May 3, 2019 Korea Morning Focus Company News & Analysis Major Indices Close Chg Chg (%) SK Networks (001740/Buy/TP: W7,000) KOSPI 2,212.75 9.16 0.42 Margin gains through business synergies are critical KOSPI 200 286.12 1.20 0.42 KOSDAQ 760.38 5.64 0.75 Lotte Data Communication (286940/Buy/TP: W63,000) HIT merger to create additional business opportunities Turnover ('000 shares, Wbn) Volume Value GS Retail (007070/Buy/TP: W48,000) KOSPI 358,951 5,027 1Q19 review: Convenience stores showing signs of improvement KOSPI 200 83,515 3,482 KOSDAQ 769,128 4,248 DGB Financial Group (139130/Buy/TP: W12,000) Market Cap (Wbn) Underlying earnings power enhanced by business diversification Value KOSPI 1,467,463 BNK Financial Group (138930/Buy/TP: W8,900) KOSDAQ 260,785 Full confidence will be recovered after 4Q results, but the current KOSPI Turnover (Wbn) performance is not that bad Buy Sell Net Foreign 1,531 1,463 68 Sector News & Analysis Institutional 1,269 1,252 17 Retail 2,186 2,288 -102 Airlines (Overweight) KOSDAQ Turnover (Wbn) China route allocation results: LCC share increases to 28.1% Buy Sell Net Foreign 370 303 68 Institutional 176 192 -17 Retail 3,674 3,714 -39 Program Buy / Sell (Wbn) Buy Sell Net KOSPI 1,246 1,137 109 KOSDAQ 332 266 66 Advances & Declines Advances Declines Unchanged KOSPI 515 289 81 KOSDAQ 842 340 89 KOSPI Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Samsung Electronics 45,900 50 395 Hynix 80,700 1,700 249 KODEX Leverage 13,530 115 193 Dongsung Pharm. 28,150 0 187 KODEX 200 Futures 6,845 -50 155 Inverse 2X KOSDAQ Top 5 Most Active Stocks by Value (Wbn) Price (W) Chg (W) Value Hyundai IT 18,400 1,800 404 Optomagic CO. 5,270 1,020 229 KRTNet Corporation 5,090 690 154 Crystal New Material 2,630 605 129 PROSTEMICS 6,750 420 82 Note: As of May 02, 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. SK Networks (001740 KS) Margin gains through business synergies are critical Rental 1Q19 review: Margins remain subdued Results Comment For 1Q19, SK Networks (SKN) delivered consolidated revenue of W3.3tr (-5.6% May 3, 2019 YoY, -7.4% QoQ) and operating profit of W35bn (+42.5% YoY, -31.1% QoQ), which was slightly behind the consensus (W39bn). By business segment, the ICT and energy retail divisions saw profits decline QoQ on unfavorable comparisons, and the trading division also remained soft, hurt by fewer transactions in the Middle East. On the other hand, the car-life division posted strong top-line growth thanks to the AJ Rent-a-Car (Maintain) Buy acquisition. SK Magic also continued top-line growth on the back of an increased number of accounts. On the non-operating side, interest expenses increased due to 1) Target Price (12M, W) 7,000 changes in lease accounting standards from 2019 and 2) the AJ Rent-a-Car acquisition. Share Price (05/02/19, W) 5,790 Car rental market to consolidate into two-player game; business synergies yet to materialize Expected Return 21% In 1Q19, the car-life division’s revenue and operating profit surged to W428bn (+75% YoY, +47.6% QoQ) and W21bn (+184.7% YoY, 42.4% QoQ), respectively, as a result of the AJ Rent-a-Car acquisition. Rental fleet increased from 108,000 units at end-4Q18 to OP (19F, Wbn) 177 191,000 units at end-1Q19 (111,000 units for SK Rent-a-Car and 80,000 units for AJ Consensus OP (19F, Wbn) 209 Rent-a-Car), narrowing the gap with current market leader Lotte Rental (211,000 units). That said, we have yet to see any signs of business synergies. No decisions have been EPS Growth (19F, %) 47.4 made regarding the integration of SK Rent-a-Car and AJ Rent-a-Car, but our Market EPS Growth (19F, %) -17.0 expectation is that SKN will merge its car-life division into AJ Rent-a-Car through an P/E (19F, x) 134.5 equity swap. Market P/E (19F, x) 12.0 KOSPI 2,212.75 SKN has driven industry margins down by pursuing an aggressive unit-oriented growth strategy. However, as the market consolidates around two players and competition Market Cap (Wbn) 1,437 eases, this could prompt the company to shift its focus to profitability, leading to Shares Outstanding (mn) 248 margin improvements across the car rental industry. We also see strong potential for Free Float (%) 56.5 merger synergies, given how little overlap there is in their businesses (SKN focuses on Foreign Ownership (%) 14.2 individual long-term rentals, while AJ Rent-a-Car focuses on corporate/short-term Beta (12M) 0.53 rentals). In the long run, we believe the merged entity could play a crucial role in SK 52-Week Low 4,255 Group’s mobility business. 52-Week High 6,430 SK Magic to continue top-line growth, driven by increasing accounts (%) 1M 6M 12M Absolute -3.2 31.0 0.7 SK Magic’s rental accounts have continued to grow, rising 19.4% YoY to around 1.6mn Relative -4.7 24.1 14.0 at end-1Q19. For 2019, the company has set a target of 1.87mn accounts, up 20% YoY. We also expect SK Magic’s overseas expansion to pick up speed. The company took 120 SK Networks KOSPI over SKN’s global growth business for W10bn in January and plans to advance into 110 Southeast Asia. 100 90 Reaffirm Buy and TP of W7,000 80 We reaffirm our Buy rating and target price of W7,000 on SKN. We believe margin 70 gains through business synergies, in addition to top-line growth, are critical for the 60 4.18 8.18 12.18 4.19 stock to move higher. Mirae Asset Daewoo Co., Ltd. [ Advanced Materials/Metals] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 12,905 15,202 13,986 13,404 13,815 13,285 Jaekwang Rhee +822-3774-6022 OP (Wbn) 155 143 138 177 209 209 [email protected] OP margin (%) 1.2 0.9 1.0 1.3 1.5 1.6 NP (Wbn) -82 33 7 11 36 36 EPS (W) -329 135 29 43 143 143 ROE (%) -3.3 1.4 0.3 0.5 1.5 1.5 P/E (x) - 49.4 178.0 134.5 40.5 40.5 P/B (x) 0.7 0.7 0.5 0.6 0.6 0.6 Dividend yield (%) 1.4 1.8 2.3 2.1 2.1 2.1 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. May 3, 2019 SK Networks Table 1. Quarterly and annual earnings (Wbn, %) 1Q18 2Q18 3Q18 4Q18 1Q19P 2Q19F 3Q19F 4Q19F 2018 2019F 2020F Revenue 3,477 3,432 3,530 3,547 3,284 3,324 3,351 3,445 13,986 13,404 13,815 ICT 1,267 1,152 1,262 1,505 1,252 1,190 1,190 1,260 5,185 4,892 4,900 Energy retail 360 359 397 319 287 331 331 331 1,436 1,280 1,324 Trading 1,419 1,452 1,370 1,191 1,077 1,100 1,100 1,100 5,431 4,377 4,400 SK Magic 148 162 167 180 181 191 195 200 656 767 922 Car-Life 244 246 268 290 428 449 465 483 1,048 1,825 2,001 Walkerhill 55 62 70 70 62 63 70 70 257 266 268 Operating profit 25 21 41 51 35 45 46 51 138 177 209 ICT 19 17 21 34 17 19 19 20 92 74 77 Energy retail 4 3 2 12 5 7 7 7 21 24 26 Trading 18 14 14 1 2 4 4 4 46 16 18 SK Magic 6 7 14 24 15 15 16 16 51 62 74 Car-Life 7 8 12 14 21 25 26 27 41 98 112 Walkerhill (2) 0 2 (1) 1 0 0 2 0 3 3 Shared costs (28) (28) (23) (33) (25) (25) (25) (25) (112) (100) (100) Pretax profit 3 3 16 38 1 6 7 12 60 25 52 Net profit 1 0 (7) 13 (6) 4 5 8 7 11 36 Note: Net profit is attributable to controlling interests Source: Mirae Asset Daewoo Research estimates Table 2.