Fledgling Hedge Fund Market Will Need Time to Gain Momentum

8/3/2019 Fledgling Hedge Fund Market Will Need Time to Gain Momentum

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www.wooriwm.com

Fledgling hedge fund market will need time togain momentum

2012 outlook: Share price fluctuations driven by short-term momentum

We initiate coverage on the securities sector with a Neutral recommendation.

While both a likely higher portion of individual financial assets and thedomestic introduction of hedge funds (which should expand investmentopportunities for securities firms) bode well for the securities sector, tangibleearnings momentum from these changes will likely need some time to develop.

Rights offering-related ROE dilution effect > revenue from new sources

The hedge fund market should grow to around the W30tn-level by 2014,generating around W200bn pa worth of additional income for the sector.

But, the fledgling hedge fund market is unlikely to see strong expansion duringits early development phase as obstacles lie in its path, including the absence ofan established track record and a shortage of experienced professionals.

In FY2012 (fiscal year ends in March), the combined net profit of the foursecurities players under our coverage should rise by 21.5% y-y; however, giventwo announced rights offerings, meaningful ROE improvement looks unlikely(FY2010: 10.4% FY2011E: 8.9% FY2012F: 9.4%).

Top pick: Kiwoom Securities; Samsung Securities also deserves attention

We initiate our coverage at Buy, suggesting a target price of W75,000.

Our key investment points for Kiwoom Securities are as follows: 1) itssustained outstanding growth in the brokerage business; 2) its leading status inthe mobile trading system (MTS) market; 3) its likely expanded lendingcapacity (brokers loans) upon the planned acquisition of a savings bank; and 4)the likelihood that it will be a primary beneficiary of the introduction of an

alternative trading system (ATS; currently under discussion). Also warranting attention in our view is Samsung Securities (Buy, target price

of W65,000). As the largest wealth management securities company in Korea,Samsung Securities will likely enjoy a rising premium in line with a likelyincreased portion of individual financial assets. Moreover, the company isexpected to be the frontrunner in hedge fund product sales.

Securities IndustryIndustry Analysis

Nov 25, 2011

Securities sector investment recommendation/investment indicators (Units: won, %, x)

OP margin P/E P/B ROECode Rating TP (12M)

Currentprice 2011E 2012F 2011E 2012F 2011E 2012F 2011E 2012F

Samsung Securities (016360.KS) Buy( Initiate) 65,000( Initiate) 50,000 12.6 12.4 12.6 12.7 1.1 1.0 8.8 8.3Daewoo Securities (006800.KS) Hold(Initiate) 12,000(Initiate) 10,100 6.0 8.8 14.1 12.0 0.9 0.8 5.3 6.7Mirae Asset Securities (037620.KS) Buy(Initiate) 43,000(Initiate) 32,100 8.8 9.8 9.8 8.1 0.7 0.6 7.1 8.1

Kiwoom Securities (039490.KS) Buy(Initiate) 75,000(Initiate) 55,500 30.8 34.6 11.5 10.0 1.6 1.4 14.5 14.5Note: Based on Nov 18 closing pricesSource: Woori I&S Research Center estimates

Neutral (Initiate)

Analyst

Dahee Woo822)768-7137, [email protected]


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CONTENTSI. Summary .............................................................................................................................

II. Capital movement to stock market has begun...........................................................

1. Waning property investment boom

2. Financial assets likely to expand

III. ROE at standstill ................................................................................................................

1. Korean securities industry finding it difficult to sustain on agency-oriented

profit structure

2. Hedge fund launch to boost income over mid- to long term

3. Dilution of ROE from rights offering > revenue from new resources

IV. Share price momentum positive over longer term; but soft in near term..........

1. Valuations nearing historic low; unlikely to rise over near term

2. Investment strategy: Suggest range-bound trading based on short-term

momentum; over long term, suggest buying shares below P/B of 0.7x

[Company Analysis]

Samsung Securities [Buy, TP W65,000] .........................................................................

Daewoo Securit ies [Hold, TP W12,000] ........................................................................

Mirae Asset Securities [Buy, TP W43,000] .....................................................................

Kiwoom Securities [Buy, TP W75,000] ............................................................................

3

4

9

27

32

36

40

44


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3

Securities Industry www.wooriwm.com

I. Summary

2011 securities

industry review:

Largestunderperformer

among financial

sectors; lags 2011

Kospi by 33.8%p

(YTD)

Thus far in 2011, the securities sector has lagged the Kospi by 33.8%p YTD, posting the

lowest returns among financial sectors (banking: 18.3%p underperformance; insurance:

3.8%p outperformance). We attribute this underperformance to: 1) rising market concernsover a lack of new revenue sources; 2) large-scale rights offerings at large securities firms

aimed at raising capital for their prime brokerage services (PBS); and 3) government

regulatory risks (ie, ban on short-term loans). Presently, the securities sector trades at a P/B of

0.74x (vs 0.8x during the 2008 financial crisis). In terms of valuation, we view the securities

sector as being significantly more attractive than other financial sectors. Despite concerns

over the securities sectors growth potential, we believe it is unlikely that sector will turn to

loss again like in 2004, noting that sector fundamentals have considerably strengthened since

that time.

As such, we view as meaningful the question of whether the sector will be able to repeat a

gradual uptrend going forward, similar to that which was witnessed in 1999, 2005, and 2007.

Positive changes

expected in 2012;meaningful ROE

improvement

unlikely

From a macro-economic perspective, there have been some positive changes for the securities

sector. Given that Koreas baby boom generation is closing in on retirement age, the portionof individual financial assets is expected to expand going forward. We draw attention to the

fact that government policies toward the securities sector have recently turned favorable,

including deregulation of the net capital ratio (NCR) criteria in order to expand investment

opportunities for securities players.

However, it will likely take some time for these positive changes to translate into meaningful

earnings growth for the securities sector. Over the short term, we believe concerns over ROE

dilution caused by large-scale rights offering by some large securities firms will outweigh

expectations for potential mid- to long-term growth momentum.

The hedge fund market should grow to around the W30tn-level by 2014, generating around

W200bn pa worth of additional income for the sector (assuming that around 10% of capital

presently invested in risky assets moves to hedge funds). However, it is our opinion that the

fledgling hedge fund market is unlikely to see strong expansion during its early developmentphase as several obstacles need to first be overcome, including the absence of an established

track record and a shortage of experienced professionals.

Securities shares to

fluctuate driven by

short-term

momentum

In consideration of the above-listed factors, we believe thateven at the current low (and

thus very attractive) valuation levelsecurities shares are unlikely to show a steady rise in

the near future. We believe that the securities sector shares will only start outpacing the Kospi

again once meaningful ROE improvement is established. While we estimate that the

combined FY2012 net profit of the four securities firms under Woori I&Ss coverage will rise

by 21.5% y-y;, these players are unlikelyin consideration of rights offeringsto show ROE

improvement to a degree that would be sufficient to push up share prices (Average ROE:

FY2010 10.4% FY2011E 8.9% FY2012F 9.4%).

In addition, if the governments proposed measures to protect investors (including hikes incustomer deposit usage fees) were to be actually implemented, the regulations would likely

hurt securities firms earnings, as well. Accordingly, for 2012, we believe that securities

shares will fluctuate, mainly driven by short-term momentum.

Top pick: Kiwoom

Securities

Samsung Securities

also deserves

attention

We present Kiwoom Securities as a top pick for the securities sector, citing the following

key investment points: 1) its sustained outstanding growth in the brokerage business; 2) its

leading status in the MTS market; 3) its likely expanded lending capacity (brokers loans)

upon the planned acquisition of a savings bank; and 4) the likelihood that it will be a primary

beneficiary of the introduction of an ATS (currently under discussion).

Also warranting attention in our view is Samsung Securities. As the largest wealth

management securities company in Korea, Samsung Securities should enjoy a rising premium

in line with a likely increased portion of individual financial assets. Moreover, the company is

expected to be the frontrunner in hedge fund product sales.


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II. Capital movement to stock market has begun

1. Waning property investment boom

Portion of real assets

(property) out of

Koreas household

assets is much higher

than that in other

countries

As property prices have risen steadily over a long period of time in Korea, it has become

conventional wisdom for households to buy property if possible. In particular, drastic

property price increases were have been seen since the millennium, at about which time many

Korean baby boomers (generation born between 1955 and 1963; account for 14.6% of

Koreas total population) gained the means to purchase property. As a result, baby boomers

have driven up housing demand. Moreover, as baby boomers have shown a strong preference

for property as their first choice of investment vehicle, property holdings now account for

74.8% of Korean baby boomers combined total assets. In contrast, financial assets account

for a mere 22.2% of total assets (vs 45% in Japan and 63% in the US), suggesting an

excessive concentration of property in asset portfolios.

Japan and US:Demographic

changes have

resulted in housing

market recession

In the US and Japan, housing prices have displayed a mid- to long term decline since the startof a contraction in the size of the population segment aged 35~54. Given this pattern, it can

be seen that a reduction in the economically-active population generally tends to result in

lowered housing demand.

In Japan, housing prices have been plunging sharply since 1990, likely in response to the

slowing growth of economically-active population coinciding with the governments property

market cooling policies (including large-scale rate hikes). At present, despite the

governments stimulus efforts, Japans housing prices have continued to fall due to declines in

both household income and real housing demand.

In the US, housing prices have been sliding since 2006this drop is partly attributed to baby

boomer (78mn people born in 1946-1964) retirements and a decrease in the size of the

population aged 35-54.

Japan: Housing prices dropping since 1990 in line withreduction in economically-active population

US: Housing prices declining since 2006 in conjunction withretirement of baby boomers

0

50

10 0

15 0

20 0

25 0

30 0

35 0

'70 '75 '80 '85 '90 '95 '00 '05

24

2628

30

32

34

36

38

40Population aged 35-5 4 (RHS)

Housing price index (LHS)

('10.3=100) (Mn ppl)

60

10 0

14 0

18 0

22 0

26 0

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

81

82

83

84

85

86

87

88Population aged 35 -54 (RHS)

Housing price index (L HS)

('00.1=100) (Mn ppl)

Note: Housing price index based on nationwideSource: Statistics Bureau of Japan, Bloomberg

Note: Housing price index based on big-10 citiesSource: US Census Bureau, Case-Shiller


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5


Property prices to

keep falling following

retirement of baby

boomers

Since 2010, Koreas baby boomers (as noted earlier, the approximately 7.12mn people born

between 1955~1963), have begun to retire. Moreover, the nations economically-active

population (ages 35~54) is expected to peak out this year. Based on the already discussed

patterns in the Japan and the US, we believe domestic property prices will keep falling after

baby boomers retire, noting: 1) effective demand for housing should slow due to babyboomers retirements and the relatively low estimated average income level of potential

homebuyers; and 2) given likely lower income for 10 years after retirement (of note, the

average retirement age for company employees in Korea is 50~55) until pensionable age

(ages of 60-65), baby boomers are likely to dispose of property investments.

Baby boomers likely

to sell properties

after retirement

Compared to their counterparts in Japan and the US, Korean baby boomers assets are greatly

concentrated on property holdings; moreover, elderly Koreans tend to depend greatly on their

children for income. Given that the pension system in Korea is still less developed than in

other nations, the income of Koreans tends to fall sharply after retirement. Meanwhile, 75%

of baby boomers own a house, with 70% of these homeowners being leveraged, indicating

weak financial health.

For Koreans aged 50-60 (a segment which includes most of the baby boomers), financialliabilities are equal to 87% of their household income (or 114.4% of disposable income);

furthermore, their debt repayment burden is likely to increase following retirement. Thus, we

believe a large portion of the population in such circumstances will decide to sell property in

order to secure financial assets. Given declining real housing demand and reduced property

holdings, we project that domestic property prices will steadily decline in line with the

reduction in the size of the economically-active population.

Korean property prices to fall on expected decrease in economically-active population from 2011

20

30

40

50

60

70

80

90

100110

'86 '91 '96 '01 '06 '11E '16F '21F '26F

8

9

10

11

12

13

14

15

1617

Population aged 35-54 (RHS)

Housing transaction price index (LHS)

('11.6=100) (mn persons)

Source: Statistics Korea, KB


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6


Assets of baby boomers; sources of income for population aged 60 and above

Korea Japan US

Financial assets per capita W73mn JPY18.68mn US$860,000

% of total assets Properties 74.8%Financial assets

45%Financial assets

63%

Public pension 6.6% 57.4% 55.8%

Support from children 56.6% 6.6% 1.6%

Job income 26.6% 21.6% 15.5%

Source of income forthose aged 60 andabove

Assets 9.9% 6.6% 23.3%

Source: Statistics Korea, KIHASA

Debt to income (financial liability to household income), by age group (Units: W10,000, %)

Disposableincome (A)

Ordinaryincome (B)

Financialliability (C)

DTI(C/A) DTI(C/B)

~30 2,176 2,706 856 39.3 31.6

30~40 3,252 4,183 2,890 88.9 69.140~50 3,661 4,777 3,807 104.0 79.7

50~60 3,533 4,647 4,042 114.4 87.0

60~ 1,681 2,133 1,577 93.8 73.9

Source: Statistics Korea


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2. Financial assets likely to expand

US: 1985~2007 stock

market expanded on

low interest-rateenvironment

In the US, shares have risen sharply since 1985, a time during which high-earning and high-

spending baby boomers have been reaching middle age. In keeping, stocks have been

accounting for a greater portion of US household financial assets since the mid- to late 1990s.In fact, the Dow Jones Industrial Average grew a towering 930% over 1985~2007, catalyzed

by steady falls in interest rates.

Japan: Aging society

sparked surge in

financial assets

Meanwhile, the Japanese stock market rallied between the early-1980s and 1990, at which

time Japans first baby boom generation (born in 1930~1939) was well into middle age and

its second baby boom generation (1947-1979) was starting to reach middle age. While the

Japanese stock market has trended downward since peaking in the 1990s, the portion of

personal financial assets continued to rise at a CAGR of 4% from the 1980s to the 2000s

(1984: JPY556tn 2009: JPY1,485tn). In particular, safe assets (including insurance,

pensions, cash, and savings) increased markedly, as baby boomers prepared for retirement.

Lower real interest rate in USbullish stock marketJapanese stock market saw rise starting in 1985 on greaterdemand from baby boomers

-6.0-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

'70.1 '75.1 '80.1 '85.1 '90.1 '95.1 '00.1 '05.1 '10.1

02,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

10yr treasury yield-CPI y-y (LHS)

DJIA (RHS)

(%) (P)

05,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

'70.2 '75.2 '80.2 '85.2 '90.2 '95.2 '00.2 '05.2 '10.2

Nikkei 225 Index

(P)

Source: Bloomberg Source: BOJ, Statistics Bureau of Japan, Datastream

Japan: Personal financial assets increasing in line withaging population

Aging population and insurance/pension closely correlated

0

20 0

40 0

60 0

80 0

1,000

1,2001,400

1,600

1,800

'84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08

Cash/deposit Stock

Insu rance /pension Investmen t trust

Others

(JPYtn)

5

10

15

20

25

30

35

'85 '90 '95 '00 '05 '07 '08 '09

5

10

15

20

25

% of insurance and pension (LHS)

% of population aged 65 and above (RHS)

(%) (%)

Source: BOJ, Statistics Bureau of Japan, Datastream Source: BOJ, Statistics Bureau of Japan, Datastream


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Aging of population

tends to result in

asset portfolio

changes

Socioeconomic patterns in the modern history of the US and Japan have displayed the

following common features: 1) property prices have dropped in the wake of demographic

changes; 2) stock markets became bullish after baby boomers entered the middle age and

elderly age groups; 3) the portion of individual financial assets increased following the

retirement of baby boomers; and 4) among the elderly segments of the population, demandfor safe assets (including insurance and pensions) has outstripped that for risky assets. In the

following analysis, we will identify where Korea now stands in terms of these interrelated

demographic and economic patterns.

Money moving

towards financial

assets: Risky assets

have taken greater

portion since 2005

Risky assets have taken a greater portion of total financial assets in Korea since 2005, as: 1)

stock demand increased after baby boomers reached the middle or elderly age segments (key

income and spending groups); and 2) interest rates have been low during this period. Despite

population aging, we believe that the portion of risky assets will increase steadily in Korea in

the near term, in line with baby boomers accumulation of financial assets. However, once

Korea turns into a super-aged society (as Japan did in 2006), demand for safe assets

(including insurance and pensions) should outstrip demand for risky assets, due to the elderly

populations general aversion to risk. Of note, Korea is now considered to be an aging

societyit is expected to become an aged society in 2018 and a super-aged society in 2026.

However, when considering both the higher portion of real assets (vs that in other countries)

and increasing asset size upon higher gross national income (GNI), we believe that (assuming

that capital continues to flow into the financial market) the chances are slim that the absolute

amount of risky assets (eg, equities) will decline within the foreseeable future.

Portion of ri sky assets is increasingAnnual comparison of countries that have enteredaging/aged/super-aged society demographic categories

7%(aging society)

14%(aged society)

20%(super-aged

society)

Korea 2000 2018 2026

Japan 1970 1994 2006

US 1942 2015 2036

52 49 47 46 42 46 44 44 44

22 2322 23 23

25 24 24 25

4 56 7 10

7 7 5 4

15 15 19 18 20 15 17 18 19

7 7 6 6 5 7 8 8 8

0%

20%

40%

60%

80%

100%

'03 '04 '05 '06 '07 '08 '09 '10 1Q11

Deposit Insurance & annuity BC Equity Others

Source: Bank of Japan, Statistics Bureau of Japan

Source: Bank of Japan, Statistics Bureau of Japan


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III. ROE at standstill

1. Korean securities industry finding it diff icult to sustain on agency-

oriented profit structure

Disparity between

securities sector and

Kospi wider than in

past

Compared to the Kospi, the securities industrys share price momentum has weakened over

the past two years. In terms of absolute performance, the Kospi (as of Oct 2011) has risen

20.8% versus two years ago, while the securities sector has slid 26.6% over the same time

period. Given that the formerly widely-held domestic investor maxim that a buy signal for

securities stocks equals an uptrend for the Kospi no longer holds true, we point out that the

correlation between the Kospi and the securities sector has weakened over the past two years.

Despite Kospis rally,

securities sectors

P/B premium

decreasing

Due to this widening disparity between the Kospi and the securities sector, the basis for

applying a premium to securities stocks has changed. Prior to 2009 (when the Kospi

displayed an upward trajectory), the P/B-based value of securities shares traded at a premium.

During that time period, the level of premium varied depending on the Kospis trading range,but the securities sector was closely correlated with the Kospi overall.

However, the post-2009 P/B-based value of securities shares has been seen to actually

decrease during Kospi uptrends.

Despite Kospis upward trajectory, securities sector at standstill

0

500

1,000

1,500

2,000

2,500

'05 .3 ' 05 .9 ' 06 .3 ' 06 .9 ' 07 .3 ' 07 .9 ' 08 .3 ' 08 .9 ' 09 .3 ' 09 .9 ' 10 .3 ' 10 .9 ' 11 .3 ' 11 .9

0

1,000

2,000

3,000

4,000

5,000Kospi (LHS)

Securities sector index (RHS)

(P) (P)

Source: Dataguide Pro


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Correlation between Kospi and premium on securities sector has weakened

P/B-based valuation: Prior to Jun2009, premium was applied to

securities shares during Kospi rises

Source: Dataguide Pro

500

1,000

1,500

2,000

2,500

'05 .3 ' 05 .9 ' 06 .3 ' 06 .9 ' 07 .3 ' 07 .9 ' 08 .3 ' 08 .9 ' 09 .3 ' 09 .9 ' 10 .3 ' 10 .9 ' 11 .3 ' 11 .9

0.4

0.6

0.8

1.0

1.2

1.4

Kospi (LHS)

Securities sector's P/B/Kospi' s P/B (RHS)

(P) (x )

500

1,000

1,500

2,000

2,500

'05 .3 ' 05 .9 ' 06 .3 ' 06 .9 ' 07 .3 ' 07 .9 ' 08 .3 ' 08 .9 ' 09 .3 ' 09 .9 ' 10 .3 ' 10 .9 ' 11 .3 ' 11 .9

0.4

0.6

0.8

1.0

1.2

1.4

Kospi (LHS)

Securities sector's P/B/Kospi' s P/B (RHS)

(P) (x )


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Uncertainty exists

over securities firms

profit-generating

ability

Likely due to uncertainty over its profit-generating ability stemming from a perceived lack of

growth potential, the securities sector has been performing sluggishly over the past two years.

Despite the Kospis upward trend in 2010, securities shares have not traded at a premium,

likely due to a decline in commissions (which represent an important source of revenue for

securities firms) stemming from fiercer competition in the brokerage market.In light of ongoing downward pressure on securities firms ROE due to a weakening in their

business models, uncertainties have emerged involving the ability of sector players to

generate significant profit (vs book value).

Key to growth is to

secure new revenue

sources

Given this situation, we believe thatin order for their shares to trade at a higher premium to

the marketsecurities firms need both to ease the above-discussed worries over their profit-

generating ability and to secure new sources of revenue.

In the case of the USwhere the ceiling on brokerage commissions was lifted in May

1975securities firms have widened their business scope to include asset management (wrap

accounts) or institutional client services (PBS), both of which have significantly contributed

to sector earningsbased on 2010 sales, Goldman Sachs institutional client services

accounts for 55.7% of net operating income, while Merrill Lynchs asset management,

distribution & administration represents 25.2% of net operating income. By meeting clients

growing needs for retirement planning amidst a low-interest rate environment, this

diversification of revenue sources has enabled US securities firms to realize positive growth.

Looking at domestic securities firms, despite changes within the financial market

environment, commission income still accounts for a large portion (64%) out of net operating

revenue as sector players have experienced difficult in diversifying their revenue streams.

Morgan Stanleys diversified profit structureKorean securities industrys profit structure: Agencyaccounts for more than 60%

Principal

transcation

35%

Others5%

Net interestincome

3%

Asset

management,

distribution

and

adimistration

fees

Commision

16%

Investment

banking

16%

Interest

income

33%

Wealth

management

11%

Investment

banking

8%

Brokerage

41%

Others6%

Net trading

income

1%

Note: Based on 2010 salesSource: Morgan Stanley

Note: Portion based on net operating income. Others category includes valuationand disposal gains on loans and foreign exchange transaction gains.

Source: Financial Statistics Information System (FSIS)


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12


Potential new

revenue sources: IB

or wealth

management

When considering both the low-interest rate environment and the aging of the domestic

population, wealth management services and investment banking services are viewed as

representing new revenue sources for Korean securities firms. Domestic firms have now

started to offer wealth management services, introducing various products aimed at the

specialized needs of clients. In addition, upon the scheduled introduction of hedge funds,domestic securities firms should be enabled to broaden their business scope from traditional

areas (eg, M&A, brokerage, IPO acquisitions) to new business domains (eg, PI, PBS).

Wealth management (WM): Domestic firms have begun to offer wealth management

services for high-net-worth (HNW) clients interested in shifting their focus from realizing

high returns over a short period toward realizing steady returns within the current low-

interest rate environment.

Investment banking (IB): In order to further develop the domestic capital market, the

Korean government is looking to introduce hedge funds. Hedge fund licensing is scheduled

to begin in Dec 2011 for securities firms (Daewoo Securities, Samsung Securities, Woori

Investment & Securities, Korea Investment & Securities, and Hyundai Securities) which

have met the governments criteria (minimum capital requirement of W3tn).

Profitability of securities industry over 2000~2010

Need to secure new revenue sourcesNeed to secure new revenue sources

Despite efforts for revenue diversification, brokerage portion still highDifficult to improve profitability of PI and WM

Profitability worsening from heated competition

Profitability has weakened over past five yearsProfitability has weakened over past five years

ROE: FY05 20% FY10 7.5%

Shareholders equity 97% , NP 21%

Decreased brokerage commissionDecreased brokerage commission

Daily average trading value: W5.6tn (FY05) W7.9tn (FY10)

Commission continues to fall due to intensifying competition (16bp 11bp)

Falling contribut ion of brokerage units; revenue diversification effortsFalling contribution of brokerage units; revenue diversification efforts

Brokerage po rtion from 71.4% in FY05 to 37.9% in FY10Net interest income increase from rise in brokers loans

Slight increase in contribution of IB and WM

Source: Woori I&S Research Center


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13


2. Hedge fund launch to boost income over mid- to long term

Hedge fund launch

scheduled for Dec

2011

Following the revision of Capital Market Act on Sep 27, the domestic launch of hedge funds

is slated for Dec 2011. The introduction these funds should allow Koreas securities firms to

diversify their business scope beyond existing brokerage services.As hedge funds seek returns regardless of market conditions, a wide range of management

strategies are possible. We believe hedge funds various investment strategies will contribute

to the growth of Koreas capital market both by offering a broader array of investment

opportunities and by injecting greater liquidity. However, in order not to repeat the mistakes

of US hedge funds (remembering the collapse of prime broker Lehman Brothers and the

subsequent global financial crisis), the government will place limits on Koreas new hedge

fund market, including both a leverage ceiling (up to 400%) and the compulsory reporting of

transaction records.

Hedge fund related business


Asset mgtcompanies

Invest (deposit)

Investor

Securities firms

Hedge fund

operation

Order assetmanagement

Prime brokerage

service

Stock lendingStock lending

Brokers loanBrokers loan

Trade executionTrade execution


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14


Rapid growth of

hedge fund unlikely

in initial stages

We positively view the upcoming introduction of hedge funds, believing the launch will lead

to growth for Koreas capital market over the mid- to long term. However, as the fledgling

hedge fund market will need some time to gain growth momentum, the positive impact of this

new business on sector players will likely be limited over the short term.

The fledgling hedge fund market is unlikely to see strong expansion during its earlydevelopment phase as several obstacles will need to be overcome the following investor

concerns: 1) the lofty minimum investment ceiling (W500mn); 2) the lack of an established

track record; and 3) the typically conservative stance of pension funds. Meanwhile, we

consider the risks from the suppliers perspective as being a lack of skilled, experienced

professionals and the governments restrictions (including a leverage ceiling) on possible

asset management strategies.

1) High entry barrier

for investors

Hedge fund investors will likely largely be divided into: 1) retail investors; and 2)

institutional investors (including pension funds). Of note, the hedge fund market has been

expanding rapidly and globally since the 1990s. In the initial launch stages of the industry,

retail investors represented around 60% of clients; however, the retail investor portion has

now dropped to the 20%-range in the wake of an influx of institutional investors.

Noting the lofty minimum investment ceiling (W500mn), we believe the Korean hedge fund

market will be driven by institutional investors rather than retail investors

We assume that retail investors capable of investing W500mn in hedge funds will possess

financial assets worth at least W2.5-3.0bn. Of note, as of end-2010, the segment of the

Korean population possessing financial assets of over W1.0bn had reached 130,000 (with per

capita financial assets within this segment standing at W2.2bn). Drawing attention to a survey

on wealth management tools showed investment in financial assets ranking second (following

property) among preferred vehicles, we expect capital inflow into financial products to

increase over the mid- to long term. Nonetheless, over the near term, retail investors are

unlikely to switch to risky hedge funds with no proven track record when there are alternative

high yield investment tools available, including wrap accounts, ELSs, and ELWs.

Number of people with financial assets over W1bn and totalassets

Most preferred investment tool among upper-tier investors(financial assets of over W1.0bn)

40

60

80

100

120

140

'06 '07 '08 '09 '10

100

150

200

250

300Financial a sset of the wealthy (RHS)

No. of wealthy in Korea (L HS)

('000 persons) (Wtn)

0

20

40

60

80

100

Inheritance Wage Business Financial

investment

Property

investment

1st choice

1st+2nd+3rd choices

(%)

Note: Wealthy refers to individuals with financial assets of more than W1bnSource: KB Research Institute

Note: 1+2+3 = respondents allowed to pick three preferred methodsSource: KB Research Institute


15/46

15


2) Lack of track

record

In selecting financial assets, safety-oriented investors tend to prefer deposits in order to retain

assets, while aggressive investors tend to seek profitability via stocks and mutual funds. In

general, a solid past performance record is required to attract customers. Considering the

widely held belief that hedge funds are a high risk/high return form of investment vehicle,

capital inflow into the fledgling domestic hedge fund market is unlikely over the short term assuch a track record has yet to be established.

Looking at the growth pattern of global hedge funds, the market expanded rapidly over the

five-to-ten-year period following the launch thanks to a cumulative track record. In keeping,

we believe that any meaningful capital inflow into hedge funds will become possible only

once a sound performance track record is established.

3) Pension funds tend

to adopt conservative

stance

The growth of the domestic hedge fund market will likely be driven by the inflow of pension

funds. The National Pension Service (NPS) has said that it will diversify the distribution of its

investments by increasing the alternative investment portion from 6.4% in 2010 to over 10%

by 2016. Given the current low-interest rate environment, hedge funds should present an

attractive alternative investment down the road. However, looking at the short term, we point

out that Koreas pension funds face stricter investment restrictions than those placed on mostoverseas pension funds. Given such, the chances of large-scale capital inflow into hedge

funds with no proven track record would appear unlikely during the initial stages of the

domestic launch of these investment vehicles.

Global hedge funds: Growth limited in initi al stages NPS to increase alternative investment portion

0

500

1,000

1,500

2,000

2,500

'91 '94 '97 '00 '03 '06 '09

(US$bn)

0

5

10

15

20

25

30

35

'06 '07 '08 '09 '10 '12F '16F

Stock

Alternative investment

(%)

Source: Hennesee Group Source: NPS


16/46

16


4) At present,

fledgling hedge fund

services lack

sufficient number of

experiencedprofessionals

Since their introduction in 2005, private equity funds (PEF) have been unable to achieve

significant grow in Korea due to an insufficient number of professionals (2005: W81tn

2010: W11.8tn). Of note, the key elements for hedge fund management are known as the

4Ps: People, Process, Performance, and Partnershipin particular, people

(professionals) are viewed as representing the most important factor in facilitating the growthof hedge funds.

In order for domestic securities firms to efficiently provide PBS, professional-level research,

transaction, and consulting services will all need to be firmly in place. At present, however,

Korea lacks a sufficient number of financial experts specializing in economy, finance,

accounting, tax, and law; moreover, there exist very few domestic hedge fund accounting &

administration companies.

5) Government

regulations to restrict

hedge funds asset

management

strategies

Upon the scheduled introduction of hedge funds in December, the equity long-short strategy

is highly likely to be adopted as the key approach for the funds. The fact that this strategy is

based on stock lending is viewed as presenting a difficulty as the domestic stock lending

market is very small compared to that of developed nations (comparison of stock lending and

borrowing ratioKorea: 2% vs US: 9.9%; UK: 4.0%; and Japan 9.7%) due to: 1) the typicallong-only strategy of existing growth-type funds; 2) unfavorable borrowing conditions

(commission rate of 3~4% for stock lending and short selling); and 3) strict government

regulations (legally bans on naked short selling and short selling of financial stocks).

Meanwhile, as naked short selling is banned, stock lending requires accompaniment. In

Korea, the roles of lenders-borrowers-brokers are clearly defined given that there is a limited

pool of stock lenders (pension funds, mutual funds, and individual stocks); therefore, the

domestic stock lending market is not as developed as that in most other major economies. Of

note, the ban on short selling has recently been lifted (excluding financial stocks); however, if

the market environment were to deteriorate, the possibility that the government would again

ban short selling cannot be ruled out. Accordingly, in order for hedge funds to adopt effective

asset management strategies, we believe a need exists to facilitate stock lending procedures.

Korea lacks a sufficient number of financial experts andmanagers

Global fund accounting & administrationcompanies

(Unit: Wbn)

CompanySize of hedge funds under

management

Citico Fund Services 482

Citi 228

HSBC Securities Services 217

Goldman Sachs Administration Services 212

The bank of New York Mellon 150

CACEIS Investor Services 137

SS&C Fund Services 115UBS Global Asset Management Fund Services 83

GlobeOp Financial Services 78

71.2

37.0 30.8

86.7

16.4

43.8 51.4

8.912.4 19.2 17.84.4

0%

20%

40%

60%

80%

100%

UK Hong Kong Singapore Korea

Suppor ting sta ff Experts Managers

PFPC Alternative Investment Group 72

Source: Ministry of Strategy and Finance Source: Hedge Fund Administrator Survey, IFSL


17/46

17


Stock lending amount

In 1H11, balance of stock lendingrose to level seen at end-2007

(W24.7tn); however, slight declineseen over September-October due

to short selling ban (now lifted)

200

250

300

350

400

450

500

550

600

' 08 .1 0 ' 09 .1 ' 09 .4 ' 09 .7 ' 09 .1 0 ' 10 .1 ' 10 .4 ' 10 .7 ' 10 .1 0 ' 11 .1 ' 11 .4 ' 11 .7 ' 11 .1 0

5

10

15

20

25

30Balance ( RHS)

Number of outstandin g shares (L HS)

(mn) (Wtn)

Source: Dataguide Pro, media reports, Woori I&S Research Center

Hedge fund management st rategy

AlternativeInvestment

Hedge Funds

Event Driven

Relative Value

Long/Short EquityLong/Short EquityOpportunistic



18/46

18


Initial hedge fund

market size

estimated at W30tn

(two years after the

introduction ofKorean-type hedge

fund)

At this point in time, it is hard to forecast the size of the hedge fund market as there is no

established track record. Assuming that 10% of capital flows out (within two years of the

introduction of Korean-type hedge funds) of similar-type products (eg, discretionary wrap

accounts, private-placement funds, discretionary and advisory-type investment accounts), and

if combining that amount with the initial asset size of hedge fund managers (W30bn*15managers), we expect the hedge fund market to be worth W30tn by 2014.

If assuming that the sales trend of domestic hedge fund managers is similar to that of foreign

fund managers in Korea (ie, more than triple-digit growth in two years), we expect the

domestic hedge fund market to grow to W54.2tn by 2015 and to W97.2tn by 2016.

Initial hedge fund market size estimated at W30tn (two years after introduction) (Unit: Wbn)

Category Amount Remarks

Seed money of hedge fund companies (1) 450Financial authorities sent inquiries on seed money provision to 15 companies planninghedge fund management

Hyundai Securities decided to invest W30bn~50bn

Discretionary wrap account + PEF + investmentadvisory and discretionary investment (2) 298,421 - Wrap account, investment advisory and discretionary investment as of end-Aug 2011- PEF as of end-Oct 2011

(2) * 10% (3) 29,842 Assuming capital flow of 10% within two years of introduction

Koreas initi al hedge fund size (1)+(3) 30,292

Note: Discretionary wrap account and PEF based on net assets; investment advisory and discretionary investment based on contract assetsSource: Media reports, KOFIA

Koreas hedge fund market size still small (roughlyW1tn~3tn)

Hedge fund market to amount to W30tn within two years ofintroduction

2.5

3.2

1.5

1.01.3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

'06 '07 '08 '09 '10

(Wtn)

30.3

54.3

97.2

174.2

0

50

100

150

200

'14F '15F '16F '17F

(Wtn)

Assuming CAGR of 79%

Source: KITMC Note: Applied initial sales growth of overseas funds in the domestic marketSource: Woori I&S Research Center


19/46

19


New revenue sources

from introduction of

Korean-type hedge

fund: PBS and direct

management services

Upon the introduction of hedge funds, the key sources of revenue for securities firms will

likely be generated from PBS and the direct management of hedge funds. Given that domestic

prime brokers are banned from engaging in hedge fund management, hedge funds are likely

to be managed by spinning off a subsidiary or a separate division. Securities firms which meet

the minimum capital requirement (more than W1tn) will be allowed to directly manage hedgefunds; however, when considering the conservative nature of proprietary trading in Korea, we

expect only a small number of securities firms to engage in the management of hedge funds

during the initial market development phase.

Prime brokers handle financing (eg, stock lending & borrowing, credit lines), custody (eg,

retaining and managing hedge fund assets, clearing & settlement (eg, transaction settlements,

liquidation), and reporting (eg, providing reports to fund investors)of note, the key source

of revenue for prime brokers comes from financing.

Contribution of PBS

to securities

industrys annual

income to amount toroughly W200bn by

2014

PBS sales growth and hedge fund market growth tend to go hand in hand. Accordingly, upon

the introduction of a hedge fund, this correlation enables securities firms to generate new

revenue through the offering PBS. As there is no matching data available in Korea, we have

referenced the US hedge fund market in order to estimate the potential size of new revenuesthat Korean securities firms will be likely to generate as the market develops.

According to the TABB Group, the US hedge fund market reached US$1.5tn in 2010, with

PBS income representing US$10bn or 0.7% of the market. Assuming that Koreas PBS

income also reaches the 0.7%-level of the hedge fund market, we estimate the income

contribution of domestic PBS will reach W200bn pa within two years following the

introduction of hedge funds.

Income contribution

to hinge on

government

regulations and

availability of skilled

professionals

Assuming the market shares of the five companies registered to offer PBS (Daewoo

Securities, Samsung Securities, Woori I&S, Hyundai Securities, and Korea Investment

Securities) remains at the same levels, we calculate the sales contribution of each company

would reach around W40.0bn in the initial stages of the domestic introduction of hedge funds.

Nonetheless, actual market size may turn out smaller than estimated due to negatives such as

regulations and a lack of skilled, experienced professionals.

PBS offered by hedge funds PBS income mostly comes from stock lending

20

25

30

40

40

45

50

55

70

0 20 40 60 80

Credit lines

Capital introduction

Risk management

Custody services

Fund a dministration

Clearnan ce and settlement

Trade ex ecution

Cash lending

Securities lendin g

(%

Credit lines

Securities

lending

Trade

execution

and WM

Attracting

investorsCommission

income

Note: % refers to portion of prime brokers offering each serviceSource: IFSL Research

Source: Bernstein Research


20/46

20


Koreas hedge funds

Criteria Remarks

Asset mgt companiesCombined deposits of over W10tn, including private funds, public

funds, and discretionary accountsSecurities firms Shareholders equity of over W1tn

Running both hedge fundbusiness and PBS not allowed

Investment advisory Discretionary contracts of over W500bn

Source: Press reports, Woori I&S Research Center

Operating income from PBS (Units: Wbn)

2014F 2015F 2016F 2017F

Koreas hedge fund market size 30,292.1 54,266.9 97,216.6 174,158.9

PBS income (A) 201.9 361.8 648.1 1,161.1

Operating income by company (A/f ive companies) 40.4 72.4 129.6 232.2

Note: Operating income of each company estimated assuming market share remains the same for Daewoo Securities, Samsung

Securities, Woori I&S, Korea Investment Securities, and Hyundai SecuritiesSource: Woori I&S Research Center


21/46

21


3. Dilution of ROE from rights offering > revenue from new resources

Securities sector to

turn around in 2012

We believe the stock market to be strong in 1H12, but weaken in 2H12. Expecting an easing

of European fiscal crisis-related fears, we estimate the Kospi will rise to 2,300p in 1H11.

Upon the anticipated stabilization of the eurozone sovereign debt situation, preference forrisky assets should increase, boosting the Kospi and thus boding for the securities industry.

Despite customer deposit usage fee hikes and pressure for commission cuts, our overall view

toward the industry environment is positive, citing: 1) anticipation of a more favorable

industry environment in the long run following the introduction of hedge funds; and 2) likely

greater investment opportunities stemming from the scheduled easing of NCR regulations.

Combined net profit

of four securities

firms under our

coverage to grow

21.5% y-y in FY12

We believe net profit in the sector will fall 6.2% y-y in FY11 due to: 1) likely losses at trading

units stemming from higher market volatility amid external uncertainties (including the

European fiscal crisis); 2) likely lower WM commission income due to decreased wrap

account balances; and 3) one-off expenses at some securities firms (eg, Daewoo Securities

loss related to China Gaoxian Fibre Fabric Holdings).

However, net profit should climb 21.5% y-y in FY12 for the four companies under our

coverage. Nonetheless, considering rights offering to meet shareholders equity requirement

for entry into PBS, the average ROE for these four players is unlikely to show meaningful

improvement in FY12.

As such, we expect the single-digit ROE growth witnessed since 2007 to continue, believing

significant improvement is unlikely to be experienced in FY12 (FY10 10.4% FY11E 8.9%

FY12F 9.4%)

Combined net profit of companies under our coverage and y-y growth

Combined FY12 net profit of fourcompanies under our coverage to

grow 21.5% y-y

0

200

400

600

800

1,000

1,200

FY07 FY08 FY09 FY10 FY11E FY12F

-50

-40

-30

-20

-10

0

10

20

30

40

50Combined NP (LHS)

y-y (RHS)

(Wbn) (%)

Note: Samsung Securities, Daewoo Securities, Mirae Asset Securities and Kiwoom SecuritiesSource: Company data, Woori I&S Research Center


22/46

22


Regulations on

industry aimed at :

1) protection of

investors; and

2) improvingindustry

environment

To date, domestic regulations on the securities industry have focused on protecting investors,

and have thus tended to be unfavorable for securities firms.

Here, we look at two sets of major government policies that will likely affect the profitability

of securities firms in 2012: 1) measures aimed at protecting investors and easing their burden;

and 2) the launch of PBS and hedge funds. Unlike the government regulatory efforts, webelieve the governments decision to allow the introduction of hedge funds will prove to be

positive for securities firms, serving as a new source of revenue going forward. In addition,

the easing of NCR criteria to 250% will likely be positive for the industry over the mid- to

long term.

Investor protection

measures to impact

negatively over near

term, but improving

business

environment to

positively impactover mid- to long

term

As stated, it is our view that both the launch of hedge funds and the easing of NCR criteria

will provide attractive investment opportunities for securities firms down the road. However,

it is also our view such favorable measures are unlikely to boost income to a significant

degree over the near term.

Turning to the investor protection measures unveiled in Sep 2011 (details to be finalized by

end-2011), it is our opinion that these regulations will hurt sector earnings over the near term.

Weighing all of the above, we believe thatover the short termthe pressure on income

from the new investor protection measures will exceed the income growth from new hedge

fund-related business ventures.

Planned launch of hedge funds: Investor protection measures vs PBS

2006 2007 2008 2009 2010

Reduce margin buyingand promote margin

transactions

Permit new securities bizPermit securities biz tooperate futures biz

Control PF risk

2011

Daily call money100% of

shareholdersequity

Call money reducedto 25% of

shareholdersequity

Lower trading feesand interest rate on

overdue loans

Minimum marginrate for margin

transactions(40%)

Minimummaintenance

requirement rateof collateral

(140%)

Settlement servic e

Improve policies onELS issuance and

operations

Allow investors toshift fund sellers

Ceiling of fund fees

Improve wrap account

Improve ELWmarket

2012E

PBS likely inline with

hedge funds

Protectinvestors and

lessenfinancialburden

(raising rateson customer

deposit)



23/46

23


Government

measures to protect

investors and lessen

their financial

burden to undermineearnings

In order to protect investors and lessen their financial burdens, securities firms have expressed

their willingness to lower commissions and interest rates on overdue brokers loans. Large

securities firms are expected both to temporarily cut the commissions on stocks, futures, and

options trading and by end-2011 and to lower interest rates on overdue loans by 2~6%p.

We believe these efforts will have no significant impact on securities firms earnings. Cuts inbrokerage commissions (0.4623bp for Daewoo, Samsung, and Woori; 0.54bp for Hana

Daetoo) should reduce FY2010 operating income by 0.3% for Daewoo, 0.5% for Samsung,

0.3% for Woori, and 1.0% for Mirae. In addition, as customers with overdue brokers loans

account for only 2% of the total number of customers, lower interest rates on overdue loans

will likley have only a marginal impact on income.

Summary of governments investor protection measures

Remarks

Investors deposit usage fees Securities firms will need to pay a reasonable deposit usage fee to investors in

reflection of expected rate of returns on deposits

Advisory-type wrap account fees

Upfront fees (sales fee) represent high portion of discretionary investmentmanagement fees Fee system revision needed

Interest rate on delinquent brokersloan

In consideration of low credit risk, lower interest rate on delinquent brokers loansFund sales commission charge

For long-term investors (4yrs or longer), avg sales commission charge to belowered to 1.0%

Fees comparison and disclosure

Recognition that disclosure of brokerage commissions and brokers loan ratecomparison has been insufficient

As brokerage commission system becomes simplified, it should become easier tocompare commissions

Need to strengthen disclosure of consulting service fees Need to disclose advisory-type wrap account fee system (to allow investors to

make comparisons) Expects indirect fee cuts to be facilitated via comparison disclosure

FX marginFees

Need to disclose FX margin fees Such disclosure to lead indirectly to fee cuts

Source: FSS

Impact of cuts in brokerage commissions (Unit: Wbn)

Samsung Daewoo Woori Mirae Industry

Operating income (FY2010) 2,501.6 3,524.4 3,779.2 1,423.8 47,407.1

Likely decrease in operating incomefollowing commission cuts

11.6 10.6 10.7 14.7 161.7

Likely impact (%) on operatingincome

-0.5% -0.3% -0.3% -1.0% -0.3%

Source: FSS, Woori I&S Research Center


24/46

24


Rise in customer

deposit usage fee to

undermine

profitability

However, a rise in customer deposit usage fees would likely have a substantial impact on

income. Currently, securities firms receive a 2.32~2.9% yield on customer deposits from

Korea Securities Finance Corp, while charging a 0~2.65% usage fee for investors. As income

from customer deposit usage should account for 7~24% of operating profit, any rise in the

usage fees will likely negatively impact earnings of securities firms. We estimate that aconservative 1%p rise in customer deposit usage fees would reduce operating profit 11.4% for

Kiwoom (largest impact) and 3.6% for Mirae (smallest impact).

Likely Impact of 1%p increase in customer deposit usage fees on operating profit (Units: Wbn)

Samsung Daewoo Woori Mirae Kiwoom

Reserve for claims of customer deposit (A) 2,405 1,870 875 658 1,560

Yield on A (B/A) 2.5% 3.5% 3.2% 2.9% 2.3%

Usage fee (C/A) 0.6% 1.3% 0.8% 0.9% 0.2%

Valuation gains on reserve for claims of customer deposit (B) 59.5 65.3 28.4 19.4 36.4

Customer deposit usage fees (C) 15.1 24.8 6.8 6.0 3.8

Customer deposit related gains (B-C) 44.4 40.5 21.6 13.4 32.6Operating profit 356.4 332.6 165.0 182.1 137.2

Portion (%) 12.5% 12.2% 13.1% 7.4% 23.8%

Assuming 1%p increase in usage fee

Operating profit decrease 24.0 18.7 8.8 6.6 15.6

Impact on operating profit -6.7% -5.6% -5.3% -3.6% -11.4%

Note: FY10 cumulative (K-GAAP non-consolidated basis)

Source: Company data, Woori I&S Research Center


25/46

25


Resumed pressure to

lower advisory wrap

account fees

In 2010, wrap accounts increased sharply in line with the bullish stock market, driving up

asset management-related commission income. However, the securities sector index fell in

fear of lower profitability following new regulations on advisory wrap account fees.

Recently, the government took issue over the high portion of total advisory wrap account fees

represented by advanced fees (48.7%), indicating it might institute another fee cut.

For now, Korean Investment Securities and Hana Daetoo have said that they would cut their

fees from an average of 2.6~2.8% to 2.4% and from an average 2.5% to 2.3%, respectively

other securities firms are considering similar moves.

WM fees unlikely to

improve sharply

In the wake of external uncertainties, the net asset value of advisory wrap accounts has fallen

sharply. Until these uncertainties fade, we do not believe that wrap accounts will yet fully

rebound to the pre-financial crisis level (W8~9tn-level). Moreover, given possible cuts in fees

on advisory wrap accounts, WM commission income is unlikely to improve sharply over the

near term.

Regulation on advisory wrap account fees underminingsecurities sector index

WM commission income unlikely to improve sharply y-y

0

2,000

4,000

6,000

8,000

10,000

'10 .4 ' 10 .7 ' 10 .10 '11 .1 ' 11 .4 ' 11 .7 ' 11 .10

1,500

1,700

1,900

2,100

2,300

2,500

2,700

2,900

3,100

3,300

Advisory Wrap (LHS)

Sector ind ex (RHS)

(P)(Wbn)

0

100

200

300

400

500

FY08 FY09 FY10 FY11E FY12F

(Wbn) To remain flat

Source: Kofia, Dataguide Pro Note: Based on sum of four securities firms in Woori coverage (Samsung, Daewoo,Mirae, Kiwoom); Asset management fees are the sum of fees on BCs, wrapaccounts, and trust accounts

Source: Company data, Woori I&S Research Center


26/46

26


Conclusion:

Earnings downside

to outweigh gains

from hedge funds

over short run

Given an anticipated stock market rebound following the expected fading of the European

fiscal crisis and likely improved net trading value amid the low interest-rate environment, we

foresee industry conditions improving y-y in 2012. However, we view it as unlikely that

hedge funds will significantly contribute to earnings over the short run, believing it will be

difficult to raise ROE to a degree sufficient to offset EPS dilution caused by rights offeringsin the near term. Moreover, we note that some signs exist that the government may tighten

regulations on commissions. Weighing all of these factors, we believe that sector ROE will

require more time to see a meaningfully increase.

Valuation table (Units: Wbn, won, %, x)

Samsung Daewoo Mirae Kiwoom Avg

Rating Buy Hold Buy Buy Neutral

Target price 65,000 12,000 43,000 75,000

Share price (11/18) 50,000 10,100 32,100 55,500Upside 30.0 18.8 34.0 35.1

Net profit FY10 238.3 256.2 142.1 111.5FY11E 275.0 181.9 137.5 107.1

FY12F 293.1 271.0 166.0 122.3

Shareholders equity FY10 2,798.7 2,863.3 1,889.3 690.4

FY11E 3,426.8 3,950.7 1,984.9 787.0

FY12F 3,638.1 4,154.6 2,119.4 893.8

ROA FY10 1.8 1.4 1.6 3.8 2.2

FY11E 1.9 0.9 1.1 3.0 1.7 FY12F 1.8 1.2 1.2 3.2 1.8ROE FY10 8.8 9.0 7.8 16.0 10.4

FY11E 8.8 5.3 7.1 14.5 8.9

FY12F 8.3 6.7 8.1 14.5 9.4

EPS FY10 3,686 1,365 3,423 5,047

FY11E 3,956 717 3,282 4,846FY12F 3,945 842 3,962 5,532

P/E FY10 21.9 16.4 13.7 16.0 17.0

FY11E 12.6 14.1 9.8 11.5 12.0

FY12F 12.7 12.0 8.1 10.0 10.7

BPS FY10 43,286 14,318 45,507 29,731

FY11E 46,118 11,823 47,380 35,613

FY12F 48,962 12,433 50,593 40,445

P/B FY10 1.9 1.6 1.0 2.7 1.8

FY11E 1.1 0.9 0.7 1.6 1.0

FY12F 1.0 0.8 0.6 1.4 1.0

DPS (FY10) 1,250 400 750 800

Dividend yield (FY10) 1.6 1.8 1.6 1.0 1.5

Source: Company data, Woori I&S Research Center estimates


27/46

27


IV. Share price momentum positive over longer term; but soft in

near term

1. Valuations nearing histor ic low; unlikely to rise over near term

Following stagnate

earnings over past

three years,

valuations continue

to fall

Currently, the securities sector is trading at a P/B of 0.74x, far lower than the P/Bs following

the 2008 financial crisis or during the period of sector losses in 2005of note, the post-2005

P/B average is 1.15x.

While the Kospi has bounced back to the pre-2008 crisis level, the securities sector index has

yet to make significant progress due to stiff competition. If sector players are to regain the

premiums enjoyed in the past, we believe earnings will have to improve substantially.

In our view, despite rising trading volume, securities firms have failed to improve their

profitability due to competition over lower commissions. Moreover, we note that the overall

ROE of domestic sector playerswhich are highly dependent on brokerage commissions

has continued to fall.

Sector trailing Kospi due to stagnant ROE: Price trend Sector trailing Kospi due to stagnant ROE: Premium trend

-10

-50

5

10

15

20

25

30

35

'05.3 '06.6 '07.9 '08.12 '10.3 '11.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0ROE (LHS)

P/B (RHS)

(%) (x)

0.0

0.5

1.0

1.5

2.0

2.5

'05.1 '06.1 '07.1 '08.1 '09.1 '10.1 '11.1

(x)

Post-2005

average P/B of

1.1x

Current P/B of0.74x

Note: Based on overall sector

Source: FSS

Source: FnGuide, Woori I&S Research Center


28/46

28


Explosive trading

volume growth

unlikely

In the past, the securities sector index has largely outperformed the Kospi. Prominent

examples include 1999 (when stock trading volume grew explosively), 2005 (when securities

firms earnings improved sharply after having turned to profit), and 2007 (when expectations

for enactment of capital market consolidation act were riding high).

For the time being, with no new revenue sources currently in place and in order to make upfor deteriorating margins caused by intensifying competition, brokerage income-dependent

securities players would likely need to see a large-scale increase in stock trading volume (an

event which we view as being unlikely) in order to experience a significant expansion in their

brokerage income, net interest income, and net trading income figures.

However, in our view, stock trading is unlikely to significantly expand in the near future,

noting thatwhile we expect the risks to ease next yearit will take at least several years

before a fundamental resolution for the European fiscal crisis to be found, and believing that

double-dip fears over US economy will continue to linger. Furthermore, given our earlier-

described belief that expected positive structural changes fro the sector following the

scheduled introduction of hedge funds are unlikely to lead to tangible short-term earnings

generation for securities firms, we hold the opinion that a steady share price rise for securities

firms is unlikely in the short term.

Securities sectors past outperformance to the market

0

500

1,000

1,500

2,000

2,500

'98.2 '99.10 '01.6 '03.2 '04.10 '06.6 '08.2 '09.10 '11.6

0

1,000

2,000

3,000

4,000

5,000

Kospi index (LHS)

Securities sector index (RHS)

(P) (P)

Trading volu me

expansion Strong earnings

improvement

Expectations for capital

market consolidation act

Note: Based on 12M Forward P/BSource: Dataguide Pro, Woori I&S Research Center

Explosive trading volume expansion in 1999 Securities improv ing earnings (TTP) in 2005

0

2

4

6

8

10

12

14

'98.2 '00.8 '03.2 '05.8 '08.2 '10.8

0

1,000

2,000

3,000

4,000

5,000Trading volume(LHS)

Securities index(RHS)(Wtn)

Explosive trading

volume expansion

(P)

-600

-300

0

300

600

900

1,200

1,500

'0 3.1 2 '0 5.3 '06 .6 '07 .9 '0 8.1 2 '1 0.3 ' 11 .6

-10

-5

0

5

10

15

20

25

30

35NP (LHS)

ROE (RHS)

(Wbn) (%)Sharp earningsimprovement

Source: Dataguide pro Source: KOSCOM


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2. Investment strategy: Suggest range-bound trading based on short-term

momentum; over long term, suggest buying shares below P/B of 0.7x

Some government

policies to befavorable for

securities firms

Despite the earlier-discussed likely negative short-term impact on financial sector players of

most of the governments proposed new regulatory measures, we recognize that some ofKorean governments financial policies should be favorable for the securities sector. While it

is true that securities firms will not be entirely spared from regulatory risks (including

pressure to lower commissions), the 2012 regulatory environment is expected to be favorable

for the securities sector in light of the scheduled lowering of the NCR requirement to 250%,

the introduction of ATS, and the approval of hedge funds.

However, given thatdespite a rise in the Kospisecurities sector valuations have continued

to decline due to high market doubts over the likelihood of new revenue sources, we believe

that market premiums for securities sector shares will only be seen once the above-listed

positives actually translate into improved earnings.

Recommend taking

advantage of short-

term momentum bybuying on dips

As discussed earlier, the overall market environment has been turning in a favorable direction

for the securities sector in light of: 1) likely increased financial assets stemming as baby

boomers enter retirement age; 2) the launch of PBS upon the scheduled introduction of hedgefunds; and 3) expected ample market liquidity. However, looking at 2012, we believe these

positive factors are unlikely to resolve the securities sectors fundamental problem of low

operating margins.

We note thatdepending on developments related to the European fiscal crisis and

introduction of hedge fundssecurities shares are expected to fluctuate wildly. Thus, over the

short term we recommend a strategy which takes advantage of short-term momentum by

buying on dips. Given this expected environment, it remains to be seen whether the securities

sector will be able to show a steady rise similar to that seen in 2007.

Additional downside

risk limited, at P/B of

0.7x or below level

Following the financial crisis, the banking and insurance sectors rebounded in line with the

market rebound. Currently, despite the shaky stock market amid the European fiscal crisis,

these sectors receive a higher valuation than that which was seen during the financial crisis.

However, given that securities shares are now trading at a valuation level similar to that seenover 2005~2006, when securities firms were in the red (P/B of 0.6~0.8x in 2005), we view

sector shares as very attractive in terms of valuation. Furthermore, we note that securities

have also strengthened their shareholders equity sharply, believing the chances of securities

again posting losses are slim within the foreseeable future. Thus, considering likely overall

structural changes over the mid- to long term, we believe downside risk is limited when

securities are trading at a P/B of 0.7x or below.

Financial sector P/Bs Securities shareholders equity has risen steadily

0.0

0.5

1.0

1.5

2.0

2.5

Ba nkin g Se cu ritie s In su ra nce Cre di t ca rd

'08'09

'10

'11.10

(x )

20.1

26.828.9

32.434.7

0

5

10

15

20

25

30

3540

FY06 FY07 FY08 FY09 FY10

(Wtn)

Note: For insurance sector, 2008 figure based on average of top-five non-lifeinsurance companies as life insurers were not listed in 2008Source: Dataguide Pro

Note: Sum of domestic securities shareholders equitySource: KOSCOM


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30


Top pick: Kiwoom

Securities

Samsung Securities

also deserves

attention

We recommend Kiwoom Securities as a top pick for the securities sector, highlighting the

high possibility that the company will enjoy a valuation premium rise in line with improving

market conditions. In addition, we believe Samsung Securities deserves attention.

Based on its attractive 1.5bp commission rate, Kiwoom Securities has established a solid

brand image as a leader in online trading. Of note, in early-2011 Hanwha Securities startedoffering a lower commission rate than that of Kiwoom; however, Kiwooms market share

actually expanded further following this challengewe believe that this occurence well

illustrates the fact that Kiwoom has been expanding its loyal retail client base. Considering

the stable earnings generation from its brokerage unit (more than 1,000 new accounts are

being opened on a daily basis), the company deserves a premium to the market in our view.

Also, if Kiwoom were to succeed in acquiring a savings bank in the future (which it has

attempted to do in the past), such an acquisition could be expected to expand Kiwooms

lending capacity (brokers loans), thus leading to a likely share price re-rating.

Also warranting attention in our view is Samsung Securities. As the largest wealth

management securities company in Korea, Samsung Securities should enjoy a rising premium

in line with a likely increased portion of individual financial assets. Moreover, the company is

expected to be the frontrunner in hedge fund product sales.

Kiwoom Securities brokerage market share on steadily rise

0

2

46

8

10

12

14

16

18

'08.1 '08.5 '08.9 '09.1 '09.5 '09.9 '10.1 '10.5 '10.9 '11.1 '11.5 '11.9

Kiwoom.com Mira e Asse t

Samsung Daewoo

Woori

(%)

Note: Excluding ELWsSource: Industry data


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31


Samsung Securities: P/B band Daewoo Securities: P/B band

0

20,000

40,000

60,000

80,000

100,000

120,000

'06 '07 '08 '09 '10 '11 '12

Share price 3.2x2.4x 1.8x1.3x .8x

(won)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

'06 '07 '08 '09 '10 '11 '12


(won)

Source: Dataguide pro, Woori I&S Research Center Source: Dataguide pro, Woori I&S Research Center

Mirae Asset Securities: P/B band Kiwoom Securities: P/B band

0

40,000

80,000

120,000

160,000

200,000

'06 '07 '08 '09 '10 '11 '12


(won)

0

20,000

40,000

60,000

80,000

100,000

'06 '07 '08 '09 '10 '11 '12


(won)

Source: Dataguide pro, Woori I&S Research Center Source: Dataguide pro, Woori I&S Research Center


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www.wooriwm.com

Samsung Securities(016360.KS) Company AnalysisNov 25, 2011

Samsung Securities to maintain its lead

Initiate coverage at Buy and a target price of W65,000

We initiate coverage on Samsung Securities with a Buy recommendation and a

target price of W65,000.

Our target price is the arithmetic mean of its theoretical P/B-based fair value of

W54,000 and historical P/B-based fair value of W75,875 (target multiple of 1.6x

applied to our FY2011 BPS forecast of W46,118), and offers 30.0% upside.

Superior competitiveness in WM market to strengthen further

As the play is a leader in the WM market, Samsung Securities has lost some of its

premium due to the recent contraction of the wrap account segment. However, the

contraction is mainly a decrease in Samsung Securities NAVdue to volatility in

the marketand both Samsungs HNW client base and competitiveness of its

asset management business remain intact.

For the time being, a rebound in the wrap account market appears unlikely;however, when the wrap account market does recover, Samsung Securities share

premium should rise in line with it. In addition, hedge fund product sales have the

ability to boost Samsungs growth potential.

Capital expansion at minimum levels; smaller dilution burden than peers

ROE dilution effects caused by the rights offering (to raise capital for PBS) should

be smaller for Samsung Securities than for other securities firms as Samsung has

reduced the rights offering amount to a bare minimum. Considering that tangible

earnings generated by the hedge funds are unlikely to be generated in the short

term, we are encouraged by the likely limited EPS dilution.

In line with the rising portion of financial assets in individual asset portfolios,

Samsung Securities WM business should enjoy sustained growth momentum

thanks to its competitiveness in product design and sales capability. Currently,

Samsung Securities shares are trading at a FY2011 P/B of 1.1x (as of Nov 18)

versus an average P/B of 1.6x (over the last three years). Considering the above,

we believe Samsungs shares will rebound going forward.

Price Trend

0

50

100

150

200

'10. 11 '11.1 '11. 3 '11.5 '11.7 '11.9 '11.11

Samsung Securities

KOSPI

NOI Chg OP Pre-tax profit NP BPS EPS Chg PER PBR ROE ROAYE-Mar

(Wbn) (%) (Wbn) (Wbn) (Wbn) (won) (won) (%) (x) (x) (%) (%)

2009 866 14.7 316 319 245 40,246 3,799 6.7 16.1 1.5 9.8 2.0

2010 977 12.9 356 338 238 43,286 3,686 -3.0 21.9 1.9 8.8 1.8

2011E 1,058 8.3 356 357 275 46,118 3,956 7.3 12.6 1.1 8.8 1.9

2012F 1,165 10.1 386 387 293 48,962 3,945 -0.3 12.7 1.0 8.3 1.8

2013F 1,296 11.2 427 427 324 52,120 4,357 10.5 11.5 1.0 8.6 1.9Note: FY2009~2010 figures based on K-GAAP; FY2011 and afterwards based on IFRS non-consolidatedSource: Woori I&S Research Center estimates

Buy(Initiate)

Analyst

Dahee Woo822)768-7137, [email protected]

TP W65,000(Initiate)CP(11/11/18) W50,000

Sector Securities

KOSPI 1,839.17KOSDAQ 503.09Market cap (common) US$3,355.84mnOutstanding shares (common) 66.8mn shrs

52W high (11/01/14) W97,100low(11/10/05) W45,450Dividend yield (FY10) 1.6%Foreign ownership 19.5%

Major shareholders

Samsung Life 11.4%Samsung F&M 7.7%

Share performance (%)1M 6M 12M

Absolute -22.0 -38.2 -20.7Relative -20.9 -24.3 -16.1


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Samsung Securit ies www.wooriwm.com

2QFY11 earnings preview and earnings outlook

2QFY11 preview:

Net profit of

W54.3bn due toreduced WM income

Despite difficult market conditions in 2QFY11, Samsung Securities is expected to post

relatively small proprietary trading losses compared to other securities firms. Despite a q-q

rise in average daily trading value (1QFY11 W9.2tn

2QFY11 W9.4tn), its brokeragecommission income was likely flat q-q as online trading accounted for a growing portion of

its total trading value. Meanwhile, the company will likely post an IB commission income of

W8.8bnslightly higher q-q (W7.1bn recorded in 1QFY11).

However, its advisory-type wrap account balance contracted sharply, from W3.4tn in 1QFY11

to W2.4tn in 2QFY11, which led to a W20bn decline in its WM income. We believe Samsung

Securities will post 2QFY11 net profit of W54.3bn.

WM and client-based

strength

Recently, WM capability has become a potential core competitive point at securities

companies. Samsung Securities has excelled in WM business thanks to its superior strength in

attracting clients and selling products.

For the time being, we do not expect the wrap account market to grow strongly given

government regulations impacting advisory-type wrap accounts and intensifying market

competition (triggered by other securities firms cutting their wrap account commissions).

However, considering that the fall in the companys customer deposits (from W114tn at end-

July to W100tn at end-September) is attributable to a fall in NAV and not to customer flight,

the plays shares should trade at a premium (vs peers) when the stock market rebounds.

In addition, Samsung Securities is expected to grow steadily over the longer term as we are of

the opinion the company is capable of introducing a variety of products promptly, in line with

the anticipated growth of the hedge fund market.

Samsung enjoyed highest P/B premium along with explosive growth of wrap accounts

Strong WM capability to drawinvestor attention

0

1,000

2,000

3,000

4,000

5,000

6,000

'10.4 '10.7 '10.10 '11.1 '11.4 '11.7 '11.10

75

85

95

105

115

125Wrap account balan ce (LHS)

Samsung 's pre mium (RHS)

(%)(Wbn)

Note: Premium relative to the KospiSource: Samsung Securities, Dataguide Pro, industry data


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Breakdown of net operating income Samsung has higher number of HNW customers than peers

44 47 40 44 37

3 3 4 5 4

16 15 12 11 18

11 912 12 16

1 11 1

21213 23 17 16

14 12 9 10 7

0%

20 %

40 %

60 %

80 %

100%

FY06 FY07 FY08 FY09 FY10

Net trading incomeNet interest incomeOther commissions

Sales commissions on derivatives-combined securitiesWMIBBrokerage

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Samsung Woori Mirae Daewoo

(No)

Source: Samsung Securities, Woori I&S Research Center Note: HNW customersindividual investors with accounts of W100mn or more

Source: Company data

Samsungs wrap account balance more than double peers Valuation at historic lows

0

50 0

1,000

1,500

2,000

2,500

Samsung Mirae Korea Woori Daewoo

(Wbn)

0

20,000

40,000

60,000

80,000

100,000

120,000

'06 '07 '08 '09 '10 '11 '12


(won)

Note: As of end-Sep 2011Source: Company data

Source: Dataguide Pro, Samsung Securities, Woori I&S Research Center


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INCOME STATEMENT BALA NCE SHEET

(Wbn) 2011/03A 2012/03E 2013/03F 2014/03F (Wbn) 2011/03A 2012/03E 2013/03F 2014/03F

Operating inco me 2,502 2,834 3,105 3,200 Cash and deposits 3,256 3,585 3,773 3,910Net commission income 750 779 833 851 Cash and cash equivalents 225 939 988 1,024

Brokerage 358 392 427 426 Deposits 3,031 2,646 2,785 2,886

IB 34 30 36 42 Securities 7,997 9,417 9,648 9,839Wealth management 180 191 200 213 Trading securities 5,864 6,990 7,139 7,291Others 178 166 170 170 Securities available for sale 1,769 1,999 2,065 2,096

Net interest income 156 165 178 188 Securities using equity method 336 399 400 402Net trading income 3 -10 23 125 Structured securities 28 0 0 0Other income 68 124 130 131 Loans(net of allowance) 1,002 1,141 1,233 1,233Net operating income 977 1,058 1,165 1,296 Tangible Assets 79 81 81 82SG&A expenses 621 702 779 869 Other Assets 786 2,143 2,163 2,202

Salary 330 401 478 568 Total As sets 13,121 16,366 16,898 17,266Others 291 301 301 301 Deposits 2,716 2,902 3,054 3,165

Operating profit 356 356 386 427 Borrowings 6,926 7,512 7,549 7,551Non-operating profit -18 1 1 1 Other liabilities 680 2,526 2,657 2,677

Non-operating income 33 1 1 1 Total liabilit ies 10,322 12,940 13,260 13,393Non-operating expenses 52 1 0 0 Paid-in capital 346 394 394 394

Pre-tax profit 338 357 387 427 Capital surplus 1,145 1,547 1,547 1,547Income tax 100 82 94 103 Retained earnings 1,230 1,391 1,603 1,837

Tax rate (%) 29.5% 22.9% 24.2% 24.2% Capital adjustment + AOCI 78 94 94 94Net profit 238 275 293 324 Total shareho lder s equity 2,799 3,427 3,638 3,873

VALUATION INDEX

(%) 2011/03A 2012/03E 2013/03F 2014/03F 2011/03A 2012/03E 2013/03F 2014/03F

Brokerage 36.7 37.0 36.6 32.9 Investment indicators(x, won)

IB 3.5 2.9 3.1 3.3 BPS 43,286 46,118 48,962 52,120Wealth management 18.4 18.0 17.2 16.4 EPS 3,686 3,956 3,945 4,357Other commission 18.2 15.7 14.6 13.1 DPS(common shrs) 1,250 1,100 1,200 1,200Net interest income 15.9 15.6 15.3 14.5 PBR 1.9 1.1 1.0 1.0Net trading income 0.4 -0.9 2.0 9.6 PER 21.9 12.6 12.7 11.5Others 7.0 11.7 11.2 10.1 Dividend payout ratio 31.0 29.7 30.4 27.5

GROWTH RATE & PROFITABIL ITY Efficiency(%)

2011/03A 2012/03E 2013/03F 2014/03F Of total assets (%)

Growth(YoY,%) Net commission income 5.7 4.8 4.9 4.9Total asset -0.4 24.7 3.3 2.2 Net interest income 1.2 1.0 1.1 1.1Shareholders equity 7.7 22.4 6.2 6.4 Net trading income 0.0 -0.1 0.1 0.7Customers deposits 33.2 6.8 5.3 3.6 Of operating income (%)Net operating income 12.9 8.3 10.1 11.2 Net operating income 39.1 37.3 37.5 40.5Net commission income 18.9 4.0 6.9 2.2 SG&A expenses 24.8 24.8 25.1 27.2SG&A expenses 12.8 1

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