PER EV/EBITDA PBR ROE

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1 4 January 2018 ( KS) Valuation discount to dissipate on holdco conversion BUY (MAINTAIN) Price (Jan 3) W147,500 Target Price W180,000 % variance 22.0% Eung-Ju Lee (82-2) eungju.lee@shinhan.com SangWon Han (82-2) sangwon.han@shinhan.com KOSPI 2,486.35p KOSDAQ p Market Cap. W5,179.8bn/ US4,543.7mn Par Value W5,000 Outstanding Shares Free Floating Shares 52-Week High/Low 60-Day Avg. Trading Volume 60-Day. Avg. Trading T/O 35.1mn 20.1mn(57.3%) W176,000/W123, ,549shrs W25,362mn Foreign Ownership 22.33% Major Shareholders Seok-rae Cho and 7 others 37.48% NPS 10.95% Absolute Performance 3M 1.4% 6M -14.7% 12M -1.0% Relative performance 3M -2.4% to KOSPI 6M -17.9% 12M -18.6% 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 certification and important disclosures & disclaimers at the end of this report. Transition to holding company structure to: 1) strengthen competitiveness of business divisions; and 2) improve management transparency Focus on gradual earnings improvement from 3Q17 bottom Retain BUY for a target price of W180,000 Transition to holding company structure to: 1) strengthen competitiveness of business divisions; and 2) improve management transparency s board of directors, on January 3, approved plans to spin off business divisions and convert into a holding company structure. The company s six business divisions will be spun off to create four new operating entities (textile/trading, heavy industry/construction, industrial materials, and chemicals) and the surviving entity will be converted into a pure holding company. The spinoff will take place on June 1. Transition into a holding company structure will be completed by swapping the largest shareholder s stake in operating subsidiaries with the holding company s shares. The conversion into a holding company aims at: 1) strengthening the competitiveness of business divisions; 2) improving management transparency; and 3) maximizing shareholder value. Independent operation of businesses will likely enhance management efficiency, while appointment of key management personnel outside of the owner family should help to improve transparency. As a result, valuation discount weighing on shares from concerns over accounting fraud and slush fund allegations should dissipate going forward. Focus on gradual earnings improvement from 3Q17 bottom We also focus on the visible improvement in s earnings. After suffering an earnings shock over two consecutive quarters, the company is now expected to post operating profit in line with the W206.5bn market consensus at W206.1bn (+20.7% QoQ) for 4Q. However, pre-tax profit likely dropped 53.3% QoQ to W47.5bn due to conservative accounting measures taken ahead of the spin-off (one-off loss from asset re-evaluation estimated at W150bn). In 2018, we expect operating profit to climb 21.7% YoY to W1.0tr, led by 1) an upturn in market conditions for textile (upbeat on spandex market conditions with demand growth to exceed supply growth) and industrial materials (ASP to increase in reflection of rising raw material prices) and 2) base effect (YoY base lowered from costs incurred by the power/industrial systems division from suspended construction of a nuclear power plant and other one-off costs of W70bn booked in 2017). Retain BUY for a target price of W180,000 We retain our BUY rating on for a target price of W180,000 (2018F PBR of 1.5x). Investment points are: 1) upbeat forecasts for improvement in share valuations after the transition to a holding company structure; 2) expectations for stronger earnings in 2018 (operating profit +21.7% YoY); and 3) dividend merit (2018F dividend yield of 4.1%). 1 Year to Dec. Sales OP Pre-tax NP EPS Growth BPS PER EV/EBITDA PBR ROE Net Debt (W bn) (W bn) (W bn) (W bn) (Won) (%) (Won) (X) (X) (X) (%) Ratio (%) , , , , , ,971 (7.5) 103, F 12, , , F 13, , , , F 13, , , , ,

2 Outline of s businesses Holding company transition schedule Date Remarks January 3, 2018 Board of directors resolution on spin-off; application for preliminary review submitted March 12, 2018 Submit securities registration statement April 11, 2018 Securities registration statement goes into effect; send out shareholders meeting notifications April 27, 2018 Scheduled date of shareholders meeting June 1, 2018 Scheduled date of spin-off July 13, 2018 Re-listing and change-listing of shares July-December 2018 Stock swap between owner and ; complete transition to holding company structure Financial statements before/after spin off and spin-off ratio (K-IFRS standalone) (bn KRW, Before After 1,000 shares) T&C Heavy Advanced Chem Total assets 7, , , , , ,500.0 Total liabilities 4, , ,167.5 Total equity 3, , Capital stock Spin-off ratio (per 1 existing share) Outstanding shares 35,117 13,795 4,328 9,325 4,480 3,190 (bn KRW) Business focus Others Financials (3Q17) Earnings (2018F) Remarks Total Total Total Sales OP (spin-off issues) assets liabilities equity Subtotal 2,679 1,420 1,259 4, T&C Polyester, Textile Spandex 2, ,360 2, Additional acquisition of facilities in Vietnam nylon Steel and chemical Trade (102) 2, Heavy Industries Advanced Materials export/import Subtotal 2,919 1,640 1,278 3, Heavy Transformers, Industrial industries circuit breakers motor 2,336 1,122 1,213 2, HGS (consolidated subsidiary) excluded Construction Housing , % stake in Chinhung International included Carbon Industrial T/C, industrial fiber, materials thread aramid fiber 3,278 1,248 2,030 2, Spandex production facilities in Vietnam included PTMG, NF3, Chemicals PP, PTA Chemical TAC Film 1, ,355 1, % stake in Shinwha Intertek included Total (pre-spin-off) 14,759 10,693 4,065 13,025 1,009 Capital to be sold within two years ; Note: Based on consolidated statements and earnings Ownership structure before/after spin-off <Before spin-off> Largest shareholder and family members <After spin-off> Largest shareholder and family members <End-2018F> Largest shareholder and family members Over 60% (textile, industrial materials, chemicals, power & industrial systems, construction, trading) Others/consol subsidiaries - Nautilus (ATM) - Goodsprings (water treatment) - Capital (to be sold within two years) (treasury shares 5.3%) 5.3% 5.3% 5.3% T&C (textile/trade) Heavy Industries (heavy industries/ construction) 5.3% Advanced Materials (industrial materials) Chemical (chemicals) T&C (textile/trade) Heavy Industries (heavy industries/ construction) Over 20% Advanced Materials (industrial materials) Chemical (chemicals) ; Note: Domestic/overseas subsidiaries to be placed under the four new entities and the holdco according to business relevance 2

3 4Q17 preview (bn KRW, %) 4Q17F 3Q17 QoQ 4Q16 YoY Previous Consensus Sales 3, , , , ,361.0 OP (4.1) Pre-tax profit (53.3) (9.6) TP NP (81.9) (15.9) TP OPM NPM (0.5) Source: Company data, QuantiWise, Shinhan Investment Corp. Note: NP based on controlling interests Earnings forecast revision Before After Change (bn KRW, KRW, %) 2017F 2018F 2019F 2017F 2018F 2019F 2017F 2018F 2019F Sales 12,496 13,208 13,640 12,426 13,025 13,541 (0.6) (1.4) (0.7) OP 842 1,007 1, ,009 1,204 (1.5) Pre-tax profit , ,059 (19.8) (8.8) 0.8 NP (16.0) (8.8) 0.8 EPS 17,291 17,459 22,000 14,526 15,920 22,169 (16.0) (8.8) 0.8 OPM ROE Source: Shinhan Investment Corp. Note: NP, EPS and ROE based on controlling interests Earnings trend and outlook (bn KRW, %) 1Q17 2Q17 3Q17 4Q17F 1Q18F 2Q18F 3Q18F 4Q18F F 2018F 2019F Sales Total 2,871 3,108 3,119 3,327 3,078 3,327 3,134 3,486 11,929 12,426 13,025 13,541 Textile ,979 2,128 2,311 2,448 Industrial materials ,384 2,398 2,468 2,606 Chemicals ,194 1,506 1,688 1,696 Power & industrial systems ,557 2,262 2,341 2,502 Construction ,072 1,114 1,148 Trading/finance/others ,922 3,061 3,103 3,141 OP Total , ,009 1,204 Textile Industrial materials Chemicals Power & industrial systems (4) Construction Trading/finance/others Pre-tax profit ,059 NP Sales YoY (4.2) growth QoQ (10.0) (7.5) 8.1 (5.8) 11.2 OP YoY 4.5 (33.6) (31.1) (4.1) (1.2) (18.4) growth QoQ 8.0 (5.4) (22.3) (6.1) 1.7 OPM Total Textile Industrial materials Chemicals Power & industrial systems (0.7) Construction Trading/finance/others

4 Target price calculation EBITDA Applied multiple Fair value Remarks (bn KRW, x, 1,000 shares) (12MF) (book value) Operating value (A) Total 1, ,087 Textile ,041 10% premium to SHIC universe chemical sector average Industrial materials ,030 10% premium to SHIC universe chemical sector average Chemicals ,180 SHIC universe petrochemical sector average Power & industrial systems ,254 SHIC universe utility equipment sector average Construction % discount to SHIC universe construction sector average Trading % discount to SHIC universe trading sector average Asset value (B) Total 638 Capital 97.2% Total shareholders equity*stake*target PBR (0.5x vs. ROE 9%) Nautilus 54.0% Total shareholders equity*stake*target PBR (0.6x vs. ROE 5%) Investments in affiliates % discount to book value/ treasury shares based on current price Net debt (C) 5,067 As of end-3q17, excluding Capital (operating asset) Stake of non-controlling interests (D) 208 As of end-3q17 Target market cap. (E=A+B-C-D) 6,450 Outstanding shares (F) 35,117 Target price (E/F, KRW) 180,000 Current price (KRW) 147,500 January 3 close Target return (%) 22.0 Source: Shinhan Investment Corp. Note: Reasons for premium/discount Textile (global competitiveness of spandex), industrial materials (global competitiveness of PET T/C), construction and trading (lack of growth potential) Peer group valuation Company 2017F 2018F Market cap. OP PER PBR EV/EBITDA ROE OP PER PBR EV/EBITDA ROE (bn KRW) growth (x) (x) (x) (%) growth (x) (x) (x) (%) Korea 5,180 (17.7) Petrochemical LG Chem 28, Lotte Chemical 12, (0.9) Spandex Asahi Kasei (Japan) 19, Yantai Tayho (China) 1, Tire cord Indorama (Thailand) 9, Kolon Industries (Korea) 2,252 (22.1) Power & industrial systems GE (U.S.) 166, (9.0) Siemens (U.S.) 126, Source: Bloomberg consensus, Shinhan Investment Corp. Note: Among spandex makers, we recommend taking a long position on and a short position on Yantai Tayho (China). Relative performance of global spandex companies (2015/01/01=100) TK Chemical Asahi Kasei (Japan) Yantai Tayho (China) 12-month forward PBR band (1,000 KRW) x 1.3x 1.0x 0.7x 0.4x 0 01/15 07/15 01/16 07/16 01/17 07/17 01/18 Source: Bloomberg, Shinhan Investment Corp F 18F Source: QuantiWise, Shinhan Investment Corp. 4

5 Balance Sheet Year to Dec. (W bn) F 2018F 2019F Assets 14, , , , ,737.2 Total Current Assets 4, , , , ,412.9 Cash and Cash Equivalents Accounts Receivables 1, , , , ,714.1 Inventories 1, , , , ,651.4 Non-Current Assets 7, , , , ,226.8 Tangible Assets 5, , , , ,108.3 Intangible Assets Investment Assets Other Financial Institutions Assets 2, , , , ,097.4 Liabilities 10, , , , ,582.9 Current Liabilities 6, , , , ,345.9 ST Borrowings 3, , , , ,371.7 Account Payables , , , ,128.4 Current Portion of LT Debt 1, , , , ,380.6 Non-Current Liabilities 3, , , , ,237.1 Bonds 1, , , , ,061.0 LT Borrowings(incl. LT Fin. Liab.) 1, , , , ,376.4 Other Financial Institutions Liab Shareholders' Equity 3, , , , ,154.3 Capital Stock Capital Surplus Other Reserves (35.9) (36.0) (36.0) (36.0) (36.0) Accu. Other Comp. Income Retained Earnings 2, , , , ,261.8 Owners of Parent Equity 3, , , , ,884.7 Non-Controlling Interests Equity *Total Debt 7, , , , ,221.9 *Net Debts(Cash) 7, , , , ,682.9 Profit and Loss Year to Dec. (W bn) F 2018F 2019F Sales 12, , , , ,541.2 Growth (%) 2.3 (4.2) COGS 10, , , , ,172.2 Gross Profit 2, , , , ,369.0 Gross margin (%) SG&A 1, , , , ,164.5 Operating Income , , ,204.5 Growth (%) (18.4) Operating margin (%) Other Net Non-Operating Profits (352.9) (319.8) (273.7) (248.3) (145.7) Financial Income(Expenses) (325.5) (229.1) (44.6) (201.8) (125.0) Net Other Non-Operating Profits (38.8) (119.0) (234.2) (53.8) (31.6) Net Gains in Asso., Subs., and JVs Pre-tax Profit from Cont. Op ,058.8 Income Taxes Profit from Continuing Op Profit from Discontinued Op Net Profit Growth (%) 80.1 (9.6) Net Profit margin (%) Net Profit of Parent Net Profit to Non-Controlling Total Comprehensive Income Total Comp. Income of Parent Total Comp. Income to Non-Cont EBITDA 1, , , , ,882.4 Growth (%) (9.5) EBITDA Margin (%) Note: Operating profit is based on 2012 K-IFRS (gross profit - SG&A costs) Cash Flow Year to Dec. (W bn) F 2018F 2019F Operating Cash Flow 1, , , ,409.5 Net Profit Depreciation Amortization Losses(Gains) on F/X Translation (88.2) 35.4 (21.5) Losses(Gains) on Disp. of Assets (8.9) Losses(Gains) in Asso.., Subs.,JVs (66.4) (28.3) 0.0 (7.3) (11.0) Chg. in A/L from Op. Activities (100.7) (48.8) (38.8) (Payments of Income Taxes) (165.8) (142.8) (38.9) (184.0) (256.2) Others Investing Cash Flow (707.2) (908.3) (635.7) (805.9) (731.8) Incr. in Tangible Assets(CAPEX) (702.2) (903.3) (751.2) (774.6) (750.4) Decr. in Tangible Assets Decr.(Incr.) in Intangible Assets (26.0) (25.8) 4.5 (0.7) (5.7) Decr.(Incr.) in Investment Assets (8.2) Others (133.9) (153.0) (38.3) 18.6 Free Cash Flow Financing Cash Flow (656.5) (999.1) (368.4) (435.9) (602.1) Incr.(Decr.) in Borrowing (560.6) (864.9) (202.0) (252.9) (402.5) Decr.(Incr.) of Treasury Stock Dividend (87.8) (134.9) (166.3) (183.0) (199.6) Others (8.1) 0.7 (0.1) 0.0 (0.0) Other Cash Flows Change of Consolidated Scope Difference by Chg. in F/X Rates Incr.(Decr.) in Cash (13.7) (81.6) (20.9) (4.8) 77.0 Beginning Cash Ending Cash Key Ratios Year to Dec F 2018F 2019F EPS_C (won) 14,975 13,537 14,703 16,412 22,854 EPS_P (won) 14,030 12,971 14,526 15,920 22,169 BPS_C (won) 98, , , , ,773 BPS_P (won) 92, , , , ,097 DPS (won) 3,500 5,000 5,500 6,000 6,000 PER_C (x) PER_P (x) PBR_C (x) PBR_P (x) EV/EBITDA (x) Payout Ratio (%) Dividend Yield (%) Profitability EBITDA Margin (%) OP Margin (%) NP Margin (%) ROA (%) ROE (%) ROIC (%) Stability D/E Ratio (%) Net Debt to Equity (%) Cash Ratio (%) Interest Coverage (x) Activity (%) Working Capital Turnover (t) Inventory Turnover (d) Receivable Turnover (d)

6 ( KS) Share Price Performance (won) 180, , ,000 KOSPI Index = , /16 04/17 08/17 12/17 Price (LHS) Relative Performance to KOSPI (RHS) (Indexed,Dec-16=100) Target Price (won) 250, , , ,000 50, /16 01/17 Target Price (LHS) Price (LHS) Recommendation (RHS) BUY Trading BUY HOLD REDUCE Compliance Notice Analyst Certification: The following analysts hereby certify the information and material presented in this report are accurate expressions of their views, and that they have not received wrongful pressure to express such views: Eung-Ju Lee, SangWon Han. As of the date of this report's publication, Shinhan Investment Corp.'s shareholdings in the company mentioned in this report() do not exceed 1% of outstanding shares of the company. As of this date, Shinhan Investment Corp. has not participated as the lead underwriter or advisor in issuance of the securities of the company during the past 1 year. As of this date, the covering analyst does not possess any financial interest in the securities or debt instruments convertible into such shares of the company, which is required to be disclosed by law, and has not and will not receive any compensation of any kind whatsoever in exchange for expressing specific recommendations. All opinions and estimates regarding the company and its securities are accurate representations of the covering analyst's judgments as of this date, and may differ from actual results. This report is intended to provide information to assist investment decisions only and should not be used or considered an offer or the solicitation of an offer to sell or to buy any securities. Stock selection and final investment decisions should be made at the client's own discretion. This report is distributed to our clients only, and any unauthorized use, duplication, or redistribution of this report is strictly prohibited. Date Recommendation Target Price Target Price Gap (%) (won) Average Max/Min BUY 185,000 (29.2) (24.9) BUY 190,000 (14.7) (7.4) BUY 200,000 (23.6) (12.8) BUY 190,000 (28.8) (27.9) BUY 180, Note: Calculation of target price gap based on the past 6 months Distribution United States: This report is distributed in the U.S. by Shinhan Investment America, Inc., a member of FINRA/SIPC, and is only intended for major U.S. institutional investors as defined in Rule 15a-6(a)(2) under the U.S. Securities Exchange Act of All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major U.S. institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Shinhan Investment Corp. or its affiliates. Pursuant to Rule 15a-6(a)(3), any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Shinhan Investment America, Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. person absent registration or an applicable exemption from the registration requirement. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Shinhan or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Shinhan and its affiliates to any registration or licensing requirement within such jurisdiction. SHIC Rating Classifications (As of Apr. 1, 2017) Stock BUY: Expected return of over +10% in the next 6 months Trading BUY: Expected return of -10% ~ +10% in the next 6 months HOLD: Expected return of -20% ~ -10% in the next 6 months REDUCE: Expected return of below -20% in the next 6 months Sector OVERWEIGHT: Prevalence of BUY rating for stocks in our sector coverage universe based on market cap NEUTRAL: Prevalence of HOLD rating for stocks in our sector coverage universe based on market cap UNDERWEIGHT: Prevalence of REDUCE rating for stocks in our sector coverage universe based on market cap SHIC Universe Rating Classification Ratio (as of Jan. 2, 2018) BUY (BUY) 92.16% Trading BUY (HOLD) 3.43% HOLD (HOLD) 4.41% REDUCE (SELL) 0%