March 28, 2013 KOREA Morning Company News & Analysis Major Indices Close Chg Chg (%) Hyundai Steel (Buy/TP: W110,000) KOSPI 1,993.44 9.74 0.49 (Conference feedback) OP and net profit to bottom in 1Q KOSPI 200 261.86 1.32 0.51 KOSDAQ 548.72 -1.18 -0.21 Economy & Strategy Update Turnover ('000 shares, Wbn) Market Strategy Volume Value KOSPI 362,611 3,905 Market begins to heed North Korean issues KOSPI 200 63,430 3,032 KOSDAQ 443,319 2,070 Market Cap (Wbn) Value KOSPI 1,154,759 KOSDAQ 121,995 KOSPI Turnover (Wbn) Buy Sell Net Foreign 865 1,078 -213 Institutional 1,342 977 365 Retail 1,661 1,814 -153 KOSDAQ Turnover (Wbn) Buy Sell Net Foreign 94 104 -10 Institutional 120 125 -5 Retail 1,832 1,813 19 Program Buy / Sell (Wbn) Buy Sell Net KOSPI 989 777 212 KOSDAQ 19 19 -1 Advances & Declines Advances Declines Unchanged KOSPI 399 407 73 KOSDAQ 399 517 66 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value KODEX LEVERAGE 12,620 205 443 Samsung Electronics 1,504,000 -5,000 387 KODEX INVERSE 7,480 -65 206 Kia Motors 56,900 1,200 145 Hyundai Motor 224,000 3,500 122 KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Easy Bio System 4,100 300 90 KOREA COMPUTER INC 3,700 210 39 Speco 3,630 300 35 Diostech 11,650 -300 33 Dodram Bio & Feed 1,270 55 33 Note: As of March 27, 2013 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. Hyundai Steel (004020 KS/Buy) (Conference feedback) OP and net profit to bottom in 1Q Issue Comment n 1Q13 earnings already downbeat; No negative earnings surprise n March 28, 2013 Both OP and net profit to bottom in 1Q n Maintain Buy with TP of W110,000 Daewoo Securities Co., Ltd. What’s new: 1Q13 earnings already downbeat; No negative earnings surprise Steel/Non-ferrous metal We forecast Hyundai Steel’s 1Q consolidated operating profit to come in at W123.5bn, Seung-hun Jeon slightly below the market consensus (W130.2bn as of reports published after February). We +822-768-2713 do not think the miss will come as a negative earnings surprise, however, as the market [email protected] consensus was already significantly downbeat (as low as W109.2bn). Still, F/X-translation Aiden Lee losses from the steelmaker’s US$3.8bn worth of foreign currency-denominated debt are likely +822-768-3297 to result in a modest 1Q net loss. [email protected] Catalyst: Earnings to steadily recover after bottoming in 1Q We expect both operating profit and net profit to steadily pick up after bottoming in 1Q. Our full-year operating profit estimates suggest a weak 1H, followed by a strong 2H. We believe a number of factors support our expectations of an earnings recovery from 2Q. We look for a reduced fixed cost burden on the back of normalizing HRC production (since March 13th, following the completion of massive maintenance work). We also see higher ASP on an improved product mix. Furthermore, we believe Japan’s planned hike in electricity prices on April 1 will push up the production costs of long products at Japanese competitors by roughly W20,000/tonne, putting upside pressure (around 3%) on export prices to Korea. We also expect sales volume to grow, fueled by the resumption of normalized HRC production, and seasonal strength in long products. Additionally, we project robust domestic HRC demand, as Hyundai Hysco’s new CRC facility (annual capacity: 1.5mn tonnes) is set to go online this May. We note that HRC contributes 43% of Hyundai Steel’s total revenues. We also believe the US$/W rate is more likely to resume its downtrend (as opposed to remaining above W1,100). This implies little risk of additional F/X-translation losses. Valuation: Absent an economic shock, shares are unlikely to fall further Currently, Hyundai Steel’s market cap is estimated at W6.8tr, a level we find too cheap even after factoring in the decline in 2013F net profit. We think the market is already pricing in this net profit contraction, and thus see minimal downside risks to current share prices. We note that the steelmaker’s stake in Hyundai Mobis alone is valued at W1.7tr, equivalent to 25% of Hyundai Steel’s market cap (we also note there is very little incentive for the firm to keep that stake). FY (Dec.) 12/10 12/11 12/12 12/13F 12/14F 12/15F Revenue (Wbn) 10,236 15,260 14,146 13,680 16,708 16,708 OP (Wbn) 1,059 1,304 886 1,241 1,548 1,558 OP margin (%) 10.4 8.6 6.3 9.1 9.3 9.3 NP (Wbn) 922 747 796 945 1,039 1,013 EPS (W) 10,812 8,758 9,335 11,071 12,177 11,872 ROE (%) 12.3 8.5 8.4 9.1 9.2 8.2 P/E (x) 11.5 10.9 9.4 7.3 6.6 6.8 P/B (x) 1.3 0.9 0.8 0.6 0.6 0.5 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. Market Strategy Market begins to heed North Korean issues DMZ fracas frightens investors, briefly The KOSPI lost nearly 20 points in early trading on Wednesday when a newsflash alerted Strategy Report market watchers to heightened tensions in the demilitarized zone (DMZ) between the March 27, 2013 two Koreas. Around 9:20 a.m. (Korean time), the domestic online media reported that South Korean troops were placed on highest alert after a South Korea soldier threw a grenade at what appeared to be intruders from the North in the wee hours. Although Daewoo Securities Co., Ltd. the alert (Jinedogae 1) was lifted after no signs of intruders were found, it has become increasingly clear that North Korean issues can no longer be ignored as non market- Strategist moving factors. Historically, North Korea’s provocations have not had lasting impacts on Chi-hwan Han Korea’s financial markets. +822-768-3053 [email protected] The aforementioned newsflash sent the KOSPI tumbling to a daily low of 1,973p from around 1,990p in early trade. The index closed the day at 1,993.44, up 9.74p. On Tuesday, North Korea assumed its “number-one combat-ready posture,” which appears to be the nation’s highest level of combat readiness, threatening to hit targets in the US as well as in South Korea. The old saying “a barking dog never bites” carries some amount of truth. But the problem in this region is that there are no forceful arbitrators. China, which is believed to have the longest lever in North Korean affairs, is likely to show only the appearance of taking part in the economic sanctions imposed on the North. After all, North Korea is its long-time ally and serves as a buffer state in its standoff with the US in the Asia-Pacific region. The third nuclear test by the North in February could end up proving to be a game- changer as the outcast nation raises the stakes in its negotiations with the US, which has been trying in vain to dismantle the North’s nuclear weapons program. Inter-Korean tensions should remain high for the time being as Pyongyang’s new leader Kim Jung-un should continue to rattle his saber as a way to consolidate his power base, although he is highly unlikely to trigger an all-out war against South Korea. For investors, frosty inter- Korean relations should mean more volatility. Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. Key Universe Valuations March 28, 2013 ※All data as of close March 26, 2013, unless otherwise noted. 12F Earnings growth Mkt Cap Price P/E (x) P/B (x) ROE (%) Ticker Company Div Yield OP EPS (Wbn) (W) (%) 12F 13F 12F 13F 12F 13F 12F 13F 12F 13F 005930 Samsung Electronics 221,538 1,504,000 0.5 85.7 32.6 73.3 29.5 11.2 8.5 2.2 1.7 21.7 22.9 005380 Hyundai Motor 49,342 224,000 0.9 7.4 -7.8 11.8 -6.4 7.3 8.0 1.4 1.2 20.8 16.3 012330 Hyundai Mobis 30,274 311,000 0.7 8.6 9.6 17.7 1.1 7.9 8.4 1.8 1.6 23.2 19.4 005490 POSCO 28,510 327,000 2.7 -36.2 41.3 -21.6 25.9 12.2 9.1 0.7 0.7 6.5 7.8 000270 Kia Motors 23,065 56,900 1.2 2.3 -16.2 11.5 -11.0 5.9 6.7 1.5 1.2 25.5 18.6 032830 Samsung Life 20,900 104,500 2.0 33.2 0.0 23.0 4.2 17.9 17.2 1.1 1.0 6.2 6.0 000660 SK Hynix 20,443 29,450 - - - - - 13.7 2.0 2.1 - 14.4 055550 Shinhan Financial Group 18,921 39,900 2.0 -18.2 -1.5 -14.1 2.3 8.1 8.2 0.7 0.7 9.2 8.7 051910 LG Chem 17,893 270,000 1.2 -32.2 8.6 -30.1 9.1 16.3 12.2 2.3 1.7 14.8 14.3 009540 Hyundai Heavy 16,264 214,000 -56.4 20.9 -63.3 55.1 19.6 11.2 1.2 1.0 5.7 8.4 096770 SK Innovation 15,164 164,000 1.8 -42.6 44.0 -62.6 41.2 13.8 9.2 1.2 1.0 7.9 10.4 105560 KB Financial Group 14,295 37,000 1.6 -19.5 3.6 -11.8 3.5 7.2 6.8 0.6 0.5 8.5 8.2 066570 LG Electronics 13,485 82,400 0.7 301.4 17.0 - 1075.9 199.3 19.0 1.2 1.2 0.5 6.1 035420 NHN 12,994 270,000 0.3 13.2 26.0 22.1 16.8 19.9 20.2 3.9 3.8 29.8 27.7 023530 Lotte Shopping 12,313 391,000 0.4 -15.3 11.7 8.4 12.6 10.8 10.0 1.1 1.0 7.0 7.4 034220 LG Display 11,540 32,250 - 19.6 - 263.8 47.6 13.6 1.1 1.1 2.3 8.0 003550 LG Corp.