tightness in phenol chain supply-demand [email protected] • Retain BUY, TP cut to KRW135,000

Price Relative Disappointing 3Q18 likely due to subdued synthetic rubber and resin demand. Despite solid margins for phenol derivatives 140,000 150 120,000 140 (bisphenol A [BPA], phenol), Kumho Petrochemical’s 3Q18 130 100,000 earnings should decrease q-o-q, due to weaker demand for 120 80,000 110 synthetic rubber and resins. 60,000 100 90 40,000 Future earnings to be buoyed by completion of capacity 80 20,000 70 expansion and robust phenol chain/energy margins. In 4Q18, 0 60 the company is likely to continue to suffer sluggish demand Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) and high costs for synthetic rubber/resins. However, it should see continued solid margins for the phenol chain and earnings Forecasts and Valuation FY Dec (KRW bn) improvements in the energy division on the back of strong 2017A 2018F 2019F 2020F seasonality. Overall, we expect the company’s 4Q18 earnings Revenue 5,064.8 5,683.2 6,087.6 6,156.0 EBITDA 480.5 805.4 775.8 781.6 to remain relatively stable. Strong earnings are likely for the Operating profit 262.6 592.2 563.5 570.7 company in 2019, backed by its capacity expansion (+150k Pre-tax Profit 289.8 688.7 671.0 666.3 tonnes) for acrylonitrile-butadiene latex (NB latex). Its affiliate Net Profit 217.6 544.7 483.1 479.7 Kumho Mitsui Chemicals is also expected to complete Net Pft (Pre Ex.) 217.6 544.7 483.1 479.7 methylene diphenyl diisocyanate (MDI) capacity expansion Net Pft Attributable to (+60k tonnes) in 2H18. Controlling Interest 213.6 526.3 468.6 465.3 EPS (KRW) 7,010 17,273 15,380 15,273 Tight phenol supply-demand dynamics to continue on limited EPS Pre Ex. (KRW) 7,144 17,673 15,603 15,492 capacity expansion in industry. We also expect production EPS Gth (%) 191.6 146.4 -11.0 -0.7 capacity of the polycarbonate (PC) industry (a downstream EPS Gth Pre Ex (%) 169.5 147.4 -11.7 -0.7 industry for the phenol chain) to increase by about 300k Diluted EPS (KRW) 7,010 17,070 15,127 15,020 tonnes every year mostly in China and other countries. In Net DPS (KRW) 1,000 2,000 2,500 2,500 contrast, BPA capacity expansion is projected to be limited to BV Per Share (KRW) 54,573 71,202 83,231 94,653 PE (X) 14.2 4.7 5.3 5.3 only some companies (+200k tonnes by Covestro in 2H19). PE Pre Ex. (X) 13.9 4.6 5.2 5.3 This indicates continuously favorable supply-demand conditions P/Cash Flow (X) 6.3 4.0 5.2 5.0 for the phenol chain. EV/EBITDA (X) 9.8 4.7 4.5 4.0 Net Div Yield (%) 1.0 2.5 3.1 3.1 TP revised downwards following drop in peer valuations. We P/Book Value (X) 1.8 1.1 1.0 0.9 lower our TP for Kumho Petrochemical to KRW135,000, which Net Debt/Equity (X) 0.8 0.5 0.3 0.2 is equivalent to a P/BV of 1.9x (2019F 1.6x), considering ROE (%) 12.6 25.7 18.6 16.0 valuation correction for its domestic and overseas peers. Earnings Rev (%): (1.8) (1.5) 1.5 Consensus EPS (KRW): 15,536 14,494 14,789 At A Glance Other Broker Recs: B : 20 S : 2 H : 7 Issued Capital (m shrs) 30.47 Mkt. Cap (KRWbn/US$m) 2,486/2,177 ICB Industry: Chemicals Major Shareholders ICB Sector: Materials Park Chul-wan and 5 others (%) 24.7 Principal Business: Kumho Petrochemical manufactures synthetic Free Float (%) 47.39 rubbers, synthetic resins, and rubber chemicals. The company's Avg. Daily Vol. (‘000) 221 products include styrene butadiene, acrylonitrile butadiene, polystyrene, expandable polystyrene, and antioxidant.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ed-KK/ sa-LEY / CS / AH Company Focus Kumho Petrochemical

Earnings preview Unit: KRW bn, % Vs. our previous Our estimates y-o-y q-o-q Vs. consensus estimates estimates ‘18.09F ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06A Diff. (%) ‘18.09F Diff. (%) Revenue 1,477.4 1,484.4 (0.5) 1,205.2 22.6 1,441.8 2.5 1,484.4 (0.5) OP 134.7 144.1 (6.5) 57.8 133.3 153.5 (12.2) 137.0 (1.6) NP 118.1 123.3 (4.2) 56.7 108.4 175.4 (32.7) 119.7 (1.3) Margin (%) OP margin 9.1 9.7 4.8 10.6 9.2 Net margin 8.0 8.3 4.7 12.2 8.1 Difference (ppts) OP margin (0.6) 4.3 (1.5) (0.1) Net margin (0.3) 3.3 (4.2) (0.1) Note: Based on consolidated K-IFRS Source: Kumho Petrochemical, DBS Bank

Revision to annual earnings forecasts

(KRW bn) Previous Revised Diff. (%, ppts) 2018F2019F2020F2018F2019F2020F2018F2019F2020F Revenue 5,697.0 5,737.7 5,747.1 5,683.2 6,087.6 6,156.0(0.2)6.17.1 Operating profit 607.3583.4570.4592.2563.5570.7(2.5)(3.4)0.0 OP margin (%) 10.710.29.910.49.39.3(0.2)(0.9)(0.7) EBITDA 821.9797.3781.6805.4775.8781.6(2.0)(2.7)0.0 EBITDA margin (%)14.413.913.614.212.712.7(0.3)(1.2)(0.9) Net profit 554.6490.5472.6544.7483.1479.7(1.8)(1.5)1.5 Note: Based on consolidated K-IFRS Source: Kumho Petrochemical, DBS Bank

Page 12 Company Focus Kumho Petrochemical

BALANCE SHEET INCOME STATEMENT

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRWbn) 2016 2017 2018F 2019F 2020F Current Assets 1,255.3 1,332.7 1,353.0 1,519.7 1,696.1 Revenue 3,970.4 5,064.8 5,683.2 6,087.6 6,156.0 Cash & Short-term 232.6 250.3 125.3 194.4 371.4 Growth (%) 0.9 27.6 12.2 7.1 1.1 investment Accounts Receivable 566.5 620.9 728.1 787.4 786.8 Operating Profit 157.1 262.6 592.2 563.5 570.7 Inventories 445.5 426.8 464.6 502.5 502.1 Growth (%) (4.2) 67.2 125.5 (4.8) 1.3 Fixed assets 3,290.8 3,247.1 3,247.6 3,285.0 3,296.7 EBITDA 363.0 480.5 805.4 775.8 781.6 Non-operating Investment Assets 708.7 792.0 854.9 889.6 925.7 (44.2) 27.2 96.5 107.4 95.6 Gains/Losses Tangible Assets 2,564.8 2,440.3 2,377.9 2,382.0 2,358.7 Net Interest Income (50.2) (58.1) (44.0) (35.2) (26.9) Intangible Assets 17.3 14.9 14.8 13.4 12.3 Foreign Currency Gains (17.1) 40.9 0.0 6.0 6.0 Total Assets 4,546.1 4,579.8 4,600.5 4,804.7 4,992.8 Equity Method Gains 36.6 88.7 165.3 160.0 140.0 Current Liabilities 2,145.6 1,913.9 1,669.0 1,515.9 1,366.6 Pre-tax Profit 112.9 289.8 688.7 671.0 666.3 Accounts Payable 542.8 562.2 560.5 606.3 605.8 Net Profit 80.8 217.6 544.7 483.1 479.7 Net profit attributable to Short-term Debts 1,521.1 1,233.2 988.7 788.7 638.7 73.2 213.6 526.3 468.6 465.3 controlling interest Non-current Liabilities 672.7 709.1 528.0 483.7 439.7 Growth (%) (33.7) 169.5 150.3 (11.3) (0.7) Long-term Debts 560.5 586.9 381.7 331.7 281.7 NOPLAT 112.4 197.2 468.3 405.7 410.9 Total Liabilities 2,818.2 2,623.0 2,197.0 1,999.7 1,806.4 (+) Dep 206.0 217.9 213.2 212.2 210.9 Capital Stock 167.5 167.5 167.5 167.5 167.5 (-) Wc (2.4) 3.3 145.8 50.7 (1.4) Capital Surplus 266.5 266.5 359.0 359.0 359.0 (-) Capex 272.7 106.0 166.9 213.1 184.7 Earned Surplus 1,207.9 1,403.0 1,876.4 2,277.9 2,659.4 OpFCF 48.0 305.9 368.9 354.2 438.5 Capital Adjustment (22.2) 5.7 (3.4) (3.4) (3.4) 3 Yr CAGR & Margins Treasury Stock (40.1) (40.1) (40.1) (40.1) (40.1) Revenue growth(3Yr) (8.2) 2.0 13.0 15.3 6.7 Total Equity 1,727.9 1,956.8 2,403.5 2,805.0 3,186.5 OP growth(3Yr) 5.4 12.4 53.4 53.1 29.5 Invested capital 2,927.2 2,783.0 2,839.9 2,889.4 2,859.6 EBITDA growth(3Yr) 5.6 9.9 33.3 28.8 17.6 Net debt / (cash) 1,849.0 1,569.8 1,245.1 926.0 548.9 NP growth(3Yr) n/a 35.1 64.7 81.5 30.1 ROA 1.8 4.8 11.9 10.3 9.8 OP margin (%) 4.0 5.2 10.4 9.3 9.3 ROE 5.1 12.6 25.7 18.6 16.0 EBITDA margin (%) 9.1 9.5 14.2 12.7 12.7 ROIC 3.9 6.9 16.7 14.2 14.3 NP margin (%) 2.0 4.3 9.6 7.9 7.8

CASH FLOW KEY INDICATOR

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRW,x,%) 2016 2017 2018F 2019F 2020F Operating cash flow 296.8 421.0 469.3 475.9 543.6 Per share Data (w) Net Profit 80.8 217.6 544.7 483.1 479.7 EPS 2,404 7,010 17,070 15,127 15,020 Depr. & Amort. 206.0 217.9 213.2 212.2 210.9 BPS 47,848 54,573 71,202 83,231 94,653 Chg in Working Capital (20.2) (39.5) (159.2) (50.7) 1.4 DPS 800 1,000 2,000 2,500 2,500 Chg in Accounts (93.9) (60.7) (95.9) (59.4) 0.6 Valuation (x,%) Receivable Chg in inventories (50.9) 18.8 (37.8) (37.9) 0.4 PER 34.1 14.2 4.8 5.4 5.4 Chg in Accounts Payable 118.1 20.9 3.3 45.7 (0.5) PBR 1.7 1.8 1.1 1.0 0.9 Investing cash flow (250.7) (106.0) (99.5) (91.1) (84.2) EV/EBITDA 12.2 9.8 4.7 4.5 4.0 Chg in Short-term (18.3) 10.0 (20.7) (1.5) (1.5) Dividend yield 1.0 1.0 2.5 3.1 3.1 Investments Chg in Long-term 31.3 (3.3) 85.1 127.2 105.8 PCR 7.0 6.3 4.0 5.2 5.0 Investment Securities Capex (272.7) (106.0) (166.9) (213.1) (184.7) PSR 0.7 0.7 0.5 0.4 0.4 Disposal of Tangible & 0.1 4.4 3.9 (1.9) (1.9) Stabilities (%) Intangible Assets Financing cash flow 103.6 (276.7) (516.1) (317.1) (283.9) Liabilities Ratio 163.1 134.0 91.4 71.3 56.7 Chg in debt 131.8 (251.4) (451.6) (250.0) (200.0) Net debt/Equity 107.0 80.2 51.8 33.0 17.2 Chg in Equity (22.5) (22.1) (27.3) (67.1) (83.9) Net debt/EBITDA 509.3 326.7 154.6 119.4 70.2 Dividend Payout 22.5 22.1 27.3 67.1 83.9 Current ratio 58.5 69.6 81.1 100.2 124.1 Chg in Cash 149.7 37.5 (145.8) 67.6 175.5 Interest coverage ratio 3.1 4.5 13.5 16.0 21.2 Gross cash flow 390.7 528.1 681.0 526.6 542.2 Interest/revenue 1.5 1.3 1.0 0.7 0.6 (-) Chg in WC (2.4) 3.3 145.8 50.7 (1.4) Asset Structure (-) Capex 272.7 106.0 166.9 213.1 184.7 IC 75.7 72.8 74.3 72.7 68.8 (+) Disposal of Assets 0.1 4.4 3.9 (1.9) (1.9) Cash + IC(%) 24.3 27.2 25.7 27.3 31.2 Free Cash Flow 120.5 423.2 372.3 261.0 357.1 Capital Structure (-) Other Investments (31.3) 3.3 (85.1) (127.2) (105.8) Debt/Asset 54.6 48.2 36.3 28.5 22.4 Free Cash 151.8 419.9 457.4 388.1 462.9 Equity/Asset 45.4 51.8 63.7 71.5 77.6 Source: KTB DBS Investment Bank & Securities *Asset = Equity + Debt, P/E is derived by using diluted EPS. Note: Results Results are areconsolidated consolidated This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information*Asset = and Equity data obtained + Debt, from sourcesP/E is wederived consider reliable.by using However, diluted KTB Investment EPS. & Securities does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of KTB Investment & SecuritiesThis report Co. and has thus, been it may prepared not be reproduced, for informational distributed or modified purposes without only,the prior and consent does of KTBnot Investment constitute & Securities an offer Co. or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, DBS Bank does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of DBS Bank and thus, it may not be reproduced, distributed or modified without the prior consent of DBS Bank.

Page 13 Regional Company Focus LG Chem Bloomberg: 051910 KS, Reuters: 051910.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 16 Oct 2018

BUY, KRW307,000 KOSPI: 2,129.7 Earnings to weaken in 2H18, before (Closing price as of 11/10/18) EV picks up momentum Price Target 12-mth: KRW470,000 • US-China trade dispute weighing on petrochemical Reason for Report: 3Q18 earnings preview earnings in 3Q18 Potential catalyst: Stronger EV momentum Where we differ: We are more positive than the market • But battery division to see better margins on increased shipments of small batteries Analyst • Sales from high-spec EV battery orders to bolster Regional Research Team battery division profitability from 2020 [email protected] • Retain BUY, KRW470,000 TP

Price Relative Petrochemical margins likely to deteriorate throughout 2H18. 500,000 160 LG Chem should report margin deterioration for chemical 400,000 140 products (polyethylene [PE], acrylonitrile, butadiene, styrene

300,000 120 [ABS], polystyrene [PS], polycarbonate [PC], etc.) for 3Q18, owing to uncertain demand amid the US-China trade dispute. 200,000 100 The positive effect from low-priced naphtha input in 2Q18 has 100,000 80 also dissipated. The company’s earnings are likely to continue 0 60 to weaken in 4Q18, with increased oil prices pressuring its Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) margins. Moreover, routine maintenance works for its Yeosu cracker should incur costs of KRW100bn, weighing on the Forecasts and Valuation FY Dec (KRW bn) division’s overall earnings. 2017A 2018F 2019F 2020F Revenue 25,698.0 28,312.8 31,430.4 36,043.7 EBITDA 4,330.5 4,021.0 4,724.2 5,530.8 EV battery sales to drive 4Q18 battery earnings. In contrast, the Operating profit 2,928.5 2,420.5 2,786.2 3,403.0 company’s battery division is expected to see its margins Pre-tax Profit 2,563.9 2,208.8 2,604.4 3,237.5 improve by c.3% for 3Q18 (from 1.8% in 2Q), backed by Net Profit 2,022.0 1,744.1 2,005.4 2,476.7 increased shipments of cylinder-type and pouch-type small Net Pft (Pre Ex.) 2,022.0 1,744.1 2,005.4 2,476.7 batteries. Despite low seasonal demand for small batteries, Net Pft Attributable to 4Q18 battery earnings are forecast to remain flattish q-o-q and Controlling Interest 1,945.3 1,693.1 1,965.3 2,427.2 to swing to profitability y-o-y, thanks to the solid growth of EPS (KRW) 27,633 23,984 27,840 34,383 electric vehicle (EV) battery sales. EPS Pre Ex. (KRW) 28,723 24,048 27,696 34,317 EPS Gth (%) 42.9 -13.2 16.1 23.5 Clear margin improvement for battery business from 2020 EPS Gth Pre Ex (%) 48.6 -16.3 15.2 23.9 Diluted EPS (KRW) 27,633 23,325 27,128 33,615 underpinned by its dominance in global EV battery market. LG Net DPS (KRW) 6,000 6,000 6,500 7,000 Chem is leading the global EV battery market. It has been BV Per Share (KRW) 183,255 199,443 218,360 242,696 selectively receiving high-margin orders amid tight supply of PE (X) 14.7 12.8 11.0 8.9 high-spec batteries in 2018. As such, the battery division PE Pre Ex. (X) 14.1 12.8 11.1 8.9 should see strong margin growth from 2020, backed by P/Cash Flow (X) 7.1 6.2 6.1 5.2 revenue from these high-margin orders. EV/EBITDA (X) 7.1 6.3 5.3 4.4 Net Div Yield (%) 1.5 2.0 2.1 2.3 At A Glance P/Book Value (X) 2.2 1.5 1.4 1.3 Issued Capital (m shrs) 70.59 Net Debt/Equity (X) 0.0 0.1 0.1 0.1 ROE (%) 13.4 10.4 11.0 12.4 Mkt. Cap (KRWbn/US$m) 21,672/18,977 Major Shareholders Earnings Rev (%): (3.7) (0.0) 8.5 LG and 4 others (%) 33.4 Consensus EPS (KRW): 23,370 26,569 31,081 Free Float (%) 55.57 Other Broker Recs: B : 34 S : 0 H : 4 Avg. Daily Vol. (‘000) 379

ICB Industry: Chemicals ICB Sector: Materials Principal Business: LG Chem Ltd. is a chemical manufacturer. The company's products include petrochemicals, plastic resins, and engineering plastics. LG Chem also produces industrial and electronic materials

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ed-KK/ sa-LEY / CS / AH Company Focus LG Chem

Earnings preview Unit: KRW bn, % Vs. our previous Our estimates y-o-y q-o-q Vs. consensus estimates estimates ‘18.09F ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06A Diff. (%) ‘18.09F Diff. (%) Revenue 7,303.8 7,250.1 0.7 6,397.1 14.2 7,051.9 3.6 7,177.2 1.8 OP 604.5 597.3 1.2 789.7 (23.5) 703.3 (14.1) 629.7 (4.0) NP 402.0 400.9 0.3 545.5 (26.3) 493.4 (18.5) 439.8 (8.6) Margin (%) OP margin 8.3 8.2 12.3 10.0 8.8 Net margin 5.5 5.5 8.5 7.0 6.1 Difference (ppts) OP margin 0.0 (4.1) (1.7) (0.5) Net margin (0.0) (3.0) (1.5) (0.6) Note: Based on consolidated K-IFRS Source: LG Chem, DBS Bank

Revision to annual earnings forecasts

(KRW bn) Previous Revised Diff. (%, ppts) 2018F2019F2020F2018F2019F2020F2018F2019F2020F Revenue 28,279.3 31,751.0 36,011.8 28,312.8 31,430.4 36,043.70.1(1.0)0.1 Operating profit2,496.1 2,791.4 3,153.9 2,420.5 2,786.2 3,403.0(3.0)(0.2)7.9 OP margin (%) 8.88.88.88.58.99.4(0.3)0.10.7 EBITDA 4,136.6 4,717.8 5,271.3 4,021.0 4,724.2 5,530.8(2.8)0.14.9 EBITDA margin (%)14.614.914.614.215.015.3(0.4)0.20.7 Net profit 1,811.0 2,006.1 2,283.3 1,744.1 2,005.4 2,476.7(3.7)(0.0)8.5 Note: Based on consolidated K-IFRS Source: LG Chem, DBS Bank

Page 15 Company Focus LG Chem

BALANCE SHEET INCOME STATEMENT

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRWbn) 2016 2017 2018F 2019F 2020F Current Assets 9,226.9 11,205.6 11,894.8 11,753.4 12,786.2 Revenue 20,659.3 25,698.0 28,312.8 31,430.4 36,043.7 Cash & Short-term 2,228.4 2,779.0 2,362.4 1,836.7 2,558.5 Growth (%) 2.2 24.4 10.2 11.0 14.7 investment Accounts Receivable 3,728.8 4,636.0 5,030.4 5,700.3 5,727.5 Operating Profit 1,991.9 2,928.5 2,420.5 2,786.2 3,403.0 Inventories 2,965.2 3,352.5 4,059.6 3,769.5 4,048.7 Growth (%) 9.2 47.0 (17.3) 15.1 22.1 Fixed assets 11,260.1 13,835.6 15,865.9 17,669.0 18,912.2 EBITDA 3,328.6 4,330.5 4,021.0 4,724.2 5,530.8 Non-operating Investment Assets 747.8 801.0 842.1 853.5 865.4 (332.1) (364.6) (211.6) (181.8) (165.5) Gains/Losses Tangible Assets 9,680.1 11,211.5 13,158.4 14,935.7 16,153.3 Net Interest Income (36.6) (69.3) (75.3) (70.8) (53.4) Intangible Assets 832.1 1,823.2 1,865.4 1,879.8 1,893.5 Foreign Currency Gains (101.4) (60.6) 15.0 6.0 6.0 Total Assets 20,487.1 25,041.2 27,760.8 29,422.4 31,698.4 Equity Method Gains (45.0) 6.2 (2.9) (4.8) (4.8) Current Liabilities 5,446.9 6,644.7 6,788.6 7,432.4 7,766.1 Pre-tax Profit 1,659.8 2,563.9 2,208.8 2,604.4 3,237.5 Accounts Payable 2,694.9 3,862.0 3,690.8 4,321.2 4,641.2 Net Profit 1,281.0 2,022.0 1,744.1 2,005.4 2,476.7 Net profit attributable to Short-term Debts 2,212.6 1,451.3 1,753.1 1,753.1 1,753.1 1,281.1 1,945.3 1,693.1 1,965.3 2,427.2 controlling interest Non-current Liabilities 989.2 2,058.0 3,279.5 2,802.1 2,825.7 Growth (%) 11.5 57.8 (13.7) 15.0 23.5 Long-term Debts 678.0 1,593.6 2,711.4 2,211.4 2,211.4 NOPLAT 1,537.3 2,309.5 1,911.2 2,145.4 2,603.3 Total Liabilities 6,436.1 8,702.6 10,068.1 10,234.5 10,591.7 (+) Dep 1,336.7 1,402.0 1,600.5 1,938.0 2,127.8 Capital Stock 369.5 391.4 391.4 391.4 391.4 (-) Wc 463.0 (531.2) 1,263.8 (259.5) (22.7) Capital Surplus 1,157.8 2,274.4 2,274.4 2,274.4 2,274.4 (-) Capex 1,398.5 2,252.6 3,716.6 3,614.5 3,243.9 Earned Surplus 12,462.8 14,039.3 15,268.9 16,764.1 18,682.8 OpFCF 1,012.4 1,990.1 (1,468.6) 728.4 1,509.9 Capital Adjustment (52.7) (536.5) (456.6) (456.6) (456.6) 3 Yr CAGR & Margins Treasury Stock (15.5) (354.9) (354.9) (354.9) (354.9) Revenue growth(3Yr) (3.7) 4.4 11.9 15.0 11.9 Total Equity 14,051.0 16,338.6 17,692.7 19,187.9 21,106.6 OP growth(3Yr) 4.5 30.7 9.9 11.8 5.1 Invested capital 14,429.0 16,316.6 19,513.6 21,023.1 22,208.0 EBITDA growth(3Yr) 6.1 20.7 9.3 12.4 8.5 Net debt / (cash) 662.3 265.9 2,102.2 2,127.8 1,406.0 NP growth(3Yr) 0.3 33.3 14.9 16.1 7.0 ROA 6.6 8.9 6.6 7.0 8.1 OP margin (%) 9.6 11.4 8.5 8.9 9.4 ROE 9.5 13.4 10.4 11.0 12.4 EBITDA margin (%) 16.1 16.9 14.2 15.0 15.3 ROIC 11.3 15.0 10.7 10.6 12.0 NP margin (%) 6.2 7.9 6.2 6.4 6.9

CASH FLOW KEY INDICATOR

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRW,x,%) 2016 2017 2018F 2019F 2020F Operating cash flow 2,516.7 3,180.7 2,278.1 4,190.3 4,606.1 Per share Data (w) Net Profit 1,659.8 2,563.9 1,995.4 2,005.4 2,476.7 EPS 19,332 27,633 23,325 27,128 33,615 Depr. & Amort. 1,336.7 1,402.0 1,600.5 1,938.0 2,127.8 BPS 177,337 183,255 199,443 218,360 242,696 Chg in Working Capital (382.1) (714.8) (1,094.5) 259.5 22.7 DPS 5,000 6,000 6,000 6,500 7,000 Chg in Accounts (12.6) (971.5) (310.2) (669.9) (27.2) Valuation (x,%) Receivable Chg in inventories (352.1) (395.8) (668.7) 290.1 (279.2) PER 13.5 14.7 13.2 11.3 9.1 Chg in Accounts Payable 349.2 328.3 117.2 630.3 320.1 PBR 1.5 2.2 1.5 1.4 1.3 Investing cash flow (1,736.8) (1,640.4) (3,545.1) (3,765.7) (3,396.4) EV/EBITDA 5.8 7.1 6.3 5.3 4.4 Chg in Short-term 0.0 0.0 (9.3) (19.8) (20.6) Dividend yield 1.9 1.5 2.0 2.1 2.3 Investments Chg in Long-term (3.4) (3.0) (7.9) (16.2) (16.7) PCR 5.6 7.1 6.2 6.1 5.2 Investment Securities Capex (1,398.5) (2,252.6) (3,716.6) (3,614.5) (3,243.9) PSR 0.9 1.2 0.8 0.8 0.7 Disposal of Tangible & (56.0) 312.7 110.9 (115.2) (115.2) Stabilities (%) Intangible Assets Financing cash flow (1,007.3) (736.5) 889.3 (970.1) (508.5) Liabilities Ratio 45.8 53.3 56.9 53.3 50.2 Chg in debt (673.8) (348.6) 1,349.4 (500.0) 0.0 Net debt/Equity 4.7 1.6 11.9 11.1 6.7 Chg in Equity (346.5) (385.7) (460.1) (470.1) (508.5) Net debt/EBITDA 19.9 6.1 52.3 45.0 25.4 Dividend Payout 346.5 385.7 460.1 470.1 508.5 Current ratio 169.4 168.6 175.2 158.1 164.6 Chg in Cash (230.6) 775.0 (375.0) (545.5) 701.2 Interest coverage ratio 54.4 42.2 32.2 39.4 63.7 Gross cash flow 3,465.3 4,431.2 3,846.3 3,930.8 4,583.3 Interest/revenue 0.4 0.4 0.4 0.4 0.3 (-) Chg in WC 463.0 (531.2) 1,263.8 (259.5) (22.7) Asset Structure (-) Capex 1,398.5 2,252.6 3,716.6 3,614.5 3,243.9 IC 82.9 82.0 85.9 88.7 86.6 (+) Disposal of Assets (56.0) 312.7 110.9 (115.2) (115.2) Cash + IC(%) 17.1 18.0 14.1 11.3 13.4 Free Cash Flow 1,547.7 3,022.5 (1,023.1) 460.6 1,247.0 Capital Structure (-) Other Investments 3.4 3.0 7.9 16.2 16.7 Debt/Asset 17.1 15.7 20.1 17.1 15.8 Free Cash 1,544.3 3,019.5 (1,031.0) 444.4 1,230.3 Equity/Asset 82.9 84.3 79.9 82.9 84.2 Source: KTB DBS Investment Bank & Securities *Asset = Equity + Debt, P/E is derived by using diluted EPS. Note: Results Results are consolidatedare consolidated This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and*Asset data obtained = Equity from sources+ Debt, we consider P/E is reliable. derived However, by KTB using Investment diluted & Securities EPS. does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of KTB Investment & Securities Co. and thus,This it report may not behas reproduced, been prepared distributed or for modified informational without the prior purposes consent of KTBonly, Investment and does & Securities not Co.constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, DBS Bank does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of DBS Bank and thus, it may not be reproduced, distributed or modified without the prior consent of DBS Bank.

Page 16 Regional Company Focus Lotte Chemical Bloomberg: 011170 KS, Reuters: 011170.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 16 Oct 2018

BUY, KRW268,000 KOSPI: 2,129.7 Weak 2H18, effect of capacity (Closing price as of 11/10/18) expansion likely from end-2018 Price Target 12-mth: KRW400,000 (prev. KRW450,000) • Weak 3Q18 margins to drop further in 4Q18 amid oil price increases and maintenance costs Reason for Report: 3Q18 earnings preview Potential catalyst: Capacity expansion effect from next year • Earnings turnaround after year-end may restore share Where we differ: We have more conservative view than the makret price momentum • Dividend expansion likely on Lotte Corp’s strong tilt Analyst towards shareholder-friendly policies Regional Research Team [email protected] • Retain BUY, TP cut to KRW400,000 Disappointing 3Q18 likely due to trade war between US and China. Price Relative Lotte Chemical’s margins from naphtha crackers (NCC) have

500,000 310 plummeted, due to increased uncertainty for demand amid the US-

400,000 260 China trade dispute. The polyethylene (PE), mono-ethylene glycol

300,000 210 (MEG), purified isophthalic acid (PIA) and acrylonitrile, butadiene,

200,000 160 styrene (ABS) chains have shown weak performance. The

100,000 110 company’s 3Q18 earnings should come in below market

0 60 expectations, due to the dissipation of the low-priced material Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) input effect. The company should see further margin deterioration in 4Q18, affected by higher oil prices and routine NCC Forecasts and Valuation maintenance costs (KRW70bn). FY Dec (KRW bn) 2017A 2018F 2019F 2020F Earnings to strengthen on contribution from new production Revenue 15,874.5 16,934.2 18,056.7 18,651.7 EBITDA 3,620.9 3,146.9 3,497.2 3,564.2 capacity. After the scheduled maintenance, the effect of capacity Operating profit 2,929.7 2,367.2 2,593.8 2,613.2 expansion should begin to be reflected. We expect Lotte Chemical’s Pre-tax Profit 3,084.7 2,660.8 2,887.0 2,883.5 top line and margins to improve with the commencement of Net Profit 2,284.6 1,913.1 2,078.6 2,076.1 Net Pft (Pre Ex.) 2,284.6 1,913.1 2,078.6 2,076.1 operations for its US ethane cracker in Mar-Apr 2019. Although US ethane prices have recently surged, they should stabilise in 2019 on Net Pft Attributable to Controlling Interest 2,243.9 1,841.4 1,994.8 1,992.4 the back of pipeline restoration and capacity expansion. The effects EPS (KRW) 65,466 53,722 58,200 58,130 of low-priced materials input should be more visible once it EPS Pre Ex. (KRW) 66,654 55,815 60,644 60,572 commences operations of its MEG facility (700k tonnes) earlier than EPS Gth (%) 22.2 -17.9 8.3 -0.1 EPS Gth Pre Ex (%) 24.4 -16.3 8.7 -0.1 scheduled. Diluted EPS (KRW) 65,466 53,722 58,200 58,130 Geared more towards stronger shareholder return policies. We Net DPS (KRW) 10,500 10,500 13,500 13,500 lower our TP for Lotte Chemical to KRW400,000, which is BV Per Share (KRW) 335,215 381,416 429,116 473,746 PE (X) 5.6 5.0 4.6 4.6 equivalent to a P/BV of 1.05x (2019F 0.93x), in view of sluggish PE Pre Ex. (X) 5.5 4.8 4.4 4.4 business conditions and valuation correction for its P/Cash Flow (X) 3.5 3.3 3.5 3.4 domestic/overseas peers. We consider a P/BV of 0.7x or lower as EV/EBITDA (X) 3.3 2.6 2.1 1.8 oversold territory. In view of a likely earnings turnaround from end- Net Div Yield (%) 2.9 3.9 5.0 5.0 P/Book Value (X) 1.1 0.7 0.6 0.6 2018, the company’s share price momentum is expected to recover Net Debt/Equity (X) CASH CASH CASH CASH once again. Meanwhile, with Lotte Corp projected to strengthen ROE (%) 21.9 15.6 15.0 13.4 shareholder returns, including dividend expansion, Lotte Chemical’s dividend yields are likely to become more attractive. We expect Earnings Rev (%): (2.7) (1.3) (1.2) Consensus EPS (KRW): 57,620 60,650 58,198 further dividend expansion on the back of an earnings recovery in Other Broker Recs: B : 34 S : 0 H : 4 2019.

ICB Industry: Chemicals At A Glance ICB Sector: Materials Issued Capital (m shrs) 34.28 Principal Business: Lotte Chemical manufactures a wide range of Mkt. Cap (KRWbn/US$m) 9,186/8,044 petrochemical products such as high-density polyethylene, Major Shareholders polypropylene, and ethylene glycol. Lotte Property & Development and 3 others (%) 53.5 Source of all data: Company, DBS Bank, Bloomberg Finance L.P Free Float (%) 37.41 Avg. Daily Vol. (‘000) 317

ed-KK/ sa-LEY / CS / AH Company Focus Lotte Chemical

Earnings preview Unit: KRW bn, % Vs. our previous Our estimates y-o-y q-o-q Vs. consensus estimates estimates ‘18.09F ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06A Diff. (%) ‘18.09F Diff. (%) Revenue 4,274.8 4,319.8 (1.0) 3,990.2 7.1 4,330.2 (1.3) 4,410.0 (3.1) OP 536.0 562.6 (4.7) 766.2 (30.0) 701.3 (23.6) 638.6 (16.1) NP 445.8 462.3 (3.6) 631.0 (29.4) 579.0 (23.0) 494.4 (9.8) Margin (%) OP margin 12.5 13.0 19.2 16.2 14.5 Net margin 10.4 10.7 15.8 13.4 11.2 Difference (ppts) OP margin (0.5) (6.7) (3.7) (1.9) Net margin (0.3) (5.4) (2.9) (0.8) Note: Based on consolidated K-IFRS Source: Lotte Chemical, DBS Bank

Revision to annual earnings forecasts

(KRW bn) Previous Revised Diff. (%, ppts) 2018F2019F2020F2018F2019F2020F2018F2019F2020F Revenue 16,993.7 17,906.7 18,461.6 16,934.2 18,056.7 18,651.7(0.4)0.81.0 Operating profit2,441.0 2,659.3 2,675.3 2,367.2 2,593.8 2,613.2(3.0)(2.5)(2.3) OP margin (%) 14.414.914.514.014.414.0(0.4)(0.5)(0.5) EBITDA 3,233.6 3,532.9 3,598.1 3,146.9 3,497.2 3,564.2(2.7)(1.0)(0.9) EBITDA margin (%)19.019.719.518.619.419.1(0.4)(0.4)(0.4) Net profit 1,966.6 2,105.9 2,101.8 1,913.1 2,078.6 2,076.1(2.7)(1.3)(1.2) Note: Based on consolidated K-IFRS Source: Lotte Chemical, DBS Bank

Page 18 Company Focus Lotte Chemical

BALANCE SHEET INCOME STATEMENT

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRWbn) 2016 2017 2018F 2019F 2020F Current Assets 5,851.7 8,225.5 8,615.7 9,009.2 9,252.8 Revenue 13,223.5 15,874.5 16,934.2 18,056.7 18,651.7 Cash & Short-term 2,661.5 4,875.9 5,060.8 5,211.1 5,324.7 Growth (%) 12.9 20.0 6.7 6.6 3.3 investment Accounts Receivable 1,551.9 1,667.6 1,757.4 1,882.0 1,948.3 Operating Profit 2,544.3 2,929.7 2,367.2 2,593.8 2,613.2 Inventories 1,477.2 1,536.0 1,650.0 1,767.0 1,829.2 Growth (%) 57.9 15.2 (19.2) 9.6 0.7 Fixed assets 10,015.2 11,325.5 12,416.8 12,991.9 13,569.5 EBITDA 3,173.4 3,620.9 3,146.9 3,497.2 3,564.2 Non-operating Investment Assets 2,673.1 2,895.9 3,005.8 3,127.8 3,254.8 (56.9) 155.0 293.6 293.1 270.4 Gains/Losses Tangible Assets 5,546.7 6,716.2 7,764.9 8,295.8 8,820.4 Net Interest Income (47.0) (43.6) 8.3 23.2 40.8 Intangible Assets 1,792.4 1,710.6 1,646.2 1,568.3 1,494.2 Foreign Currency Gains (37.1) 36.6 (1.0) 4.0 4.0 Total Assets 15,866.8 19,551.0 21,032.5 22,001.1 22,822.3 Equity Method Gains 71.4 284.4 311.9 300.0 260.0 Current Liabilities 3,448.8 3,790.9 4,077.8 3,879.5 3,637.7 Pre-tax Profit 2,487.4 3,084.7 2,660.8 2,887.0 2,883.5 Accounts Payable 1,077.4 1,420.8 1,312.2 1,405.3 1,454.8 Net Profit 1,837.2 2,284.6 1,913.1 2,078.6 2,076.1 Net profit attributable to Short-term Debts 1,747.2 1,514.4 1,901.3 1,601.3 1,301.3 1,835.8 2,243.9 1,841.4 1,994.8 1,992.4 controlling interest Non-current Liabilities 3,017.2 3,505.3 3,077.2 2,609.1 2,142.4 Growth (%) 85.5 24.4 (16.3) 8.7 (0.1) Long-term Debts 2,444.8 2,752.7 2,290.8 1,790.8 1,290.8 NOPLAT 1,879.2 2,169.8 1,702.0 1,867.6 1,881.5 Total Liabilities 6,466.0 7,296.2 7,155.0 6,488.6 5,780.1 (+) Dep 629.2 691.2 779.6 903.3 951.0 Capital Stock 171.4 171.4 171.4 171.4 171.4 (-) Wc 161.6 (415.5) 305.3 141.4 71.8 Capital Surplus 478.6 880.7 880.8 880.8 880.8 (-) Capex 1,588.1 2,019.9 1,581.1 1,353.7 1,398.9 Earned Surplus 8,487.0 10,582.1 12,069.1 13,704.0 15,233.8 OpFCF 758.6 1,256.5 595.2 1,275.8 1,361.8 Capital Adjustment 226.2 (144.6) (48.1) (48.1) (48.1) 3 Yr CAGR & Margins Treasury Stock 0.0 0.0 0.0 0.0 0.0 Revenue growth(3Yr) (7.0) 2.2 13.1 10.9 5.5 Total Equity 9,400.8 12,254.8 13,877.5 15,512.5 17,042.2 OP growth(3Yr) 73.5 102.9 13.7 0.6 (3.7) Invested capital 8,487.9 9,003.3 10,283.2 10,857.1 11,358.1 EBITDA growth(3Yr) 47.2 62.6 14.5 3.3 (0.5) Net debt / (cash) 1,530.5 (608.8) (868.7) (1,819.0) (2,732.6) NP growth(3Yr) 85.9 151.5 24.5 4.2 (3.1) ROA 13.4 12.9 9.4 9.7 9.3 OP margin (%) 19.2 18.5 14.0 14.4 14.0 ROE 21.8 21.9 15.6 15.0 13.4 EBITDA margin (%) 24.0 22.8 18.6 19.4 19.1 ROIC 27.3 24.8 17.6 17.7 16.9 NP margin (%) 13.9 14.4 11.3 11.5 11.1

CASH FLOW KEY INDICATOR

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRW,x,%) 2016 2017 2018F 2019F 2020F Operating cash flow 2,682.1 3,097.5 2,264.7 2,488.7 2,644.9 Per share Data (w) Net Profit 1,837.2 2,284.6 1,913.1 2,078.6 2,076.1 EPS 53,561 65,466 53,722 58,200 58,130 Depr. & Amort. 629.2 691.2 779.6 903.3 951.0 BPS 273,173 335,215 381,416 429,116 473,746 Chg in Working Capital (157.2) 38.5 (59.6) (141.4) (71.8) DPS 4,000 10,500 10,500 13,500 13,500 Chg in Accounts (128.1) (172.6) (74.1) (124.6) (66.3) Valuation (x,%) Receivable Chg in inventories (125.8) (101.0) (94.4) (117.0) (62.3) PER 6.9 5.6 5.0 4.6 4.6 Chg in Accounts Payable 153.6 314.2 (95.0) 93.1 49.5 PBR 1.4 1.1 0.7 0.6 0.6 Investing cash flow (3,578.7) (4,730.9) (1,096.3) (1,300.2) (1,395.3) EV/EBITDA 4.5 3.3 2.6 2.1 1.8 Chg in Short-term 418.4 (2,799.9) 257.9 (121.8) (126.7) Dividend yield 1.1 2.9 3.9 5.0 5.0 Investments Chg in Long-term (124.5) 35.8 104.3 189.3 144.8 PCR 3.9 3.5 3.3 3.5 3.4 Investment Securities Capex (1,588.1) (2,019.9) (1,581.1) (1,353.7) (1,398.9) PSR 1.0 0.8 0.5 0.5 0.5 Disposal of Tangible & 4.0 0.6 7.6 (2.7) (2.7) Stabilities (%) Intangible Assets Financing cash flow 1,133.1 1,159.4 (810.5) (1,159.9) (1,262.7) Liabilities Ratio 68.8 59.5 51.6 41.8 33.9 Chg in debt 1,295.8 234.6 (367.3) (800.0) (800.0) Net debt/Equity 16.3 CASH CASH CASH CASH Chg in Equity (84.2) 78.6 (359.9) (359.9) (462.7) Net debt/EBITDA 48.2 CASH CASH CASH CASH Dividend Payout 84.2 134.8 359.9 359.9 462.7 Current ratio 169.7 217.0 211.3 232.2 254.4 Chg in Cash 260.7 (517.7) 376.1 28.5 (13.2) Interest coverage ratio 54.1 67.2 n/a n/a n/a Gross cash flow 3,212.6 3,649.4 2,817.1 2,630.1 2,716.7 Interest/revenue 0.6 0.7 0.5 0.4 0.3 (-) Chg in WC 161.6 (415.5) 305.3 141.4 71.8 Asset Structure (-) Capex 1,588.1 2,019.9 1,581.1 1,353.7 1,398.9 IC 61.4 53.7 56.0 56.6 57.0 (+) Disposal of Assets 4.0 0.6 7.6 (2.7) (2.7) Cash + IC(%) 38.6 46.3 44.0 43.4 43.0 Free Cash Flow 1,466.9 2,045.5 938.3 1,132.2 1,243.3 Capital Structure (-) Other Investments 124.5 (35.8) (104.3) (189.3) (144.8) Debt/Asset 30.8 25.8 23.2 17.9 13.2 Free Cash 1,342.4 2,081.3 1,042.7 1,321.6 1,388.1 Equity/Asset 69.2 74.2 76.8 82.1 86.8 Source: KTB DBS Investment Bank & Securities *Asset = Equity + Debt, P/E is derived by using diluted EPS. Note: Results Results are consolidatedare consolidated This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and*Asset data obtained = Equity from sources+ Debt, we consider P/E is reliable. derived However, by KTBusing Investment diluted & Securities EPS. does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment shouldThis reportbe made basedhas beenon each prepared client's own judgment,for informational and we expressly purposes disclaim all liabilityonly, for and any investmentdoes not decisions constitute and any anresults offer thereof. or Thissolicitation report is a copyrighted of a contract material offor KTB trading. Investment Opinions& Securities Co. in andthis thus, it may not be reproduced, distributed or modified without the prior consent of KTB Investment & Securities Co. report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, DBS Bank does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of DBS Bank and thus, it may not be reproduced, distributed or modified without the prior consent of DBS Bank

Page 19 Regional Company Focus Lotte Fine Chemical Bloomberg: 004000 KS, Reuters: 004000.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 16 Oct 2018

BUY, KRW46,300 KOSPI: 2,129.7 Holding strong on different product (Closing price as of 11/10/18) cycles Price Target 12-mth: KRW75,000 (prev. KRW85,000) • Prices of key products weakened, to weigh on Reason for Report: 3Q18 earnings preview 3Q18 results Potential catalyst: Stronger caustic soda, ECH prices Where we differ: We are more conservative than the market • Caustic soda prices to rebound next year on tight supply Analyst Regional Research Team • Easing of ECH oversupply is another positive [email protected] • Retain BUY, TP cut to KRW75,000

Price Relative Slower growth for 2H18 amid weakening international prices for

90,000 180 some products. Lotte Fine Chemical’s 3Q18 earnings should 80,000 160 decline q-o-q, due to lower prices for its key products 70,000 60,000 140 epichlorohydrin (ECH) and caustic soda, as well as increased 50,000 120 electricity rates in the summer. Despite sharp drops in 40,000 30,000 100 international prices, domestic caustic soda prices are expected to 20,000 80 remain stable. In 4Q18, we expect the company to adjust the 10,000 0 60 ASPs of some products, reflecting the downtrend in international Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 prices. However, ECH export prices should remain strong. Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts)

Forecasts and Valuation Favourable supply-demand dynamics ahead. Global supply of FY Dec (KRW bn) 2017A 2018F 2019F 2020F caustic soda should tighten gradually. While demand is expected Revenue 1,159.5 1,410.2 1,445.0 1,478.0 to increase by over 2m tonnes yearly, supply growth should be EBITDA 186.8 292.5 291.5 307.9 limited to only 600k-800k tonnes per year. Therefore, the Operating profit 111.1 211.1 208.5 221.5 average caustic soda price is projected to rebound in 2019. ECH Pre-tax Profit 110.7 273.2 290.0 303.7 supply-demand conditions should also improve in 2019, with Net Profit 89.2 212.0 221.9 232.3 oversupply ratio likely to decline to its lowest levels. Net Pft (Pre Ex.) 89.2 212.0 221.9 232.3 Net Pft Attributable to Despite industry correction, still positive on the company for its Controlling Interest 89.2 212.0 221.9 232.3 differentiated product cycles. We cut our TP for Lotte Fine EPS (KRW) 3,459 8,216 8,600 9,005 EPS Pre Ex. (KRW) 3,459 8,216 8,600 9,005 Chemical to KRW75,000, which is equivalent to a P/BV of 1.4x EPS Gth (%) n/a 137.6 4.7 4.7 (2019F 1.2x), considering the valuation correction for its EPS Gth Pre Ex (%) n/a 137.6 4.7 4.7 domestic and overseas peers. However, we keep our BUY rating Diluted EPS (KRW) 3,459 8,216 8,600 9,005 and recommend gradually accumulating Lotte Fine Chemical Net DPS (KRW) 800 2,000 2,000 2,200 shares. There has been sufficient share price correction for the BV Per Share (KRW) 45,644 52,937 59,836 67,016 stock and its product cycles do not move in sync with general PE (X) 18.8 5.6 5.4 5.1 petrochemical products. PE Pre Ex. (X) 18.8 5.6 5.4 5.1 P/Cash Flow (X) 8.6 4.6 5.0 4.7 At A Glance EV/EBITDA (X) 8.6 3.5 3.0 2.5 Net Div Yield (%) 1.2 4.3 4.3 4.8 Issued Capital (m shrs) 25.80 P/Book Value (X) 1.4 0.9 0.8 0.7 Mkt. Cap (KRWbn/US$m) 1,195/1,046 Net Debt/Equity (X) CASH CASH CASH CASH Major Shareholders ROE (%) 7.7 16.5 15.1 14.1 Lotte Chemical (%) 31.1 Free Float (%) 55.32 Earnings Rev (%): (3.4) (3.9) (1.4) Avg. Daily Vol. (‘000) 131 Consensus EPS (KRW): 8,669 9,579 9,709 Other Broker Recs: B : 8 S : 0 H : 0

ICB Industry: Chemicals ICB Sector: Materials Principal Business: LOTTE Fine Chemical produces general and fine chemicals. The company produces ammonia, epichlorohydrin, caustic soda, and dimethylformamide. LOTTE Fine Chemical also manufactures chemicals used in pharmaceutical and paint manufacturing industries.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ed-xx/ sa-CS / AH Company Focus Lotte Fine Chemical

Earnings preview Unit: KRW bn, % Vs. our previous Our estimates y-o-y q-o-q Vs. consensus estimates estimates ‘18.09F ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06A Diff. (%) ‘18.09F Diff. (%) Revenue 370.6 368.3 0.6 309.3 19.8 355.4 4.3 355.2 4.4 OP 46.0 53.8 (14.4) 29.4 56.6 73.1 (37.1) 53.9 (14.6) NP 47.7 52.8 (9.6) 31.7 50.6 68.5 (30.4) 53.2 (10.3) Margin (%) OP margin 12.4 14.6 9.5 20.6 15.2 Net margin 12.9 14.3 10.2 19.3 15.0 Difference (ppts) OP margin (2.2) 2.9 (8.2) (2.8) Net margin (1.5) 2.6 (6.4) (2.1) Note: Based on consolidated K-IFRS Source: Lotte Fine Chemical, DBS Bank

Revision to annual earnings forecasts

(KRW bn) Previous Revised Diff. (%, ppts) 2018F2019F2020F2018F2019F2020F2018F2019F2020F Revenue 1,379.0 1,433.6 1,461.3 1,410.2 1,445.0 1,478.02.30.81.1 Operating profit 223.2225.0230.4211.1208.5221.5(5.4)(7.3)(3.9) OP margin (%) 16.215.715.815.014.415.0(1.2)(1.3)(0.8) EBITDA 301.7305.0315.2292.5291.5307.9(3.1)(4.4)(2.3) EBITDA margin (%)21.921.321.620.720.220.8(1.1)(1.1)(0.7) Net profit 219.4230.8235.7212.0221.9232.3(3.4)(3.9)(1.4) Note: Based on consolidated K-IFRS Source: Lotte Fine Chemical, DBS Bank

Page 21 Company Focus Lotte Fine Chemical

BALANCE SHEET INCOME STATEMENT

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRWbn) 2016 2017 2018F 2019F 2020F Current Assets 569.2 697.0 772.1 848.3 943.3 Revenue 1,110.7 1,159.5 1,410.2 1,445.0 1,478.0 Cash & Short-term 240.2 357.8 355.9 465.7 548.4 Growth (%) (4.4) 4.4 21.6 2.5 2.3 investment Accounts Receivable 183.4 190.6 241.9 215.6 222.7 Operating Profit 29.7 111.1 211.1 208.5 221.5 Inventories 136.8 138.6 164.2 156.8 162.0 Growth (%) 1,064.7 273.5 90.0 (1.2) 6.2 Fixed assets 961.8 944.3 984.7 1,056.0 1,127.5 EBITDA 111.4 186.8 292.5 291.5 307.9 Non-operating Investment Assets 220.5 221.1 239.8 249.6 259.7 (80.1) (0.4) 62.1 81.5 82.2 Gains/Losses Tangible Assets 717.1 708.1 726.4 795.6 861.5 Net Interest Income (5.3) (3.9) 2.8 5.5 6.1 Intangible Assets 24.1 15.1 18.6 10.9 6.3 Foreign Currency Gains (0.1) (1.2) (2.2) 0.0 0.0 Total Assets 1,530.9 1,641.3 1,756.8 1,904.3 2,070.9 Equity Method Gains 15.0 24.4 84.0 68.0 68.0 Current Liabilities 202.8 354.6 273.9 250.3 235.3 Pre-tax Profit (50.4) 110.7 273.2 290.0 303.7 Accounts Payable 84.6 116.2 145.1 141.1 145.8 Net Profit (43.5) 89.2 212.0 221.9 232.3 Net profit attributable to Short-term Debts 101.6 201.2 91.3 71.3 51.3 (43.5) 89.2 212.0 221.9 232.3 controlling interest Non-current Liabilities 216.5 94.0 98.6 99.4 100.2 Growth (%) NM NM 137.6 4.7 4.7 Long-term Debts 199.8 79.8 79.9 79.9 79.9 NOPLAT 21.6 89.6 163.8 159.5 169.5 Total Liabilities 419.3 448.6 372.5 349.7 335.5 (+) Dep 81.6 75.6 81.4 83.0 86.4 Capital Stock 129.0 129.0 129.0 129.0 129.0 (-) Wc 36.1 (41.9) 47.7 (30.0) 7.4 Capital Surplus 331.1 331.1 331.1 331.1 331.1 (-) Capex 31.2 62.9 107.8 144.5 147.8 Earned Surplus 661.1 742.2 943.5 1,113.8 1,294.6 OpFCF 35.9 144.3 89.7 128.0 100.7 Capital Adjustment (9.5) (9.6) (19.3) (19.3) (19.3) 3 Yr CAGR & Margins Treasury Stock (9.4) (9.4) (9.4) (9.4) (9.4) Revenue growth(3Yr) (5.5) (1.4) 6.7 9.2 8.4 Total Equity 1,111.7 1,192.7 1,384.3 1,554.6 1,735.4 OP growth(3Yr) n/a n/a 335.6 91.4 25.9 Invested capital 977.9 900.7 964.0 994.9 1,063.0 EBITDA growth(3Yr) 42.2 59.6 56.8 37.8 18.1 Net debt / (cash) 61.2 (76.8) (184.8) (314.6) (417.2) NP growth(3Yr) n/a 15.0 33.1 n/a 37.6 ROA (2.7) 5.6 12.5 12.1 11.7 OP margin (%) 2.7 9.6 15.0 14.4 15.0 ROE (3.8) 7.7 16.5 15.1 14.1 EBITDA margin (%) 10.0 16.1 20.7 20.2 20.8 ROIC 2.2 9.5 17.6 16.3 16.5 NP margin (%) (3.9) 7.7 15.0 15.4 15.7

CASH FLOW KEY INDICATOR

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRW,x,%) 2016 2017 2018F 2019F 2020F Operating cash flow 102.6 177.8 209.1 267.6 244.2 Per share Data (w) Net Profit (43.5) 89.2 212.0 221.9 232.3 EPS (1,688) 3,459 8,216 8,600 9,005 Depr. & Amort. 81.6 75.6 81.4 83.0 86.4 BPS 42,152 45,644 52,937 59,836 67,016 Chg in Working Capital (48.3) (11.6) (76.2) 30.0 (7.4) DPS 300 800 2,000 2,000 2,200 Chg in Accounts (23.1) (18.9) (41.1) 26.3 (7.1) Valuation (x,%) Receivable Chg in inventories 13.3 0.7 (24.2) 7.4 (5.2) PER n/a 18.8 5.6 5.4 5.1 Chg in Accounts Payable (30.1) 18.5 25.0 (4.0) 4.7 PBR 0.7 1.4 0.9 0.8 0.7 Investing cash flow (47.6) (242.0) 53.7 (90.2) (94.1) EV/EBITDA 7.6 8.6 3.5 3.0 2.5 Chg in Short-term (30.7) (197.9) 122.9 (4.0) (4.1) Dividend yield 1.0 1.2 4.3 4.3 4.8 Investments Chg in Long-term (4.3) 0.1 35.2 58.4 58.0 PCR 4.9 8.6 4.6 5.0 4.7 Investment Securities Capex (31.2) (62.9) (107.8) (144.5) (147.8) PSR 0.7 1.4 0.8 0.8 0.8 Disposal of Tangible & 1.4 1.7 0.7 0.0 0.0 Stabilities (%) Intangible Assets Financing cash flow (64.1) (14.1) (136.6) (71.6) (71.6) Liabilities Ratio 37.7 37.6 26.9 22.5 19.3 Chg in debt (51.4) (6.4) (116.2) (20.0) (20.0) Net debt/Equity 5.5 CASH CASH CASH CASH Chg in Equity (12.7) (7.6) (20.4) (51.6) (51.6) Net debt/EBITDA 54.9 CASH CASH CASH CASH Dividend Payout 12.7 7.6 20.4 51.6 51.6 Current ratio 280.7 196.6 281.9 338.9 400.8 Chg in Cash (9.2) (78.4) 126.2 105.8 78.5 Interest coverage ratio 5.6 28.2 n/a n/a n/a Gross cash flow 160.1 194.9 258.3 237.6 251.6 Interest/revenue 0.9 0.9 0.4 0.2 0.2 (-) Chg in WC 36.1 (41.9) 47.7 (30.0) 7.4 Asset Structure (-) Capex 31.2 62.9 107.8 144.5 147.8 IC 68.0 60.9 61.8 58.2 56.8 (+) Disposal of Assets 1.4 1.7 0.7 0.0 0.0 Cash + IC(%) 32.0 39.1 38.2 41.8 43.2 Free Cash Flow 94.1 175.7 103.5 123.1 96.4 Capital Structure (-) Other Investments 4.3 (0.1) (35.2) (58.4) (58.0) Debt/Asset 21.3 19.1 11.0 8.9 7.0 Free Cash 89.8 175.8 138.6 181.6 154.4 Equity/Asset 78.7 80.9 89.0 91.1 93.0 Source: KTB DBS Investment Bank & Securities *Asset = Equity + Debt, P/E is derived by using diluted EPS. Note: Results Results are areconsolidated consolidated This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information*Asset = and Equity data obtained + Debt, from sourcesP/E is wederived consider reliable.by using However, diluted KTB Investment EPS. & Securities does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of KTB Investment & Securities Co. and thus, it may not be reproduced, distributed or modified without the prior consent of KTB Investment & Securities Co. This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, DBS Bank does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of DBS Bank and thus, it may not be reproduced, distributed or modified without the prior consent of DBS Bank.

Page 22 Regional Company Focus SK Innovation Bloomberg: 069260 KS, Reuters: 069260.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 16 Oct 2018 BUY, KRW206,000 KOSPI: 2,129.7 Better refining/aromatics margins, (Closing price as of 11/10/18) Price Target 12-mth: KRW285,000 (prev. KRW280,000 strong battery momentum Reason for Report: 3Q18 earnings preview Potential catalyst: Better refining margins/aromatics earnings • Solid 2H18 earnings likely for both refining and Where we differ: We are more optimistic than the market petrochemical divisions • Well prepared for effects of IMO’s stricter sulphur cap with Analyst desulphurisation facility Regional Research Team [email protected] • Greater EV battery production capacity to boost earnings • Retain BUY, TP raised to KRW285,000

Price Relative Bright earnings outlook for 2H18. Oil price growth has slowed to 250,000 310 +US$3.6/bbl in the last month of 3Q18, from +US$10.8/bbl in 200,000 260 2Q18. However, the company should continue to see positives from 150,000 210 the time lag between material purchase and input. The refining 100,000 160 division should post solid earnings, backed by slight improvement in 50,000 110 refining margins and the KRW’s depreciation (+KRW41/US$). The 0 60 petrochemical division should also report better earnings on a surge Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) in the paraxylene (PX)-naphtha spread to US$600/tonne in Sep. In Forecasts and Valuation 4Q18, refining margins are likely to rebound, especially for FY Dec (KRW bn) 2017A 2018F 2019F 2020F kerosene/diesel, backed by seasonally strong demand for heating oil Revenue 46,260.9 54,257.3 53,885.8 54,385.1 and tight inventory levels amid strong oil prices. PX margins should EBITDA 4,134.4 4,200.2 4,324.2 4,559.7 remain solid in 4Q18, considering the average contract price. Operating profit 3,234.4 3,260.8 3,307.3 3,484.2 Pre-tax Profit 3,234.8 3,264.9 3,447.4 3,607.9 Benefits from IMO’s harsher fuel oil regulations. The company’s Net Profit 2,145.1 2,284.1 2,423.5 2,536.4 desulphurisation facility (Vacuum Residue Desulphurisation 40k bpd), Net Pft (Pre Ex.) 2,155.7 2,280.5 2,423.5 2,536.4 which can produce low-sulphur fuel oil (LSFO), will start operations Net Pft Attributable to in 1H20. This should lower the proportion of high-sulphur fuel oil Controlling Interest 2,103.8 2,226.4 2,367.8 2,478.0 EPS (KRW) 22,752 24,665 25,607 26,800 (HSFO) to 5% or below. As such, the company should benefit from EPS Pre Ex. (KRW) 23,313 25,153 26,088 27,295 the implementation of the International Maritime Organisation’s EPS Gth (%) 25.9 8.4 3.8 4.7 (IMO) stricter sulphur cap on vessel fuels. EPS Gth Pre Ex (%) 25.2 7.9 3.7 4.6 Diluted EPS (KRW) 22,752 24,553 25,485 26,664 Battery business to accelerate after US market entry. The company’s Net DPS (KRW) 8,000 8,000 9,000 10,000 electric vehicle (EV) battery production capacity should expand to BV Per Share (KRW) 176,761 174,152 191,779 209,558 20GW in 2020 and 50GW in 2025. Its battery business should PE (X) 9.0 8.4 8.0 7.7 accelerate upon making inroads into the US market, following its PE Pre Ex. (X) 8.8 8.2 7.9 7.5 P/Cash Flow (X) 4.6 5.2 6.0 5.6 entry into Europe and China. The company currently has the world’s EV/EBITDA (X) 4.9 5.1 4.9 4.5 third largest production capacity of battery separator (high-margin Net Div Yield (%) 3.9 3.9 4.4 4.9 material). It plans to expand its capacity 2.6 times within the next P/Book Value (X) 1.2 1.2 1.1 1.0 Net Debt/Equity (X) 0.1 0.1 0.1 0.1 three years. ROE (%) 12.2 12.6 12.8 12.3 Deserves upward TP revision. In view of stronger-than- expected 2H18 business environment/earnings and positive Earnings Rev (%): 1.8 5.0 5.0 Consensus EPS (KRW): 21,651 23,786 25,701 outlook for the battery business, we nudge up our TP to Other Broker Recs: B : 31 S : 0 H : 0 KRW285,000, applying a target P/BV of 1.6x (the upper-end of its historical P/BV band). ICB Industry: Oil, Gas & Coal ICB Sector: Energy At A Glance Principal Business: SK Innovation refines, markets, and distributes Issued Capital (m shrs) 92.47 oil. The company produces gasoline, kerosene, LPG, and diesel oil, Mkt. Cap (KRWbn/US$m) 19,048/16,680 as well as manufactures petrochemical products, including paraxylene, synthetic resins, styrene monomer, and ethylene. Major Shareholders SK Corp and 3 others (%) 33.4 Source of all data on this page: Bloomberg Finance L.P., Company, Free Float (%) 51.62 DBS Bank Avg. Daily Vol.(‘000) 280

ed-KK/ sa-LEY / CS / AH Company Focus Huchems Fine Chemical

Earnings preview Unit: KRW bn, % Vs. our previous Our estimates y-o-y q-o-q Vs. consensus estimates estimates ‘18.09F ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06A Diff. (%) ‘18.09F Diff. (%) Revenue 14,132.3 14,253.6 (0.9) 11,758.9 20.2 13,438.0 5.2 14,225.2 (0.7) OP 840.6 834.8 0.7 963.6 (12.8) 851.6 (1.3) 748.1 12.4 NP 650.4 636.4 2.2 696.3 (6.6) 512.6 26.9 498.8 30.4 Margin (%) OP margin 5.9 5.9 8.2 6.3 5.3 Net margin 4.6 4.5 5.9 3.8 3.5 Difference (ppts) OP margin 0.1 (2.2) (0.4) 0.7 Net margin 0.1 (1.3) 0.8 1.1 Note: Based on consolidated K-IFRS Source: SK Innovation, DBS Bank

Revision to annual earnings forecasts

(KRW bn) Previous Revised Diff. (%, ppts) 2018F2019F2020F2018F2019F2020F2018F2019F2020F Revenue 54,008.2 54,648.6 55,152.4 54,257.3 53,885.8 54,385.10.5(1.4)(1.4) Operating profit3,236.1 3,243.7 3,412.8 3,260.8 3,307.3 3,484.20.82.02.1 OP margin (%) 6.05.96.26.06.16.40.00.20.2 EBITDA 4,173.8 4,254.8 4,486.7 4,200.2 4,324.2 4,559.70.61.61.6 EBITDA margin (%)7.77.88.17.78.08.40.00.20.2 Net profit 2,243.0 2,307.6 2,416.2 2,284.1 2,423.5 2,536.41.85.05.0 Note: Based on consolidated K-IFRS Source: SK Innovation, DBS Bank

Page 24 Company Focus Huchems Fine Chemical

BALANCE SHEET INCOME STATEMENT

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRWbn) 2016 2017 2018F 2019F 2020F Current Assets 14,987.7 16,219.2 15,627.7 15,633.2 16,584.6 Revenue 39,520.5 46,260.9 54,257.3 53,885.8 54,385.1 Cash & Short-term 5,755.7 4,343.1 2,977.8 3,446.7 4,344.4 Growth (%) (18.3) 17.1 17.3 (0.7) 0.9 investment Accounts Receivable 4,272.2 5,297.5 5,282.6 5,490.5 5,513.0 Operating Profit 3,228.3 3,234.4 3,260.8 3,307.3 3,484.2 Inventories 4,445.3 5,978.6 6,761.4 6,084.0 6,109.0 Growth (%) 63.1 0.2 0.8 1.4 5.4 Fixed assets 17,593.6 18,024.4 19,406.0 20,814.3 22,084.5 EBITDA 4,142.7 4,134.4 4,200.2 4,324.2 4,559.7 Non-operating Investment Assets 2,717.8 2,916.4 3,253.3 3,639.4 3,928.1 (805.0) 0.4 4.1 140.1 123.7 Gains/Losses Tangible Assets 13,603.5 13,587.2 14,307.1 15,363.2 16,376.3 Net Interest Income (158.3) (121.7) (146.0) (136.1) (147.1) Intangible Assets 1,272.3 1,520.8 1,845.7 1,811.7 1,780.1 Foreign Currency Gains (38.0) 100.5 14.2 60.0 56.0 Total Assets 32,581.3 34,243.6 35,033.8 36,447.5 38,669.1 Equity Method Gains (124.0) 311.3 292.7 353.6 353.6 Current Liabilities 8,736.5 9,954.8 10,485.5 10,079.8 10,431.2 Pre-tax Profit 2,423.4 3,234.8 3,264.9 3,447.4 3,607.9 Accounts Payable 4,548.6 5,712.1 6,404.6 5,972.3 5,996.8 Net Profit 1,721.4 2,145.1 2,284.1 2,423.5 2,536.4 Net profit attributable to Short-term Debts 1,808.4 1,606.1 1,417.9 1,417.9 1,717.9 1,671.3 2,103.8 2,226.4 2,367.8 2,478.0 controlling interest Non-current Liabilities 5,539.7 4,979.5 5,137.5 5,338.9 5,574.5 Growth (%) 98.4 24.6 6.5 6.1 4.7 Long-term Debts 4,871.5 4,063.8 3,951.7 3,951.7 3,951.7 NOPLAT 2,293.2 2,155.4 2,277.7 2,325.0 2,449.4 Total Liabilities 14,276.3 14,934.3 15,623.0 15,418.7 16,005.8 (+) Dep 914.4 900.1 939.4 1,017.0 1,075.5 Capital Stock 468.6 468.6 468.6 468.6 468.6 (-) Wc (315.9) 1,223.5 55.0 (57.8) 2.2 Capital Surplus 5,884.2 5,765.8 5,766.0 5,766.0 5,766.0 (-) Capex 607.0 938.4 1,599.7 1,939.9 1,957.9 Earned Surplus 10,670.8 12,041.7 13,652.6 15,270.6 16,905.2 OpFCF 2,916.5 893.5 1,562.3 1,459.8 1,564.8 Capital Adjustment 79.6 (190.3) (1,721.1) (1,721.1) (1,721.1) 3 Yr CAGR & Margins Treasury Stock (136.1) (136.1) (1,906.4) (1,906.4) (1,906.4) Revenue growth(3Yr) (15.7) (11.1) 3.9 10.9 5.5 Total Equity 18,305.0 19,309.3 19,410.8 21,028.8 22,663.3 OP growth(3Yr) 31.9 n/a 18.1 0.8 2.5 Invested capital 16,808.2 17,928.5 18,810.4 19,583.9 20,343.1 EBITDA growth(3Yr) 25.9 90.1 12.7 1.4 3.3 Net debt / (cash) 924.2 1,326.7 2,391.8 1,923.0 1,325.2 NP growth(3Yr) 30.3 n/a 38.1 12.1 5.7 ROA 5.4 6.4 6.6 6.8 6.8 OP margin (%) 8.2 7.0 6.0 6.1 6.4 ROE 10.4 12.2 12.6 12.8 12.3 EBITDA margin (%) 10.5 8.9 7.7 8.0 8.4 ROIC 13.2 12.4 12.4 12.1 12.3 NP margin (%) 4.4 4.6 4.2 4.5 4.7

CASH FLOW KEY INDICATOR

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRW,x,%) 2016 2017 2018F 2019F 2020F Operating cash flow 3,677.8 2,180.2 3,237.2 3,290.3 3,433.3 Per share Data (w) Net Profit 1,721.4 2,145.1 2,284.1 2,423.5 2,536.4 EPS 18,075 22,752 24,553 25,485 26,664 Depr. & Amort. 914.4 900.1 939.4 1,017.0 1,075.5 BPS 168,927 176,761 174,152 191,779 209,558 Chg in Working Capital 268.0 (1,214.2) 143.5 57.8 (2.2) DPS 6,400 8,000 8,000 9,000 10,000 Chg in Accounts (314.5) (957.1) 263.0 (207.9) (22.5) Valuation (x,%) Receivable Chg in inventories (858.4) (1,501.0) (784.6) 677.4 (25.0) PER 8.1 9.0 8.4 8.1 7.7 Chg in Accounts Payable 1,466.7 1,272.8 359.7 (432.3) 24.5 PBR 0.9 1.2 1.2 1.1 1.0 Investing cash flow (2,056.1) (1,066.1) (949.5) (2,126.5) (2,049.2) EV/EBITDA 3.5 4.9 5.1 4.9 4.5 Chg in Short-term 0.1 (16.9) (17.2) (54.9) (57.1) Dividend yield 4.4 3.9 3.9 4.4 4.9 Investments Chg in Long-term (21.9) (7.5) 65.1 (21.9) 76.0 PCR 3.4 4.6 5.2 6.0 5.6 Investment Securities Capex (607.0) (938.4) (1,599.7) (1,939.9) (1,957.9) PSR 0.3 0.4 0.3 0.4 0.4 Disposal of Tangible & (14.1) 4.8 (107.3) (99.2) (99.2) Stabilities (%) Intangible Assets Financing cash flow (2,018.6) (1,670.7) (2,683.2) (749.8) (543.5) Liabilities Ratio 78.0 77.3 80.5 73.3 70.6 Chg in debt (1,568.5) (910.6) (341.7) 0.0 300.0 Net debt/Equity 5.0 6.9 12.3 9.1 5.8 Chg in Equity (451.3) (756.6) (1,787.3) (749.8) (843.5) Net debt/EBITDA 22.3 32.1 56.9 44.5 29.1 Dividend Payout 451.3 756.6 745.6 749.8 843.5 Current ratio 171.6 162.9 149.0 155.1 159.0 Chg in Cash (375.5) (640.5) (377.8) 414.0 840.7 Interest coverage ratio 20.4 26.6 22.3 24.3 23.7 Gross cash flow 4,075.5 4,137.3 3,653.7 3,232.5 3,435.6 Interest/revenue 0.6 0.4 0.4 0.4 0.4 (-) Chg in WC (315.9) 1,223.5 55.0 (57.8) 2.2 Asset Structure (-) Capex 607.0 938.4 1,599.7 1,939.9 1,957.9 IC 66.5 71.2 75.1 73.4 71.1 (+) Disposal of Assets (14.1) 4.8 (107.3) (99.2) (99.2) Cash + IC(%) 33.5 28.8 24.9 26.6 28.9 Free Cash Flow 3,770.4 1,980.2 1,891.7 1,251.2 1,376.3 Capital Structure (-) Other Investments 21.9 7.5 (65.1) 21.9 (76.0) Debt/Asset 26.7 22.7 21.7 20.3 20.0 Free Cash 3,748.5 1,972.7 1,956.7 1,229.2 1,452.3 Equity/Asset 73.3 77.3 78.3 79.7 80.0 Source: KTB DBS Investment Bank & Securities *Asset = Equity + Debt, P/E is derived by using diluted EPS. Note: Results are consolidated ThisNote: report Results has been preparedare consolidated for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, KTB Investment & Securities does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of KTB Investment & Securities Co. and thus,*Asset it may = not Equity be reproduced, + Debt, distributed P/E oris modifiedderived without by theusing prior consentdiluted of KTBEPS. Investment & Securities Co. This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, DBS Bank does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of DBS Bank and thus, it may not be reproduced, distributed or modified without the prior consent of DBS Bank.

Page 25 Regional Company Focus S-Oil Bloomberg: 069260 KS, Reuters: 069260.KS

Refer to important disclosures at the end of this report

DBS Group Research . Equity 16 Oct 2018 BUY, KRW129,000 KOSPI: 2,129.7 Strong earnings momentum to (Closing price as of 11/10/18) Price Target 12-mth: KRW175,000 (prev. KRW160,000) continue Reason for Report: 3Q18 earnings preview Potential catalyst: Positive effect from RUC/ODC capacity expansion • Solid earnings to be underpinned by RUC/ODC Where we differ: We have more optimistic view for 2018F EPS capacity expansion and solid business conditions • Asia’s best equipped refiner for IMO’s harsher sulphur Analyst regulations Regional Research Team [email protected] • Deserves premium over regional peers • Retain BUY, TP raised to KRW175,000

Price Relative Petrochemical earnings to strengthen in 3Q18. Oil price 160,000 330 140,000 growth has slowed to +US$3.6/bbl in the last month of 3Q18 280 120,000 from +US$10.8/bbl in 2Q18. However, the company’s earnings 100,000 230 80,000 should exceed market expectations, backed by material 60,000 180 purchase/input time lag and the KRW’s depreciation 40,000 130 20,000 (+KRW41/US$). Refining margins have also rebounded slightly. 0 80 In particular, the petrochemical division should post earnings Oct-14 May-15 Dec-15 Jul-16 Feb-17 Sep-17 Apr-18 Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts) improvements on sharply increased paraxylene (PX) prices in Forecasts and Valuation Sep. FY Dec (KRW bn) 2017A 2018F 2019F 2020F Revenue 20,891.4 24,880.3 25,313.6 25,185.3 Improvements likely for refining/petrochemical earnings on EBITDA 1,667.4 1,984.1 2,566.7 2,727.4 RUC/ODC capacity ramp-up. We expect earnings to continue Operating profit 1,373.3 1,617.0 2,112.3 2,270.9 Pre-tax Profit 1,644.9 1,543.8 1,899.6 2,071.8 to increase in 4Q18, on the back of refining margins rebound Net Profit 1,246.5 1,167.0 1,439.9 1,570.4 for kerosene and diesel, and recognition of earnings from its Net Pft (Pre Ex.) 1,246.5 1,167.0 1,439.9 1,570.4 newly built residue upgrading complex (RUC)/olefin Net Pft Attributable to downstream complex (ODC). This capacity ramp-up should Controlling Interest 1,246.5 1,167.0 1,439.9 1,570.4 lead to a sharp increase in refining and petrochemical earnings. EPS (KRW) 11,072 10,366 12,790 13,949 EPS Pre Ex. (KRW) 11,072 10,154 12,567 13,716 The effects of this investment should be optimised upon the EPS Gth (%) 3.4 -6.4 23.4 9.1 implementation of the International Maritime Organisation’s EPS Gth Pre Ex (%) 3.4 -8.3 23.8 9.1 (IMO) stricter limit on sulphur content in vessel fuels starting Diluted EPS (KRW) 11,072 10,154 12,567 13,716 from 2020. S-Oil is regarded as the best-prepared refining Net DPS (KRW) 5,900 5,900 6,200 6,500 BV Per Share (KRW) 57,780 63,187 69,751 77,126 company in Asia for these new regulations. PE (X) 10.6 12.4 10.1 9.2 Earnings momentum to continue on capacity expansion and PE Pre Ex. (X) 10.6 12.7 10.3 9.4 benefits from IMO’s regulations. We expect S-Oil to trade at a P/Cash Flow (X) 7.3 8.2 7.9 7.4 EV/EBITDA (X) 9.7 9.5 7.0 6.2 premium over its regional peers. As such, we apply a target Net Div Yield (%) 5.0 4.6 4.8 5.0 P/BV of 2.7x, the upper end of its valuation band. We slightly P/Book Value (X) 2.0 2.0 1.8 1.7 raise our TP for S-Oil to KRW175,000 from KRW160,000. Net Debt/Equity (X) 0.4 0.5 0.4 0.2 ROE (%) 18.8 16.3 18.4 18.2 At A Glance Issued Capital (m shrs) 112.58 Earnings Rev (%): (0.4) (9.0) (8.8) Consensus EPS (KRW): 8,786 13,336 13,514 Mkt. Cap (KRWbn/US$m) 14,523/12,717 Other Broker Recs: B : 31 S : 2 H : 2 Major Shareholders Aramco Overseas Company and 11 others (%) 63.5 ICB Industry: Oil, Gas & Coal Free Float (%) 30.29 ICB Sector: Energy Avg. Daily Vol.(‘000) 382 Principal Business: S-Oil refines crude oil and sells petroleum and its related products. The company mainly focuses on petroleum refining, petrochemical, and lubricant business. S-Oil's major products are gasoline, bunker oil, kerosene, naphtha, lubricants, benzene, toluene, and xylene.

Source of all data on this page: Bloomberg Finance L.P., Company, DBS Bank

ed-KK/ sa-LEY / CS / AH Company Focus Huchems Fine Chemical

Earnings preview Unit: KRW bn, % Vs. our previous Our estimates y-o-y q-o-q Vs. consensus estimates estimates ‘18.09F ‘18.09F Diff. (%) ‘17.09A Diff. (%) ‘18.06A Diff. (%) ‘18.09F Diff. (%) Revenue 6,535.7 6,547.4 (0.2) 5,211.8 25.4 6,003.1 8.9 6,351.7 2.9 OP 422.0 467.3 (9.7) 553.2 (23.7) 402.6 4.8 352.8 19.6 NP 363.2 379.2 (4.2) 398.7 (8.9) 163.2 122.5 281.2 29.1 Margin (%) OP margin 6.5 7.1 10.6 6.7 5.6 Net margin 5.6 5.8 7.7 2.7 4.4 Difference (ppts) OP margin (0.7) (4.2) (0.2) 0.9 Net margin (0.2) (2.1) 2.8 1.1 Note: Based on consolidated K-IFRS Source: S-Oil, DBS Bank

Revision to annual earnings forecasts

(KRW bn) Previous Revised Diff. (%, ppts) 2018F2019F2020F2018F2019F2020F2018F2019F2020F Revenue 24,661.4 25,160.6 25,030.0 24,880.3 25,313.6 25,185.30.90.60.6 Operating profit1,671.4 2,098.8 2,268.1 1,617.0 2,112.3 2,270.9(3.3)0.60.1 OP margin (%) 6.88.39.16.58.39.0(0.3)0.00.0 EBITDA 2,060.5 2,553.1 2,725.4 1,984.1 2,566.7 2,727.4(3.7)0.50.1 EBITDA margin (%)8.410.110.98.010.110.8(0.4)0.0(0.1) Net profit 1,172.1 1,581.7 1,721.9 1,167.0 1,439.9 1,570.4(0.4)(9.0)(8.8) Note: Based on consolidated K-IFRS Source: S-Oil, DBS Bank

Page 27 Company Focus Huchems Fine Chemical

BALANCE SHEET INCOME STATEMENT

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRWbn) 2016 2017 2018F 2019F 2020F Current Assets 7,974.4 6,774.8 6,708.9 6,467.5 6,478.9 Revenue 16,321.8 20,891.4 24,880.3 25,313.6 25,185.3 Cash & Short-term 4,213.2 2,222.4 1,830.6 1,835.0 2,045.1 Growth (%) (8.8) 28.0 19.1 1.7 (0.5) investment Accounts Receivable 1,308.6 1,744.5 1,898.8 1,802.7 1,725.0 Operating Profit 1,616.9 1,373.3 1,617.0 2,112.3 2,270.9 Inventories 2,423.4 2,790.7 2,962.1 2,812.2 2,691.0 Growth (%) 97.8 (15.1) 17.8 30.6 7.5 Fixed assets 5,984.6 8,312.6 10,163.4 10,116.2 10,241.4 EBITDA 1,903.6 1,667.4 1,984.1 2,566.7 2,727.4 Non-operating Investment Assets 219.4 238.8 204.3 212.6 221.3 (41.8) 271.6 (73.3) (212.7) (199.1) Gains/Losses Tangible Assets 5,710.8 7,968.7 9,863.1 9,821.1 9,950.3 Net Interest Income (1.0) (4.7) 23.4 (65.2) (49.7) Intangible Assets 54.5 105.2 96.1 82.4 69.9 Foreign Currency Gains (67.2) 241.6 76.0 40.0 40.0 Total Assets 13,959.0 15,087.5 16,872.3 16,583.7 16,720.3 Equity Method Gains 6.6 5.1 5.0 4.4 4.4 Current Liabilities 4,832.8 4,544.4 5,895.3 5,545.9 5,325.8 Pre-tax Profit 1,575.1 1,644.9 1,543.8 1,899.6 2,071.8 Accounts Payable 2,152.1 2,749.8 3,038.1 2,884.4 2,760.0 Net Profit 1,205.4 1,246.5 1,167.0 1,439.9 1,570.4 Net profit attributable to Short-term Debts 2,196.7 1,376.9 2,435.3 2,235.3 2,135.3 1,205.4 1,246.5 1,167.0 1,439.9 1,570.4 controlling interest Non-current Liabilities 2,734.7 3,700.4 3,513.1 2,822.1 2,331.5 Growth (%) 90.9 3.4 (6.4) 23.4 9.1 Long-term Debts 2,563.6 3,474.7 3,257.3 2,557.3 2,057.3 NOPLAT 1,237.3 1,040.7 1,222.4 1,601.1 1,721.3 Total Liabilities 7,567.4 8,244.8 9,408.4 8,367.9 7,657.2 (+) Dep 286.7 294.2 367.1 454.4 456.5 Capital Stock 291.5 291.5 291.5 291.5 291.5 (-) Wc (214.4) 259.8 33.4 (96.3) (78.7) Capital Surplus 1,331.5 1,331.5 379.2 379.2 379.2 (-) Capex 1,063.6 2,414.1 2,219.7 405.0 579.3 Earned Surplus 4,745.4 5,198.1 6,795.1 7,546.9 8,394.3 OpFCF 674.9 (1,339.0) (663.6) 1,746.7 1,677.2 Capital Adjustment 23.2 21.5 (1.9) (1.9) (1.9) 3 Yr CAGR & Margins Treasury Stock (1.9) (1.9) (1.9) (1.9) (1.9) Revenue growth(3Yr) (19.4) (9.9) 11.6 15.8 6.4 Total Equity 6,391.6 6,842.6 7,463.9 8,215.8 9,063.1 OP growth(3Yr) 64.1 n/a 25.5 9.3 18.3 Invested capital 6,856.1 9,389.6 11,244.3 11,088.4 11,122.2 EBITDA growth(3Yr) 37.4 221.9 22.1 10.5 17.8 Net debt / (cash) 547.1 2,629.1 3,862.0 2,957.7 2,147.5 NP growth(3Yr) 60.8 n/a 22.7 6.1 8.0 ROA 9.7 8.6 7.3 8.6 9.4 OP margin (%) 9.9 6.6 6.5 8.3 9.0 ROE 20.5 18.8 16.3 18.4 18.2 EBITDA margin (%) 11.7 8.0 8.0 10.1 10.8 ROIC 19.0 12.8 11.8 14.3 15.5 NP margin (%) 7.4 6.0 4.7 5.7 6.2

CASH FLOW KEY INDICATOR

(Unit:KRWbn) 2016 2017 2018F 2019F 2020F (Unit:KRW,x,%) 2016 2017 2018F 2019F 2020F Operating cash flow 1,722.0 1,143.3 1,678.9 1,995.1 2,110.5 Per share Data (w) Net Profit 1,205.4 1,246.5 1,167.0 1,439.9 1,570.4