GREAT EXPECTATIONS ANNUAL REPORT 2010 GREAT EXPECTATIONS At Kumho Petrochemical Co., Ltd. (KKPC), we have grown along with our customers since our founding in 1970 by providing innovative petrochemical solutions and customer-focused service. Today as a trusted partner and the world’s largest and most competitive producer of synthetic rubbers with world-class technology and products in the fields of synthetic resins, specialty chemicals, electronic chemicals, and building materials, we are now expanding into the fields of energy and advanced materials to drive future growth as we pursue our vision of being the flagship of a global leading chemical group. CONTENTS 06 08 10 We finished the first decade of the 21st century on high note. 06 21 48 69 WE fiNished the first decade SeveN reasoNS why KKPC is lookiNG Corporate FINANcial of the 21st ceNtury ON high Note. forward to the future. CitiZENship Review 06 Sales Revenue 22 Downstream Industries are Booming 49 Business Ethics 70 Independent Auditors’ Report 08 Operating Income 24 The Synthetic Rubber Price Spread is Growing 50 Environmental Management 72 Non-Consolidated Statements of Financial Position 10 Stock Price 26 Uncertainty is History 52 Social Responsibility 74 Non-Consolidated Statements of Operations 28 Growing Leadership in Synthetic Rubbers 76 Non-Consolidated Statements of Appropriation 30 Rising Gains on Valuation of Equity-Method of Retained Earnings 13 Financial Highlights Investments 77 Non-Consolidated Statements of Changes in Equity 15 Chairman’s Message 32 Full-Steam Ahead for Yeosu Energy II 54 79 Non-Consolidated Statements of Cash Flows Review of 16 Presidents’ Message 34 Improving Financial Soundness 84 Consolidated Statements of Financial Position OperatioNS 20 Vision & Mission 86 Consolidated Statements of Operations 55 2010 Overview 88 Consolidated Statements of Changes in Equity 56 Synthetic Rubbers 90 Consolidated Statements of Cash Flows 36 60 Synthetic Resins MANagemeNT 64 Other Businesses review 68 The Year Ahead 94 Corporate History 37 Corporate Governance 96 Chemical Affiliates 40 Shareholder Value 97 Global Partnerships 43 Research & Business Development 98 Global Network 46 Risk Management Seven reasons why KKPC is looking forward to the future. 22 24 26 28 30 32 34 KUMHO PETROCHEMICAL ANNUAL REPORT 2010 04 Great EXpectatioNS 05 THE YEAR 2010 WILL BE REMEMBERED AS ONE OF THE MOST MEMORABLE YEARS IN OUR MORE THAN 40 YEARS IN BUSINESS. As we shared in our 2009 annual report, “Back to basics again” was our All of the above were instrumental in dispelling excessive market concerns management focus in 2010 as we concentrated on our most fundamental task of based on our poor 2009 performance and internal and external uncertainties. ensuring the success of our customers. By delivering superior access, tailored In 2010, we delivered results that no one could have imagined, finishing the solutions, constant innovation, and competitive prices, our efforts to maximize first decade of the 21st century on high note. Today, we are preparing with great the profitability of our customers have steadily borne fruit. expectations and confidence for the new decade ahead. From a business perspective, we sharpened our focus on our core competency of chemicals. We separated ourselves from the Kumho Asiana Group and focused our resources on our core businesses as we laid a firm foundation that will support us in our new vision of becoming a truly world-class chemical group. KUMHO PETROCHEMICAL ANNUAL REPORT 2010 06 GREAT EXPECTATIONS 07 FROM A GROWTH PERSPECTIVE, OUR SALES HAVE GROWN 294% OVER THE PAST 10 YEARS. WE CLOSED 2010 BY SETTING A NEW SALES RECORD OF KRW 3,886 BILLION. SALES REVENUE (in KRW billions) 4,000 3,886 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 KUMHO PETROCHEMICAL ANNUAL REPORT 2010 08 Great EXpectatioNS 09 FROM A PROFITABILITY PERSPECTIVE, OUR OPERATING INCOME HAS GROWN 300% OVER THE PAST DECADE, HITTING A NEW HIGH OF KRW 360 BILLION IN 2010. OperatiNG INCOME (in KRW billions) 400 360 350 300 250 200 150 100 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 KUMHO PETROCHEMICAL ANNUAL REPORT 2010 10 Great EXpectatioNS 11 FROM A MARKET VALUATION PERSPECTIVE, OUR SHARES HAVE RISEN 3,324% SINCE 2001, CLOSING 2010 AT AN ALL-TIME HIGH OF KRW 90,400. IN COMPARISON, KOREA’s Stock PRICE (in KRW, as of December 31, 2010) BENCHMARK KOSPI INDEX HAS RISEN A MERE 196% DURING THE SAME PERIOD. 90,400 90,000 KKPC 80,000 70,000 60,000 50,000 40,000 30,000 20,000 KOSPI 10,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Great EXpectatioNS 13 THESE RESULTS PROVE THAT OUR FINANCIAL STRATEGY OF GETTING BACK TO HIGHLIGHTS THE BASICS TO FOCUS ON OUR CUSTOMERS AND OUR CORE CHEMICALS BUSINESSES WAS WITHOUT A DOUBT THE RIGHT CHOICE. In KRW Billions 2010 2009 2008 INCOME STATEMENTS Sales 3,886.3 2,801.7 3,182.5 Operating Income 359.6 116.2 281.3 Income before Income Tax 595.1 -841.9 -26.7 Net Income 471.4 -614.8 -19.7 BALANCE SHEETS Total Assets 3,435.8 3,199.9 3,714.8 Total Liabilities 2,555.4 2,664.8 2,551.7 Total Equity 880.3 535.1 1,163.1 Net Financing Cost 116.8 105.6 86.3 KEY FIGURES Operating Margin 9.3% 4.1% 8.8% Debt-to-Equity Ratio 290.3% 498.0% 219.4% Earnings per Share in KRW 23,611 -31,003 -1,118 Return on Equity 66.6% -72.4% -1.9% Interest Coverage Ratio 3.1x 1.1x 3.3x Dividend per Ordinary Share in KRW 1,000 - 750 Capital Expenditures 173.3 198.1 403.7 Sales Operating Income Net Income In KRW Billions In KRW Billions In KRW Billions 3,886 4,000 400 600 360 471 3,500 350 400 3,183 3,000 300 200 We set new records for sales and profitability as we made our strong 2,802 281 2,500 250 0 fundamentals even stronger. More importantly, these results are just the 2,000 200 -20 -200 1,500 150 -400 starting point for a new beginning. While we are proud of our achievements, we 116 1,000 100 -600 -615 believe we can do even better as we continue step-by-step toward our ambitious 500 50 -800 0 0 -1,000 vision of becoming a global leading chemical group. 2008 2009 2010 2008 2009 2010 2008 2009 2010 Great EXpectatioNS 15 Chairman’s MESSAGE Dear Stakeholder, Change drives growth. Our remarkable growth in 2010 that no one could have predicted is proof of this. As we work to build an even stronger future, our company has transformed itself, achieving the best performance in our history in the process. In addition to recording our highest sales, operating income, and net income to date, we focused on chemicals— the industry we know best and the reason for our existence—as we set our sights on an ambitious vision of becoming a global leading chemical group by 2020. The secret behind our success in 2010 was a combination of the right strategy and the passionate, dedicated employees who systematically executed it. I would like to take this opportunity to express my great appreciation to each member in the over 1,000-strong KKPC family. I would also like to thank our loyal customers for purchasing our products and services, our shareholders for believing in us through good times and bad, and all our partners for helping make us one of the world’s most competitive chemical makers. While we’re proud of our accomplishments, we are not content rest on our laurels. As in every ecosystem, if you’re standing still in the business world, you’re being left behind. Step-by-step, we are now heading toward the next level. We are better prepared for the future than we have ever been before. We have the right people, resources, and market competitiveness. And as a global corporate citizen, we will do everything in our power to protect the environment and fulfill our responsibilities to society. Thank you once again for your interest in and support of KKPC. We invite you to join us, our customers, employees, and local communities as we prosper together on our journey to become a global leading chemical group. Chan-Koo Park Chairman & CEO Kumho Petrochemical KUMHO PETROCHEMICAL ANNUAL REPORT 2010 16 Great EXpectatioNS 17 Presidents’ MESSAGE Dear valued shareholder, customer, or partner, When our core businesses underperformed in 2009 due to the global economic downturn and significant losses on valuation of equity-method investments from unprofitable consolidated subsidiaries led to our largest net loss to date, markets and investors raised their voices in alarm. A year later, we achieved far more than a turnaround as we delivered our best sales, operating income, and net profit in our history in 2010. Our share prices—the barometer of our market value—soared 338% during the year to reach an all-time-high of KRW 90,400, dispelling market concerns and raising expectations to the next level. The economic recovery that began in emerging markets is now gradually spreading to the US, Europe, and other developed markets. That said, sharply rising oil and other raw materials prices, democracy movements in Egypt, Libya, and elsewhere, and the general state of affairs in Africa and the Middle East are all growing sources of uncertainty and reminders that we cannot take future growth for granted. Let us backtrack for a moment to report our 2010 performance before I talk about our goals and major strategies for the future.