February 4, 2020 Korea Morning Focus Company News & Analysis Major Indices Close Chg Chg (%) LG Chem (051910/Buy/TP: W500,000) Raise TP KOSPI 2,118.88 -0.13 -0.01 Battery poised for a re-rating; Maintain as our top pick KOSPI 200 285.05 0.52 0.18 KOSDAQ 646.85 4.37 0.68 NCsoft (036570/Buy/TP: W910,000) Watch for potential earnings surprise in 1Q20 Turnover ('000 shares, Wbn) Volume Value Industrial Bank of Korea (024110/Buy/TP: W14,000) Lower TP KOSPI 827,336 8,069 More exposed to low interest rates than peers due to lack of portfolio KOSPI 200 109,045 5,224 KOSDAQ 1,177,906 6,082 diversification Market Cap (Wbn) BNK Financial Group (138930/Buy/TP: W8,300) Lower TP Value ROE to fall on continued NIM contraction KOSPI 1,427,133 KOSDAQ 234,040 DGB Financial Group (139130/Buy/TP: W9,000) Lower TP KOSPI Turnover (Wbn) Outsized impact of falling bond yields Buy Sell Net Foreign 2,029 2,337 -308 Economy & Strategy Update Institutional 2,051 1,881 170 Retail 3,914 3,796 118 Fixed Income Monthly KOSDAQ Turnover (Wbn) Coronavirus outbreak may not necessarily prompt rate cuts Buy Sell Net Foreign 933 779 154 Institutional 309 235 75 Retail 4,808 5,037 -229 Program Buy / Sell (Wbn) Buy Sell Net KOSPI 1,904 1,973 -69 KOSDAQ 913 737 176 Advances & Declines Advances Declines Unchanged KOSPI 295 573 38 KOSDAQ 638 629 80 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 57,200 800 1,293 KODEX 200 Futures 6,465 -15 552 Inverse 2X KODEX Leverage 13,505 5 517 Digital Power 7,400 1,470 357 Communication Hynix 94,700 1,200 346 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Welcron 6,600 -1,930 375 OKONG Corp. 8,150 -1,450 214 ECOPROBM 64,000 11,100 182 Cheil Bio 8,400 250 116 HLB 96,700 4,000 116 Note: As of February 03, 2020 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. LG Chem (051910 KS) Battery poised for a re-rating; Maintain as our top pick Chemicals Battery poised for a re-rating; Raise TP and maintain as our top pick Company Report EV market to accelerate on Tesla effects: While LG Chem’s stock has made modest February 4, 2020 gains on the back of Tesla’s recent rally, we believe the company’s battery business is still undervalued and on track for a full-fledged re-rating. Tesla’s strong performance has been driven by the electric vehicle (EV) maker’s robust sales in Europe, and by expectations that the launch of the Model Y and startup of the Chinese plant will make it even more competitive in 2020. This inevitably means traditional automakers will (Maintain) Buy have to ramp up their EV strategies. Target Price (12M, W) ▲ 500,000 Batteries deserve high valuation: There are only a limited number of battery suppliers due to the industry’s high entry barriers, and leading battery makers are making Share Price (02/03/20, W) 350,000 meaningful advances. In China, market leader CATL has been the only battery supplier to continuously expand its market share. This has led to a sharp rise in share price and Expected Return 43% a high valuation (2020F P/E of 57x) for the Chinese company, which we believe reflects the sophisticated technology and extensive experience in volume production required to make batteries. OP (19F, Wbn) 896 Raise TP and maintain as our top pick: We raise our target price on LG Chem by 9% to Consensus OP (19F, Wbn) 1,061 W500,000 and maintain the stock as our top pick. We adjusted up our valuation of the EPS Growth (19F, %) -78.7 EV battery business from W23tr to W28tr (from 2023F EV/EBITDA of 5x to 6x). With Market EPS Growth (19F, %) -34.6 CATL’s market value rising to W52tr, we see upside potential to LG Chem’s value, given P/E (19F, x) 79.3 its stronger growth potential and technology. Market P/E (19F, x) 14.8 4Q19 review: ESS-related expenses weigh on earnings; Management KOSPI 2,118.88 considering a number of options, including battery spin-off Market Cap (Wbn) 24,707 4Q19 operating loss of W27.5bn: For 4Q19, LG Chem posted an operating loss of Shares Outstanding (mn) 78 W27.5bn, missing the consensus. This was largely attributable to around W300bn in Free Float (%) 64.3 ESS-related one-off expenses. Stripping away this item, earnings were actually better Foreign Ownership (%) 38.5 than market expectations. The EV battery unit neared the breakeven point. Beta (12M) 1.10 52-Week Low 289,000 Conference call highlights: On its earnings call, LG Chem reaffirmed its 2020 guidance for EV batteries and said that it expects yields at its European battery plant to 52-Week High 394,500 normalize in 2H20. Regarding the rumored spin-off of the battery business, the (%) 1M 6M 12M company said that it was considering a number of ways to enhance shareholder value. Absolute 12.5 5.6 -4.9 Relative 15.6 -0.4 -1.1 Quarterly earnings to improve after bottoming in 1Q20 OP to remain sluggish (W66bn) in 1Q20 but improve in subsequent quarters: We 110 LG Chem KOSPI expect earnings to remain sluggish in 1Q20. In particular, chemical earnings are likely 100 to worsen materially on a sharp decline in chemical spreads, coupled with some 90 production disruptions caused by the coronavirus outbreak. In batteries, the operation 80 of the new European line in 1Q20 should widen related losses. That said, absent one- 70 off items, we believe the chemicals unit will still be able to deliver a mid-single-digit OP 60 margin even under current spread levels. Battery earnings should also gradually 1.19 5.19 9.19 1.20 improve from 2Q20 as yields pick up. Overall, we expect quarterly earnings to improve after hitting a bottom in 1Q20. Mirae Asset Daewoo Co., Ltd. [Chemicals/Oil Refining/EV Batteries] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 20,659 25,698 28,183 28,625 37,832 43,239 Yeon-ju Park +822-3774-1755 OP (Wbn) 1,992 2,928 2,246 896 1,286 2,776 [email protected] OP margin (%) 9.6 11.4 8.0 3.1 3.4 6.4 Jongsoo Lee NP (Wbn) 1,281 1,945 1,473 313 762 1,844 +822-3774-1380 EPS (W) 17,336 24,854 18,812 4,005 9,734 23,555 [email protected] ROE (%) 9.5 12.9 8.9 1.8 4.4 10.0 P/E (x) 15.1 16.3 18.4 79.3 36.0 14.9 P/B (x) 1.4 1.9 1.6 1.4 1.5 1.4 Dividend yield (%) 1.9 1.5 1.7 0.6 1.1 1.7 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. February 4, 2020 LG Chem Table 1. Quarterly and annual earnings (Wbn) 1Q19 2Q19 3Q19 4Q19P 1Q20F 2Q20F 3Q20F 4Q20F 2019P 2020F 2021F Revenue 6,639.1 7,177.4 7,347.3 7,461.2 8,140.6 8,967.3 10,091.7 10,632.4 28,625.0 37,832.0 43,238.9 Chemicals 3,748.8 3,936.4 3,964.8 3,898.0 4,391.8 4,416.9 4,482.1 4,457.1 15,548.0 17,747.9 17,639.0 Advanced materials 1,233.5 1,253.5 1,217.9 1,201.1 809.2 809.2 809.2 809.2 4,906.0 3,236.7 3,236.7 Battery 1,650.1 2,009.4 2,210.2 2,480.6 2,541.8 3,391.8 4,527.9 5,125.3 8,350.3 15,586.8 21,033.6 Red bio 143.5 154.0 165.9 164.4 157.9 169.4 182.5 180.8 627.8 690.6 759.6 Green bio 228.0 169.6 93.7 98.8 240.0 180.0 90.0 60.0 590.1 570.0 570.0 Operating 275.4 267.5 380.3 -27.5 66.0 262.9 396.6 560.2 895.6 1,285.7 2,775.7 profit Chemicals 398.6 382.2 321.2 315.8 129.3 262.7 310.8 310.1 1,417.8 1,012.9 1,312.4 Advanced materials 3.6 19.0 32.8 8.3 3.9 3.9 3.9 3.9 63.7 15.4 26.2 Battery -147.9 -128.0 71.2 -249.6 -65.3 18.0 93.2 272.6 -454.3 318.6 1,396.9 Red bio 11.8 10.9 16.1 -1.6 3.2 3.4 3.6 3.6 37.2 13.8 15.2 Green bio 38.2 9.1 -11.1 -15.3 45.0 25.0 -15.0 -30.0 20.9 25.0 25.0 Pretax profit 279.6 192.9 243.9 -155.5 9.0 198.6 324.9 483.5 560.9 1,016.0 2,458.5 Net profit 194.5 68.1 128.6 -77.6 6.8 148.9 243.6 362.6 313.5 762.0 1,843.9 Source: Company data, Mirae Asset Daewoo Research estimates Table 2.