SUMMARY FINANCIAL DATA

Transcription

1 Company Update Hyundai Heavy (009540) Why investors should hold onto shares WHAT S THE STORY? Youngsoo Han Analyst han.youngsoo@samsung.com Richard Moon Research Associate joonho.moon@samsung.com AT A GLANCE Target price KRW210,000 (20.7%) Current price KRW174,000 Market cap KRW13.2t/USD11.8b Shares (float) 76,000,000 (64.5%) 52-week high/low KRW179,500/KRW99,100 Avg daily trading value (60-day) KRW34.3b/ USD30.5m ONE-YEAR PERFORMANCE Hyundai Heavy (%) 1M 6M 12M Vs Kospi (%pts) KEY CHANGES (KRW) New Old Diff Recommend. BUY BUY Target price 210, , % 2017E EPS 8,390 8, % 2018E EPS 8,483 8, % SAMSUNG vs THE STREET No of estimates 18 Target price 193,647 Recommendation 3.9 BUY : 5 / BUY: 4 / HOLD: 3 / SELL: 2 / SELL : 1 Spinoffs: Hyundai Heavy decision to spin off its non-shipbuilding businesses is, in our opinion, aimed at improving its financials and strengthening the largest shareholder s control of the group. The spun-off entities, which are in industries with relatively solid outlooks, should find fundraising easier once they are independent. As for HHI (which runs shipbuilding and offshore businesses), its financials should improve as parent company debt is allocated to the spun-off units. In short, HHI Group s overall funding conditions should improve. That the shift to a holding company structure should strengthen the largest shareholder s influence on the group is not necessarily bad for minority shareholders, as the group should make better use of resources that have hitherto been used to protect the largest shareholder s managerial rights, while the dismantling of a circular shareholder structure should make valuing the businesses easier. The spinoffs should be beneficial for any future M&A activity. Shares in all of the listed units should rerate, as the spinoffs should cause valuation multiples to rise (even though gross consolidated earnings should not be affected). The market will start to value the non-shipbuilding entities relative to their own industry peers, while HHI s shipbuilding business should rerate on its simplified business structure and its premium over rivals. Investment strategy to take profit or hold? A recent share-price rally has given investors cause to consider taking profit. Those that advocate taking profit now with the hopes of reinvesting at a lower price later cite: 1) concerns that not all of the spun-off companies will see a rise in their share prices; and 2) uncertainty during the period of suspended trading. At the current share price, however, we are skeptical of such a strategy. True, we cannot derive fair values for the spun-off units before HHI release more financial information (eg, how costs will be split, how overseas subsidiaries will be treated, and how new companies will be consolidated). Still, HHI is attractively valued relative to both pure shipbuilders and firms in the other industries in which it operates implying that the spun-off entities will see a rise in combined value. Moreover, there seems little chance that shipbuilding shares will plunge during the period of suspended trading, as: 1) oilproducers have cut output boding well for oil prices; 2) shipbuilders suffered a dearth of orders last year creating a low base; and 3) declines in shipbuilders sales should be steeper in 2H than in 1H. All in all, investors should not try to time the stock, but keep their holdings to benefit from a rise in the combined market cap of the spun-off units. HHI remains our top pick. We raise our target price from KRW190,000 to KRW210,000, to reflect: 1) recent increases in valuation multiples in the shipbuilding, refining, and machinery sectors; and 2) the likelihood of shareholder equity increasing post-spinoff (after the value of treasury shares is reflected). SUMMARY FINANCIAL DATA E 2017E 2018E Revenue (KRWb) 46,232 39,317 35,010 35,401 Net profit (adj) (KRWb) (1,350) EPS (adj) (KRW) (21,919) 7,173 8,390 8,483 EPS (adj) growth (% y-y) n/a n/a EBITDA margin (%) (1.4) ROE (%) (8.5) P/E (adj) (x) n/a P/B (x) EV/EBITDA (x) n/a Dividend yield (%) Note: Attributable to controlling shareholders / Source: Company data, Samsung Securities estimates

2 Contents Spinoffs and relisting Why the spinoffs? Why the spinoffs will benefit shareholder value Investment strategy-to take profit or hold? Risks p2 p4 p8 p14 p21 Spinoffs and relisting Timeline Hyundai Heavy on Nov 15, 2016 announced a plan to spin off its non-shipbuilding units to create six entities, four of which will list. The two units that will not list Hyundai Green Energy (a renewable-energy business) and Hyundai Global Service (which does vessel repairs and maintenance) were spun off via in-kind contributions in Dec Investors do not need to pay much attention to these two companies, as: 1) their businesses are small; and 2) post-spinoff, they remain subsidiaries of HHI and Hyundai Robotics. Rather, investors should focus on the four companies that will list Hyundai Construction Equipment, Hyundai Electric, Hyundai Robotics, and HHI (which will keep the shipbuilding, offshore, onshore-plant, and engine businesses). Shares in the new entities will be allocated to current HHI shareholders according to a spinoff ratio. (The spinoff does not include a tender offer.) HHI s treasury shares will go to Hyundai Robotics, giving it a 13.4% stake in each of HHI, Hyundai Construction Equipment, and Hyundai Electric. In other words, Hyundai Robotics will become the holding company of HHI Group. Hyundai Samho Heavy and Hyundai Mipo Dockyard will remain as subsidiaries of HHI, while Hyundai Oilbank will become a subsidiary of Hyundai Robotics. The group has yet to reveal which firms will own what stakes in other overseas subsidiaries. Shareholders approved the spinoff plan at an extraordinary meeting on Feb 27. The spinoffs will take place on Apr 1, and trading of HHI shares will be suspended over Mar 30-May 9. The new entities will list on May 10. 2

3 Spinoff and relisting schedule Schedule Nov 15, 2016 Spinoff announcement; in-kind contributions of Hyundai Green Energy and Hyundai Global Service Dec 23, 2016 Shareholder record date Jan 17, 2017 Regulatory filing Feb 27, 2017 Shareholder approval at extraordinary meeting Mar 30-May 9, 2017 Suspension of trading Apr 1, 2017 Deadline Apr 3, 2017 Registration of spinoff May 10, 2017 Relisting/listing of shares Source: Company data, Samsung Securities HHI: Holding structure (pre-spinoffs) HHI: Holding structure (post-spinoffs) MJ Chung 10.2% 10.2% MJ Chung 10.2% 10.2% 10.2% Hyundai Mipo Dockyard 8.0% 42.3% Hyundai Heavy (Treasury: 13.4%) 94.9% Hyundai SamhoHeavy 91.1% Hyundai Oilbank 13.4% Hyundai Heavy 94.9% 8.0% Hyundai SamhoHeavy Hyundai Robotics (Treasury: 13.4%) 13.4% 13.4% 91.1% Hyundai Electric 8.0% 42.3% 8.0% Hyundai Construction Equipment 8.0% Hyundai Mipo Dockyard Hyundai Oilbank Source: Company data Source: Company data 3

4 Contents Spinoffs and relisting Why the spinoffs? Why the spinoffs will benefit shareholder value Investment strategy-to take profit or hold? Risks p2 p4 p8 p14 p21 Why the spinoffs? To improve parent financial structure; equity holders, bondholders have different views When HHI first announced its spinoff plan, it said the moves were part of a self-rescue plan agreed to by major creditors implying that the firm and its creditors agree that the spinoff would help improve the shipbuilder s financial structure. This may raise some eyebrows given that the spinoffs will not result in any change in HHI s consolidated gross assets or debt. In particular, equity holders, which will be assigned shares in all of the spun-off entities, may scratch their heads at the notion of the spinoffs doing anything to improve the firm s financial structure. However, bondholders will have a different view. For creditors, the spinoffs will change who is responsible for debt repayments. (Pre-spinoff, HHI affiliates are responsible collectively.) Ease of funding and funding rates differ depending on a company s financial health and the outlook for its industry. In other words, though HHI Group may see no change in consolidated gross assets or debt, the individual business units may see changes in funding terms (eg, the size of available funding and lending rates). Until recently, shipbuilders have had significant difficulty raising funds, as financial institutions have been reluctant to extend loans and roll them over given that: 1) massive losses from offshore businesses over have impaired shipbuilders financial health, and 2) a dearth of new orders has clouded the outlook for their profitability. HHI is no exception. Indeed, in a bid to overcome such difficulties, it sold around KRW2t in available-for-sale securities (mainly stakes in Posco and Hyundai Motor) over Shipbuilders: Credit rating and funding Rating Restructuring method Latest bond issuance HHI A Self-rescue plan Jul 2015 SHI A- Self-rescue plan Feb 2015 HMD A- Self-rescue plan Jun 2015 DSME B Discussing conditional creditor-led workout program Mar 2015 HHIC n/a Creditor-led workout program (May 2016) Aug 2012 STX n/a Court receivership (May 2016) Jul 2012 SPP n/a Creditor-led workout program (May 2015) n/a Source: Infomax HHI Group: Marketable securities disposal ( ) HHI Hyundai Samho Heavy HMD Securities Disposal Shares Amount (KRWb) Hyundai Motor 4,400, Subtotal 668 KCC 803, Posco 1,308, Hyundai Motor 2,265, Subtotal 996 Posco 871, KCC 397, Subtotal 428 Total 2,092 Source: Company data, local media 4

5 Big three: Summaries of self-rescue plans (KRWb) Amount Sale of non-core asset 1,540 HHI Corporate rationalization 850 Business reallocation 1,120 Total 3,510 Sale of non-core asset 547 SHI Labor cost savings 909 Total 1,456 Sale of dockyards 946 Subsidiary disposal 342 DSME Special division disposal 300 Early-retirement scheme 1,260 Other 600 Total 3,448 Source: Company data, local media Big three: Self-rescue plan achievement rate (%) Note: As of end-nov 2016 Source: Government data HHI SHI DSME HHI s creditors have been worried most about the firm s shipbuilding and offshore/plant businesses, as its other enterprises are already generating solid earnings or are in industry s that appear set for upturns. Few investors are worried about Hyundai Robotics ability to pay interest on its debt or pay down the debt itself, as it will own the financially sound Hyundai Oilbank, which is an available-forsale asset and distributes a large dividend. The electro electric division (Hyundai Electric) has been profitable for the past four years and has seen its profitability improve every year. The construction equipment business (Hyundai Construction Equipment) has a bright outlook given that sales volumes in emerging markets (EMs) have been improving (led by China). These businesses should see funding conditions improve post-spinoff. Post-spinoff, HHI will be left with the shipbuilding/offshore businesses. It will benefit from the spinoffs as the non-shipbuilding businesses will each inherit a portion of its net debt. In short, for creditors, the spinoffs entail the transfer of debt in the shipbuilding/offshore businesses to the nonshipbuilding units, which enjoy more-favorable funding conditions. If HHI were to attempt to improve its financials by selling its stakes in its non-shipbuilding business units (instead of spinning them off), it would be able to pay down its debt with the proceeds. In short, there would be no difference between this and the spinoff scenario (in which its debt is split between the spun-off companies). However, the spinoff scenario is more efficient in terms of time and cost savings. We estimate that the spinoffs will result in costs of about KRW2.5b. 5

6 Financial improvement plans Financial improvement plan HHI Plan 1 Plan 2 Transfer debt to non-shipbuilding units post-spinoff Sell stakes in non-shipbuilding business units and pay down debt with proceeds Results 1.Parent s net debt decreases 2.Business units gain management independence 3.Group structure improves Results of both plans are identical, but Plan 1 saves more time and costs Source: Samsung Securities estimates Spinoff-related costs (KRWb) Service provider Details Cost Consulting Investment banks, auditors, etc Spinoff and relisting-related services; consulting for accounting, taxes, etc Registration Registration office, judicial scriveners Taxes and service fees 0.2 Other Print shop, etc Printing costs, listing fees 0.6 Total 2.5 Source: Company data 1.7 Largest shareholder to protect managerial rights and tighten grip on group Shift to holding company structure to help largest shareholder cement influence The spinoffs will transform HHI Group into a holding company structure headed up by Hyundai Robotics and likely help HHI s largest shareholder to increase his control over (or stake in) the group a common occurrence when other conglomerates have transitioned to holding company structures. HHI s treasury shares (13% of shares outstanding) will move to Hyundai Robotics, giving the latter 13% stakes in each of the post-spinoff HHI, Hyundai Construction Equipment, and Hyundai Electric. The largest shareholder would then sell his stakes in post-spinoff HHI, Hyundai Construction Equipment, and Hyundai Electric, using the proceeds to raise his stake in Hyundai Robotics. Since Hyundai Robotics would become the largest shareholder of its affiliates, the investor who controls Hyundai Robotics would have controlling influence over the group a s whole. 6

7 Who benefits from shift to holding company structure? The shift to a holding company structure and concomitant increase in the influence of the largest shareholder is not necessarily bad news for minority investors. First, under the new structure, the group will be better positioned to use resources that have hitherto been used to protect managerial rights. Specifically, we are thinking of HHI s treasury shares and Hyundai Mipo Dockyard s (HMD) stake in HHI. The largest shareholder currently owns just 10.2% of HHI, and thus his controlling power has been backed up by the treasury shares (13%) and HMD s stake (8%) which also protects the incumbent management s managerial rights. HHI s treasury shares will be allocated to Hyundai Robotics, giving it shares in the new HHI, Hyundai Construction Equipment, and Hyundai Electric. These shares are entirely different from treasury shares, which are deducted from shareholder equity. Also, the treasury shares were not available for sale given their function of protecting managerial rights. However, Hyundai Robotics will be able to see its stakes in its affiliates, which means HHI Group can become more aggressive in sales and M&A activity essentially, giving management more options. HMD s stake in HHI would also become available for sale. Currently, HHI owns 95% of Hyundai Samho, which owns 42% of HMD, which owns 8% of HHI creating a circular shareholder structure. Under a holding company structure, HMD needs to dismantle this. (Ultimately, it needs to sell its stakes in group affiliates.) In other words, HMD s holdings in HHI would become available for sale positive for HMD shareholders. The shift to a holding company structure should benefit HHI Group investors in terms of enterprise value, as it should become easier to calculate fair values for group affiliates since the dismantling of circular shareholdings will simplify the group s ownership structure. This is another reason the firm s valuation discount should dissipate. Holding company regulations Regulation Deadline Expected Stake requirement (must hold at least 20% of listed subsidiaries) 2 years from adoption of holding company structure Robotics increases stakes in spun-off firms New cross-shareholdings must be dismantled 6 months from adoption of holding company structure HMD sells stake in Robotics Sub-subsidiaries cannot hold stakes of less than 100% in domestic affiliates 2 years from adoption of holding company structure Merger between HHI and Hyundai Samho Sub-sub-subsidiaries cannot hold stakes in domestic affiliates 2 years from adoption of holding company structure HMD sells stake in spun-off firms Group cannot include a financial firm Plans to sell this year HMD sells HI Investment & Securities and its affiliates Source: Company data, local media 7

8 Contents Spinoffs and relisting Why the spinoffs? Why the spinoffs will benefit shareholder value Investment strategy-to take profit or hold? Risks p2 p4 p8 p14 p21 Why the spinoffs will benefit shareholder value Valuation multiples to rise The spinoffs will not boost HHI Group s absolute profit. In particular, shareholders will see little change in that: 1) they already use a consolidated balance sheet in calculating HHI s enterprise value; and 2) they will be allocated shares in all the entities post-spinoff. Still, the spinoffs should raise shareholder value by boosting valuation multiples. Spinoff to reveal true value of non-shipbuilding business units HHI is one of Korea s big-three shipbuilders, with 49% of its consolidated sales coming from the shipbuilding, offshore, and engine businesses. Thus, it has traditionally been valued relative to other shipbuilders (Korean and overseas) meaning its non-shipbuilding units have received shipbuildingsector valuations. Post-spinoff, Hyundai Construction Equipment, Hyundai Electric, and Hyundai Robotics will be valued not relative to shipbuilders, but in comparison with their industry peers most of which trade at higher valuation multiples than shipbuilders do. First, Hyundai Construction Equipment s peers include Doosan Infracore (which is trading at 0.9x 2017 P/B, or 1.1x if perpetual bonds are included in debt) and Doosan Bobcat (1.1x) which both trade at higher P/B multiple than HHI does (0.8x). Second, Hyosung and LSIS Hyundai Electric s rivals in the electric systems business currently trade at 1.1x and 1.2x 2017 P/B, respectively. Third, Hyundai Robotics will be valued relative to refiners, since most of its sales and earnings will come from Hyundai Oilbank. Currently, SK Innovation and S-Oil are trading at 0.8x and 1.6x 2017 P/B, respectively. We thus believe Hyundai Robotics valuation multiple will also rise. HHI: Consolidated sales Hyundai Robotics: Highly dependent on Hyundai Oilbank Other: 1% Financial: 2% Refining: 30% Offshore: 9% Construction equipment: 6% Engine & machinery: 3% Shipbuilding and offshore related sales account for 49%of total Shipbuilding: 37% Industrial plant: 6% Electro electric systems: 5% Green energy: 1% (KRWt) Sales* Hyundai Robotics Total shareholder equity** Total assets** Hyundai Oilbank Source: Company data Note: * 1H16 cumulative ** As of end-3q16; Hyundai Robotics figures are parent-based, and Hyundai Oilbank figures are consolidated Source: Company data 8

9 Shipbuilders: Peer valuations (%) HHI* SHI* HMD* Domestic avg Sembcorp Keppel Mitsui Overseas avg Operating margin P/E (x) P/B (x) 2017E E E E E E E 11.6 nm (26.2) (1.1) EPS growth 2018E 1.1 (8.1) (3.2) (3.4) ROE 2017E E Note: * Samsung Securities estimates Source: Bloomberg, Samsung Securities estimates Construction equipment firms: Peer valuations (%) Doosan Bobcat* Doosan Infracore* Domestic avg Caterpillar Komatsu Kubota Overseas avg Operating Margin P/E (x) P/B (x) 2017E E E E E E E (4.4) (26.8) 12.9 (6.1) EPS growth 2018E ROE 2017E E Note: * Samsung Securities estimates Source: Bloomberg, Samsung Securities estimates Electrical equipment firms: Peer valuations (%) Hyosung LS IS Domestic avg Siemens GE Overseas avg Operating margin P/E (x) P/B (x) 2017E E E E E E E (3.4) EPS growth 2018E ROE Source: Bloomberg 2017E E

10 Refiners: Peer valuations (%) SK Innovation S-Oil GS Domestic avg Shell Chevron Exxon Mobil Overseas avg Operating margin P/E (x) P/B (x) EPS growth ROE Source: Bloomberg 2017E E E E E E E 1.8 (6.4) E E E Shipbuilding/offshore businesses to enjoy valuation premiums over peers Throughout its history, HHI has almost always traded at a discount to domestic shipbuilders, not because it lacks competitiveness or trails in profitability, but because of its complex business structure, which is the most diverse of any Korean shipbuilder. Investors who buy HHI need to forecast earnings for each of its various operations. In other words, its earnings visibility is lower than that of pure shipbuilders. Moreover, investors who buy HHI admit non-shipbuilding businesses into their portfolios, which makes HHI less enticing particularly during shipbuilding and offshore market booms. Pure shipbuilders are a more reasonable investment as they benefit fully from booms and boast higher earnings visibility. The spinoffs will make HHI a shipbuilding/offshore pure-play, sharply boosting its earnings visibility (meaning one valuation discount factor will disappear). Post-spinoff, HHI should actually enjoy a valuation premium over its rivals as it will boast stronger profitability and a better portfolio mix. HHI produces core equipment (eg, vessel engines and propellers) in-house and jointly purchases raw materials at the group level, making it the most competitive player in the commercial vessel market. Although the firm has thinner experience in the offshore drilling rig segment than its rivals do, this should not detract from its valuation, as the segment is unlikely to see new orders for some time. Rather, many view offshore drilling rigs as the primary culprit behind cashflow woes at shipbuilders (as orders for such vessels have been canceled and deliveries postponed). HHI s low exposure to offshore drilling rigs may actually serve as a valuation premium factor in the near term. Indeed, HHI Group has no exposure to drilling rigs in its order backlog though the parent shipyard had a contract for a semi-submersible drilling rig canceled in 2015, losses on which it has already recognized. As for the rest of the offshore production facility segment, HHI is not behind its rivals either in terms of building experience or technological knowhow. 10

11 Shipbuilding/offshore operating profit, excluding one-offs (2016) (KRWb) HHI SHI Sales 18,128 10,414 Operating profit 714 (147) Operating margin (%) 3.9 (1.4) One-off profits* One-off costs** Common expenses*** 187 Adjusted operating profit (adj) Adjusted operating margin (%) Note: * Change orders ** Early-retirement-related, drilling rig-related provisioning, accounts receivable-related provisioning etc *** Common expenses estimated in proportion to division s contribution to total sales Source: Company data, Samsung Securities estimates Big three: Drilling rig order breakdown (USDm) Vessel type Delivery date Vessels Contract value Owner DSME SHI Drillship Transocean Drillship ,691 Seadrill, Transocean, Sonangol* Drillship ,338 Atwood, Seadrill, Sonangol* plus one cancellation Drillship Atwood Total 9 5,112 Drillship ,040 Seadrill Drillship Ocean Rig Drillship ,337 Ensco, Ocean Rig (2), plus one cancellation Jack up rig ,301 Statoil Semi-submersible Under negotiation Stena* Total 10 5,946 HHI Semi-submersible n/a Canceled Note: Schedules based on Clarkson estimates Source: Company data, Clarksons, Samsung Securities estimates 11

12 Fair value estimate We raise our target price for HHI from KRW190,000 to KRW210,000 to reflect: 1) recent increases in valuation multiples in the shipbuilding, refining, and machinery sectors; and 2) the likelihood of shareholder equity increasing post-spinoff (after the value of treasury shares is reflected). Previously, we did not reflect the value of the treasury shares in our fair value estimate as we did not view them as available for sale. We maintain our valuation method (ie, a weighted average of P/B multiples for the shipbuilding, refining, and machinery sectors) as we do not yet have sufficient information to estimate earnings and consolidated equity for the spun-off units. Since 2004, HHI has traded on average at a discount of 13% to pure shipbuilding/offshore plays. In deriving our new target price, we gave the shipbuilding business a 10% premium to its rivals for three reasons. First, profitability at HHI is likely to remain above the industry average on the back of inhouse production of core equipment (particularly vessel engines) and the group-level purchasing of raw materials. Second, drilling rig-related risk has eased. HHI recently sold one of two drilling rigs for which orders had been canceled, which should ease concerns over additional losses (since the drilling rig market has yet to recover) and liquidity concerns. Third, the firm s financial activities have been normalizing quickly. According to press reports, HHI issued KRW150b in corporate bonds early this year. Though this was but a moderate issuance and the funding rate was not especially low, that the firm even managed to raise funds in the market testifies to the market s confidence in the firm s financial status and should allow HHI to use its cash more efficiently. Post-spinoff HHI: Estimating total shareholder equity (consolidated) (KRWb) 3Q16 post-spinoff shareholder equity (parent) (A) 11,299 Adjustment for Samho & HMD (B= axb-c) 754 3Q16 Samho s shareholder equity (consolidated) (a) 2,710 HHI s stake in Samho (%) (b) 95 Book value of Samho (parent) (c) 1,818 3Q16 post-spinoff shareholder equity (consolidated) (C=A+B) 12, total shareholder equity (consolidated) 11, total shareholder equity (consolidated) 11,696 Note: Consolidated shareholder equity refers to equity attributable to controlling shareholders Excludes value of affiliate and overseas subsidiaries other than Hyundai Samho Heavy Source: Samsung Securities estimates Hyundai Robotics: Estimating total shareholder equity (consolidated) (KRWb) 3Q16 post-spinoff shareholder equity (parent) (A) 2,248 Adjustment for Hyundai Oilbank (B= axb-c) 634 3Q16 Oilbank s shareholder equity (consolidated) (a) 3,939 Robotics stake in Oilbank (%) (b) 91 Book value of Oilbank (parent) (c) 2,955 3Q16 post-spinoff shareholder equity (consolidated) (C=A+B) 2, total shareholder equity (consolidated) 3, total shareholder equity (consolidated) 3,486 Note: Consolidated shareholder equity refers to equity attributable to controlling shareholders Source: Samsung Securities estimates 12

13 Fair value calculation (KRW) End-3Q16 End-2017 Weight in total shareholder equity (consolidated) (%) Post-spinoff HHI Hyundai Robotics Hyundai Electric* 5 5 Hyundai Construction Equipment* 4 4 Applied P/B (x) Post-spinoff HHI** Hyundai Robotics Hyundai Electric Hyundai Construction Equipment Weighted P/B E BVPS (pre-spinoff) 218, ,080 BVPS increase (post-spinoff)*** 10,707 10, E BVPS (post-spinoff) 228, ,787 Fair value 206, ,318 Note: * Conservatively excludes impact of Hyundai Electric and Hyundai Construction Equipment s overseas subsidiaries on book value ** 10% premium to rivals *** Book value increases after spinoffs as treasury shares no longer excluded from calculation to be conservative, we previously excluded treasury shares from our fair value calculation; Consolidated shareholder equity refers to equity attributable to controlling shareholders Source: Samsung Securities estimates Balance sheet (parent basis): Pre-spinoff vs post-spinoff (KRWb) Pre-spinoff Post-spinoff HHI (A) HHI Electric Construction Equipment Robotics Cash and equivalents 2,372 1, ,372 Short-term financial assets Short-term debt 2,195 1, ,195 Bonds with maturities of 1-year or less Long-term debt coming due in 1 year or less Long-term debt 1,955 1, ,955 Corporate bonds 1, ,461 Total liabilities 15,056 10,798 1, ,141 15, Common stock Paid-in capital 1, ,341 4,464 Hybrid bonds Capital adjustment (967) (3,406) (153) (3,559) Accumulated other comprehensive income 1,244 1, ,244 Retained earnings 12,044 12,044 12,044 Other 0 Shareholder equity 14,187 11, ,248 15, Debt ratio (%) Net debt 4,725 2, ,695 4,725 Spinoff ratio Source: Company data, Samsung Securities estimates Total (B) Diff (B-A) 13

14 Contents Spinoffs and relisting Why the spinoffs? Why the spinoffs will benefit shareholder value Investment strategy-to take profit or hold? Risks p2 p4 p8 p14 p21 Investment strategy to take profit or hold? Share-price rally tempts some to take profit and seek reinvestment at lower price Shares in HHI have risen 20% ytd (after rallying 66% in 2016 or 59% since end-may 2016, when we upgraded our investment recommendation to BUY), driven by: 1) an earnings turnaround; 2) recoveries in oil and other commodity prices; 3) anticipation of industry restructuring; and 3) spinoff-related momentum. Share price trends (KRW) 200, , , ,000 Creditors require self-rescue plan Turns to operating profit in 2Q16 Announces spinoff plan Spinoff-related HHI group conference 120, ,000 80,000 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 Source: QuantiWise, Samsung Securities OPEC agrees to cut output Announces 2017 sales guidance Shareholder meeting approves spinoff The market remains confident in HHI s fundamentals, but steep share-price run-up will surely tempt some investors to take profit in the near term. This temptation may be all the stronger since trading of shares will be suspended over Mar 30-May 9 ie, while the non-shipbuilding units are spun off. For a 40-day period, investors will not be able to sell their HHI shares even in the event of news that could send their value plummeting. Portfolio managers shipbuilding exposure could be larger (or smaller) than they desire as they trade other sectors, if they cannot adjust exposure to HHI (which accounts for 68% of the combined market cap of HHI, HMD, and SHI). In addition, fund managers will experience some inconvenience when investors redeem funds during the period of suspended trading. Another factor contributing to the pressure to take profit is the possibility of shares in the spun-off entities diverging ie, concerns that not all of the spun-off businesses will enjoy share-price rises. Those who advocate profit-taking before trading is suspended argue that it would be wiser to take a selective approach to the spun-off companies after they list. 14

15 Selling prior to spinoff not necessarily efficient at current share price level We, however, advise against pre-spinoff profit-taking for three reasons. First, we see little chance of an issue that would cause shipbuilding shares to plunge during the trading suspension period. We rather believe investors will continue to prefer shipbuilders among industrials for the time being. Second, HHI Group s market cap should increase post-spinoff given the valuation gap between HHI and the industries in which is non-shipbuilding businesses operate (while any information needed to calculate the fair values of the spun-off companies will be released during the period in which trading is suspended). Third, we expect the spun-off units to rerate immediately upon listing ie, there will be no time to buy back in before shares move up. Little chance of catastrophe while trading is suspended In the past, shipbuilding shares have plunged for one of four reasons: 1) an oil price plunge-driven deterioration in the business environment; 2) capital impairment following massive losses; 3) a sharp decline in new orders; and 4) liquidity concerns following order cancellations and delivery postponements. Investors need to ask whether any one of these issues is likely to rear its head while trading of HHI shares is suspended. We believe the chances are slim. First, oil-price risk has been easing. WTI-based oil prices are up 81% from their 1H16 bottom. While we do not rule out the possibility of short-term oil price fluctuations, we do not believe prices will fall below USD40/bbl (as they did in 1H16). The oil drop was triggered by: 1) increased crude production by non-opec countries particularly the US; and 2) output increases by OPEC countries to maintain market share. However, OPEC last year agreed to cut crude output, and member countries have so far largely complied with this agreement. Moreover, we believe investment sentiment for the shipbuilding sector would prove resilient even if oil prices edged lower, as: 1) the market expects oil prices to rise in 2017; 2) oil prices have reached 89% of the consensus for the average in 2017; and that 3) oil majors have resumed orders for offshore production facilities which vessels are the most sensitive to oil prices. OPEC output ( 000 bpd) Base Target Jan Feb Cut Jan Feb Feb requirement output cut output cut achievement (A) (B) (C) (D) (E=A-B) (F=A-C) (G=A-D) (H=G/E) Algeria 1,089 1,039 1,053 1, % Angola 1,751 1,673 1,659 1, % Ecuador % Gabon % Iran 3,707 3,797 3,778 3,814 Iraq 4,561 4,351 4,476 4, % Kuwait 2,838 2,707 2,718 2, % Libya Nigeria 1,550 1,608 Qatar % Saudi Arabia 10,544 10,058 9,865 9, % UAE 3,013 2,874 2,962 2, % Venezuela 2,067 1,972 2,003 1, % Total OPEC* 27,261 26,007 26,091 25,868 1,254 1,170 1, % Note: * Excludes Iran, Libya, and Nigeria, which did not agree to cut output Source: OPEC 15

16 Oil price trends and forecasts (USD/bbl) Oil prices 25 Jan 15 Jun 15 Nov 15 Apr 16 Sep 16 Feb 17 Note: * Used EIA s average oil price forecast for 2017 figure Source: Bloomberg, EIA Annual average oil prices* Oil prices: Quarterly fluctuations ease (USD/bbl) Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 Note: WTI prices Source: Bloomberg, EIA Neither should new orders prove much of a concern. It is still highly likely that shipbuilders new orders will fall short of their annual sales this year. However, the market does not have high expectations for new orders, and an order vacuum last year has created a low base this year. Global shipbuilding orders rose 51% y-y over January-February, whereas Korean shipbuilders saw new orders grow 479% y-y over the same period. We attribute this outperformance to an exceptionally low base Korean shipbuilders last year greatly underperformed their rivals due to restructuringrelated uncertainty. Also, there has been a steady stream of news related top offshore-structure orders, as oil prices have stabilized and restructuring among oil majors has driven down the breakeven point for oil prices even in offshore oil fields. Upcoming offshore projects (global) Type Project Expected contract date FLNG Steelhead, Malahat 1Q18 Delfin LNG (hull) 4Q18 Statoil, Johan Castberg (hull) 4Q17 FPSO Prime Marine 2Q18 Shell, Bonga/Aparo 4Q18 Shell, Vito (hull) 4Q17 FPU Cobalt International, North Platte 3Q18 Chevron, Jansz-lo 2Q20 Jack-up Petronas Carigali, K5 MOPU 3Q17 Pipeline Neelam T&I 2Q17 Maersk Oil, Tyra Future 4Q17 Platform Mubadala, Pegaga 1Q18 Petronas Carigali, Kasawari 4Q18 Source: Company data Oil majors: Breakeven oil price for offshore projects (USD/bbl) Statoil, FPSO (Castberg) Source: Company data BP, FPU (Mad Dog 2) Oil majors lower breakeven oil prices through restructuring Shell, FPU (Vito) Statoil, PF (Sverdrup)

17 Global new orders Korea China Japan Other Total New order ( 000 CGT) ,589 8,813 4,178 4,506 26, ,403 25,625 10,077 6,887 60, ,837 16,718 9,501 5,756 44, ,668 11,811 12,243 4,806 39, ,826 4,276 1,404 4,109 11,614 Jan-Feb ,832 Diff (% y-y) (46) Market share (%) Jan-Feb Source: Clarksons Global new orders (Mil CGT) E 2018E Source: Clarksons, Samsung Securities estimates If we look only at HHI, SHI, and HMD, the risk of order cancellations seems limited. The market is not worried about order cancellations or delivery delays per se, but about a subsequent liquidity crunch. In relation to order cancellations or delivery delays, it is drilling rigs that could hit shipbuilders cash flows hardest, as per-vessel contract values are large and most orders are based on a heavy-tail scheme (ie, the lion s share of the payment is made upon delivery). Samsung Heavy (SHI) has 9 drilling rigs in its order backlog (and it had an order for one drillship that has been canceled). Thus, it is not free from drilling rig-related risk. However, it has prepared somewhat by securing around KRW1.1t in cash via a rights offering last year, and has excluded drilling rig deliveries from its budget plan for this year. Even excluding possible drillship deliveries, SHI expects to see around KRW2t in cash inflows thanks to a rise in deliveries of other vessels. HHI has no drilling rigs in its order backlog. (There is only one canceled semi-submersible drilling rig at the parent s shipyard, but it has already reflected associated losses.) SHI: Cash management plan (KRWt) E Note Cash inflow (outflow) (1.7) 2.0 Rights offering Issuance of 159m shares Borrowings (payments) 0.3 (1.7) KRW600b in bonds matures in 2017 Total debt Cash and equivalents Net debt Source: Company data Shipbuilders: Consolidated debt-to-equity ratio (3Q16) (KRWb) Total liability Total shareholder equity Debt ratio (%) Kospi average 3,987,243 1,388, HHI 30,516 18, SHI 11,371 5, HMD (parent) 2,322 2, Hyundai Samho 10,409 4, DSME 16,271 (1,059) n/a HHIC 4,124 1, STX 7,325 (4,026) n/a SPP* 1,615 (775) n/a Sungdong* 3,562 (1,371) n/a Note: * As of end Firms once ranked in global top-20 Source: Company data, QuantiWise, Samsung Securities estimates 17

18 We also see little chance of shipbuilders incurring additional losses. The large losses shipbuilders suffered in the past largely resulted from offshore structures as shipbuilders were not compensated for cost overruns when their clients were battered by oil-price plunges. Given that shipbuilders provisioned massively last year when oil prices tumbled, any future losses from their offshore businesses should be limited (theoretically, to the tune of SG&A costs). Meanwhile, an increase in the burden of fixed costs following a sharp decline in sales should be also offset by lower labor costs following restructuring. We also note that sales declines should be steeper in 2H than in 1H. In short, the chances of HHI s earnings missing forecasts while shares are suspended seems slim. HHI: Offshore production facilities (KRWb) New order Projects Value 6,005 1, Order backlog Value 21,704 21,436 9,696 Diff (% y-y) 25.8 (1.2) (54.8) Source: Company data HHI: Onshore plant completion (USDm) Owner Contract Delivery Order backlog Completion date Deliverybased Salesrecognition (%) Jeddah South SEC* Oct Shuqaiq Steam SEC* Aug Jazan Refinery Aramco Dec Clean Fuel KNPC** Apr ZOR Refinery KNPC** Oct , ,511 1, Other Total 9,722 2,519 Note: * Saudi Electricity Company ** Kuwait National Petroleum Company Source: Company data And the chances appear slimmer for HHI than for other shipbuilders given that all of its businesses (except onshore plants) returned to profitability last year. Its shipbuilding division recorded an operating margin of 3.8% despite one-off costs related to early retirement and is unlikely to return to the red even considering the increased burden of fixed costs arising from a shrinking order backlog. Despite taking no new contracts last year, the offshore division took USD2b in new orders (which came from change orders) easing fears of additional losses. Based on progress rates for major projects, losses at HHI s onshore plant division should be held in check. Progress rates for the Jeddah South and Shuqaiq power plant projects stand at 95% and 85%, respectively. 18

19 Fair value estimates for spun-off entities not easy due to lack of accounting information We do not believe a post-spinoff, selective re-entry strategy is valid, as the data currently available are insufficient to evaluate the entities that will be spun off ie, there are no consolidated financial statements for them. Most investors use P/B valuations to derive fair values for shipbuilders. To accurately derive fair values for the entities that will be spun off, data related to their consolidated controlling shareholder equity is needed. However, the data so far made available has been limited to parent-based financial statements as of end-3q16. Although HHI s parent-based financial statement includes values for the subsidiaries, these are based on book values in 2009, before IFRS accounting rules were introduced (and thus do not reflect post-2009 changes). Moreover, there is scant information on overseas subsidiaries. Parent assets at end-2016 included a massive KRW6.8t in value derived from subsidiaries and affiliates (or KRW2t excluding the value of Hyundai Oilbank and Hyundai Samho Heavy). Thus, the value of the spun-off entities will depend on how and when the assets and debt of these companies especially the overseas subsidiaries are allocated. Hyundai Construction Equipment and Hyundai Electric s parent-based shareholder equity stood at KRW714.6b and KRW739.8b, respectively, at end-3q16. Meanwhile, the shareholder equity values of HHI s construction equipment and electro electrical systems divisions reflected in the firm s 3Q16 consolidated financial statement stood at KRW1.7t and KRW976.9b both figures significantly higher. Earnings-based valuations are equally tricky, as there is not enough data on how HHI will split its costs (which equate to 15-20% of its operating profit). All things considered, the accounting information HHI has thus far made available is sufficient to analyze the firm s consolidated earnings, but it does not clarify how the firm s resources (including assets, debt, and costs) will be reflected in spun-off units consolidated earnings which will determine fair values of and investment strategies for such businesses. The relevant data should be made available when 1Q earnings are released (ie, during the period in which trading is suspended). Electro electric system & construction equipment divisions: Change in total shareholder equity post-spinoff (3Q16) (KRWb) Consolidated Parent-based post-spinoff Diff (%) Electro electric system division Construction equipment division 1, Source: Company data Impact of other items on sales and operating profit (KRWb) Consolidated sales 54,974 54,188 52,582 46,232 39,317 Shipbuilding/offshore/plant/engine/financial/green energy 26,583 25,698 26,068 28,471 23,056 Construction equipment 3,791 3,290 2,867 2,225 2,180 Electro electric 2,873 2,761 2,355 2,507 2,144 Refining 21,499 22,221 21,087 12,832 11,673 Other Consolidated operating profit 1, (3,250) (1,540) 1,642 Shipbuilding/offshore/plant/engine/financial/green energy 1, (3,248) (1,883) 809 Construction equipment (33) (116) 109 Electro electric (75) Refining Other (including common costs) (316) (357) (283) (313) (407) Other portion of sales (%) Other portion of operating profit (%) nm nm 24.8 Source: Company data 19

20 Difficulty in post-spinoff re-entry + attractive valuation = maintain exposure Given the lack of financial information, investors may be tempted to take profit prior to the spinoffs and make a selective re-entry afterwards. We caution against this for two reasons. First, we do not believe selective re-entry will be easy to implement. As we stated above, the fair values of the spun-off entities may be subject to change depending on accounting assumptions (eg, allocation of costs and consolidated capital). Is it plausible that an investor might profit from trading the spun-off entities using the financial information that is released while trading is suspended? If the market is efficient, uncertainty caused by the mere lack of accounting information should dissipate immediately after the information is made available. In other words, share prices will reflect this information the minute trading resumes. Barring an ultra-short-term trading strategy, we do not believe investors would be able to profit from post-spinoff, selective re-entry. Second, in terms of valuation, there are few alternatives in the sector besides HHI. Investors who hold HHI shares should consider selling their shares if: 1) there is a risk of the combined market cap of the spun-off entities falling; or 2) there is a better alternative in the sector. But neither of these criteria are met for now. The available financial information may not be enough to calculate fair values for the spun-off companies, but does suffice to estimate the overall value of the firm. All that is unknown is how earnings and assets will be split among the subsidiaries. HHI is trading at 0.8x 2017 P/B, a premium of only 10% to its rivals, whose shares have rallied of late. Factoring in the ROE gap, we find the firm s valuation to be discounted to those of its rivals. HHI is attractively valued relative to its pure shipbuilding rivals and firms in the industries to which its non-shipbuilding businesses belong. This implies that the spun-off entities will not see a decline in their combined market cap. This also implies that HHI is the best bet in the shipbuilding sector. The machinery sector has also seen share prices rally along with recent rises in raw material prices. However, few companies are insulated from: 1) US protectionism; and 2) China s retaliation against Korea s deployment of the THAAD missile defense system. Given that there are questions marks over the financials of some machinery companies, investors appetite for listed shipbuilders (HHI, SHI, and HMD) should remain intact for the time being. In sum, we expect investors to continue to tilt towards shipbuilders in the machinery sector and HHI in the shipbuilding sector. The combined market cap of HHI and the spun-off companies should rise post-spinoff. However, it remains uncertain how HHI s consolidated assets/debt and costs will be split among the firms. In light of all of this, investors who hold HHI shares would be better off maintaining their position on the prospect of benefiting from this rise in market cap (rather than taking profit now and hoping to buy back in later). 20

21 Contents Spinoffs and relisting Why the spinoffs? Why the spinoffs will benefit shareholder value Investment strategy-to take profit or hold? Risks p2 p4 p8 p14 p21 Risks Overhang The shift to a holding company structure is likely to prompt Hyundai Robotics, HHI s largest shareholder, and HMD to unload their holdings in HHI affiliates. First, Hyundai Robotics to meet holding company requirements needs to secure a stake of more than 20% in each listed subsidiary. In other words, it needs to increase it stakes in each of post-spinoff HHI, Hyundai Construction Equipment, and Hyundai Electric by 6.6%pts. Second, HHI s largest shareholder might want to increase his stake in Hyundai Robotics to tighten his grip on the group. To do so, he may sell his stakes in Hyundai Construction Equipment, post-spinoff HHI, and Hyundai Electric (as they are less important for group governance). HMD will have to sell its stake in HHI in order to dismantle the circular shareholder structure (thereby meeting holding company structure requirements). This will require it to sell its 8% stakes in each of Hyundai Robotics, HHI, Hyundai Construction Equipment, and Hyundai Electric. In short, there is share overhang concern. However, as the group has two years from the spinoffs to meet the holding company requirements, the overhang concern is not an imminent issue, and Hyundai Robotics purchases of additional shares in its subsidiaries should partially mitigate the concerns. That said, the circular shareholding structure between HMD and Hyundai Robotics needs to be resolved within six months, thus requiring HMD to sell its stake in Hyundai Robotics the only near-term source of overhang concerns. Holding company discount for Hyundai Robotics After HHI, Hyundai Robotics (the holding company) would be the largest Hyundai Group affiliate. Thus, the group s fair value will be affected significantly by Hyundai Robotics valuation. We believe the market will value Hyundai Robotics by comparing it with domestic refiners S-Oil and SK Innovation, as most of its earnings will come from subsidiary Hyundai Oilbank. (Hyundai Robotics own business is insignificant in size.) However, some investors are worried that Hyundai Robotics will receive a large discount to S-Oil and SK Innovation for its status as a holding company. They go on to argue that GS Holdings (a holding company with refining and chemical subsidiaries) is a more-appropriate peer. At present, SK Innovation and S-Oil are trading at 1.2x P/B, while GS Holdings is trading at 0.7x. We do not agree. We believe there are two reasons for holding company discounts. First, holding companies often have diversified business structures that: 1) make it difficult for investors to forecast earnings; and 2) cause investors to include unwanted businesses in their portfolio. Second, it is not easy to evaluate unlisted subsidiaries. In terms of these two factors, Hyundai Robotics and GS Holdings are starkly different from each other. GS Holdings exposure to the refining business stands at 5.3% in terms of sales and 43% in terms of pre-tax profit, and its stake in oil refining subsidiary GS Caltex stands at just 50%. As for Hyundai Robotics, more than 90% of its sales and earnings come from Hyundai Oilbank. Thus, we do not believe it deserves a holding company discount for having a complex business structure. Moreover, its core subsidiaries are all listed, which means it is easy to value them. We also draw the reader s attention to Doosan Heavy & Construction, the de facto holding company for the Doosan Group it, too, does not have a holding company discount, which we believe is because all of its major subsidiaries are listed, making it easy for investors to value them. 21

22 Income statement Year-end Dec 31 (KRWb) E 2017E 2018E Sales 52,582 46,232 39,317 35,010 35,401 Cost of goods sold 53,299 44,682 34,866 31,272 31,678 Gross profit (717) 1,550 4,451 3,738 3,723 Gross margin (%) (1.4) SG&A expenses 2,532 3,090 2,809 2,457 2,497 Operating profit (3,249) (1,540) 1,642 1,281 1,226 Operating margin (%) (6.2) (3.3) Non-operating gains (losses) 144 (301) (556) (241) (174) Financial profit 1,611 1, Financial costs 1,938 2, Equity-method gains (losses) (37) (56) (80) 0 0 Other (666) (38) 0 Pre-tax profit (3,105) (1,841) 1,086 1,040 1,051 Taxes (899) (478) Effective tax rate (%) Profit from continuing operations (2,206) (1,363) Profit from discontinued operations Net profit (2,206) (1,363) Net margin (%) (4.2) (2.9) Net profit (controlling interests) (1,769) (1,350) Net profit (non-controlling interests) (437) (13) EBITDA (1,932) (626) 2,389 2,391 2,446 EBITDA margin (%) (3.7) (1.4) EPS (parent-based) (KRW) (25,834) (21,919) 7,173 8,390 8,483 EPS (consolidated) (KRW) (29,027) (17,937) 8,640 9,988 10,099 Adjusted EPS (KRW)* (23,279) (17,762) 7,173 8,390 8,483 Balance sheet Year-end Dec 31 (KRWb) E 2017E 2018E Current assets 29,872 27,176 26,431 25,838 26,627 Cash & equivalents 3,229 3,105 4,786 5,538 6,128 Accounts receivable 4,031 4,280 3,986 3,645 3,686 Inventories 5,822 4,492 3,770 3,357 3,395 Other current assets 16,789 15,298 13,889 13,298 13,419 Fixed assets 23,513 22,557 22,813 22,968 23,036 Investment assets 3,432 1,896 2,600 2,630 2,630 Tangible assets 16,060 16,320 16,607 16,806 16,944 Intangible assets 2,212 2,140 2,106 2,032 1,962 Other long-term assets 1,809 2,200 1,500 1,500 1,500 Total assets 53,384 49,733 49,244 48,806 49,663 Current liabilities 27,703 23,061 21,487 20,062 19,971 Accounts payable 3,754 2,984 2,801 2,494 2,619 Short-term debt 7,877 6,531 7,000 7,200 6,900 Other current liabilities 16,071 13,546 11,687 10,368 10,452 Long-term liabilities 9,043 11,173 9,867 10,217 10,520 Bonds & long-term debt 6,386 8,053 7,974 7,624 7,274 Other long-term liabilities 2,657 3,120 1,893 2,593 3,246 Total liabilities 36,746 34,234 31,354 30,279 30,491 Owners of parent equity 15,174 13,736 15,936 16,574 17,219 Capital stock Capital surplus 1,109 1,125 1,125 1,125 1,125 Retained earnings 14,272 12,819 13,364 14,002 14,646 Other (587) (588) 1,068 1,068 1,068 Non-controlling interests equity 1,465 1,763 1,953 1,953 1,953 Total equity 16,639 15,499 17,890 18,527 19,172 Net debt 11,612 11,358 8,860 7,827 6,464 Cash flow statement Year-end Dec 31 (KRWb) E 2017E 2018E Cash flow from operations 1,507 (574) 2,757 2,182 2,521 Net profit (2,206) (1,363) Non-cash profit and expenses 707 1,736 1,554 1,574 1,621 Depreciation ,022 1,082 1,143 Amortization Other (311) Changes in A/L from operating activities 3,139 (916) 547 (150) 133 Cash flow from investments (591) (147) (1,281) (1,281) (1,281) Change in tangible assets (1,360) (1,235) (1,281) (1,281) (1,281) Change in financial assets 1,260 1, Other (491) (212) Cash flow from financing (150) (650) Change in debt 1,589 (427) 319 (150) (650) Change in equity Dividends (117) Other (485) 1, Change in cash 1,893 (124) 1, Cash at beginning of year 1,337 3,229 3,105 4,786 5,538 Cash at end of year 3,229 3,105 4,786 5,538 6,128 Gross cash flow (1,499) 372 2,210 2,333 2,388 Free cash flow 20 (1,855) 1, ,240 Note: * Excluding one off items ** Fully diluted, excluding one-off items *** From companies subject to equity-method valuation Source: Company data, Samsung Securities estimates Financial ratios Year-end Dec E 2017E 2018E Growth (%) Sales (3.0) (12.1) (15.0) (11.0) 1.1 Operating profit nm nm nm (22.0) (4.3) Net profit nm nm nm Adjusted EPS** nm nm nm Per-share data (KRW) EPS (parent-based) (25,834) (21,919) 7,173 8,390 8,483 EPS (consolidated) (29,027) (17,937) 8,640 9,988 10,099 Adjusted EPS** (23,279) (17,762) 7,173 8,390 8,483 BVPS 199, , , , ,563 DPS (common) Valuations (x) P/E*** n/a n/a P/B*** EV/EBITDA n/a n/a Ratios (%) ROE (12.4) (8.5) ROA (4.1) (2.6) ROIC (8.8) (4.5) Payout ratio Dividend yield (common) Net debt to equity Interest coverage (x) (12.7) (6.8)

23 Compliance notice - As of Mar 24, 2017, the covering analyst(s) did not own any shares, or debt instruments convertible into shares, of any company covered in this report. - As of Mar 24, 2017, Samsung Securities holdings of shares and debt instruments convertible into shares of each company covered in this report would not, if such debt instruments were converted, exceed 1% of each company s outstanding shares. - This report has been prepared without any undue external influence or interference, and accurately reflects the views of the analyst(s) covering the company or companies herein. - All material presented in this report, unless specifically indicated otherwise, is under copyright to Samsung Securities. - Neither the material nor its content (including copies) may be altered in any form, or by any means transmitted, copied, or distributed to another party, without prior express written permission from Samsung Securities. - This memorandum is based upon information available to the public. While we have taken all reasonable care to ensure its reliability, we do not guarantee its accuracy or completeness. This memorandum is not intended to be an offer, or a solicitation of any offer, to buy or sell the securities mentioned herein. Samsung Securities shall not be liable whatsoever for any loss, direct or consequential, arising from the use of this memorandum or its contents. Statements made regarding affiliates of Samsung Securities are also based upon publicly available information and do not necessarily represent the views of management at such affiliates. - This material has not been distributed to institutional investors or other third parties prior to its publication. Target price changes in past two years (KRW) 250, , , ,000 50,000 0 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Rating changes in past two years Date 2015/3/23 4/29 7/11 7/30 10/ /4/27 5/31 7/28 10/5 12/1 2017/3/23 Recommendation HOLD HOLD BUY BUY HOLD HOLD BUY BUY BUY BUY BUY Target price (KRW) 133, , , , , , , , , , ,000 Samsung Securities uses the following investment ratings. Company BUY HOLD SELL Expected to increase in value by 10% or more within 12 months and is highly attractive within sector Expected to increase/decrease in value by less than 10% within 12 months Expected to decrease in value by 10% or more within 12 months Industry OVERWEIGHT Expected to outperform market by 5% or more within 12 months NEUTRAL Expected to outperform/underperform market by less than 5% within 12 months UNDERWEIGHT Expected to underperform market by 5% or more within 12 months Percentage of ratings in 12 months prior to Dec 31, 2016 BUY (82%) HOLD (18%) SELL (0%) 23

24 Global Disclosures & Disclaimers General This research report is for information 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 or to participate in any trading strategy. This report does not provide individually tailored investment advice. This report does not take into account individual client circumstances, objectives, or needs and is not intended as recommendations of particular securities, financial instruments or strategies to any particular client. The securities and other financial instruments discussed in this report may not be suitable for all investors. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein and investors should seek the advice of a financial adviser. This report may not be altered, reproduced, distributed, transmitted or published in whole or in part for any purpose. References to "Samsung Securities" are references to any company in the Samsung Securities, Co., Ltd. group of companies. Samsung Securities and/or other affiliated companies, its and their directors, officers, representatives, or employees may have long or short positions in any of the securities or other financial instruments mentioned in this report or of issuers described herein and may purchase and/or sell, or offer to purchase and/or sell, at any time, such securities or other financial instruments in the open market or otherwise, as either a principal or agent. Any pricing of securities or other financial instrument contained herein is as of the close of market for such day, unless otherwise stated. Opinions and estimates contained herein constitute our judgment as of the date of this report and are subject to change without notice. The information provided in this report is provided "AS IS". Although the information contained herein has been obtained from sources believed to be reliable, no representation or warranty, either expressed or implied, is provided by Samsung Securities in relation to the accuracy, completeness or reliability of such information or that such information was provided for any particular purpose and Samsung Securities expressly disclaims any warranties of merchantability or fitness for a particular purpose. Furthermore, this report is not intended to be a complete statement or summary of the securities, markets or developments referred to herein. Samsung Securities does not undertake that investors will obtain any profits, nor will it share with investors any investment profits. Samsung Securities, its affiliates, or any of its and their affiliates, directors, officers, employees or agents disclaim any and all responsibility or liability whatsoever for any loss (direct or consequential) or damage arising out of the use of all or any part of this report or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. Past performance is not indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or financial instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Samsung Securities. Any analysis contained herein is based on numerous assumptions. Different assumptions may result in materially different results. Samsung Securities is under no obligation to update or keep current the information contained herein. Samsung Securities relies on information barriers to control the flow of information contained in one or more areas or groups within Samsung Securities into other areas or groups of Samsung Securities. Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other financial instruments. Samsung Securities makes no representation that any transaction can or could have been effected at those prices and any prices contained herein may not reflect Samsung Securities internal books and records or theoretical modelbased valuations and may be based on certain assumptions. Different assumptions by Samsung Securities or any other source may yield substantially different results. Additional information is available upon request. For reports to be distributed to US: Securities research is prepared, issued and exclusively distributed by Samsung Securities Co., Ltd., an organization licensed with the Financial Supervisory Service of South Korea. This research may be distributed in the United States only to major institutional investors as defined in Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended, and may not be circulated to any other person otherwise. All transactions by U.S. investors involving securities discussed in this report must be effected through Samsung Securities (America) Inc., a broker-dealer registered with the U.S. Securities & Exchange Commission and a member of the Financial Industry Regulatory Authority/SIPC, and not through any non-u.s. affiliate thereof. The analysts listed [on the front of this report] are employees of Samsung Securities Co., Ltd., or a non-u.s. affiliate thereof, and are not registered/qualified as research analysts under applicable U.S. rules and regulations and may not be subject to U.S. restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. For reports to be distributed to UK: This report is not an invitation nor is it intended to be an inducement to engage in investment activity for the purpose of section 21 of the Financial Services and Markets Act 2000 of the United Kingdom ("FSMA"). To the extent that this report does constitute such an invitation or inducement, it is directed only at (i) persons who are investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (as amended) of the United Kingdom (the "Financial Promotion Order"); (ii) persons who fall within Articles 49(2)(a) to (d) ("high-net-worth companies, unincorporated associations etc.") of the Financial Promotion Order; and (iii) any other persons to whom this report can, for the purposes of section 21 of FSMA, otherwise lawfully be made (all such persons together being referred to as "relevant persons"). Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons. Persons who are not relevant persons must not act or rely on this report. For reports to be distributed to Korea: This report is for private circulation only, not for sale, and is issued and distributed only to persons permitted under the laws and regulations of Korea. For reports to be distributed to Singapore: This report is provided pursuant to the financial advisory licensing exemption under Regulation 27(1)(e) of the Financial Advisers Regulation of Singapore and accordingly may only be provided to persons in Singapore who are "institutional investors" as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore. This report is intended only for the person to whom Samsung Securities has provided this report and such person may not send, forward or transmit in any way this report or any copy of this report to any other person. Analyst certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of such analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research report. The analyst(s) principally responsible for the preparation of this research report receives compensation based on determination by research management and senior management (not including investment banking), based on the overall revenues, including investment banking revenues of Samsung Securities Co., Ltd. and its related entities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. Copyright 2010 Samsung Securities Co., Ltd. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the prior written consent of Samsung Securities America Inc. 24

25