J. P Morgan - Strategic Options for Ownership Restructuring

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Asia Pacific Equity Research29 April 2014

Samsung's strategic options forownership restructuringHeart & Seoul analysis part 1: The start

Korea Equity Strategy

Scott YH Seo AC

(82-2) 758 5759

[email protected]

Bloomberg JPMA SEO <GO>

J.P. Morgan Securities (Far East) Ltd, SeoBranch

JJ Park

(822) 758-5717

[email protected]


Sokje Lee

(82-2) 758-5729

[email protected]


MW Kim

(852) 2800-8517

[email protected]

J.P. Morgan Securities (Asia Pacific) Limite

Youna Kim

(82-2) 758-5715

[email protected]


Young Kwon Kim

(82-2) 758- 5733

[email protected]


See page 17 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that tfirm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factormaking their investment decision.

Samsung Group’s commanding shares of the Korean economy and listed equitymarket capitalization mean that changes in the Group's ownership structure couldhave profound implications for the whole Korean market, in our view. Under thestrong leadership of Chairman Lee, Kun-hee for the last 27 years, Samsung Grouphas been transformed into a well-entrenched global manufacturer, competing withother electronics giants for global supremacy. While the timing is not fixed, wethink his top priorities ahead of retirement could include: 1) Samsung’s

positioning within Korea, (2) efficient wealth transfer to the 3rd generation, and (3) business reshuffling for further strong growth in coming decades. In this report

and the upcoming series of reports, we review Samsung’s strategic options from

the perspective of the Group Chairman and related family holdings in the Group.

Samsung and Korea. Samsung Group generated ~23% of Korea’s GDP as of

2012 and the aggregated market cap of Samsung affiliates accounts for ~28% ofKOSPI. Due to the Group's strong presence in the Korea economy, thechairman could be motivated to follow the government’s stance and worktowards simplifying the Group’s ownership structure. In line with this, our basecase scenario is that the chairman could pursue: (1) ownership separation (orminimization) between manufacturing and finance, and (2) better co-operationwith SMEs. In our view, ownership separation is likely to be a key priority forthe chairman as it directly relates to wealth transfer plans for the nextgeneration.

Chairman’s assets and shareholdings. The chairman's current wealth status(including his spouse), besides his property holdings, can be simplified into two

parts—shareholdings in SEC (66% in terms of value) and SLI (32%). Given

that Samsung's ownership structure is directly/indirectly controlled via SLI, wethink the passing down of wealth to the 3rd generation should start withSEVLD’s ownership position in SLI, as well as the chairman’s ownshareholdings in SEC and SLI.

Considerations within Samsung Group. The chairman's ownership transfercould pave the way for both improving the Group ownership structure as wellas reshuffling the Group business portfolio. Our restructuring scenario centerson: 1) looking for ways to strengthen controls on SEC, 2) outperformers helpingthe relative underperformers within the Group, 3) growing merger cases amongSamsung affiliates due to the ban on additional circular ownership creation, and4) looking for ways of better utilizing excess capital at Samsung Group financialcompanies.

Wealth transfer and tax. Nonetheless, the starting point of the wealth transfershould be largely focused on the tax consideration from the chairman's point ofview since any ownership transfers could bring about sizable tax liabilities forhis children, resulting in negative impacts on the Group ownership structure,given the significant wealth accumulation over many years and high inheritancetax rate. Our base case scenario is that the Group might ask SLI and SEC to take

bigger roles in husbanding tax liabilities.

Acronyms used in this report:

Name Abbr.

Cheil Industries CIDCheil Worldwide CWWHotel Shilla HTSSamsung Asset Mgt. SAMSamsung C&T SCTSamsung Card SSCSamsung Electro-Mechanics SEMCOSamsung Electronics SECSamsung Engineering SEGSamsung Everland SEVLD

Samsung F&M Insurance SFMSamsung Fine Chemical SFCSamsung General Chemical SGCSamsung Heavy Industry SHISamsung Life Insurance SLISamsung Petrochemical SPCSamsung SDI SDISamsung SDS SDSSamsung SNS SNSSamsung Securities SSSS One SONE

Source: J.P. Morgan.


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Asia Pacific Equity Research

29 April 2014Scott YH Seo(82-2) 758 [email protected]

Table of Contents

Samsung and Korea.................................................................3What does Samsung mean to the Korean economy?.................................................3

Challenge to chaebol structure locally...................................5

The circular ownership structure..............................................................................5

President Park’s stance on Chaebol ownership structure...........................................6

Transferring the helm of the Group to the 3rd generation....7

The Founder, current Chairman, and the 3rd

generation............................................7

Chairman’s wealth .............. ............. ............. ............. ............. .............. ............. .....7

What top-down aspects should be considered for the ownership transfer?....... ..........9

Group restructuring begins...................................................10

Wave of minor ownership changes already announced...........................................10Son of Chairman gains effective control on SEVLD...............................................12

Legality and ethical issues behind ownership transfers...........................................13

AppendicesAppendix I: Background reading on Samsung Group’sownership structure ...............................................................12

Appendix II: Samsung group ownership structure .............15

Note: Unless otherwise mentioned, all share prices in the report are priced as of

April 25, 2014.



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Samsung and Korea

What does Samsung mean to the Korean economy?

Fair Trade Commission puts Samsung on top of the chaebol list

According to a recent release by Korea Fair Trade Commission (KFTC), SamsungGroup is the biggest business conglomerate or chaebol in Korea as of April 1, 2014,

beating other business conglomerates or chaebols by a big margin in terms of assetsize and net profit, as shown in Table 1.

The fleet of Samsung Group affiliates consisting of 74 affiliates possess W559trillion in assets and generate W24 trillion of net profit, according to KFTC. Evenexcluding financial companies run by the Group, Samsung Group’s combined assetsamount to W291 trillion with aggregated net profit of W22 trillion.

Table 1: Korea—Snapshot of top 20 business conglomerates

Won in trillions, %

Ranking Group Chaebolor not?

No. ofcos.

Group-combined Ex-Financials

Asset Equity Liabilit. NP D/E Asset Equity Liabilit. NP D/E

1 Samsung Yes 74 558.8 243.9 314.8 24.2 129.1 291.1 203.6 87.5 22.0 43.02 KEPCO No 24 186.6 80.7 105.8 0.6 131.1 186.6 80.7 105.8 0.6 131.13 Hyundai Motor Yes 57 220.1 111.9 108.1 14.7 96.6 174.0 105.0 69.0 14.1 65.74 Korea Land & Housing Corp. No 5 173.7 31.1 142.6 0.7 458.2 173.7 31.1 142.6 0.7 458.25 SK Yes 80 148.9 77.9 70.9 4.5 91.1 144.7 77.5 67.3 4.6 86.86 LG Yes 61 102.1 51.2 50.9 2.2 99.3 102.0 51.2 50.9 2.2 99.47 Lotte Yes 74 106.6 56.4 50.2 1.9 89.0 88.8 53.5 35.3 1.7 65.98 POSCO No 46 83.8 54.4 29.5 1.9 54.2 83.7 54.3 29.4 1.9 54.39 Hyundai Heavy Industry Yes 26 63.2 27.9 35.3 0.4 126.3 57.5 27.1 30.5 0.4 112.6

10 GS Yes 80 58.1 27.3 30.7 -0.1 112.4 58.1 27.3 30.7 -0.1 112.511 Korea Expressway Corp. No 3 53.5 27.6 26.0 0.1 94.1 53.5 27.6 26.0 0.1 94.112 KOGAS No 3 42.5 8.6 33.9 -0.3 396.1 42.5 8.6 33.9 -0.3 396.113 Nonghyup No 32 275.1 39.6 235.5 1.0 594.7 4.0 2.8 1.2 0.1 41.014 Hanjin Yes 48 39.5 7.2 32.4 -0.9 452.3 39.5 7.2 32.4 -0.9 452.315 Hanwha Yes 51 122.3 20.0 102.3 1.0 510.4 28.3 11.6 16.7 0.5 144.816 KT No 57 39.7 16.6 23.1 0.0 139.5 33.5 15.2 18.4 -0.1 121.417 Doosan Yes 22 31.3 13.3 18.0 0.6 134.8 29.6 13.0 16.7 0.6 128.718 K-water No 2 25.5 11.6 13.9 0.3 119.3 25.5 11.6 13.9 0.3 119.319 Shinsegae Yes 29 25.2 13.0 12.3 0.7 94.5 25.2 13.0 12.3 0.7 94.520 CJ Yes 73 24.1 12.7 11.4 0.3 89.7 24.1 12.7 11.4 0.3 89.8

Source: KFTC.

Note: Dated as of April 1, 2014.

Samsung Group represents the biggest part of Korea’s economy

The Group generated 23% of Korea’s GDP in 2012As of 2012, Samsung Group accounted for 23% of GDP (nominal GDP of W1,272.5

trillion for Korea) and 14% of corporate tax revenue (W47.3 trillion in total from482,574 corporates), as shown in Figure 1, according to local news media reports(e.g., CEO Score and SBS). Indeed, the aggregated operating profit and net profit ofSamsung Group represents 16% and 24% of Korea’s entire corporate operating

profits and net profits, respectively as of 2012, according to the same sources.

Samsung accounts for 28% of the equity market

In the equity market, the aggregated market cap (both common and preferred shares)of listed companies (17 companies) of Samsung Group is equivalent to 28% of totalmarket cap in Korea as of April 25, 2014. Of note, SEC alone represents 20% of totalmarket cap in Korea.



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Figure 1: Samsung Group—Contribution to GDP%

Source: CEO Score.

Table 2: Samsung Group—Listed group companiesWon in billions, %

Company name Marketcap.

Company name Marketcap.

Samsung Electronics 206,072 Cheil Industries 3,435Samsung Life 19,180 Hotel Shilla 3,218Samsung F&M 11,441 Samsung Securities 3,027Samsung C&T 10,092 S-One 3,021Samsung Heavy 6,580 Samsung Techwin 3,066Samsung SDI 6,834 Samsung Engineering 2,972SEMCO 5,176 Cheil Worldwide 2,801Samsung Card 4,154 Samsung Fine Chem. 1,085Credu 277Listed- otal (incl. preferred shrs) 318,106 as % of KOSPI 28%

Source: Bloomberg.

Note: As of April 25, 2014.

More than 250,000 employeesThe Federation of Korea Industries (FKI) states that Samsung Group has 257,091employees (c. 1% of economically active people) in Korea as of 2012 (see Figure 2).As the Group has been moving its labor-intensive production lines into emergingmarket countries, the Group’s job creation has decreased substantially in Korea overthe last couple of years. However, the group is still one of biggest providers of high-end jobs locally.

Fast-growing global brand recognition

As a result of Samsung Group’s rising global reputation, the group’s brandrecognition across the globe has improved meaningfully over the last couple of years.According to a study by Interbrand , Samsung’s brand value is estimated at US$40

billion as of 2013 (see Table 3). The group's brand recognition has shown asignificant improvement from 19th in 2010 to 8th in 2013, according to the samesource.

Figure 2: Samsung Group—No. of group employeesPersons

Source: FKI.

Table 3: Global—Best global brands 2013

Ranking, US$ in billions

2013 2012 2011 2010 Value

Apple 1 2 8 17 98.3Google 2 4 4 4 93.3Coca-Cola 3 1 1 1 79.2IBM 4 3 2 2 78.8Microsoft 5 5 3 3 59.5GE 6 6 5 5 46.9McDonald's 7 7 6 6 42.0Samsung 8 9 17 19 39.6

Intel 9 8 7 7 37.3

Toyota 10 10 11 11 35.3Mercedes-Benz 11 11 12 12 31.9BMW 12 12 15 15 31.8Cisco 13 14 13 14 29.1Disney 14 13 9 9 28.1HP 15 15 10 10 25.8

Source: Interbrand.



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Challenge to chaebol structure locally

The circular ownership structure

Chairman Lee relies on circular ownership for effective control of

Samsung Group

One of the public’s strongest criticisms of the chaebol structure is the fact that achairman/chairwoman and his/her family control the whole organization by relyingon a circular ownership structure among group affiliates, despite the family’srelatively tiny stakes across the group.

For example, according to a report of KFTC published in 2013, while the chairmanof Samsung Group only holds a 1.3% stake (including his family stakes) in the wholegroup companies, he effectively controls 50.1% of the group via a circularownership structure (see Table 4). Hence his ownership leverage via circular

ownership (i.e., the ratio of Chairman Lee's effective control of the Group over hisdirect ownership) exceeded 38 times in 2013.

Table 4: Korea—Chaebol ownership structure

Won in billions

Paid-in

capital

Chairman & family total (%) Other controls (%) Total

controls (%)Chairman Family Total Group cos. *Others

Samsung 9,238 0.7 0.6 1.3 45.5 3.4 50.1Hyundai Motor 9,981 2.0 1.6 3.6 47.0 0.9 51.6SK 10,627 0.0 0.6 0.7 47.6 0.7 49.0LG 7,441 1.3 2.8 4.1 35.1 0.5 39.7Lotte 3,899 0.1 2.4 2.5 59.1 0.5 62.1Hyundai Heavy 3,719 1.0 0.1 1.2 68.4 2.6 72.1GS 2,946 1.9 14.9 16.8 44.0 0.4 61.2Hanjin 1,759 2.4 2.4 4.8 40.9 4.7 50.4

Hanwha 7,440 1.2 0.8 2.0 52.7 2.7 57.4Doosan 3,017 0.1 3.5 3.5 50.6 4.7 58.9STX 1,370 2.4 0.6 3.0 52.7 0.8 56.5CJ 1,780 4.6 1.3 5.9 58.4 3.8 68.0Shinsegae 1,076 3.3 2.9 6.2 60.8 10.9 77.9

Source: KFTC.

Note: 1. Dated as of April 1, 2013.

2. *Shareholdings by non-chaebol family executives, non-profit organizations as well as treasury shares.

Pros and cons of circular ownership structure for Korea economy

A cross-holding between two units of a chaebol is strictly prohibited in Korea. Towork around this ban, chaebols have used circular ownership structures. Anownership loop is created when Company A makes an equity investment inCompany B, which buys a stake in Company C, which in turn secures a stake inCompany A.

The rapid expansion of chaebols during the past decades has been well supported bythis mechanism and clearly it has helped the Korean economy to grow dramaticallyover the last five decades. But, this governance structure is harmful, in our view, notonly because economic power becomes concentrated in the hands of a few chaebolchairmen/chairwomen, but also because it can limit fair competition within thesystem. In some cases, chaebol families have also used this mechanism toconsolidate corporate wealth via the setting up of family-owned private companies or

by facilitating “father-to-son” transfer of chaebol control..



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Figure 3: Samsung Group—Circular ownership structure (as of April 2013)%

Source: KFTC.

President Park’s stance on Chaebol ownership structure

President Park has a relatively favorable stance on circular ownership structureDuring every presidential election campaign in the last two decades, circularownership structure of chaebols has always been one of the most debated topicsamong presidential candidates. Most candidates have agreed with eliminatingcircular ownership mechanism in principle. On flip side, however, the potential sideeffects of banning cross-holding structures have also been of concern. An across-the-

board ban would require relevant chaebols (or chaebol families) to spend trillions ofWon to change their governance structure (i.e., untangling circular ownership) whichcould have a significant impact on their ability to invest and create jobs locally,according to the arguments from the FKI, an organization representing interests ofchaebols.

President Park Geun-hye promised during her presidential campaign trail that she

would accept existing circular ownership structure loops but ban chaebols frommaking additional ones. The bill banning chaebols (with assets exceeding W5trillion) from creating a fresh circular equity investment in group affiliate companieswas passed in the National Assembly in Dec 2013 and it will be effective from thesecond half of 2014. After this act is enacted, we expect many chaebols to evolveinto a holding company structure or to simplify existing circular ownership structure(i.e., “quasi” holding company), particularly before the end of current presidentialterm (February 2018).

Affiliate Stake Affiliate Stake Affiliate Stake Affiliate Stake Affiliate Stake Affiliate Stake Affiliate

1 SCT → SEC → SDI → SCT

3.5 19.7 7.2

2 SCT → SEVLD → SLI → SCT

1.5 19.3 4.6

3 SEVLD → SLI → SSC → SEVLD

19.3 28.0 5.0

4 Cheil Ind. → SEVLD → SLI → SSC → Cheil Ind.

4.0 19.3 28.0 4.7

5 SEC → SSC → SEVLD → SLI → SEC

37.5 5.0 19.3 6.2

6 SCT → SEC → SDI → SEVLD → SLI → SCT

3.5 19.7 4.0 19.3 4.6

7 SCT → SEC → SEMCO → SEVLD → SLI → SCT

3.5 22.8 4.0 19.3 4.6

8 SCT → SEC → SSC → SEVLD → SLI → SCT

3.5 37.5 5.0 19.3 4.6

9 SDI → SCT → SEVLD → SLI → SEC → SDI

7.2 1.5 19.3 6.2 19.7

10 SEMCO → SSC → SEVLD → SLI → SEC → SEMCO

3.8 5.0 19.3 6.2 22.8

11 SFM → SEC → SEMCO → SEVLD → SLI → SFM

1.1 22.8 4.0 19.3 9.7

12 SFM → SEC → SSC → SEVLD → SLI → SFM

1.1 37.5 5.0 19.3 9.7

13 SCT → SEC → SSC → Cheil Ind. → SEVLD → SLI → SCT

3.5 37.5 4.7 4.0 19.3 4.6

14 SCT → SEC → SEMCO → SSC → SEVLD → SLI → SCT

3.5 22.8 3.8 5.0 19.3 4.6

15 SDI → SCT → SSC → SEVLD → SLI → SEC → SDI

7.2 2.5 5.0 19.3 6.2 19.7

16 SFM → SEC → SDI → SCT → SEVLD → SLI → SFM

1.1 19.7 7.2 1.5 19.3 9.7



7



Transferring the helm of the Group to the

3rd generationThe Founder, current Chairman, and the 3rd generation

The founder of Samsung Group

Lee, Byung-chull (February 12, 1910 ~ November 19, 1987), the founder ofSamsung Group, started the business by incorporating Samsung Trading, theforerunner to Samsung Group (Samsung means “three stars” in Korean), in 1938.The founder of the Group set the stone on current chaebol structure of SamsungGroup via entering into a wide variety of businesses from light industries to heavyindustries as well as a circular ownership structure among the Group companies.

Chairman of the Group

Lee, Kun-hee (January 9, 1942 ~ ), current chairman of Samsung Group and the thirdson of the founder, took over the chairmanship on December 1, 1987, just two weeksafter the death of his father, in accordance with the will of his father. The chairmanhas been very successful so far in achieving the globalization of the Samsung Groupand the emergence of SEC as a globally competitive IT player. Today SamsungGroup's revenues are more than 40 times what they were in 1987.

3rd generation

One son—Lee, Jae-yong (June 23, 1968 ~ )—and two daughters—Lee, Bu-jin(October 6, 1970 ~ ) and Lee, Seo-hyun (September 20, 1973 ~ )—of the chairmanare participating in managing several Samsung Group companies including SEC,HTS and SEVLD. They became the largest shareholders of SEVLD, de facto holdingcompany of Samsung Group, via taking convertible bond issuance in 1996. The case

had been publicly criticized due to the expedient transfer of the Chairman’s wealth tohis children, but the Supreme Court finally gave a "not guilty" verdict for the case in2009, paving a smooth way for the chairman to transfer his wealth to his children(please see Appendix 1 on page 12 for more details).

Chairman’s wealth

Chairman’s equity holdings in Samsung Group affiliates

The chairman’s current wealth status (including his spouse), besides his propertyholdings, can be simplified into two parts—the shares in SEC (66% in terms of value)and the shares in SLI (32%), as displayed in Table 5.

Table 5: Samsung Group—Stakes holdings by the chairman and his spouse

‘000 shares, %, Won in billions

Holders Company Ticker Share type No. of shrs. Stakes Value

Lee, Kun-hee Samsung Electronics 005930 KS Common 4,985 3.4 6,975Lee, Kun-hee Samsung Life 032830 KS Common 41,519 20.8 3,982Hong, Ra-hee Samsung Electronics 005935 KS Common 1,080 0.7 1,176Lee, Kun-hee Samsung C&T 000830 KS Common 2,206 1.4 143Lee, Kun-hee Samsung Electronics 005935 KS Preferred 12,398 0.1 13Total holding in listed Samsung companies 12,285

Source: DART, Bloomberg.

Note: As of April 25, 2014.



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Given Samsung Group's ownership structure (especially SEC) is directly/indirectlycontrolled through SLI, we think wealth transfer planning should start with SEVLD’s

ownership positioning in SLI (38.7 million shares or 19.3% stake) as well as thechairman’s (and his spouse's) own shareholdings in SEC (6.1 million share or 4.1%stake) and SLI (41.5 million share or 20.8% stake).

Chairman might complete the transfer within the next couple of years

It is hard to estimate when the chairman might substantially transfer his wealth andthe chairmanship to his children. While the chairman took the chairmanship after thedeath of the founder of the group, considering the relatively favorable stance ofPresident Park Geun-hye on circular ownership structure, we think he shouldconsider completing the transfer of his wealth and the chairmanship to one of hischildren during the current President’s term.

"Corporate Strategy Office” at SEC

With the comeback of the chairman to the Group chairman position in 2010, thegroup established the "Corporate Strategy Office", which is the effective controltower of Samsung Group (similar organization to the "Chairman's Office" ofSamsung Group in the past). This organization is currently led by Choi, Gee-sung,who served as the CEO of SEC between Dec-09 and May-12, and 42 seniorexecutives (excluding chief legal council and his team members) of SamsungElectronics are assigned to the unit as of end-2013, according to SEC’s annual report.

The control tower role for the Group’s financial companies is done by a task force,so-called “Financial Business Strategy Team” and the head of the task force is part ofSamsung Life Insurance. According to various local news media (e.g., Yonhap

News), the Group’s ownership restructuring agenda is being planned and executed bythe Corporate Strategy Office.

Figure 4: Samsung Group—Organization structure of “Corporate Strategy Office”

Source: Yonhap News, DART, J.P. Morgan.

Samsung CorporateStrategy Office

Strategy team #1

Strategy team #2

Planning team

HR support team

Communication team

Corporate audit team

Legal council

Financial businessstrategy team

Choi , Gee-sung

Head , Corporate Strategy Office Chang, Choong Ki

Deputy Head, Corporate Strategy Office

Kim, Jong Joong , Head/President (from Samsung Electronics) Oversee IT business lines of Samsung Group 1 President, 1 EVP, 1 SVP & 7 VP (from Samsung Electronics)

Kim, Myung Soo ,Head/EVP (from Samsung Electronics) Oversee non-I T business lines of Samsung Group 1 EVP & 4 VP (from Samsung Electronics)

Yuk, Hyeon Pyo, Head/EVP(from Samsung Electronics) Oversee overall business process of Samsung Group 1 EVP, 1 SVP & 3 VP (from Samsung Electronics)

Chung, Keum Yong ,Head/EVP (from Samsung Electronics) Oversee HR of Samsung Group 2 EVP & 3 VP (from Samsung Electronics)

Lee, In Yong, Head /President (from Samsung Electronics) Oversee c orporate marketing and communication 1 President, 1 EVP, 3 SVP & 3 VP (from Samsung Electronics)

Chung, Hyun Ho, Head/EVP (from Samsung Electronics) Oversee audit and consulting of Samsung Group 1 EVP, 3 SVP & 3 VP from (Samsung Ele ctronics)

Kim, San g Gyun, Head/President (f rom Samsung Electronics) Oversee legal process of Samsung Group

Lim, Young Bin, Head/EVP (from Samsung Life Insurance) Oversee fina ncial companies of Samsung Group



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What top-down aspects should be considered for theownership transfer?

Keeping the policy direction of the government

Due to its strong presence in the Korea economy, the chairman could be motivated tofollow the government’s stance and work towards simplifying the ownershipstructure of the Group. In line with this, our base case scenario is that the chairmancould pursue:

Ownership separation (or minimization) between manufacturing and financialswithin a chaebol structure,

Better co-operation with SMEs, and

Better preparation for long-term reunification of the two Koreas.

Of the three agenda items, we think ownership separation should remain the key

agenda for the chairman as it is directly related to the near-term wealth transfer planto the next generation.

From the point of view of Samsung Group

From the angle of Samsung Group, the chairman's ownership transfer could be agood catalyst for both enhancing the Group's controls across the entire Group as wellas reshuffling the Group's business portfolio. We believe a restructuring scenarioshould consider the following:

The Group should look for ways of solidifying its controls on SEC,

Within the Group, outperformers might help underdogs address their operationalweakness, if they are focusing on similar business lines,

Due to the government’s ban on creating additional circular ownership, mergersand integrations among Samsung Group affiliates should take place more actively,

The Group should leverage the reshuffling opportunities in order to secure furtherdrivers of strong growth for Group over the next decades, and

The Group should consider ways of better utilizing excess capital held by itsfinancial affiliates.

From the point of view of the chairman

We think the starting point of the wealth transfer should focus on the taxconsideration from the chairman's point of view, as it would bring about sizable taxliabilities for his children, resulting in negative impact on the family’s Groupownership structure, given the chairman’s sizable wealth accumulation and high

inheritance tax rate (i.e., max 50% tax rate for amounts exceeding W3 billion under progressive taxation system). Our base case is that the Group might ask SLI and SECto take bigger roles in tax consideration.

We think SLI would have more scope to husband the future tax liability throughvarious schemes including simplifying the ownership structure within Samsungfinancials. Our base case is, given SLI’s ample excess capital, SLI could increase itsstakes in SSC and SFM, working as a quasi-holding company.



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Group restructuring begins

Wave of minor ownership changes already announced

In our opinion, moves for group restructuring have already begun. Since September 2013, the group has announced a series of changes to Samsung business/ownershipstructure. The changes have revolved around the following:

Spin-off of divisions among affiliates (i.e., SEVLD acquires fashion businessfrom CID)

Mergers among affiliates (i.e., SDI + CID, SGC + SPC)

Minor ownership re-alignment between financial and non-financial affiliates (i.e.,SLI purchases non-financial affiliates stake in SSC)

Table 6: Samsung Group—Summary of recent changes to business/ownership structure

Date Details

Sep 23, 2013 SEVLD acquires fashion business from CIDSep 27, 2013 SDS merges with SNSNov 04, 2013 SONE acquires building management business from SEVLD, SEVLD spins-off food retail businessDec 13, 2013 SCT increases stake in SEG from affiliatesDec 13, 2013 SLI increases stake in SSC by purchasing stake from affiliatesMar 31, 2014 SDI announces merger with CID Apr 02, 2014 SGC merges with SPC Apr 22, 2014 Non- inancial affiliates sell SLI shares in the market, SSC sells SFM stake to SLI.

Source: Local press, DART, J.P. Morgan.

Samsung SDI + CID merger

On March 31, 2014, SDI announced it would acquire CID through a share swap atthe ratio of 1:0.442548 shares on July 1, 2014.

Figure 21: SDI—Ownership breakdown(Dec-13) As % of tot al

Source: DART, J.P. Morgan.

Figure 22: CID—Ownership breakdown(Dec-13) As % of total


Figure 23: SDI & CID—Post mergerownership structure As % of total


SGC + SPC merger

On April 2, 2014, SGC followed by announcing that it would merge with SPC. SGCwill issue new shares and swap SOC share at a ratio of 1 to 2.1441. The merger would be effective on June 1, 2014.

SEC29%

Samsungaffiliates

1%Others70%

SSC5%

Samsungaffiliates

2%

Others93%

SEC13%

SSC2%

Samsungaffiliates

1%

Others84%



11



Figure 24: SGC—Ownership breakdown(Dec-13) As % of tot al


Figure 25: SPC—Ownership breakdown(Dec-13) As % o f t ota l


Figure 26: SGC & SPC—Post mergerownership structure As % o f t ota l


Breaking link between financial and non-financial affiliates

On April 22, 2014, Samsung group announced another round of ownership

realignments. Details included (1) SSC selling 298,377 shares of SFM to SLI, (2)SEMCO disposing of 1,206,380 shares of SLI in the market, (3) SFC disposing of944,090 shares of SLI in the market, (4) CWW disposing of 425,560 shares of SLI inthe market, and 5) SDS disposing of 708,910 shares of SLI in the market.

Table 7: SFM—Major shareholders as of Dec-13

‘000 shares, %

(Common share) No. of shares Ownership

SLI 4,906 10.4SSC 298 0.6Samsung Foundation of Culture 1,451 3.1Samsung Welfare Foundation 171 0.4Samsung Group Total 6,823 14.4Treasury share 6,382 13.5

Total common share 47,375 100.0Source: DART.

Table 8: SLI—Major shareholders as of Dec-13

‘000 shares, %

(Common share) No. of shares Ownership

Chairman: Lee, Kun-hee 41,519 20.8SEVLD 38,688 19.3Samsung Foundation of Culture 9,360 4.7Samsung Welfare Foundation 9,360 4.7SEMCO 1,206 0.6SFC 944 0.5SDS 709 0.4CWW 426 0.2Samsung Group Total 102,212 51.1Treasury share 8,925 4.5

Total common share 200,000 100.0

Source: DART.

SCT39%

Techwin26%

SDI11%

SEMCO10%

SEC4%

Others10%

BJ Lee33%

SCT27%

Cheil Ind22%

SEC13%

Shinsegae5%

SCT37%

Techwin23%

SDI9%

SEMCO9%

SEC5%

BJ Lee5%

CheilInd

4%

Others8%



12



Appendix I: Background reading on

Samsung Group’s ownership structureSon of Chairman gains effective control on SEVLD

(Source: Prosecutors' special investigation into Samsung Group and Chairman Lee

in 2008)

The initial inheritance

Until 1994, Lee, Jae-yong (JY Lee) had limited involvement in the Group'sownership structure. Then, from October 1994 to April 1996, JY Lee inherited W6.1

billon in cash from his father, Chairman Lee. Excluding inheritance tax, JY Lee usedthe proceeds to become a shareholder in three unlisted Samsung Group companies,namely, SONE, SEG and CWW, via direct share purchase, warrant investment and

participation in new share issuance. With SONE (January 1996), SEG (December1996) and CWW (March 1998) going public, JY Lee recognized the proceeds ofW77.5B from selling his shareholdings on the companies to the market and theGroup affiliates.

JY Lee becomes major shareholder of SEVLD

In October 1996, the BoD of SEVLD (unlisted) approved a convertible bondissuance to the shareholders. In December, 1996, JY Lee took unsubscribed (byChairman Lee and Samsung affiliates) convertible bonds, which were allowed toconvert into 1.25 million of SEVLD shares at W7,700/share. Then, JY Leeimmediately became the largest shareholder (25.1% stake) of SEVLD via convertingCBs into ordinary shares. Lee, Bu-jin and Lee, Seo-hyun, two daughters of ChairmanLee also became major shareholders of SEVLD (8.4% each) via converting CBs into

ordinary shares as well. Of note, regulations related to inheritance via CB issuancewere implemented starting January, 1997.

Figure 5: Samsung group—Key shareholders of SEVLD, SLI, SCT, SEC and SSC.


Note: Diagram excludes minor unlisted affiliates, shareholdings that are less than 1%, special account holdings at financial companies.

Samsung Everl and

Samsung Life

JY Lee & family 46.04%

Samsung Card 5.00%

Other Samsung affiliates 14.36%

Samsung Electronics

4.06% 7.21%

Samsung Card

37.45%

5.00%

34.41%

Chairman Lee 20.76%

Samsung Everland 19.34%

Two Samsung Foundations 9.36%

Samsung Life 7.21%

Samsung C&T 4.06%

Chairman Lee 3.38%

Samsung Electronics 37.45 %

Samsung Life 34.41%

Samsung C&T

19.34%

1.48%

4.65%

Samsung SDI 7.18% Samsung Life 4.65%

Chairman Lee 1.37%



13



SEVLD purchases shares in SLI

In December 1998, SEVLD purchased a 19.3% stake in SLI (going public in May

2010) at W9,000/share. A largely criticized issue related to this transaction was thefact that SEVLD’s acquisition price on SLI was much lower than what Chairman Leevalued SLI (i.e., at W700,000/share or above) in June/July 1999 as collateral (4million of SLI shares) for troubled debt at Samsung Motors. Combined withChairman Lee’s stake (20.8%) and SEVLD's stake in SLI as well as the circularownership structure among SEVLD, SLI, SCT, SEC and SSC, Chairman Lee and hisfamily effectively control both SLI and SEC (see Figure 5)

SDS issues BW at low price to Chairman Lee’s family

SDS issued W23 billion worth of bonds with warrant, allowing BW holders to purchase SDS shares at W7,150/share for 3.2 million shares, to Chairman Lee, JYLee, two daughters of Chairman Lee, and two Samsung Group executives inFebruary 1999. Both National Tax Service and KFTC ruled that this issuance was

illegal in October 1999, considering OTC price for SDS (W53,000~W60,000 pershare) at that time.

Legality and ethical issues behind ownership transfers

Testing the legality of SEVLD’s CB issuance

The legality and ethics behind the process in which JY Lee gained effective controlof SEVLD have been much debated topics in public locally. In June 2000, Membersof the Democratic Legal Studies Association (MDLSA) charged Chairman Lee andrelated members of malpractice under the "Economic Act of AggravatedPunishment”. In September 2003, the prosecutor’s office started its investigation intothe issues involving illicit CB issuance and tax evasion resulting from lowconversion price of the CB.

After guilty rulings on illicit CB issuance by the Seoul Central District Court inJanuary 2005 and the Seoul High Court in May 2007, however, the Supreme Court inMay 2009 overturned the decision, deeming that the issuance of CB by SEVLD toJY Lee was legal. While the legal issue of JY Lee’s succession was cleared from thecourt ruling, the ethical aspect has been criticized continuously in public.

Table 9: Samsung Group—Timeline of issues surrounding SEVLD’s CB issuance

Date Events

Oct-96 SEVLD s BoD approves CB issuance to shareholdersDec-96 SEVLDs BoD approves CB designation to JY Lee and family. (conversion price at W7,700 per share)

Jun-00Members of the Democratic Legal Studies Association charge Chairman Lee and related members ofmalpractice under the "Economic Act of Aggravated Punishment"

Sep-03 Prosecutor's Office summons members of Samsung's Restructuring Office

Dec-03Prosecutor's Office judges proper value of CB to be W85,000 per share.

CEOs of SEVLD prosecuted without detention.Jan-05

Prosecutor's Office pronounces Her, Tae-hak and Park, Ro-bin (former CEOs of SEVLD) to 5 years ofpenal servitude and 3years reprieve, respectively, for arranging illicit CB issuance.

Oct-05 Seoul Central District court rules in favor of Prosecutor's Office.May-07 Seoul High court, after appeal, assigns 3 years of penal servitude and 5years of reprieveMay-09 Supreme court overturns Seoul High Court's decision

Source: Local press, J.P. Morgan.

Whistle blowing and a special investigation

In October 2007, Mr. Kim, Yong-chul, the former chief legal council of SamsungGroup, unveiled the group’s alleged corruption including holding slush funds,opening bank accounts with borrowed names, bribery, and tax evasion. The case was



14



widely publicized in the press. And in December 2007, Mr. Choi, Joon-woong wasappointed to lead a special prosecution team to investigate Samsung Group (i.e.,

Samsung Group special investigation task force) and Chairman Lee. On January2008, the task force raided Samsung’s head offices as well as homes of severalexecutives of the Group.

In April 2008, the task force announced its findings. While there was no charge on bribery, the task force indicted Chairman Lee and ten others of malpractice under“Economic Act of Aggravated Punishment”, tax evasion, and violation of the“Securities and Exchange Law”. Chairman Lee stepped down as Chairman.

After rulings at the Seoul Central District Court (in July 2008) and Seoul High court(in October 2008), the Supreme Court (in May 2009) overruled the high court’s ‘notguilty’ verdict for Chairman Lee regarding illicit BW issuance by Samsung SDS andsent the case back to Seoul High Court. Ultimately, the Seoul High Court handed aguilty verdict but Chairman Lee was not given a jail sentence. Chairman Lee waslater acquitted by former President Mr. Lee, Myung-bak in preparation for thePyeong Chang Winter Olympics. Of note, as an outcome of the investigation,Chairman Lee became the largest shareholder of SLI after transferring SLI sharesunder borrowed names to his own account.

Table 10: Samsung group—Timeline of issues surrounding the Samsung Group Special

investigation

Date Events

Oct-07Kim, Yong-chul, former chief lawyer of Samsung Group, whistle-blows on the group's alleged corruptionincluding secret slush funds, borrowed bank accounts, bribery, tax evasion

Dec-07Choi, Joon-woong, lawyer, appointed to lead special prosecutor's team to investigate Samsung groupscandal

Jan-08 Special task force raids Samsung's head office as well as executive homes

Apr-08Special task force announces the results of the investigation; Chairman Lee indicted and steps down asChairman position.

Jul-08 Seoul Central District Court rules against Chairman Lee and othersOct-08 Seoul High Court rules in favor of Prosecutor’s OfficeMay-09 Supreme court overrules ‘not guilty on tax evasion and SDS's BW issuance.

Source: Local press, J.P. Morgan.





16



Figure 7: Samsung—Group ownership structure after reflecting recent mergers/ownership changes%stake


Note: Diagram excludes minor unlisted affiliates, shareholdings that are less than 1%, special account holdings at financial companies.

Samsung

Fire & Marine

Samsung

Everland

Samsung

Electronics

Samsung

Life insurance

FAMILY

FAMILY

FAMILY

FAMILY

FAMILY

Samsung

SDS

Lee, Kun-Hee 3.38%

Hong, La-Hee 0.74%

Lee, Jae-Yong 0.57%

Lee, Jae-Yong 25.10%Lee, Bu-Jin 8.37%

Lee, Seo-Hyun 8.37%

Lee, Kun-Hee 3. 72%

Lee, Yoo-Jung 0.48%

Lee, Kun-Hee

20.76%

Lee, Kun-Hee 1.37 %

Lee, Jae-Yong 11.25%

Lee, Bu-Jin 3.90%

Lee, Seo-Hyun 3.90%

Lee, Kun-Hee 0.01 %

Samsung

C&T

Samsung

Asset Management

Samsung

Securities

Samsung

Heavy Industry

Samsung

Techwin

Samsung

EngineeringHotel Shilla

S-1 Corporation

Samsung

Display

Samsung SDI /

Cheil Industries

Samsung

Fine Chemical

Samsung Petro /

General Chemical

SEMCO

Cheil Worldwide

19.3%

1.5%

7.2%

4.0%

7.9%

13.1%

Samsung

Card

5.0%

1.3%

1.9%

23.7%

5.2%25.5%

8.4%13.2%

84.8%

17.6%37.5%

5.1%

2.6%

7.3%

11.1%

5.3%

11.0%

4.7%

34.4%3.4%

8.0%

1.2%

85.3%

8.0%

15.2%

11.0%

7.8%

4.3%

12.6%

17.1%

5.6%

3.2%

13.0%

3.0%

1.5%

4.1%

1.3%

7.2%

2.4%

22.6%

11.5%

2.2%

3.1%

37.0%22.6%

3.9%3.1%

8.9%

1.1%

1.0%

2.0 %

1.3%



17



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