August 16, 2019 Korea Morning Focus Company News & Analysis Major Indices Close Chg Chg (%) KEPCO (015760/Trading Buy/TP: W29,000) Upgrade rating & Present TP KOSPI 1,938.37 12.54 0.65 Earnings improve on easing cost pressures KOSPI 200 254.86 2.03 0.80 KOSDAQ 597.15 6.40 1.08 Korean Air (003490/Buy/TP: W30,000) Lower TP Attractive valuation vs. weak earnings momentum Turnover ('000 shares, Wbn) Volume Value Hanwha Corp. (000880/Buy/TP: W34,000) Lower TP KOSPI 687,077 5,076 Plant issue resolved; Revenue to normalize from 4Q19 KOSPI 200 80,776 3,177 KOSDAQ 781,543 4,106 SK Holdings (034730/Buy/TP: W300,000) Lower TP Market Cap (Wbn) Share prices at rock bottom Value KOSPI 1,293,002 LS (006260/Buy/TP: W57,300) Lower TP KOSDAQ 207,101 LSCS on the mend; LS Mtron in need of growth engines KOSPI Turnover (Wbn) Buy Sell Net Partron (091700/Buy/TP: W20,000) Lower TP Foreign 1,528 1,578 -50 Record-high quarterly results Institutional 1,001 1,025 -24 Retail 2,497 2,445 52 Spigen Korea (192440/Buy/TP: W76,000) Lower TP Revenue growth vs. inevitable margin erosion KOSDAQ Turnover (Wbn) Buy Sell Net Amotech (052710/Buy/TP: W23,500) Foreign 415 480 -65 Navigating rough waters Institutional 197 191 5 Retail 3,466 3,403 62 Iljin Materials (020150/Buy/TP: W64,000) Program Buy / Sell (Wbn) Elecfoils in hot demand Buy Sell Net KOSPI 1,187 1,339 -152 JYP Entertainment (035900/Buy/TP: W28,000) Lower TP KOSDAQ 394 447 -53 Margin recovery in 3Q19 will be key Advances & Declines Advances Declines Unchanged Vieworks (100120/Buy/TP: W34,000) Lower TP KOSPI 508 316 70 Hope remains KOSDAQ 807 408 84 Medytox (086900/Buy/TP: W500,000) Lower TP KOSPI Top 5 Most Active Stocks by Value (Wbn) Earnings shock due to litigation and bad debt expenses Price (W) Chg (W) Value Samsung Electronics 43,700 700 372 KODEX 200 Futures Seegene (096530/Buy/TP: W30,000) 8,515 -145 225 Right on track Inverse 2X KODEX Leverage 10,650 155 220 Nongshim (004370/Buy/TP: W320,000) Lower TP Hynix 76,900 2,400 195 KODEX KOSDAQ150 9,485 -185 189 Overseas growth deserves more credit INVERSE Hite Jinro (000080/Trading Buy/TP: W24,000) Look for a turnaround in 2H19 and 2020 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value KMW 58,100 3,600 140 ViroMed 177,100 28,600 111 Samryoong 8,170 1,180 90 SillaJen 13,600 -850 89 ZUMinternet 6,920 590 88 Note: As of August 14, 2019 This document is a summary of a report prepared by Mirae Asset Daewoo Co., Ltd. (“Mirae Asset 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. Mirae Asset 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. Mirae Asset 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. KEPCO (015760 KS) Earnings improve on easing cost pressures Utility 2Q19 review: Smaller-than-expected operating loss of W298.6bn Results Comment For 2Q19, KEPCO reported revenue of W13.07tr (-2.0% YoY). Electricity sales volume August 16, 2019 (+0.1% YoY) and ASP (+0.4% YoY) held steady YoY, but overall revenue remained sluggish, hurt by a decline in other revenue, including overseas revenue. At the operating level, the company recorded a loss of W298.6bn, which was smaller than the losses recorded in 2Q18 (W687.1bn) and 1Q19 (W629.9bn), and better than (Upgrade) Trading Buy the market consensus (loss of W604.8bn). Fuel costs fell 8.1% YoY on lower utilization of coal-fired plants and higher utilization of nuclear reactors (82.8%; +20.1%p YoY). Target Price (12M, W) 29,000 Power purchasing costs also dropped 4.9% YoY as a result of a decline in both purchase volume and prices. Share Price (08/14/19, W) 25,100 Net loss attributable to controlling interests also narrowed YoY to W447.5bn (vs. loss of W949.2bn in 2Q18). Valuation gains related to derivatives declined and net interest Expected Return 16% expenses increased (+10.4% YoY to W449.8bn), but the impact was outweighed by the removal of tangible asset impairments (W701.3bn) recorded last year. On a non- consolidated basis, the company swung to a net profit of W125.4bn (vs. loss of OP (19F, Wbn) 594 W423.9bn in 2Q18). That said, YTD net loss remains higher YoY, at W1.52tr (vs. loss of Consensus OP (19F, Wbn) 593 W1.05tr in 1H18). EPS Growth (19F, %) - Nuclear reactor utilization and price hikes will be key Market EPS Growth (19F, %) -26.5 P/E (19F, x) - 1) Nuclear reactor utilization: Nuclear reactor utilization, which picked up to 82.8% in Market P/E (19F, x) 12.0 2Q19, has recently fallen back below 70%. For 3Q19 as a whole, we forecast utilization KOSPI 1,938.37 to be in the low-70% range, largely unchanged from the 3Q18 level (73.2%). That said, profits should continue to improve YoY, driven by a fall in system marginal prices (SMP) Market Cap (Wbn) 16,113 amid lower oil prices. Shares Outstanding (mn) 642 Free Float (%) 44.7 In 4Q19, we expect nuclear reactor utilization to recover to the high-70% or low-80% Foreign Ownership (%) 26.4 range due to the end of maintenance and resumption of reactor operation. Given that Beta (12M) 0.43 nuclear reactor utilization was 72.8% in 4Q18, profits could improve at a faster rate in 52-Week Low 23,850 4Q19. 52-Week High 35,800 2) Electricity price hikes: Expectations on electricity price hikes could gradually increase, as KEPCO has said it will present a tariff reform proposal by the end of (%) 1M 6M 12M November. That said, if earnings improvements continue, the actual timing of price Absolute -1.4 -25.7 -17.3 hikes could be pushed back, causing uncertainties to linger. Relative 6.2 -14.7 -3.6 Upgrade to Trading Buy and present TP of W29,000 130 KEPCO KOSPI 120 We upgrade our rating on KEPCO from Hold to Trading Buy and present a target price 110 of W29,000 (target P/B of 0.27x), which reflects the company’s potential ROE (2%) based 100 on current oil prices and nuclear reactor utilization. Nuclear reactor utilization, which 90 has recently fallen, should recover in 4Q19, and the decline in SMP is likely to further 80 support earnings improvements. Most importantly, we believe policy risks are already 70 8.18 12.18 4.19 8.19 reflected in the stock’s current valuation (P/B of 0.23x). Mirae Asset Daewoo Co., Ltd. [ Transport/Energy] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 60,190 59,815 60,628 59,660 62,609 64,696 Jay JH Ryu +822-3774-1738 OP (Wbn) 12,002 4,953 -208 594 2,407 2,706 [email protected] OP margin (%) 19.9 8.3 -0.3 1.0 3.8 4.2 NP (Wbn) 7,049 1,299 -1,315 -653 614 794 EPS (W) 10,980 2,023 -2,048 -1,017 957 1,237 ROE (%) 10.2 1.8 -1.9 -0.9 0.9 1.1 P/E (x) 4.0 18.9 - - 26.2 20.3 P/B (x) 0.4 0.3 0.3 0.2 0.2 0.2 Dividend yield (%) 4.5 2.1 0.0 0.0 0.4 0.8 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. Korean Air (003490 KS) Attractive valuation vs. weak earnings momentum Airlines 2Q19 review: Earnings disappoint, with operating loss of W98.6bn Results Comment For 2Q19, Korean Air posted revenue of W3.12tr (+0.5% YoY). In international August 16, 2019 passenger, traffic growth (+4.2% YoY) was in line with our expectation, while yield (+4.1% YoY) surpassed our estimate. In cargo, we believe yield continued to increase despite a decline in load factor. Meanwhile revenue from the aerospace unit grew 9.0% YoY, supporting overall revenue. (Maintain) Buy Earnings disappointed, however, with a larger-than-expected operating loss of W98.6bn (vs. our forecast of a W67.2bn loss and consensus estimate of a W23.7bn Target Price (12M, W) ▼ 30,000 loss). The loss stemmed from a 6% increase in operating expenses, including labor expenses (safety incentives, etc.), and rising fuel costs caused by won depreciation.