Jeju Air (089590.KS) Reason to Pay Attention!

Jeju Air (089590.KS) Reason to pay attention!

Company Note │Dec 30, 2019 Although Jeju Air is expected to record a large-scale deficit for 4Q19, we believe the firm’s share price already reflects the likely earnings disappointment. Going forward, Jeju Air’s share price should move in accordance with downsizing efforts following the anticipated acquisition of Hold (maintain) Eastar Jet. In particular, we believe that resolving oversupply issues in the market via fleet reductions is to be a key factor. TP W26,000 (maintain) CP (’19/12/27) W27,000 Sector Air transportation Kospi/Kosdaq 2,204.21 / 661.24 4Q19 preview: Large-scale deficit expected; disappointing results to Market cap (common) US$613.66mn sustain in 1Q20 Outstanding shares (common) 26.4mn 52W high ('19/04/15) W42,300 We maintain a Hold rating with a TP of W26,000 on Jeju Air. low ('19/10/10) W22,800 Average trading value (60D) US$3.33mn Expecting a large-scale operating deficit, we forecast Jeju Air’s 4Q19 sales at Dividend yield (2019E) 0.0% W312bn (-1.9% y-y) with an operating loss of W51.4bn (TTL y-y; OPM of Foreign ownership 6.6% -16.5%). Although Jeju Air’s 4Q19 international flight RPK is likely to show an Major shareholders increase of 11.9% y-y, international passenger traffic sales will likely show AK Holdings & 3 others 58.9% decline of 3.9% y-y, with intense freight competition pushing down dollar-based Jeju Self-Governing Province 7.8% freight rates by an estimated 25% y-y. Share perf 3M 6M 12M Having remained in a negative growth phase since November, passenger demand is Absolute (%) 10.9 -18.4 -21.1 Relative (%p) 3.1 -21.0 -27.3 expected to continue shrinking y-y in 1Q20 due to high-base effect. While China route expansion (1H20) and the Japan Summer Olympics (Jul 2020) promise to 2018 2019E 2020F 2021F boost demand somewhat, the extent of improvement is likely to be limited. Sales 1,259 1,386 1,500 1,531 Chg 26.4 10.1 8.2 2.1 OP 101 -39.3 6.0 45.7 Focus on air transportation industry reorganization rather than earnings Chg -0.1 TTL TTP 666.8 With 2020 international demand growth estimated at 5.6% and supply growth at OPM 8.0 -2.8 0.4 3.0 4.7%, oversupply issues are unlikely to be resolved next year. However, we view it NP 71 -51.3 -1.4 43.5 as positive that: 1) domestic carriers are reducing their introduction of new aircraft; EPS 2,689 -1,946 -54 1,650 and 2) the rate of supply growth may slow going forward due to prolonged delays in Chg -9.0 TTL RR TTP the introduction of such models as the B737 MAX and A321 NEO. P/E 12.5 N/A N/A 16.4 P/B 2.3 2.1 2.2 1.9 While its earnings are forecast to come in sluggish, we expect Jeju Air’s share EV/EBITDA 5.3 11.2 5.6 4.2 price to largely depend on its business strategy following the anticipated ROE 19.9 -14.4 -0.4 12.5 acquisition of Eastar Jet. Once the acquisition is confirmed, the gap between Jeju Debt/equity 169.8 313.5 300.8 272.8 Air and second-tier LCCs should widen significantly. As its scale of operations Net debt -153 -126 -120 -67 expands, Jeju Air’s route, aircraft, and manpower management strategies are to Unit: Wbn, %, won, x become increasingly important. In particular, decisions regarding whether to Note 1: NP excludes minority interests reduce its number of operating aircraft are to greatly affect market conditions. Note 2: EPS, P/E, P/B, ROE based on NP (excl minority interests) Source: NH I&S Research Center estimates International seat oversupply: Reduction in Eastar Jet fleet to improve supply- demand conditions

(mn seats) 21 Oversupply 20 19 Supply- 18 demand conditions to 17 improve upon 16 Eastar Jet's fleet reduction 15 by up to 70% 14 Ys Jung, Analyst '11 '12 '13 '14 '15 '16 '17 '18 '19E '20F 822)768-7882, [email protected]

Source: IIA, KAC, Airportal, NH I&S Research Center estimates Jeju Air www.nhqv.com

Summary

Established in Jan 2005, Jeju Air stands as the top LCC in Korea. Having obtained a regular air transport business license in Aug 2005, the company now operates around 79 routes across the world. As of 2018, Jeju Air’s sales came in at W1.25tn, breaking down by business as: 1) international passenger sales (74.1%); 2) domestic passenger sales (17.8%); 3) additional sales (7.9%); and 4) cargo sales (0.5%). Through 3Q19, the firm’s M/S stood at 9.4% in terms of international passenger demand. Based on its solid financials, we expect Jeju Air to further expand its M/S amid ongoing restructuring in the airline industry.

Share price drivers/earnings momentum Downside risks

Resolving of oversupply issues following airline industry Falling airfares due to reduced passenger traffic and restructuring intensifying competition Cost reduction on dollar/won forex rate decline Unfavorable forex rates and oil prices Rise in passenger demand thanks to new Chinese routes Falling aircraft utilization rates L/F recovery for Japanese routes thanks to improvement in Korea-Japan relations

Cross valuations (Unit: x, %) Historical valuations (Unit: x, %)

P/E P/B ROE Company Valuations 2017 2018 2019E 2020F 2021F 2019E 2020F 2019E 2020F 2019E 2020F Jin Air N/A N/A 2.0 2.3 -13.3 -7.0 P/E 12.0 12.5 N/A N/A 16.6 T’way Air N/A N/A 1.5 1.7 -19.6 -15.6 P/B 2.8 2.3 2.3 2.4 2.2 Air Busan N/A N/A 3.5 5.3 -47.7 -33.9 P/S 0.9 0.7 0.5 0.5 0.5 Ryan Air Holdings 15.1 18.1 2.5 2.9 18.3 15.8 ROE 25.8 19.9 -14.9 -0.5 13.6 Southwest Airlines 12.7 11.3 2.6 2.1 23.6 23.5 ROIC 332.8 37.1 -10.3 0.8 5.2 Source: Bloomberg, NH I&S Research Center Source: Bloomberg, NH I&S Research Center

Historical key financials (Unit: Wbn, won, %)

2010 2011 2012 2013 2014 2015 2016 2017 2018 Sales N/A N/A N/A N/A N/A 608 748 996 1,259 OP N/A N/A N/A N/A N/A 51 58 101 101 OPM (%) N/A N/A N/A N/A N/A 8.5 7.8 10.2 8.0 Pre-tax profit N/A N/A N/A N/A N/A 53 69 101 93 NP N/A N/A N/A N/A N/A 47 53 78 71 NP (excl minority interests) N/A N/A N/A N/A N/A 47 53 78 71 EBITDA N/A N/A N/A N/A N/A 61 72 127 137 Capex N/A N/A N/A N/A N/A 41 30 133 153 Free cash flow N/A N/A N/A N/A N/A 31 80 11 -32 EPS (won) N/A N/A N/A N/A N/A 2,053 2,038 2,954 2,689 BPS (won) N/A N/A N/A N/A N/A 8,948 10,342 12,574 14,509 DPS (won) N/A N/A N/A N/A N/A 400 500 600 650 Net debt N/A N/A N/A N/A N/A -253 -326 -296 -153 ROE (%) N/A N/A N/A N/A N/A 20.3 21.0 25.8 19.9 ROIC (%) N/A N/A N/A N/A N/A N/A 277.5 332.8 37.1 DPR (%) N/A N/A N/A N/A N/A 22.0 24.8 20.2 24.1 DY (%) N/A N/A N/A N/A N/A 1.0 2.0 1.7 1.9 Net debt ratio (%) N/A N/A N/A N/A N/A -109.0 -119.9 -89.3 -40.1 Note: The company is likely to book a higher debt/equity ratio in 2019 owing to a change in accounting rules regarding aircraft lease liabilities and greater forex translation losses related to the lease liabilities Source: Jeju Air, NH I&S Research Center 2 Jeju Air www.nhqv.com

1. Earnings to deteriorate on greater fixed cost burden Number of In Aug 2019, the number of outbound travelers decreased 3.7% y-y, showing negative outbound travelers growth for the first time since Jan 2012. With the number sliding 9.0% y-y in Nov 2019, declining since LCCs, whose earnings are mainly determined by outbound travel demand, are seeing August limited top-line growth and heavier fixed cost burden.

RPK to up 12% y-y; We note that Jeju Air’s international passenger growth declined 4% y-y in Nov 2019, yields (US$) to drop showing negative growth for the first time. In addition, passenger demand growth 25% y-y in 4Q19 (including domestic passenger demand) fell 1.4% y-y. Although Jeju Air’s 4Q19 international flight RPK is likely to show expansion of 12% y-y (backed by an increase in fleet and distance traveled), international passenger traffic sales will likely drop for the To book 4Q19 first time in 4Q19, with intense freight competition pushing down dollar-based freight operating loss of rates by an estimated 25% y-y. With fixed cost burden expanding, we expect Jeju Air to W51.4bn book an operating loss of W51.4bn in 4Q19.

High-base effect to In 1Q20, in light of tepid expectations towards demand recovery, we believe that Jeju Air sustain in 1Q20 will see a decline in top-line growth (y-y), even after considering that 1Q tends to represent a peak season for the airline industry. While the company’s fixed-cost burden could ease thanks to strong seasonality, given its healthy 1Q19 earnings, it should still see high-base effect (y-y) in 1Q20.

4Q19 preview (IFRS consolidated) (Unit: Wbn, %) 4Q19E 4Q18 1Q19 2Q19 3Q19 1Q20F Estimate y-y q-q Previous Consen Sales 317.5 392.9 313.0 368.8 311.5 -1.9 -15.5 314.7 319.9 391.3 OP 5.4 57.0 -27.4 -17.4 -51.4 TTL RR -46.9 -32.3 17.1 OPM 1.7 14.5 -8.8 -4.7 -16.5 -14.9 -10.1 4.4 Pre-tax profit -17.5 55.5 -38.7 -40.2 -40.6 RR RR -35.9 -39.4 20.3 NP (excl minority interests) -14.0 42.1 -29.5 -30.1 -33.8 RR RR -30.0 -22.6 20.5 Source: Jeju Air, FnGuide, NH I&S Research Center estimates

Earnings forecasts (IFRS consolidated) (Unit: Wbn, won, x, %) 2018 2019E 2020F 2021F Sales - Revised 1,259 1,386 1,500 1,531 - Previous - 1,389 1,501 1,531 - Change - -0.2 -0.1 0.0 OP - Revised 101 -39 6 46 - Previous - -35 -2 44 - Change - -13.1 TTP 3.3 OPM - Revised 8.0 -2.8 0.4 3.0 EBITDA 137 52 107 154 NP (excl minority interests) 71 -51 -1 43 PS - Revised 2,689 -1,946 -54 1,650 - Previous - -1,802 -318 1,603 - Change - -7.9 Losses to narrow 3.0 P/E 12.5 N/A N/A 16.3 P/B 2.3 2.1 2.2 1.9 EV/EBITDA 5.3 11.2 5.5 4.2 ROE 19.9 -14.4 -0.4 12.5 Note 1: EPS, P/E, P/B, and ROE based on NP (excluding minority interests) Note 2: Under IFRS 16 accounting standards, aircraft lease and liabilities are reflected from 2019 Source: NH I&S Research Center estimates

3 Jeju Air www.nhqv.com

Quarterly earnings forecasts (IFRS-consolidated) (Unit: won, %, Wbn, x, %) 1Q19 2Q19 3Q19 4Q19E 1Q20F 2Q20F 3Q20F 4Q20F 2018 2019E 2020F Key assumptions Average forex rate 1,124.3 1,166.9 1,194.0 1,177.5 1,150.0 1,170.0 1,180.0 1,180.0 1,099.9 1,165.7 1,170.0 y-y (%) 4.9% 8.2% 6.5% 4.4% 2.3% 0.3% -1.2% 0.2% -2.7% 6.0% 0.4% Jet fuel price (US$/bbl) 74.7 76.4 75.0 74.2 80.0 77.0 77.0 73.0 82.9 75.1 76.8 y-y (%) -4.3% -10.3% -13.0% -10.7% 7.1% 0.8% 2.7% -1.6% 28.5% -9.5% 2.3% Domestic routes ASK (mn seat-km) 570.5 627.6 655.5 588.1 574.2 633.6 613.8 597.7 2,369.2 2,441.8 2,419.3 RPK (mn pns-km) 542.3 584.8 607.8 546.9 528.3 582.9 564.7 549.9 2,226.9 2,281.8 2,225.8 L/F (%) 94.8 93.3 92.6 93.0 92.0 92.0 92.0 92.0 94.0 93.4 92.0 Yield (US$, cent) 8.8 9.6 9.2 8.1 8.5 8.8 8.2 8.1 9.2 8.4 8.4 Yield (won) 90.0 104.1 101.7 95.0 97.2 103.0 97.0 95.0 100.7 97.9 98.1 Chg y-y (%) ASK 2.3% 4.1% 9.0% -3.1% 0.6% 1.0% -6.4% 1.6% 4.4% 3.1% -0.9% RPK 3.8% 1.6% 8.4% -3.8% -2.6% -0.3% -7.1% 0.5% 2.6% 2.5% -2.5% L/F (%p) 1.5%p -2.0%p -0.5%p -0.3%p -2.8%p -1.3%p -0.6%p -1.0%p -1.6%p -0.5%p -1.4%p Yield (US$) -1.7% -11.1% -12.0% -11.3% -3.4% -8.5% -10.6% -0.2% 0.2% -8.2% -0.2% Yield (won) -5.7% -5.5% -4.7% 0.1% 8.0% -1.1% -4.6% 0.0% -2.5% -2.7% 0.2% International routes ASK 5,442.0 5,436.8 6,156.5 5,474.9 5,805.8 5,702.4 5,986.2 5,694.3 17,765 22,510 23,188.7 RPK 4,798.8 4,368.8 5,234.5 4,549.6 4,934.9 4,618.9 5,058.3 4,726.2 15,474 18,952 19,338.4 L/F 88.3 81.3 83.1 83.1 85.0 81.0 84.5 83.0 87.1 84.2 83.4 Yield (US$, cent) 6.3 4.8 4.8 4.2 5.4 4.8 4.9 5.0 5.5 4.7 5.0 Yield (won) 65.6 50.7 51.8 49.5 62.1 56.2 57.8 59.0 60.3 54.5 58.8 Chg y-y (%) ASK 34.0% 30.8% 30.2% 13.6% 6.7% 4.9% -2.8% 4.0% 31.5% 26.7% 3.0% RPK 30.9% 20.0% 27.6% 11.9% 2.8% 5.7% -3.4% 3.9% 29.9% 22.5% 2.0% L/F (%p) -2.7%p -6.7%p -4.4%p -2.0%p -3.3%p -0.3%p 1.4%p -0.1%p -1.1%p -2.9%p -0.8%p Yield (US$) -4.9% -12.4% -22.2% -25.2% -13.7% -0.4% 2.1% 19.0% 3.9% -14.8% 7.5% Yield (won) -7.0% -6.0% -25.2% -14.1% -5.4% 10.8% 11.6% 19.3% 1.1% -9.7% 7.9% Earnings estimates (Wbn) Total sales 392.9 313.0 368.8 311.5 391.3 354.5 387.1 367.1 1,259 1,386 1,500 Passenger sales 363.8 282.3 332.9 277.0 357.8 319.4 347.2 331.1 1,158 1,256 1,356 Domestic 48.8 60.9 61.8 52.0 51.3 60.0 54.8 52.2 224 223 218 International 315.0 221.4 271.1 225.0 306.5 259.4 292.5 278.8 934 1,033 1,137 Additional sales 27.6 29.1 33.7 30.0 29.0 30.6 35.4 31.5 99 120 126 Operating costs 335.9 340.4 386.7 362.9 374.2 369.5 378.0 372.4 1,158 1,426 1,494 Labor costs 68.0 61.7 70.1 66.2 69.3 69.3 69.3 69.8 209 266 278 Depreciation/amortization costs 34.6 36.0 38.8 37.5 43.9 44.5 46.7 47.2 36 101 54 Rental fees 10.1 10.1 11.3 10.7 12.1 12.3 13.1 13.3 139 42 51 Fuel costs 90.3 100.2 111.0 102.3 108.9 106.6 107.5 102.0 339 404 425 Maintenance costs 28.8 29.3 37.3 34.8 36.5 37.5 38.4 39.3 96 130 152 Airport charges 58.4 58.4 67.2 67.2 55.0 55.0 55.0 55.0 201 251 220 Sales commissions 4.1 2.6 3.2 3.2 4.0 4.0 4.0 4.0 12 13 16 Other 39.9 40.2 45.8 38.9 43.0 39.0 42.6 40.4 125 165 165 OP 57.0 -27.4 -17.4 -51.4 17.1 -15.0 9.1 -5.2 101 -39 6 OPM (%) 14.5% -8.8% -4.7% -16.5% 4.4% -4.2% 2.3% -1.4% 8.0% -2.8% 0.4% Source: Jeju Air, NH I&S Research Center estimates

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2. Supply variables to be in play Supply variables to Overall, we expect Jeju Air to face a tough business environment in 2020. Still, the be in play company could see favorable supply conditions thanks to: 1) the limited introduction of new short-range aircraft models; and 2) airline industry restructuring.

While Boeing and Airbus initially planned to deliver their new short-range aircraft models to clients in earnest in 2019, following a series of accidents, the operation of the Introduction of new Boeing 737 MAX has been suspended. Recently, Boeing even announced that it will halt short-range aircraft production of the 737 MAX model. models to be limited Operation of B737 MAX to be delayed further Delivery of A320 In addition, the delivery of Airbus’s A320 NEO series (A320, A321 NEO) is also being NEO series facing delayed, due to a prolonged production phase for customized aircraft cabins. Airbus CEO delay Guillaume Faury has said that production of the A320 NEO series is unlikely to normalize before 2021. While some domestic airlines (including Korean Air (KAL), Asiana Airlines, and Air Busan) initially planned to adopt the A320 NEO series over 2019~2020, we note that KAL eventually decided not to adopt the model in 2020.

Introduction of new In fact, many domestic airlines have already scaled back their aircraft introduction plans aircraft at LCCs to for 2020. T’way Air and Air Busan are likely to add only one aircraft each, while Jeju Air be limited in 2020 is to remove one aircraft from its existing fleet. Facing Ministry of Land, Infrastructure, and Transport (MOLIT) sanctions, Jin Air should be unable to introduce aircraft, and unlisted airlines Eastar Jet and Air Seoul are also unlikely to introduce new aircraft.

Looking at aircraft introduction plans at three new LCCs (ie, Aero K, Fly GangWon, and Air Premia), Fly GangWon plans to introduce two aircraft in 2020, with a view to flying mainly out of Yangyang Airport. Aero K and Air Premia are expected to start fleet introduction from end-2020. Accordingly, the effects of fleet introduction at the new LCCs should be limited.

Overall, we expect domestic LCCs to add only three aircraft to their total fleet. In addition, the above-mentioned problems with new aircraft models should further limit industry players from engaging in strategic fleet expansion.

KAL’s short- to KAL plans to introduce four B787 jets at end-2020. But, its introduction of six B737 medium-range MAX aircraft and six A320 NEO aircraft is unlikely to proceed as planned. At Asiana, as airliner the airline is expected to be acquired by HDC-Mirae Asset Daewoo consortium, it is introduction difficult to predict fleet size until its operational plans are announced. But, considering unlikely to proceed the sluggish conditions of the domestic air transportation market and the airline’s aging as planned fleet, chances are slim that the airline will focus on replacement of old aircraft rather than aggressive fleet expansion. Against this backdrop, domestic airlines’ aircraft introduction Asiana unlikely to plans appear limited overall. aggressively increase fleet

Supply growth to be Based on domestic airlines’ aircraft introduction plans, we foresee limited supply growth difficult for in the air transportation market. And, if Jeju Air decides to reduce fleet after its structural reasons acquisition of Eastar Jet, supply-demand conditions should improve.

5 Jeju Air www.nhqv.com

Boeing to halt B737 MAX production; Airbus to face worsening bottlenecks in A320 NEO Series production

Source: Bloomberg, NH I&S Research Center

Domestic LCCs’ fleet Fleet by domestic LCC

(unit) (Unit) Domestic LCCs’ fleet '18 '19E '20F 180 50 157 160 45 44 160 45 140 39 140 40 119 35 120 100 27 28 27 30 26 26 26 25 26 100 24 23 23 25 20 80 20 60 15 40 10 20 5 0 0 '16 '17 '18 '19E '20F Jeju Air Jin Air T'Way Air Air Busan Eastar Jet

Source: Company data, NH I&S Research Center estimates Source: Company data, NH I&S Research Center estimates

Domestic airlines’ passenger fleet International seat supply and growth

(Unit) Domestic airlines’ passenger fleet (mn seats) International seat supply (LHS) Change (%, RHS) 140 20% 400 381 12% 374 Growth (RHS) 380 9.6% 120 10% 360 14.1% 16% 340 100 322 353 8% 11.4% 12% 320 301 5.9% 80 9.8% 300 7.0% 6% 8.1% 7.1% 6.8% 60 6.6% 8% 280 5.3% 4% 4.7% 260 40 240 4% 2% 20 220 1.9% 200 0% 0 0% '16 '17 '18 '19E '20F '11 '12 '13 '14 '15 '16 '17 '18 '19E '20F

Source: Company data, NH I&S Research Center estimates Source: KAC, Airportal, NH I&S Research Center estimates

6 Jeju Air www.nhqv.com

3. Jeju Air’s influence on air transportation market increasing In 2019, oversupply In the domestic air transportation market, international seat supply exceeded demand by has increased to 17~18mn seats over 2013~2018. While LCCs have kept increasing fleet since 2013, 20mn seats, causing oversupply has hovered around the same levels, thanks to robust demand. deterioration in supply-demand In 2019, however, oversupply has increased to 20mn seats, leading to supply-demand conditions deterioration. We attribute the increase to the fact that while LCCs have aggressively added fleet on expectations for sound demand, demand has stagnated.

Dramatic fleet It was expected that facing financial woes, Eastar Jet would sharply reduce fleet in 2020, reduction looks improving supply-demand conditions. As Jeju Air has announced plans to take over unlikely, as Jeju Air Eastar Jet, however, the possibility of a dramatic fleet reduction has decreased. If Jeju Air has announced plan keeps Eastar Jet’s fleet unchanged y-y in 2020, any improvement in supply-demand to take over Eastar conditions is likely to be limited. Jet

If Jeju Air reduces Assuming that following its acquisition of Eastar Jet, Jeju Air eliminates overlapping fleet following its routes and reduces fleet, supply-demand conditions in the overall air transportation acquisition of market should improve. In 2019, oversupply has increased by 2.53mn seats y-y, with Eastar Jet, supply- Eastar Jet’s international seat supply estimated at 3.83mn seats. Accordingly, if the demand conditions airline’s fleet is reduced by around 70%, supply-demand conditions would likely return should improve to those of 2018.

That said, as such developments might push down Jeju Air and Eastar Jet’s combined M/S, it is uncertain whether Jeju Air will pursue fleet reduction. If Jeju Air decides to keep fleet size at the current level in order to expand M/S, the air transportation market will likely remain choppy next year. As Jeju Air has become Korea’s number-one LCC, its business direction is likely to have a major impact on the domestic market at large.

International seat oversupply; Reduction in Eastar Jet fleet to improve supply-demand conditions

(mn seats)

21 Oversupply 20

19 Supply-demand conditions to 18 improve upon 17 Eastar Jet's fleet reduction by up 16 to 70%

14 '11 '12 '13 '14 '15 '16 '17 '18 '19E '20F

Source: Airportal, NH I&S Research Center estimates

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Contribution to seat oversupply, by airline group Contribution to seat oversupply, by LCC

(mn seats) (mn seats) Foreign airlines FSCs LCCs Air Seoul Eastar Jet Air Busan 25 7 T'Way Air Jin Air Jeju Air

6 20 5 15 4

10 3 2 5 1

0 0 '17 '18 '19E '14 '15 '16 '17 '18 '19E

Source: Airportal, NH I&S Research Center estimates Source: Airportal, NH I&S Research Center estimates

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STATEMENT OF COMPREHENSIVE INCOME Valuation / Profitability / Stability (Wbn) 2018/12A 2019/12E 2020/12F 2021/12F 2018/12A 2019/12E 2020/12F 2021/12F Sales 1,259 1,386 1,500 1,531 Price/ Earnings (X) 12.5 N/A N/A 16.4 Growth (%) 26.4 10.1 8.2 2.1 Price/ Book Value (X) 2.3 2.1 2.2 1.9 COGS 1,016 1,250 1,298 1,263 Price/ Gross Cash Flow (X) 6.2 15.8 6.6 4.6 Gross Profit 244 136 202 269 Price/ Sales (X) 0.7 0.5 0.5 0.5 Gross margin (%) 19.4 9.8 13.5 17.5 EV/ EBITDA (X) 5.3 11.2 5.6 4.2 SG&A 143 175 196 223 EV/ EBIT (X) 7.2 N/A 99.3 14.1 Operating Income 101 -39 6 46 Fully diluted EPS (W) 2,689 -1,946 -54 1,650 Growth (%) -0.1 TTL TTP 666.8 BVPS (W) 14,509 12,563 12,509 13,960 Operating margin (%) 8.0 -2.8 0.4 3.0 Sales PS (W) 47,783 52,589 56,913 58,097 EBITDA 137 52 107 154 ROE (%) 19.9 -14.4 -0.4 12.5 Non-Operating Profit -8 -25 -8 5 ROA (%) 7.7 -4.3 -0.1 3.2 Financial Income(Costs) -1 3 5 4 ROIC (%) 37.1 -10.1 0.8 5.2 Other Non-Operating Profit -7 -28 -12 1 Dividend Yield (%) 1.9 0.0 0.0 0.7 Gains(Losses) in Associates, Subsidiaries and JVs 0 0 0 0 Payout Ratio (%) 24.1 0.0 0.0 12.1 Pre-tax Profit from Cont. Op. 93 -64 -2 51 Total Cash Dividend (Wbn) 17 0 0 5 Income Taxes 22 -13 0 8 Cash DPS (W) 650 0 0 200 Profit from Continuing Op. 71 -51 -1 43 Net debt(cash)/ equity (%) -40.1 -38.2 -36.3 -18.2 Net Profit 71 -51 -1 43 Debt/ equity (%) 169.8 313.5 300.8 272.8 Growth (%) -8.9 TTL RR TTP Interest-Bearing Debts (Wbn) 127 441 476 551 Net margin (%) 5.6 -3.7 -0.1 2.8 Current Ratio (%) 118.6 86.6 80.0 95.6 Net Profit of Parent 71 -51 -1 43 Total shares (mn) 26 26 26 26 Net Profit to Non-Controlling 0 0 0 0 Par value (W) 5,000 5,000 5,000 5,000 Other Comprehensive Income -6 0 0 0 Share price (W) 33,550 27,000 27,000 27,000 Total Comprehensive Income 65 -51 -1 43 Market Cap (Wbn) 884 712 712 712

STATEMENT OF FINANCIAL POSITION CASH FLOW STATEMENT (Wbn) 2018/12A 2019/12E 2020/12F 2021/12F (Wbn) 2018/12A 2019/12E 2020/12F 2021/12F Cash and Cash Equivalents 223 147 137 160 Operating Cash Flow 121 153 119 99 Accounts Receivables 45 42 46 47 Net Profit 71 -51 -1 43 Total Current Assets 478 400 298 302 Depreciation&Amortization 36 91 101 109 Tangible Assets 331 500 558 607 + Loss(Gains) from Subs 0 0 0 0 Investment Assets 2 0 0 0 + FC translation loss(profit) -1 18 10 -3 Non-Current Assets 553 969 1,024 1,070 Gross Cash Flow 144 45 108 155 Assets 1,032 1,369 1,321 1,372 - Incr. (Decr.) in WC 9 93 9 -50 Short-Term Debt 25 16 15 29 Investing Cash Flow -6 -526 -164 -150 Account Payables 1 1 1 2 + Decr. In Tangible Assets 0 0 0 0 Current Liabilities 403 462 372 316 - Incr. In Tangible Assets(CAPEX) -153 -250 -150 -150 Long-Term Debt 101 424 460 521 + Disp.(Acq.) of Inv. Assets 3 2 0 0 Long-Term Allowance 142 149 156 164 Free Cash Flow -32 -97 -31 -51 Non-Current Liabilities 246 576 619 688 Net Cash Flow 115 -372 -45 -52 Liabilities 649 1,038 992 1,004 Financing Cash Flow 5 297 35 75 Capital Stock 132 132 132 132 Equity Financing 0 0 0 0 Capital Surplus 90 90 90 90 Debt Financing 5 297 35 75 Retained Earnings 163 111 110 148 Incr.(Decr.) in Cash 119 -76 -10 23 Non-Controlling Interests Equity 0 0 0 0 Ending Cash and Cash Equivalents 223 147 137 160 Shareholders' Equity 382 331 330 368 Net Debt (Cash) -153 -126 -120 -67

9 Jeju Air www.nhqv.com

Rating and TP update Jeju Air (089590.KS) Disparity ratio (%) Date Rating TP Avg Max/Min (won) Closing Price Target price(12M) 2019.11.12 Hold W26,000(12M) - - 60,000 2019.08.06 Buy W31,000(12M) -22.1% -16.1% 2019.07.01 Buy W41,000(12M) -31.5% -21.7% 48,000 2019.03.17 Buy W50,000(12M) -25.2% -15.4% 36,000 2019.01.15 Buy W39,000(12M) -10.1% 0.5% 24,000 2018.10.18 Buy W41,000(12M) -15.5% -4.6% 2018.08.07 Buy W58,000(12M) -35.2% -28.6% 12,000 2018.07.25 Covering analyst changed - 0 2018.04.09 Buy W58,000(12M) -19.5% -12.1% '17.12 '18.4 '18.8 '18.12 '19.4 '19.8 '19.12 2017.11.08 Buy W48,000(12M) -19.3% 2.1%

NH Investment & Securities stock ratings 1. Rating based on a stock’s forecasted absolute return over a period of 12 months from the date of publication.

l Buy: Greater than +15% l Hold: -15% to +15% l Sell: Less than -15% 2. Regarding listed companies under NH I&S’ coverage, our stock ratings break down as follows (as of Dec 27 2019).

l NH I&S’ stock rating distribution Buy Hold Sell 74.9% 25.1% 0.0%

- The stock rating on an individual company can change at irregular intervals. Our stock rating distribution is calculated on a weekly basis.

Compliance notice

l NH I&S does not have a stake greater than or equal to 1% in Jeju Air as of the preparation date. l NH I&S has not provided this material to any institutional investor or other third party in advance. l The analyst and his/her spouse do not own any securities of Jeju Air as of the preparation date. l This report correctly reflects the analyst’s opinion and was written without any external influence or intervention.

Disclosures The research is based on current public information that NH I&S considers reliable, but NH I&S does not represent it as accurate or complete and it should not be relied on as such. Furthermore, the research does not take into account particular investment objectives, financial situations or individual client needs, and NH I&S is in no way legally responsible for future returns or loss of original capital. All materials in this report are the intellectual property of NH I&S. Copying, distributing, transmitting, transforming or lending of this material without NH I&S' consent is prohibited.