November 16, 2011 Company Report

Shinsegae (004170 KS)

Daewoo Securities Co., Ltd. Oct.: Depressed sales growth on high base effect & warm weather Mina Kim +822-768-4163 Maintain Trading Buy call; Lower TP to W320,000 [email protected] We maintain our Trading Buy rating on Shinsegae but lower our target price to Jieun Lee W320,000 (from W351,000). Our downward target price revision is the result of: 1) +822-768-3265 adjustments to non-operating items owing to the adoption of consolidated K-IFRS, [email protected] and 2) our decision to apply a higher discount rate (50%; up from 30%) to

ShinsegaeÊs Life Insurance stake (as it currently appears unlikely that

Shinsegae well sell the shares). Using a sum-of-the-parts methodology, we arrived at our target price by adding the companyÊs operating value to its asset value. The value of ShinsegaeÊs operations (W240,000/sh) was derived by applying a target

P/E of 12x to our 2012F EPS. The companyÊs asset value (W80,000/sh) was derived by adding the value of its shares (W32,000/sh; based on their November 15th closing price of W85,100; 50% discount) to the Trading Buy (Maintain) value of its Shinsegae International shares (W48,000/sh; based on their November Target Price (12M, W) 320,000 th 15 closing price of W145,000; no discount). Share Price (11/15/11, W) 272,500 Expected Return (%) 17.4 October: Depressed sales growth on high base effect and warm weather EPS Growth (11F, %) -33.5 In October, Shinsegae posted gross merchandise sales (GMS) of W347.8bn (up Market EPS Growth (11F, %) -2.1 2.7% YoY), net sales of W131.5bn (up 3.8% YoY), an operating profit of W27.3bn P/E (11F, x) 14.4 (down 2.1% YoY), and an OP margin of 9.2% (down 0.1%p YoY). October same- Market P/E (11F, x) 10.7 store-sales growth came in at 5.8% YoY. YTD same-store-sales growth stands at KOSPI 1,886.12 13.8% YoY, which indicates that ShinsegaeÊs same-store sales growth has been Market Cap (Wbn) 2,683 deteriorating in 2H. Gross profit margin rose 0.5%p YoY to 29.2% owing to: 1) a Shares Outstanding (mn) 10 lower proportion of online sales due to the redesign of the companyÊs online Avg Trading Volume (60D, '000) 44 shopping mall, Shinsegae Mall, and 2) a lower proportion of electronic goods sales. Avg Trading Value (60D, Wbn) 13 Dividend Yield (11F, %) 0.9 However, OP margin slipped by 0.1%p to 9.2%, due to: 1) a high base effect, 2) a Free Float (%) 72.8 slowdown in womenÊs apparel sales on unseasonably warm weather, and 3) a 52-Week Low (W) 240,000 larger operating loss at Shinsegae Mall. It should be noted that the first two issues 52-Week High (W) 672,000 also contributed to depressed sales growth in October. Beta (12M, Daily Rate of Return) 0.4 Price Return Volatility (12M Daily, %, SD) 4.0 Luxury goods and cosmetics to support Shinsegae’s revenue growth Foreign Ownership (%) 52.9 Despite worries over an economic downturn and depressed asset prices (which can Major Shareholder (s) negatively impact consumer sentiment), we still believe that ShinsegaeÊs sales growth M.H. Lee et al. (27.13%) will be relatively less sensitive to economic cycles, because: 1) high-end consumers Aberdeen Asset Manangement Asia Limited et account for a large share of the companyÊs sales (the top 5% of customers accounts al. (10.24%) First State Investment Management (UK) for 45% of sales; the top 1% accounts for 20%), and 2) the companyÊs major sales Limited et al. (6.2%) drivers, cosmetics and accessories, are likely to be relatively insensitive to negative Price Performance consumer sentiment. The growth of luxury goods and cosmetics is likely to be (%) 1M 6M 12M resilient to the economic cycle; this should drive ShinsegaeÊs revenue growth. Absolute -4.1 2.1 -1.8 Relative -6.8 13.1 -0.3 § Earnings & Valuation Metrics Share price FY Revenues OP OP Margin NP EPS EBITDAFCF ROE P/E P/B EV/EBITDA 160 KOSPI

(Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) (x) (x) 140 12/09 11,494 933 8.1 566 15,015 1,287 149 13.7 23.5 3.0 10.9 120 12/10 13,005 1,030 7.9 1,076 28,532 1,420 117 18.4 14.1 2.1 10.6 100 12/11F 1,906 285 15.0 187 18,986 350 -1,471 4.0 14.4 1.4 10.4 12/12F 1,773 289 16.3 194 19,716 365 -141 9.4 13.8 1.3 11.4 80 12/13F 1,898 312 16.4 207 21,010 400 -114 9.2 13.0 1.2 11.7 60 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests 40 Source: Company data, KDB Daewoo Securities Research estimates 11/10 3/11 7/11 11/11

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. November 16, 2011 Shinsegae

Table 1. Valuation of Shinsegae 2012F Comments Operating value Adjusted net profit (Wbn) 196.9 Shares outstanding (mn) 9.8 Operating value EPS (W) 19,997 Target P/E (X) 12.0 Expect slowdown in department store's revenue growth Operating value per share (W) 239,959 1. Samsung Life Stake (%) 3.7 Number of shares (mn) 7.4 Share price (W) 85,100 As of November 15, 2011 Value of SLI (Wbn) 628.2 Discount rate (%) 50.0 Previously 30% Value of Samsung Life (Wbn) 314.1 2. Shinsegae International Asset value Stake (%) 63.6 Number of shares (mn) 3.3 Share price (W) 145,000 Value of SLI (Wbn) 473.7 As of November 15, 2011 Discount rate (%) - Value of Samsung International 473.7 (Wbn) Shares outstanding (mn) 9.8 Asset value per share (W) 80,018 Target price (W) 319,977 Source: Company data, KDB Daewoo Securities Research estimates

Table 2. October results of Shinsegae (Wbn, %) Monthly Accumulated

Oct. 2011 Oct. 2010 Jan.~Oct. 2011 Jan.~Oct. 2010 GMS 347.8 338.8 3,179.4 2,750.0 Dept. store 320.1 308.5 2,861.0 2,561.3 Shinsegae Mall 27.7 30.3 318.4 188.7 Net sales 131.5 126.6 1,211.5 1,101.8 Gross profit 101.5 97.2 905.7 813.8 Operating profit 27.3 27.9 166.8 152.7 Department store 29.6 28.8 181.6 160.6 Shinsegae Mall -2.3 -0.9 -14.8 -7.9 GMS growth (YoY) 2.7 29.4 15.6 29.9 Net sales growth (YoY) 3.9 15.4 10.0 21.0 Gross profit growth (YoY) 4.4 15.3 11.3 23.3 OP growth (YoY) -2.2 17.2 9.3 25.2 Gross profit margin 29.2 28.7 28.5 29.6 OP margin 7.8 8.2 5.2 5.6 Department store 9.2 9.3 6.3 6.3 Shinsegae Mall -8.3 -3.0 -4.6 -4.2 Source: Company data, KDB Daewoo Securities Research

KDB Daewoo Securities Research 2 November 16, 2011 Shinsegae

Shinsegae (004170 KS/Trading Buy/TP: W320,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F (Wbn) 12/10 12/11F 12/12F 12/13F Revenues 13,005 1,906 1,773 1,898 Current Assets 1,342 212 237 251 Cost of Sales 8,841 583 443 475 Cash and Cash Equivalents 104 24 25 26 Gross Profit 4,164 1,322 1,330 1,423 AR & Other Receivables 406 119 137 146 SG&A Expenses 3,134 1,042 1,041 1,111 Inventories 610 39 45 48 Operating Profit (Adj) 1,030 280 289 312 Other Current Assets 68 25 24 24 Operating Profit 1,030 285 289 312 Non-Current Assets 13,111 3,880 4,316 4,741 Non-Operating Profit 457 -17 -30 -39 Investments in Associates 164 254 354 454 Net Financial Income 145 24 38 47 Property, Plant and Equipment 9,403 2,382 2,707 3,021 Net Gain from Inv in Associates 15 -8 0 0 Intangible Assets -10 40 38 36 Pretax Profit 1,487 263 259 273 Total Assets 14,452 4,092 4,553 4,992 Income Tax 381 67 65 66 Current Liabilities 4,341 1,245 1,281 1,302 Profit from Continuing Operations 1,106 196 194 207 AP & Other Payables 1,271 216 246 261 Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 1,633 355 355 355 Net Profit 1,106 196 194 207 Other Current Liabilities 1,437 674 680 686 Controlling Interests 1,076 187 194 207 Non-Current Liabilities 2,681 867 1,120 1,352 Non-Controlling Interests 30 9 0 0 Long-Term Financial Liabilities 1,773 100 100 100 Total Comprehensive Profit 1,106 204 194 207 Other Non-Current Liabilities 812 767 1,020 1,252 Controlling Interests 1,076 195 194 207 Total Liabilities 7,022 2,112 2,401 2,654 Non-Controlling Interests 30 9 0 0 Controlling Interests 7,268 1,980 2,153 2,337 EBITDA 1,420 350 365 400 Capital Stock 94 49 49 49 FCF (Free Cash Flow) 117 -1,471 -141 -114 Capital Surplus 723 369 369 369 EBITDA Margin (%) 10.9 18.4 20.6 21.1 Retained Earnings 4,647 8,037 8,209 8,394 Operating Profit Margin (%) 7.9 15.0 16.3 16.4 Non-Controlling Interests 163 0 0 0 Net Profit Margin (%) 8.3 9.8 11.0 10.9 Stockholders' Equity 7,430 1,980 2,153 2,337

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/10 12/11F 12/12F 12/13F 12/10 12/11F 12/12F 12/13F Cash Flows from Op Activities 1,276 -176 310 333 P/E (x) 14.1 14.4 13.8 13.0 Net Profit 1,106 187 194 207 P/CF (x) 10.4 10.5 9.9 9.1 Non-Cash Income and Expense -70 57 101 116 P/B (x) 2.1 1.4 1.3 1.2 Depreciation 381 68 74 86 EV/EBITDA (x) 10.6 10.4 11.4 11.7 Amortization 9 2 2 2 EPS (W) 28,532 18,986 19,716 21,010 Others 428 -43 -38 -38 CFPS (W) 77,722 26,072 27,436 29,963 Chg in Working Capital 240 -451 12 8 BPS (W) 386,344 201,135 218,632 237,396 Chg in AR & Other Receivables -64 -93 -18 -10 DPS (W) 2,500 2,500 2,500 2,500 Chg in Inventories -177 -8 -6 -3 Payout ratio (%) 4.4 13.2 12.7 11.9 Chg in AP & Other Payables 146 -77 31 15 Dividend Yield (%) 0.4 0.9 0.9 0.9 Income Tax Paid 0 149 -65 -66 Revenue Growth (%) 13.2 -85.4 -7.0 7.0 Cash Flows from Inv Activities -734 -101 -534 -538 EBITDA Growth (%) 10.3 -75.3 4.2 9.7 Chg in PP&E -1,396 -683 -400 -400 Operating Profit Growth (%) 10.4 -72.3 1.3 8.0 Chg in Intangible Assets -18 0 0 0 EPS Growth (%) 90.0 -33.5 3.9 6.6 Chg in Financial Assets 727 152 -1 -1 Accounts Receivable Turnover (x) 54.4 9.8 13.9 13.4 Others -47 430 -133 -137 Inventory Turnover (x) 24.2 5.9 42.6 41.1 Cash Flows from Fin Activities -523 322 225 205 Accounts Payable Turnover (x) 15.6 3.4 7.7 7.5 Chg in Financial Liabilities -564 421 0 0 ROA (%) 8.6 2.1 4.5 4.3 Chg in Equity 0 735 1,477 1,477 ROE (%) 18.4 4.0 9.4 9.2 Dividends Paid -27 -47 0 0 ROIC (%) 9.3 4.1 12.9 14.8 Others 68 -54 -47 -57 Liability to Equity Ratio (%) 94.5 106.7 111.5 113.6 Increase (Decrease) in Cash 20 -78 1 1 Current Ratio (%) 30.9 17.0 18.5 19.3 Beginning Balance 84 104 26 27 Net Debt to Equity Ratio (%) 42.4 21.5 19.7 18.1 Ending Balance 104 26 27 28 Interest Coverage Ratio (x) 5.4 8.5 6.1 5.5 Source: Company data, KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research 3 November 16, 2011 Shinsegae

Important Disclosures & Disclaimers Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for single stock futures backed by shares of Shinsegae as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with Shinsegae as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.

Buy Relative performance of 20% or greater (W) Shinsegae Stock Trading Buy Relative performance of 10% or greater, but with volatility 800,000 Ratings Hold Relative performance of -10% and 10% 600,000

Sell Relative performance of -10% 400,000

Overweight Fundamentals are favorable or improving 200,000 Industry Neutral Fundamentals are steady without any material changes Ratings 0 11/09 5/10 11/10 5/11 11/11 Underweight Fundamentals are unfavorable or worsening * Ratings and Target Price History (Share price (----), Target price (----), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analystÊs estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Analyst Certification The research analysts who prepared this report (the „Analysts‰) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the AnalystÊs area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclaimers This report is published by Daewoo Securities Co., Ltd. („Daewoo‰), a broker-dealer registered in the Republic of Korea and a member of the . Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the . If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.

KDB Daewoo Securities Research 4 November 16, 2011 Shinsegae

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KDB Daewoo Securities International Network

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KDB Daewoo Securities Research 5