Mando (060980) BUY. Company Comment. Solution to corporate governance problem

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1 Company Comment April 8, 2014 (060980) BUY TP W184,000 Stock (Apr 7) W135,000 Solution to corporate governance problem To adopt holding company structure via spin-off On April 7, announced it would execute a spin-off, with the remaining entity renamed as Holdings and the newly established company continuing the moniker. Holdings (Holdings) will serve as the holding company, while will be the operating company responsible for the auto parts business. The spin-off ratio will be (holding company):52.18 (operating company), and trading is scheduled to be suspended on August 28 and resume October 6. As for the subsidiaries, Meister, Stackpole and Hella Electronics will be allocated to the holding company, while the remaining subsidiaries will go to. Unwinding cross shareholdings to bolster corporate governance Corporate governance risks should ease under the holding company structure. We believe is adopting this structure to limit potential governance risks related to the cross shareholdings. After financial supporting the parent company,, in April 2013 via Meister, has worked to bolster corporate governance, including appointing outside directors and pledging to not extend support again. However, it was unclear if this would have been enough to resolve the governance issues given the cross shareholdings. Stakes in subsidiaries to be adjusted We believe there are two potential methods to unwind the cross shareholdings. We believe the first potential scenario would be: 1) Holdings buys back a stake from for cash, then 2) Holdings exchanges a stake in from for new shares in Holdings (Figure 4). We believe this scenario is likely as Holdings would retain 90% of the cash (W450bn) of the pre-split company (Table 2). However, in that case, Holdings would have to buy additional shares in (only a stake) to transition into a holding company. The next potential method would be: 1) Holdings and merge, then 2) the merged entity exchanges the stake in from for new shares (Figure 5). While this would be relatively simple, Holdings would have to split-off the operating divisions, as it would not be a pure holding company given the construction business. Valuation We maintain BUY and a TP of W184,000, 14.0x the mid-cycle 12MF PE. We believe the valuation discount should fade as should no longer extend financial support to. Jin Woo Kim, CFA jinwoo.kim@truefriend.com Sung Moon Suh sungmoon.suh@truefriend.com Won Joon Choi wonjoon.choi@truefriend.com

2 Table 1. Spin-off schedule Old stock submission period start Old stock submission period close Suspension date of trading Spin-off date New shares listed/relisted Source:, Korea Investment & Securities Table 2. Financial structure summary pre- and post spin-off Account Before spin-off Remaining New Remaining (%) New (%) Total assets 3,604 1,078 2,539 30% 70% Current assets 1, % 62% Cash % 10% Account receivables % 100% Inventory % 100% Non-current assets 2, ,754 26% 75% Total liabilities 2, ,796 19% 81% Current liabilities 1, ,005 2% 98% Non-current liabilities 1, % 67% Total equity 1, % 53% Spin-off ratio Source:, Korea Investment & Securities Table 3. affiliates (%, W bn) Country Region Business areas Stake Meister* Korea Seoul Logistics/trading (navigation, hi-pass (automatic toll-paying device)) % 9 (14) MBCO (JV with Brose in Korea) Korea Incheon Electric motors 50-1 (9) (13) HSC ( Stackpole)* Korea Ochang Engine & transmission parts % MHE ( Hella Electronics)* Korea Incheon Chassis electronics (ECU, sensor, radar) % (3) 11 MAM ( Advanced Materials) Korea % (6) (4) MCH ( China Holdings) China 100 1,118 1,296 16% MBC ( (Beijing) Automotive Chassis) China Beijing Brakes (CBS), suspension MSC ( Suzhou Chassis) China Suzhou Brakes (ABS), steering (CSS/EPS) MNC ( Ningbo Automotive Parts) China Ningbo Brakes (CBS), suspension MTC ( Tianjin Automotive Parts) China Tainjin Iron casting MHC ( Harbin Automotive Chassis) China Harbin Brakes (CBS) Shenyang Automotive Parts China Shenyang Brakes (CBS), steering (EPS) MAIL ( Automotive India) India Chennai Brakes (CBS), steering (EPS), suspension % 2 (11) MSI ( Soft Tech India) India R&D center % 0 0 MCB ( Corp. Brazil) Brazil Brakes (ABS) % (7) (7) KMB (JV with KYB in Brazil) Brazil Suspension % (4) (8) MCA ( America Corp.) US Alabama ,044 9% 6 12 Alabama plant US Alabama Brakes (CBS), steering (CSS), suspension 100 Georgia plant US Georgia Brakes (ABS-2013), steering (EPS-2014) 100 Georgia casting plant US Georgia Iron casting 100 MMT (Maysan Otomotiv Parcalari) Europe Turkey % 5 4 MCE ( Corp. Europe GmbH) Europe Germany % 0 1 MCP ( Corp. Poland) Europe Poland Brakes (CBS), suspension % (4) (6) AVM (Auto venture SDN) Malaysia % 0 1 Note: *Indicated affiliates belong to a holding company (remaining) sales 2013 sales YoY 2012 NP 2013 NP 2

3 Figure 1. ownership structure (March 2014) 20% Figure 2. core affiliate governance and affiliates Others 48% Mongwon and affiliates 8% 15.86% 100% Truston Asset Management 11% NPS 13% Meister Figure 3. group governance post spin-off & affiliated parties 39.72% 15.86% Holdings 50% 100% 70% Hella Electronics Meister Stackpole Other affiliates Figure 4. Clearing cross-shareholding structure scenario 1 Holdings buying back shares from for cash +a & affiliated parties 39.72% Holdings Hella Electronics Meister Stackpole 15.86% Note: Holdings buy back stake from for cash & Holdings receives of shares from in return for new shares (a) 3

4 Figure 5. Clearing cross-shareholding structure scenario 2 Holdings merges with & affiliated parties Holdings %+b + Hella Electronics Meister Stackpole Note: Holdings and merge, and the merged company receives the stake in from in return in exchange for new shares (b) 4

5 Changes to recommendation and price target Company (Code) Date Recommendation Price target (060980) BUY W270, BUY W225, BUY W200, BUY W170, BUY W110, BUY W135, BUY W150, BUY W170, BUY W184, , , , , ,000 50,000 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec

6 Guide to Korea Investment & Securities Co., Ltd. stock ratings based on absolute 12-month forward share price performance BUY: Expected to give a return of +15% or more Hold: Expected to give a return between -15% and 15% Underweight: Expected to give a return of -15% or less Korea Investment & Securities does not offer target prices for stocks with Hold or Underweight ratings. Guide to Korea Investment & Securities Co., Ltd. sector ratings for the next 12 months Overweight: Recommend increasing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Neutral: Recommend maintaining the sector s weighting in the portfolio in line with its respective weighting in the Kospi (Kosdaq) based on market capitalization. Underweight: Recommend reducing the sector s weighting in the portfolio compared to its respective weighting in the Kospi (Kosdaq) based on market capitalization. Analyst Certification I/We, as the research analyst/analysts who prepared this report, do hereby certify that the views expressed in this research report accurately reflect my/our personal views about the subject securities and issuers discussed in this report. I/We do hereby also certify that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Important Disclosures As of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), Korea Investment & Securities Co., Ltd., or its affiliates does not own 1% or more of any class of common equity securities of. There is no actual, material conflict of interest of the research analyst or Korea Investment & Securities Co., Ltd., or its affiliates known at the time of publication of the research report or at the time of the public appearance. Korea Investment & Securities Co., Ltd., or its affiliates has not managed or co-managed a public offering of securities for in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates has not received compensation for investment banking services from in the past 12 months; Korea Investment & Securities Co., Ltd., or its affiliates does not expect to receive or intend to seek compensation for investment banking services from in the next 3 months. Korea Investment & Securities Co., Ltd., or its affiliates was not making a market in s securities at the time that the research report was published. Korea Investment & Securities Co., Ltd. does not own over 1% of shares as of April 8, Korea Investment & Securities Co., Ltd. has not provided this report to various third parties. Neither the analyst/analysts who prepared this report nor their associates own any shares of the company/companies covered in this report as of April 8, Korea Investment & Securities Co., Ltd. has issued ELW with underlying stocks of and is the liquidity provider. Prepared by: Jinwoo Kim This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions. 6