July 17, 2013

KOREA

Company News & Analysis Major Indices Close Chg Chg (%) Heavy Industries (Buy/TP: W50,000) Raise TP KOSPI 1,887.49 21.13 1.13 Offshore and merchant vessels to sustain resilient earnings KOSPI 200 244.82 2.80 1.16 KOSDAQ 541.82 4.10 0.76 Jusung Engineering (Buy/TP: W8,500) Upgrade rating & Raise TP Turnaround in sight Turnover ('000 shares, Wbn) Volume Value (Trading Buy/TP: W93,000) KOSPI 378,452 3,970 A few silver linings KOSPI 200 94,268 3,200 KOSDAQ 321,241 1,875

Hotel Shilla (Buy/TP: W85,000) Raise TP Market Cap (Wbn) Expectations of margin recovery coming to pass Value KOSPI 1,097,774 KOSDAQ 123,251 Sector News & Analysis KOSPI Turnover (Wbn) Banks (Overweight) Buy Sell Net Solid fundamentals to lay foundation for recovery in 2H Foreign 1,076 959 117 Institutional 1,127 887 240 Economy & Strategy Update Retail 1,747 2,100 -353 Technical Analysis KOSDAQ Turnover (Wbn) Buy Sell Net Short of momentum, a technical rebound seems limited Foreign 93 85 8 Quant Strategy Institutional 81 71 10 Retail 1,704 1,720 -16 Misconceptions about Korean exporters Program Buy / Sell (Wbn) Buy Sell Net KOSPI 902 447 455 KOSDAQ 17 19 -2

Advances & Declines Advances Declines Unchanged KOSPI 501 297 91 KOSDAQ 506 394 78

KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value KODEX LEVERAGE 10,710 210 532 1,320,000 22,000 323 KODEX INVERSE 8,055 -85 281 KODEX 200 24,425 235 174 Hyundai Motor 219,000 6,000 149

KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Celltrion 49,100 1,700 117 Nasmedia 15,350 300 69 Woory Industrial 8,650 570 59 Lumens 10,050 -150 53 Danal 10,900 450 45 Note: As of July 17, 2013

This document is a summary of a report prepared by Daewoo Securities Co., Ltd. (“Daewoo”) and published on our website. Please review the compliance notices contained in the original report. Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for informational purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose.

Samsung Heavy Industries (010140 KS) Offshore and merchant vessels to sustain resilient earnings

Shipbuilding 2Q preview: Revenue of W3.78tr (+12.7% YoY), OP of W301.3bn (+13.8% YoY) For 2Q, we forecast (SHI) to post revenue of W3.78tr Earnings Preview (+12.7% YoY), operating profit of W301.3bn (+13.8% YoY), and net profit of W236.1bn (+22.2% YoY). OP margin is estimated to come in at 8%, ahead of our previous July 17, 2013 projection and the market consensus.

The improvement in operating earnings should be attributable to an increased mix of (Maintain) Buy higher-margin offshore plants (to around 60% of revenue in 2Q13 from 50% in 2Q12). In particular, we believe drillships, the most profitable offshore segment, accounted for Target Price (12M, W) 50,000 35% of revenue in the quarter. Other positive drivers are the sharply declining exposure to low-priced orders taken in 1H10 and increased exposure to LNG carriers, which are Share Price (07/16/13, W) 38,100 preventing further erosion in margins at the merchant vessel unit. Furthermore, we believe the increase in heavy tail payments has boosted the firm’s cash flow, helping it to Expected Return 31% reduce its debt and thus improve its balance sheet.

Earnings to continue to outshine rivals’ in 2H OP (13F, Wbn) 1,341 SHI’s earnings outperformance is likely to continue in 2H, driven by what we believe is Consensus OP (13F, Wbn) 1,257 the most robust order backlog among domestic shipbuilders. Drillships, a key area of strength for SHI, still comprise a high percentage of its backlog (over 35%), with EPS Growth (13F, %) 26.8 offshore plants accounting for more than 60%. We expect the shipbuilder will easily Market EPS Growth (13F, %) 19.8 achieve its annual order guidance (US$13bn), with monthly orders evenly spread P/E (13F, x) 8.7 throughout 2H. We believe SHI secured sufficient margins from its LNG FPSO contracts Market P/E (13F, x) 9.1 and its CPF contract (for INPEX) on the back of its competitiveness. We thus see OP KOSPI 1,866.36 margin remaining stable at around 8% in 2H. The large-scale projects could cause some fluctuations in quarterly earnings depending on their delivery schedules, but we believe Market Cap (Wbn) 8,796 annual earnings growth should largely remain intact, as long as there are no surprises. Shares Outstanding (mn) 231 Free Float (%) 69.3 We see little risk of margin erosion despite the industry slump, given SHI’s high exposure Foreign Ownership (%) 30.5 to LNG carriers and containerships in the merchant vessel segment. Earnings should Beta (12M) 1.23 remain stable in 2H, as LNG vessel prices have remained relatively resilient over the years 52-Week Low (W) 29,800 and SHI now enjoys higher productivity in mega-containerships. As of end-2Q, total debt 52-Week High (W) 40,300 is estimated at W2.3tr, down W400bn from the previous quarter (vs. W1tr in cash holdings). We expect debt to shrink to W1tr by year-end with the increase of heavy tail (%) 1M 6M 12M payments. Absolute 7.2 0.7 5.0 Relative 8.4 6.3 2.3 Maintain Buy and raise TP to W50,000

Share price We retain our Buy rating on SHI and lift our target price by 8.2% to W50,000. SHI has 120 KOSPI become the market leader by attracting substantial orders in offshore plants, LNG 110 carriers, and mega-containerships. Our new target price reflects our bullish expectations 100 for earnings and fundamentals over the medium to long term. In 2H, we expect the 90 company to sustain a healthy order flow and sharply reduce its debt burden. We remain 80 upbeat on the stock from a long-term perspective, as we are confident the firm will 70 7/12 11/12 3/13 7/13 continue to deliver the best earnings performance in its peer group.

Daewoo Securities Co., Ltd. FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F Shipbuilding/Machinery Revenue (Wbn) 13,146 13,392 14,490 15,154 15,912 16,629 OP (Wbn) 1,433 1,083 1,206 1,341 1,416 1,513 Ki-jong Sung OP margin (%) 10.9 8.1 8.3 8.9 8.9 9.1 +822-768-3263 [email protected] NP (Wbn) 1,000 851 796 1,010 1,095 1,177 EPS (W) 4,330 3,685 3,448 4,372 4,740 5,097

ROE (%) 28.7 19.4 16.1 17.7 16.5 15.3

P/E (x) 9.5 7.6 11.2 8.7 8.0 7.5

P/B (x) 2.1 1.2 1.5 1.3 1.1 1.0 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS BEGINNING ON PAGE 6.

Jusung Engineering (036930 KQ) Turnaround in sight

Technology What’s New: Earnings to continue to grow after swinging back to profit in 2Q Earnings turnaround expected in 2Q13: We expect Jusung Engineering to post 2Q13 Earnings Preview revenue of W42.5bn (+154% QoQ) and an operating profit of W1.3bn, on an OP margin July 17, 2013 of 3%. The company should swing back to profit after posting eight consecutive quarters of operating losses since 3Q11. The display and semiconductor divisions should

each contribute W32bn and W7.5bn to revenues, with OLED encapsulation equipment sales driving growth (W38.6bn in orders placed by LG Display in 1Q). (Upgrade) Buy Revenue expansion to continue in 2H13: As Jusung’s revenues are anticipated to Target Price (12M, W) 8,500 continue to increase in 2H, profitability should also improve. We forecast that revenue and operating profit will each slightly improve to W46.2bn (+9% QoQ) and W2.2bn Share Price (07/16/13, W) 6,110 (+67% QoQ; OP margin of 4.7%) in 3Q, and then, surge to W70bn (+51% QoQ) and W7.3bn (+236% QoQ; OP margin of 10.4%) in 4Q. Expected Return 39% Catalysts: LCD deposition equipment orders + semiconductor equipment sales LCD equipment orders: LG Display’s Guangzhou line (8G, 70k/month) is expected to place OP (13F, Wbn) -1 equipment orders starting 3Q, boosting Jusung’s 2H LCD deposition equipment orders to Consensus OP (13F, Wbn) 36 W50-60bn. The company is also anticipated to receive OLED encapsulation equipment orders EPS Growth (13F, %) RR worth W10bn in 2H in addition to W8.5bn in 2Q. Furthermore, the company recently Market EPS Growth (13F, %) 19.8 announced that it took W24.1bn-worth LCD equipment orders (supply through end-2014) P/E (13F, x) - from Taiwan-based display panel maker Chunghwa Picture Tubes (CPT). Accordingly, Jusung Market P/E (13F, x) 9.1 Engineering’s display equipment sales are likely to exceed W120bn this year. KOSDAQ 537.72 Recovery of semiconductor equipment sales: Jusung supplied space-divided-plasma Market Cap (Wbn) 252 chemical-vapor-deposition (SDP-CVD) equipment to SK Hynix’s R&D lines. This Shares Outstanding (mn) 41 equipment improves productivity through space division, and produces high-quality Free Float (%) 72.4 deposits at a 400 degree-or-lower temperature. Furthermore, it can be used for other Foreign Ownership (%) 3.5 deposition processes such as oxidation and nitride deposition. We expect Jusung to take Beta (12M) 0.90 SDP-CVD orders worth W15-17bn in 2H. 52-Week Low (W) 4,095 Valuation: Upgrade to Buy and raise TP by 29% to W8,500 52-Week High (W) 7,630 Annual earnings turnaround: For 2013, we forecast Jusung Engineering to post revenue of (%) 1M 6M 12M W175.4bn (+119% YoY) and an operating loss of W1.4bn (remain black YoY). If Jusung Absolute -0.3 15.7 -13.3 Engineering exhibits better-than-expected earnings in 2H, the company could swing to Relative 0.9 21.3 -15.9 operating profit on a full year basis this year. Given that the company recorded an

Share price operating loss of W8.4bn in 2012, its earnings are sure to pick up in 2013. Furthermore, we 140 KOSDAQ believe that the company is highly likely to swing to operating profit in 2014. 120

100 Upgrade to Buy: We upgrade our rating on Jusung Engineering from Trading Buy to Buy 80 and raise our target price from W6,600 to W8,500, as the company is likely to display an 60 earnings turnaround in light of massive orders for display equipment in 2H. We arrived 40 at our target price by averaging the values calculated using a 12 month forward P/B of 7/12 11/12 3/13 7/13 2.7x (three-year high of 3.6x and average of 2.5x; W7,100) and 2014F P/S of 1.8x (three- year high of 3.5x and average of 2.3x; W9,800). Daewoo Securities Co., Ltd. FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F Semiconductor Revenue (Wbn) 444 319 80 175 224 259 OP (Wbn) 40 -4 -84 -1 22 36 James Song OP Margin (%) 8.9 -1.2 -104.7 -0.8 10.0 13.9 +822-768-3722 [email protected] NP (Wbn) 35 -13 -110 -19 7 20 EPS (W) 1,020 -365 -3,077 -459 159 485 Joon-ho Jang ROE (%) 17.9 -5.9 -63.9 -15.7 5.7 15.6 +822-768-3241 P/E (x) 18.8 - - - 38.5 12.6 [email protected] P/B (x) 3.2 1.8 1.5 2.4 2.2 1.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS BEGINNING ON PAGE 5.

Samsung Engineering (028050 KS) A few silver linings

Construction 2Q earnings disappoint Samsung Engineering’s 2Q revenue came in at W2.7tr, down 14.5% YoY. We believe Results Comment hydrocarbon revenue edged down just 2% YoY, but non-hydrocarbon revenue slumped July 17, 2013 more sharply by 38% YoY. Overall cost ratio stood at 99.7% (98.6% for hydrocarbon and 102.8% for non-hydrocarbon), resulting in a wider-than-expected operating loss of W88.7bn. Most of the losses came from: 1) another delay in the Dow Chemical Falcon (Maintain) Trading Buy project (-W95bn), 2) cost overruns related to the Shaybah natural gas liquid (NGL) project in Saudi Arabia (-W120bn), and 3) losses related to the settlement of the Jubail 3 Target Price (12M, W) 93,000 project (-W30bn). Unlikely to worsen in 2H Share Price (07/16/13, W) 71,600 The substantial losses in 1Q were mainly due to schedule delays, while the 2Q earnings Expected Return 30% weakness was largely the result of cost ratio adjustments (following management evaluation) and another schedule delay in the Dow Chemical project. Does this mean that expectations for 2H should be lowered? OP (13F, Wbn) -104 Consensus OP (13F, Wbn) 194 As for the Dow Chemical project, risks of further delays still linger. That said, given the sheer size of losses already booked, any impact on earnings will likely be limited in 2H. EPS Growth (13F, %) TTR Regarding other troubled projects, no further cost adjustments have been made for the Market EPS Growth (13F, %) 19.8 Ma’aden project, and potential losses from the Shaybah NGL project are unlikely to P/E (13F, x) - exceed the estimated range set by the management evaluation in 2Q. Although the Market P/E (13F, x) 9.1 status of the Takreer Carbon Black and Yanbu power plant projects remain to be seen, KOSPI 1,866.36 we do not think the company will have any major problem returning to profit in 2H. Market Cap (Wbn) 2,864 Shares Outstanding (mn) 40 Still, there are a few silver linings Free Float (%) 73.0 First, we believe negative events (e.g. schedule delays and cost adjustments from Foreign Ownership (%) 28.8 management evaluations) will begin to fade in 2H. Furthermore, excluding cost-adjusted Beta (12M) 1.53 projects, we estimate gross profit margin stood at more than 10% in 2Q, suggesting 52-Week Low (W) 67,500 earnings will pick up in 2H, as long as no major losses arise from new projects. Third, the 52-Week High (W) 213,000 company’s SG&A ratio dropped to 3.6% in 2Q, driven by smaller bonus payouts and

(%) 1M 6M 12M bidding expenses. For 2H, we forecast the SG&A ratio at the mid-4% range. Lastly, we Absolute -11.9 -53.7 -59.3 see potential for margin gains from change order negotiations. Relative -10.7 -48.0 -62.0 Put simply, we believe 2Q marked the end of the earnings shock cycle. The losses

Share price reported in 2Q could cause some near-term volatility in the stock price, but we would 140 KOSPI advise against using further downside from current prices as a gauge for future 120 100 performance. That said, even if earnings improve in 2H, upside to share prices will likely 80 be limited due to stagnant growth in new orders and revenue. We maintain our Trading 60 Buy call and target price of W93,000. 40 20 7/12 11/12 3/13 7/13

Daewoo Securities Co., Ltd. FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F Construction Revenue (Wbn) 5,312 9,298 11,440 10,815 10,094 9,923 OP (Wbn) 412 626 732 -104 447 443 Hyung-ryul Park OP margin (%) 7.8 6.7 6.4 -1.0 4.4 4.5 +822-768-4165 [email protected] NP (Wbn) 339 513 524 -100 308 311 EPS (W) 8,482 12,832 13,095 -2,500 7,710 7,781

ROE (%) 38.3 43.7 33.9 -6.2 19.8 18.0

P/E (x) 22.6 15.7 12.6 - 9.3 9.2

P/B (x) 6.1 5.0 3.3 1.7 1.5 1.4 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS BEGINNING ON PAGE 4.

Hotel Shilla (008770 KS) Expectations of margin recovery coming to pass

Hotel/Leisure 2Q preview: Duty free shop margins to recover as expected We project Hotel Shilla’s 2Q revenue and operating profit to come in at W563bn (+1.2% Earnings Preview YoY, 18.9% QoQ) and W33.3bn (-18.8% YoY, +290.8% QoQ), respectively. In particular, July 17, 2013 we believe OP margin at the duty free unit has returned to the normal level. Because the unit’s revenue and costs are settled in US dollars, F/X movements have a defining impact on the firm’s short-term margins. Indeed, the sharp won appreciation in 4Q12 ate into (Maintain) Buy duty free profits, but the US$/W rate has reversed course since then, spurring expectations of an earnings recovery in 2Q13. We estimate OP margin at the duty free Target Price (12M, W) 85,000 unit picked up to 7.1% in 2Q, as originally expected. We raised our overall 2Q operating profit estimate by 13.7% (from W29.3bn previously), reflecting narrower operating Share Price (07/16/13, W) 62,800 losses from the firm’s hotel renovation. Catalysts: 1) Operating leverage, 2) duty free shop expansion, 3) hotel reopening Expected Return 35% In addition to the F/X-driven margin recovery, we expect the duty free division to see meaningful operating leverage in 2H from continued top-line growth following the OP (13F, Wbn) 123 freeze of its rent at Incheon International Airport (IIA). Consensus OP (13F, Wbn) 117 We also see duty free shop expansions on the horizon. Hotel Shilla’s planned expansion EPS Growth (13F, %) -37.3 of its duty free shop in downtown Jeju is likely to gain full approval in the near future. Market EPS Growth (13F, %) 19.8 Once completed, the expansion would help the firm meet rising demand in the medium P/E (13F, x) 39.5 to long term, boosting its domestic market share. On the overseas front, we expect to Market P/E (13F, x) 9.1 see bids for duty free concessions at foreign airports, and forays into downtown areas in KOSPI 1,866.36 the Asia region. Although visibility still remains limited, advances into overseas markets Market Cap (Wbn) 2,465 would serve as an important opportunity for the company to position itself as a global Shares Outstanding (mn) 40 duty free operator. Free Float (%) 81.1 After seven months of renovation, the firm’s landmark hotel in downtown Seoul is set to Foreign Ownership (%) 37.1 st Beta (12M) 0.34 reopen on August 1 . While the size and number of rooms will stay largely unchanged, 52-Week Low (W) 41,200 the renovation (the hotel’s first ever) is widely anticipated to renew the hotel’s image. 52-Week High (W) 65,700 We believe this could set the stage for a new growth story for the firm’s hotel business.

(%) 1M 6M 12M Lift TP to W85,000 to reflect change in base year Absolute 1.3 43.2 27.5 We maintain our Buy call but revise up our target price to W85,000 after changing our Relative 2.5 48.8 24.8 valuation base year to 2014F (from 2013-14F average). We derived our target price

Share price using a global peer valuation methodology, applying a multiple of 18.7x (the average 140 KOSPI 2014F multiple of global luxury good makers) for the duty free business and a multiple 120 of 19.2x for the hotel business (20% discount to the average of global hotel chains). Our 100 target price implies a 35% upside from current share price. 80

60 7/12 11/12 3/13 7/13

Daewoo Securities Co., Ltd. FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F Hotel/Leisure Revenue (Wbn) 1,440 1,764 2,190 2,340 2,869 3,264 OP (Wbn) 81 96 129 123 249 270 Regina Hahm OP Margin (%) 5.6 5.4 5.9 5.3 8.7 8.3 +822-768-4172 [email protected] NP (Wbn) 49 56 101 64 178 200 EPS (W) 1,235 1,401 2,535 1,588 4,442 4,987

ROE (%) 9.0 9.6 15.8 8.9 21.7 20.2

P/E (x) 22.5 27.5 17.3 39.5 14.1 12.6

P/B (x) 2.0 2.7 2.7 3.5 2.9 2.4 Note: All figures are based on non-consolidated K-IFRS Source: Company data, KDB Daewoo Securities Research estimates

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS BEGINNING ON PAGE 14.

Banks Solid fundamentals to lay foundation for recovery in 2H

Overweight (Maintain) Headline 2Q earnings to disappoint, again… We project banks to deliver weaker-than-expected earnings in 2Q, primarily due to: 1) Sector Update muted top-line figures, 2) extraordinary expenses related to corporate credit issues, and July 17, 2013 3) impairment losses related to marketable securities. We estimate banks within the KDB Daewoo Universe to post an aggregate 2Q net profit of W1.2tr, which represents a 24%

decline from a quarter earlier. For 2Q, we believe Jeonbuk Bank (JBB) is the only bank Daewoo Securities Co., Ltd. likely to demonstrate a QoQ increase in earnings. Also, on a QoQ basis, we expect (SFG) and BS Financial Group (BSFG) to post low single-digit Banks decreases in earnings, while KB Financial Group (KBFG), (HFG), Taye Shim (IBK), and DGB Financial Group (DGBFG) are likely to deliver +822-768-4178 double-digit earnings declines. [email protected]

Yong-uk Ku …but underlying operating trends remain healthy +822-768-4494 Operations are looking good. We believe banks have regained their appetite for growth [email protected]

(system loan growth is up 1.9% QoQ), and expect to see a normalization of growth as we Joong-han Kim head into 2H. Banks’ net interest margins (NIM) are likely to remain pressured in 2Q +822-768-4152 given the prolonged low interest-rate environment. However, we expect to see a slower [email protected] pace of decline going forward. Indeed, yields on new deposits declined 43bps YTD (as of May), while yields on new loans declined 22bps during the same period. On the credit side, we anticipate additional provisioning burdens due to recent issues related to several distressed companies, as well as the recent large-corporate credit assessment. KDB Daewoo Universe banks (excluding (WFG)) are expected to reflect aggregate provisions of W280bn in 2Q. However, we expect the provisioning burden will largely be manageable.

Impairment losses on marketable securities to squeeze earnings further We expect banks to recognize additional impairment losses on marketable securities amid continued share-price pullbacks. Under current accounting standards, impairment losses on marketable securities are recognized after a significant decline in market price (more than 30% of acquisition price), or if the market price has been underwater for a prolonged period of time (more than six months). We expect KBFG, HFG, and IBK to reflect impairment losses of W88bn in 2Q.

Reaffirm our Overweight recommendation on banks Despite our expectations of weak 2Q earnings, we reaffirm our Overweight recommendation on banks. We believe most of the negative factors have been flagged, and anticipate solid fundamentals to build a foundation for an earnings recovery. In the short term, we like banks with consensus estimates close to our own (SFG, BSFG, JBB). Over the longer investment horizon, we prefer banks with high earnings visibility, as well as those with higher sensitivity to valuation convergence (BSFG, DGBFG, KBFG).

2Q earnings preview snapshot (Wbn, %) Earnings release KDB Daewoo Consensus Diff. Banks date 2Q13F 2013F 2Q13F 2013F 2Q13F 2013F KBFG July 26th 174.6 1,415.2 410.0 1,661.2 -57.4 -14.8 SFG July 30th 472.3 1,829.9 521.0 2,034.9 -9.3 -10.1 HFG July 19th 249.3 1,224.2 292.3 1,223.9 -14.7 0 IBK August 2nd 173.2 861.6 226.0 965.6 -23.4 -10.8 BSFG August 2nd 93.9 356.7 94.9 366.6 -1.1 -2.7 DGBFG August 2nd 56 251.5 68.8 271.1 -18.6 -7.2 JBB August 2nd 16.9 73.3 17.9 71.8 -5.6 2.1 Total N/A 1,236.2 6,012.4 1,630.9 6,595.1 -24.2-8.8 Note: Consensus estimates as of July 16th Source: FnGuide, KDB Daewoo Securities Research PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS BEGINNING ON PAGE 17.

Technical Analysis Short of momentum, a technical rebound seems limited

KOSPI showing a higher correlation with Chinese equities than US equities After fluctuating significantly thus far in July, the KOSPI now stands at end-June levels. Strategy Report Meanwhile, mid- to small-cap-heavy KOSDAQ is relatively healthy. All in all, a technical July 17, 2013 rebound in domestic equities appears limited given the lack of visible momentum.

Until the end of last year, the KOSPI displayed strong correlations with the Philadelphia Semiconductor Index and the Bovespa (Brazil). However, they have diverged since the Daewoo Securities Co., Ltd. beginning of this year. Rather than US equities, which are hitting new highs, the KOSPI is Strategist showing high correlations with the Shanghai Stock Exchange Composite Index and the Jeong-hwan Kim Taiwan Capitalization Weighted Stock Index (TCWSI)

. In particular, the +822-768-2129 correlation with the TCWSI is as high as 0.91. [email protected]

Figure 1. KOSPI vs. Shanghai Stock Exchange Composite Index and Taiwan Capitalization Weighted Stock Index

(2013=100) 115

110

105

100

95

90 Shanghai Stock Exchange Composite Index KOSPI 85 Taiwan Capitalization Weighted Stock Index 80 1/13 2/13 3/13 4/13 5/13 6/13 7/13

Source: Bloomberg, KDB Daewoo Securities Research

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS BEGINNING ON PAGE 4..

Quant Strategy Misconceptions about Korean exporters

Is Korea truly sandwiched between China and Japan? It has long been feared that Korean exporters may be driven out by their Chinese counterparts in labor-intensive manufacturing, and Japanese rivals in technology- intensive sectors. However, this concern appears to be thinly based. According to the Trade Specialization Index published by the UN, Chinese exporters are still facing Quant Report difficulties climbing the technological ladder, while Korean exporters are actually doing July 17, 2013 better than their Japanese counterparts (and even US exporters) in technology-intensive industries. In particular, the index gap between Korea and Japan diverged sharply in 2012 as shipments of Korea’s telecommunications devices such as smartphones surged. Daewoo Securities Co., Ltd. In addition, Korea has begun to excel in services exports. Korea’s services exports grew 16.1% in 2012, beating comparable growth rates for China and Japan. Although Korea’s Quantitative Analysis GDP is only one fifth of Japan’s, Korea’s services exports have risen to the equivalent of Wonsun Lee 77% of Japan’s. +822-768-4130 Is weak yen really helping Japanese exporters? [email protected] Since Japan began to depreciate the yen last November, a general consensus has been

that Japanese exporters would be back on the prowl. However, the benefits of a weak

yen on Japanese exporters appears to be exaggerated. Indeed, sales of Japanese cars

(including small-sized trucks) in the first five months of this year rose 6.0% YoY in the US, while those of American cars jumped 10.5%. Yet, margins on Toyota and Honda vehicles have started to fall again since June. OP margins for Japanese automakers are

expected to slide further in 3Q from 2Q. Meanwhile, operating margins at Japanese IT exporters stagnated in 1Q and 2Q, given difficulties catching up with rivals in Korea and the US. Things should remain little changed in 3Q, with margins ranging from 2% to 4%. The earnings recovery for Japanese exporters should weaken in 2H, as Japan is expected to slow the pace of yen depreciation down the line. Investment strategy Although Korea appears to have retained its edge in the IT sector and strengthened its competitiveness in services exports, shares of Korean exporters have underperformed the KOSPI, weighed down by the global recession since the financial crisis. As a result, Korean exporters should look attractively valued, especially given that their competitiveness remains intact. In the short term, shares of exporters with valuation merits will likely outperform. But from the mid- to long-term perspective, services exporters will likely stand out, in light of their strong growth potential. Undervalued exporters include Samsung SDI, SK Innovation, and Hyundai Mipo Dockyard in terms of P/B, and Hyundai Motor, Motors, Samsung Electronics, and Samsung Heavy Industries in terms of P/E. Services exporters with bright long-term growth prospects include NHN, CJ CGV, and NCsoft. China’s Trade Specialization Index

(p) 1.0 Labor-intensive industries Low-tech industries Mid-tech industries High-tech industries 0.8

0.6

0.4

0.2

0.0

-0.2

-0.4

-0.6 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Source: UNCTAD, KDB Daewoo Securities Research

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS BEGINNING ON PAGE 9.

Key Universe Valuations July 17, 2013

※All data as of close July 16, 2013, unless otherwise noted.

13F Earnings growth Mkt Cap Price P/E (x) P/B (x) ROE (%) Ticker Company Div Yield OP EPS (Wbn) (W) (%) 13F 14F 13F 14F 13F 14F 13F 14F 13F 14F 005930 Samsung Electronics 191,195 1,298,000 0.6 35.1 17.3 38.1 20.3 6.9 5.7 1.5 1.2 24.3 23.5 005380 Hyundai Motor 46,919 213,000 0.9 3.4 10.9 1.9 6.3 7.0 6.6 1.2 1.0 18.2 16.6 005490 POSCO 27,115 311,000 2.6 -9.2 36.5 -25.3 53.4 14.5 9.5 0.6 0.6 4.7 6.9 012330 24,774 254,500 0.8 -3.0 17.2 -4.1 13.1 7.3 6.4 1.3 1.1 18.5 17.7 000270 Kia Motors 23,876 58,900 1.2 -0.5 8.9 -3.3 13.4 6.4 5.6 1.3 1.1 20.2 19.2 032830 Samsung Life 21,200 106,000 2.0 0.0 9.3 4.2 4.3 18.1 17.4 1.1 1.0 6.0 5.8 000660 SK Hynix 19,765 28,450 0.5 - 12.4 - 16.9 7.1 6.1 1.8 1.4 25.4 23.9 055550 Shinhan Financial Group 18,755 39,550 0.2 -10.3 14.2 -10.1 13.7 10.0 8.8 0.7 0.6 7.1 7.6 051910 LG Chem 18,092 273,000 1.7 4.3 20.9 5.4 20.9 12.8 10.6 1.7 1.5 13.9 14.9 017670 SK Telecom 17,764 220,000 4.4 21.9 26.6 47.8 24.9 10.4 8.4 1.7 1.6 14.0 16.3 009540 Hyundai Heavy 14,554 191,500 -24.2 58.8 2.1 71.7 14.5 8.4 0.9 0.8 5.8 9.2 035420 NHN 14,077 292,500 0.3 22.8 30.3 19.4 31.7 21.6 16.4 4.5 3.7 31.8 34.6 096770 SK Innovation 13,592 147,000 2.2 27.5 21.5 12.1 39.9 10.4 7.4 0.9 0.8 8.4 10.8 105560 KB Financial Group 13,503 34,950 -3.3 11.4 3.8 11.4 7.7 6.9 0.5 0.5 6.9 7.4 066570 LG Electronics 11,619 71,000 1.0 50.9 30.9 1142.9 51.4 15.5 10.2 1.1 1.0 6.7 9.7 023530 Lotte Shopping 11,368 361,000 0.4 11.7 12.3 12.6 10.3 9.2 8.4 0.9 0.9 7.4 7.6 000810 Samsung F&M 11,346 239,500 2.8 20.2 14.1 19.2 14.4 11.1 9.7 1.2 1.1 11.7 11.9 003550 LG Corp. 11,164 64,700 1.5 11.1 12.4 16.5 8.3 10.4 9.6 1.0 0.9 9.4 9.5 033780 KT&G 10,736 78,200 4.3 -4.8 5.3 0.4 6.1 14.5 13.7 1.9 1.8 14.1 13.9 034220 LG Display 9,894 27,650 1.9 13.1 -17.4 196.6 -1.5 14.3 14.5 1.0 0.9 6.6 6.2 086790 Hana Financial Group 9,856 34,000 -8.7 10.0 -22.8 12.7 7.2 6.4 0.5 0.5 8.8 7.3 030200 KT 9,139 35,000 5.2 23.1 19.1 15.8 17.9 7.5 6.3 0.9 0.8 9.7 10.8 010140 Samsung Heavy 8,796 38,100 1.3 11.2 5.6 26.8 8.4 8.7 8.0 1.3 1.1 17.7 16.5 051900 LG H&H 8,481 543,000 0.6 18.5 17.3 16.9 18.8 27.1 22.8 6.2 4.9 26.4 25.3 010950 S-Oil 8,297 73,700 4.1 32.4 22.3 35.4 27.2 10.8 8.5 1.5 1.3 14.1 16.4 000830 Samsung C&T 8,264 52,900 0.9 10.3 13.7 -13.0 -0.6 21.7 21.8 0.8 0.8 3.3 3.2 003600 SK Holdings 7,843 167,000 1.6 20.1 16.6 18.1 11.6 6.4 5.7 1.8 1.4 10.5 10.9 006400 Samsung SDI 7,153 157,000 1.1 -22.1 100.3 -62.7 32.2 13.5 10.2 1.0 0.9 7.3 9.3 161390 6,999 56,500 1.2 253.8 3.6 237.3 7.3 9.0 8.4 1.9 1.6 22.1 19.9 086280 6,975 186,000 1.2 3.0 9.4 6.1 12.5 13.2 11.7 3.0 2.5 24.6 22.6 000720 Hyundai E&C 6,370 57,200 1.3 16.9 18.6 15.3 17.7 10.8 9.2 1.3 1.2 12.3 13.0 024110 Industrial Bank of Korea 6,245 11,350 0.3 -26.5 16.3 -19.6 16.1 7.8 6.7 0.5 0.5 6.6 7.3 009150 Samsung Electro-Mechanics 6,140 82,200 1.2 24.0 17.7 26.4 17.1 11.5 9.8 1.6 1.4 13.5 14.1 035250 6,108 28,550 2.9 12.3 15.4 18.4 17.8 17.4 14.8 2.2 2.1 14.1 15.4 088350 Hanwha Life 5,819 6,700 3.5 - - 3.5 1.6 9.8 9.6 0.8 0.8 8.6 8.3 139480 Emart 5,784 207,500 0.3 4.1 5.0 3.3 4.5 10.6 10.2 0.9 0.8 8.7 8.4 004020 5,690 66,700 0.7 -16.3 61.4 -49.3 112.7 14.1 6.6 0.6 0.5 4.0 8.0 001800 Orion 5,486 919,000 0.3 -3.1 7.8 -0.2 9.5 36.3 33.1 5.1 4.4 14.3 13.6 032640 LG Uplus 5,414 12,400 2.7 388.6 17.7 - 29.3 16.5 12.7 1.6 1.5 8.4 10.1 090430 Amorepacific 5,384 921,000 0.7 2.3 11.1 4.5 16.6 22.6 19.4 2.6 2.3 11.5 12.1 010130 Korea Zinc 5,246 278,000 1.6 -0.7 3.9 3.0 8.2 9.1 8.4 1.2 1.1 14.0 13.5 078930 GS 5,045 54,300 2.5 31.6 9.4 26.0 18.9 8.3 7.0 0.8 0.8 9.5 10.4 011170 Lotte Chemical 5,021 146,500 1.5 37.3 25.3 29.6 14.2 11.5 10.0 0.8 0.8 7.0 7.6 034730 SK C&C 5,000 100,000 10.0 6.0 27.6 3.6 11.0 10.6 1.8 1.6 19.1 17.5 068270 Celltrion 4,761 47,400 36.3 27.9 30.2 29.2 36.7 28.4 9.9 7.9 19.2 20.3 001300 4,609 87,900 0.8 18.1 42.8 41.5 43.3 15.6 10.9 1.6 1.5 8.9 12.1 034020 Doosan Heavy I&C 4,510 42,600 1.8 3.9 6.6 1028.4 19.4 10.5 8.8 1.3 1.3 9.5 11.2 011210 Hyundai Wia 4,040 157,000 0.5 5.5 12.8 5.4 16.1 9.2 7.9 1.9 1.6 21.6 20.5 036570 NCsoft 3,879 177,000 0.6 67.6 39.7 50.5 42.3 16.5 11.6 3.2 2.6 21.1 24.3 012450 Samsung Techwin 3,661 68,900 0.9 31.1 25.8 44.5 21.2 19.3 16.0 2.5 2.2 11.6 12.9 Source: KDB Daewoo Securities Research

Market Data July 17, 2013

※All data as of close July 17, 2013, unless otherwise noted.

Other Major Indices Economic Indicators Close Net Chg 1D (%) YTD (%) Close 1D ago 1M ago 1Y ago MSCI Korea* 376.69 -0.80 -0.21 -12.24 USD/KRW 1,119.00 1,122.60 1,128.20 1,147.60 KOSPI 1,887.49 21.13 1.13 -7.07 JPY100/KRW 1,127.85 1,123.16 1,197.09 1,456.07 KOSDAQ 541.82 4.10 0.76 8.02 EUR/KRW 1,471.26 1,466.23 1,505.86 1,408.11 Dow Jones* 15,451.85 -32.41 -0.21 15.20 3Y Treasury 2.89 2.88 2.81 2.92 S&P 500* 1,676.26 -6.24 -0.37 14.62 3Y Corporate 3.37 3.36 3.18 3.51 NASDAQ* 3,598.50 -8.99 -0.25 15.62 DDR2 1Gb* 1.39 1.39 1.44 1.24 Philadelphia Semicon* 491.06 1.73 0.35 22.85 NAND 16Gb* 2.98 2.98 2.98 1.93 FTSE 100* 6,556.35 -29.76 -0.45 8.78 Oil (Dubai)* 104.68 104.04 102.59 98.96 Nikkei 225 14,615.04 15.92 0.11 36.74 Gold* 1,290.40 1,283.50 1,387.30 1,591.60 Hang Seng* 21,312.38 9.07 0.04 -8.58 Customer deposits (Wbn)* 17,740 18,060 18,009 16,493 Taiwan (Weighted) 8,258.95 -1.16 -0.01 6.17 Equity type BC (Wbn)(Jul. 15) 92,603 92,454 90,627 99,125 Note: * as of July 16, 2013 Source: KSDA, Wisefn, DRAMeXchange, MSCI

KOSPI Top 10 Foreign Net Buy / Net Sell (Wbn) KOSPI Top 10 Institutional Net Buy / Net Sell (Wbn) Net Buy Net Sell Net Buy Net Sell Hyundai Motor 34.78 LG Electronics 26.93 KODEX LEVERAGE 106.26 KT 48.03 Samsung SDI 31.50 KODEX 200 25.57 Samsung Electronics 62.35 KODEX INVERSE 31.68 KB Financial Group 11.87 Samsung Engineering 16.10 KODEX 200 37.17 KB Financial Group 24.06 Kia Motors 11.67 10.38 Hyundai Heavy Industries 29.75 Hynix 13.96 LG Uplus 11.51 Samsung Electronics (P) 9.84 Hotel Shilla 21.24 Honam Petrochemical 9.93 LG Chem 11.50 KT&G 9.28 Samsung Heavy Ind. 16.39 Samsung SDI 6.86 Samsung Electronics 11.45 Hotel Shilla 8.69 Shinhan Financial Group 15.73 LG Electronics 5.32 KODEX LEVERAGE 8.57 Shinhan Financial Group 8.59 Woori Investment Securities 11.49 POSCO 4.37 8.09 Woori Investment Securities 5.58 Woori Finance Group 10.50 HITEJINRO 2.92 POSCO 8.08 Hana Financial Group 5.51 SK Energy 9.56 LG Uplus 2.90 Source: KSDA, Wisefn

KOSDAQ Top 10 Foreign Net Buy / Net Sell (Wbn) KOSDAQ Top 10 Institutional Net Buy / Net Sell (Wbn) Net Buy Net Sell Net Buy Net Sell Seoul Semiconductor 8.56 Lumens 4.12 KH Vatec 3.50 Nasmedia 4.85 Celltrion 2.19 Partrion 3.62 ATTO 3.41 Lumens 2.11 Media Flex 1.58 KH Vatec 1.48 SK Broadband 2.93 Nongwoo Bio 1.82 Techno Semichem 0.94 POSCO ICT 1.48 Medy-tox 1.84 Sung Kwang Bend 1.68 DK UIL 0.81 Com2us 1.19 SM 1.61 Access Bio(Reg.S) 1.29 WAVE ELECTRO 0.80 Paradise 1.09 Woory Industrial 1.43 SFA Engineering 1.26 Sung Kwang Bend 0.77 ATTO 1.09 Seowon Intech 1.40 Seoul Semiconductor 1.25 OCI Materials 0.72 Wemade 1.08 Vieworks 1.15 Maeil Dairy Industry 1.17 PNESolution 0.72 Innochips Technology 0.87 Celltrion 1.08 NEPES 0.99 YG Entertainment 0.70 Gamevil 0.86 Modetour Network 0.91 Sekonix 0.86 Source: KSDA, Wisefn

KOSPI Top 10 by Market Cap (Wbn) KOSDAQ Top 10 by Market Cap (Wbn) Close (W) Chg (W) Mkt Cap Close (W) Chg (W) Mkt Cap Samsung Electronics 1,320,000 22,000 194,435 Celltrion 49,100 1,700 4,932 Hyundai Motor 219,000 6,000 48,241 CJ O Shopping 356,700 -2,100 2,213 POSCO 313,000 2,000 27,289 Paradise 23,300 150 2,119 Hyundai Mobis 257,500 3,000 25,066 Seoul Semiconductor 36,250 0 2,114 Kia Motors 59,700 800 24,200 SK Broadband 5,490 30 1,625 Samsung Life Insurance 108,000 2,000 21,600 GS Home Shopping 245,400 1,400 1,610 Hynix 28,600 150 19,869 Dongsuh 27,100 300 1,604 Samsung Electronics (P) 852,000 2,000 19,454 CJ E&M 38,850 -250 1,474 Shinhan Financial Group 39,850 300 18,897 POSCO ICT 9,470 -20 1,298 LG Chem 273,000 0 18,092 Daum Communications 83,900 200 1,138 Source: