Holding Companies What to expect next for Group ’s ownership restructuring

Key objective: Strengthening control over SEC We believe Samsung Group’s ownership restructuring will be largely focused on enhancing the enterprise value of Samsung C&T and strengthening control over (SEC) via Samsung C&T. To this end, we think 1) Samsung C&T Overweight (Maintain) will lead the group’s biopharma business and directly control Samsung SDS’s post- split business, and 2) SEC will adopt a holding structure via a spin-off, with Sector Update Samsung C&T assuming control over the holding company. June 17, 2016 I. Samsung SDS: Potential breakup Current status: Samsung SDS is weighing whether to separate its logistics business by the end of the year to strengthen its global competitiveness. Mirae Asset Daewoo Co., Ltd. Our view: We think the company will be split up, with the logistics business and the [Holding Companies/IT Services ] IT services business being relisted as separate entities.

Dae -ro Jeong 1) The logistics business, which is looking to expand into third-party logistics via an +822 -768 -4160 M&A, could be re-rated higher on bullish growth expectations. [email protected] 2) The IT services business should continue to see steady revenue from group affiliates. Yoon -seok Seo +822 -768 -4127 II. SEC: Taking control of SEC holding company is key [email protected] Current status: Samsung Group currently owns only a 17.6% stake in SEC (excluding

SEC’s 12.4% treasury shares). But it is difficult for the group to directly buy additional shares, given the sheer cost of such an endeavor and the government’s ban on new circular shareholdings. 1) Budget constraints: Given SEC’s current market cap of roughly W200tr, it would cost around W2tr for the group to increase its stake by just 1%. 2) Circular shareholding ban: With SEC tied to six of the group’s seven cross- shareholdings, it would be almost impossible for affiliates to acquire additional shares without creating new cross-shareholdings or strengthening existing ones . Our view: We believe converting SEC to a holding company structure would b e the best way for the group to strengthen its grip in the electronics giant. As SEC splits into an investment company and an operating company, we think it will use its treasury shares (12.4%) to transition into a holding company structure. The group can then gain control of the operating company through the holding company. The key challenge is securing control of the SEC holding company. We think this will be achieved by merging the SEC investment company with Samsung SDS’s post-split IT services business. This would enable the group to acquire additional shares in the SEC holding company without incurring costs, as the group holds a considerable stake in Samsung SDS (56 .7%, including 17.0% by the controlling fa mily, and 17.1% by Samsung C&T). When the SEC holding company makes a tender offer for operating subsidiary shares , the controlling family and Samsung C&T could acquire additional shares in the holding company. This would cement Samsung C&T as the SEC holding company’s largest shareholder, and thus give the group stable ownership of the operating company.

III. Samsung C&T: Biopharma/logistics to boost earnings and ease valuation pressures Current status: Samsung C&T is trading at a lofty valuation despite weak earnings . Meanwhile, as the group’s de facto holding company, Samsung C&T does not have sufficient holdings in SEC (4.1% stake). Our view: In addition to , S amsung C&T is likely to integrate Samsung SDS’s logistics business as a consolidated subsidiary. Through its merger with , Samsung C&T became the largest shareholder of Samsung BioLogics with a total stake of 52.1%, assuming control of the group’s biopharma business. We believe Samsung C&T will see an increase in the value of its stake following the bio firm’s IPO and earnings improvements. Samsung C&T could also become the controlling shareholder (39.7%) of Samsung SDS’s logistics business (after the split in 2H16) by exchanging shares with SEC. Going forward, Samsung C&T may merge with Samsung SDS’s logistics business (after its split), thus internalizing the logistics business.

June 17, 2016 Holding Companies

Table 1. Samsung Group’s restructuring since 2013 No Details No. Details . (Sep. 23, 2013) acquired Cheil Industries’ fashion business 1 12 (Nov. 14, 2014) Samsung SDS IPO (worth W1tr) (Nov. 26, 2014) Four affiliates including Samsung Techwin, etc. were 2 (Sep. 27, 2013) Merger between Samsung SDI and Samsung SNS 13 sold to Hanwha Group; SEC repurchased treasury shares (1.12%) and

purchased 10% stake in 3 (Nov. 4, 2013) S1 acquired building management business of Everland 14 (Dec. 18, 2014) Cheil Industries IPO

(Dec. 13, 2013) Samsung Life purchased 6.38% stake in 4 15 (May. 26, 2015) Merger between Cheil Industries and Samsung C&T (2.54% from Samsung C&T; 3.81% from SEMCO; 0.03% from SHI) (Aug, 2013 -) Samsung C&T acquired stake (0% → 2.7%), 5 16 (Oct. 22, 2015) Samsung Securities repurchased treasury shares (3.21%) (Additionally purchased 5.09% stake held by Samsung SDI on Dec. 13, 2013 (2.7% →7.79%)) 6 (Mar. 31, 2014) Samsung SDI merged with Cheil Industries 17 (Oct. 27, 2015) Samsung F&M repurchased treasury shares (3.5%)

(Apr. 2, 2014 ) Samsung General Chemicals merged with Samsung 7 18 (Oct. 29, 2015) SEC repurchased and retired treasury shares (1.51%) Petrochemical (Apr. 22, 2014) affiliates (e.g., SEMCO, Samsung Fine (Oct. 30,2 015) Samsung SDI’s chemical business, stake in Samsung 8 Chemicals, Samsung SDS, Cheil Worldwide) sold Samsung Life stakes 19 Fine Chemicals were sold to Lotte Group

(1.64% ; 3.28mn shares) Samsung Life repurchased treasury shares (3.25%) (Apr. 22, 2014) Samsung Life decided to purchase 100% of Samsung (Jan. 28, 2016) Samsung Life purchased SEC’s stake in Samsung Card Asset Management (currently holds 5.48%): 62.25% from Samsung (37.5%) 9 20 Securities, 3.88% from SHI, 1.18% from Samsung F&M, 7.7% from Lee SEC repurchased and retired treasury shares (1.45%), Samsung Life Jae -yong, 5.13% from Lee Boo -jin, 2.57% from Lee Seo -hyun, etc. (1.5%), Samsung Securities (2.22%) repurchased treasury shares (May 9, 2014) Samsung Securities decided to acquire 100% of Samsung 10 Futures (currently holds 51%): 41% from Samsung Life, 4% from 21 (Jan. 28, 2016) Lee Jae-yong sold his stake in Samsung SDS (2.05%)

Samsung F &M, 2% from Samsung Life Public Welfare Foundation, etc. (Feb. 25, 2016) Samsung SDI sold its stake in SEC (5mn shares) due to (Sep. 1, 2014) Merger between SHI and Samsung Engineering (failed on regulation of circular-shareholdings 11 22 Nov. 9, 2014) (Jun. 7, 2016) Samsung SDS announced that it was considering its spin- off its logistics division Source: Mirae Asset Daewoo Research

Figure 1. Samsung Group’s corporate governance

Lee Jae-yongand related parties

31.5%

2.6% Cheil Industries 1.4% [028260] 2.1% Samsung C&T [000830] 12.6% (Treasury 100% Samsung Welstory shares 12.7%) 52.1% Samsung 91.2% Samsung Cheil Worldwide Biologics Bioepis [030000] 47.8% 4.1% 7.3% 19.3% 20.8% 5.1% [008770] 12.6% Samsung SDI SEC 7.4% Samsung Life [006400] 19.6% [005930] [032830] (Treasury shares 12.4%) 1.4%

15.2% 84.8.% 23.7% SEMCO Samsung Card 71.9% Samsung Display [009150] [029780]

11.0% S1 17.6% SHI Samsung Securities 11.1% [012750] [010140] [016360]

8.0%

11.7% 15.0% Samsung Engineering Samsung SDS Samsung Life [028050] 22.6% [018260] [000810] 7.0% 17.1% Samsung SNS 17.0%

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 2 June 17, 2016 Holding Companies

Table 2. SEC’s major shareholders (%, Wbn) Shares Stake Value

Lee Kun-hee 4,985,464 3.44 6,923 Controlling family Hong Ra-hee 1,083,072 0.75 1,504 (1) Lee Jae-yong 840,403 0.58 1,167 Total 6,908,939 4.76 9,594 Samsung Life 10,622,814 7.32 14,751 Samsung C&T 5,976,362 4.12 8,299 Samsung F&M 1,856,370 1.28 2,578 Samsung Welfare 89,683 0.06 125 Affiliates (2) Foundation Samsung Foundation of 37,615 0.03 52 Culture Total 18,582,844 12.81 25,804 Holdings in the group (1) + (2) 25,491,783 17.57 35,398 Treasury shares 17,986,686 12.40 24,976 Group’s ownership 43,478,469 29.97 60,374 Total 147,299,337 100.00 201,444 Note: Based on Jun. 16, 2016 closing price Source: Mirae Asset Daewoo Research

Table 1. Seven Samsung Group cross-shareholdings remain Subject to Affiliate 1 Affiliate 2 Affiliate 3 Affiliate 4 Affiliate 5 Affiliate 6 removal 1 Samsung C&T → SEC → SEMCO → Samsung C&T 4.1% 23.7% 2.6% 2 Samsung C&T → Samsung Life → SEC → SEMCO → Samsung C&T SEMCO → 19.3% 7.2% 23.7% 2.6% Samsung C&T 3 Samsung C&T → Samsung Life → Samsung F&M → SEC → SEMCO → Samsung C&T 19.3% 14.9% 1.3% 23.7% 2.6% 4 Samsu ng C&T → SEC → Samsung SDI → Samsung C&T 4.1% 19.6% 4.8% 5 Samsung C&T → Samsung Life → SEC → Samsung SDI → Samsung C&T Samsung SDI → 19.3% 7.2% 19.6% 4.8% Samsung C&T 6 Samsung C&T → Samsung Life → Samsung F&M → SEC → Samsung SDI → Samsung C&T 19.3% 14.9% 1.3% 19.6% 4.8% 7 Samsung C&T → Samsung Life → Samsung F&M → Samsung C&T Samsung F&M 19.3% 14.9% 1.4% → Samsung C&T Source: Mirae Asset Daewoo Research

Figure 2. Business realignment scenario for cementing control over SEC: Split SEC into investment unit and operating company, then merge the former with Samsung SDS

Related parties Related parties

31.4% 31.4%

Samsung C&T Samsung C&T

4.1% 4.1%+α 4.8% 4.8% +β SEC SEC Samsung SDS Investment unit 22.6% IT services

12.4% (Original 17.1% 22.6% 22.6% 17.1% 22.6% treasury shares) SamsungSDS Samsung SDS SEC Samsung SDS Logistics IT services Operating company Logistics 17.0% 17.0% 4.1% 17.1% 4.8% 17.0%

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 3 June 17, 2016 Holding Companies

Figure 3. Samsung Group bio businesses Figure 4. 2020F revenue target: W1.8tr

SEC Samsung C&T (Wtr) 2.0 Samsung Bioepis 1.8 (005930 KS) (028260 KS) Samsung BioLogics

47.8% 52.1% 1.5 0.85

0.1% Samsung CAGR Quintiles 1.0 62.5% BioLogics

91.2% 0.5 0.95 0.1 8.8% Samsung Biogen Bioepis 0.0 2014 2020F

Note: Biogen holds option to acquire additional stake in Bioepis (up to 49.9%) Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Table 3. Overview of Samsung BioLogics’ capacity No. 1 facility No. 2 facility No. 3 facility No. 4 facility

Capacity 30,000L (5,000L x 6) 150,000L (15,000L x 10) 180,000L TBD Construction May 2011-Jul. 2012 (15 months) Sep. 2013-Feb. 2015 (18 months) To start in Dec. 2015 - period Utilization Received GMP certification in Jun. 2013 Expected to receive GMP certification in 1Q16 - - Started commercial production in Mar. 2015 Expected to be completed in 2017 Highest profitability in the world Other Short construction period Commercial operation expected in - Secured orders for over 70% utilization (2018) Secured orders for 100% utilization 4Q18 Source: Company data, Mirae Asset Daewoo Research

Figure 5. Samsung Group’s expected corporate governance ‰‰‰ Likely merger between Samsung C&T and SEC holdco

Lee Jae-yongand affiliates Merger to be considered after brand ownership issues Samsung C&T are sorted out (Cheil Industries + Samsung C&T)

Samsung New Samsung C&T New Samsung C&T Electronics Samsung intermediate operating company operating company financial holdco holdco (leisure, services) (fashion )

Cheil Samsung Electronics Hotel Shilla Samsung Life Worldwide [005930] [032830] [008770] [030000]

SEMCO Samsung F&M [009150] [000810]

Samsung Heavy Industries Samsung Securities [010140] [016360] Samsung Engineering Samsung Card [028050] [029780]

S1 [012750]

Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 4 June 17, 2016 Holding Companies

APPENDIX 1

Important Disclosures & Disclaimers

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. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. 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 Mirae Asset Daewoo, 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 Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers This report is published by Mirae Asset 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 Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. 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. Mirae Asset 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 Mirae Asset 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 Mirae Asset Daewoo. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. 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.

Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae Asset Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Mirae Asset Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction.

Mirae Asset Daewoo Research 5 June 17, 2016 Holding Companies

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Mirae Asset Daewoo Research 6