April 9, 2015 KOREA Sector News & Analysis Major Indices Close Chg Chg (%) Steel (Overweight) KOSPI 2,058.87 -0.39 -0.02 Hyundai Steel announces merger with Hyundai Hysco KOSPI 200 258.33 -0.18 -0.07 KOSDAQ 676.96 8.93 1.34 Economy & Strategy Update Turnover ('000 shares, Wbn) April MPC Volume Value KOSPI 519,429 5,805 Expectations for a rate cut remain intact KOSPI 200 84,005 3,924 KOSDAQ 579,044 3,700 Market Cap (Wbn) Value KOSPI 1,285,499 KOSDAQ 180,759 KOSPI Turnover (Wbn) Buy Sell Net Foreign 1,421 1,349 72 Institutional 963 1,227 -264 Retail 3,371 3,188 184 KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 235 185 50 Institutional 179 186 -7 Retail 3,275 3,317 -42 Program Buy / Sell (Wbn) Buy Sell Net KOSPI 839 887 -49 KOSDAQ 35 39 -4 Advances & Declines Advances Declines Unchanged KOSPI 455 359 57 KOSDAQ 613 369 58 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 1,483,000 4,000 251 Hynix 41,900 -700 234 KODEX LEVERAGE 11,435 -25 155 LG Chem 254,000 12,500 128 NHN 653,000 8,000 115 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Daum Communications 110,300 3,200 152 Sansung P&C 91,800 11,900 136 GOLFZON 15,450 2,000 131 Coreana Cosmetics 7,920 380 89 Celltrion 73,500 -1,200 83 Note: As of April 9, 2015 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. Steel (Overweight/Maintain) Hyundai Steel announces merger with Hyundai Hysco Hyundai Steel to merge with Hyundai Hysco: Deal to be finalized on July 1 st , 2015 News Comment Merger likely to create only limited synergies April 9, 2015 Recommended strategy: Buy POSCO st Daewoo Securities CCo.,o., Ltd. Hyundai Steel to merge with Hyundai Hysco; Deal to be finalized on July 1 [Steel/Non-ferrous metal] On April 8th, Hyundai Steel announced it has decided to merge with Hyundai Hysco. Hyundai Hysco shareholders will receive 0.8577607 shares of Hyundai Steel for each existing Hyundai Seung-hun Jeon Hysco share they own. Dissenting shareholders will be able to exercise appraisal rights at +822-768-2713 W72,100 per share for Hyundai Steel and W63,552 per share for Hyundai Hysco, which are, [email protected] respectively, 9.2% and 6.4% lower than current share prices. The 2,667,762 shares Hyundai Hysco owns in Hyundai Steel will be allocated to Hyundai Hysco shareholders, which will have the same impact as cancelling 2% of treasury shares. As a result, the merged company will have 133,445,785 shares outstanding (rather than 136,113,547 shares). Merger likely to create only limited synergies In our view, the merger effects are more psychological than tangible. While the merger does have some benefits, we also see several negative effects that could partially offset the positives. We believe potential merger synergies between the two companies were mostly realized after Hyundai Hysco spun off its cold-rolled coil (CRC) division to Hyundai Steel in December 2013. We think the latest merger will have limited benefits, given the likelihood of 1) an increase in current Hyundai Hysco employees’ pay (which is lower than that of Hyundai Steel’s employees), and 2) margin deterioration at the steel pipe business due to the use of Hyundai Steel’s relatively expensive hot-rolled coil (HRC). We estimate the merger will boost Hyundai Steel’s EPS by 4.9% (based on the 2014 figure), but mainly as a result of the 2% treasury stock retirement. Such an impact appears to have been mostly priced in after yesterday’s rally. 2) Due to the removal of internal transactions, operating profit growth is likely to outpace revenue growth following the merger, pushing OP margin higher. But in the long term, we view this as a negative to pricing, as a seemingly high margin may work to the company’s disadvantage at a time when major customers, most notably Hyundai Motor Group (HMG), are struggling with falling margins. Recommended strategy: Buy POSCO Hyundai Steel’s and Hyundai Hysco’s stocks could rise further, in line with the overall advance of the steel sector. In the short run, however, we believe POSCO is the best bet in the sector. Hyundai Steel’s stock has gained 11.2% in the past month on merger expectations, while POSCO’s stock has fallen 7.2% during the same period amid poor industry conditions and prosecutors’ probe into the steelmaker’s former chairman. We find it hard to see Hyundai Steel’s stock continuing to rise on the merger issue alone, considering that the actual benefits of the tie-up with Hyundai Hysco will be limited. The challenging earnings outlook for HMG also poses a headwind to the steelmaker’s stock. In 4Q13, hopes of a merger similarly drove Hyundai Steel higher, pushing the stock’s P/B far above POSCO’s. But, after the deal was announced, Hyundai Steel’s P/B converged with that of POSCO in the subsequent quarter. Thus, in the near term, we believe POSCO shares are likely to catch up. We see little differentiation between Hyundai Steel’s and Hyundai Hysco’s shares, as prices will move toward the pre-set merger ratio. Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including tthehe U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. April MPC Expectations for a rate cut remain intact Expectations for a rate cut in 2Q remain intact; Bond market to stay favorable until May MPC meeting Fixed Income Report The April MPC meeting yielded several noteworthy developments. In particular, we note April 9, 2015 that: 1) the BOK revised down its 2015 real GDP estimate (to 3.1%) and CPI estimate (0.9%); 2) a minority opinion (voicing support for a rate cut) emerged; 3) the BOK Daewoo Securities CCo.,o., Ltd. emphasized the government’s role in reviving the economy; 4) some members expressed confidence in a domestic economic recovery; and 4) the BOK indicated a [Fixed Income] willingness to depend on economic data. Yeo-sam Yoon In light of the BOK’s base rate cut in March, substantial downward revisions to +822-768-4022 economic estimates were inevitable. Some market watchers predicted that real GDP [email protected] and CPI estimates would be adjusted to below the 3.0% and 1.0% levels. We projected that the BOK would lower its 2015 real GDP and CPI estimates to 3.1% and 1.0%, respectively, considering the bank’s previous stance. Given that some expected the bank to lower its GDP growth estimate to below 3.0%, its actual revision—to 3.1%, as we projected—can be expected to weigh on the bond market to some degree. Meanwhile, the BOK lowered its inflation estimate more sharply than we expected, pointing to the central bank’s concerns about the current low- inflation environment. These concerns were also reflected in its April report on monetary policy direction, which stated that the negative GDP gap would persist for a “considerable period of time.” In answer to a question about possible government stimulus measures, the BOK governor said he would agree with the idea of introducing a supplementary budget if the economic recovery appeared to be threatened by a tax revenue shortfall, indicating that fiscal measures are still needed to stabilize the economy. The BOK governor maintained his positive stance on the economy, but also sounded caution over the economic outlook. Despite the better-than-anticipated February industrial activity reading, overall economic indicators for March are likely to be dragged down by a sharp decline in daily average export growth and sluggish wholesale and retail sales. In our view, the negative outlook for March economic data is why the BOK governor said the central bank must check the sustainability of domestic demand growth to confirm the economic recovery. With regard to exports, the governor acknowledged the unfavorable environment, including the decline in petrochemical product sales resulting from the oil price downtrend, the weak yen, and the investment slowdown in China. He also acknowledged, albeit indirectly, the burden of the escalating currency war, saying that he is paying keen attention to the yen’s movements . Based on his comments, we forecast Korea’s exports to face an uphill battle throughout 2015. The governor’s comments following the MPC meeting were in line with his recent announcement that the BOK’s policy decisions would be data-dependent, similar to the US Fed.