Korea Auto Insight 2012

KDB Daewoo Securities
upgraded to AA+ (highest credit rating given to a domestic securities firm)

By KR, KIS, and NICE on Nov. 2011
2012 Outlook Report
December 6, 2011 Industry Report
Auto
(Overweight)
Daewoo Securities Co., Ltd. Michael Yun Young-ho Park +822-768-4169 +822-768-3033 michael.yun@dwsec.com youngho.park@dwsec.com
In between gears
In 2012, global auto demand is forecast to grow 3%, assuming that fast-growing economies, such as those of China and the rest of the BRICs, maintain positive growth. On the supply side, with production disruptions (caused by natural disasters in 2011) easing, global production is forecast to begin normalizing from early 2012. Although Japanese factories have resumed normal operations, they should find it difficult to recover their margins, as: 1) the yen remains relatively strong, and 2) product improvements should take time. In addition, considering the sluggish European market and the slowdown in emerging economies, earnings improvements at European auto makers are likely to be slow. We believe the sluggishness at global competitors should benefit Korean auto makers such as Hyundai Motor (HMC) and Kia Motors in the medium term. However, over the long term, once global supply and demand dynamics normalize, production capacity growth is expected to outpace demand growth, which should erode the competitive edges enjoyed by Korean auto makers. In the current macro environment, the Korean won is likely to remain relatively weak and raw material prices depressed. This favorable business environment should enable Korean auto makers to maintain stable earnings. Considering expectations of earnings growth, HMC and Kia Motors appear undervalued, trading at 2012F P/Es of less than 7x. From a short- to medium-term perspective, we recommend as our top picks major auto makers such as Kia Motors and HMC in light of their attractive valuations. From a longterm perspective, we recommend Mando, Hyundai Wia, and Hyundai Mobis, considering their rosy secular growth outlooks and ongoing diversification of customer base.
Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.
I. Investment summary ...................................................................................................................3 II. Valuation and investment strategy ...........................................................................................5 1. Has valuation charm disappeared for Korean auto sector? .....................................................5 2. Valuation premium to be rationalized for large system parts makers ......................................8 3. Auto makers in the short run; Parts makers in the long run ...................................................10 III. Demand outlook: Weakness with limited downside ............................................................11 1. Global demand: Dependent on emerging markets .................................................................11 2. Domestic market: Converting to low growth market ...............................................................12 3. U.S. market: Recovery extended, but no more back steps ....................................................13 4. W. European market: Another negative year..........................................................................14 5. China and rest of BRICs: Robust growth to slow....................................................................15 IV. Supply outlook: No oversupply issue until 2013 .................................................................16 1. Global supply & demand dynamics: Balanced until 2012.......................................................16 2. HMC and Kia Motors: Volume growth limited but not too bad................................................17 3. New car lineup: 2011-2012 The climax of new car launches for HMC, Kia ...........................18 V. Business environment: Favorable to Korean autos .............................................................22 1. Currency: Earnings defendable to structural strengthening of won........................................22 2. Small cars to go a long way ....................................................................................................23 3. FTAs and higher safety measures are LT opportunities for parts makers .............................24 Kia Motors (000270 KS) ............................................................................................................... 25 Hyundai Motor (005380 KS)......................................................................................................... 29 Mando (060980 KS) ...................................................................................................................... 33 Hyundai Wia (011210 KS) ............................................................................................................ 39 Hyundai Mobis (012330 KS) ........................................................................................................ 44 S&T Daewoo (064960 KS)............................................................................................................ 48 S&T Dynamics (003570 KS)......................................................................................................... 52
December 6, 2011
Auto
I. Investment summary
Demand recovery expected to be weak in 2012 In 2012, we forecast global auto demand to increase 3% YoY in light of the following: 1) weak U.S. recovery, 2) W. Europes ongoing economic hardship leading to another year of negative growth, 3) economic slowdown of BRICs, and 4) stagnant growth in the domestic market. We believe that global auto demand will pick up from 2013 and increase 9.2% YoY as growth recovers in the emerging markets and auto demand in advanced markets normalizes. Since the global economic crisis in 2008, supply at Japanese auto makers has not normalized due to the Fukushima earthquake in March 2011 and the recent flooding in Thailand. We anticipate production at Japanese auto makers to finally normalize by early 2012. Although production at Japanese auto makers may normalize, we believe their earnings recovery will be delayed due to the strong yen. In addition, 1) it will take some time for the Japanese auto makers to improve their new car lineup, 2) it will be difficult for them to implement a strong incentive program unless the yen weakens dramatically against the U.S. dollar. Thus, we believe that sales and earnings at Japanese auto makers will take some time to recover. Meanwhile, as the slump continues in Europe and growth weakens in the emerging countries, European auto makers could see their utilization rate fall and earnings erode. Hence, going into 2012, we believe the global auto environment will once again favor Hyundai Motor (HMC) and Kia Motors. However, in the long term, as global auto supply normalizes and outpaces demand, HMC and Kia Motors will see their comparative advantages fade. Positive for HMC and Kia: 1) weak won, 2) depressed raw material prices With the global macro environment continuing to be weak, the won is likely to remain weak against the U.S. dollar. On the contrary, the yen is likely to remain strong against the U.S. dollar for the time being. Raw material prices including oil prices will also remain under pressure in a weak demand environment. In the long run, we expect 1) the won to strengthen against the U.S. dollar and our competitors currencies to weaken, and 2) inflation to pick up as the global economy recovers. This would act as a burden for HMC and Kia Motors as competition intensifies. Earnings to remain solid despite slowing growth We expect 2012 earnings for the Korean auto sector will continue to be solid as the business environment will act favorably. Plus, continuous adoption of the integrated platform, new car launches, and enhanced brand image will also help to maintain their high level of earnings. Valuations will also remain very attractive, with all major Korean auto makers trading at a P/E below 7x. However, the stellar earnings growth of the past several years will approach its end. We believe that if the past three years were offense, 2012 will be the year of defense. As we expect the Korean auto sector to maintain their high level of earnings despite a weak macro environment, we maintain our Overweight rating on the sector. However, the risk to our rating is a double dip in the economy. Our top picks for the short term remain Kia Motors and HMC, but we prefer Mando, Hyundai Wia, and Hyundai Mobis in the long term.
Production at Japanese auto makers to normalize in early 2012
Recovery of sales and earnings will be delayed
Top picks Short term: Kia, HMC Long term: Mando, Hyundai Wia, and Hyundai Mobis
KDB Daewoo Securities Research
December 6, 2011
Auto
Table 1. 2012 Auto sector outlook and investment strategy

1H12 Demand 1) Slow recovery for US 2) Demand in W. Europe to fall once again 3) Growth momentum slowing in China and BRICs 4) Korea demand to be stagnant 5) Global demand growth to slow to 3% YoY 1) Thailand flood to impact Japanese supply 2) Japans U shaped recovery to be delayed to 1H12 3) Strong yen to delay earnings turnaround for Japan 4) Dilemma between incentives and residual value for Japan 5) Expansion plans to slow due to stagnant demand 2H12 1) Demand to recover from 2H12 and stay solid until 2013 2) Growth in W. Europe to turn positive from 2013 3) China and BRICs to return to double digit growth from 2013 4) Global auto demand to post 9.2% YoY growth in 2013 1) Supply to normalize (including parts supply) 2) Increase in capacity from BRICs starting from 2013 3) New car models from Japanese and European makers 4) Competitiveness of European makers to improve in US market with weak Euro 5) Global overcapacity issue to come up from 2013 1) Structural strengthening of the won expected 2) Competitors currencies to be relatively weak (yen, euro) 3) Inflation to resurface 1) Limited capacity expansion for Korean auto makers 2) Earnings turnaround for competitors 3) Structural won strengthening to limit profitability improvement 4) Earnings momentum to rise for large system parts makers 1) Competitorsvaluation attractiveness to rise 2) Valuation attractiveness to rise for large system parts makers
Supply
Business Environment 1) Weak macro environment likely to keep won weak 2) Yen to be relatively stronger 3) Raw material and oil prices to be weak Earnings momentum 1) Earnings stability to be highlighted 2) Weak macro, but room for additional growth 3) Platform integration and new car launches 4) Brand image enhancement Valuation 1) Competitors: Japanese turnaround to be limited 2) European, US makers to feel pressure from weak demand 3) HMC, Kia still trading below P/E of 7x 4) Valuations to remain attractive Top Picks 1) Maintain Overweight on Korea auto 2) Top Picks: 1) Kia Motors, 2) HMC Kias gap with HMC to continue to narrow Source: KDB Daewoo Securities Research estimates
1) Customer diversification and next gen electronics should be new catalysts for large system parts makers: Buy and Hold strategy 2) Top Picks: 1) Mando, 2) Hyundai Wia, 3) Hyundai Mobis
Figure 1. Korea auto sector index, and HMC and Kias global market share trend
(1/2001=100) 3,000 Auto sector index (L) HMC, Kia market share (R) (%) 10
2,400
1) 2nd EM growth 2) Demand recovery 3) Utilization recovery
8 1,800 1) Stagnant growth with global production investment cycle 2) Strong won 3) Japanses makers' topping global MS 1) Competition returning 2) New car lineups to strengthen at competitors 1) Supply disruption at competitors 2) New car launches by Korean auto makers 3) Weak won Global economic crisis 1) Robust growth from emerging markets 2) Demand normalized 3) Supply normalization delayed 10 11 11F 12 12F 13 13F
1,200
Domestic consumer credit bubble bursts
1) 1st EM growth 2) Potential overseas growth
600
1) Dominance in domestic market 2) Robust export growth
0 01 02 03 04 05 06 07 08 09
Source: KDB Daewoo Securities Research estimates
December 6, 2011
Auto
II. Valuation and investment strategy

1. Has valuation charm disappeared for Korean auto sector?
Relatively high valuations compared to global peers In 2012, the valuation of the Korean auto sector will become less attractive relative to recent years. Currently, Korean auto makers and parts makers are trading at a premium compared to their global peers. This is attributable to the following: 1) while shares of the Korean auto sector have appreciated on the back of robust earnings growth, shares of overseas competitors have fallen to abnormal levels; 2) and with continuous earnings revisions reflecting the competitors earnings turning around, their valuation levels have remained at lower levels compared to the Korean auto sector. Japanese auto makers earnings turnaround to take time However, Japanese auto makers will find it difficult to recover their margins as: 1) global supply disruptions continued until recently, 2) new product lineup will take time, and 3) the yen will remain relatively strong, in our opinion. In addition, considering the sluggish European market and the slowdown in emerging economies, European automakers earnings improvements are likely to be slow. Thus, we believe the Korean auto sector will continue to trade at a premium to its overseas counterpart.
Figure 3. MSCI Japanese auto sector P/E band
(p) 13X 10X 700
Figure 2. MSCI Korea auto sector P/E band

(p) 1,800 1,500 1,200 7X 900
500
300 30X 24X 13X 9X
100 600 300 0 95 98 01 04 07 10 4X -100
-300 95 98 01 04 07 10
Source: Thomson Reuters, KDB Daewoo Securities Research
Figure 4. Global relative P/E valuation to market P/E

(%) 120 100 90
Figure 5. Global relative P/E valuation to market P/E

(%) 200
160
120
60
100 80
30
40
0
o ta B MW HMC o nd a issa n H To y N VW r K ia a imle D Fia t d Fo r t lt G M e na u eu ge o R P
0
l r a . r s a nd o Wi o bi r ne HCCta Ind e nso Vale o Aisinin en ta u re ci NOK JCI utol iv L ea a gn a TRW D M Mau nd ai d ai M rg Wa A nt fa yo Co To Hy Hyu n Bo
December 6, 2011
Auto
Table 2. Global auto makers valuation comparison

Absolute return (%) -1M -3M Toyota BMW HMC Honda VW Nissan Daimler Kia Fiat Ford GM PSA Renault -5.7 -14.4 -7.1 -7.4 -8.5 -6.6 -17.3 -5.2 -25.9 -16.7 -21.6 -21.1 -17.9 -10.3 -2.1 8.6 -5.4 9.0 0.1 -10.0 2.7 -13.9 -3.8 -9.3 -32.2 -1.3 EPS (W, JPY, EUR, US$) 11F 12F YoY % 127.3 7.7 27193.0 155.7 19.3 74.2 5.2 9495.0 0.4 1.9 3.9 3.6 7.0 228.0 7.0 28736.0 273.4 18.2 88.5 5.0 11045.0 0.8 1.6 3.9 3.4 7.0 79.1 -9.3 5.7 75.6 -5.9 19.3 -2.5 16.3 87.2 -13.7 -1.3 -6.4 0.4 OPM (%) 11F 12F 2.3 11.7 10.4 3.6 7.5 6.7 8.4 8.5 4.5 5.6 4.5 2.5 2.8 4.2 9.9 10.4 6.4 7.0 7.3 8.1 8.6 4.3 6.0 4.8 2.5 2.6 EV/EBITDA (x) 11F 12F 5.4 2.2 6.2 11.3 2.6 5.7 2.3 6.3 2.7 4.8 2.2 1.5 3.0 3.7 2.3 5.0 7.4 2.3 4.8 2.4 5.3 2.0 4.4 2.3 1.7 3.0 P/E (x) 11F 19.5 6.9 6.3 14.9 6.2 9.1 6.3 6.4 8.5 5.3 5.3 3.6 3.7 12F 10.9 7.6 6.9 8.5 6.6 7.6 6.4 6.0 4.5 6.2 5.3 3.9 3.7 Relative P/E (%) 11F 12F 162 84 79 123 76 75 77 78 118 50 49 45 46 115 95 91 89 83 81 80 79 67 60 51 49 47
Figure 6. Global auto makers P/E and EPS growth (2012F)

(P/E, x) 15
Figure 7. Global auto makers P/B and ROE (2012F)

(P/B, x) 2.4
Toyota 10 BMW VW 5 Daimler Renault PSA 0 -20 0 20 40 60 80 (EPSG, %) 100 Nissan Fiat HMC K ia Honda
1.8 HMC 1.2 Toyota 0.6 PSA 0.0 0 7 14 21 Honda Fiat Renault BMW Nissan VW Daimler
K ia
(ROE, %) 28 35
December 6, 2011
Auto
Table 3. Global auto parts makers valuation comparison

Absolute return (%) -1M -3M Mando Hyundai Wia BorgWaner Mobis Toyota Ind. Denso NOK Aisin Continental JCI Keihin Autoliv Valeo Magna Int. Lear Faurecia TRW -0.3 6.4 -17.3 -10.6 -9.2 -12.4 -4.3 -12.3 -13.1 -13.4 -14.3 -16.8 -20.4 -15.6 -13.6 -26.2 -29.1 16.4 21.1 -7.7 0.0 -6.0 -12.3 1.0 -13.7 2.0 -3.7 -17.3 -4.8 -5.7 -7.7 -6.8 -18.5 -17.7 EPS (W, JPY, EUR, US$) 11F 12F YoY % 13213.0 9957.0 4.4 33875.0 171.5 140.5 120.2 214.0 7.3 3.0 93.5 6.8 5.6 4.4 5.3 3.1 7.1 16382.0 13671.0 5.3 37424.0 200.8 207.5 149.2 265.4 7.7 3.6 159.8 6.6 5.5 4.6 5.6 3.0 6.4 24.0 37.3 20.6 10.5 17.1 47.6 24.2 24.0 4.8 20.0 70.8 -2.4 -2.4 4.2 6.7 -4.0 -9.6 OPM (%) 11F 12F 7.2 5.4 10.8 10.8 4.9 5.2 7.6 5.7 9.0 6.1 5.4 10.9 6.4 4.5 5.5 3.8 7.7 7.6 5.8 11.2 10.4 5.4 7.2 8.0 6.6 9.1 6.7 7.3 10.6 6.2 4.7 5.7 3.7 7.6 EV/EBITDA (x) 11F 12F 8.1 11.0 8.6 9.3 5.8 3.4 3.6 2.6 4.3 7.1 1.6 4.4 2.7 3.2 3.6 3.1 3.4 6.5 8.3 7.2 7.7 5.0 2.6 3.1 2.2 4.0 5.9 1.0 4.1 2.6 3.0 3.4 3.2 3.2 P/E (x) 11F 15.1 15.9 14.3 9.3 11.8 14.8 10.7 10.0 6.7 9.7 12.3 7.4 5.5 7.6 7.8 4.8 4.4 12F 12.2 11.6 11.9 8.4 10.0 10.0 8.6 8.1 6.4 8.1 7.2 7.6 5.6 7.3 7.3 5.0 4.8 Relative P/E (%) 11F 12F 189 199 134 116 97 123 89 83 82 91 102 70 67 71 73 59 41 161 153 115 111 106 106 91 86 80 78 76 73 71 71 70 63 47
Figure 8. Global auto parts makers P/E and EPS growth (2012F)
(P/E, x) 20
Figure 9. Global auto parts makers P/B and ROE (2012F)

(P/B, x) 3.0 2.5 Hyundai Wia Mando
15 Mando Hyundai Mobis Lear Hyundai Wia Denso 1.5 NOK Keihin 1.0 0.5 0 0 30 60 90 (EPSG, %) 120 0.0 0 5 10 15 Aisin Denso NOK Magna Toyota Ind. Keihin 2.0
Borgwaner Valeo JCI Lear Autoliv
Hyundai Mobis Faurecia TRW
10
Borgwaner Toyota Ind. JCI Aisin
Magna 5
(ROE, %) 20 25 30
December 6, 2011
Auto
2. Valuation premium to be rationalized for large system parts makers

Large system parts makers receiving a premium is not new If we look to the past, structural growth in the auto industry has come with large system auto parts makers receiving a premium over auto makers, and undergoing a rerating. A good example of this is Toyotas system parts maker Aisin Seiki. In 2003-2007, when the company actively diversified its customer base and increased overseas sales, shares of Aisin outperformed Toyota with an annual rerating of 26%. Continental, JCI, and Borg Warner also underwent the same scenario. We believe that Korean auto parts makers such as Mando, Hyundai Wia, and Hyundai Mobis will also follow in the footsteps of their global auto parts peers as they strive to go global. The large system parts makers in Korea will be driven by the growth prospects of recent new orders from overseas OEMs and structural growth of HKAG. Furthermore, we believe this would serve to rationalize their valuation premium over the OEMs in the long run.
(Wbn)
2010 Revenue 42,131 30,371 2010 Net profit 1,924 937 Main items Climate control, powertrain control system, electronic parts, motor, telecommunications Body, brake and chassis system, electronic parts, transmission and powertrain Electronic brake system, stability control, tire, chassis system, safety system, telematics, interior module dash board, powertrain related electronic parts Seats, interior related parts, door and instrument panels, hybrid battery Turbo charger, engine parts, transmission clutch, transmission control, All-wheel-drive system Current market cap 27,916 9,837
Korean system parts makers will also enjoy valuation premium
Table 4. Global top system parts suppliers

Region Denso Aisin Seiki Japan Japan
Continental AG
Germany
14,920
39,931
883
Johnson Controls
U.S.
22,658
39,999
1,739
BorgWarner
U.S.
7,920
6,539
437
Source: Thomson Reuters, Ward's Automotive Yearbook, KDB Daewoo Securities Research
Figure 10. Toyotas P/E band: 03-07 annual increase of 15%

(W) 70,000
Figure 11. Aisins P/E band: 03-06 annual increase of 26%

(W) 50,000 20.5X 18.0X 15.5X 13.0X
60,000
40,000 9.5X 16.3X 14.5X 30,000
50,000
40,000
13.0X 11.5X 20,000
30,000
9.7X
20,000 96 98 99 00 01 03 04 05 06 08 09 10 11F 12F 11
10,000 96 98 99 00 01 03 04 05 06 08 09 10 11F 12F 11
December 6, 2011
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Figure 12. Japanese parts makers earnings and valuation against auto makers
(%) 70 Denso P/E premium (L) Denso earnings momentum (R) Aisin P/E premium (L) Aisin earnings momentum (R) (%) 60
Figure 13. Denso and Aisins overseas revenue portion trend

(%) 55
Denso
Aisin
50
40
45
30
20 35
10
0 25
-10
-20
-30 92 94 96 98 00 02 04 06
-40
15 97 98 99 00 01 02 03 04 05 06 07 08 09
Figure 14. VWs P/E band: 04-07 annual increase of 12%

(W) 500,000 21X 400,000 14X 300,000 11X 200,000 8X 100,000
Figure 15. Continentals P/E band: 03-07 annual increase of 20%

(W) 150,000 16.0X 14.0X 11.5X 9.0X 7.0X 60,000
120,000
90,000
30,000
0 96 98 99 00 01 03 04 05 06 08 09 10 11 11F 12F
0 96 98 99 00 01 03 04 05 06 08 09 10 11 11F 12F
Figure 16. JCIs P/E band: 03-07 annual increase of 16%

(W) 50,000 20.3X 17.5X 15.0X 12.5X 40,000 10.2X 30,000
Figure 17. Borg Warners P/E band: 05-07 annual increase of 37%
(W) 100,000 22X 19X 16X 80,000 13X 10X
60,000
20,000
40,000
10,000
20,000
0 96 98 99 00 01 03 04 05 06 08 09 10 11 12F 11F
0 96 98 99 00 01 03 04 05 06 08 09 10 11 11F 12F
December 6, 2011
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3. Auto makers in the short run; Parts makers in the long run
Maintain Overweight on Korean auto sector In 2012, we believe the focus in auto sector will shift to earnings stability from earnings growth post 2008 global economic crisis. We maintain our Overweight rating on the Korean auto sector as we believe downside risks are minimal despite the current weak macro environment. However, our position would change if the economy enters into a double dip recession. Our sector top picks for 2012 are Kia Motors and HMC in the short run. Kia Motors and HMC trades at a P/E of under 7x with high earnings visibility. The valuation discount is due to concerns that major competitors will soon stage an earnings turnaround. Going into 2012, we are highly optimistic that Kia and HMC will face a favorable environment and the earnings turnaround of their major competitors will be delayed until at least 2H12. Meanwhile, in the long run, we prefer large system auto parts makers such as 1) Mando, 2) Hyundai Wia, and 3) Hyundai Mobis on back of customer diversification and long term growth prospects. We forecast Mando and Hyundai Wias annual EPS growth to reach 19.0% and 19.4%, respectively, until 2016.
Figure 18. Mando and Hyundai Wias valuation premium over HMC and Kia
(%) 120 100 80 60 40 20 0 10 11F 12F 13F Mando/Wia P/E Premium (L) Mando/Wia excess earnings growth (R) Mando, Wia Target P/E premium level (%) 30 20 10 0 -10 -20 -30
Korean system parts makers will also enjoy valuation premium
Source: KDB Daewoo Securities Research
Table 5. KDB Daewoo Research auto coverage and TP

Name ST Top Picks Kia Motors HMC Mando LT Top Picks Hyundai Wia Hyundai Mobis HCC S&T Daewoo S&T Dynamics PHA Sungwoo Hitech Code 000270 005380 060980 011210 012330 018880 064960 003570 043370 015750 Current price (W) 72,400 223,000 197,500 153,000 317,500 22,800 32,100 18,200 17,800 15,600 TP (W) 96,000(Lowered) 290,000(Lowered) 250,000 212,000 410,000(Lowered) 31,500 42,000 22,700 24,000 20,900 P/E (X) 6.4 7.5 12.2 11.6 8.4 13.5 8.5 8.0 14.3 10.1 P/B (X) EV/EBITDA (X) 1.7 1.4 2.2 2.4 1.8 2.0 0.9 0.8 1.7 1.1 5.3 5.0 6.5 8.3 7.7 10.7 4.6 6.0 11.3 22.9
*: 1) PER, PBR, EV/EBITDA based on 2012 2) HCC, PHA, Sungwoo Hitech based on non-consolidated earnings Source: KDB Daewoo Securities Research
10
December 6, 2011
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III. Demand outlook: Weakness with limited downside

1. Global demand: Dependent on emerging markets
Global auto demand growth will rely on the BRICs once again We are anticipating a weak macro environment in 2012. Furthermore, the normalization of global auto demand will also be delayed. In 2008 and 2009, global auto demand fell by 5.0% and 3.5%, respectively, due to a rapid breakdown in demand in the U.S. and relatively weak support from the emerging markets. But, in 2012, even though the global macro environment resembles the recent turmoil, we believe that downside risk to global auto demand is limited. We do not believe auto demand in the advanced markets will hurt global demand considering: 1) the U.S. auto market has already seen its trough and is structurally recovering back to its normalized levels, albeit at a slowing pace, and 2) the three consecutive years of negative growth in the W. European auto market appears to be approaching its end in our opinion. Global auto demand in 2012 will once again come to rely on growth from the emerging markets. Although the robust growth from the emerging markets will fade, stable growth will continue to help global auto demand post a moderate growth of 3%.
Table 6. Global auto demand outlook by region
05 U.S. Japan W. Europe Brazil Russia India China E. Europe Others Global YoY % 16,965 5,725 16,487 1,618 1,565 1,226 5,390 2,364 11,720 63,059 4.0 06 16,564 5,610 16,704 1,844 1,923 1,480 6,722 2,473 12,869 66,189 5.0 07 16,157 5,247 16,840 2,377 2,593 1,709 7,991 2,835 13,757 69,506 5.0 08 13,247 4,987 15,357 2,673 2,940 1,734 8,594 2,817 13,673 66,021 -5.0 09 10,432 4,556 14,978 3,007 1,477 2,060 12,982 1,888 12,338 63,717 -3.5 10 11,590 4,884 14,442 3,325 1,910 2,712 17,054 2,017 14,308 72,243 13.4 11F 12,588 3,954 14,035 3,486 2,321 2,905 17,924 2,101 15,416 74,731 3.4 12F 13,447 4,602 13,179 3,540 2,468 3,059 18,848 2,194 16,079 77,418 3.6
(000 units, %)
13F 15,133 4,740 14,423 3,793 2,612 3,786 21,035 2,293 16,706 84,521 9.2
Figure 19. Global auto demand trend

(mn units) 90 BRICs robust growth to slowdown 82 Positive assumptions 74 11. 5% Global supply, demand 3. 6% normalizes Global macro 3. 4% turnaround Supply disruption from delayed natural disaster
Figure 20. Global auto demand by region

(%) 10 8 6 4 2 0 -2 -4 -6 3.4 3.6 11F 12F
66
58 06 07 08 09 10 11F 12F 13F
-8 U.S W. Europe China BRICs Global
11
December 6, 2011
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2. Domestic market: Converting to low growth market

Little room for more structural growth in 2012 The Korean domestic market experienced robust growth during the past couple of years (2009-2010) with government incentives and the reduction of consumption taxes after the global economic crisis in 2008. In addition, new car launches in the volume segment accompanied by relatively low interest rates helped the domestic market recover quickly. With domestic auto demand at around 1.47mn units in 2011, we believe there is little room for more structural growth. New car launch effects have also passed its peak as major volume selling models have already been launched. In other words, with niche market (variation models) models being the mainstream of new car launches, we believe it will be insufficient to lead demand growth. Also, going forward, imported cars will continue to nibble away market share away from domestic auto makers as their price gap gradually narrows. For 2012, we are forecasting the Korean domestic market to increase by 3.8% to 1.53mn units, while imported cars will see growth of 10.2% with a market share of 7.4%.
Table 7. Korean domestic market outlook by company
05 06 Sales HMC 570.7 581.1 Kia Motors 266.5 270.6 GM Korea 107.6 128.3 Renault Samsung 115.4 119.1 Ssangyong 75.5 56.1 Others 6.8 9.1 Total(A) 1,142.6 1,164.3 Market share HMC 50.0 49.9 Kia Motors 23.3 23.2 GM Korea 9.4 11.0 Renault Samsung 10.1 10.2 Ssangyong 6.6 4.8 Others 0.6 0.8 Imported cars(B) 45.3 55.3 - Market share, B/(A+B)100 3.8 4.5 Source: KAMA, KDB Daewoo Securities Research 07 625.3 272.3 130.5 117.2 60.6 13.6 1,219.5 51.3 22.3 10.7 9.6 5.0 1.1 73.2 5.7 08 571.0 316.4 116.5 102.0 39.2 9.3 1,154.4 49.5 27.4 10.1 8.8 3.4 0.8 84.4 6.8 09 702.7 412.8 114.8 133.6 22.2 7.9 1,394.0 50.4 29.6 8.2 9.6 1.6 0.6 69.0 4.7 10 659.6 484.5 125.7 155.7 32.5 7.5 1,465.4 45.0 33.1 8.6 10.6 2.2 0.5 96.5 6.2 11F 690.3 494.9 139.6 104.6 32.8 12.2 1,474.5 46.8 33.6 9.5 7.1 2.2 0.8 111.5 7.0 12F 702.8 521.4 144.6 113.5 37.3 11.5 1,531.1 45.9 34.1 9.4 7.4 2.4 0.8 122.9 7.4
(000 units, %)
13F 692.7 524.7 153.4 129.3 42.9 14.0 1,556.8 44.5 33.7 9.9 8.3 2.8 0.9 136.0 8.0 12F YoY 1.8 5.3 3.6 8.4 13.6 -5.6 3.8
10.3
Figure 21. Domestic demand outlook

('000 units) 2,200 SAAR(L) Consumer confident index (R) 1,800 (p) 150
Figure 22. Domestic sales and ASP outlook of HMC and Kia
(W'000) 26,000 HMC+Kia domestic sales (R) HMC ASP(L) Kia ASP (L) 125 22,000 1,200 ASP to rise on back of new car launches ('000 units) 1,400
Korea domestic market entering low growth phase
1,400
100 18,000 1,000
1,000
75 14,000 800
600
50
200 97 99 01 03 05 07 09 11 11F 12F
25
10,000 06 07 08 09 10 11F 12F 13F
600
Source: KAMA, KDB Daewoo Securities Research
Source: KAMA, KDB Daewoo Securities Research
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3. U.S. market: Recovery extended, but no more back steps

Demand picking up in 4Q with inventory restocking We believe U.S. auto demand has already seen its trough and is on track to structurally rebound to normalized levels. But, the level of recovery we had originally expected for 2011 appears unlikely. This is mainly due to the natural disasters that occurred in 2011, such as the Japanese earthquake in March and the Thailand flood in October, which disrupted the supply chain and led to low inventories. Meanwhile, as the supply shortage after the March earthquake has been resolved in 3Q and inventory restocking has begun, we are seeing a solid rebound in the U.S. market. 2012 U.S. auto demand to increase by 6.8% YoY We anticipate the U.S. markets structural rebound to continue as supply and inventory levels normalize. On the demand side, pent up demand is still very solid and financing remains stable accompanied with low interest rates. But, with the macro environment weak, the recovery will take longer and the magnitude of the recovery will be limited, in our opinion. Thus, we are forecasting U.S. auto demand to increase by 6.8% YoY in 2012, which is lower than 2011s recovery of 8.6%. We believe that strong demand for small cars with no over supply issues will continue to be favorable to Korean auto makers.
Figure 24. U.S. auto demand outlook
(mn units) 23 (mn units) 18 Upside Base
Figure 23. U.S. SAAR and auto loan interest trend

(%) 12 10 19 8 6 4 11 2 0 05 06 07 08 09 10 11 11F 12F 12 7 Low interest rates helping auto demand recovery 15 Autoloan interest rate (L) US SAAR (R)
16
14 8.6%
6.8%
12
10
8 06 07 08 09 10 11F 12F 13F
Source: The Federal Reserve, Bloomberg, KDB Daewoo Securities Research
Source: Wards Auto, KDB Daewoo Securities Research
Figure 25. U.S. markets sales breakdown by segmentation

(%) 100 Small car Small RV Large car Large SUV/pickup
Figure 26. U.S. auto markets inventory trend

('000 units) 4,500 4,000 Inventory units (L) Inventory days (R) (days) 160 140 120 100 80 2,000
80
42.5%
35.8% 3,500 3,000 2,500
60
40 57.5% 20 64.2%
1,500 1,000
60 40 20 00 02 04 06 08 10 12
0 07 08 09 10 11F 12F 13F
500
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4. W. European market: Another negative year

Another disappointing year for W. Europe We forecast auto demand in W. Europe to see negative growth of 6.1% in 2012, for the fifth consecutive year of negative growth. We believe auto demand in Europe will bottom out next year and turn positive in 2013. We anticipate W. Europes bottom level to be around high 12mn units to low 13mn units. Unlike the U.S., where auto demand has already bottomed out, W. Europe is continuing its downtrend, which began before the recent European economic turmoil. Spain and Italy, which are two of the top five countries for auto demand in Europe, are in the center of this economic turmoil. Their auto demand has already fallen 30% from pre-crisis levels and their portion of sales among the big five have also fallen to 12%, a 6%p drop from five years ago. On the other hand, the sales portion from Germany, England, and France has risen to 63%. Thus, we believe that the recent economic downturn will have limited down side risks to Italy and Spains auto demand. Small car and fleet segment should be solid Meanwhile, even though total auto demand will continue to be weak, we believe that demand for small cars and CUVs will continue to be solid. Fleet sales will also start to recover. We believe that HMC and Kia Motors are in good position with their new European lineups to achieve higher market share.
Figure 28. W. Europes regional sales portion trend
(1/06=100) 194 3 months moving average 162 63% 129 14,000 97 12,000 65 10,000 32 0 90 92 94 96 98 00 02 04 06 08 10 06 07 08 09 10 11 A: 41% B: 18% 12% 12 13 14 Germany+England+France (A) (L) Italy+Spain (B) (L) W. Europe demand SAAR (R) (mn units) 16
Figure 27. W. Europes SAAR trend

('000 units) 18,000
16,000
15
8,000
11
Source: ACEA, KDB Daewoo Securities Research
Figure 29. W. Europes auto demand outlook

(mn units) 17 Positive assumptions Base assumptions 16
Figure 30. HMC and Kias W. Europe market share trend

(%) 4 HMC Kia
3
15 3.6%
2
14 2.8%
13
6.1%
12 06 07 08 09 10 11F 12F 13F
0 99 00 01 02 03 04 05 06 07 08 09 10 11
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5. China and rest of BRICs: Robust growth to slow

China auto demand to slow to 5.2% YoY The robust growth Chinas auto market has been slowing as we entered the second half of 2011. Auto demand until October 2011 rose 8.0% YoY, which is dramatically lower than last years growth of 30%. We believe that Chinas tightening policy and the end of its subsidies were the main reasons for the slowdown. We anticipate the slowdown to continue into the first half of 2012. But in the second half, we expect auto demand in China to recover to its high growth from the easing of monetary policy and assistance from a potential new government subsidy program. For 2012, we are forecasting Chinas auto demand to increase by 5.2% YoY. We believe that HMC and Kias combined sales will increase by 6.8% YoY in 2012. HMC and Kia will enjoy the fast growing mid-car, SUV, and CUV segments as they have recently launched new cars in those segments. Meanwhile, the rest of the BRICs will also experience a slowdown from their past robust growth.
Figure 31. Chinas car production and sales trend
('000 units) 1200 1050 900 750 600 450 300 150 0 00 01 02 03 04 05 06 07 08 09 10 11 Car production Car demand
Source: CEIC, KDB Daewoo Securities Research
Figure 32. Chinas auto demand outlook

(mn units) 22 20 18 16 14 12 10 5.1% Positive assumption Base assumption 5.2%
Figure 33. BRICs auto demand outlook

(mn units) 35 Positive assumptions Base assumptions 4.8%
30
25
6.5%
20
15 8 6 06 07 08 09 10 11F 12F 13F 10 06 07 08 09 10 11F 12F 13F
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IV. Supply outlook: No oversupply issue until 2013

1. Global supply & demand dynamics: Balanced until 2012
Re-stocking to continue in 2012 We believe that the global supply and demand dynamics will remain in balance until 2012 due to 1) the restructuring of supply after the subprime crisis and a fast recovery of demand, and 2) supply disruptions after the Japan earthquake. Thus, we do not see competition intensifying due to oversupply in the near future. Also for HMC and Kia Motors which are running at full utilization, the positive environment will continue. Meanwhile, in the mid- to- long-term, we believe that capacity expansion plans in the emerging markets for global OEMs, which were halted after the economic crisis, will start production from 2013 as global auto demand normalizes. We believe this will be the turning point when the global auto industry re-enters oversupply phase.
Table 8. Global capacity expansion plans by region
10 China 531 India Brazil Russia 100 BRICs total 631 N. America Europe 40 S. America Asia/Others 29 Global 700 Supply corruption in Japan 11F 17 60 210 287 40 100 120 547 -2,910 12F 900 1,000 620 80 2,600 200 1,300 230 225 4,555 13F 250 14F 200 500 250 50 70 770 700 15F 350 700 1,050 350 350 265 815 200 4 1,019
(000 units)
16F After 2016 450 100
300
1,050
350
Figure 34. Global production, sales and inventory outlook

(mn units) 90 Production-sa;es spread (R) Production (L) Sales (L) (mn units) 4 Restructuring Re-stocking Oversupply issue to spring up with capacity expansion
80
0 70 -2 60 Natural disasters 50 05 06 07 08 09 10 11F 12F 13F
-4
-6
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2. HMC and Kia Motors: Volume growth limited but not too bad
Global auto demand growth will rely on the BRICs once again We forecast HMC and Kia Motors global production will increase by 8.7% in 2012 to reach the 7mn mark for the first time. HMC is expected to increase by 7.6%, while Kia Motors, on back of domestic expansion, will increase by 11.1%. The expansions at HMC and Kia are in response to growing demand for their vehicles in various regions, where they are running at over 100% utilization rate. Thus, we believe that HMC and Kia Motors global market share will continue to rise in 2012, as their global sales will once again outpace the increase in global auto demand. We are forecasting HMC and Kia Motors combined market share to rise 0.5%p to 9.2% in 2012. Also, even though their global volume growth is limited, we expect their earnings growth to outpace volume growth with profitability improving further.
Table 9. HMC and Kia Motors global production outlook by region
03 HMC Domestic China India U.S. Czech Rep. Turkey Russia Brazil Total Capacity Production Capacity Production Capacity Production Capacity Production Capacity Production Capacity Production Capacity Production Capacity Production Capacity Production Utilization rate Overseas % Capacity Production Capacity Production Capacity Production Capacity Production Capacity Production Utilization rate Overseas % Capacity Production Utilization rate Overseas % 1,880 1,646 150 55 150 154 04 1,850 1,674 150 131 250 221 05 1,760 1,684 300 234 250 244 150 91 06 1,760 1,618 300 290 300 300 282 236 07 1,760 1,707 300 232 363 327 300 251 08 1,760 1,670 433 295 550 489 300 237 22 11 100 96 09 1,760 1,614 600 570 550 560 300 195 120 116 100 80 10 1,760 1,731 670 703 600 604 300 300 222 200 100 95 11F 1,840 1,805 750 742 600 613 340 346 300 254 100 100 120 124
(000 units, %)
12F 1,910 1,904 810 776 600 603 340 346 340 316 100 108 200 180 40 38 4,340 4,271 98.4 55.4 1,650 1,632 480 478 360 343 360 365 2,850 2,818 98.9 42.1 7,190 7,089 98.6 50.1 13F 1,910 1,907 950 935 600 595 360 355 360 360 100 109 220 213 150 136 4,650 4,610 99.1 58.6 1,650 1,657 480 480 360 347 360 365 2,850 2,849 100.0 41.8 7,500 7,459 99.5 52.2
60 36
60 58
60 58
85 87
100 108
Kia
Domestic China Slovakia U.S. Total
2,240 1,891 84.4 13.0 1,038 852 50 52
2,310 2,084 90.2 19.7 1,200 1,020 130 53
2,520 2,311 91.7 27.1 1,250 1,105 130 108
2,727 2,531 92.8 36.1 1,308 1,150 130 115
2,823 2,624 93.0 35.0 1,350 1,119 130 101 150 145
3,165 2,798 88.4 40.3 1,350 1,056 250 142 250 201
3,430 3,135 91.4 48.5 1,350 1,149 300 241 250 150
HMC, Kia combined
1,088 904 83.2 5.8 3,478 2,796 80.4 10.6
1,330 1,073 80.7 4.9 3,790 3,156 83.3 14.7
1,380 1,213 87.9 8.9 4,050 3,524 87.0 20.9
1,438 1,265 88.0 9.1 4,315 3,796 88.0 27.1
1,630 1,365 83.8 18.1 4,453 3,989 89.6 29.2
1,850 1,399 75.6 24.5 5,015 4,197 83.7 35.0
1,900 1,540 81.1 25.4 5,330 4,675 87.7 40.9
3,652 3,632 99.5 52.3 1,350 1,400 365 333 250 230 150 167 2,115 2,130 100.7 34.3 5,767 5,762 99.9 45.7
4,050 3,985 98.4 54.7 1,500 1,572 430 430 300 269 288 266 2,518 2,537 100.7 38.0 6,568 6,521 99.3 48.2
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3. New car lineup: 2011-2012 The climax of new car launches for HMC, Kia
New car lineup looking solid for HMC and Kia 2011 and 2012 will mark the climax for HMC and Kia Motors integrated platform sharing and new car launches based on integrated platforms. Meanwhile, we expect other global competitors to launch a stream of new cars from 2H12. Thus, competition for HMC and Kia will also intensify as we head towards the second half.
Figure 35. HMCs new low cost Indian market car the EON
Table 10. HMC and Kia Motors new car pipeline

Region HMC Korea 2008 2009 2010 Avante MD (Aug) Accent (Nov) 2011 Grandeur (Jan) Velostor (Apr) YF Sonata Hybrid (Jun) i40, i30 (Oct) YF Sonata (Jan) Equus (Oct) Avante MD (Nov) i30 (Aug) Venga (Kia, Nov) n/a Forte Coupe (Jun) K7 (Nov) Sorento R (Dec) Soul (Apr), Forte (Jul) Sorento R (Nov) Forte Cee'd F/L (Jun) Venga (Nov) YF Sonata 2.1 GDI turbo (2Q) Accent (2Q) YF Sonata Hybrid (3Q) Velostor (3Q) YF Sonata (2Q) TucsonIX (Mar), Verna (Jul) Velostor (2Q) ix20(Oct) i40, Avante MD (3Q) i10 F/L, Verna YF Sonata, Accent (2Q) HA Sportage R (Apr) K5 Hybrid (3Q) K5 (May), Morning (Nov) Pride (3Q) Ray (Small CUV) (Dec) K5 (Jan, SOP) Sportage R (Jan) K5 (4Q) Sportage R (Feb), K2 (3Q) Sportage R (Jun) Morning (2Q), Pride 2012 Santa Fe, YFSonata F/L Genesis Coupe F/L, TucsonIX F/L Avante Coupe PQ (Small CUV) HB (Small Sedan 4, 5door) YF Sonata F/L Santa Fe Genesis Coupe F/L, TucsonIX F/L Santa Fe, Avante MD Santa Fe i30 (1Q) Genesis (Jan) Equus (Sep) Genesis Coupe (Sep) YF Sonata (Sep) Tucson ix (Jul)
U.S.
i30 Wagon
China Czech India Kia Korea
Elantra (Apr) i30 (Nov) n/a Lotze (Jun) Forte (Aug) Soul (Sep)
U.S. China Slovakia Source: KDB Daewoo Securities Research
K9 (1Q) Sorento R F/L (2Q) Carens, K7 F/L (3W) Sorento R F/L
Cee'd
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Table 11. New car launch schedules for major players in US market
Group Toyota Brand Toyota Year 2012 2012 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2015 2012 2013 2013 2014 2012 2012 2012 2012 2013 2012 2012 2012 2012 2012 2013 2013 2013 2014 2014 2014 2013 2013 2013 2014 2014 2014 2012 2012 2012 2012 2012 2012 2013 2013 2013 2013 2013 2013 2013 2014 When 2011 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2014 2011 2012 2012 2013 2011 2011 2011 2011 2012 2011 2011 2011 2011 2011 2012 2012 2012 2013 2013 2013 2012 2012 2012 2013 2013 2013 2011 2011 2011 2011 2011 2011 2012 2012 2012 2012 2012 2012 2012 2013 Model Camry Camry Hybrid Prius-V RAV4 Sports Car Yaris Avalon Prius PHEV Prius-C RAV4 EV Corolla FJ Cruiser Tundra Highlander GS ES Small A-Segment Car LS iQ iQ EV xB xD New Model Civic Civic Hybrid CR-V CSX Fit Hybrid Accord Fit EV Ridgeline Accord Hybrid Element Pilot MDX MDX Hybrid RSX RDX RL TL Full-size pickup Micra NV Plantina Titan Versa/Tiida Altima Altima Hybrid B-Car Frontier LCV LCV2 Sentra Maxima
Lexus
Delayed til 2012
Scion
Honda
Honda
Delayed til 2011 Delayed til 2011 Only in Canada Cancelled
Delayed til 2012 Cancelled
Acura
Nissan
Nissan
Cancelled
Only in Mexico Cancelled Moved up to 2012
Moved up to 2012
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Group Nissan Brand Nissan Year 2014 2014 2014 2014 2012 2012 2013 2013 2013 2013 2014 2012 2012 2012 2013 2014 2013 2013 2013 2014 2014 2014 2014 2012 2012 2012 2012 2013 2013 2013 2013 2013 2013 2013 2014 2014 2014 2014 2014 2014 2014 2014 2013 2013 2013 2014 2014 2014 2014 2014 2014 2014 2012 When 2013 2013 2013 2013 2011 2011 2012 2012 2012 2012 2013 2011 2011 2011 2012 2013 2012 2012 2012 2013 2013 2013 2013 2011 2011 2011 2011 2012 2012 2012 2012 2012 2012 2012 2013 2013 2013 2013 2013 2013 2013 2013 2012 2012 2012 2013 2013 2013 2013 2013 2013 2013 2011 Model Pathfinder Rogue Titan Xterra DX M35h G37 JX Ethereal Small EV FX LaCrosse Hybrid Regal Hybrid Verano Enclave Encore ATS SRX Hybrid XTS Converj Escalade Escalade ESV XTS Hybrid Caprice PPV Captiva Sport Orlando Sonic Colorado Express Malibu Malibu Hybrid Spark Traverse Volt CUV Corvette Impala Silverado Silverado HD Silverado Hybrid Suburban Tahoe Tahoe Hybrid Acadia Canyon Savana Granite Sierra Sierra HD Sierra Hybrid Yukon Yukon Hybrid Yukon XL Ampera Delayed til 2013
Infiniti
GM
Buick
Delayed til 2012 Delayed til 2012
Cadillac
Chevrolet
Only fleet Only Canada
GMC
Opel
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Group Ford Brand Ford Year 2012 2012 2012 2012 2012 2013 2013 2013 2013 2013 2013 2013 2013 2013 2014 2014 2014 2014 2012 2012 2012 2013 2013 2013 2013 2013 2014 2014 2014 2014 2013 2013 2014 2014 2014 2014 2014 2013 2014 2014 2012 2013 2014 When 2011 2011 2011 2011 2011 2012 2012 2012 2012 2012 2012 2012 2012 2012 2013 2013 2013 2013 2011 2011 2011 2012 2012 2012 2012 2012 2013 2013 2013 2013 2012 2012 2013 2013 2013 2013 2013 2012 2013 2013 2011 2012 2013 Model C-Max Explorer PHEV Focus Focus BEV Ikon C-Max Energi C-Max Hybrid C-Max Plug-in Hybrid Escape Escape Hybrid Fusion Fusion Hybrid PHEV Taurus Police Interceptor Edge Edge Hybrid F-Series Super Duty Transit C-Car Navigator New CUV MKX MKZ MKZ Hybrid 300 Series Hybrid Small Car 200 Compact Sedan CUV CUV Midsize Unit-body pickup CUV Small Compact Sedan CUV Dodge Hornet Journey Viper Grand Wagoneer CUV Small Liberty Rampage Large Commercial Van Ram Pickup
Only Mexico
Delayed til 2013
Lincoln
Chrysler
Chrysler
Dodge
Jeep
Ram
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V. Business environment: Favorable to Korean autos

1. Currency: Earnings defendable to structural strengthening of won
Re-stocking to continue in 2012 HMC and Kia Motors consolidated earnings have continuously improved from 2009, despite the strengthening of won. This is mainly attributable to: 1) platform integration effect leading to lower manufacturing costs, 2) strong new car momentum accompanied with brand enhancement leading to lower incentives, and 3) ASP increases overseas. After 2009, HMC and Kia Motors were able to increase their global ASPs higher than the magnitude of the won strengthening. We forecast HMC to raise their export ASPs an additional 5.0% in 2012, following a 9.4% increase in 2011. For Kia Motors, we expect export ASP to increase by 13.0% in 2011 and 3.7% in 2012. Meanwhile, unless the yen dramatically weakens against the U.S. dollar, we do not anticipate Japanese auto makers to unfold a very aggressive incentives plan. Furthermore, HMC and Kia Motors already offer the least amount of incentives in the U.S. market due to limited supply. Thus, we do not expect HMC and Kia to increase incentives in the U.S. market in 2012.
Figure 36. HMC and Kias consolidated OP and US$/W rate
(W) 1,800 HMC consolidated OPM (R) US$/W (L) Kia consolidated OPM (R) 100JPY/W (L) (%) 12
9 1,350 6 900 Second phase of platform integration (integrated chassis) - Launch of YF Sonata First phase of platform integration (engine+transmission) - Launch of NF Sonata 0 04 05 06 07 08 09 10 11 11F 12 12F
450 0
-3
Source: Company data, KDB Daewoo Securities Research
Figure 37. HMC and Kias export ASP and US$/W outlook
(US$'000) 17 16 15 14 13 12 11 10 9 02 03 04 05 06 07 08 09 10 11F 12F 13F OPM improvse despite won strengthening Robust growth of export ASP HMC ASP (L) Kia ASP (L) US$/W (R) (W) 1,390 1,320 1,250 1,180 1,110 1,040 970 900 830
Figure 38. U.S. markets incentive per car trend

() 6,000 5,000 4,000 3,000 2,000 1,000 0 07 08 09 10 11 GM Ford Toyota Honda HMC Kia
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2. Small cars to go a long way

Small car segment will continue to be strong After the subprime crisis, global demand for small cars have continuously risen on back of reduced consumer spending and robust growth of emerging markets. Small car segments (A-C segment) portion in the global auto industry has risen to 72% in 2010 from 60% level before 2009. Even when global auto demand normalizes, we believe that demand for small cars will continue to be strong and occupy over 70% of the market. This is mainly due to long term structural growth continuing in the emerging markets. In addition, we do not anticipate the downtrend in consumer spending in advanced markets to change in the short term. Green car market is not picking up as fast as we expected Meanwhile, the fuel economy of internal combustion engines is improving at a very fast pace, while demand for hybrid and electric vehicles has not grown as fast as we expected. We believe natural disasters which hit Toyota, the leader in hybrid sales, were the main culprit for the slowdown in the global green car market. GM and other U.S. auto makers have entered the plug-in-hybrid market, but initial sales figures have been lackluster. We believe that HMC and Kia Motors will continue to enjoy this favorable environment as they hold a competitive edge in the small car segment and are also leading the improvement in fuel economy.
Figure 39. Global small car sales and market share trend
(mn units) 50 Sales (L) Market share (R) (%) 74
45
71
40 68 35 65
30
25 07 08 09 10 11F 12F 13F
62
Figure 40. U.S. markets small car sales and gasoline price trend
('000 units) 700 Small cars and SUV sales (L) Gasoline prices (R) (US$/gal) 5
550
400
250
100 05 06 07 08 09 10 11
Source: U.S. Energy Information Administration, Wards Auto, KDB Daewoo Securities Research
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3. FTAs and higher safety measures are LT opportunities for parts makers
Growing LT potential for auto parts makers Large Korean system auto parts makers are rapidly diversifying their customer base on the back of strong fundamentals, and solid product quality and price competitiveness. Meanwhile, Korea has signed two major FTAs this year with Europe and the U.S., which hold enormous potential for Korean auto parts makers. The increasing awareness of safety is leading auto makers to adapt more safety related electronics. This should also be positive to large system auto parts makers. In Korea, starting from 2012, all new vehicles must be equipped with a stability control system (ESC) and a TPMS (Tire Pressure Monitoring System). Thus, we believe that large system parts makers such as Mando and Hyundai Mobis will be a huge beneficiary in the long run.
Table 14. Status of major FTAs
Import tariffs Auto 2.5% (Cars) U.S. 25% (Pickups, commercial) 10% 2~4% 3~4% (Estimated average of 3.4%) 12.5% 25% Below 10% Effective from 2012 Auto parts Present condition Tariff reduction schedule No tariffs from 5th year No tariffs from 10th year Immediately for parts/Tires within 5 years Immediately for parts /3 Years for mid-large cars Within 5 years for small cars 1-5% Reduction in 9 years -
EU India (CEPA) China
2H 2011 Effective from 2010 Negotiation stage
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Kia Motors (000270 KS)

Buy (Maintain)
Target Price (12M, W) 96,000 Share Price (11/29/11, W) 70,700 Expected Return (%) 35.8 EPS Growth (11F, %) 41.2 Market EPS Growth (11F, %) -2.3 P/E (11F, x) 7.4 Market P/E (11F, x) 10.2 KOSPI 1,856.52 Market Cap (Wbn) 28,292 Shares Outstanding (mn) 400 Avg Trading Volume (60D, '000) 2,407 Avg Trading Value (60D, Wbn) 172 Dividend Yield (11F, %) 0.9 Free Float (%) 64.6 52-Week Low (W) 47,600 52-Week High (W) 84,600 Beta (12M, Daily Rate of Return) 1.1 Price Return Volatility (12M Daily, %, SD) 2.5 Foreign Ownership (%) 28.5 Major Shareholder (s) Hyundai Motor et al. (35.29%) NPS (6%) Price Performance (%) Absolute Relative
Closing up on big sister

Closing the gap with HMC on all aspects Monthly sales to level up with additional capacity of K5 and Sportage R Maintain Buy, but lower TP to W96,000
We maintain our Buy rating on Kia Motors, but lower our 12-month target price 9.4% to W96,000 from W106,000. The target price of W96,000 was derived by applying a target EV/EBITDA multiple of 6.2x to 2012F global EBITDA. We have revised down our target EV/EBITDA to 6.2x from 6.8x to reflect 1) our conservative 2012 demand outlook, 2) global competitors relative earnings recovery, and 3) expected slowdown of Kia Motors net profit growth compared to 2010-2011. Key investment points for Kia Motors include the following: 1) We believe that Kia Motors will continue to narrow its gap with Hyundai Motor (HMC) in 2012 with increased global capacity and solid retail sales. We forecast Kia Motors 2012 global capacity to increase by 13.1% and global output to increase by 11.1%, outpacing HMC. This is mainly attributable to solid demand for Kia Motors recently launched new cars. With more room for productivity improvement (UPH, Units Per Hour) than HMC, Kia Motors will seek to enhance its productivity by improving efficiency at its Korea plant and changing to a three shift operation at its overseas plants. 2) With increased production capacity for its K5 and the Sportage R, we believe Kia Motors monthly average sales figure will level up as early as 4Q. The K5, which began production in the Georgia plant from September 2011, will increase Kia Motors U.S. monthly sales by 30%. Furthermore, this will free up the Korea plant to export K5s to other regions with high demand for the model. 3) We forecast Kia Motors net profit margin will continue to improve in 2012 with declining net interest expenses as its consolidated net debt continues to fall. We are forecasting Kia Motors net interest expenses to turn positive to net interest income from 2012.
1M -2.6 1.2
6M -5.9 5.7
12M 47.6 49.7
Share price 180 160 140 120 100 80 60 40 11/10 3/11 7/11 11/11 KOSPI
Earnings & Valuation Metrics

FY Revenues (Wbn) 12/09 29,445 12/10 42,290 12/11F 44,573 12/12F 51,524 12/13F 52,461 OP OP Margin (Wbn) (%) 1,195 4.1 2,836 6.7 3,796 8.5 4,403 8.6 4,502 8.6 NP EPS EBITDA FCF ROE (Wbn) (Won) (Wbn) (Wbn) (%) 979 2,664 2,158 3,744 16.1 2,641 6,724 3,902 3,735 32.6 3,789 9,495 4,883 1,911 31.9 4,407 11,045 5,505 2,152 26.8 4,682 11,733 5,529 2,367 22.5 P/E (x) 7.5 7.5 7.5 6.4 6.0 P/B EV/EBITDA (x) (x) 1.4 7.3 2.5 6.3 2.2 6.3 1.7 5.3 1.3 5.0
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
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Expanding lineups in 2012

Strong lineup and expansion of integrated platform Kia Motors newly designed cars, such as the K5, Sportage R and K7, were huge hits in the domestic market in 2010. These same models are now performing strongly in the overseas markets, and are helping Kia narrow its gap with HMC, as well as enhance its overseas brand image. In 2H, Kia launched the new Pride. In November, the company plans to launch the all new TAM, a small CUV (Cross Utility Vehicle). Kia also launched the Chinese version of the new Pride (K2) in July. Going into 2012, Kia is planning to launch full model changes for the Carens, K3 and K9, and facelifts for the Sorento and K7. In 2012, Kia will expand its lineup; thereby increasing the number of models on the integrated platform.
330,000 Units of additional capacity coming online next year

More capacity to come for Kia Motors We believe that Kia Motors global capacity will increase by 330,000 units in 2012 with 180,000 units from its overseas plants and 150,000 units from its Korea plant. Overseas expansions will be coming from its plants in the U.S. (70,000 additional units), Slovakia (60,000 additional units), and China (50,000 additional units). In Korea, the Sohari plant will add 40,000 additional units for the new Pride, 50,000 units from Seosan which will produce the new Ray, 50,000 units from Hwasung and 10,000 from Kwangju plants. Meanwhile, UPH at Kia Motors China plant will improve to the 70 UPH level, in line with HMCs UPH in China, from its current 66 UPH. In addition, the U.S. plants UPH will also be raised to 66 from the current 59. For Kias Slovakia plant, it will initiate a three shift operation from 2012. For its Korea plant, Kia Motors will continue to enhance its productivity and try to improve its production line efficiency with new cars being launched.
2012 Net profit to increase by 16.3% to W4.4tr

2012 EPS growth will slow, but earnings stability to be highlighted Although the global auto environment will not be as friendly as in 2011, HKAG should be able to maintain its sales and earnings growth in 2012. This is attributable to 1) strong presence in emerging markets, 2) cost competitiveness (thanks to the expansion of integrated platforms), and 3) better than expected F/X rates. For Kia Motors, we are forecasting 2012 net profit to increase by 16.3% to W4.4tr Although Kias EPS growth is slowing, we believe that its 2012F P/E of 6.6x is a very attractive valuation level considering its relatively stable earnings and improved operating margins in a weak macro environment. Furthermore, Kia Motors P/B of 1.7x seems undemanding with an ROE of over 25%.
Table 15. Global production outlook of Kia Motors
2011 Domestic Overseas China U.S. Slovakia Global sum 1,500 1,020 430 290 300 2,520 2012E 1,650 1,200 480 360 360 2,850 Additional 150 180 50 70 60 330 Models Pride, TAM, K9, K7, K5, Carens K2 K5 C'eed, Sportage R Productivity enhancement UPH 66 70 UPH 59 66 Three shifts
(000 units)
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Figure 41. Kia Motors new small MPV the Ray
Source: Media, KDB Daewoo Securities Research
Figure 42. Kia Motors new luxury sedan the K9
Source: Media, KDB Daewoo Securities Research
Figure 43. P/E band of Kia Motors

(W) 120,000 100,000 80,000 6.5x 60,000 40,000 20,000 0 99 01 03 05 07 09 11 11F 12F 4.0x 11.5x
Figure 44. P/B band and ROE outlook of Kia Motors

(W) 120,000 100,000 2.1x 80,000 60,000 40,000 20,000 0 99 01 03 05 07 09 11F 11 12F 0.5x 2.9x
9.0x
1.3x
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Kia Motors (000270 KS/Buy/TP: W96,000)

Comprehensive Income Statement (Summarized)
(Wbn) Revenues Cost of Sales Gross Profit SG&A Expenses Operating Profit (Adj) Operating Profit Non-Operating Profit Net Financial Income Net Gain from Inv in Associates Pretax Profit Income Tax Profit from Continuing Operations Profit from Discontinued Operations Net Profit Controlling Interests Non-Controlling Interests Total Comprehensive Profit Controlling Interests Non-Controlling Interests EBITDA FCF (Free Cash Flow) EBITDA Margin (%) Operating Profit Margin (%) Net Profit Margin (%) 12/10 42,290 33,098 9,192 6,356 2,836 2,836 675 174 838 3,511 668 2,842 0 2,842 2,641 202 2,842 2,641 202 3,902 3,735 9.2 6.7 6.2 12/11F 44,573 34,485 10,088 6,337 3,751 3,796 1,022 66 1,453 5,064 1,183 3,881 0 3,881 3,789 92 4,581 4,522 59 4,883 1,911 11.0 8.5 8.5 12/12F 51,524 39,885 11,639 7,287 4,353 4,403 1,514 -19 1,516 5,917 1,420 4,497 0 4,497 4,407 90 4,557 4,501 57 5,505 2,152 10.7 8.6 8.6 12/13F 52,461 40,714 11,747 7,297 4,450 4,502 1,784 -67 1,756 6,286 1,509 4,778 0 4,778 4,682 96 4,834 4,772 62 5,529 2,367 10.5 8.6 8.9
Statement of Financial Condition (Summarized)

(Wbn) Current Assets Cash and Cash Equivalents AR & Other Receivables Inventories Other Current Assets Non-Current Assets Investments in Associates Property, Plant and Equipment Intangible Assets Total Assets Current Liabilities AP & Other Payables Short-Term Financial Liabilities Other Current Liabilities Non-Current Liabilities Long-Term Financial Liabilities Other Non-Current Liabilities Total Liabilities Controlling Interests Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Stockholders' Equity 12/10 11,087 1,693 3,594 3,802 624 16,506 4,923 9,654 1,272 27,593 12,355 7,207 3,315 1,834 5,033 3,111 1,733 17,388 9,464 2,102 1,706 4,418 741 10,205 12/11F 13,091 1,902 4,405 4,577 642 19,105 6,987 8,871 1,398 32,196 12,072 8,236 1,781 2,056 5,486 3,498 1,683 17,558 14,314 2,108 1,714 9,701 324 14,638 12/12F 16,233 2,156 5,970 5,427 766 20,785 8,503 8,912 1,433 37,018 13,022 9,500 1,352 2,171 5,059 2,930 1,709 18,081 18,557 2,108 1,714 13,850 380 18,937 12/13F 18,126 3,064 6,237 5,703 758 22,862 10,259 9,043 1,441 40,988 12,323 9,225 933 2,165 5,172 2,930 1,707 17,495 23,050 2,108 1,714 18,254 443 23,493
Cash Flows (Summarized)

(Wbn) Cash Flows from Op Activities Net Profit Non-Cash Income and Expense Depreciation Amortization Others Chg in Working Capital Chg in AR & Other Receivables Chg in Inventories Chg in AP & Other Payables Income Tax Paid Cash Flows from Inv Activities Chg in PP&E Chg in Intangible Assets Chg in Financial Assets Others Cash Flows from Fin Activities Chg in Financial Liabilities Chg in Equity Dividends Paid Others Increase (Decrease) in Cash Beginning Balance Ending Balance 12/10 4,381 2,842 1,453 827 239 -1,263 86 -1,864 902 1,560 0 -2,603 -1,204 -397 -868 -133 -2,468 -2,428 53 -97 4 -609 2,301 1,693 12/11F 3,904 3,881 1,732 847 286 -728 -809 -1,002 -987 1,426 -900 -2,162 -1,180 -308 -322 -352 -1,274 -1,127 8 -199 -156 210 1,693 1,902 12/12F 3,166 4,497 1,008 853 300 28 -919 -1,565 -850 1,264 -1,420 -1,526 -939 -335 -350 98 -1,386 -997 0 -258 -131 254 1,902 2,156 12/13F 3,318 4,778 751 777 303 37 -702 -267 -276 -275 -1,509 -1,595 -966 -311 -450 132 -815 -419 0 -278 -118 908 2,156 3,064
Forecasts/Valuations (Summarized)
P/E (x) P/CF (x) P/B (x) EV/EBITDA (x) EPS (W) CFPS (W) BPS (W) DPS (W) Payout ratio (%) Dividend Yield (%) Revenue Growth (%) EBITDA Growth (%) Operating Profit Growth (%) EPS Growth (%) Accounts Receivable Turnover (x) Inventory Turnover (x) Accounts Payable Turnover (x) ROA (%) ROE (%) ROIC (%) Liability to Equity Ratio (%) Current Ratio (%) Net Debt to Equity Ratio (%) Interest Coverage Ratio (x) 12/10 7.5 5.4 2.5 6.3 6,724 9,438 20,635 500 7.5 1.0 43.6 80.8 137.3 152.4 14.8 9.9 9.6 10.6 32.6 23.4 170.4 89.7 32.9 9.4 12/11F 7.5 5.7 2.2 6.3 9,495 12,332 32,301 650 6.8 0.9 5.4 25.2 33.8 41.2 12.4 10.6 8.1 13.0 31.9 32.1 120.0 108.4 12.4 20.9 12/12F 6.4 5.1 1.7 5.3 11,045 13,933 42,822 700 6.3 1.0 15.6 12.7 16.0 16.3 11.0 10.3 8.1 13.0 26.8 34.9 95.5 124.7 1.1 33.6 12/13F 6.0 4.9 1.3 5.0 11,733 14,438 54,039 700 5.9 1.0 1.8 0.4 2.2 6.2 9.4 9.4 7.9 12.3 22.5 32.2 74.5 147.1 -6.7 38.2
Source: Company data, KDB Daewoo Securities Research estimates
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Hyundai Motor (005380 KS)

Buy (Maintain)
Target Price (12M, W) 290,000 Share Price (11/29/11, W) 216,500 Expected Return (%) 33.9 EPS Growth (11F, %) 42.7 Market EPS Growth (11F, %) -2.3 P/E (11F, x) 8.0 Market P/E (11F, x) 10.2 KOSPI 1,856.52 Market Cap (Wbn) 47,690 Shares Outstanding (mn) 285 Avg Trading Volume (60D, '000) 798 Avg Trading Value (60D, Wbn) 169 Dividend Yield (11F, %) 0.9 Free Float (%) 69.0 52-Week Low (W) 161,500 52-Week High (W) 257,000 Beta (12M, Daily Rate of Return) 1.3 Price Return Volatility (12M Daily, %, SD) 2.7 Foreign Ownership (%) 32.2 Major Shareholder (s) Hyundai Mobis et al. (25.97%) NPS (5.95%) Price Performance (%) Absolute Relative
Valuation appealing despite growth slowdown

Stable growth and profitability to further improve despite weak macro environment Financial division to step up and offset for slowing growth Valuation remains attractive on market cap basis with P/E of 6.6x
We maintain our Buy rating on Hyundai Motor (HMC) but lower our 12-month target price by 12.1% to W290,000 from W330,000. The target price was lowered to adjust for our downward revision of target EV/EBITDA to 6.2x from 6.8x. We revised down our target EV/EBITDA to reflect 1) our conservative 2012 demand outlook, 2) global competitors relative earnings recovery, and 3) expected slowdown of Kia Motors net profit growth compared to 2010-2011. Meanwhile, our target price was derived by applying a target EV/EBITDA of 6.2x to our 2012 consolidated EBITDA estimates for the company (including its global factories, financial subsidiaries, and other affiliates). Key investment points for HMC include the following: 1) Although global auto demand recovery is expected to be weak, we believe that HMC will be able to maintain its stable earnings growth and further improve its profitability despite growth moderating. We forecast HMCs 2012 global capacity and output increase to be flat at 7.2% from 2011. Nevertheless, the weakness of won and raw material prices amid a weak macro environment, should positively impact HMCs earnings. Also, the percentage of integrated platform will increase to 74% in 2012 from 58% in 2011, which will help HMC to further improve its world leading profitability. 2) Although HMCs auto business is expected to stagnate in 2012, its finance arm should start to take off from 2012. We believe that Hyundai Capital and HCA (Hyundai Capital America) will start to enjoy high growth on the back of HMCs rising global sales and market share. 3) On a market-cap basis (value of common shares and preferred shares divided by net profit), HMCs shares are currently trading at a P/E of 6.6x. And considering HMCs solid earnings and world class profitability, we believe it is still trading at a very attractive level.
1M -3.8 0.0
6M -12.9 -1.3
12M 23.0 25.1
Share price 160 140 120 100 80 60 40 11/10 3/11 7/11 11/11 KOSPI

FY Revenues (Wbn) 12/09 91,463 12/10 112,590 12/11F 78,000 12/12F 85,079 12/13F 88,321 OP OP Margin (Wbn) (%) 5,620 6.1 9,118 8.1 8,111 10.4 8,827 10.4 9,544 10.8 NP (Wbn) 2,974 5,441 7,763 8,204 8,990 EPS EBITDA FCF ROE P/E (Won) (Wbn) (Wbn) (%) (x) 10,416 9,203 7,760 14.6 11.6 19,060 13,001 701 22.2 9.1 27,193 10,088 37,022 23.9 8.0 28,736 10,795 10,226 19.6 7.5 31,491 11,524 7,044 17.8 6.9 P/B EV/EBITDA (x) (x) 1.9 7.5 2.1 6.4 1.8 6.2 1.4 5.0 1.2 4.2
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Transitioning from offensive (2010-2011) to defensive stance in 2012

Maintaining momentum in 2012 We expect operations in Japan to normalize by year-end. Nevertheless, HMC remains confident that it will be able to maintain strong momentum in major markets with its competitive lineup and improved brand image. We also believe that the return of Japanese auto makers will not have a big impact on HMCs current strong sales momentum. There are concerns that a return of Japanese automakers will lead to a rise in HMCs marketing expenses. However, with marketing expenses (i.e., promotions and advertisement) for the YF Sonata and Elantra expected to decline from 2012, HMC should be able to maintain an attractive OP margin. Although we expect HMC to take a defensive stance in 2012, HMC will continue to strengthen its lineup and compete with its main rival. HMC will launch the i40 wagon in 3Q, the i40 sedan in 1Q12, the i30 FMC (Full Model Change) in 4Q, and the Elantra coupe in early 2012. Also, the all new Santa Fe is expected to be launched, in addition to facelifts for the YF Sonata, Genesis Coupe, and Tucson ix.
Finance arm to become another growth driver for Hyundai Motor

Positive turnaround for HCA HCA, the finance arm for HMC and Kia Motors U.S. business, has recently shown qualitative and quantitative growth. Here are some of HCAs recent developments. 1) Total asset size has more than tripled from 3-4 years ago to W10tr. 2) HCAs captive sales portion has risen to almost 50% from 20% five years ago. 3) 94% of current customers have prime rated credit. 4) HCAs delinquency ratio is below the industry average and given conservative provisions set aside for potential negative events, we expect a meaningful write backs in the event the U.S. economy rebounds. We believe that HCAs positive turnaround will offset for the growth slowdown of HMCs auto business. Meanwhile, Hyundai Capital is preparing to expand its finance business for HMC and Kia to other regions such as China and Europe.
Table 16. Finance related affiliates for HKAG
Company Hyundai Card Hyundai Capital Hyundai Commercial HCA (Hyundai Capital America) HMC Investment Securities Listed Non-listed Non-listed Non-listed Non-listed Listed Core business Credit card business Consumer financing Consumer financing (Commercial cars) Consumer financing (U.S.) Investment Securities Shareholders HMC 32% / Kia 11% / Hyundai Commercial 5% / Hyundai Steel 5% HMC 56% / GE Capital Holdings 43% HMC 50% / ME Chung 33% / TY Chung 17% HMA (Hyundai Motor America) 94% / KMA (Kia Motors America) 6% HMC 27% / Mobis 16% / Kia 4% / Amco 4% / Hyundai Steel 3%
Source: Companies data, KDB Daewoo Securities Research
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2012 Net profit to increase by 5.7% to W8.2tr

Net profit growth to slow down but earnings stability will be highlighted We forecast HMCs 2011 net profit to increase by 43%, thanks to solid global sales, an ASP increase, and margin improvement owing to the companys use of integrated platforms. While auto demand outlook in 2012 appears gloomy, we believe that HMC will continue to strengthen its global performance on the back of its improved market presence and price competitiveness. Accordingly, we forecast HMCs 2012 net profit to increase by 5.7% to W8.2tr.
Figure 45. Consolidated operating profit and OPM trend of HMC
(Wbn) 12,000 10,000 8,000 6,000 4,000 2,000 0 04 05 06 07 08 09 10 11F 12F 13F First phase of platform integration (engine+transmission) - After the launch of NF Sonata Second phase of platform integration (integrated chassis) - After YF Sonata Operating profit (L) OP margin (R) Including Kia Excluding Kia (%) 12 10 8 6 4 2 0
Figure 46. P/E band of HMC

(W) 350,000 12X 10X
Figure 47. P/E band and ROE outlook of HMC

(W) 350,000 2.1X
280,000
280,000 1.6X
8X 210,000 6X 140,000 140,000 0.6X 70,000 70,000 210,000 1.1X
0 97 99 01 03 05 07 09 11F 11 12F
0 97 99 01 03 05 07 09 11F 11 12F
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Hyundai Motor (005380 KS/Buy/TP: W290,000)

(Wbn) Revenues Cost of Sales Gross Profit SG&A Expenses Operating Profit (Adj) Operating Profit Non-Operating Profit Net Financial Income Net Gain from Inv in Associates Pretax Profit Income Tax Profit from Continuing Operations Profit from Discontinued Operations Net Profit Controlling Interests Non-Controlling Interests Total Comprehensive Profit Controlling Interests Non-Controlling Interests EBITDA FCF (Free Cash Flow) EBITDA Margin (%) Operating Profit Margin (%) Net Profit Margin (%) 12/10 112,590 86,060 26,530 17,412 9,118 9,118 1,334 351 1,100 10,452 2,469 7,983 0 7,983 5,441 2,542 7,983 5,441 2,542 13,001 701 11.6 8.1 4.8 12/11F 78,000 59,074 18,927 11,047 7,880 8,111 2,836 28 2,592 10,816 2,502 8,313 0 8,313 7,763 550 8,544 7,971 573 10,088 37,022 12.9 10.4 10.0 12/12F 85,079 65,911 19,168 10,643 8,525 8,827 2,921 -132 2,648 11,747 2,983 8,765 0 8,765 8,204 561 9,566 8,887 678 10,795 10,226 12.7 10.4 9.6 12/13F 88,321 68,154 20,167 10,929 9,238 9,544 3,241 -214 2,970 12,784 3,214 9,570 0 9,570 8,990 580 10,367 9,670 697 11,524 7,044 13.1 10.8 10.2

(Wbn) Current Assets Cash and Cash Equivalents AR & Other Receivables Inventories Other Current Assets Non-Current Assets Investments in Associates Property, Plant and Equipment Intangible Assets Total Assets Current Liabilities AP & Other Payables Short-Term Financial Liabilities Other Current Liabilities Non-Current Liabilities Long-Term Financial Liabilities Other Non-Current Liabilities Total Liabilities Controlling Interests Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Stockholders' Equity 12/10 12/11F 12/12F 12/13F 40,600 49,515 56,875 60,277 9,391 16,266 23,596 26,807 8,780 6,144 6,175 6,184 11,525 5,346 5,348 5,526 2,258 1,243 1,240 1,246 77,478 58,302 58,358 62,515 4,920 11,900 14,548 17,518 28,878 18,666 18,930 18,964 3,948 2,640 2,627 2,618 118,078 107,817 115,234 122,792 45,593 34,070 35,356 36,374 16,275 9,316 9,281 9,300 20,893 17,883 19,108 20,026 8,425 6,871 6,967 7,048 35,749 32,768 29,855 26,604 27,844 25,169 22,091 18,536 7,255 7,103 7,246 7,521 81,342 66,838 65,211 62,978 27,266 37,662 46,027 55,121 1,489 1,489 1,489 1,489 5,961 3,901 3,901 3,901 19,742 32,574 40,255 48,669 9,470 3,317 3,996 4,693 36,736 40,980 50,023 59,814

(Wbn) Cash Flows from Op Activities Net Profit Non-Cash Income and Expense Depreciation Amortization Others Chg in Working Capital Chg in AR & Other Receivables Chg in Inventories Chg in AP & Other Payables Income Tax Paid Cash Flows from Inv Activities Chg in PP&E Chg in Intangible Assets Chg in Financial Assets Others Cash Flows from Fin Activities Chg in Financial Liabilities Chg in Equity Dividends Paid Others Increase (Decrease) in Cash Beginning Balance Ending Balance 12/10 15,947 7,983 5,890 2,987 896 -3,292 2,074 -1,684 159 3,304 0 -16,789 -3,705 -1,266 -4,091 -7,726 1,585 2,591 -453 -659 106 731 8,660 9,391 12/11F 6,475 8,313 3,596 1,554 655 -1,449 -3,313 -929 23 2,166 -2,122 1,608 -1,899 -687 6,126 -1,931 2,487 3,797 0 -412 -1,311 6,875 9,391 16,266 12/12F 12,086 8,765 2,030 1,552 718 389 4,145 -31 -2 -36 -2,854 -1,923 -1,822 -705 0 604 -2,833 -865 0 -522 -458 7,330 16,266 23,596 12/13F 8,499 9,570 1,954 1,579 707 404 193 -9 -178 20 -3,218 -1,656 -1,622 -698 0 665 -3,634 -1,660 0 -576 -419 3,210 23,596 26,807
P/E (x) P/CF (x) P/B (x) EV/EBITDA (x) EPS (W) CFPS (W) BPS (W) DPS (W) Payout ratio (%) Dividend Yield (%) Revenue Growth (%) EBITDA Growth (%) Operating Profit Growth (%) EPS Growth (%) Accounts Receivable Turnover (x) Inventory Turnover (x) Accounts Payable Turnover (x) ROA (%) ROE (%) ROIC (%) Liability to Equity Ratio (%) Current Ratio (%) Net Debt to Equity Ratio (%) Interest Coverage Ratio (x) 12/10 12/11F 12/12F 12/13F 9.1 8.0 7.5 6.9 5.3 6.2 5.9 5.5 2.1 1.8 1.4 1.2 6.4 6.2 5.0 4.2 19,060 27,193 28,736 31,491 32,662 34,929 36,687 39,497 82,916 123,307 152,654 184,538 1,500 1,900 2,100 2,300 7.6 6.7 7.0 7.0 0.9 0.9 1.0 1.1 23.1 -30.7 9.1 3.8 41.3 -22.4 7.0 6.8 62.2 -11.0 8.8 8.1 83.0 42.7 5.7 9.6 16.0 12.7 17.8 18.3 9.7 9.3 15.9 16.2 12.0 9.2 13.1 13.5 7.2 7.4 7.9 8.0 22.2 23.9 19.6 17.8 12.1 15.6 41.2 51.5 221.4 163.1 130.4 105.3 89.1 145.3 160.9 165.7 83.6 15.3 -5.8 -14.7 9.6 16.7 19.1 22.0
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Mando (060980 KS)

Buy (Initiate)
Target Price (12M, W) 250,000 Share Price (11/29/11, W) 199,000 Expected Return (%) 25.6 EPS Growth (11F, %) 20.6 Market EPS Growth (11F, %) -2.3 P/E (11F, x) 15.1 Market P/E (11F, x) 10.2 KOSPI 1,856.52 Market Cap (Wbn) 3,625 Shares Outstanding (mn) 18 Avg Trading Volume (60D, '000) 136 Avg Trading Value (60D, Wbn) 26 Dividend Yield (11F, %) 0.6 Free Float (%) 68.8 52-Week Low (W) 123,000 52-Week High (W) 226,500 Beta (12M, Daily Rate of Return) 1.1 Price Return Volatility (12M Daily, %, SD) 3.0 Foreign Ownership (%) 29.0 Major Shareholder (s) Jung Mong Won et al. (30.01%) NPS (8.62%) Mirae Asset Investment et al. (6.45%) Price Performance (%) 1M 6M 12M Absolute -0.3 3.7 58.6 Relative 3.5 15.3 60.6
New orders are winning the minds of investors

Long term growth intact with huge backlog of new orders A system parts manufacturer with strengthening pricing power Initiating coverage with Buy rating and TP of W250,000
We initiate coverage of Mando with a Buy rating and 12-month target price of W250,000. We forecast Mandos net profit to grow at a CAGR of 19% over five years (2011-2016F), exceeding the average 9.5% growth of KOSPI manufacturers as well as the growth of HMC and Kia Motors. In deriving our target price, we applied a target P/E of 15.3x to Mandos 2012F EPS of W16,382. We arrived at our target multiple of 15.3x by applying a PEG of 0.8x, which is the average PEG of KOSPI listed manufacturers. Key investment points for Mando include the following: 1) Backlog of new orders, which far exceeds its current consolidated revenues, will serve as the backbone for Mandos long term top line growth. Mandos new orders started to pick up from 2006 with new orders from the Hyundai-Kia Automotive Group (HKAG), GM Global and other non-Hyundai affiliated customers. By end-2011, we believe Mandos new orders will reach W6tr. This is 131% of 2011F consolidated revenues of W4.5tr. We believe that the pace of new orders will continue to be solid and allow Mando to enjoy stellar sales growth of 13.1% CAGR to 2016. Even if we factor in the limited margin improvement due to Mando being a supplier, we forecast its net profit at 19% CAGR. 2) We believe that Mando will strengthen its pricing power as a system parts supplier as it diversifies its customer base. In 2010, 42% of new orders came from HKAG, 29% from GM Global, and 18% from Chinese and European auto makers. Meanwhile, the Korea-EU FTA should further enhance Mandos ability to gain new customers and improve margins in the long run. 3) Next generation electronic parts in braking and steering systems will be the core driver of quality earnings at Mando.
Share price 200 180 160 140 120 100 80 60 40 11/10 3/11 7/11 11/11 KOSPI

FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) 12/09 2,727 177 6.5 107 6,653 322 132 13.1 12/10 3,624 262 7.2 191 10,961 391 70 18.2 11.8 12/11F 4,538 327 7.2 241 13,213 479 55 17.9 15.1 12/12F 5,232 399 7.6 298 16,382 586 121 18.6 12.2 12/13F 5,823 470 8.1 350 19,190 671 130 18.2 10.4 P/B EV/EBITDA (x) (x) 2.0 6.5 2.6 8.1 2.2 6.5 1.8 5.5
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Strong comparative advantage in braking and steering systems

Moving towards more core electronic parts Mando has been manufacturing braking and steering systems for HKAG. Recently, these braking and steering systems have been getting more advanced with a growing focus on safety, convenience, and fuel efficiency. In braking systems, the conventional braking systems are being replaced by next generation braking systems such as ABS (Antilock Brake System), TCS (Traction Control System), ESC (Electronic Stability Control) and EPB (Electric Power Brakes). Conventional steering systems are also being replaced by EPS (Electric Power Steering). In addition, Mando looks to broaden its business into ASV (Advanced Safety Vehicles) with crash prevention and prevention safety systems. These systems include products like SCC (Smart Cruise Control), LKAS (Line Keeping Assist System), BSD (Blind Spot Detection), and SPAS (Smart Parking Assist System) which are already or shortly to be put into production. We believe that Mando holds a very strong comparative advantage in this space among Koreas system parts suppliers.
Table 17. Product lineups of Mando
Functioning field Braking system Parts Function Prevents skidding when braking ABS + traction improvement ABS + improves safety in corners Safe braking system with improved steering Transfers drivers foot brake to actual braking system Stops a car using hydraulics Parking brake system Power steering using hydraulics Power steering using motors Power steering using the motor on the rack gear Controls the cars movement; Absorption of shock and vibrating energy Controls the cars movement; Suspension link function Controls the cars movement; Suspension link function Improves turning ability and roll safety Controls the cars cabin vibration with air spring Vehicle cruise control system adapted to the high-speed route Blind spot detecting sensors Lane-keeping assistance system Pressure warning system by monitoring the tires pressure Automatic parking system Automatic speed control during traffic jams ABS (Anti-Lock Brake System) TCS (Traction Control System) ESC (Electric Stability Control) BCM (Brake Corner Module) Master Cylinder and Booster Caliper Brake High Torque DIH Steering system CSS (Conventional Power Steering System) C EPS (Column type Electric Power Steering) R EPS (Rack type Electric Power Steering) Suspension system Shock Absorber Shock Absorber Spring Assembly Suspension Struts Mono Tube Damper Cabin Air Suspension ASV SCC (Smart Cruise Control) BSD (Blind Spot Detection) LKAS (Line Keeping Assist System) TPMS (Tire Pressure Monitoring System) SPAS (Smart Parking Assist System) TJA (Traffic Jam Assist) Source: Company data, KDB Daewoo Securities Research
Table 18. Types of EPS

Column type Applied vehicles Core technology possession Characteristics Small cars that are under 1,500cc TRW Pinion type Cars under 2,000cc Japanese Rack type Large cars, SUVs, RVs, commercial ZF
Motor is attached to steering column Motor is attached to steering gear box Motor is attached to steering gear box (upper) (lower) (lower)
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Figure 48. ESC (Electric Stability Control) system
Figure 49. Rack type EPS
Figure 50. ASCC (Adaptive Smart Cruise Control) system
Figure 51. SPAS (Smart Parking Assist System)
Figure 52. LKAS (Lane Keeping Assist System)
Figure 53. BSD (Blind Spot Detection) System
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Strengthening pricing power through customer diversification

Portion of new orders from HKAG falling to 40% levels Mando and Hyundai Mobis are the core parts suppliers for HKAGs braking and steering systems. This had previously posed serious risks for Mando as its sales portion to HKAG was absolute. But even though Mandos consolidated revenue has shown strong growth in the past years, its sales to HKAG have fallen below 60% from 2010. On back of strong orders from global customers and a widening base of customers, we believe that Mandos pricing power as a system parts manufacturer will improve. As of 2010, the portion of new orders from HKAG has fallen to 40% levels. On the other hand, 30% of new orders are from GM Global and the other 30% are from Chinese and European auto makers. Thus, Mandos diversification of customer base will eventually strengthen its pricing power and minimize its dependence on a particular customer.
Long-term structural growth intact with solid new order backlog

New orders exceed current revenues New orders, which far exceed its current consolidated revenues, will serve as the backbone for Mandos long-term top line growth. Mandos new orders started to pick up from 2006 with new orders from HKAG, GM Global and other non-Hyundai affiliated customers. By end-2011, we believe Mandos new orders will reach W6tr. This is 131% of 2011F consolidated revenues of W4.5tr. As of 3Q, Mandos new orders reached W4.1tr and by end-2011, we believe Mando will win another important order from GM Global. In addition, recent new orders are showing that Mando is securing not only component supply deals, but deals that require Mando to supply the entire braking or steering systems. Sales to grow at 13% CAGR; Net profit to grow at 19% CAGR to 2016 We believe the pace of new orders will continue to be solid and allow Mando to enjoy stellar sales growth of 13.1% CAGR to 2016. Even if we factor in the limited margin improvement due to Mando being a supplier, we forecast its net profit at 19% CAGR.
Figure 54. Breakdown of new orders by customer and long term revenue forecast of Mando
(Wbn) 7,500 HMC Chinese Others GM European Consolidated Rev.(R) 2013 2012 4,500 2010 3,000 2009 2,000 1,500 2011 4,000 2015 2014 6,000 (Wbn) 8,000
6,000
0 05 06 07 08 09 10 11F
Source: Mando, KDB Daewoo Securities Research estimates
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FTAs with U.S. and EU to open more opportunities

FTA to bring more opportunities to Mando In 2011, Korea signed FTAs with the U.S. and EU. These FTAs will immediately abolish tariffs on auto parts, which is a long term positive for Korean auto parts makers. We believe that the abolishment of tariffs on auto parts will have two benefits. First, the auto parts makers which have followed HMC and Kia Motors overseas plants will benefit from cost improvement which will lead to profitability improvement. Second, Korean auto parts makers, which are exporting parts to global auto manufacturers, will gain a cost advantage that will help them win new orders from overseas auto manufacturers in the long-term. As Mando already conducts a lot of business with GM, Ford, and Chrysler through CKD exports from Korea, we believe the FTAs will have an immediate impact on their earnings improvement.
Table 19. Quarterly earnings forecasts of Mando
1Q11 Revenue Operating profit Pretax profit Net profit(Controlling) OP margin Pretax margin Net margin 1,028 70 68 57 6.8 6.6 5.6 2Q11 1,109 83 81 61 7.5 7.3 5.5 3Q11 1,154 83 73 57 7.2 6.3 4.9 4Q11F 1,247 92 87 66 7.3 7.0 5.3 1Q12F 1,215 90 91 69 7.4 7.5 5.6 2Q12F 1,313 108 108 81 8.2 8.2 6.2 3Q12F 1,283 91 91 68 7.1 7.1 5.3 4Q12F 1,421 110 107 81 7.7 7.5 5.7 2011F 4,538 327 310 241 7.2 6.8 5.3
(Wbn, %)
2012F 5,232 399 397 298 7.6 7.6 5.7
Source: Mando, KDB Daewoo Securities Research estimates
Figure 55. P/E band of Mando

(W) 300,000 250,000 13.5X 200,000 11.0X 150,000 18.5X 16.0X
Figure 56. P/B band of Mando

(W) 350,000 3.2X 2.8X 2.5X 210,000 2.2X
280,000
140,000 100,000 50,000 0 10 11F 11 12F 12 70,000
0 10 11F 11 12F 12
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Mando (060980 KS/Buy/TP: W250,000)

(Wbn) Revenues Cost of Sales Gross Profit SG&A Expenses Operating Profit (Adj) Operating Profit Non-Operating Profit Net Financial Income Net Gain from Inv in Associates Pretax Profit Income Tax Profit from Continuing Operations Profit from Discontinued Operations Net Profit Controlling Interests Non-Controlling Interests Total Comprehensive Profit Controlling Interests Non-Controlling Interests EBITDA FCF (Free Cash Flow) EBITDA Margin (%) Operating Profit Margin (%) Net Profit Margin (%) 12/10 3,624 3,031 593 331 262 262 -7 7 -4 255 60 195 0 195 191 3 195 191 3 391 70 10.8 7.2 5.3 12/11F 4,538 3,880 659 317 341 327 -29 9 2 310 64 246 0 246 241 5 266 262 4 479 55 10.6 7.2 5.3 12/12F 5,232 4,456 776 347 429 399 -2 10 3 397 93 304 0 304 298 6 314 310 4 586 121 11.2 7.6 5.7 12/13F 5,823 4,938 885 380 505 470 2 8 4 471 116 355 0 355 350 6 364 359 5 671 130 11.5 8.1 6.0

(Wbn) Current Assets Cash and Cash Equivalents AR & Other Receivables Inventories Other Current Assets Non-Current Assets Investments in Associates Property, Plant and Equipment Intangible Assets Total Assets Current Liabilities AP & Other Payables Short-Term Financial Liabilities Other Current Liabilities Non-Current Liabilities Long-Term Financial Liabilities Other Non-Current Liabilities Total Liabilities Controlling Interests Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Stockholders' Equity 12/10 1,224 124 764 275 20 1,288 34 1,096 65 2,512 954 757 104 93 309 118 77 1,262 1,227 91 240 738 23 1,249 12/11F 1,903 397 1,012 364 65 1,549 42 1,322 72 3,452 1,238 883 282 73 719 267 311 1,958 1,461 91 240 1,090 34 1,494 12/12F 2,113 513 1,072 392 71 1,762 45 1,529 75 3,875 1,442 938 431 73 645 108 368 2,087 1,751 91 240 1,368 38 1,788 12/13F 2,223 506 1,158 419 75 1,974 50 1,735 79 4,196 1,362 973 312 76 705 80 425 2,066 2,088 91 240 1,696 42 2,130

(Wbn) Cash Flows from Op Activities Net Profit Non-Cash Income and Expense Depreciation Amortization Others Chg in Working Capital Chg in AR & Other Receivables Chg in Inventories Chg in AP & Other Payables Income Tax Paid Cash Flows from Inv Activities Chg in PP&E Chg in Intangible Assets Chg in Financial Assets Others Cash Flows from Fin Activities Chg in Financial Liabilities Chg in Equity Dividends Paid Others Increase (Decrease) in Cash Beginning Balance Ending Balance 12/10 364 195 187 114 15 -56 -17 -126 -51 164 0 -310 -252 -21 -22 -15 -106 -271 172 0 -6 -51 174 124 12/11F 430 274 223 123 14 -27 2 -288 -92 134 -68 -438 -377 -18 -24 -20 291 306 0 -18 -15 273 124 397 12/12F 524 304 282 143 15 -7 31 -60 -28 55 -93 -362 -350 -18 0 6 -45 -10 0 -20 -15 117 397 513 12/13F 546 355 315 150 16 -13 -9 -86 -27 36 -116 -371 -356 -20 0 5 -183 -148 0 -22 -13 -7 513 506
P/E (x) P/CF (x) P/B (x) EV/EBITDA (x) EPS (W) CFPS (W) BPS (W) DPS (W) Payout ratio (%) Dividend Yield (%) Revenue Growth (%) EBITDA Growth (%) Operating Profit Growth (%) EPS Growth (%) Accounts Receivable Turnover (x) Inventory Turnover (x) Accounts Payable Turnover (x) ROA (%) ROE (%) ROIC (%) Liability to Equity Ratio (%) Current Ratio (%) Net Debt to Equity Ratio (%) Interest Coverage Ratio (x) 12/10 11.8 7.0 2.0 6.5 10,961 18,368 64,066 1,000 9.5 0.8 32.9 21.5 48.0 64.8 5.7 14.5 6.8 8.2 18.2 15.1 101.1 128.3 4.6 15.3 12/11F 15.1 9.6 2.6 8.1 13,213 20,770 76,268 1,100 8.2 0.5 25.2 22.5 25.0 20.6 5.4 14.2 6.2 8.3 17.9 18.3 131.0 153.7 5.9 24.3 12/12F 12/13F 12.2 10.4 8.0 7.0 2.2 1.8 6.5 5.5 16,382 19,190 25,023 28,263 91,987 110,289 1,200 1,300 7.2 6.7 0.6 0.7 15.3 11.3 22.4 14.4 21.8 17.8 24.0 17.1 5.1 5.3 13.8 14.4 5.8 6.1 8.3 8.8 18.6 18.2 19.5 19.9 116.7 97.0 146.5 163.3 -2.2 -8.4 26.2 35.9
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Hyundai Wia (011210 KS)

Buy (Initiate)
Target Price (12M, W) 212,000 Share Price (11/29/11, W) 158,500 Expected Return (%) 33.8 EPS Growth (11F, %) 37.3 Market EPS Growth (11F, %) -2.3 P/E (11F, x) 15.9 Market P/E (11F, x) 10.2 KOSPI 1,856.52 Market Cap (Wbn) 4,078 Shares Outstanding (mn) 26 Avg Trading Volume (60D, '000) 244 Avg Trading Value (60D, Wbn) 36 Dividend Yield (11F, %) 0.0 Free Float (%) 42.7 52-Week Low (W) 65,800 52-Week High (W) 178,500 Beta (12M, Daily Rate of Return) 1.1 Price Return Volatility (12M Daily, %, SD) 4.1 Foreign Ownership (%) 5.3 Major Shareholder (s) Hyundai Motor et al. (51.02%) Treasury Shares (6.32%) Price Performance (%) Absolute Relative
Next beneficiary of HKAGs expansion

Third in line to benefit from HKAGs global expansion Capa. expansion of powertrains and machine tools exports to secure high growth Initiate coverage with Buy rating and TP of W212,000
We initiate coverage of Hyundai Wia with a Buy rating and 12-month target price of W212,000. We forecast Hyundai Wias net profit to grow at a CAGR of 19.4% over five years (2011-2016F), exceeding the average 9.5% growth of KOSPI manufacturers as well as the growth of HMC and Kia Motors. In deriving our target price, we applied a target P/E of 15.5x to Hyundai Wias 2012F EPS of W13,671. We arrived at our target multiple of 15.5x by applying a PEG of 0.8x, which is the average PEG of KOSPI listed manufacturers. Key investment points for Hyundai Wia include the following: 1) Hyundai Wia will be the third company within the Hyundai-Kia Automotive Group (HKAG) to benefit from HMC and Kia Motors global expansion. Until now, Hyundai Mobis and Hyundai Glovis were the primary beneficiaries of HKAGs global expansion. Hyundai Mobis provided modules, system auto parts, and core electronic parts. Hyundai Glovis provided logistics support for HKAG. Hyundai Wia have been supplying HMC and Kia Motors with some powertrains (engines and transmissions) and have installed all the manufacturing lines for HMC and Kias engine and transmission lines. Thus, Hyundai Wia should continue to benefit from HKAGs global expansion. For now, Hyundai Wia is expected to generate growth by establishing lines for the new cars being launched at HMC and Kia Motors overseas plants and by expanding its engine and transmission capacity. On top of this, Hyundai Wias machine tool business should receive a solid boost as HMC and Kia Motors are expanding capacity in China by 600,000 units. 2) Capacity expansion of powertrains will provide an additional layer of growth in the future. Hyundai Wia provides the engines for small-sized cars and commercial vehicles. The company also supplies manual transmissions and next generation dual clutch transmissions. 3) Large machine tools will continue to be a strong part of Wias earnings.
1M 6.7 10.5
6M 13.2 24.8
12M
Share price 290 240 190 140 90 40 2/11 6/11 10/11 KOSPI

FY Revenues OP OP Margin NP EPS EBITDA FCF ROE P/E (Wbn) (Wbn) (%) (Wbn) (Won) (Wbn) (Wbn) (%) (x) 12/09 3,118 123 3.9 77 3,554 180 52 9.8 12/10 4,435 132 3.0 137 6,289 196 80 15.4 12/11F 6,365 346 5.4 251 9,957 433 -330 20.4 15.9 12/12F 7,843 457 5.8 345 13,671 561 155 20.5 11.6 12/13F 9,304 577 6.2 446 17,679 684 243 21.7 9.0 P/B EV/EBITDA (x) (x) 2.9 11.0 2.4 8.3 1.9 6.5
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Third in line to benefit from HKAGs growth

Factory automation will be another core driver for Hyundai Wia Hyundai Wias machinery business is comprised of large machine tools and the installation of production lines and equipments for HMC and Kia Motors. For production lines, Hyundai Wia is in charge of engine and transmission production lines. Although HMC and Kia Motors are their sole customers, we believe that Hyundai Wias factory automation system will attract other overseas OEMs. As of now, the biggest project for Hyundai Wia is the capacity expansion of engine plant in China, and HMC and Kia Motors expansion in China. HMC and Kia Motors will each expand capacity by 300,000 units in the upcoming years. This will be reflected in Hyundai Wias revenues starting 2012.
Machinery business to grow accompanied with profitability improvement

Machinery business OPM to turnaround to 5.8% in 2011 from BEP levels in 2010 Hyundai Wias machinery business is forecast to increase by 26.5% YoY in 2011 on the back of solid recovery of industrial equipment cycle and solid growth of its auto manufacturing related items, such as F/A (Factory Automation) and press equipments. Also their operating margin in the machinery business will turnaround from BEP levels in 2010 to an OP margin of 5.8% in 2011. The F/A and machine tool business, which accounts for 64% of total machinery business sales, will be a strong growth driver for Hyundai Wia and provide continued margin improvement. Although the global macro environment is weak, Hyundai Wias machinery business has continued to manage solid growth with exports to advanced markets rising for its high end products. Meanwhile, low end products for the domestic market are contracting. As of now, new orders at Hyundai Wias machinery business stand at W1.5tr, which is similar to its annual revenues. We expect new orders at Hyundai Wia to remain solid in 2012.
Figure 57. Machinery business (machine tools, F/A) of Hyundai Wia Figure 58. Machinery business (industry, defense) of Hyundai Wia
Turning center
Vertical machining center Boring machine Press F/A(Engine, Transmission Crane
Robot arms K1A1 tank gun Source: Company data, KDB Daewoo Securities Research 57mm naval gun KF 16 landing gear
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Moving to powertrain parts from modules and chassis

Core parts supplier for HMC and Kias power train Hyundai Wias automotive business, which has been manufacturing chassis modules, is now moving into more core parts with its engines and transmissions unit. Hyundai Wias engine business produces Kappa gasoline engines for small (mini) cars and diesel engines for small commercial vehicles with respective engine production capacity at 360,000 and 200,000 units. The manufacturer recently increased its small car engine capacity in light of the launch of Kias new small MPV the Ray. Meanwhile, Hyundai Wia has established a full lineup of next generation small car engines at its Chinese plant. Capacity at this plant, which supplies the engines used in small cars manufactured at HMC and Kia Motors China and Russia plants, is expected to be expanded from its current 500,000 units to 700,000 units by end-2012. Powertrain revenues to hit W1tr in 2012 As for its transmission business, Hyundai Wia has a plant in Changwon with a capacity of 670,000 units. It is responsible for HMCs and Kias manual transmissions (mostly for overseas markets). Also, the factorys capacity for transfer cases, which are used in SUVs to switch from 2WD to 4WD, is expected to increase to 550,000 units (from 450,000 units). And Hyundai Wia has the capacity to produce 40,000 next-generation dual-clutch transmission (DCT) units, which are used in the new Hyundai Veloster model. We forecast Hyundai Wias engine- and transmission-related revenues to increase to W890bn in 2011 from W390bn in 2009, and exceed the W1tr mark for the first time in 2012.
Figure 59. Powertrain business of Hyundai Wia Figure 60. Next-generation DCT of Hyundai Wia
HMCs new DCT Engine Transmission Transfer
CV joint
FF module
DCT(Dual Clutch Transmission) Source: Company data, KDB Daewoo Securities Research
Figure 61. Revenue outlook of Hyundai Wias machinery business

(Wbn) 2,500 Others Defense Press Machine toold, F/A
Figure 62. Revenue outlook of Hyundai Wias automotive business

(Wbn) 6,000 5,000 4,000 others CV joint Transmission Engine Module
2,000
1,500 3,000 1,000 2,000 500 1,000 0 04 05 06 07 08 09 10 11F 12F 13F 04 05 06 07 08 09 10 11F 12F 13F
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2012 Consolidated net profit to increase by 37.3%

2011 Revenues and net profit to increase by 43.5% and 83.8%, respectively. On the back of solid growth and the global expansions of HMC and Kia Motors, Hyundai Wias top-line growth has been astonishing. And, beginning this year, the turnaround of the machinery business should cause the companys top-line growth and profitability to level up further. For 2011, we are forecasting Hyundai Wias revenues to increase by 43.5% YoY to W6.4tr. OP margin should improve 2.4%p to 5.4% (from 3.0% in 2010), and net profit is forecast to increase by 83.8% to W255bn. We anticipate Hyundai Wias 4Q revenues to set a quarterly record, coming in W1.7tr. Also operating profit and net profit should be strong, reaching W105bn and W78bn, respectively, in the quarter. 2012 Revenues and net profit to increase by 23.2% and 37.3%, respectively In 2012, we are forecasting Hyundai Wias machinery business revenues to increase by another 27.6% on the back of HMC and Kia Motors domestic and overseas capacity expansions. The automotive business growth should also remain strong due to its increased engine and transmission production capacities. As such, we are forecasting 2012 consolidated revenues to increase by 23.2% to W7.8tr. With solid top-line growth expected in 2012, Hyundai Wias OP margin and net profit margin should see improvement. We are forecasting the companys 2012 OP margin and net profit margin to come in at 5.8% and 4.4%, respectively. Net profit (attributable to controlling interests) is forecast at W345bn, up 37.3% YoY.
Table 20. Quarterly and annual earnings forecasts of Hyundai Wia
1Q11 Revenues Operating profit Pretax profit Net profit (controlling) OP margin Pretax margin Net margin 1,497 72 65 54 4.8 4.4 3.6 2Q11 1,615 85 78 60 5.3 4.8 3.7 3Q11 1,531 83 78 59 5.4 5.1 3.9 4Q11F 1,721 105 102 78 6.1 5.9 4.5 1Q12F 1,845 99 99 79 5.4 5.3 4.3 2Q12F 1,991 110 106 85 5.5 5.3 4.3 3Q12F 1,887 112 106 85 5.9 5.6 4.5 4Q12F 2,121 137 120 96 6.4 5.7 4.5 2011F 6,365 346 323 251 5.4 5.1 3.9
(Wbn, %)
2012F 7,843 457 430 345 5.8 5.5 4.4
Source: Hyundai Wia, KDB Daewoo Securities Research estimates
Figure 63. P/E band of Hyundai Wia

(W) 300,000 20.5X 250,000 200,000 150,000 100,000 50,000 0 11F 11 12F 12 17.0X 13.5X 10.0X
Figure 64. P/B band of Hyundai Wia

(W) 300,000 250,000 3.4X 200,000 150,000 100,000 50,000 0 11F 11 12F 12 2.8X 2.2X 1.6X
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Hyundai Wia (011210 KS/Buy/TP: W212,000)

(Wbn) Revenues Cost of Sales Gross Profit SG&A Expenses Operating Profit (Adj) Operating Profit Non-Operating Profit Net Financial Income Net Gain from Inv in Associates Pretax Profit Income Tax Profit from Continuing Operations Profit from Discontinued Operations Net Profit Controlling Interests Non-Controlling Interests Total Comprehensive Profit Controlling Interests Non-Controlling Interests EBITDA FCF (Free Cash Flow) EBITDA Margin (%) Operating Profit Margin (%) Net Profit Margin (%) 12/10 4,435 4,127 308 176 132 132 36 33 62 168 31 137 0 137 137 0 137 137 0 196 80 4.4 3.0 3.1 12/11F 6,365 5,767 597 263 335 346 -12 32 20 324 68 256 0 256 251 4 317 312 4 433 -330 6.8 5.4 4.0 12/12F 7,843 7,081 762 305 457 457 -27 48 24 430 80 351 0 351 345 6 342 336 6 561 155 7.2 5.8 4.4 12/13F 9,304 8,365 940 362 577 577 -21 40 28 556 103 453 0 453 446 7 449 442 7 684 243 7.4 6.2 4.8

(Wbn) Current Assets Cash and Cash Equivalents AR & Other Receivables Inventories Other Current Assets Non-Current Assets Investments in Associates Property, Plant and Equipment Intangible Assets Total Assets Current Liabilities AP & Other Payables Short-Term Financial Liabilities Other Current Liabilities Non-Current Liabilities Long-Term Financial Liabilities Other Non-Current Liabilities Total Liabilities Controlling Interests Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Stockholders' Equity 12/10 1,543 133 916 487 4 1,269 321 815 81 2,812 1,400 1,139 195 66 464 379 71 1,864 948 109 5 644 0 948 12/11F 2,317 258 1,314 699 5 1,757 142 1,355 111 4,074 1,985 1,424 466 95 570 478 77 2,555 1,518 129 241 1,087 1 1,519 12/12F 2,606 254 1,444 861 6 1,972 166 1,543 118 4,578 2,273 1,676 480 117 444 348 82 2,717 1,855 129 241 1,432 6 1,861 12/13F 3,045 318 1,657 1,021 7 2,178 194 1,721 121 5,222 2,573 1,988 445 139 378 278 86 2,951 2,258 129 241 1,839 13 2,271

(Wbn) Cash Flows from Op Activities Net Profit Non-Cash Income and Expense Depreciation Amortization Others Chg in Working Capital Chg in AR & Other Receivables Chg in Inventories Chg in AP & Other Payables Income Tax Paid Cash Flows from Inv Activities Chg in PP&E Chg in Intangible Assets Chg in Financial Assets Others Cash Flows from Fin Activities Chg in Financial Liabilities Chg in Equity Dividends Paid Others Increase (Decrease) in Cash Beginning Balance Ending Balance 12/10 191 137 47 48 16 -41 7 -205 -132 333 0 -130 -115 -25 4 6 -17 -17 0 0 -1 44 90 133 12/11F 368 256 205 78 20 -16 -20 68 -69 31 -72 -404 -357 -30 -40 22 88 -175 256 -44 -38 124 133 258 12/12F 458 351 210 79 25 9 -23 -130 -162 252 -80 -282 -267 -31 0 16 -181 -117 0 0 -64 -4 258 254 12/13F 536 453 231 81 26 3 -45 -213 -160 312 -103 -273 -260 -29 0 16 -199 -104 0 -39 -56 64 254 318
P/E (x) P/CF (x) P/B (x) EV/EBITDA (x) EPS (W) CFPS (W) BPS (W) DPS (W) Payout ratio (%) Dividend Yield (%) Revenue Growth (%) EBITDA Growth (%) Operating Profit Growth (%) EPS Growth (%) Accounts Receivable Turnover (x) Inventory Turnover (x) Accounts Payable Turnover (x) ROA (%) ROE (%) ROIC (%) Liability to Equity Ratio (%) Current Ratio (%) Net Debt to Equity Ratio (%) Interest Coverage Ratio (x) 12/10 2.3 6,289 9,223 39,889 0 0.0 0.0 42.2 8.5 7.4 77.0 5.6 10.5 5.5 5.3 15.4 9.8 196.6 110.2 46.1 3.3 12/11F 15.9 11.5 2.9 11.0 9,957 13,837 54,696 0 0.0 0.0 43.5 121.4 162.6 58.3 5.9 10.7 6.1 7.4 20.4 17.1 168.2 116.7 42.5 8.9 12/12F 11.6 8.9 2.4 8.3 13,671 17,779 67,507 1,500 11.2 1.0 23.2 29.6 32.2 37.3 5.9 10.1 6.3 8.1 20.5 17.8 146.0 114.6 28.7 7.1 12/13F 9.0 7.2 1.9 6.5 17,679 21,904 83,052 1,700 9.8 1.1 18.6 22.0 26.3 29.3 6.3 9.9 6.4 9.3 21.7 20.3 129.9 118.3 16.1 10.3
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Hyundai Mobis (012330 KS)

Buy (Maintain)
Target Price (12M, W) 410,000 Share Price (11/29/11, W) 315,500 Expected Return (%) 30.0 EPS Growth (11F, %) 31.7 Market EPS Growth (11F, %) -2.3 P/E (11F, x) 9.3 Market P/E (11F, x) 10.2 KOSPI 1,856.52 Market Cap (Wbn) 30,712 Shares Outstanding (mn) 97 Avg Trading Volume (60D, '000) 381 Avg Trading Value (60D, Wbn) 124 Dividend Yield (11F, %) 0.5 Free Float (%) 67.8 52-Week Low (W) 245,000 52-Week High (W) 416,500 Beta (12M, Daily Rate of Return) 1.3 Price Return Volatility (12M Daily, %, SD) 2.8 Foreign Ownership (%) 47.0 Major Shareholder (s) Kia Motors et al. (30.17%) Alliance Bernstein L.P. (7.09%) NPS (6%) Price Performance (%) 1M 6M 12M Absolute -8.3 -14.5 14.7 Relative -4.5 -2.9 16.8
Profitability and growth

Stable earnings in an unfriendly environment Growing contribution from overseas operations; Still-attractive valuation Maintain Buy rating; But lower TP to W410,000
We maintain our Buy rating on Hyundai Mobis but lower our 12-month target price by 10.3% to W410,000 (from W457,000). Our target price was derived by using the sum-of-the-parts methodology to calculate the operating values of Hyundai Mobis AS and module divisions relative to their respective benchmarks. We then added the results to the companys asset value and net cash holdings. We revised down our target price because, contrary to our expectations, Hyundai Mobis AS division has not entered its second phase of sales growth. Thus, we have lowered the premium we applied to the business. Key investment points for Hyundai Mobis include the following: 1) We believe that Hyundai Mobis will be able to maintain its stable earnings growth despite the decline in global auto demand and the slowing paces of Hyundai Motors (HMC) and Kia Motors expansions. Even though Hyundai Mobis AS business is not entering its second phase of growth, it should still deliver stable and solid earnings thanks to a rise in global units in operation (UIO) and product mix improvement. In addition, by 2012, the proportion of HMC and Kia vehicles built using integrated platforms should reach 60%. Thus, Hyundai Mobis core parts sales to the two auto giants are likely to continue to rise and see solid upside. 2) As HMC and Kia Motors overseas operations have entered stable full-utilization ratio phases, we believe that the earnings contribution of Hyundai Mobis overseas operations will start to grow. In particular, the companys Chinese operations are expected to be a key driver, as HMC and Kias combined Chinese output is projected to increase to 1.8mn units by 2016 (from 1.1mn units.) 3) Due to its high and stable ROE and ROIC, Hyundai Mobis should continue to show solid growth at its core parts manufacturing business. Thus, we believe that the companys valuation is undemanding.
Share price 160 140 120 100 80 60 40 11/10 3/11 7/11 11/11 KOSPI

FY Revenues (Wbn) 12/09 17,230 12/10 22,144 12/11F 26,651 12/12F 31,297 12/13F 34,750 OP OP Margin (Wbn) (%) 1,694 9.8 2,331 10.5 2,876 10.8 3,259 10.4 3,586 10.3 NP (Wbn) 1,567 2,504 3,298 3,644 4,057 EPS EBITDA FCF ROE P/E (Won) (Wbn) (Wbn) (%) (x) 16,933 2,089 732 24.0 10.1 25,712 2,800 1,679 28.0 11.1 33,875 3,288 1,648 27.2 9.3 37,424 3,733 2,137 23.0 8.4 41,666 4,021 2,424 20.8 7.6 P/B EV/EBITDA (x) (x) 2.2 8.6 2.8 9.8 2.2 9.3 1.8 7.7 1.4 6.7
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More electronic parts and steady AS growth in 2012

Electronic core parts contributing to revenues and profitability In 2012, we expect Hyundai Mobis electronic core parts business to continue to grow at a fast pace, led by motor-driven power steering (MDPS), headlamps, and around-view monitors. MDPS systems, which are currently installed in all of HMC and Kias C-segment vehicles, will also be used in D-segment vehicles going forward. Hyundai Mobis will supply headlamps for use in HMCs i40 and Kias Ray, which are scheduled to be launched by end-2011. Moreover, around-view monitors, which command a high ASP, are currently installed in HMCs Grandeur and are expected to be installed in Kias K9 beginning in 2012. These aforementioned electronic core parts will continue to contribute to Hyundai Mobis sales and profitability. AS unit to see gradual margin deterioration; But it should still remain a high-margin business Meanwhile, we have revised down our forecasts for the AS divisions 2012 and 2013 OP margins. Going forward, we believe that the AS divisions OP margin will gradually come down to the 20~21% level, in line with the levels of Hyundai Mobis peers. Nevertheless, top-line growth should remain in the double digits, on the back of a steady rise in HMC and Kia Motors global UIO. Thus, we forecast 2012 net profit to increase by 10.5% to W3.6tr. But, if the won remains weak against the U.S. dollar in 2012, we see additional upside thanks to high-margin CKD exports and the AS division.
Table 21. Quarterly and annual earnings forecasts of Hyundai Mobis
1Q11 Revenues Operating profit Pretax profit Net profit (controlling) OP margin Pretax margin Net margin 6,196 687 1,042 800 11.1 16.8 12.9 2Q11 6,561 734 1,153 898 11.2 17.6 13.7 3Q11 6,496 667 909 705 10.3 14.0 10.9 4Q11F 7,398 788 1,167 895 10.7 15.8 12.1 1Q12F 7,297 774 1,121 860 10.6 15.4 11.8 2Q12F 7,708 819 1,206 925 10.6 15.6 12.0 3Q12F 7,628 798 1,169 897 10.5 15.3 11.8 4Q12F 8,664 869 1,255 963 10.0 14.5 11.1 2011F 26,651 2,876 4,271 3,298 10.8 16.0 12.4
(Wbn, %)
2012F 31,296 3,259 4,750 3,644 10.4 15.2 11.6
Source: Hyundai Mobis, KDB Daewoo Securities Research estimates
Table 22. Quarterly and annual earnings forecasts of Hyundai Mobis by division
1Q11 Revenues AS Domestic Export Module Operating profit AS Module OP margin AS Module 6,196 1,361 638 723 4,835 687 334 353 11.1 24.5 7.3 2Q11 6,561 1,351 579 771 5,211 734 309 426 11.2 22.8 8.2 3Q11 6,496 1,369 584 785 5,127 667 299 368 10.3 21.8 7.2 4Q11F 7,398 1,519 586 933 5,878 788 341 447 10.7 22.4 7.6 1Q12F 7,297 1,559 675 884 5,737 774 331 443 10.6 21.2 7.7 2Q12F 7,708 1,569 616 953 6,139 819 340 479 10.6 21.7 7.8 3Q12F 7,656 1,545 626 919 6,112 802 327 476 10.5 21.2 7.8 4Q12F 8,636 1,482 629 853 7,154 864 307 557 10.0 20.7 7.8 2011F 26,651 5,600 2,387 3,213 21,051 2,876 1,282 1,594 10.8 22.9 7.6
(Wbn, %)
2012F 31,296 6,154 2,546 3,609 25,142 3,259 1,305 1,954 10.4 21.2 7.8
Source: Hyundai Mobis, KDB Daewoo Securities Research estimates
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Figure 65. P/E band of Hyundai Mobis

(W) 500,000 13.5X
400,000
11.0X 8.5X
300,000
200,000
6.0X
100,000
0 99 01 03 05 07 09 11 11F 12F
Figure 66. P/B band of Hyundai Mobis

(W) 500,000 3.3X 2.5X 400,000
300,000
1.7X
200,000 0.9X 100,000
0 99 01 03 05 07 09 11F 11 12F
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Hyundai Mobis (012330 KS/Buy/TP: W410,000)

(Wbn) Revenues Cost of Sales Gross Profit SG&A Expenses Operating Profit (Adj) Operating Profit Non-Operating Profit Net Financial Income Net Gain from Inv in Associates Pretax Profit Income Tax Profit from Continuing Operations Profit from Discontinued Operations Net Profit Controlling Interests Non-Controlling Interests Total Comprehensive Profit Controlling Interests Non-Controlling Interests EBITDA FCF (Free Cash Flow) EBITDA Margin (%) Operating Profit Margin (%) Net Profit Margin (%) 12/10 22,144 17,910 4,234 1,903 2,331 2,331 921 3 897 3,252 746 2,506 0 2,506 2,504 2 2,506 2,504 2 2,800 1,679 12.6 10.5 11.3 12/11F 26,651 22,358 4,293 1,427 2,866 2,876 1,405 -17 1,437 4,271 971 3,300 0 3,300 3,298 2 3,282 3,281 2 3,288 1,648 12.3 10.8 12.4 12/12F 31,297 26,194 5,103 1,844 3,259 3,259 1,491 0 1,440 4,750 1,102 3,648 0 3,648 3,644 4 3,630 3,626 4 3,733 2,137 11.9 10.4 11.6 12/13F 34,750 29,180 5,571 1,984 3,586 3,586 1,702 -13 1,581 5,288 1,227 4,061 0 4,061 4,057 4 4,043 4,039 4 4,021 2,424 11.6 10.3 11.7

(Wbn) Current Assets Cash and Cash Equivalents AR & Other Receivables Inventories Other Current Assets Non-Current Assets Investments in Associates Property, Plant and Equipment Intangible Assets Total Assets Current Liabilities AP & Other Payables Short-Term Financial Liabilities Other Current Liabilities Non-Current Liabilities Long-Term Financial Liabilities Other Non-Current Liabilities Total Liabilities Controlling Interests Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Stockholders' Equity 12/10 8,332 2,449 3,951 1,568 102 8,919 5,264 2,646 692 17,251 5,683 3,389 1,690 604 1,380 522 779 7,063 10,171 491 1,362 8,272 17 10,188 12/11F 8,948 2,013 4,512 1,866 123 12,649 8,275 3,197 791 21,596 6,190 3,720 1,744 727 1,309 331 899 7,499 14,081 491 1,359 12,648 17 14,098 12/12F 11,134 3,222 5,143 2,191 144 13,951 9,715 3,116 704 25,085 6,219 4,055 1,311 853 1,287 331 877 7,505 17,559 491 1,359 16,144 20 17,579 12/13F 13,768 4,857 5,780 2,537 160 15,430 11,296 3,013 667 29,198 6,506 4,503 1,057 947 1,222 331 812 7,728 21,445 491 1,359 20,049 24 21,469

(Wbn) Cash Flows from Op Activities Net Profit Non-Cash Income and Expense Depreciation Amortization Others Chg in Working Capital Chg in AR & Other Receivables Chg in Inventories Chg in AP & Other Payables Income Tax Paid Cash Flows from Inv Activities Chg in PP&E Chg in Intangible Assets Chg in Financial Assets Others Cash Flows from Fin Activities Chg in Financial Liabilities Chg in Equity Dividends Paid Others Increase (Decrease) in Cash Beginning Balance Ending Balance 12/10 2,219 2,506 -190 265 204 -247 -97 -363 -347 263 0 -595 -364 -13 -253 36 -264 -144 1 -121 0 1,338 1,112 2,449 12/11F 1,812 3,300 65 310 112 -28 -494 -475 -406 447 -1,060 -1,776 -521 -13 -171 -1,071 -317 -262 0 -143 -55 -437 2,449 2,013 12/12F 2,097 3,648 85 379 94 16 -534 -630 -325 335 -1,102 -265 -298 -8 0 41 -622 -433 0 -148 -42 1,210 2,013 3,222 12/13F 2,324 4,061 -40 390 45 9 -470 -637 -346 448 -1,227 -250 -287 -8 0 45 -440 -254 0 -153 -33 1,635 3,222 4,857
P/E (x) P/CF (x) P/B (x) EV/EBITDA (x) EPS (W) CFPS (W) BPS (W) DPS (W) Payout ratio (%) Dividend Yield (%) Revenue Growth (%) EBITDA Growth (%) Operating Profit Growth (%) EPS Growth (%) Accounts Receivable Turnover (x) Inventory Turnover (x) Accounts Payable Turnover (x) ROA (%) ROE (%) ROIC (%) Liability to Equity Ratio (%) Current Ratio (%) Net Debt to Equity Ratio (%) Interest Coverage Ratio (x) 12/10 12/11F 12/12F 12/13F 11.1 9.3 8.4 7.6 9.3 8.3 7.5 6.8 2.8 2.2 1.8 1.4 9.8 9.3 7.7 6.7 25,712 33,875 37,424 41,666 30,525 38,202 42,287 46,131 102,425 142,949 179,558 219,854 1,500 1,550 1,600 1,700 5.7 4.5 4.2 4.0 0.5 0.5 0.5 0.5 28.5 20.4 17.4 11.0 34.0 17.4 13.5 7.7 37.6 23.4 13.3 10.0 51.9 31.8 10.5 11.3 6.0 6.5 6.7 6.5 15.6 15.5 15.4 14.7 7.6 8.7 9.4 9.6 15.9 17.0 15.6 15.0 28.0 27.2 23.0 20.8 36.0 39.5 39.5 41.2 69.3 53.2 42.7 36.0 146.6 144.6 179.0 211.6 -4.9 -2.6 -11.5 -18.2 41.3 52.8 78.6 109.2
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S&T Daewoo (064960 KS)

Buy (Maintain)
Target Price (12M, W) 42,000 Share Price (11/29/11, W) 32,400 Expected Return (%) 29.6 EPS Growth (11F, %) 35.5 Market EPS Growth (11F, %) -2.3 P/E (11F, x) 9.2 Market P/E (11F, x) 10.2 KOSPI 1,856.52 Market Cap (Wbn) 377 Shares Outstanding (mn) 12 Avg Trading Volume (60D, '000) 58 Avg Trading Value (60D, Wbn) 2 Dividend Yield (11F, %) 1.4 Free Float (%) 57.1 52-Week Low (W) 25,650 52-Week High (W) 39,200 Beta (12M, Daily Rate of Return) 0.8 Price Return Volatility (12M Daily, %, SD) 2.6 Foreign Ownership (%) 4.8 Major Shareholder (s) S&T Holdings et al. (30.97%) Korea Investment Trust et al. (10.19%) NPS (8.22%) Price Performance (%) 1M 6M 12M Absolute -6.1 17.0 3.9 Relative -2.3 28.6 5.9
Healthy growth momentum

High-margin defense business to lift off from 2012 Potential earnings catalysts: Sales to GM Global and motor business Maintain Buy rating with TP of W42,000
We maintain our Buy rating on S&T Daewoo with a 12-month target price of W42,000. Our target price was derived by applying a target P/E of 11.0x to our 2012 EPS estimate of W3,827. Our target P/E of 11.0x represents a 10% discount to the target P/E of Hyundai Mobis. We have revised up our 2011 net profit estimates for S&T Daewoo by 13.8% to W52bn. This adjustment was mainly the result of a gain from the disposal of the companys Korea Delphi Automotive Systems shares. Going forward, we believe that S&T Daewoos medium-term growth story is still attractive, as its defense and motor businesses should continue to show strong growth. Key investment points for S&T Daewoo include the following: 1) We believe that the companys highly profitable defense business will take off from 2012. We anticipate that the delayed K11 project will resume production in 4Q and contribute to sales and margin improvement shortly thereafter. Thus, we are forecasting S&T Daewoos defense-related revenues to increase by 67.3% YoY to W125bn in 2012. Also, as the proportion of K11 sales increases, S&T Daewoos defense business OP margin should improve to over 15%. 2) Parts supply to GM Global (normally W900,000~1.8mn for each model) will contribute steadily to S&T Daewoos top-line growth. Currently, S&T Daewoo has received new orders related to four of GMs global small cars. 3) S&T Daewoos motor business will also be a solid part of the companys future growth. Currently, S&T Daewoo supplies MDPS (a type of electric power steering (EPS) motors to Hyundai Mobis. And the increasing adoption of MDPS systems in mid- to large-sized cars should be another catalyst for S&T Daewoo. Meanwhile, S&T Daewoo is one of the leaders in hybrid system motors. The company is supplying hybrid motors for use in the Hyundai YF Sonata, Kia K5, and Chevy Volt.

FY Revenues OP OP Margin NP (Wbn) (Wbn) (%) (Wbn) 12/09 453 20 4.4 10 12/10 680 49 7.1 38 12/11F 947 74 7.8 52 12/12F 1,139 83 7.3 56 12/13F 1,246 95 7.6 65 EPS EBITDA FCF ROE P/E (Won) (Wbn) (Wbn) (%) (x) 677 38 -2 2.7 44.0 2,610 66 -7 9.9 12.1 3,535 78 22 11.9 9.2 3,827 97 35 11.5 8.5 4,453 108 44 12.1 7.3 P/B EV/EBITDA (x) (x) 1.2 10.7 1.1 6.1 1.0 6.1 0.9 4.6 0.8 3.9
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Defense business to start contributing to earnings from 2012

Short delay to the production of the K11 We believe that revenues from the defense business will grow by 20.2% in 2011 to W66bn. S&T Daewoo started to produce the K11 in 2H. However, production has been halted, as an initial test of the K11 resulted in an accident due to a faulty bullet fuse. Even though S&T Daewoo does not manufacture the bullets (Poongsan) or the fuses (Hanwha), the company will still feel the effects of this incident. Despite the delay to the production of the K11, S&T Daewoos 2012 earnings forecasts remain more or less unchanged. However, the production standstill has led us to revise down our 4Q revenue and operating profit forecasts by W8.7bn (3.2% of total revenues) and W1.8bn, respectively. The company was initially forecast to sell at least 780 units of the K11 (upper-end forecast of 1,000 units) by the end of this year. Meanwhile, S&T Daewoo will likely go ahead with its plans to sell the K12, which will be loaded onto the Korean armys ground attack vehicles. Thus, we remain bullish on the defense business (revenues are forecast to grow by 67.3% to W125bn in 2012).
Defense divisions revenues are forecast to increase by 67.3% in 2012
Motor business, another key growth driver

Motor business, another potential growth catalyst Meanwhile, S&T Daewoos automotive business should continue to show solid growth going forward. GM, the companys main customer, is on the road to recovery in its major markets. Furthermore, S&T Daewoos MDPS motors, which are supplied to Hyundai Mobis, are gaining market share. We believe that North American car manufacturers, including GM, are increasing their adoption of EPS, as it helps to raise fuel efficiency. We think that S&T Daewoo is in a very good position to be awarded more business related to EPS motors, as the companys global price competitiveness is strong. Also, S&T Daewoos EV motor division, which is supplying hybrid motors to HMC, Kia, and GM, should continue to be another key potential catalyst. In the near future, we are expecting S&T Daewoo to expand its EV motor business to traction motors (the main motors for EV vehicles). Recently, S&T Daewoo won contracts from HMC and Kia to supply traction motors for use in hybrid buses and fuel-cell vehicles. Hybrid buses will eventually replace the current CNG buses, and the total value of these contracts could rise to W300bn.
Table 23. Quarterly and annual earnings forecasts of S&T Daewoo
1Q11 Revenues K-IFRS non-consolidated Operating profit Pretax profit Net profit (controlling) OP margin Pretax margin Net margin 204.2 168.6 11.2 8.2 6.4 5.5 4.0 3.1 2Q11 233.8 193.0 12.3 9.3 6.8 5.3 4.0 2.9 3Q11 244.0 205.0 29.2 33.5 24.3 12.0 13.7 9.9 4Q11F 265.1 211.1 21.5 19.7 14.3 8.1 7.4 5.4 1Q12F 241.9 198.2 16.0 13.7 10.3 6.6 5.7 4.2 2Q12F 275.6 224.3 19.1 16.7 12.5 6.9 6.0 4.5 3Q12F 297.9 247.2 20.5 18.5 13.9 6.9 6.2 4.7 4Q12F 323.8 268.1 27.4 25.8 19.3 8.5 8.0 6.0 2011F 947.1 777.7 74.3 70.6 51.7 7.8 7.5 5.5
(Wbn, %)
2012F 1,139.2 937.7 83.0 74.6 56.0 7.3 6.5 4.9
Source: S&T Daewoo, KDB Daewoo Securities Research estimates
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Figure 67. Defense items of S&T Daewoo
Figure 68. Next-generation defense items of S&T Daewoo
K1A
K2
K3 K11 K12
Rifle K4 K5 K7 Source: Company data, KDB Daewoo Securities Research
Corner Shot
Figure 69. Electronic parts of S&T Daewoo
Figure 70. Motor business of S&T Daewoo
HVAC switch
Remote Keyless Entry Door Control Switch Module Transmission transfer motor DIC
Sunroof motor
RSE
AVR
Full TFT LCD Cluster Source: Company data, KDB Daewoo Securities Research
Black Box
Auxiliary pump motor
HSG(ISG) Motor
Traction Motor
Figure 71. P/E band of S&T Daewoo

(W) 60,000 50,000 40,000 9.0X 30,000 20,000 10,000 0 06 07 08 09 10 11F 11 12F 12 18.0X 13.5X
Figure 72. P/B band of S&T Daewoo

(W) 60,000 50,000 40,000 1.0X 30,000 20,000 10,000 0 06 07 08 09 10 11F 11 12F 12 0.4X 2.2X 1.6X
4.5X
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S&T Daewoo (064960 KS/Buy/TP: W42,000)

(Wbn) Revenues Cost of Sales Gross Profit SG&A Expenses Operating Profit (Adj) Operating Profit Non-Operating Profit Net Financial Income Net Gain from Inv in Associates Pretax Profit Income Tax Profit from Continuing Operations Profit from Discontinued Operations Net Profit Controlling Interests Non-Controlling Interests Total Comprehensive Profit Controlling Interests Non-Controlling Interests EBITDA FCF (Free Cash Flow) EBITDA Margin (%) Operating Profit Margin (%) Net Profit Margin (%) 12/10 680 575 105 56 49 49 1 3 -1 49 11 39 0 38 38 0 38 38 0 66 -7 9.7 7.1 5.6 12/11F 947 799 148 90 58 74 -2 3 2 71 18 53 0 53 52 1 53 51 2 78 22 8.3 7.8 5.5 12/12F 1,139 951 188 113 75 83 -8 3 1 75 19 56 0 56 56 0 56 55 0 97 35 8.5 7.3 4.9 12/13F 1,246 1,038 208 122 86 95 -8 3 2 87 22 65 0 65 65 0 65 65 0 108 44 8.6 7.6 5.2

(Wbn) Current Assets Cash and Cash Equivalents AR & Other Receivables Inventories Other Current Assets Non-Current Assets Investments in Associates Property, Plant and Equipment Intangible Assets Total Assets Current Liabilities AP & Other Payables Short-Term Financial Liabilities Other Current Liabilities Non-Current Liabilities Long-Term Financial Liabilities Other Non-Current Liabilities Total Liabilities Controlling Interests Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Stockholders' Equity 12/10 358 54 181 97 11 387 8 351 3 745 268 167 76 25 66 0 39 334 411 73 32 175 0 411 12/11F 432 60 215 135 16 484 9 414 6 915 340 213 92 35 69 0 41 408 460 73 32 357 47 507 12/12F 490 58 247 161 19 475 11 403 6 965 337 233 62 42 70 0 43 407 511 73 32 408 47 558 12/13F 556 79 270 181 21 469 12 392 6 1,025 337 242 49 46 71 0 44 408 570 73 32 467 47 617

(Wbn) Cash Flows from Op Activities Net Profit Non-Cash Income and Expense Depreciation Amortization Others Chg in Working Capital Chg in AR & Other Receivables Chg in Inventories Chg in AP & Other Payables Income Tax Paid Cash Flows from Inv Activities Chg in PP&E Chg in Intangible Assets Chg in Financial Assets Others Cash Flows from Fin Activities Chg in Financial Liabilities Chg in Equity Dividends Paid Others Increase (Decrease) in Cash Beginning Balance Ending Balance 12/10 25 38 28 17 1 -11 -42 -7 -30 -13 0 36 -32 -2 70 0 -33 -51 18 0 0 27 27 54 12/11F 28 53 31 18 2 12 -24 -10 -10 4 -33 -13 -20 -2 8 1 -4 0 2 -6 -6 6 54 60 12/12F 46 56 41 20 2 8 -32 -32 -25 20 -19 -9 -9 -2 0 2 -39 -30 0 -5 -4 -2 60 58 12/13F 55 65 42 19 2 9 -31 -23 -20 9 -22 -10 -9 -3 0 1 -23 -14 0 -6 -4 21 58 79
P/E (x) P/CF (x) P/B (x) EV/EBITDA (x) EPS (W) CFPS (W) BPS (W) DPS (W) Payout ratio (%) Dividend Yield (%) Revenue Growth (%) EBITDA Growth (%) Operating Profit Growth (%) EPS Growth (%) Accounts Receivable Turnover (x) Inventory Turnover (x) Accounts Payable Turnover (x) ROA (%) ROE (%) ROIC (%) Liability to Equity Ratio (%) Current Ratio (%) Net Debt to Equity Ratio (%) Interest Coverage Ratio (x) 12/10 12.1 8.3 1.1 6.1 2,610 3,791 27,859 400 14.7 1.3 50.1 75.4 145.9 285.5 4.1 8.2 4.6 5.2 9.9 8.8 81.3 133.5 1.9 9.6 12/11F 9.2 6.6 1.0 6.1 3,535 4,917 31,098 450 9.6 1.4 39.3 18.9 53.3 35.5 4.9 8.2 5.6 6.4 11.9 8.9 80.5 127.2 5.2 16.4 12/12F 8.5 6.1 0.9 4.6 3,827 5,343 34,540 500 9.9 1.6 20.3 24.5 11.7 8.2 5.1 7.7 5.8 6.0 11.5 10.3 73.0 145.4 -0.2 19.6 12/13F 7.3 5.5 0.8 3.9 4,453 5,938 38,559 550 9.3 1.7 9.4 10.5 14.1 16.4 5.0 7.3 6.0 6.6 12.1 11.4 66.1 165.2 -5.9 21.8
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S&T Dynamics (003570 KS)

Buy (Maintain)
Target Price (12M, W) 22,700 Share Price (11/29/11, W) 17,700 Expected Return (%) 28.2 EPS Growth (11F, %) 2.4 Market EPS Growth (11F, %) -2.3 P/E (11F, x) 10.2 Market P/E (11F, x) 10.2 KOSPI 1,856.52 Market Cap (Wbn) 575 Shares Outstanding (mn) 32 Avg Trading Volume (60D, '000) 185 Avg Trading Value (60D, Wbn) 3 Dividend Yield (11F, %) 2.5 Free Float (%) 62.8 52-Week Low (W) 12,900 52-Week High (W) 23,950 Beta (12M, Daily Rate of Return) 1.0 Price Return Volatility (12M Daily, %, SD) 3.0 Foreign Ownership (%) 11.9 Major Shareholder (s) S&T Holdings et al. (30.88%) NPS (9.46%) Allianz Global Investors AM et al. (8.52%) Price Performance (%) 1M 6M 12M Absolute 16.1 13.8 -22.7 Relative 19.9 25.4 -20.7
Defense business to lead growth

Defense business to lead growth Turnaround of S&TC and solid operations to result in NP growth of 28.2% Maintain Buy rating with TP of W22,700
We maintain our Buy rating on S&T Dynamics with a 12-month target price of W22,700. Our target price was derived by applying a target P/E of 10.8x to our 12month forward EPS estimate of W2,108. Our target multiple is equivalent to the weighted average P/E of S&T Dynamics business units. Despite S&T Dynamics disappointing 3Q results, we believe that the companys earnings will improve in 4Q on the back of solid defense sales. Also, due to the rapid turnaround of S&T Corporation (S&TC, a subsidiary), we believe that S&T Dynamics consolidated 2012 earnings will show strong growth. In our view, disappointment related to delays to some major defense contracts has already been priced in. Indeed, shares are trading at historic-low valuations, which we believe are attractive. Key investment points for S&T Dynamics include the following: 1) We believe that S&T Dynamics defense business will be the companys key future growth driver. The defense unit accounts for 50% of the companys total consolidated revenues (excluding S&TCs contribution). And the business is highly profitable, generating double-digit OP margins. We anticipate S&T Dynamics defense business to grow at a pace of 10% annually for at least five years thanks to new orders and replacement orders. In the near term, we are optimistic that new K2 tank sales will be another driver for top-line growth from 2013. 2) S&TCs turnaround began in 2H, earlier than expected, as low-priced new orders began to be phased out of the subsidiarys revenues. Thus, S&TCs 2012 earnings should contribute to higher margins for S&T Dynamics. 3) We forecast S&T Dynamics 2011 net profit to increase by 2.4% to W56.4bn. We believe that, going forward, the company will recover its robust net profit growth on the back of new orders at the defense and machine tools businesses. Also exports at the automotive unit should start to pick up from 2012. Thus, S&T Dynamics net profit growth should return to the double-digit level (28%) in 2012. Earnings & Valuation Metrics
FY Revenues OP OP Margin NP (Wbn) (Wbn) (%) (Wbn) 12/09 497 51 10.3 42 12/10 581 60 10.3 55 12/11F 753 71 9.5 56 12/12F 1,029 96 9.3 72 12/13F 1,141 114 10.0 86 EPS EBITDA FCF ROE P/E (Won) (Wbn) (Wbn) (%) (x) 1,288 65 58 7.9 12.7 1,696 74 11 9.4 13.5 1,736 82 -66 8.9 10.2 2,225 106 50 10.5 8.0 2,656 124 58 11.5 6.7 P/B EV/EBITDA (x) (x) 1.0 7.3 1.3 9.1 0.9 8.2 0.9 6.0 0.8 4.7
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Table 24. Quarterly and annual earnings forecasts of S&T Dynamics

1Q11 Revenues - Non-consolidated K-IFRS Operating profit Pretax profit Net profit Net profit (controlling) OP margin Pretax margin Net margin 137.3 130.4 13.6 15.4 11.1 11.4 9.9 11.2 8.3 2Q11 180.1 158.0 17.4 18.4 13.9 13.6 9.7 10.2 7.5 3Q11P 187.7 141.9 16.3 16.8 12.8 12.8 8.7 8.9 6.8 4Q11F 247.6 193.4 24.0 24.6 18.6 18.6 9.7 9.9 7.5 1Q12F 216.4 160.4 18.0 18.5 14.1 14.1 8.3 8.5 6.5 2Q12F 254.7 191.7 22.8 22.7 17.3 17.3 8.9 8.9 6.8 3Q12F 262.6 202.9 25.2 24.5 18.5 18.5 9.6 9.3 7.0 4Q12F 294.8 232.6 29.7 29.7 22.4 22.4 10.1 10.1 7.6 2011F 752.7 623.6 71.3 75.1 56.4 56.4 9.5 10.0 7.5
(Wbn, %)
2012F 1,028.5 787.6 95.8 95.3 72.3 72.3 9.3 9.3 7.0
Table 25. Quarterly and annual revenue breakdowns of S&T Dynamics

1Q11 Revenues Automotive Defense Machine tools Material Other S&TC Revenue % Automotive Defense Machine tools Material Other S&TC 137.3 28.4 69.1 13.9 19.0 7.0 0.0 20.7 50.3 10.1 13.8 5.1 0.0 2Q11 180.1 36.6 83.5 15.6 22.2 8.3 13.7 20.3 46.4 8.7 12.3 4.6 7.6 3Q11P 187.7 41.4 65.9 13.9 20.7 6.5 39.3 22.1 35.1 7.4 11.0 3.5 20.9 4Q11F 247.6 44.1 104.2 18.1 27.0 7.7 46.6 17.8 42.1 7.3 10.9 3.1 18.8 1Q12F 216.4 38.5 81.8 16.0 24.1 8.6 47.4 17.8 37.8 7.4 11.1 4.0 21.9 2Q12F 254.7 50.1 89.6 20.5 31.5 8.7 54.3 19.7 35.2 8.0 12.4 3.4 21.3 3Q12F 262.6 50.3 101.3 19.2 32.1 8.0 51.7 19.2 38.6 7.3 12.2 3.0 19.7 4Q12F 294.8 53.8 116.9 26.2 35.8 8.9 53.3 18.2 39.7 8.9 12.1 3.0 18.1 2011F 752.7 150.5 322.7 61.5 88.9 29.5 99.6 20.0 42.9 8.2 11.8 3.9 13.2
(Wbn, %)
2012F 1,028.5 192.7 389.7 81.8 123.4 34.2 206.6 18.7 37.9 8.0 12.0 3.3 20.1
Figure 73. P/E band of S&T Dynamics

(W) 30,000 25,000 20,000 8X 15,000 10,000 5,000 0 06 07 08 09 10 11F 11 12F 12 20X 16X 12X
Figure 74. P/B band of S&T Dynamics

(W) 30,000 25,000 20,000 0.8X 15,000 10,000 5,000 0 06 07 08 09 10 11F 11 12F 12 0.5X 1.4X
1.1X
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S&T Dynamics (003570 KS/Buy/TP: W22,700)

(Wbn) Revenues Cost of Sales Gross Profit SG&A Expenses Operating Profit (Adj) Operating Profit Non-Operating Profit Net Financial Income Net Gain from Inv in Associates Pretax Profit Income Tax Profit from Continuing Operations Profit from Discontinued Operations Net Profit Controlling Interests Non-Controlling Interests Total Comprehensive Profit Controlling Interests Non-Controlling Interests EBITDA FCF (Free Cash Flow) EBITDA Margin (%) Operating Profit Margin (%) Net Profit Margin (%) 12/10 581 494 88 28 60 60 11 -2 2 71 17 54 0 54 55 -1 54 55 -1 74 11 12.8 10.3 9.5 12/11F 753 651 102 36 66 71 6 -2 1 75 19 56 0 56 56 0 50 51 -1 82 -66 10.9 9.5 7.5 12/12F 1,029 889 139 50 89 96 -1 -1 1 95 23 72 0 72 72 0 67 68 -1 106 50 10.3 9.3 7.0 12/13F 1,141 980 161 55 106 114 0 -3 1 114 28 86 0 86 86 0 81 82 -1 124 58 10.8 10.0 7.6

(Wbn) Current Assets Cash and Cash Equivalents AR & Other Receivables Inventories Other Current Assets Non-Current Assets Investments in Associates Property, Plant and Equipment Intangible Assets Total Assets Current Liabilities AP & Other Payables Short-Term Financial Liabilities Other Current Liabilities Non-Current Liabilities Long-Term Financial Liabilities Other Non-Current Liabilities Total Liabilities Controlling Interests Capital Stock Capital Surplus Retained Earnings Non-Controlling Interests Stockholders' Equity 12/10 384 126 138 111 9 516 25 464 14 899 189 113 11 65 87 0 56 276 609 84 29 289 14 624 12/11F 483 78 223 155 18 643 0 552 22 1,126 239 144 32 63 117 5 78 356 662 84 49 549 109 771 12/12F 550 122 235 164 19 663 1 563 29 1,213 262 165 35 62 126 5 85 389 716 84 49 608 108 824 12/13F 614 167 242 176 18 682 2 574 35 1,296 271 171 30 70 135 5 92 406 784 84 49 679 106 890

(Wbn) Cash Flows from Op Activities Net Profit Non-Cash Income and Expense Depreciation Amortization Others Chg in Working Capital Chg in AR & Other Receivables Chg in Inventories Chg in AP & Other Payables Income Tax Paid Cash Flows from Inv Activities Chg in PP&E Chg in Intangible Assets Chg in Financial Assets Others Cash Flows from Fin Activities Chg in Financial Liabilities Chg in Equity Dividends Paid Others Increase (Decrease) in Cash Beginning Balance Ending Balance 12/10 38 54 22 14 0 -9 -38 -6 -31 1 0 63 -16 -7 87 -1 -65 -62 3 -6 0 33 93 126 12/11F 0 56 33 16 0 -2 -70 4 -40 -12 -20 -6 -18 -6 -14 32 -7 -1 -10 -12 -1 -48 126 78 12/12F 86 72 34 16 1 3 2 -12 -9 22 -22 -31 -27 -7 0 3 -10 3 0 -13 1 45 78 122 12/13F 94 86 37 17 1 2 -3 -7 -12 6 -27 -29 -28 -7 0 6 -19 -5 0 -15 0 45 122 167
P/E (x) P/CF (x) P/B (x) EV/EBITDA (x) EPS (W) CFPS (W) BPS (W) DPS (W) Payout ratio (%) Dividend Yield (%) Revenue Growth (%) EBITDA Growth (%) Operating Profit Growth (%) EPS Growth (%) Accounts Receivable Turnover (x) Inventory Turnover (x) Accounts Payable Turnover (x) ROA (%) ROE (%) ROIC (%) Liability to Equity Ratio (%) Current Ratio (%) Net Debt to Equity Ratio (%) Interest Coverage Ratio (x) 12/10 13.5 10.7 1.3 9.1 1,696 2,144 18,349 400 22.5 1.8 17.1 15.2 16.9 31.7 4.4 6.0 5.5 6.0 9.4 8.4 44.3 203.2 -18.4 43.4 12/11F 10.2 7.9 0.9 8.2 1,736 2,237 19,699 450 23.8 2.5 29.5 10.5 19.3 2.4 4.3 5.7 6.3 5.6 8.9 7.5 46.2 202.4 -6.7 43.9 12/12F 8.0 6.5 0.8 6.0 2,225 2,742 21,182 500 20.6 2.8 36.6 29.1 34.2 28.2 4.6 6.5 7.1 6.2 10.5 8.8 47.2 209.6 -11.3 42.0 12/13F 6.7 5.6 0.8 4.7 2,656 3,186 23,050 550 19.0 3.1 11.0 16.4 18.6 19.3 4.9 6.7 7.2 6.9 11.5 10.1 45.6 226.6 -16.1 52.6
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Important Disclosures & Disclaimers

Disclosures As of the publication date, Daewoo Securities Co., Ltd. has acted as a liquidity provider for equity-linked warrants backed by shares of KiaMtr, HyundaiMtr and Mobis as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies. As of the publication date, Daewoo Securities Co., Ltd. issued equity-linked warrants with KiaMtr, HyundaiMtr and Mobis as an underlying asset, and other than this, Daewoo Securities has no other special interests in the covered companies.
Stock Ratings Buy Trading Buy Hold Sell Relative performance of 20% or greater Relative performance of 10% or greater, but with volatility Relative performance of -10% and 10% Relative performance of -10%
Industry Ratings Overweight Neutral Underweight Fundamentals are favorable or improving Fundamentals are steady without any material changes Fundamentals are unfavorable or worsening
* 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 analysts 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.
(W) 120,000 100,000 80,000 60,000 40,000 20,000 0 12/09 6/10 12/10 5/11 11/11 KiaMtr (W) 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 12/09 6/10 12/10 5/11 11/11 HyundaiMtr (W) 300,000 250,000 200,000 150,000 100,000 50,000 0 12/09 6/10 12/10 5/11 11/11 100,000 50,000 0 12/09 6/10 12/10 5/11 11/11 MANDO (W) 250,000 200,000 150,000 HYUNDAI WIA
(W) 600,000 500,000 400,000 300,000 200,000 100,000 0 12/09 (W) 30,000 25,000 20,000 15,000 10,000 5,000 0 12/09 6/10 6/10
Mobis
(W) 50,000 40,000 30,000 20,000 10,000 0
S&T DAEWOO
(W) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
S&TDynamics
(W) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
HallaClimCntrl
12/10 PHA
5/11
11/11 (W)
12/09
6/10
12/10
5/11
11/11
12/09
6/10
12/10
5/11
11/11
12/09
6/10
12/10
5/11
11/11
SW HIT ECH
35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 12/10 5/11 11/11 12/09 6/10 12/10 5/11 11/11
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Analyst 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 Analysts 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. Disclaimers 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. 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Distribution 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. 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Korea Auto Insight 2012

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KDB Daewoo Securities

upgraded to AA+ (highest credit rating given to a domestic securities firm)

2012 Outlook Report

December 6, 2011 Industry Report

Production at Japanese auto makers to normalize in early 2012

Recovery of sales and earnings will be delayed

KDB Daewoo Securities Research

Table 1. 2012 Auto sector outlook and investment strategy

1) 2nd EM growth 2) Demand recovery 3) Utilization recovery

Domestic consumer credit bubble bursts

1) 1st EM growth 2) Potential overseas growth

1) Dominance in domestic market 2) Robust export growth

Source: KDB Daewoo Securities Research estimates

KDB Daewoo Securities Research

II. Valuation and investment strategy

Figure 2. MSCI Korea auto sector P/E band

300 30X 24X 13X 9X

100 600 300 0 95 98 01 04 07 10 4X -100

Source: Thomson Reuters, KDB Daewoo Securities Research

Source: Thomson Reuters, KDB Daewoo Securities Research

Figure 4. Global relative P/E valuation to market P/E

Figure 5. Global relative P/E valuation to market P/E

Source: Thomson Reuters, KDB Daewoo Securities Research

Source: Thomson Reuters, KDB Daewoo Securities Research

KDB Daewoo Securities Research

Table 2. Global auto makers valuation comparison

Source: Thomson Reuters, KDB Daewoo Securities Research

Figure 6. Global auto makers P/E and EPS growth (2012F)

Figure 7. Global auto makers P/B and ROE (2012F)

Source: Thomson Reuters, KDB Daewoo Securities Research

Source: Thomson Reuters, KDB Daewoo Securities Research

KDB Daewoo Securities Research

Table 3. Global auto parts makers valuation comparison

Source: Thomson Reuters, KDB Daewoo Securities Research

Figure 9. Global auto parts makers P/B and ROE (2012F)

Borgwaner Valeo JCI Lear Autoliv

Hyundai Mobis Faurecia TRW

Borgwaner Toyota Ind. JCI Aisin

Source: Thomson Reuters, KDB Daewoo Securities Research

Source: Thomson Reuters, KDB Daewoo Securities Research

KDB Daewoo Securities Research

2. Valuation premium to be rationalized for large system parts makers

Korean system parts makers will also enjoy valuation premium

Table 4. Global top system parts suppliers

Figure 10. Toyotas P/E band: 03-07 annual increase of 15%

Figure 11. Aisins P/E band: 03-06 annual increase of 26%

40,000 9.5X 16.3X 14.5X 30,000

13.0X 11.5X 20,000

20,000 96 98 99 00 01 03 04 05 06 08 09 10 11F 12F 11

10,000 96 98 99 00 01 03 04 05 06 08 09 10 11F 12F 11

Source: Thomson Reuters, KDB Daewoo Securities Research

Source: Thomson Reuters, KDB Daewoo Securities Research

KDB Daewoo Securities Research

Figure 13. Denso and Aisins overseas revenue portion trend

Source: Thomson Reuters, KDB Daewoo Securities Research

Source: Thomson Reuters, KDB Daewoo Securities Research

Figure 14. VWs P/E band: 04-07 annual increase of 12%

Figure 15. Continentals P/E band: 03-07 annual increase of 20%

Source: Thomson Reuters, KDB Daewoo Securities Research

Source: Thomson Reuters, KDB Daewoo Securities Research

Figure 16. JCIs P/E band: 03-07 annual increase of 16%

Source: Thomson Reuters, KDB Daewoo Securities Research

Source: Thomson Reuters, KDB Daewoo Securities Research