Holding companies - Mirae Asset

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including tAnalysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including tAnalysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including tAnalysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. he U.S. he U.S. he U.S.

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

Holding companies Growing motivation for holding company conversion

1. End of circular shareholdings

For Korean conglomerates, circular shareholdings are no longer a feasible option for

maintaining and expanding control over their vast business empires. Under the revision

to the Monopoly Regulation and Fair Trade Act (MRFTA), large corporate groups are

banned from forming new circular shareholdings or strengthening existing ones.

Companies are allowed to keep previously established circular shareholdings, but are

encouraged to gradually and voluntarily untie their existing shareholdings (which are

required to be publicly disclosed). However, we believe there is a possibility that existing

circular shareholdings could also be directly regulated, potentially becoming subject to

mandatory removal within a certain period.

Ultimately, the unwinding of circular shareholdings should serve as a major catalyst to

convert to a holding company. Some of the biggest Korean conglomerates, such as

Samsung, Hyundai Motor Group (HMG), and Lotte, have recently been making great

efforts to unwind their existing circular shareholdings. By doing so, they may be able to

avoid potential policy risks while also making the transition to a holding company

structure easier. In our view, adopting a holding company structure is the best or

second-best option for conglomerates looking to tighten their managerial control and

ensure ownership succession.

2. Opportune time for holding company conversion

The government is introducing various policies to facilitate holding company conversion.

If the intermediate financial holding company bill passes into law, large corporate groups

will be able to convert to holding structures without being forced to dispose of their

stakes in their financial subsidiaries. In addition, under the Special Act for Corporate Vitality

Improvement (the so-called “one-shot” act), tax benefits would be provided for corporate

groups’ restructuring plans and restructuring processes will be simplified, albeit for a

limited period (five years). Furthermore, through the tax code revision, the statutory

grace period for the deferral of taxation on capital gains from the tender offer would be

extended by three years, until end-2018.

Historically, corporate governance-related pledges tend to increase during presidential

campaigns. Accordingly, the environment for holding company conversions is likely to

become increasingly unfavorable heading into the next presidential election in end-2017.

Meanwhile, it has taken eight months on average from the announcement of holding

structure conversions until the tender offers/rights offerings to meet subsidiary stake

requirements. Thus, the two-year period from now should be the opportune time for

holding company conversion.

3. Attention to shift to dividend after completion of holding company structure

Currently, controlling families are facing increasingly limited opportunities to expand

their wealth through related-party transactions due to strengthening regulations. When

circular shareholdings were large corporate groups’ prevailing structure, dividends were

considered the outflow of groups’ cash holdings. Going forward, however, corporate

groups should be encouraged to increase dividends after completing a holding company

structure as they need a legitimate way to acquire funds to pay inheritance and gift tax

for the transfer of managerial control.

Overweight (Maintain)

Industry Report

November 26, 2015

Daewoo Securities Daewoo Securities Daewoo Securities Daewoo Securities CCCCo., Ltd.o., Ltd.o., Ltd.o., Ltd.

[Holding Companies/IT Services]

Dae-ro Jeong

+822-768-4160

[email protected]

Yoon-seok Seo

+822-768-4127

[email protected]

Holding companies

2

November 26, 2015

KDB Daewoo Securities Research

Opportune time to convert to holding companyOpportune time to convert to holding companyOpportune time to convert to holding companyOpportune time to convert to holding company

Source: KDB Daewoo Securities Research

Major conglomerates’ circular shareholdings and financial subsidiariesMajor conglomerates’ circular shareholdings and financial subsidiariesMajor conglomerates’ circular shareholdings and financial subsidiariesMajor conglomerates’ circular shareholdings and financial subsidiaries

RankRankRankRank NameNameNameName HeadHeadHeadHead Circular Circular Circular Circular

shareholdingshareholdingshareholdingshareholding

FinancialFinancialFinancialFinancial

subsidiariessubsidiariessubsidiariessubsidiaries

RankRankRankRank NameNameNameName HeadHeadHeadHead CircularCircularCircularCircular

shareholdingshareholdingshareholdingshareholding

FinancialFinancialFinancialFinancial

subsidiariessubsidiariessubsidiariessubsidiaries 1 Samsung Lee Kun-hee ○ ○

21 Hyosung Cho Seok-lae X ○

2 HMG Chung Mong-koo ○ ○

22 Dongkuk Steel Jang Se-joo X X

3 SK Chey Tae-won Converted to holding company

(Jul. 3, 2007)

23 Youngpoong Jang Hyung-jin ○ X

4 LG Koo Bon-moo Converted to holding company

(Apr. 3, 2001)

24 Mirae Asset Park Hyun-joo X ○

5 Lotte Shin Kyuk-ho ○ ○

25 Kolon Lee Woong-yul Converted to holding company

(Jan. 1, 2010) 6 Hyundai Heavy

Industries Chung Mong-joon ○ ○

26 Hanjin Heavy

Industries Cho Nam-ho Converted to holding company

(Aug. 1, 2007) 7 GS Huh Chang-soo Converted to holding company

(Jul. 7, 2004)

27 KCC Jung Mong-jin X X

8 Hanjin Cho Yang-ho In process of converting to holding

company (Aug. 1, 2013)

28 Halla Jung Mong-won In process of converting to holding

company (Sep. 2, 2014) 9 Hanwha Kim Seung-yeon X ○

29 Hankook Tire Cho Yang-lae Converted to holding company (Jul.

6, 2013) 10 Doosan Park Yong-gon Converted to holding company

(Jan. 1, 2009)

30 Taekwang Lee Ho-jin X ○

11 Shinsegae Lee Myung-hee X X

31 Daesung Kim Young-dae Converted to holding company

(Jan. 1, 2011) 12 CJ Lee Jae-hyun Converted to holding company

(Sep. 4, 2007)

32 Hyundai

Development -Jung Mong-kyu ○ ○

13 LS Ku Tae-hoi Converted to holding company (Jul.

2, 2008)

33 Kyobo Life

Insurance Shin Chang-jae X ○

14 Kumho Asiana Park Sam-gu ○ X

34 SeAH Lee Soon-hyung Converted to holding company (Jul.

3, 2001) 15 Dongbu Kim Joon-gi X ○

35 E-Land Park Sung-su X ○

16 Daelim Lee Joon-young ○ X

36 Taeyoung Yoon Sae-young X X

17 Booyoung Lee Joong-geun Converted to holding company

(Dec. 30, 2009)

37 HiteJinro Park Moon-deok Converted to holding company (Jul.

3, 2008) 18 Hyundai Hyun Jeong-eun ○ ○

38 AmorePacific Seo Kyung-bae Converted to holding company (Jul.

1, 2007) 19 OCI Lee Soo-young X X

39 Samchully Lee Man-deuk X ○

20 Hyundai

Department Jeong Jee-sun ○ X

40 Hansol Lee In-hee In process of converting to holding

company (Jan. 1, 2015) Note: Excludes government-owned companies

Source: FTC, KDB Daewoo Securities Research

Holding companies

3

November 26, 2015


C O N T E N T S

I. Corporate governance improved sharply in 2015 4 1. For stronger competitiveness and managerial control 4 2. Holding company conversions to increase 5

II. Changes in corporate governance-related policies 7 1. Restrictions on circular shareholding 8 2. Regulations on related-party transactions 9 3. Introduction of intermediate financial holding companies 11 4. Introduction of“one shot” law 12

III. Holding company conversion A to Z 13 1. Method of transition to a holding company 13 2. Requirements for conversion to holding company 14 3. Tax benefits to boost holding company conversion 15 4. Investment opportunities in holding company conversions 16

IV. Group ownership restructuring scenarios 18 1. Samsung Group 18 2. Hyundai Motor Group (HMG) 22 3. Lotte 24

V. Top Picks 27 SK Holdings (034730 KS) 28 LG (003550 KS) 31

Holding companies

4

November 26, 2015


I. Corporate governance improved sharply in 2015

1. For stronger competitiveness and managerial control

Corporate groups’ efforts for improving governance were one of the greatest issues in the Korean

stock market this year. In 2015, major corporate groups have made various efforts to optimize

their business portfolios. Faced with increasing need to concentrate on selected business areas,

corporate groups are seeking to streamline their businesses and improve efficiency of each

business via spin-offs/split-offs and mergers.

Samsung Group and SK Group were the most prominent in this effort. They have optimized their

business portfolios to improve competiveness and strengthen controlling families’ managerial

control. These efforts will likely continue through 2016, with medium-sized corporate groups

following suit.

TableTableTableTable 1111.... Major groupsMajor groupsMajor groupsMajor groups’’’’ restructuring in 2015restructuring in 2015restructuring in 2015restructuring in 2015

RankRankRankRank GroupGroupGroupGroup DetailsDetailsDetailsDetails RankRankRankRank GroupGroupGroupGroup DetailsDetailsDetailsDetails

1 Samsung

Samsung C&T and Cheil Industries merge (Sep. 2015)

20 CJ

CJ Systems and CJ Olive Young merge (Dec. 2014)

Samsung group announces disposal of Samsung SDI’s

chemical unit and Samsung Fine Chemicals to Lotte

Group (Oct. 2015)

Announces sale of CJ HelloVision to SK Group (Nov. 2015)

3 Hyundai

Motor

Sells families’ 13.39% controlling stake in Hyundai Glovis

(Feb. 2015) 26 Daelim Daelim Corporation and Daelim I&S merge (Jul. 2015)

Hyundai Steel and Hyundai Hysco merge (Jul. 2015);

INNOCEAN Worldwide IPO (Jul. 2015)

5 SK SK and SK C&C merge (Aug. 2015)

28 Dongbu Announces sale of Dongbu Farm Hannong (Mar. 2015) SK Telecom to acquire CJ HelloVision (Nov. 2015)

6 LG

LG Int’l acquires 51% of Pantos’s outstanding shares

(Jan. 2015) 29 Hyundai Sells stake in Hyundai Logistics (Oct. 2014)

Pantos fully acquires Hi Business Logistics (Oct. 2015)

7 Lotte

Announces IPO of Hotel Lotte (Aug. 2015)

33 Hyosung Galaxia Communications and Infohub merge (Jul. 2015) Unwinds 84% of Lotte Group’s total cross-shareholdings

(Aug.2015)

14 Hanjin

Hanjin KAL Holdings acquires Jungseok Enterprise’s

investment unit (Jun. 2015) 39 Dongkuk

Steel Dongkuk Steel and and Union Steel merge (Jan. 2015)

Hanjin sells entire stake in Korean Air (Jul. 2015)

15 Hanwha

Hanwha Q Cells and Hawha Solar One merge (Feb. 2015)

42 Halla Halla Holdings and Halla Meister merge (Jul. 2015) Acquires Samsung group’s affiliates (Techwin, Thales,

General Chemicals, etc.) (Jun. 2015)

17 Doosan

Oricom fully acquires HAN COMM. (Aug. 2015)

43 Hankook Tire

Hankook Tire acquires 19.5% stake in Halla Visteon Climate

Control (Jun. 2015)

Announces split-off of Doosan Infracore’s machine tool

division and sell partial stake in the division (Oct 2015) Hankook Tire and Hanyang Tire Sales merge (Jul. 2015)

18 Shinsegae Shinsegae Food and Shinsegae SVN merge (Dec. 2014) 61 Hansol

Hansol Holdings and Hansol Logistics’s investment unit

merge (Mar. 2015)

Hansol Holdings and Hansol Lighting’s investment unit

merge (Aug. 2015)

Notes: Based on total asset size

Source: Fair trade committee, News, KDB Daewoo Securities Research

Holding companies

5

November 26, 2015


2. Holding company conversions to increase

Steady increase in holding company conversions

Currently, a total of 140 holding companies have been established as of October 2015 (+9 in

2011, +10 in 2012, +12 in 2013, +5 in 2014, and +8 in 2015). Since a holding company structure

was allowed under the MRFTA in 1999, the number of holding companies has steadily increased.

Although the number of large corporate groups that have holding companies has steadily risen to

24, there has recently been a slowdown as the MRFTA bans holding companies from having

shares of financial companies, and requires them to eventually unwind circular shareholdings to

become a holding company structure.

Growing demand for holding company conversions

① Government: Request for simpler and more transparent shareholding structure for companies

② Investors: Expectations for growth in EV based on governance improvement and

restructuring via holding company conversion

③ Controlling shareholders: Low stakes � concerns about hostile M&As � defense and transfer

of managerial control

Figure Figure Figure Figure 1111.... Number of holding companiesNumber of holding companiesNumber of holding companiesNumber of holding companies (financial + non(financial + non(financial + non(financial + non----financial)financial)financial)financial)

Source: Fair Trade Commission, KDB Daewoo Securities Research

TableTableTableTable 2222. . . . Current Current Current Current ‘‘‘‘dddde factoe factoe factoe facto’’’’ holding companiesholding companiesholding companiesholding companies (Wbn)

RankRankRankRank GroupGroupGroupGroup De facto holdDe facto holdDe facto holdDe facto holding ing ing ing cocococo Market capMarket capMarket capMarket cap NotesNotesNotesNotes

1 Samsung Samsung C&T 28,928 Samsung C&T and Cheil Industries

merge (Sep. 2015)

3 Hyundai Motor Hyundai Mobis 24,044

7 Lotte Hotel Lotte - Preparing IPO

10 Hyundai Heavy Indust. Hyundai Heavy Industries 6,886

15 Hanwha Hanwha Corp 2,818

17 Doosan Doosan Corp 2,287 Doosan Corp disqualified as holding

company (Dec. 2014)

18 Shinsegae Shinsegae 2,471 Shinsegae spun-off E-mart (May

2011) E-mart 6,049

25 Kumho Asiana Kumho Industrial 555

28 Dongbu Dongbu 92

29 Hyundai Hyundai Elevator 1,468

30 Hyundai Department

Store Hyundai Greenfood 2,467

31 OCI OCI Company 1,801

33 Hyosung Hyosung Corp 4,074

36 Youngpoong Youngpoong Corp 2,037

Notes: Based on Nov, 25th

2015 closing price


22 2736

5570

84 92 103 114 117126

34

4

5

9

1213

12

13 1515

0

20

40

60

80

100

120

140

160

05 06 07 08 09 10 11 12 13 14 15F

Financial holding companies

Holding companies

(unit)

GS

SKCJ

LS

Doosan

KolonDaesung

HanjinKAL Halla

Hansol

Nonghyup

Holding companies

6

November 26, 2015


Figure Figure Figure Figure 2222. . . . MarketMarketMarketMarket capitalization by sectorcapitalization by sectorcapitalization by sectorcapitalization by sector

Notes: Wise26 classification basis, Hanwha Corp(Chemicals), SK(Software), CJ(Consumer Staples) are labeled as Holding companies, Nov, 25th

2015 closing price basis


Figure Figure Figure Figure 3333. . . . Holding companiesHolding companiesHolding companiesHolding companies’’’’ market capitalizationmarket capitalizationmarket capitalizationmarket capitalization

Notes: Holding companies whose market cap Is over W60bn, Nov, 25th

2015 closing price basis


29

18

13 12 9

7 5

3 2 2 1 1 1

0

5

10

15

20

25

30

35(Wtr)

Over W1tr

986 970 913

805 776 710 691 684 649 610

0

200

400

600

800

1,000

1,200

(Wbn)Over W60bn

0

50

100

150

200

250(Wtr)

Holding companies

7

November 26, 2015


II. Changes in corporate governance-related policies

Opportune time for holding company conversion

The government is introducing various policies to facilitate holding company conversion. If the

intermediate financial holding company bill passes into law, large corporate groups will be able to

convert to holding structures without being forced to dispose of their stakes in their financial

subsidiaries. In addition, under the Special Act for Corporate Vitality Improvement (the so-called

“one-shot” act), tax benefits would be provided for corporate groups’ restructuring plans and

restructuring processes will be simplified, albeit for a limited period (five years). Furthermore,

through the tax code revision, the statutory grace period for the deferral of taxation on capital

gains from the tender offer would be extended by three years, until end-2018.

Historically, corporate governance-related pledges tend to increase during presidential

campaigns. Accordingly, the environment for holding company conversions is likely to become

increasingly unfavorable heading into the next presidential election in end-2017. Meanwhile, it

has taken eight months on average from the announcement of holding structure conversions

until the tender offers/rights offerings to meet subsidiary stake requirements. Thus, the two-year

period from now should be the opportune time for holding company conversion.

Figure Figure Figure Figure 4444. . . . Opportune tOpportune tOpportune tOpportune time ime ime ime totototo convert to holding companconvert to holding companconvert to holding companconvert to holding companyyyy


Holding companies

8

November 26, 2015


1. Restrictions on circular shareholding

For Korean conglomerates, circular shareholdings are no longer a feasible option for maintaining

and expanding control over their vast business empires. Under the revised Monopoly Regulation

and Fair Trade Act (MRFTA), large corporate groups are banned from forming new circular

shareholdings or strengthening existing ones. Companies are allowed to keep previously

established circular shareholdings, but are encouraged to gradually and voluntarily untie their

existing shareholdings (which are required to be publicly disclosed).

Ultimately, the unwinding of circular shareholdings should serve as a major catalyst to convert to

a holding company. Some of the biggest Korean conglomerates, such as Samsung, Hyundai Motor

Group (HMG), and Lotte, have recently been making great efforts to unwind their existing circular

shareholdings. Going forward, we expect conglomerates to continue to unwind their circular

shareholdings to improve their corporate governance and switch to a holding company structure.

1) Under the revised MRFTA, large corporate groups are banned from forming new circular

shareholdings or strengthening existing ones.

Following the passage of the revision to the MRFTA in late 2013, the government’s ban on new

cross-shareholdings between affiliates of conglomerates subject to cross-shareholding

restrictions took effect on July 25, 2014. The law bans 1) new circular equity investments and 2)

the acquisition of additional shares to strengthen existing circular ownership structures within a

single corporate group.

Breach of the act could result in: 1) penalties (up to 10% of purchase price), 2) restrictions on the

exercise of voting rights (for every stock used to establish or strengthen circular shareholdings

following the date on which an order of disposal was issued), or 3) criminal prosecution (up to

three years in prison or up to W200mn in fines).

2) Companies are allowed to keep previously established circular shareholdings. However, they

are being encouraged to gradually and voluntarily untie their existing shareholdings.

Indeed, the Fair Trade Commission (FTC) now requires 1) each company under the umbrella of a

large corporate group to disclose its cross-shareholding status, and 2) the representative firm of

each corporate group to disclose the group’s overall cross-shareholding status as of April 1st on

May 31st of each year. And any corporate group that has experienced a change in the cross-

shareholding ties of its affiliates shall disclose such changes at the end of the following quarter

(February 28th, May 31st, August 31st, and November 30th).

3) However, we believe there is a possibility that existing circular shareholdings could also be

directly regulated after the presidential election in late 2017, potentially becoming subject to

mandatory removal within a certain period.

TableTableTableTable 3333. . . . Pledges by 2012 presidential election candidatesPledges by 2012 presidential election candidatesPledges by 2012 presidential election candidatesPledges by 2012 presidential election candidates

Park GeunPark GeunPark GeunPark Geun----hyehyehyehye Moon JaeMoon JaeMoon JaeMoon Jae----inininin Ahn CheolAhn CheolAhn CheolAhn Cheol----soosoosoosoo

New circular

shareholdings Ban Ban Ban

Existing circular

shareholdings No new measures

Complete unwinding after

three-year grace period

Voluntary unwinding followed

by possible regulatory

intervention

Other - Violators subject to restrictions

on voting rights and fines

Violators subject to forced

disposal


TableTableTableTable 4444. . . . Major groupsMajor groupsMajor groupsMajor groups’’’’ crosscrosscrosscross----shareholdingsshareholdingsshareholdingsshareholdings (units)

GroupGroupGroupGroup 2013201320132013 2014201420142014 2015201520152015

Samsung 30 14 7 Holds financial affiliates

Hyundai Motor 2 5 4 Holds financial affiliates

Lotte 5,851 299 67 Holds financial affiliates

Hyundai Heavy Ind. 1 1 1

Hanjin 2 3 0

Dongbu 5 0 0 Holds financial affiliates

Daelim 1 1 1

Hyundai 4 6 0 Holds financial affiliates

Hyundai

Department Store 3 3 3

Youngpoong 9 6 6

Hyundai

Development 4 4 4 Holds financial affiliates

Notes: Based on cross-shareholdings which is over 1% stake, Source: KDB Daewoo Securities Research

Holding companies

9

November 26, 2015


2. Regulations on related-party transactions

Currently, the government is taking a two-track approach to regulations on related-party transactions by easing its stance on corporations (benefiting companies) on the one hand while tightening restrictions on individuals (controlling families) on the other.

1) Corporate regulations

Restrictions apply to subsidiaries or affiliates in which a specially-related person owns, individually or together with his family members, no less than 30% of issued shares (20% for unlisted subsidiaries or affiliates).

Provision of unfair profits can include: 1) deals with substantially favorable conditions, 2) the bestowal of business opportunities, and 3) transactions of substantial volume without reasonable consideration of external options. However, transactions necessary to improve efficiency, ensure security, and meet urgent needs will be exempt from regulations on related-party transactions.

2) Individual regulations

In the past, economic gains made by managing families from related-party deals were left unregulated. To prevent chaebol families from distributing their wealth to heirs unfettered, the government classified profits from related-party transactions as taxable gifts under the inheritance/gift tax law in 2011 with enforcement beginning in 2013.

The gift tax is calculated based on the NOPAT of any company in which the controlling shareholder and/or an affiliated person has a 3% or higher stake, if the company’s revenue from transactions with group affiliates exceeds 15% of total revenue.

Of note, the gift tax is calculated based on the operating profit generated from transactions between a company (i.e., beneficiary) and an entity affiliated with the controlling shareholder of the company. As the operating profit of a company translates into gains for shareholders (through share price advances), profits from related-party transactions are deemed gifts given to the controlling shareholder, etc.

Table Table Table Table 5555. Regulations on related party transactions. Regulations on related party transactions. Regulations on related party transactions. Regulations on related party transactions

LawLawLawLaw ProvisionsProvisionsProvisionsProvisions TimelineTimelineTimelineTimeline

MRFTA

↓

Providing companies,

benefiting companies,

controlling families

Ban on:

1) Deals with substantially favorable conditions

* Exemption: The price difference with arms’ length transaction is less than 7%, and the

annual transaction amount is less than W5bn (or W20bn for goods/services)

MRFTA revision bill passed by National

Assembly (July 2nd, 2013)

Legislation notice of revision to

Enforcement Decree (Oct. 2nd, 2013)

Revised Enforcement Decree took

effect (Feb. 14th, 2014)

* One-year grace period for ongoing

related party transactions, until Feb.

14th, 2015

2) Bestowal of business opportunities

* Exemption: Only the related party is capable of performing the business, or the related

party won the contract in a fair manner

3) Transactions of substantial volume without reasonable consideration of outside

options

* Exemption: Annual transaction amount is less than 12% of the transaction party’s

revenue, and less than W20bn; or the transactions are necessary to improve efficiency,

ensure security, and meet urgent needs

Inheritance/gift tax

↓

controlling families

Profits from related-party transactions are deemed taxable gifts given to the controlling

shareholder, etc.

**** Taxable profit = NOPAT Taxable profit = NOPAT Taxable profit = NOPAT Taxable profit = NOPAT ×××× (percentage of related(percentage of related(percentage of related(percentage of related----party transactions party transactions party transactions party transactions ---- 15%) 15%) 15%) 15%) ××××

(ownership stake (ownership stake (ownership stake (ownership stake ---- 3%)3%)3%)3%) ×××× gift tax rategift tax rategift tax rategift tax rate

Revision to inheritance/gift tax (Dec.

31st, 2011)

Revised inheritance/gift tax took

effect as of 2013


Table Table Table Table 6666. Penalties for breach of related party transaction provision under MRFTA. Penalties for breach of related party transaction provision under MRFTA. Penalties for breach of related party transaction provision under MRFTA. Penalties for breach of related party transaction provision under MRFTA

ClassificationClassificationClassificationClassification Corrective Corrective Corrective Corrective actionactionactionaction PenaltiesPenaltiesPenaltiesPenalties Criminal penaltiesCriminal penaltiesCriminal penaltiesCriminal penalties

Providing company

- Discontinuance of provision of unfair

profits to related parties, and

introduction of measures to prevent

recurrence of similar practices

- Deletion of relevant contract terms

- Disclosure of imposition of corrective

orders

- Other necessary measures

(Article 24 of MRFTA)

- In the amount not exceeding 5% of

revenue

- Notice on penalties pronounced on May

30th, 2014

- Up to W2bn, absent revenue (Article 24-

2, Paragraph 2 of MRFTA)

- Imprisonment of up to 3 years, or a fine

of up to W200mn

(Article 66, Paragraph 1 of MRFTA) Controlling families &

related parties

Benefiting company

- Discontinuance of provision of unfair

profits to related parties, and

introduction of measures to prevent

recurrence

- Deletion of relevant contract terms

- Disclosure of imposition of corrective

orders

- Other necessary measures

(Article 24 of MRFTA)

- In the amount not exceeding 5% of

revenue

- Notice on penalties pronounced on May

30th, 2014

- Up to W2bn, absent revenue (Article 24-

2, Paragraph 2 of MRFTA)

Not applicable


Holding companies

10

November 26, 2015


Figure Figure Figure Figure 5555. . . . DeterminationDeterminationDeterminationDetermination of relatedof relatedof relatedof related----party transactionparty transactionparty transactionparty transaction


Figure Figure Figure Figure 6666. . . . DeterminationDeterminationDeterminationDetermination of deemed donationof deemed donationof deemed donationof deemed donation


Urgency

No

Efficiency

Yes

Yes

Yes

Yes

No

No

Yes

Yes

Normal related-party

transaction

No

Yes

Yes

No

Related-party transaction is considered to provide unfair

support to related parties

→ Impose legal controls

Security

Does conglomerate in question have over W5tr in total

assets and an ownership structure of a chaebol? Is it

subject to aban on new cross-shareholding?Hyundai Glovis

Does the transaction have

substantially favorable conditions

compared to arm’s length transaction?

Does the transaction bestow business opportunities that could provide substantial profits

without reasonable payment in return?

Is the transaction of substantial

volume and made without reasonable

consideration of external options?

Does the transaction involve an affiliate in which an

individual or inclusive of family members hold more than

30% of issued shares (20% for an unlisted affiliate)?

Holding companies

11

November 26, 2015


3. Introduction of intermediate financial holding companies

▶▶▶▶ Government is moving to allow non-financial holding companies to own financial

subsidiaries

▶▶▶▶ Government has recently demonstrated its firm commitment to the introduction of

intermediate financial holding companies

The bill allowing non-financial holding companies to own financial subsidiaries and requiring

conglomerates to establish intermediate financial holding companies under certain circumstances

is still pending at the National Assembly. However, the government has recently demonstrated its

firm commitment to the introduction of intermediate financial holding companies.

Many large conglomerates already own a number of financial and insurance companies. Under

current law, they are prohibited from converting to a holding company unless they sell their

financial subsidiaries. Thus, once non-financial holding companies are allowed to own financial

subsidiaries via intermediate financial holding companies, large conglomerates will be able to

convert to holding structures without being forced to dispose of their stakes in their financial

subsidiaries. In other words, the introduction of intermediate financial holding companies would

ultimately encourage large conglomerates to adopt holding structures.

Currently, out of the 62 conglomerates subject to cross-shareholding restrictions (as designated

by the FTC), 29 are based in manufacturing yet have financial companies as subsidiaries. Among

them, Samsung, HMG, Lotte, Hanwha, and Dongbu would need to introduce intermediate

financial holding companies if they were to choose to adopt holding structures. Once non-

financial holding companies are allowed to own financial subsidiaries, these conglomerates may

switch to holding structures to solidify or transfer ownership while keeping their stakes in

financial subsidiaries intact.

Figure Figure Figure Figure 7777. . . . Introduction of intermediate financial holding companIntroduction of intermediate financial holding companIntroduction of intermediate financial holding companIntroduction of intermediate financial holding companyyyy


TableTableTableTable 7777. . . . GovGovGovGovernmenternmenternmenternment to allow nonto allow nonto allow nonto allow non----financial holding companies to own financial subsidiariesfinancial holding companies to own financial subsidiariesfinancial holding companies to own financial subsidiariesfinancial holding companies to own financial subsidiaries

NotesNotesNotesNotes

Proposal to revise the Fair

Trade Act (9/26/12)

Permission for holding companies to own financial subsidiaries; introduction of

intermediate financial holding companies to prevent movement of capital between

financial and non-financial companies

Presidential transition

committee’s national agenda

(3/21/13) Permission for holding companies to own financial subsidiaries; obligation to establish

intermediate financial holding company if certain criteria are met—e.g. companies that

own three or more financial subsidiaries (including insurers), or whose financial

subsidiaries (including insurers) hold total assets of at least W20tr

FTC policy briefing (4/24/13)

Plan to promote M&As

(3/6/14)

FTC reports to National

Policy Committee

(7/2/14)

Prioritize the establishment of intermediate financial holding companies in order to

encourage large conglomerates to improve their corporate governance and separate

financial and non-financial capital

New economic team’s policy

direction (7/30/14)

Passage of economic democratization agenda items (including requirements to establish

intermediate financial holding companies) by year-end

Current ~ The government and ruling parties are trying to introduce intermediate financial

holding company in the end of 2015


Holding companies

12

November 26, 2015


4. Introduction of““““one shot” law

▶▶▶▶ The bill to pass the National Assembly by end-2015; Provides a support package for

companies undergoing restructuring for five years

▶▶▶▶ ““““One shot” law to facilitate business restructuring full swing via M&As

- Timeline

The government sought to introduce the so-called “one shot” law, or a special law to boost

corporate vitality, which was outlined in the Ministry of Strategy and Finance’s (MOSF) “2015

Economic Policy Directions” report (December 22nd, 2014); The government announced the

results of research into the “one shot” law (May 27th, 2015); Lawmaker Lee Hyun-jae led the way

in proposing a bill to introduce the “one shot” law (July 9th, 2015); The bill is expected to pass the

National Assembly by end-2015, and the “one shot” law will likely be implemented in 2016.

- Purpose

Designed to demand that companies take preemptive reorganizing efforts � Provides a support

package for companies undergoing restructuring to advance into new business areas (Case of

Japan: Enacted a special law to boost industry vitality in 1999, contributing to raising corporate

profitably and economic growth; The average ROA of 103 companies subject to the law climbed

from 2.9% in 2003 to 3.9% in 2007, while payrolls increased by 49,000)

- Key highlights

The law is designed to make it easier for companies to restructure their businesses by allowing

them to circumvent certain regulatory restrictions if their restructuring plans are approved by a

private-public committee and the related ministry.

(Submission of restructuring plan � approval by a private-public committee and the related

ministry � application of the “one shot” law reduces business restructuring expenses, including

M&A costs, and regulatory restrictions

Table Table Table Table 8888. Special law to boost corporate vitality. Special law to boost corporate vitality. Special law to boost corporate vitality. Special law to boost corporate vitality

DetailsDetailsDetailsDetails

Target

Companies undergoing restructuring in sectors in oversupply (Example: shipbuilding, steel, display, auto, etc.)

**** Sectors in oversupplySectors in oversupplySectors in oversupplySectors in oversupply

: Sectors that have many non-viable firms due to intense competition, or those that have seen competitiveness deteriorate due to

the emergence of replacement industries

1) Sector revenue and operating profit fell sharply for the past three years, compared to their 10-year averages; The recent three-

year price hike is lower than the increase in raw material costs

2) Oversupply is unlikely to ease for the time being due to the difficulty of cost reduction

Support period Support companies undergoing restructuring for five years


Table Table Table Table 9999. Details of “one shot” law . Details of “one shot” law . Details of “one shot” law . Details of “one shot” law

Regulatory itemsRegulatory itemsRegulatory itemsRegulatory items Measures under Measures under Measures under Measures under considerationconsiderationconsiderationconsideration

Reduce cost burden Appraisal rights

In M&As, extend share repurchase period for dissenting shareholders (from one to three months for listed

firms and from two to six months for non-listed firms)

Period of exercising appraisal rights: From less than 20 days after a shareholders’ meeting to less than 10

days

Corporate registration tax 50% cut in corporate registration tax

Relax holding

company regulations

Holding third-tier

subsidiaries

Allow ownership of third-tier subsidiary if holding company owns a 20% or higher stake (Currently,

holding companies must own 100% of third-tier subsidiaries)

Extend deadline for holding company conversion to (Currently two years, but can be extended by two

years )

Debt guarantee

Cross/circular shareholding

Joint shareholding

Allow debt guarantee during holding company conversion

Extend grace period to unwind cross/circular shareholdings from six months to one year

Allow subsidiaries to jointly invest in a second-tier subsidiary during holding company conversion

Simplify procedure

Small-scale merger Exempt shareholder resolution when newly issued shares for merger account for less than 20% of

outstanding shares (currently less than 10%)

Shareholders’ meeting

Abort a small-scale merger in the event that 20% or more of the surviving company’s shareholders

oppose the merger (currently 10% or more)

Shorten the period of shareholder notice and financial disclosure from two weeks to one week

Exempt shareholder resolution when acquiring company buys more than 2/3 of acquired company’s

outstanding shares (currently more than 90%)


Holding companies

13

November 26, 2015


III. Holding company conversion A to Z

1. Method of transition to a holding company

▶▶▶▶ Holding company conversion: 1) Spin-off, 2) tender offer, 3) rights offering

▶▶▶▶ It took an average of eight months from announcement to rights offering

Several companies that underwent transitions into holding companies opted for tender offers

after spinning off their subsidiaries. In other words, once a company is separated into a holding

company and a subsidiary, the holding company could acquire a stake in the subsidiary via a

tender offer to meet regulatory qualifications (20% stake in listed subsidiaries and 40% stake in

unlisted subsidiaries). Then, shareholders would receive new shares of the holding company via a

rights offering in return for their shares in the subsidiary.

This method of transition is the most popular among companies switching to a holding company

structure, as it allows the controlling shareholder to increase their stakes in the holding company

and allows holding companies to raise its stakes in subsidiaries. Acquiring a stake in an affiliate in

the open market would require a substantial amount of funds, whereas a tender offer followed by

a rights offering would enable a holding company to easily gain stakes in its subsidiaries without

having to invest sizable funds. Simply put, controlling shareholders can assert their ownership in

holding companies at minimal costs, and holding companies can meet their regulatory

requirements for ownership in subsidiaries.

It took an average of eight months from the announcement of a holding company conversion to

rights offering (four months for a BOD meeting, a shareholders’ meeting, and re-listing, and

another four months for a rights offering, share exchange, and listing of new shares. In the event

that subsidiary earnings were weak, it took more than 12 months to ensure more favorable share

exchange ratios for controlling shareholders.

TableTableTableTable 10101010. . . . Average of eight months (247 days) from announcement of holding company conversion Average of eight months (247 days) from announcement of holding company conversion Average of eight months (247 days) from announcement of holding company conversion Average of eight months (247 days) from announcement of holding company conversion

to tender offer/rights offeringto tender offer/rights offeringto tender offer/rights offeringto tender offer/rights offering

Holding companyHolding companyHolding companyHolding company Announcement Announcement Announcement Announcement

datedatedatedate Split dateSplit dateSplit dateSplit date ReReReRe----listing datelisting datelisting datelisting date

Tender offer & Tender offer & Tender offer & Tender offer &

rights offeringrights offeringrights offeringrights offering

Announcement Announcement Announcement Announcement

until tender until tender until tender until tender

offer/rights offer/rights offer/rights offer/rights

offeringofferingofferingoffering

Halla Holdings Apr. 07, 2014 Sep. 01, 2014 Oct. 06, 2014 Nov. 06, 2014 213 days

Hanjin KAL Mar. 22, 2013 Aug. 01, 2013 Sep. 16, 2013 Sep. 23, 2014 550 days

Korea Kolmar

Holdings Jun. 04, 2012 Oct. 01, 2012 Oct. 19, 2012 Dec. 11, 2012 190 days

Hankook Tire

Worldwide Apr. 25, 2012 Sep. 01, 2012 Oct. 04, 2012 May 20, 2013 390 days

AK Holdings Apr. 24, 2012 Sep. 01, 2012 Sep. 17, 2012 Nov. 14, 2012 204 days

Samyang Holdings Aug. 10, 2011 Nov. 01, 2011 Dec. 05, 2011 Jun. 01 , 2012 296 days

Kolon Oct. 15, 2009 Dec. 31, 2009 Feb. 01, 2010 May 24, 2010 221 days

KC Green Holdings Sep. 28, 2009 Jan.01, 2010 Jan. 29, 2010 May 14, 2010 228 days

Youngone Holdings Apr. 14, 2009 Jul. 01, 2009 Jul. 30, 2009 Aug. 31, 2009 139 days

Iljin Holdings Apr. 16, 2008 Jul. 01, 2008 Aug. 01, 2008 Sep. 08, 2008 145 days

Hitejinro Holdings Apr. 16, 2008 Jul. 01, 2008 Jul. 30, 2008 Jul. 22, 2009 462 days

Hanjin Heavy Ind. &

Const. Holdings May 15, 2007 Aug. 01, 2007 Aug. 31, 2007 Oct. 08, 2007 146 days

SK Apr. 11, 2007 Jul. 01, 2007 Jul. 25, 2007 Aug. 29, 2007 140 days

Woongjin Feb. 15, 2007 May 01, 2007 May 31, 2007 Aug. 02, 2007 168 days

CJ Jun. 12, 2007 Sep. 01, 2007 Oct. 04, 2007 Nov. 08, 2007 149 days

Amorepacific

Group Mar. 15, 2006 Jun. 01, 2006 Jun. 29, 2006 Oct. 09, 2006 208 days

LG Nov. 15, 2000 Apr. 01, 2001 May 02, 2001 Nov. 08, 2001 358 days

Average time until tender offerAverage time until tender offerAverage time until tender offerAverage time until tender offer/rights offering/rights offering/rights offering/rights offering 247 days247 days247 days247 days

Notes: Tender offer/rights offering date is based on date of public announcement


Holding companies

14

November 26, 2015


2. Requirements for conversion to holding company

▶▶▶▶ Four conditions for establishing a holding company

In order to establish or convert to holding company, the company must meet all of the following

four requirements:

First, a domestic holding company must possess assets worth more than W100bn. The asset

threshold has been raised from initial W10bn, to W30bn in 2001, and to W100bn in 2002.

Second, the sum of stakes in subsidiaries owned by a holding company must exceed 50% of the

holding company’s asset value. Under the enforcement decree to MRFTA, a holding company is

designed to control operations of domestic subsidiaries. It should be noted that even if the sum

of shares in affiliates (not subsidiaries) exceeds 50% of asset value, the holding company does not

meet this qualification.

Third, a holding company must directly possess shares in companies that it controls, rather than

taking executive posts at the companies or having a de facto influence.

Fourth, a holding company is designed to control only domestic companies; overseas affiliates are

not considered subsidiaries. However, if a holding company establishes firms in Korea in

partnership with foreign investors, these foreign-invested firms could be regarded as subsidiaries.

In the meantime, under the MRFTA, companies that meet all of the aforementioned four

requirements will be automatically considered holding companies and will be subject to relevant

regulations.

TableTableTableTable 11111111.... RequirementRequirementRequirementRequirement totototo convert to holding companconvert to holding companconvert to holding companconvert to holding companyyyy

DetailsDetailsDetailsDetails

Requirement to

convert

Total assets Total assets > W100bn

Share ratio Value of stakes in subsidiaries is over 50% of parent basis total assets

Restrictions

Debt ratio Less than 200%

Separation of

industrial and

financial capital

Barred from holding stakes in financial subsidiaries (second and third-tier)

Share ratio Stakes in listed subsidiaries (second-tier subsidiaries): over 20%

Stakes in un listed subsidiaries (second-tier subsidiaries): over 40%

Holding third-tier

subsidiaries

Permitted only if second-tier subsidiaries owns 100% stakes in third-tier

subsidiaries

Stakes in non-

affiliates Holding companies can hold under 5% stake in non-affiliates

Prohibited from

joint investment Holding companies can invest only in affiliates

Source: Fair trade committee, News, KDB Daewoo Securities Research

Figure Figure Figure Figure 8888. . . . Requirement for holding company structureRequirement for holding company structureRequirement for holding company structureRequirement for holding company structure


Holding companies

15

November 26, 2015


3. Tax benefits to boost holding company conversion

▶▶▶▶ Deferral of capital gains tax arising from the conversion process

Conversion to a holding company inevitably entails share transfer and a resulting tax burden. The

biggest tax burden is capital gains tax (or corporate tax). In most of cases, capital gains on the

sale of listed shares are not subject to tax. However, major shareholders are subject to a capital

gains tax.

Under the current tax law, major shareholders are those that meet either share ratio or stake

value <Table 12>. This is determined by taking into account all shares owned by not just the

person, but also by relatives (stipulated by the law) and related parties. Thus, controlling family

members of a listed firm are rarely free from capital gains tax when they do equity transactions.

In order to facilitate conversion to a holding company, the Korean government provides holding

companies with a statutory grace period for the deferral of taxation on capital gains from the

tender offer until the disposal of holding companies’ shares. Specifically, under the Special Tax

Treatment Control Act (Article 38-2), shareholders that receive shares in the holding company in

return for their shares in the subsidiary are not subject to capital gains/income taxes until they

dispose of the holding company shares. Given that such disposal rarely occurs (because stake is

directly related with management control), taxation burden should largely dissipate.

These tax benefits will be effective only until December 31st, 2018. We see these benefits are

meant to encourage holding company conversion by relieving funding burden of major

shareholders.

TableTableTableTable 12121212. . . . Qualification Qualification Qualification Qualification of major shareholder and of major shareholder and of major shareholder and of major shareholder and capitalcapitalcapitalcapital gains gains gains gains tax ratetax ratetax ratetax ratessss

KOSPIKOSPIKOSPIKOSPI KOSDAQKOSDAQKOSDAQKOSDAQ

Share ratio 2% → 1% 4% → 2%

Stake value Over W5bn → Over W2.5bn Over W4bn → Over W2bn

Cap. gainsCap. gainsCap. gainsCap. gains raterateraterate

KOSPI & KOSDAQ

listed stocks

Major

shareholders

Small businesses 10% → 20%

Large companies Held over 1yr 20%

Held less than 1yr 30%

Minority shareholders Tax-free

Unlisted stocks

Small businesses 10%

Large companies

Minority shareholders and major shareholders

(held over 1 year) 20%

Major shareholders (held less than 1 year) 30%

Notes: New tax rates take effect April 2016


Holding companies

16

November 26, 2015


4. Investment opportunities in holding company conversions

▶▶▶▶ investors can capitalize on controlling shareholders’ efforts to secure sufficient stakes

during the conversion process

After a corporate group announces its decision to convert to a holding company and

subsequently splits off into a holding company and one or more subsidiaries, we advise investors

to accumulate shares in its subsidiaries during the conversion process until the holding company

acquires subsidiaries’ shares via a tender offer.

Following the tender offer, we recommend investors increase their exposure to the holding

company, as the stock’s perceived undervaluation could trigger a sharp narrowing of its discount

to its net asset value. It goes without saying that our investment strategy is premised on strong

confidence in the operating value of the spun-off subsidiaries.

Controlling shareholders typically make efforts to raise the value of their subsidiary until the

tender offer. The reason behind this is that, as shares of the subsidiary rise, they can secure more

newly issued shares of the holding company in exchange for their stake in the subsidiary. After a

tender offer is announced, the share swap ratio will be determined, positively affecting shares of

the holding company thanks to the lifting of uncertainties over new share issuance.

Figure Figure Figure Figure 9999. . . . ConverConverConverConversionsionsionsion process: Equity spinprocess: Equity spinprocess: Equity spinprocess: Equity spin----offoffoffoff��Tender offerTender offerTender offerTender offer��Equity swapEquity swapEquity swapEquity swap


Figure Figure Figure Figure 10101010. . . . Historical sHistorical sHistorical sHistorical sharehareharehare performance performance performance performance during conversionduring conversionduring conversionduring conversion to holding companyto holding companyto holding companyto holding company


Holding ASubsidiary A Subsidiary B

① Equity spin-off

Subsidiary B

Operating co. A

Holding A

Subsidiary BOperating co.

A

② Tender offer&

Equity swap

20% 40%

15% of treasury shares

20%

20%

15%

40%

20%+α

35% 40%

Controllingshareholders



0

50

100

150

200

07.9 07.12 08.3 08.6 08.9

(Stock price)

Announce transitionto holding company

Equity spin-offTender offerEquity swap

Holding

company

Subsidiary

(Time)

Holding companies

17

November 26, 2015


▶▶▶▶ Changes in market caps after conversion: Pre-conversion market cap < post-conversion

market cap

Comparing pre- and post–conversion market caps also supports our investment case. Although

uncertainties arise during the trading suspension period, we note that the combined market cap

of a holding company and its subsidiary is larger than the pre-conversion market cap of the

subsidiary.

Theoretically speaking, corporate value should not change after conversion, as a subsidiary just

splits into a holding company and a new subsidiary. However, this is not the case, as we have

outlined above. As such, expectations that conversion to a holding structure will ensure higher

independence and specialized management appear to be reflected in corporate value. Therefore,

the announcement of a firm’s conversion into a holding company will likely be well received in the

stock market, as the change should not just improve corporate governance but also clarify each

subsidiaries’ business focus.

Figure Figure Figure Figure 11111111. . . . NongsimNongsimNongsimNongsim’’’’ssss equity spinequity spinequity spinequity spin----offoffoffoff Figure Figure Figure Figure 12121212. . . . SKSKSKSK’’’’s equity spins equity spins equity spins equity spin----offoffoffoff Figure Figure Figure Figure 13131313. . . . Hankook TireHankook TireHankook TireHankook Tire’’’’s equity spins equity spins equity spins equity spin----offoffoffoff

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

Figure Figure Figure Figure 14141414. . . . Aekyung PetrochemAekyung PetrochemAekyung PetrochemAekyung Petrochem’’’’s equity s equity s equity s equity

spinspinspinspin----offoffoffoff

Figure Figure Figure Figure 15151515. . . . Korea KolmarKorea KolmarKorea KolmarKorea Kolmar’’’’s equity spins equity spins equity spins equity spin----

offoffoffoff Figure Figure Figure Figure 16161616. . . . DongDongDongDong----A STA STA STA ST’’’’s equity spins equity spins equity spins equity spin----offoffoffoff

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

Holding companies

18

November 26, 2015


IV. Group ownership restructuring scenarios

1. Samsung Group

(1) Issues

▶▶▶▶ Expanding control over SEC: SEC’s split, followed by merger of SEC’s investment holding

unit and Samsung SDS

▶▶▶▶ Unwinding circular shareholdings: Once the group secures complete control over SEC

through Samsung C&T, remaining circular shareholdings to be untied

TableTableTableTable 13131313. . . . Controlling familiesControlling familiesControlling familiesControlling families’’’’ stakesstakesstakesstakes (%, Wbn)

NameNameNameName RelationRelationRelationRelation CompanyCompanyCompanyCompany StakeStakeStakeStake ValueValueValueValue

Lee Kun-hee

(1942) -

SEC 3.38 6,476

Samsung Life 20.76 4,484

Samsung C&T 2.86 827

Samsung SDS 0.01 3

Total 11,790

Lee Jay-yong

(1968) Eldest son

Samsung C&T 16.54 4,784

SEC 0.57 1,092

Samsung SDS 11.25 2,263

Total 8,139

Lee Boo-jin

(1970) Eldest daughter

Samsung C&T 5.51 1,595

Samsung SDS 3.90 785

Total 2,380

Lee Seo-hyun

(1973) Second daughter

Samsung C&T 5.51 1,595

Samsung SDS 3.90 785

Total 2,380

Notes: Based on Nov, 25th

2015 closing price, Source: Dart, KDB Daewoo Securities Research

Figure Figure Figure Figure 17171717. . . . Samsung Samsung Samsung Samsung GGGGrouprouprouproup’’’’s corporate governances corporate governances corporate governances corporate governance (current)(current)(current)(current)


7.2%

1.3%

5.1%

15.0%

11.1%

4.1%

19.6%

23.7%

4.8%

37.5% 34.4%

(Treasury shares12.2%)

7.3%

17.6%

(Treasuryshares12.7%)

Lee Jae-yong and related parties

Cheil Industries[028260]

Samsung C&T[000830]

SEC[005930]

Samsung SDS[018260]

Samsung SNS

Samsung Fine Chemicals[004000]

S1[012750]

Samsung Card[029780]

Samsung Securities[016360]

Samsung Life[000810]

Samsung SDI[006400]

Formerly CheilIndustries[001300]

Samsung Engineering[028050]

SHI[010140]

SEMCO[009150]

Samsung Welstory

Hotel Shilla[008770]

100%

19.3%

Cheil Worldwide[030000]

12.6%

12.6%

22.6%

13.1%

11.0%

14.7%

7.8%

30.8%

2.6%

(Treasury shares0.05%)

8.0%

20.8%

1.4%

8.4%

19.1%

(Sep. 23, 2013)Cheil Industries’ fashionbusinesstransferredto Everland

①

(Sep. 27, 2013) Samsung SDS and Samsung SNS merge②

(Nov. 4, 2013 ) Everlanddecides to split offSamsung Welstory(wholly-owned subsidiary)③

(Dec. 12, 2013)Lifepurchasesstake inCard(6.38%)④

(Mar.31, 2014)SDI mergedwith Cheil Industries

⑤

(Sep. 1, 2014)AnnouncesmergerbetweenSHI andEngineering,(Nov. 19, 2014)Merger fails⑥

(Nov. 26, 2014)HanwhaGroupacquiresSamsungTechwin,SamsungTotal, SamsungGeneral Chemicals,SamsungThales

⑦

(Nov.26,2014)CheilWorldwidesoldtreasurystock(10%toSEC)SECtobuybackshares(1.12%)

⑧

(May26, 2015)Announcedmerger betweenCheil IndustriesandSamsungC&T

⑨

⑩ (Jul 14, 2015)Modulebusinesstransfer

17.1%


Holding companies

19

November 26, 2015


(2) Expanding control over SEC

▶ Acquisition of additional stakes unlikely

1) Currently, Samsung Group owns a 17.31% stake in SEC via affiliates and the controlling Lee

family (excluding 12.21% in treasury shares). The group needs to increase its stake in order to

ensure firm control over the electronics giant. However, buying additional shares in the company

could be challenging given the group’s budget constraints. Given SEC’s current market cap of

W190tr, it would cost around W1.9tr for just an additional 1% stake.

2) Even if the group secures enough funds to acquire additional shares, it would be practically

impossible for affiliates to raise their stakes without violating the government’s ban on new cross-

shareholdings (Under the revised MRFTA enacted in July 2014, large corporate groups are banned

from forming new circular shareholdings or strengthening existing ones).

Hence, the only way for the group to raise its SEC stake would be for SEC to increase its treasury

shares, which do not have voting rights. That said, SEC is already implementing a large repurchase

and cancellation program. We thus believe the group will not seek to increase its control over SEC

by raising its stake in the company.

TableTableTableTable 14141414. . . . SECSECSECSEC’’’’s s s s majormajormajormajor shareholdersshareholdersshareholdersshareholders (%,Wbn)

NameNameNameName SharesSharesSharesShares StakeStakeStakeStake ValueValueValueValue

Controlling family Controlling family Controlling family Controlling family

(1)(1)(1)(1)

Lee Kun-hee 4,985,464 3.38 6,476

Hong Ra-hee 1,083,072 0.74 1,407

Lee Jae-yong 840,403 0.57 1,092

Total 6,908,939 4.69 8,975

Affiliates (2)Affiliates (2)Affiliates (2)Affiliates (2)

Samsung Life 10,622,814 7.21 13,799

Samsung C&T 5,976,362 4.06 7,763

Samsung F&M 1,856,370 1.26 2,411

Samsung

Welfare

Foundation

89,683 0.06 116

Samsung

Foundation of

Culture

37,615 0.03 49

Total 18,582,844 12.62 24,138

Holdings in the group (1) + (2)Holdings in the group (1) + (2)Holdings in the group (1) + (2)Holdings in the group (1) + (2) 25,491,78325,491,78325,491,78325,491,783 17.31 17.31 17.31 17.31 33,11433,11433,11433,114

Treasury stock 17,986,686 12.21 23,365

GroupGroupGroupGroup’’’’s ownerships ownerships ownerships ownership 43,478,46943,478,46943,478,46943,478,469 29.52 29.52 29.52 29.52 56,47956,47956,47956,479

TotalTotalTotalTotal 147,299,337147,299,337147,299,337147,299,337 100.00 100.00 100.00 100.00 191,342191,342191,342191,342

Notes: Reflected current ongoing buy-back shares; Based on Nov. 25th

, 2015 closing price

Source: Dart, KDB Daewoo Securities Research

▶▶▶▶ SEC’s split, followed by merger between SEC’s investment holding unit and Samsung SDS

If SEC splits into an investment holding company and an electronics operating subsidiary,

Samsung C&T and the controlling Lee family will need to secure sufficient ownership in the

holding unit. This can be achieved by merging the holding company with Samsung SDS, in which

the group holds a considerable stake (total of 58.7%, including 22.6% by SEC, 19.1% by the Lee

family, and 17.1% by Samsung C&T). When the SEC holding company offers its shares to increase

its stake in its operating subsidiary, the Lee family and Samsung C&T could acquire additional

shares in the holding company (SEC investment holding and Samsung SDS), thereby obtaining

control over the SEC operating company and other electronics affiliates.

Such an approach would alleviate worries that a direct merger between SEC and Samsung SDS

would dilute SEC’s operating value, reducing the potential backlash from SEC shareholders. For

shareholders of SEC’s investment holding company, this could rather be viewed as a positive

event that 1) leads to a net increase in the combined market cap of SEC’s investment holding

company and operating subsidiary, and 2) turns SEC holdings into an operating holding company

through the integration of Samsung SDS’s business.

Holding companies

20

November 26, 2015


TableTableTableTable 15151515. . . . Expected major shareholders after merger between SECExpected major shareholders after merger between SECExpected major shareholders after merger between SECExpected major shareholders after merger between SEC’’’’s investment unit and Samsung SDSs investment unit and Samsung SDSs investment unit and Samsung SDSs investment unit and Samsung SDS (shares)

Before mergerBefore mergerBefore mergerBefore merger After mergerAfter mergerAfter mergerAfter merger

NotesNotesNotesNotes SECSECSECSEC’’’’s investment unit s investment unit s investment unit s investment unit (surviving)(surviving)(surviving)(surviving) Samsung Samsung Samsung Samsung SDSSDSSDSSDS ((((dissolveddissolveddissolveddissolved)))) SEC holding companySEC holding companySEC holding companySEC holding company

SharesSharesSharesShares OwnershipOwnershipOwnershipOwnership SharesSharesSharesShares OwnershipOwnershipOwnershipOwnership SharesSharesSharesShares OwnershipOwnershipOwnershipOwnership

Lee JaeLee JaeLee JaeLee Jae----yongyongyongyong 220,635220,635220,635220,635 0.58%0.58%0.58%0.58% 8,704,3128,704,3128,704,3128,704,312 11.25%11.25%11.25%11.25% 2,338,5752,338,5752,338,5752,338,575 4.11%4.11%4.11%4.11%

Controlling Controlling Controlling Controlling

familyfamilyfamilyfamily

9.499.499.499.49%%%%

Lee BooLee BooLee BooLee Boo----jinjinjinjin 0000 0.00%0.00%0.00%0.00% 3,018,8593,018,8593,018,8593,018,859 3.90%3.90%3.90%3.90% 734,551734,551734,551734,551 1.29%1.29%1.29%1.29%

Lee Lee Lee Lee SeoSeoSeoSeo----hyunhyunhyunhyun 0000 0.00%0.00%0.00%0.00% 3,018,8593,018,8593,018,8593,018,859 3.90%3.90%3.90%3.90% 734,551734,551734,551734,551 1.29%1.29%1.29%1.29%

Lee GunLee GunLee GunLee Gun----heeheeheehee 1,308,8561,308,8561,308,8561,308,856 3.44%3.44%3.44%3.44% 9,7019,7019,7019,701 0.01%0.01%0.01%0.01% 1,311,2171,311,2171,311,2171,311,217 2.30%2.30%2.30%2.30%

Hong Hong Hong Hong RRRRaaaa----heeheeheehee 284,344284,344284,344284,344 0.75%0.75%0.75%0.75% 0000 0.00%0.00%0.00%0.00% 284,344284,344284,344284,344 0.50%0.50%0.50%0.50%

Samsung Welfare

Foundation 23,545 0.06% 0 0.00% 23,545 0.04%

Samsung Foundation of

Culture 9,875 0.03% 0 0.00% 9,875 0.02%

Samsung Life 2,788,855 7.32% 0 0.00% 2,788,855 4.90%

Samsung F&M 487,361 1.28% 0 0.00% 487,361 0.86%

Samsung C&TSamsung C&TSamsung C&TSamsung C&T 1,569,0011,569,0011,569,0011,569,001 4.12%4.12%4.12%4.12% 13,215,82213,215,82213,215,82213,215,822 17.08%17.08%17.08%17.08% 4,784,6854,784,6854,784,6854,784,685 8.41%8.41%8.41%8.41%

SEC 4,722,125 12.40% 17,472,110 22.58% 8,973,452 15.77% Treasury sharesTreasury sharesTreasury sharesTreasury shares

15.15.15.15.78787878%%%% Samsung SDS 0 0.00% 27,614 0.04% 6,719 0.01%

Total number of issued Total number of issued Total number of issued Total number of issued

sharessharessharesshares 38,085,70338,085,70338,085,70338,085,703 100.00%100.00%100.00%100.00% 77,377,80077,377,80077,377,80077,377,800 100.00%100.00%100.00%100.00% 56,913,32856,913,32856,913,32856,913,328 100.00%100.00%100.00%100.00%

Note 1: Assumed split ratio between SEC’s investment unit and operating company at 0.3:0.7 and merger ratio between SEC’s investment unit and Samsung SDS at

1.0 : 0.26 (based on Nov. 25th

, 2015 closing price),

Note 2: If tender offer and share transfer are processed after merger, Samsung Group’s stake in SEC holding company will increase

Source: KDB Daewoo Securities Research estimates

Figure Figure Figure Figure 18181818. . . . MMMMerger between SEC’s investment unit and Samsung SDSerger between SEC’s investment unit and Samsung SDSerger between SEC’s investment unit and Samsung SDSerger between SEC’s investment unit and Samsung SDS��SEC holding companySEC holding companySEC holding companySEC holding company


SEMCO[009150]

30.8%

4.1%

23.7%

22.58%

SECoperating company

12.2%+x(Additionalshare buyback)

Samsung SDS[018260]

SECInvestment unit

4.8%

4.8%

19.1%17.1%

Related parties

SEMCO[009150]

30.8%

23.7%

SECoperating company

12.2%+γ(Acquire over 20% after equity swap)

Related parties

SEC holding co(SEC inv unit+Samsung SDS)

8.6%+β (After equity swap)

9.7%+α(After

equity swap)

4.1%

Samsung C&T

(Cheil Industries+SamsungC&T)

Samsung C&T

(Cheil Industries+SamsungC&T)

Holding companies

21

November 26, 2015


(3) Unwinding of cross shareholdings

Currently, there are seven cross-shareholdings across Samsung Group, three of which are bound

by Samsung SDI’s 4.8% stake in Samsung C&T, three by Samsung Electro-Mechanics’ (SEMCO)

2.6% stake in Samsung C&T, and the remaining one by Samsung F&M’s 1.4% stake. We believe

Samsung Group will first take steps to secure complete control over Samsung Electronics (SEC)

through Samsung C&T before unwinding its remaining circular shareholdings.

Figure Figure Figure Figure 19191919. . . . Samsung Samsung Samsung Samsung GGGGrouprouprouproup’’’’s s s s crosscrosscrosscross----shareholdishareholdishareholdishareholdingsngsngsngs

Notes: Red ‘O’ indicates last step of each cross-shareholding


TableTableTableTable 16161616. . . . Current circular shareholdings of Current circular shareholdings of Current circular shareholdings of Current circular shareholdings of SamsungSamsungSamsungSamsung GroupGroupGroupGroup

AffiliateAffiliateAffiliateAffiliate 1111

Affiliate 2Affiliate 2Affiliate 2Affiliate 2




Affiliate 6Affiliate 6Affiliate 6Affiliate 6 Subject to Subject to Subject to Subject to

unwindingunwindingunwindingunwinding 1 Samsung C&T → SEC → SEMCO → Samsung C&T

SEMCO

→Samsung C&T

4.1% 23.7% 2.6%

2 Samsung C&T → Samsung Life → SEC → SEMCO → Samsung C&T

19.3% 7.2% 23.7% 2.6%

3 Samsung C&T → Samsung Life → Samsung F&M → SEC → SEMCO → Samsung C&T

19.3% 14.9% 1.3% 23.7% 2.6%

4 Samsung C&T → SEC → Samsung SDI → Samsung C&T

Samsung SDI

→Samsung C&T

4.1% 19.6% 4.8%

5 Samsung C&T → Samsung Life → SEC → Samsung SDI → Samsung C&T

19.3% 7.2% 19.6% 4.8%

6 Samsung C&T → Samsung Life → Samsung F&M → SEC → Samsung SDI → Samsung C&T

19.3% 14.9% 1.3% 19.6% 4.8%

7 Samsung C&T → Samsung Life → Samsung F&M → Samsung C&T Samsung F&M

→Samsung C&T 19.3% 14.9% 1.4%


Figure Figure Figure Figure 20202020. . . . Projection of Projection of Projection of Projection of Samsung Samsung Samsung Samsung GGGGrouprouprouproup’’’’s future corporates future corporates future corporates future corporate governancegovernancegovernancegovernance


Samsung C&T[028260]


Samsung F&M[000810]

SEMCO[009150]

SEC[005930]

Samsung SDI[006400]

14.98%

19.34%

1.38%1.26%

7.21%

4.77%

19.58%23.69%

2.64%

4.06%

Holding companies

22

November 26, 2015


2. Hyundai Motor Group (HMG)

(1) Cross shareholding structure

HMG controls Hyundai Motor Company (HMC), Kia Motors and other affiliates through Hyundai

Mobis. HMG has four cross-shareholdings, two of which are bound by Hyundai Steel’s 5.7% stake

in Hyundai Mobis, one by Hyundai Glovis’s 0.7% stake in Hyundai Mobis, and the other by Kia

Figure Figure Figure Figure 21212121. . . . Hyundai Motor GroupHyundai Motor GroupHyundai Motor GroupHyundai Motor Group’’’’s corporate governances corporate governances corporate governances corporate governance


TableTableTableTable 17171717.... Controlling familiesControlling familiesControlling familiesControlling families’’’’ stakesstakesstakesstakes (%, Wbn)

NameNameNameName RelationRelationRelationRelation TitleTitleTitleTitle CompanyCompanyCompanyCompany StakeStakeStakeStake ValueValueValueValue

Chung Mong-koo

(1938) - President of HMG

Hyundai Motor 5.17 1,726

Hyundai Mobis 6.96 1,674

Hyundai Glovis 6.71 500

Hyundai Steel 11.81 790

Hyundai Engineering 4.68 294

Hyundai Autoever 9.68 11

Haevichi Hotels & Resorts 4.65 12

Total 5,007

Chung Eui-son

(1970) Eldest son

VP of Hyundai

Motor

Hyundai Glovis 23.29 1,733

Hyundai Engineering 11.72 736

Kia Motors 1.74 378

Innocean 2.00 28

Hyundai Wia 1.95 66

Hyundai Autoever 19.47 22

Seolim Development 100 13

Hyundai Motor 2.28 1,040

Total 4,015

Notes: Based on Nov. 25th

, 2015 closing price, Source: Dart, KDB Daewoo Securities Research

Holding companies

23

November 26, 2015


Figure Figure Figure Figure 22222222. . . . Hyundai Motor Hyundai Motor Hyundai Motor Hyundai Motor GGGGrouprouprouproup’’’’s crosss crosss crosss cross----shareholdingsshareholdingsshareholdingsshareholdings


TableTableTableTable 18181818. . . . Current circular shareholdings of Current circular shareholdings of Current circular shareholdings of Current circular shareholdings of Hyundai MotorHyundai MotorHyundai MotorHyundai Motor GroupGroupGroupGroup

AffiliateAffiliateAffiliateAffiliate 1111



Affiliate 4Affiliate 4Affiliate 4Affiliate 4 Affiliate Affiliate Affiliate Affiliate 5555

1 Hyundai Mobis → Hyundai Motor → Kia Motors → Hyundai Mobis

20.8%

33.9% 16.9%

2 Hyundai Mobis → Hyundai Motor → Hyundai Glovis → Hyundai Mobis

20.8% 4.9% 0.7%

3 Hyundai Mobis → Hyundai Motor → Hyundai Steel → Hyundai Mobis

20.8% 11.2% 5.7%

4 Hyundai Mobis → Hyundai Motor → Kia Motors → Hyundai Steel → Hyundai Mobis

20.8% 33.9% 19.6% 5.7%


(2) Unwinding of cross shareholdings

Kia’s shares of Hyundai Mobis (valued at roughly W3.8tr) are critically tied to the controlling

family’s group ownership, meaning selling them to outsiders is not an option. But it would also be

difficult for group affiliates or the controlling family to directly buy the shares, given the ban on

new circular investments and the sheer cost of purchase. We believe HMG will opt to transition to

a holding company structure, through which it can internally absorb its cross-shareholdings and

thus ensure managerial control and ownership transfer.

This will likely be done by Hyundai Mobis switching to a holding company, after which HMC and

Kia will follow suit, splitting themselves up into investment units and operating companies. The

investment units of HMC and Kia should then merge with Hyundai Mobis’s holding company. In

the merger process, the existing cross-shareholdings should be absorbed into the group holding

company’s treasury shares. This would also allow the group holding company to meet subsidiary

stake requirements.

Figure Figure Figure Figure 23232323. . . . ProjectedProjectedProjectedProjected converconverconverconversionsionsionsion totototo holding companyholding companyholding companyholding company


X

X: Expected to unwind

XHyundai Mobis

[028260]

Hyundai Motor[032830]

Kia Motors[032830]

Hyundai Glovis[028260]

Hyundai Steel[032830]

Hyundai MobisInvestment unit

Hyundai MobisInvestment unit

Hyundai Motor Kia Motors

Hyundai Mobisoperating co.

Hyundai Mobisinvestment unit

Hyundai Motorinvestment unit

Kia Motors

Hyundai Motoroperating co.

Hyundai Motoroperating co.

Hyundai Mobisinvestment unit

Hyundai Motorinvestment unit

Kia Motorsoperating co.

Hyundai Mobisoperating co.

Kia Motorsinvestment unit

20.8%

Step 1. Hyundai Mobis’sequity spin-off

� Change Hyundai Mobis’s investment unit

into Hyundai Motor holding company

Step 2. Hyundai Motor spin-off

� Merge Hyundai Motor investment unit with

Hyundai Motor holding company

Step 3. Kia Motors’ spin-off

� Merge Kia Motors’ investment unit with

Hyundai Motor holding company

33.9%

16.9%16.9%

20.8%

33.9%

16.9% 16.9%

20.8% 33.9% 16.9%

20.8%

33.9%

Hyundai Motor holding companyMerge

Merge

16.9%

Holding companies

24

November 26, 2015


3. Lotte

(1) Cross shareholding structure

Lotte Group now has 67 (down from 416 in 2Q15), following chairman Shin Dong-bin’s purchase

of Lotte E&C’s 1.34% stake (W35.8bn) in Lotte Confectionery in August, and Lotte Hotel’s

purchase of shares in affiliated companies in October (Lotte Shopping’s 12.0% stake in Lotte

Aluminum, Fujifilm Korea’s 3.5% stake in Daehong Communications (W13bn)., and Lotte

Confectionary’s 0.9% stake in Fujifilm Korea).

Among the group’s cross-shareholdings, 1) three are bound by Lotte Confectionery’s stake in

Lotte Shopping; 2) three by Lotte Chilsung’s stake in Lotte Shopping; 3) 26 by Fujifilm Korea’s

stake in Lotte Shopping; 4) 14 by Lotte Data Communication’s stake in Lotte Shopping; 5) 14 by

Lotte Data Communication’s stake in Lotte Shopping; 6) 17 by Lotte E&C’s stake in Lotte

Shopping; and 7) four by Daehong Communications’ stake in Lotte Confectionery.

TableTableTableTable 19191919. . . . Timeline of key eventsTimeline of key eventsTimeline of key eventsTimeline of key events

DateDateDateDate DetailsDetailsDetailsDetails

End-2Q15 Lotte Group: 416 circular shareholdings

Aug. 11, 2015 Shin Dong-bin releases public apology; announces group’s transition to a holding company

structure

Aug. 26, 2015 Launches task force to improve Lotte Group’s corporate governance; announces disposal of 80%

of circular shareholdings by end-Nov. 2015 via open-market and off-board deals

Aug. 28 , 2015 Shin Dong-bin buys 1.3% stake in Lotte Confectionery (19,000 shares; W35.8bn) from Lotte E&C

� unwound 140 circular shareholdings (33.7%)

Sep. 17, 2015 Shin Dong-bin announced the group’s plans to dispose of 80% of circular shareholdings by end-

Oct. 2015

Oct. 27. 2015

Hotel Lotte acquired affiliates’s stakes in other affiliates (W101bn) → Unwound 209 circular

shareholdings

① Lotte Shopping’s stake in Lotte Aluminum 12.0% (W84bn)

② Fujifilm Korea’s stake in Daehong Communications 3.5% (W13bn)

③ Lotte Confectionary’s stake in Fujifilm Korea 0.9% (W3.8bn)

Compared to end-June, 83.9% of circular shareholdings were unwound


TableTableTableTable 20202020. . . . Controlling familiesControlling familiesControlling familiesControlling families’’’’ stakesstakesstakesstakes (Wbn)

Major shareholdersMajor shareholdersMajor shareholdersMajor shareholders RelationRelationRelationRelation CompanyCompanyCompanyCompany StakeStakeStakeStake ValueValueValueValue

Shin Kyuk-ho

(1922) -

Lotte Confectionary 6.83 192

Lotte Chilsung 1.30 37

Lotte Shopping 0.93 67

Total 296

Shin Dong-ju

(1954)

Eldest

son




Lotte Food 1.96 23

Lotte Card 0.17 2

Lotte Capital 0.53 2

Lotte Data Communication 3.99 26

Lotte E&C 0.37 6

Lotte Corp. 8.03 36

Total 1,250

Shin Dong-bin

(1955) Second son




Lotte Food 1.96 23

Lotte Card 0.27 3

Lotte Capital 0.86 3

Lotte Non-life 1.35 5

Lotte Data Communication 7.50 48

Lotte E&C 0.59 10

Lotte Corp. 8.40 38

Total 1,502


, 2015 closing price


Holding companies

25

November 26, 2015


Figure Figure Figure Figure 24242424. . . . Lotte GroupLotte GroupLotte GroupLotte Group’’’’s corporate governance (current)s corporate governance (current)s corporate governance (current)s corporate governance (current)


Figure Figure Figure Figure 25252525. . . . Lotte Lotte Lotte Lotte GGGGrouprouprouproup’’’’s s s s circular circular circular circular shareholdingsshareholdingsshareholdingsshareholdings


LotteCorp. LotteE&C

LotteNon-Life Insurance(000400)

LotteAluminum

LotteriaDaehong

CommunicationsLotte.com

LotteShopping(023530)

LotteHimart(071840)

Korea SevenWoori

Home Shopping

LotteTrading

Korea Fujifilm

Hotel Lotte

LotteCapital LotteCard

43.1%

LotteFood(002270)

LotteDataCommunication

31.1% 25.0%

13.2%35.2% 3.2%

LotteChilsung(005300)

LotteConfectionery

(004990)

9.3%

9.3%

25.0% 26.6% 22.4% 93.8%

31.3%

12.7%

8.9% 3.5% 34.6% 27.7% 38.7%18.8%

34.5%

60.3% 51.1% 53.0%

34.0%16.3% 50.0%13.1%

56.8%

Hyundai Information

Tech (026180)

52.3%

JapanLotteHoldings

Kwangyoon-sa

19.1%

L 4th Investment company. 15.6%, L 9th Investment company10.4%L 7th Investment company9.4%, L 1st Investment company8.6%L 8th Investment company5.8%, L 10th Investment company4.4%L 12th Investment company4.2%, L 6th Investment company4.0%L 5th Investment company3.6%, L 11th Investment company3.3%L 2nd Investment company3.3%, Japan family 2.1% Hotel Lotte Pusan0.6%

28.1%

5.5%

75.5%

Korea Fujifilm7.86%LotteConfectionery7.86%LotteData Communication4.81%LotteChilsung3.93%LotteE&C0.95%Hotel LottePusan0.78%

64.0%

LotteRental20.8%

19.3%

8.8%

LotteChem(011170)

15.3%

8.9%

Holding companies

26

November 26, 2015


2) Expected corporate governance

▶▶▶▶ Currently moving to meet shareholding requirements for subsidiaries and second-tier

subsidiaries

The Lotte Group is currently pursuing the IPO of Hotel Lotte which controls most Lotte Group

affiliates along with Lotte Shopping. In the process of holding company conversion, shareholding

requirements for subsidiaries and second-tier subsidiaries should be met (at least a 20% stake in

listed firms and 40% in non-listed firms)

▶▶▶▶ Passage of the intermediate financial holding company bill to make it easier to convert to a

holding structure

The Lotte Group currently has financial subsidiaries. If the intermediate financial holding company

bill pending in the National Assembly is passed, it will be easier to convert to a holding structure

as the group would not have to sell its stakes in financial subsidiaries. Of note, the group needs to

change its third-tier subsidiary shareholding structure, given that a holding company is currently

required to have a 100% ownership of a third-tier subsidiary.

Figure Figure Figure Figure 26262626. . . . Projection ofProjection ofProjection ofProjection of Lotte Lotte Lotte Lotte GGGGrouprouprouproup’’’’s s s s future future future future corporate governancecorporate governancecorporate governancecorporate governance


Holding companies

27

November 26, 2015


V. Top Picks

SK Holdings (034730/Buy) Five growth strategies to drive up NAV

� 1) IT services (in-house): To raise its IT services profile to global standards via partnership

� 2) ICT security convergence and smart logistics (in-house): To expand new businesses

� 3) Bio/pharmaceuticals (SK Biopharmaceuticals and SK Biotek): To generate value from the pharmaceutical businesses

� 4) LNG (SK E&S): To integrate its LNG value chain; To secure new business opportunities in China

� 5) Semiconductor module (Essencore) and materials (M&A, JV, etc.): To establish high-growth, high-margin business models

� Maintain Buy and TP of W330,000

LG (003550/Buy) Rebound to start

� LG Group is revamping business portfolio: To achieve vertical integration of the automotive electronics businesses and

complete the value chain of the energy solution businesses

� Valuation to recover if electronics business recovers

� Maintain Buy and TP of W90,000

Holding companies

28

November 26, 2015


Five growth strategies to drive up NAV

1) IT services (in-house): The company is seeking to raise its IT services profile to global standards, using cloud, big data, and IoT technologies. As part of such efforts, the company established FSK Holdings, a joint venture with Taiwan’s Foxconn (Hon Hai Precision Industry). Through the joint venture (70% owned by Foxconn and 30% by SK Holdings), the company plans to acquire Daiwa Associate Holdings, a Hong Kong-based manufacturer of smart sensors and parts for the Internet of Things (IoT). Looking forward, we expect the company to gain various opportunities related to smart factory projects for Foxconn’s Chongqing plant.

2) ICT security convergence and smart logistics (in-house): The company is aiming to establish a security convergence platform (information security and physical security) and expand into security devices (sensors, etc.), as well as biometrics- and video surveillance-related software. The company is also looking to enter the business of smart logistics using big data and IoT. The company will initially focus on bolstering its capabilities on the back of captive (affiliate) demand until 2016 and then work on broadening its global presence, especially in China through its partnership with Hon Hai, from 2017.

3) Bio/pharmaceuticals (SK Biopharmaceuticals and SK Biotek): SK Group plans to fully integrate its value chain (R&D, manufacturing, and marketing) by 2018. After this, SK Biopharmaceuticals will consider going public and acquire developers with strong potential. Currently, SK Biopharmaceuticals is focusing its resources on developing central nervous system agents and seeking out-licensing deals with global companies. In particular, the drug company has successfully completed Phase 2b clinical trial for its lead epilepsy treatment (YKP3089) and is expected to move onto Phase 3 trial. Assuming manufacturing and sales begin in 2018, we estimate annual revenue to reach W1tr. SK Biotek, which was spun off from SK Biopharmaceuticals in April, manufactures and sells active pharmaceutical ingredients (API) and intermediates to multinational drug companies. The company plans to invest W70.1bn to expand its API capacity by 2019 with the aim of increasing its annual revenue to W100bn by 2020.

4) LNG (SK E&S): SK E&S is aiming to integrate its LNG value chain and expand its LNG capacity to 5mn tonnes by 2020. The LNG business enjoys cost advantages due to direct access to cheap gas in the US and Australia. SK E&S is also expected to secure new business opportunities in China through partnerships with local companies like Huadian Group and China Gas Holdings.

5) Semiconductor module (Essencore) and materials (M&A, JV, etc.): The semiconductor module business (Essencore) aims to achieve W1.5tr in revenue by 2019. The semiconductor materials business is looking to acquire or form a joint venture with a company that holds world class technology to tap into the fast-growing materials market.

Maintain Buy and TP of W330,000

As an operating holding company, SK Holdings is focusing on five key areas it believes are essential to ensuring sustainable growth. We believe the company is well positioned to implement its vision given its ample cash flow and ICT capabilities. As the company executes its growth strategies, we expect the value of the operating business and subsidiary stakes to increase, supporting a potential upward revision in our target price. We maintain our Buy call on SK Holdings with a target price of W330,000.

SK Holdings (034730 KS)

Five growth strategies to drive up NAV

FY (12) 12/11 12/12 12/13 12/14 12/15F 12/16F

Revenue (Wbn) 1,702 2,242 2,302 2,426 41,476 99,362

OP (Wbn) 176 201 225 272 1,827 5,842

OP Margin (%) 10.3 9.0 9.8 11.2 4.4 5.9

NP (Wbn) 438 356 189 127 5,427 1,513

EPS (W) 8,765 7,122 3,777 2,546 77,130 21,498

ROE (%) 25.3 15.8 8.4 5.5 41.2 9.3

P/E (x) 13.3 14.5 35.7 83.9 3.4 12.2

P/B (x) 2.4 1.9 2.4 3.6 1.3 1.3

Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests

Source: Company data, KDB Daewoo Securities Research estimates

Holding companies

(Maintain) Buy

Target Price (12M, W) 330,000

Share Price (11/25/15, W) 261,500

Expected Return 26%

OP (15F, Wbn) 1,827

Consensus OP (15F, Wbn) 2,937

EPS Growth (15F, %) 2,929

Market EPS Growth (15F, %) 22.4

P/E (15F, x) 3.4

Market P/E (15F, x) 11.6

KOSPI 2,009.42

Market Cap (Wbn) 18,399

Shares Outstanding (mn) 71

Free Float (%) 48.4

Foreign Ownership (%) 24.1

Beta (12M) 0.87

52-Week Low 196,500

52-Week High 320,500

(%)(%)(%)(%) 1M1M1M1M 6M6M6M6M 12M12M12M12M

Absolute -2.8 6.5 20.2

Relative -1.3 13.8 18.5

80

100

120

140

160

11.14 3.15 7.15 11.15

SK Holdings KOSPI

Holding companies

29

November 26, 2015


TableTableTableTable 21212121. . . . SK GroupSK GroupSK GroupSK Group’’’’ssss growth frameworkgrowth frameworkgrowth frameworkgrowth framework

Growth areasGrowth areasGrowth areasGrowth areas Related companiesRelated companiesRelated companiesRelated companies DetailsDetailsDetailsDetails

ICT

(1) IT services SK C&C, etc. - Extend the coverage of IT services, establish overseas footholds through business

partnerships, and broaden cloud-based offerings

(2) ICT

convergence

SK C&C, Infosec,

NSOK, etc.

- Security convergence platform (information security and physical security)

- Expand into security devices (sensors, etc.) as well as biometrics- and video surveillance

- related software

New

growth

portfolio

(3) Bio/

pharmaceuticals SK Biopharmaceuticals

- Integrate the pharmaceuticals value chain, including R&D, manufacturing, and

marketing by 2018

- Take SK Biopharmaceuticals public in 2018 and acquire drug developers with strong

potential

(4) LNG SK E&S

- Integrate and expand LNG value chain in the group; expand capacity of LNG business

to 5mn tonnes by 2020

- Benefits from cost advantages (due to direct access to cheap gas in the US and

Australia) and captive demand

- Expected to partner with a Chinese firm in the near future to secure new business

Opportunities

(5) Semiconductor

modules/materials

SK C&C, Essencore, SK Hynix,

etc.

- Semiconductor module business (Essencore) aims to achieve W1.5tr in revenue by

2019

- Plans to acquire a firm with world class technology to secure stable footing in the

market

Source: Company data, KDB Daewoo Securities Research

TableTableTableTable 22222222. . . . SKSKSKSK’’’’s major shareholderss major shareholderss major shareholderss major shareholders (Wbn)

NameNameNameName Number of sharesNumber of sharesNumber of sharesNumber of shares StakeStakeStakeStake ValueValueValueValue NotesNotesNotesNotes

NameNameNameName 16,465,472 23.4 4,001

Chey Tae-won 8,616 0.0 2

Noh So-young 5,250,000 7.5 1,276

Chey Gi-won 5,736 0.0 1

Chey Shin-won 21,729,824 30.9 5,280

Total of related parties 2,450,000 3.5 595 100% subsidiary of Foxconn Holdings

Best Leap Enterprises 31,644,533 45.0 7,690

Other 14,535,940 20.7 3,532

Total treasury shares 11,021,664 15.7 2,678 SK Holdings’ stake in SK C&C (31.8%) became treasury shares after

merger Original 3,514,276 5.0 854 Share buyback completed (9/11/2015 – 11/11/2015)

Newly acquired 70,360,297 70,360,297 70,360,297 70,360,297 100.0 100.0 100.0 100.0 17,098 17,098 17,098 17,098

Total number of Total number of Total number of Total number of issued sharesissued sharesissued sharesissued shares


, 2015 closing price, Source: Dart, KDB Daewoo Securities Research

Figure Figure Figure Figure 27272727. . . . SK GroupSK GroupSK GroupSK Group’’’’ssss corporate governancecorporate governancecorporate governancecorporate governance (current)(current)(current)(current)


25.2%

SK ShippingSKC

[011790 KS]SK E&S

Chey Tae-won and related

parties

SK C&C+SK[034730 KS]

SK Innovation[096770 KS]

SK E&CSK Telecom[017670 KS]

SK Gas[018670 KS]

SK BiophramSKNetworks[001740 KS]

SK Chemicals[006120 KS]

33.4% 39.1% 100% 83.1% 100% 100% 44.5%

28.2%

17.3%

Infosec

Encarsales.com

10.0%

99.4%

Initz

100%

30.9%

SKForest

41.8%

50.0%

▶ SK’s major shareholders

Chey Tae-won 23.4%Chey Gi-won 7.5%Treasury shares 15.7%

SKHynix[000660 KS]

SK Broadband SK Telink SKPlanetiRiver

[060570 KQ]

SKCommunications

[066270 KQ]

100% 20.1% 48.9% 83.5% 100%64.5%

SKD&D[210980 KS]

32.8%

▶ SKChem’s major shareholders

Chey Chang-won 14.7%Chey Shin-won 0.1%Treasury shares 15.5%

EntisUBcare

[032620 KQ]

44.0%

SK Syntec

66.0% 45.6%50.0%

SKSecurities[001510 KS]

25.4%

Chey Chang-won and related parties

Holding companies

30

November 26, 2015


TableTableTableTable 23232323. . . . SKSKSKSK Biopharmaceuticals’ Biopharmaceuticals’ Biopharmaceuticals’ Biopharmaceuticals’ major pipelinesmajor pipelinesmajor pipelinesmajor pipelines

Current stageCurrent stageCurrent stageCurrent stage DetailsDetailsDetailsDetails

Sleep-wake disorders

(SKL-N05) Phase 3b clinical trial underway

Signed out-licensing deal with Jazz Pharmaceuticals (US); Plan to go on sale in 2018

Will receive engineering fees during clinical trials (under technology export deal with

Jazz) and royalties once drug goes on sale

Secured copyright in 12 Asian countries; Plans to engage in direct marketing

Epilepsy

(YKP3089)

Phase 2b clinical trial underway

Results expected to come out in July

Phase 3b clinical trial expected to begin in 4Q15

Global release planned for 2018; Direct revenue (approximately W1tr annually)

expected

Chronic constipation/

Irritable bowel syndrome

(YKP10811)

Phase 2b clinical trial underway Plans to sign out-licensing deals with global drug companies in 1Q16

Acute seizures

(PLUMIAZ) Submitted NDA

Signed out-licensing in 2010 with Acorda Therapeutics (US supplier of drugs for

central nervous system disorders)

Dementia/ cognitive

impairment

(SKL 15508)

Phase 2a clinical trial underway Conducting phase 2a clinical trial independently


TableTableTableTable 24242424. . . . SK BiopharmaceuticalsSK BiopharmaceuticalsSK BiopharmaceuticalsSK Biopharmaceuticals’’’’ consolidated income statementconsolidated income statementconsolidated income statementconsolidated income statement ((((WbnWbnWbnWbn))))

2011201120112011 2012201220122012 2013201320132013 2014201420142014

RevenueRevenueRevenueRevenue 37.6 37.6 37.6 37.6 51.8 51.8 51.8 51.8 60.5 60.5 60.5 60.5 72.4 72.4 72.4 72.4

CMS 108.1 113.0

Development of new drugs 10.1 16.1

(adjustment) -57.8 -56.7

Cost of sales 27.4 37.7 44.4 46.6

Gross profit 10.2 14.1 16.1 25.9

SG&A 32.6 50.1 60.2 65.1

Operating profitOperating profitOperating profitOperating profit ----22.3 22.3 22.3 22.3 ----36.0 36.0 36.0 36.0 ----44.2 44.2 44.2 44.2 ----39.2 39.2 39.2 39.2

OP margin -59.4% -69.5% -73.0% -54.2%

CMS 4.7 7.8

OP margin 4.4% 6.9%

Development of new drugs -48.9 -46.7

OP margin -484.9% -289.6%

(adjustment) 0.1 -0.3

Financial income 4.9 9.2 6.4 6.2

Financial expenses 1.3 1.4 1.9 2.5

Non-operating income 2.6 1.2 0.3 0.6

Non-operating expenses 4.6 3.0 3.2 1.2

Pretax income -20.7 -30.0 -42.6 -36.2

Corporate tax -1.2 0.4 -1.6 0.8

Net profitNet profitNet profitNet profit ----19.5 19.5 19.5 19.5 ----30.3 30.3 30.3 30.3 ----41.0 41.0 41.0 41.0 ----37.0 37.0 37.0 37.0


Figure Figure Figure Figure 28282828. . . . SK GroupSK GroupSK GroupSK Group’’’’s bio s bio s bio s bio business value chainbusiness value chainbusiness value chainbusiness value chain Figure Figure Figure Figure 29292929. . . . SK BiopharmaceuticalSK BiopharmaceuticalSK BiopharmaceuticalSK Biopharmaceutical’’’’s global peer UCB (UCB BB s global peer UCB (UCB BB s global peer UCB (UCB BB s global peer UCB (UCB BB

Equity)Equity)Equity)Equity)

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

Tae-won Chey and related persons

SK C&C+SK Holdings(034730 KS)

30.9%

SK Biopharm(New drug

development)

SK Biotech(Supplies pharmaceutical

ingredients)

SKLife Science (US)

100% 100%

100%

UCB's financial data (US$mn)

2011 2012 2013 2014

Revenue 4,519.8 4,451.7 4,161.6 4,442.5

Cost of sales 1,410.5 1,393.9 1,281.8 1,398.9

Gross profit 3,109.3 3,057.8 2,879.8 3,043.6

Operating profit 484.6 537.5 349.3 362.7

OP margin 10.7% 12.1% 8.4% 8.2%

Pretax profit 324.4 338.2 160.7 147.5

Net profit 331.4 320.2 212.5 277.7

($mn,x)

Market cap P/E P/BEV/EBITD

A2015F 16,752 39.5 2.9 22.4

Holding companies

31

November 26, 2015


LG Group revamping business portfolio

Vertical integration of auto electronics systems: LG Electronics (LGE; infotainment,

motors) � LG Chem (batteries) � LG Innotek (sensors, LED) � LG Display (auto display),

etc.

Completion of energy solution value chain: LGE (solar modules, ESS) � LG Chem

(batteries) � LG CNS (smart microgrids), etc.; 2017 revenue target is upper-W4tr levels.

Valuation to recover if electronics business recovers

General investment points for holding companies are: 1) upside from rising value of

stakes in listed subsidiaries, 2) exposure to non-listed subsidiaries, and 3) positive

attributes of holding company shares (e.g., brand royalty income, dividends, and

transparent governance).

Among these three, we believe LG Corp. meets the first point. LG Group’s business

portfolio includes electronics, chemicals, telecom and other services, with electronics

(mainly LGE) responsible for 50% of revenue and operating profit. As such, LG Corp.’s

shares have been inextricably tied to the performance of the electronics business, even

in recent months despite a fall in the share of electronics in the company’s NAV. Thus, a

recovery in automotive electronic equipment and parts should help drive LG Corp.’s

stock. In the past, valuation discount eased, when the share of LGE stake in NAV

increased.

Maintain Buy with TP of W90,000

We maintain Buy with a target price of W90,000. The company’s valuation discount is

decreasing (from roughly 50% early this year) due to LGE’s turnaround. This positive

trend should continue throughout next year, as LGE’s earnings are projected to expand

further.

LG Corp. is the only holding company with a net-cash position in the KDB Daewoo

universe. The company typically generates annual free cash flow of around W250bn

from dividend income, trademark royalties, rental income, etc. Notably, if the trademark

royalty rate—which is revised annually and currently stands at 20bp of revenue—is

raised, the company will be able to secure additional cash flow of W110bn per 10bp.

Given that LG Corp. is a pure holding company that does not incur capex, expectations

of shareholder return policies, including higher dividend payouts, are likely to increase

steadily.

The company’s stable holding structure and corporate governance, combined with

positive outcomes from new growth drivers including auto parts, energy, eco-friendly

household products, and healthcare, should further brighten its business prospects.

LG (003550 KS)

Rebound to start

FY (12) 12/11 12/12 12/13 12/14 12/15F 12/16F

Revenue (Wbn) 10,059 9,695 9,799 9,865 10,210 10,440

OP (Wbn) 1,351 1,232 1,154 1,044 1,311 1,420

OP Margin (%) 13.4 12.7 11.8 10.6 12.8 13.6

NP (Wbn) 978 938 896 845 1,059 1,114

EPS (W) 5,563 5,334 5,095 4,802 6,019 6,334

ROE (%) 9.6 8.7 7.8 7.0 8.3 8.2

P/E (x) 11.0 12.2 12.6 12.7 12.3 11.7

P/B (x) 1.0 1.0 1.0 0.9 1.0 0.9

Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests


Holding companies

(Maintain) Buy

Target Price (12M, W) 90,000

Share Price (11/25/15, W) 74,100

Expected Return 21%

OP (15F, Wbn) 1,311

Consensus OP (15F, Wbn) 1,270

EPS Growth (15F, %) 25.3

Market EPS Growth (15F, %) 20.9

P/E (15F, x) 12.3

Market P/E (15F, x) 11.5

KOSPI 2,009.42

Market Cap (Wbn) 12,786

Shares Outstanding (mn) 176

Free Float (%) 51.4

Foreign Ownership (%) 27.1

Beta (12M) 0.75

52-Week Low 53,100

52-Week High 74,400

(%)(%)(%)(%) 1M1M1M1M 6M6M6M6M 12M12M12M12M

Absolute 7.9 13.3 9.5

Relative 9.5 21.0 7.9

70

80

90

100

110

120

11.14 3.15 7.15 11.15

LG Corp. KOSPI

Holding companies

32

November 26, 2015


Figure Figure Figure Figure 30303030. . . . Discount to NAVDiscount to NAVDiscount to NAVDiscount to NAV Figure Figure Figure Figure 31313131. . . . P/E bandP/E bandP/E bandP/E band

Source: KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

Figure Figure Figure Figure 32323232. . . . NAVNAVNAVNAV breakdownbreakdownbreakdownbreakdown Figure Figure Figure Figure 33333333. . . . LGLGLGLG’’’’s cashflows cashflows cashflows cashflow

Source: KDB Daewoo Securities Research Source: Dart, KDB Daewoo Securities Research

Figure Figure Figure Figure 34343434. . . . LG LG LG LG GGGGrouprouprouproup’’’’s electric car business value chains electric car business value chains electric car business value chains electric car business value chain Figure Figure Figure Figure 35353535. . . . LG LG LG LG GGGGrouprouprouproup’’’’s electric car business ecosystems electric car business ecosystems electric car business ecosystems electric car business ecosystem

Source: Dart, KDB Daewoo Securities Research Source: KDB Daewoo Securities Research

(Wbn)2011 2012 2013 2014 2015F

Ordinary net cash inflow(1)-(2) 155.4 240.5 169 199.4 198.1

Ordinary Cash inflow(1) 589.5 616.6 568 575.7 585.8

Dividends 260.9 252.6 200.3 209.4 214.4

Brand Royalties 264.9 271.1 269.1 264.9 267.6

Lease income 63.7 92.9 98.7 101.5 103.7

Ordinary Cash outflow(2) 434.1 376.1 399.1 376.3 387.7

Admin cost(exclude

depreciation cost)107.5 131.3 141.3 141.5 141.4

Corporate tax 64.2 68.8 67.7 60.6 64.2

Dividend payout 175.9 175.9 175.9 175.9 175.9

Investment on tangible and

intangible asset88 3.1 20.6 5.5 13

Net financial expense -1.5 -3.1 -6.5 -7.2 -6.9

0

10

20

30

40

50

60

70

06 07 08 09 10 11 12 13 14 15

(%)

0

5

10

15

20

25

03 04 05 06 07 08 09 10 11 12 13 14 15

6.0x

8.0x

10.0x

12.0x

14.0x

(Wtr)

15F

30.1%

LG

(003550 KS)

LG CNSLG Chemical

[051910]

LGElectronics

[066570]

LG Housys

[108670]

LG Display

[034220]

LGInnotek

[011070]

33.7% 30.1%

37.9% 40.8%

85.0%

Holding companies

33

November 26, 2015


Figure Figure Figure Figure 36363636. . . . LG LG LG LG GGGGrouprouprouproup’’’’s corporate goves corporate goves corporate goves corporate governancernancernancernance


LGMMA

30.1% 34.0%30.4%

48.6%

33.7%

27.6%

Ku Bon-mu and

related parties

LG[003550]

LG Uplus[032640]

36.1% 35.0%30.1%

LG Housys[108670]

GⅡR[035000]

Silicon Works[108320]

28.2%

LGInternationalCorp [001120]

Pantos Logistics51.0%

LG Chemical[051910]

LG Innotek[011070]

LG Display[034220]

LG CNS

LG H&H[051900]

LG Life Sciences[068870]

LGSiltron

ServeOne

LG Electronics[066570]

37.9%

40.8%

LG Sports

LG N Sys

85.0%

100%

51.0%

100%

50.0%

LG-ToyoEngineering

100%

100%

HS Ad

100%

TheFaceShop

Haitai Beverage

Coca-ColaBeverage

100%

100%

90.0%

CNP Cosmetics

86.0%

Medialog

98.4%

WithU

100%

Hi BusinessLogistics

LG-HitachiWater Solutions

100%

51.0%

Holding companies

34

November 26, 2015


LG (003550 KS/Buy/TP: W90,000)

Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized)Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized)Statement of Financial Condition (Summarized)Statement of Financial Condition (Summarized)Statement of Financial Condition (Summarized) (Wbn) 12/13 12/14 12/15F 12/16F (Wbn) 12/13 12/14 12/15F 12/16F

RevenueRevenueRevenueRevenue 9,7999,7999,7999,799 9,8659,8659,8659,865 10,21010,21010,21010,210 10,44010,44010,44010,440 Current AssetsCurrent AssetsCurrent AssetsCurrent Assets 3,7103,7103,7103,710 3,8513,8513,8513,851 4,3864,3864,3864,386 4,0354,0354,0354,035

Cost of SalesCost of SalesCost of SalesCost of Sales 8,1858,1858,1858,185 8,3628,3628,3628,362 8,4298,4298,4298,429 8,5668,5668,5668,566 Cash and Cash Equivalents 682 497 799 701

Gross ProfitGross ProfitGross ProfitGross Profit 1,6141,6141,6141,614 1,5031,5031,5031,503 1,7811,7811,7811,781 1,8741,8741,8741,874 AR & Other Receivables 2,004 2,263 2,535 2,643

SG&A ExpensesSG&A ExpensesSG&A ExpensesSG&A Expenses 461461461461 459459459459 470470470470 454454454454 Inventories 330 308 316 330

Operating Profit (Adj)Operating Profit (Adj)Operating Profit (Adj)Operating Profit (Adj) 1,1541,1541,1541,154 1,0441,0441,0441,044 1,3111,3111,3111,311 1,4201,4201,4201,420 Other Current Assets 694 783 736 361

Operating ProfitOperating ProfitOperating ProfitOperating Profit 1,1541,1541,1541,154 1,0441,0441,0441,044 1,3111,3111,3111,311 1,4201,4201,4201,420 NonNonNonNon----Current AssetsCurrent AssetsCurrent AssetsCurrent Assets 12,84112,84112,84112,841 13,48213,48213,48213,482 13,74613,74613,74613,746 13,90613,90613,90613,906

NonNonNonNon----Operating ProfitOperating ProfitOperating ProfitOperating Profit ----75757575 ----88888888 ----73737373 ----79797979 Investments in Associates 9,434 9,815 10,094 10,524

Net Financial Income -55 -60 -65 -25 Property, Plant and Equipment 2,362 2,478 2,464 2,212

Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 156 134 123 99

Pretax Profit 1,079 956 1,238 1,341 Total AssetsTotal AssetsTotal AssetsTotal Assets 16,55016,55016,55016,550 17,33317,33317,33317,333 18,13218,13218,13218,132 17,94117,94117,94117,941

Income Tax 123 127 167 184 Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities 2,6602,6602,6602,660 2,8972,8972,8972,897 2,5482,5482,5482,548 2,2322,2322,2322,232

Profit from Continuing Operations 956 829 1,071 1,157 AP & Other Payables 1,254 1,372 960 1,001

Profit from Discontinued Operations -125 6 0 0 Short-Term Financial Liabilities 605 686 578 178

Net ProfitNet ProfitNet ProfitNet Profit 831831831831 834834834834 1,0711,0711,0711,071 1,1571,1571,1571,157 Other Current Liabilities 801 839 1,010 1,053

Controlling Interests 896 845 1,059 1,114 NonNonNonNon----Current LiabilitiesCurrent LiabilitiesCurrent LiabilitiesCurrent Liabilities 1,7851,7851,7851,785 1,8501,8501,8501,850 2,1022,1022,1022,102 1,2461,2461,2461,246

Non-Controlling Interests -65 -10 12 43 Long-Term Financial Liabilities 1,149 1,196 1,431 831

Total Comprehensive ProfitTotal Comprehensive ProfitTotal Comprehensive ProfitTotal Comprehensive Profit 741741741741 659659659659 1,0741,0741,0741,074 1,1571,1571,1571,157 Other Non-Current Liabilities 636 654 671 415

Controlling Interests 804 674 1,090 1,162 Total LiabilitiesTotal LiabilitiesTotal LiabilitiesTotal Liabilities 4,4454,4454,4454,445 4,7474,7474,7474,747 4,6504,6504,6504,650 3,4793,4793,4793,479

Non-Controlling Interests -63 -15 -16 -5 Controlling InterestsControlling InterestsControlling InterestsControlling Interests 11,75611,75611,75611,756 12,25212,25212,25212,252 13,13713,13713,13713,137 14,07514,07514,07514,075

EBITDA 1,478 1,347 1,619 1,695 Capital Stock 879 879 879 879

FCF (Free Cash Flow) 405 239 417 1,527 Capital Surplus 2,365 2,363 2,362 2,362

EBITDA Margin (%) 15.1 13.7 15.9 16.2 Retained Earnings 8,575 9,153 10,025 10,963

Operating Profit Margin (%) 11.8 10.6 12.8 13.6 NonNonNonNon----Controlling InterestsControlling InterestsControlling InterestsControlling Interests 349349349349 334334334334 345345345345 388388388388

Net Profit Margin (%) 9.1 8.6 10.4 10.7 Stockholders' EquityStockholders' EquityStockholders' EquityStockholders' Equity 12,10512,10512,10512,105 12,58612,58612,58612,586 13,48213,48213,48213,482 14,46314,46314,46314,463

Cash Flows (Summarized)Cash Flows (Summarized)Cash Flows (Summarized)Cash Flows (Summarized) Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized)Forecasts/Valuations (Summarized) (Wbn)(Wbn)(Wbn)(Wbn) 12/1312/1312/1312/13 12/1412/1412/1412/14 12/15F12/15F12/15F12/15F 12/16F12/16F12/16F12/16F 12/1312/1312/1312/13 12/1412/1412/1412/14 12/15F12/15F12/15F12/15F 12/16F12/16F12/16F12/16F

Cash Flows from Op Activities 736 600 701 1,527 P/E (x) 12.6 12.7 12.3 11.7

Net Profit 831 834 1,071 1,157 P/CF (x) 12.8 13.0 10.6 7.9

Non-Cash Income and Expense 45 -7 163 484 P/B (x) 1.0 0.9 1.0 0.9

Depreciation 300 274 281 252 EV/EBITDA (x) 8.3 9.0 8.7 7.8

Amortization 24 29 27 23 EPS (W) 5,095 4,802 6,019 6,334

Others -279 -310 -145 209 CFPS (W) 4,982 4,701 7,016 9,330

Chg in Working Capital -89 -223 -463 95 BPS (W) 66,860 69,678 74,710 80,043

Chg in AR & Other Receivables -107 -252 -257 -108 DPS (W) 1,000 1,000 1,000 1,000

Chg in Inventories 79 30 -4 -13 Payout ratio (%) 20.8 20.7 16.1 14.9

Chg in AP & Other Payables 11 108 -415 41 Dividend Yield (%) 1.6 1.6 1.3 1.3

Income Tax PaidIncome Tax PaidIncome Tax PaidIncome Tax Paid ----126126126126 ----128128128128 ----197197197197 ----184184184184 Revenue Growth (%) 1.1 0.7 3.5 2.3

Cash Flows from Inv Activities -543 -721 -304 -19 EBITDA Growth (%) -6.3 -8.9 20.2 4.7

Chg in PP&E -323 -356 -253 0 Operating Profit Growth (%) -6.3 -9.5 25.6 8.3

Chg in Intangible Assets -46 -27 -16 0 EPS Growth (%) -4.5 -5.8 25.3 5.2

Chg in Financial Assets -149 -21 -13 -19 Accounts Receivable Turnover (x) 4.9 4.6 4.3 4.0

OthersOthersOthersOthers ----25252525 ----317317317317 ----22222222 0000 Inventory Turnover (x) 25.5 30.9 32.7 32.3

Cash Flows from Fin Activities -18 -60 -55 -1,176 Accounts Payable Turnover (x) 6.5 6.4 7.2 8.7

Chg in Financial Liabilities 158 129 126 -1,000 ROA (%) 5.1 4.9 6.0 6.4

Chg in Equity -1 -3 -1 0 ROE (%) 7.8 7.0 8.3 8.2

Dividends Paid -182 -179 -179 -176 ROIC (%) 30.4 26.2 30.0 33.3

OthersOthersOthersOthers 7777 ----7777 ----1111 0000 Liability to Equity Ratio (%) 36.7 37.7 34.5 24.1

Increase (Decrease) in Cash 174 -185 302 -99 Current Ratio (%) 139.5 132.9 172.1 180.8

Beginning Balance 508 682 498 799 Net Debt to Equity Ratio (%) 6.3 8.3 6.4 -0.4

Ending BalanceEnding BalanceEnding BalanceEnding Balance 682682682682 498498498498 799799799799 701701701701 Interest Coverage Ratio (x) 14.7 12.2 15.9 30.0


Holding companies

35

November 26, 2015


APPENDIX 1

Important Disclosures & Disclaimers

2222----Year Rating and Target Price HistoryYear Rating and Target Price HistoryYear Rating and Target Price HistoryYear Rating and Target Price History

Company Company Company Company ((((Code)Code)Code)Code) DateDateDateDate RatingRatingRatingRating Target PriceTarget PriceTarget PriceTarget Price Company Company Company Company ((((Code)Code)Code)Code) DateDateDateDate RatingRatingRatingRating Target PriceTarget PriceTarget PriceTarget Price

SK Holdings(034730) 08/30/2015 Buy 330,000 02/06/2014 Buy 150,000

04/27/2015 Buy 290,000 11/01/2013 Buy 140,000

03/08/2015 Buy 270,000 LG Corp.(003550) 12/02/2013 Buy 90,000

03/07/2014 Buy 170,000

Equity Ratings DistributionEquity Ratings DistributionEquity Ratings DistributionEquity Ratings Distribution

BuyBuyBuyBuy Trading BuyTrading BuyTrading BuyTrading Buy HoldHoldHoldHold SellSellSellSell

72.77% 13.86% 13.37% 0.00%

* Based on recommendations in the last 12-months (as of September 30, 2015)

DisclosuresDisclosuresDisclosuresDisclosures

As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or

more of the subject company's shares outstanding.

Analyst CertificationAnalyst CertificationAnalyst CertificationAnalyst Certification

The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean

securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions

expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this

report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s

area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified

herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been

promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific

recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by

overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and

private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of

the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.

DisclaimersDisclaimersDisclaimersDisclaimers

This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange.

Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been

independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or

correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English

translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this

report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This

report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any

securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of

the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any

laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof.

Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or

form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers,

Stock RatingsStock RatingsStock RatingsStock Ratings Industry RatingsIndustry RatingsIndustry RatingsIndustry Ratings

Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving

Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes

Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening

Sell : Relative performance of -10%

Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆))

* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.

* Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material

development.

* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of

future earnings.

* The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic

conditions.

0

20,000

40,000

60,000

80,000

100,000

Nov 13 Nov 14 Nov 15

(W) LG Corp.

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Nov 13 Nov 14 Nov 15

(W)SK Holdings

Holding companies

36

November 26, 2015


employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a

purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or

agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment

banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to

in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to

future performance. Future returns are not guaranteed, and a loss of original capital may occur.

DistributionDistributionDistributionDistribution

United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within

Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other

persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant

Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its

contents.

United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional

investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance

thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that

they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed

herein should contact and place orders with Daewoo Securities (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. persons absent registration or an applicable exemption from the registration requirements.

Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong

Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for

distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws

of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person.

All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo 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 Daewoo and its

affiliates to any registration or licensing requirement within such jurisdiction.

KDB Daewoo Securities International Network

Daewoo Securities Co. Ltd. (Seoul)Daewoo Securities Co. Ltd. (Seoul)Daewoo Securities Co. Ltd. (Seoul)Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Daewoo Securities (America) Inc. Daewoo Securities (America) Inc. Daewoo Securities (America) Inc.

Head Office

34-3 Yeouido-dong, Yeongdeungpo-gu

Seoul 150-716

Korea

Two International Finance Centre

Suites 2005-2012

8 Finance Street, Central

Hong Kong, China

320 Park Avenue

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New York, NY 10022

United States

Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000

Daewoo Securities (Europe) Ltd. Daewoo Securities (Europe) Ltd. Daewoo Securities (Europe) Ltd. Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Daewoo Securities (Singapore) Pte. Ltd. Daewoo Securities (Singapore) Pte. Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo BranchTokyo BranchTokyo BranchTokyo Branch

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United Kingdom

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Japan

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Beijing Representative OfficeBeijing Representative OfficeBeijing Representative OfficeBeijing Representative Office Shanghai Shanghai Shanghai Shanghai Representative OfficeRepresentative OfficeRepresentative OfficeRepresentative Office Ho Chi Minh Representative Office Ho Chi Minh Representative Office Ho Chi Minh Representative Office Ho Chi Minh Representative Office

2401A, 24th Floor, East Tower, Twin Towers

B-12 Jianguomenwai Avenue

Chaoyang District, Beijing 100022

China

Room 38T31, 38F SWFC

100 Century Avenue

Pudong New Area, Shanghai 200120

China

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37 Ton Duc Thang St,

Dist. 1, Ho Chi Minh City,

Vietnam

Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000

Daewoo Investment Advisory (Beijing) Co., Ltd.Daewoo Investment Advisory (Beijing) Co., Ltd.Daewoo Investment Advisory (Beijing) Co., Ltd.Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLCDaewoo Securities (Mongolia) LLCDaewoo Securities (Mongolia) LLCDaewoo Securities (Mongolia) LLC PT. Daewoo PT. Daewoo PT. Daewoo PT. Daewoo Securities IndonesiaSecurities IndonesiaSecurities IndonesiaSecurities Indonesia

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B-12 Jianguomenwai Avenue,

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China

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Ulaanbaatar 14240

Mongolia

Equity Tower Building Lt.50

Sudirman Central Business District Jl.

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