Hanjin Returns to People’s Arms’valuehanjin.com/data/file/eng_03/3537654168_nGrfcXZz_a12... · 2020-01-28 · ‘Hanjin Returns to People’s Arms’ Strictly Private & Confidential

‘Hanjin Returns to People’s Arms’

Strictly Private & Confidential

Korea Corporate Governance

Improvement (KCGI) Fund

January 2019

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VA L U E H A N J I N

D I S C L A I M E R

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2

I A Five-Year Plan to Restore Trust in HanjinI N D E X

II Present Status of Hanjin Group

III Korea Discount and the Way Forward

IV About KCGI

3

1. Proposed Background

A. KCGI Co., Ltd. (hereinafter “KCGI”) established KCGI Private Equity Fund 1 and KCGI Private Equity Fund 1–1. These funds together own 10.81% of

Hanjin Kal Corp., the holding company of Hanjin Group, and 8.03% of Hanjin Inc. The shares are held through special purpose investment companies:

Grace Holdings LLC, NK & Co. Holdings LLC, Tacoma & Co. Holdings LLC and Grace & Grace LLC.

B. KCGI strongly believes that Hanjin Group has the potential to grow into a leading global aviation and logistics group representing Korea. Despite this

potential Hanjin Group companies’ shares are severely undervalued. This stems from poor governance as epitomized by abuse of power, embezzlement,

and other negligent behavior of the controlling shareholder family. The poor governance also leads to irrational subsidies to affiliates, retention of idle

assets, and lax management. This in turn results in excessively high debt ratio.

C. Hanjin Kal is the holding company located at the top of Hanjin Group’s governance structure. It is a major shareholder of key companies including

Korean Air, Jin Air, Hanjin, KAL Hotel Network and Jungseok Enterprise. As Hanjin Kal directly influences the management of Hanjin Group the value of

Hanjin Kal effectively represents the overall enterprise value of Hanjin Group.

D. KCGI proposed measures to 1) improve Hanjin Group’s governance and establish a responsible management system and process, 2) enhance the

enterprise value by liquidating idle properties, and thereby reducing excessive debt and raising the credit rating to the level of global competitors, and 3)

enhance public trust in Hanjin Group and raise the employees’ pride in their Group.

E. However, the two sides failed to reach an agreement due to the passive attitude of Chairman Cho Yang-ho and the management. By publicly proposing

a five-year plan to recover trust in Hanjin Group KCGI would like to seek the support of shareholders and employees of Hanjin Group, including Hanjin

Kal and Hanjin, as well as the people who love and care about Hanjin Group.

4

I. A Five-Year Plan to Restore Trust in Hanjin

2-1. Hanjin Group Crisis from KCGI’s Perspective

- Excessively high debt ratio compared to other global airlines

• The credit rating of Hanjin Group fell drastically from A0 to BBB as it poured trillions of KRW into Hanjin Shipping, a

company that went bankrupt in 2016, and LA Wilshire Grand Hotel. The debt ratio of Korean Air, the flagship

company of the group, surpassed 1,000% in 2016.

• Korean Air’s debt ratio was reduced to 559% in 2017 on the back of capital increase (KRW 453.4 billion), perpetual

bond issuance (KRW 333.4 billion), and foreign currency translation gains (KRW 999.7 billion). In spite of it all, its

debt ratio is still high compared to major Asian airlines such as Singapore Airlines (88%) and Cathay Pacific Airways

(207%).

In case of soaring oil prices, drastic foreign exchange fluctuations, or long-term economic stagnation Korean Air could well

face a liquidity crisis. This could potentially lead to a crisis for the entire Hanjin Group .

Trend of Korean Air’s net debt and market interest rate

107,125

135,447 136,086138,973

154,481149,308 150,389

135,807

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

50,000

70,000

90,000

110,000

130,000

150,000

170,000

2010 2011 2012 2013 2014 2015 2016 2017

Net debt(left) Average interest rate of 3-year treasury bond (right)

Market capitalization and debt ratio of global airlines

557.1588.2 283.1

380.6

148.4

1,209.1

156.169.5

277.9

249.7

290.8

88.4

207.4

709.6

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

0.0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

35,000.0

40,000.0

Market capitalization(left) Debt ratio(2018E, right)

date: Annual Report, Bloombergdata: Bloomberg(based on the end of 2017)

(KRW 100 mil) (%)(USD mil) (%)

5



- Lax management of potential risks

• Profits and losses of Hanjin Kal are affected by Korean Air’s P& L as measured by the equity accounting method.

Korean Air’s timid hedging practice on oil prices and foreign exchange rates is leading to high volatility in Hanjin

Kal’s P&L.

• Korean Air uses up to 36 million barrels of jet fuel every year. In case of soaring oil prices Korean Air’s pre-tax profits

would plummet. On top of this Korean Air has foreign debts of around US$ 8 billion. Korean Air is thus very

vulnerable to swings in KRW/USD exchange rate fluctuations.

If the current lax management continues Hanjin Group’s financials could well deteriorate.

date: Annual Reportdata: Annual Report, Fnguide Consensus

(USD/bbl)

Korean Air’s operating profits and jet fuel prices

1,400

1,100

800

500

200

(100) 07 08 09 10 11 12 13 14 15 16 17 18F 0

30

60

90

120

150

(KRW bil)

Jet fuel pricesOperating profit

Foreign debt and F/X translation gain/loss

15,000

15,000

5,000

0

-5,000

-10,000

-15,000

-20,000

10

9

8

7

6

5

4

3

2

1

0

Debt in dollarGain and loss

translation

07 08 09 10 11 12 13 14 15 16 17

(KRW bil) (USD bil)

6



- Rapidly changing market environment

• As China’s state-owned airlines (Air China, China Southern Airlines, etc.) are growing fast, Cathay Pacific Airways

recorded an operating loss of KRW 78.5 billion in 2016 and another operating loss of KRW 330.7 billion in 2017.

Aggressive fleet expansion by Chinese airlines is expected to continue.

• Also there is a possibility that the profitability of short-distance routes such as Korea to/from Japan and Korea

to/from Southeast Asia will continue to suffer for a long time. Since 2015 domestic low-cost airlines have been

expanding their fleet aggressively and gaining market share.

Data: Incheon airportdata: Airline information portal

Top 10 global airlines in terms of number of aircraft (2017)

948

856

751 744

662627

429 412 410353

164

0

100

200

300

400

500

600

700

800

900

1000

Trend of LCC passengers and

Market share (Incheon Airport)

11.8%13.6%

15.9%

20.7%

27.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2013 2014 2015 2016 2017

LCC passengers(1,000) Total passengers(1,000) LCC Share(Total)

(aircrafts)

7



- Poor corporate governance

• During years 2015 to 2018 Hanjin Kal received a grade of B or lower in its ESG evaluation from the Korea Corporate Governance

Service. ESG evaluation encompasses environmental responsibility, social responsibility, and governance qualities.

• In the category of governance qualities Hanjin Kal was rated C for four consecutive years (please refer to the results of Korea

Corporate Governance Service below).

• During the so-called “nut rage” incident Korean Air’s debt ratio was 809% (3Q2014). This means 89% of Korean Air’s KRW 23.3

trillion assets belong to creditors. The remaining 11% of assets belong to shareholders including Chairman Cho Yang-ho and his

three children. As Cho and his family own only 13.7% (directly 10.0% and indirectly 3.7%) of Korean Air’s equity they really own only

1.5% of Korean Air’s total assets.

• The “nut rage” incident is even more shocking than it first appears as it was committed by a mere 1.5% owner.

data: Annual Report for each companydata: Korea corporate governance service

Effective ownership of Korean Air’s assets

CEO Cho Yang-ho and his children,

1%

Other stakeholders, 10%

Creditor, 89%

Hanjin Kal governance rating (ESG)

2015 2016 2017 After 2018

D

C

B

B+

A

A+

S

ESG overall rating “Below B” for 3 consecutive years

Governance “C” for 3 consecutive years

Likely to be

downgraded

*At the time of

Nut-rage incident

(2014.12)

8


3-1. KCGI’s Proposed Measures

- Improvement of corporate governance and establishment of a responsible management system

Establishment of governance committee1

• In order to (a) improve governance structure, (b) strengthen compliance system, and (c) maximize shareholder value KCGI proposes the

establishment of a committee for corporate governance improvement and corporate value enhancement (hereinafter “Governance

Committee”). This would be a permanent committee under the Board of Directors.

• Governance Committee (similar to Samsung C&T Corporation’s governance committee) would be responsible for carrying out preliminary

assessment of management-related matters and governance issues that could have a major impact on shareholder value. Governance

• Committee would be composed of one company director recommended by the management, two outside directors recommended by KCGI

(after canvassing the opinions of general shareholders), and three outside experts.

• One of the Governance Committee members recommended by KCGI (after canvassing the opinions of general shareholders) would be

appointed as an ombudsman for the protection of shareholders’ rights and interests. The ombudsman would gather opinions of general

shareholders and report to the Governance Committee and the Board of Directors.

Establishment of compensation committee2

• In order to fairly evaluate the performance and compensation of the management KCGI proposes the establishment of a compensation

committee (hereinafter “Compensation Committee”). This would be specified in Hanjin Kal’s Articles of Incorporation.

• The Compensation Committee would be composed entirely of outside directors.

• The Compensation Committee would determine the level of executive compensation and severance pay based on objective indicators.

These indicators would include sales, operating profits, financial stability, and ESG-linked performance measures.

Establishment of strong compliance culture and responsible management3

• In order to find and appoint highly qualified Chief Executive Officer and other key executives KCGI proposes the establishment of a

nomination committee (hereinafter “Nomination Committee”). The Nomination Committee would include independent outside directors.

One of Nomination Committee’s main duties would be to set up a proper process for the CEO succession.

• In order to establish a strong compliance culture KCGI proposes that Hanjin Kal adopt a strict policy on the qualification of executives.

For example, anyone who has committed criminal acts against the company or defamed the company should be banned from becoming

executives.

• KCGI proposes that Hanjin Kal delete a provision in the company’s Articles of Incorporation which mitigates the responsibility of directors

and auditors. KCGI further proposes that Hanjin Kal adopt a Code of Corporate Governance.

9



- Program to enhance corporate value

Five-year plan for restoring Hanjin Group’s credit rating1

• In order to restore Hanjin Group’s credit rating (currently BBB0) to A-, which was the level prior to the huge investments in Hanjin Shipping in

2014, KCGI proposes that Hanjin Kal adopt a five–year plan for restoring Hanjin Group’s credit rating (hereinafter “Five-Year Plan”). To achieve

a credit rating of A- or higher Hanjin Group would need to (a) achieve an annual EBITDA of KRW 2.5 trillion, (b) reduce the debt ratio to 300%

or lower, and (c) reduce the total borrowings and bonds payable as a percentage of total assets to 30% or lower.

• As a part of the Five-year Plan KCGI demands Hanjin Group’s management to (a) make sure Korean Air’s investments are concentrated in

its core aviation industry, (b) lower the debt ratio by selling off idle real estate such as Songhyeon-dong and Yuldo, and (c) set up a plan to list

the aerospace division which engages in the maintenance of private aircrafts and has assets of KRW 1.2 trillion.

Maximize corporate value through selection and concentration (weeding and feeding)2

• KCGI demands Hanjin Group’s management to re-examine from scratch the investment case for areas that have no or low synergy with aviation

industry. These include (a) Kal Hotel Network and LA Wilshire Grand Hotel, both of which suffer from chronic losses, (b) run-down Waikiki Resort,

(c) the Songhyeon-dong site where the hotel development plan has made no progress, (d) Paradise Hotel Jeju, and (e) Wangsan Marina.

• KCGI demands the management to (a) refrain from expanding its hotel business, which is highly correlated with tourism demand, and (b) come

up with measures to reduce the volatility of earnings coming from fluctuations in oil prices and F/X rates. These measures should help Hanjin

Group reduce its overall risk and thereby maximize its enterprise value.

• KCGI demands the management to consider selling idle real estate and marketable shares such as its holdings in POSCO and Hana Financial

Group Inc. The proceeds could be used for investments in the fast-growing logistics automation, which would boost Hanjin Group’s overall

competitiveness in aviation and logistics.

Hire high-quality external consultants3

• KCGI demands Hanjin Group’s management to hire a high-quality consulting firm. Hanjin Group should ask for (a) a comprehensive and multi-

faceted advice for the Group’s long-term vision and (b) concrete advice on management efficiency, risk management, and public reputation.

• KCGI demands the management to make its cost structure more predictable. Hanjin Group should cut down on the types of air crafts to

approximately 3 to 4 which would reduce parts inventory and other cost. Hanjin Group should also hedge approximately 20% of the fuel

consumed which accounts for 30% of the total cost.

• KCGI demands the management to pursue an IPO of the aerospace division which has the potential to grow fast in the LCC market in Korea.

Hanjin Group should also set up a permanent working group to achieve profitability on all flight routes.

10



Measures to strengthen social responsibility 1

• KCGI believes that there needs to be a separation of ownership and management at the Hanjin Group. A professional

management team needs to take charge of restoring the Group, with the major shareholder family providing oversight. This

should help prevent Cho family’s illegal activities and overhanded behavior (“Gapjil”). This is also necessary for repairing the

tarnished brand image.

• KCGI proposes the establishment of a permanent consultative body composed of important stakeholders including general

shareholders, executives, employees, partner organizations, and local community members.

• KCGI demands Hanjin Group’s management to adopt and implement a Code of Social Responsibility.

Measures to increase satisfaction and self-esteem of all employees 2

• KCGI demands that the major shareholder family stop meddling in the appointments of affiliates’ CEOs and top executives.

This would pave the way for the appointment of CEOs and top executives who have the requisite expertise, knowledge and

experience. They can then manage each affiliate company in a professional, responsible, and lawful manner.

• KCGI proposes the establishment of a permanent consultative body to facilitate Hanjin Group inter-company communication

on a real-time basis and to resolve employees’ grievances. This matrix body would be composed of employees in each

functional area including flight, cabin service, maintenance, transportation, and sales.

11


Conclusion

1. Excessively high debt ratio compared to other global airlines

2. Lax management of potential risks

3. Slow response to rapidly changing market environment

4. Poor corporate governance

Diagnosis

Vision

KCGI Proposal

1. Improvement of corporate governance and establishment of

a responsible management system

Establishment of Governance Committee

Establishment of Compensation Committee

Establishment of strong compliance culture and

responsible management

2. Program to enhance corporate value

Establishment of Five-Year Plan

Selection and concentration

Hire high-quality external consultants

3. Restoring trust in Hanjin

Measures to strengthen social responsibility

Measures to increase satisfaction

and self-esteem of all employees

By transforming itself and regaining trust

Hanjin Group can be reborn as an enterprise loved by shareholders,

executives, employees, customers and the whole public.

12


I N D E X I A Five-Year Plan to Restore Trust in Hanjin



IV About KCGI

13

1-1. Hanjin Group

- Corporate Overview

Shareholder Status (Common Stock, as of 2019/1/14)

• Hanjin Group is a large conglomerate. Among ‘enterprise groups subject to limitations

on mutual investment’ as classified by the Korea Fair Trade Commission Hanjin is

ranked 14th in terms of assets. Through personnel separation from Korean Air on 1

Aug 2013 Hanjin Kal, as a holding company, was established to resolve the issue of

intra-group circular investments.

• Owner family owns 28.93% of shares, with 17.84% by Chairman Cho, Yang-ho,

2.34% by Cho, Won-Tae, 2.31% by Cho, Hyun-A, 2.30% by Emily Lee Cho, 2.14 % by

Jungseok Inha Academy, and 1.08% by Jungseok Logistics Foundation, etc.

• Succession to the next generation is difficult as each sibling has only around 2.3%

stake.

• Hanjin Shipping, an insolvent affiliate, has been liquidated. From this year the

prospect for subsidiary airlines such as Korean Air and Jinair is looking brighter.

• Credit rating of Hanjin Kal: BBB/Stable (KIS, 2018/8/13)

• Credit rating of Korean Air: BBB+/Stable (KIS, 2018/11/13)

Hanjin Kal Operating Profits

• Company’s operating profits consist of i) brand loyalties from affiliates, ii) dividend,

and iii) lease income. By securing stable cash flow around KRW 60 billion per year

Hanjin Kal can cover operating costs and interest payments.

• Korean Air turned into black in 2017 and paid out a dividend of KRW 250 per share

(0.7% dividend yield). This was the first dividend in 7 years.

• Hanjin Kal paid out a dividend of KRW 75 per share in 2014 and 2015. There was no

dividend in 2016. After turning into black in 2017 Hanjin Kal paid out a dividend of

KRW 125 per share (0.7% dividend yield).

(KRW 100 mil)

Trend of Hanjin Kal’s dividend income from major

subsidiaries (KRW 100 mil)

2014 2015 2016 2017 3Q18

Korean Air 0 0 0 0 70

Jinair 0 0 108 135 45

Hanjin 6 10 10 10 10

Jungsuk Corp. 5 14 13 22 26

Topas Travel Info. 67 67 76 76 106

(Unconsolidated) 2014 2015 2016 2017 3Q18

Sales 418.2 416.4 601.5 587.7 520.1

Income from

Brand loyalties271.5 257.8 307.9 205.5 223.1

Dividend income 81.0 89.1 223.6 242.5 236.0

Income from

dispatch services7.0

Income from

lease/rent65.6 69.5 70.2 50.3 53.9

Operating Profits 341.5 275.3 419.5 446.7 407.0

Net Income 221.0 96.2 -1,139.5 2,388.8 294.5

45.94%

Other shareholders,

28.93%

Chairman Cho and

family,

10.81%

Grace Holdings,

7.34%

National Pension Service,

6.98%

Foreigner,

14

II. Present Status of Hanjin Group

1-2. Hanjin Group

- Corporate Structure (as of end-2018)

15

Hanjin Kal

Cho, Yang-Ho 17.84%

Cho, Won-Tae 2.34%, Cho, Hyun-A 2.31%, Emily Lee Cho 2.30%

Jungseok Inha Academies 2.14%

Jungseok Logistics Foundation 1.08%

Ilwoo Foundation 0.16%

Jedong

Leisure

KAL Hotel

Network

TOPAS

Travel

Info

Hanjin(Cho, Yang-Ho6.99%)

JinairHanjin

TourKorean Air

(Cho, Yang-Ho0.02%)

Cho Family

KAS

Air Korea

Hanjin Info Systems& Telecommunications

99.4%

Cyberlogics100%

Korea Global Logistics Service 95%

Air Total Service 100%

Hanjin Shipping New Port Logistics Center

60%

IAT86.1%

WangsanLeisure Development 100%

Hanjin Incheon Container Terminal100%

Incheon Pier 3 Operation 36%

Pohang Pier 7 Operation 28%

Busan Global Logistics Center 51%

Seoul Integrated Freight Service Investments31.6%

Korea TBT33.3%

Pyeongtaek Container Terminal 68%

Hanjin Busan Container Terminal 62.9%

Hanjin Ulsan New Port 51%

Seoul Integrated Logistics Asset Management 31.6%

28.95%

29.6% 60% 22.2% 100% 100% 100% 94.4%

Jungseok

Enterprise

48.3%

59.6%

100%

Holding Company

Listed Company

UnlistedCompany

• Market Cap:

KRW 1.8

trillion

• Credit Rating:

BBB+

• Market Cap: 3.1

trillion

• Credit Rating: BBB+

• Market Cap: 577.5 bn

• Credit Rating: n/a


• Credit Rating: n/a


• Credit Rating: BBB+Cho, Yang-Ho 20.64%

Jungseok Logistics Foundation 10.0%

Treasury Stock 11.82%

Other 9.27%

Waikiki

Resort

100%

Resources: Annual Reports from each company


1-3. Hanjin Group

- Stock Price Trend of Hanjin Group Major Listed Companies (2016 - 2018)

Hanjin Kal

Korean Air

Category Numbers

Share Price(2018/12/28) 29,800 KRW

52 Week High 33,400 KRW

52 Week Low 15,800 KRW

Exchange KOSPI

Market Cap 1.76 trillion KRW

Portion, foreign shareholders 6.62%

Category Numbers

Share Price(2018/12/28) 33,050 KRW



Exchange KOSPI

Market Cap 3.13 trillion KRW


16

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

15-1

2

16-0

1

16-0

2

16-0

3

16-0

4

16-0

5

16-0

6

16-0

7

16-0

8

16-0

9

16-1

0

16-1

1

16-1

2

17-0

1

17-0

2

17-0

3

17-0

4

17-0

5

17-0

6

17-0

7

17-0

8

17-0

9

17-1

0

17-1

1

17-1

2

18-0

1

18-0

2

18-0

3

18-0

4

18-0

5

18-0

6

18-0

7

18-0

8

18-0

9

18-1

0

18-1

1

18-1

2

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

15-1

2

16-0

1

16-0

2

16-0

3

16-0

4

16-0

5

16-0

6

16-0

7

16-0

8

16-0

9

16-1

0

16-1

1

16-1

2

17-0

1

17-0

2

17-0

3

17-0

4

17-0

5

17-0

6

17-0

7

17-0

8

17-0

9

17-1

0

17-1

1

17-1

2

18-0

1

18-0

2

18-0

3

18-0

4

18-0

5

18-0

6

18-0

7

18-0

8

18-0

9

18-1

0

18-1

1

18-1

2

Resources: Fnguide


0

10,000

20,000

30,000

40,000

50,000

60,000

15-1

2

16-0

1

16-0

2

16-0

3

16-0

4

16-0

5

16-0

6

16-0

7

16-0

8

16-0

9

16-1

0

16-1

1

16-1

2

17-0

1

17-0

2

17-0

3

17-0

4

17-0

5

17-0

6

17-0

7

17-0

8

17-0

9

17-1

0

17-1

1

17-1

2

18-0

1

18-0

2

18-0

3

18-0

4

18-0

5

18-0

6

18-0

7

18-0

8

18-0

9

18-1

0

18-1

1

18-1

2

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

17-12 18-01 18-02 18-03 18-04 18-05 18-06 18-07 18-08 18-09 18-10 18-11 18-12 19-01

Jinair (Listed on 8 Dec 2017)

Hanjin

Category Numbers

Share Price(2018/12/28) 19,250 KRW



Exchange KOSPI

Market Cap 577.5 bn KRW


Category Numbers

Share Price(2018/12/28) 53,800 KRW



Exchange KOSPI

Market Cap 644.2 bn KRW


17Resources: Fnguide

1-3. Hanjin Group

- Stock Price Trend of Hanjin Group Major Listed Companies (2016 - 2018)


2-1. Hanjin Kal

- Status of Listed Affiliates

Core of Group is air transportation

Korean Air

• Sales about 12 trillion KRW per year, Operating Profits maintained around 900

billion KRW after 2015 on the back of lower oil price (1-2 trillion KRW per annum

saved in fuel costs).

• 1 trillion operating profits possible with low oil price and benefits of joint venture

with Delta.

• Share price discount could be eliminated if (a) the borrowings (KRW 14 trillion) is

reduced and (b) the company focuses on its core operation.

KAS

• The company specializes in air transportation support services. 59.5% of shares

are held by Korean Air.

• The growth of sales and profits projected due to opening of the second terminal in

Incheon Airport and expansion of physical facilities of Jinair.

• After 2016 the company is maintaining 450 bn KRW sales and 25 bn in operating

profits .

Jinair

• Low Cost Carrier, but owns jumbo jets in their fleet. At the time of listing the

company was valued at a similar level as Jejuair.

• Though the acquisition of equipment is being delayed due to the sanction of the

Ministry of Land, Infrastructure and Transport (MOLIT), performance is expected to

improve when sanctions are lifted. The current market cap is 35% lower compared

to Jejuair, a competitor with a similar profit level.

Hanjin

• An enterprise specialized with stevedoring and parcel delivery service; the

company suffered from massive losses in the stevedoring division due to the

bankruptcy of Hanjin Shipping in 2016. After 2017 the company is under the

normalization process. The company attracted large-scale shippers and will

benefit from the opening of Incheon Container Terminal. Also the price of

parcel delivery service has been rising since the latter half of 2018. Better

performance in both divisions is expected in 2019.

18

Company Category 2013 2014 2015 2016 2017

Korean Air

Sales 118,487 119,097 115,448 117,319 120,922

Operating Profits (196) 3,953 8,831 11,208 9,398

Net Income (3,836) (6,129) (5,630) (5,568) 8,019

Assets 229,204 234,657 241,804 239,565 246,487

Liabilities 201,802 212,646 216,813 220,822 208,976

Capital 27,402 22,012 24,990 18,744 37,511

Jinair

Sales 2,833 3,511 4,613 7,197 8,884

Operating Profits 71 169 297 523 969

Net Income 42 131 227 393 741

Assets 886 1,267 2,035 3,023 4,983

Liabilities 709 967 1,522 2,243 2,665

Capital 178 300 513 779 2,318

Hanjin

Sales 14,996 15,328 16,417 17,648 18,126

Operating Profits 402 526 412 (153) 216

Net Income (84) 418 987 376 (470)

Assets 18,074 19,559 25,037 25,376 24,538

Liabilities 11,033 11,700 17,692 17,673 15,846

Capital 7,041 7,859 7,345 7,703 8,692

KAS

Sales 4,217 4,382 4,557 4,726 4,854


Net Income (115) 280 88 174 224

Assets 3,719 3,880 3,814 3,734 4,164

Liabilities 1,281 1,223 1,128 916 1,006

Capital 2,437 2,658 2,686 2,818 3,158

(KRW 100 mil)

Resources: Annual Reports of each company

Performance and financial indicators of major listed affiliates


2-2. Hanjin Kal

- Status of Unlisted Affiliates

Performance and financial indicators of major unlisted

affiliates

We focused on the affiliates’ asset values more than

their contribution to group profits

KAL Hotel Network (Book Value 292.5 bn, Stake 100%)

• The company is operating four hotels: Jeju KAL hotel, Seoguipo KAL hotel, Jeju

Paradise hotel, and Incheon Grand Hyatt.

• The value of Seoguipo KAL hotel and Paradise Hotel Jeju may need to be

reevaluated. The management has paid no attention on the two hotels for over a

decade.

TOPAS (BV 53.7 bn, Stake 94.4%)

• The company operates airline scheduling, reservation and ticketing systems.

• Average operating profit margin of 40%. Back in 2005 the Korea Stock Exchange

asked the company to list. A gem with dividend payout ratio of 100%.

• Though asset value is low its profit margin is high. Its value can be reevaluated

through IPO. As a tourism related business, P/E of 15x or more is possible.

Jungseok Enterprise (BV 90.2 bn, Stake 48.3%)

• The company specializes in property leasing and structure management.

• Current book value of invested property at the end of 1Q 2018 is KRW 219.6 bn

(land 168.5 bn, buildings 51.5 bn). Fair market value is 310.8 bn (land 229.2 bn,

buildings 81.6 bn).

• The book value understates the real asset value of this company as it owns Hanjin

building and land in Sogong-Dong (BV 143.1 bn), Incheon Jungseok building (BV

8.15 bn) and Busan Jungseok building and land (BV 5.1 bn).

Also the value of real estate in Jeju island held by KAS and

Jedong Leisure and the value of Hawaii Waikiki Resort (100%)

are worth reevaluating. (Refer to Pages 102 & 103)

19

Company Category 2013 2014 2015 2016 2017

KAL Hotel

Network

Sales 855 996 1,013 1,055 982

Operating Profits 87 7 (39) (27) (253)

Net Income 53 (8) (145) (117) (320)

Assets 5,086 5,524 5,373 5,153 4,957

Liabilities 1,991 2,447 2,441 2,333 2,452

Capital 3,095 3,076 2,932 2,823 2,505

TOPAS

Sales 584 531 595 341 355


Net Income 130 125 103 104 96

Assets 391 423 369 349 339

Liabilities 128 135 91 82 78

Capital 264 288 278 267 262

Jungseok

Enterprise

Sales 538 403 413 405 412


Net Income 133 128 92 159 93

Assets 3,588 4,166 2,763 2,581 2,584

Liabilities 652 818 500 492 453

Capital 2,936 3,348 2,262 2,089 2,131

Hanjin Tour

Sales 259 351 385 376 376

Operating Profits (24) 2 (2) (4) (63)

Net Income (19) 8 0 2 (62)

Assets 352 404 401 402 416

Liabilities 192 245 245 260 334

Capital 160 159 156 142 82

(KRW 100 mil)

Resources: Annual Reports of each company


3-1. Hanjin Group Real Estate and Risk Factors

- Status of major real estate holdings and indicators for financial stability of Korean Air

Group property holdings (Published book value) Trend of Korean Air’s financial stability

• Hanjin Group uses acquisition price (AP) as book value.

• Major holdings of the group

▶ Hanjin Kal: Hawaii Waikiki Resort Hotel AP 7.6 bn KRW.

▶ Korean Air

- Operating four hotels: Jeju KAL hotel, Seoguipo KAL Hotel, Paradise

Hotel Jeju and Grand Hyatt Incheon.

- 36,000 m2 land in Songhyun-Dong, Jongro-Gu : AP 290 bn, Market value 530 bn +.

- LA Wilshire Grand Center Hotel: holding via 100% international subsidiary, Hanjin International Corp.

Tallest building in LA with 73 stories and 335 m. investment of nearly a billion USD over 8 years.

- Hanjin Group Central Training institution, Deungchon-Dong, Gangseo-Gu: estimated market value of KRW

50 bn (4364m2, BV 30 bn).

- Jungseok airstrip (around 1.2 million m2) in Seoguipo, Jeju and Jedong ranch (around 4,000 acres).

▶ KAL Hotel Network

(KRW mill)

*) Listed Company, as of the end of March, 2018; otherwise, end of 2017.

*) based on consolidated statement; adjusted borrowings=gross borrowings+

future operating lease payments

(KRW 100 mil)

• As Korean Air is providing a guarantee on uninsured bonds of Hanjin Kal, Hanjin Kal

bond’s credit rating is directly linked to Korean Air’s credit rating (Corporate bond,

BBB+/Stable).

• While Korean Air is enjoying stable business practices based on market power and

competitiveness as the largest airline in Korea, the financial statement shows

diminished financial stability due to continuous investment on buying planes and

burden of credit infusion to other affiliates. Its debt ratio spiked to over 1,000%,

based on the consolidated statement in 2015-2016.

• Debt ratio was reduced to 559% in 2017 on the back of capital increase (453.5 billion

KRW), perpetual bond issuance (333.4 billion KRW), gains from reassessing tangible

assets (292.2 billion KRW), and foreign exchange translation gains (999.7 bn).

• As accounting standards will be revised in 2019 to include future operating lease

payments as liabilities, the debt ratio is expected to go up. However, the effect would

be limited as Korean Air does not have much operating leases.

20

Category 2013 2014 2015 2016 2017

Gross Borrowings 153,194 163,311 161,680 162,849 148,453

Net Borrowings 141,270 154,755 150,885 150,179 135,728

Adjusted borrowing 159,130 168,300 171,798 184,972 167,395

Debt Ratio(%) 736.4 966.1 867.6 1,178.1 557.1

Reliance on borrowings

(%)66.8 69.6 66.9 68.0 60.2

Gross borrowings

/EBITDA(x)9.4 8.2 6.4 5.7 5.6

Adjusted borrowings

/EBITDA(x)8.6 7.7 6.2 5.8 6.0

Company Land StructureInvestment

Real Estates

Hanjin Kal 25,556 3,639 65,546

Korean Air 2,153,230 439,286 78,533

Hanjin 590,051 141,345 10,957

KAL Hotel Network 0 0 0

Jungseok Enterprise 100,815 345,077 0

Hanjin Tour 0 0 219,599

TOPAS 0 0 0

Jedong Leisure 0 0 0

Total 0 0 28,448


12 13 14 15 16 17 18

NICE Information Service Korea Investors Service

Korea Ratings Corporation

A-

BBB+

BBB

A

3-2. Hanjin Group Real Estate and Risk Factors (cont’d)

- Hanjin Group Credit Risk: Internal and external loss of confidence and lack of improvement in financial structure

Governance qualities rating: the major shareholder risk and financial risk

• Hanjin Kal ESG Rating (Korea Corporate Governance Service)

2015 2016 2017 2018

and beyond

D

C

B

B+

A

A+

S

ESG Comprehensive Ratings “B or lower” for three consecutive years.

Governance, “C” for three consecutive years.

Downgrade

Expected

ESG Ratings

• Korea Corporate Governance Service’s ESG ratings is a comprehensive 7-

point ratings system reflecting all of environmental responsibility, social

responsibility, and governance qualities. Ratings below B+ are presented as

‘B or lower’.

• Hanjin Group’s ‘owner risk’ is a severe discount factor for the group’s entire

corporate value. There is a high possibility of additional downgrade due to

recent events.

• The current market environment is favorable for an upgrade in Hanjin Kal’s

valuation. Its airline subsidiaries are showing stable growth and increasing

dividends. Therefore, the owner risk looms as the single most significant

discount factor.

• Korean Air Credit Rating

• Korean Air’s credit rating has fallen drastically since 2014 when insolvent

Hanjin shipping was absorbed as a Group company and trillions of KRW

were poured in.

• Currently Korean Air is barely maintaining a credit rating of BBB+ as it is

financially stretched with expansion in hotels and leisure businesses.

• During the difficult years for the airline industry starting in 2011 the value of

Korean Air was damaged by heavy financial pressure from Hanjin shipping,

large-scale acquisition of new aircraft, and irrational investments in hotels

and leisure businesses. This value destruction epitomizes Hanjin Group’s

owner risk.

21


Owner risk leading to a drop in enterprise value and corporate governance ratings

Resources: Chosun Daily, Kookmin Daily, Maeil Economy, Asia Economy articles scrapped.22

II. Present Status of Hanjin Group3-3. Hanjin Group Real Estate and Risk Factors (cont’d)

- Hanjin Group major shareholder risk: owner family’s decadence → restoring public trust a must

4-1. Korean Air

- Performance and major indicators

Korea’s Number 1 Air Carrier• Korean Air is a global top 10 airline that represents Korea in the world stage. Also, the

company is the core subsidiary of Hanjin Kal (29.6% stake).

• Since 2015 the company benefited from lower oil price. The company has been recording

stable operating profits of around 900 billion KRW a year. However, the company

suffered net losses in 2015 and 2016 due to the acquisition (and subsequent bankruptcy)

of Hanjin Shipping, and foreign currency translation losses.

• In 2017, the net income turned to black due to foreign currency translation gains. The

company recorded a net income of 791.5 billion KRW and paid out a dividend of KRW

250 per share (the first dividend in 7 years).

• With the joint venture with Delta kicking off in May of 2018 the company is maintaining a

market share in American routes in the mid-80’s. In 2019 the company can grow on the

back of its strength in American routes and low oil price.

• Decrease in debt ratio by paying back loans would boost the company’s

share price in the long term.

• Stock Price Consensus is at KRW 40,500

Korean Air share distribution(as of 2018/1/16)

Hanjin Kal and group of 9,

33.4%

NPS, 11.7%foreigners, 21.3%

Other shareholders,

33.6%

Major indicators of performance

Fiscal year-end (Dec.) SalesOperating

ProfitsNet Income EPS P/E PBR ROE EV/EBITDA Net Debt Ratio

End of period (KRW 100 mil) (KRW 100 mil) (KRW 100 mil) (KRW) (x) (x) (%) (x) (%)

2015(A) 115,448 8,831 -5,650 -7,454 -3.49 0.86 -25.23 10.66 556.51

2016(A) 117,319 11,208 -5,649 -7,171 -3.59 1.15 -27.24 10.83 708.83

2017(A) 120,922 9,398 7,915 8,631 3.92 0.89 29.37 4.79 328.23

2018(E) 130,358 7,769 -694 -723 -47.32 0.95 -1.96 6.21 352.69

2019(E) 134,658 10,270 3,998 4,167 8.21 0.85 10.96 5.46 301.19

Resources: Annual Reports, Fnguide Consensus23


4-2. Korean Air

- Korean Air is projected to enjoy continued growth

With its competitive positioning Korean Air’s earnings can continue to grow

• Following the sharp fall in oil prices starting in 2015 the domestic airline industry showed a strong growth in operating profits. Stock market investors took

notice and are showing more interest in this sector.

• Korean Air, which uses 36 million barrels a year, is saving 1 to 2 trillion KRW per year in costs.

• A margin squeeze is expected as the number of Korean outbound passengers is going down and more price competition is expected on short routes.

• However, the portion of long range routes is over 50% for Korean Air. Thus, the effects of excessive competition in short routes would be limited.

• With the joint venture with Delta Korean Air’s earnings from the American routes is expected to improve. American routes represent 30% of passenger

sales for Korean Air.

Comparing Operating Profits of Korean Air with

Korea’s Low Cost Carriers Korean Air’s sales by routes

-19,562

395,335

883,088

1,120,809

939,782

33,276

87,768132,892 144,107

269,630

-200,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2013 2014 2015 2016 2017

Korean Air LCC

(KRW mil)

28.10%

Americas

22.00%

Europe

17.90%

Southeast Asia

13.20%

China

10.20%

Japan

5.90%

Domestic2.70%

Oceania

Resources: 18.3Q Korean Air IRResourcesResources: Annual Reports of each compnay24


25

4-3. Korean Air

- High debt ratio due to aircraft purchases

Stabilization of financial health is imperative: Korean Air to start generating net cash which can be used to repay debt.

• Korean Air’s net borrowings increased to 11.3 trillion KRW during the 2008 Global Financial Crisis. Net borrowings was 8.6 trillion KRW in 2007.

• Since 2010 Korean Air entered the replacement cycle for their jumbo jets. Its borrowings steadily grew and surpassed 15 trill ion KRW in 2014.

• Interest expenses dropped in 2013 because of lower market interest rates. As global interest rates are now on a rising trend Korean Air must keep a tight

control on the level of borrowings.

• From 2019 Korean Air will enter into the replacement cycle for smaller jets. Thus, equipment investment burden would be reduced to 1~ 1.5 trillion level.

• As Korean Air is expected to generate an annual EBITDA of KRW 2.5 trillion it should aggressively repay its debt.

• Debt ratio of Korean Air in 2018 is around 557%. Most other competitors’ debt ratio is at 200~ 300% level.

Net borrowings and interest expense Market Cap of global airlines and their debt ratios

557.1588.2

69.5

156.1

148.4

290.8249.7 88.4

207.4

283.1

1,209.10

380.6

277.9

709.6

0

200

400

600

800

1000

1200

1400

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

30,000.00

35,000.00

40,000.00

Market Cap (Left) Debt ratios (2018E, Right)

85,924

112,861 113,748 107,125

135,447 136,086 138,973

154,481 149,308 150,389

135,807

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

07 08 09 10 11 12 13 14 15 16 17

Net borrowings Interest expense(KRW 100 mil) (KRW 100 mil) (%)(USD mil)


4-4. Korean Air

- Too many plane types compared to sales volume

Must reduce to 4~5 types for efficiency

• As of the end of 2018, Korean Air operates a total of 169 aircraft, of which 138 are passenger aircraft and 31 are cargo aircraft. Compared to 2010 when

Korean Air had 129 aircraft this is an increase of 40 aircrafts.

• Despite the increase in aircraft Korean Air’s sales hardly grew during 2010 – 2018. Sales was 1.182 trillion KRW in 2010 and sales in 2018 is estimated to be

1.308 trillion KRW.

• Types of aircraft Korean Air operates increased from 5 types in 2009 to 8 types in 2018. Among them, the operation rate of CS300 is diminished due to

frequent engine failures.

• Dispersion of aircraft types drives the cost upwards. The higher costs are at the purchase stage continue onto the maintenance stage. A more streamlined

fleet is necessary for efficiency reasons.

• Back in early part of Year 2000, the company management considered a reduction of aircraft types to save on costs. They considered going down to one

type of jumbo jet and 1 to 2 types of small jets. For some unknown reason the number of aircraft types has actually increased.

• Annual depreciation of KRW 1.6 trillion is high compared to other global airlines. Depreciation period should be extended from 15 to 20 years, thereby

increasing operating profits.

Status of Korean Air’s Fleet Korean Air’s Aggressive Depreciation

Resources: Annual ReportsResources: Bloomberg26

Aircraft

type2009 2010 2011 2012 2013 2014 2015 2016 2017

B747 22 18 17 15 14 14 11 6 4

B747-8I 0 4 7 10

B777 25 28 31 32 34 34 37 38 40

B737 31 30 34 40 40 39 39 39 35

B787 5

A330 19 21 23 23 23 24 29 29 29

A300 8 8 7 3 2

A380 5 6 8 10 10 10 10

CS300 0 0

Passenge

r total105 105 117 119 121 121 130 129 133

B747F 22 24 24 23 19 17 17 13 13

B747-8F 0 0 0 2 4 5 6 7 7

B777F 0 0 0 2 3 4 5 11 11

Cargo

total 22 24 24 27 26 26 28 31 31

Overall

total127 129 141 146 147 147 158 160 164

(Unit: KRW 100 mil)

Items 2010 2011 2012 2013 2014 2015 2016 2017

Aircraft 2,799 2,920 2,842 3,110 3,176 3,262 3,197 2,190

Aircraft lease

assets3,369 4,983 5,782 6,064 5,811 6,105 6,741 6,828

Engines 788 1,827 2,369 2,764 2,536 2,510 2,277 2,168

Engine lease

Assets798 2,361 2,860 3,330 3,184 3,352 3,821 4,097

Aerial

equipment99 113 122 172 121 124 125 156

Strucutre 222 331 321 268 204 211 219 397

Other 517 583 636 590 541 538 593 609

Total 8,593 13,118 14,931 16,297 15,573 16,101 16,972 16,445


4-5. Korean Air

- Not capable of responding to rapid changes in external environment

More intensive risk management is imperative

• Price of jet fuel went down by 30.6% (from 111 USD per barrel in 2014 to 77 USD in 2015). Korean Air’s fuel cost decreased by 1.08 trillion KRW in 2015.

• Due to the drastic decrease in fuel cost, operating profits in 2015 increased to 883.1 billion KRW. With further decrease in fuel cost, operating profits expanded

to 1.121 trillion KRW in 2016.

• While the improved performance coming from lower fuel cost is good news Korean Air needs to be better prepared to respond to changes for the worse. During

2011 – 2014 when jet fuel price was higher Korean Air’s annual operating profits stagnated around 260 billion KRW.

• Even though fuel cost takes up 30% of total cost Korean Air is conservative in hedging the oil price. Such timid practice has led to high volatility in profits

depending on the price of oil.

• Volatility in profits also comes from fluctuations in foreign exchange rates. This volatility is expected to go up as Korean Air’s USD denominated debt has risen

since 2010.

• USD denominated debt increased from USD 5 billion in 2010 to USD 7.2 billion at the end of 2017. A mere change of 10 KRW in USD/KRW exchange rate

would lead to a foreign currency translation gain or loss of 72 billion KRW.

• Foreign currency denominated debt should be reduced. Although it does not entail changes in cash flow foreign currency denominated debt impacts the debt

ratio.

(USD/bbl)

Korean Air’s operating profits and jet fuel price

1,400

1,100

800

500

200

(100) 07 08 09 10 11 12 13 14 15 16 17 18F 0

30

60

90

120

150

(KRW bil)

Jet fuel priceOperating Profits

Resources: Annual ReportsResources: Annual Reports, Bloomberg27

USD-denominated debt from F/X translation gain/loss

15,000

15,000

5,000

0

-5,000

-10,000

-15,000

-20,000

10

9

8

7

6

5

4

3

2

1

0

USD

denominated

debt

F/X translation

gain/loss

07 08 09 10 11 12 13 14 15 16 17

(KRW bil) (USD bil)


5-1. Jinair


Only Low Cost Carrier that can serve long-range

routes

• Jinair is the only Low Cost Carrier in Korea that can serve long-range routes. Hanjin

Kal owns 60.0% of Jinair.

• As of the end of 2018, the company owned four jumbo jets (B777) and 23 small jets

(B737).

• The company can provide long-range services using larger jets. Starting with Hawaii

in 2016, the company provides services to Cairns, Australia and Johor Bahru,

Malaysia.

• The company is preparing for services to Eastern European destinations after

adding two more jumbo jets at the end of 2018. The company has stopped making

additional aircraft purchases. This is due to sanctions from the MOLIT related to

decadent and illegal acts of the Group owner family.

• It is not clear when and whether the MOLIT sanctions would be lifted. The company

is projected to suffer sluggish sales and decline in profits from the latter half of 2018.

• Stock Price Consensus is at 28,000 KRW

Jinair Share Distribution(as of 2019/1/16)

60.0%

Hanjin Kal34.2%

Other small

shareholders

5.8%

foreigner

Major indicators regarding performance


ProfitsNet Income EPS P/E PBR ROE EV/EBITDA Net Debt Ratio

End of period (KRW 100 mil) (KRW 100 mil) (KRW 100 mil) (KRW) (x) (x) (%) (x) (%)

2015(A) 4,613 297 227 841 55.82 -236.33

2016(A) 7,197 523 393 1,457 60.86 -165.56

2017(A) 8,884 969 741 2,721 9.74 3.43 47.84 4.3 -131.04

2018(E) 10,358 938 679 2,263 8.33 1.92 25.83 1.76 -124.81

2019(E) 11,487 1,103 830 2,767 6.81 1.52 24.97 1.18 -108.83

Resources: Annual Reports, Fnguide Consensus28


5-2. Jinair

- Status of LCC Market

Expected to benefit from growth of domestic Low Cost Carrier Market

• Korean Low Cost Carrier market is growing rapidly on the back of lower oil prices.

Fleet status for each carrier at end-2015: 16 aircrafts for Jejuair, 13 for Jinair, 14 for Airbusan, 11 for Eastar, and 9 for Tway.

• After turnaround to profits there has been an aggressive aircraft expansion led by Jejuair.

• Despite partial sanctions from the MOLIT for insufficiency in the number of pilots and maintenance staff, LCC market is maintaining 30% annual growth

on average.

• As of the end of 2018, Jejuair owns 39 aircrafts, followed by 27 for Jinair, 25 for Airbusan, 22 for Eastar, 24 for Tway and 7 for Airseoul.

• Market share of LCC for international travelers reached 30%.

• However, the number of Korean outbound travelers has plateaued. This will result in slower growth for LCC in the international travelers segment.

Equipment Status for Low Cost Carriers

(No. of Aircraft)

50

40

30

20

10

0

JinairJejuair Eastar

jet

Air

Busan

Air

Seoul

Tway

air

39

16

27

13

25

14

22

11

24

97

0

2015 2018

Resources: AirPortal Resources: Annual Reports for each company

Market share of LCC on international routes

’13.01 ’13.11 ’14.09 ’15.07 ’16.05 ’17.03 ’18.01

0

50

150

200

250

(million)

0

5

10

15

20

25

30

35

LCC international

travelers

(Left)

Market share of LCC

(Right)

29


-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%Jin air Jeju air

5-3. Jinair

- Jejuair vs Jinair

Due to the MOLIT sanctions Jinair likely to fall further behind

• Jinair is currently under sanctions of the MOLIT from the latter half of 2018. This prevents the company from expanding their fleet.

Jinair had originally planned to add 5 aircrafts (2 B777 and 3 B737) to their fleet but ended up adding only one (B737).

• Having added personnel and signed additional leases in preparation for the expansion of fleet, Jinair’s operating profits started slowing down in 3Q18.

• When Jinair was listed, the company was compared to Jejuair as it had similar size of sales and operating profits. However, the market cap of Jinair is

now only 65% of Jejuair.

• From the latter half of 2018 Jinair’s operating profit margin is likely to fall further behind that of Jejuair.

• The MOLIT sanctions are expected to be lifted In 2019 but timing is uncertain. Jinair’s discount to Jejuair will likely continue for some time.

Trend of quarterly operating profits (Jinair and Jejuair) Trend of Market Cap (Jinair and Jejuair)

Resources: QuantiwiseResources: Annual Reports each company30

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Jin Air Jeju Air


6-1. Hanjin


Undervalued compared to asset value and earnings to

grow in 2019

• Major shareholders of Hanjin include Hanjin Kal 22.2%, Cho family 10.9%, KCGI (NK & Co.

Holdings and two others) 8.03%, and National Pension Service 7.4%.

• Hanjin is one of Korea’s major land transportation company. It is a leader in

port/stevedoring and parcel delivery service. For stevedoring services, Hanjin is providing

services to major ports around the country (Pyeongtaek, Gwangyang and Pohang). Hanjin

Busan Container Terminal (formerly Hanjin Shipping New Port) and Hanjin Incheon

Container Terminal are its hubs.

• For parcel delivery services, Hanjin is the second largest in the market, with a market share

of 12%. Hanjin is expected to benefit from the rising unit price for parcel delivery services.

• Hanjin recorded an operating loss in 2016 due to difficulties in its stevedoring division

(bankruptcy of Hanjin Shipping).

• Turned around to operating profits in 2017 after normalization of Hanjin Busan Container

Terminals.

• Hanjin’s operating profits is estimated to have increased in 2018 after the Phase 2

expansion of Incheon Container Terminal and the rise in unit price of parcel delivery

service.

• Currently undervalued considering asset value and turn around in operating profits.

• Stock Price Consensus is at 63,500 KRW

Hanjin share distribution (as of 2019/1/16)

Major performance indicators

39.0%

Other small

shareholders

33.1%

Hanjin Kal and five

others

11%

foreigners

8.0%

KCGI

7.4%

NPS1.4%

Treasury Stock


ProfitsNet Income EPS P/E PBR ROE EV/EBITDA

Net Debt

Ratio

End of Period (KRW 100 mil) (KRW 100 mil) (KRW 100 mil) (KRW) (x) (x) (%) (x) (%)

2015(A) 16,417 411 1,003 8,373 5.54 0.76 13.44 8.25 156.36

2016(A) 17,648 -153 396 3,304 8.72 0.45 5.37 7 149

2017(A) 18,126 216 -449 -3,750 -6.93 0.43 -6.10 14 97

2018(E) 19,371 456 615 5,138 9.75 0.77 8.30 14 102.99

2019(E) 20,694 678 186 1,549 32.34 0.76 2.41 11 102.54

Sources: Annual Reports, Fnguide Consensus31


32

6-2. Hanjin

- Port Normalization and eased competitive pressure in parcel delivery services

Stabilization in stevedoring division and parcel delivery services expected

• Stevedoring division recorded a loss of 8.2 billion KRW due to the bankruptcy of Hanjin Shipping. However, the division succeeded in turning to black in 2017. By

attracting large-sized clients it recorded operating profits of 37.1 billion KRW.

• The company opened Hanjin Incheon Container Terminal in 2016 (600,000 TEU in annual capacity) and, in November 2017, expanded the terminal in phase 2

(additional 600,000 TEU in annual capacity).

• Stevedoring division is expected to be stable, maintaining around 20 billion to 30 billion KRW operating profits per annum.

• Operating profits in parcel delivery services diminished to 6.8 billion KRW in 2017 due to intense price competition among delivery service providers.

• Unit price of parcel delivery service has been rising since the latter half of 2018 due to the increase in minimum wage and eased competitive pressure.

• Operating profits in parcel delivery service is expected to increase to 22 billion ~ 27 billion KRW in2019. Estimated operating profits for 2018 is 13 billion KRW.

• Hanjin may well get revalued in 2019 as its main business divisions stabilize.

Sales and Operating Profits from stevedoring division Market share in parcel delivery service

249,147 250,363

308,293

400,321

371,101

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2013 2014 2015 2016 2017

Sales Operating Profits

45.5

12.2 12.6

8.1 7.1

0

10

20

30

40

50

0

200

400

600

800

1,000

1,200

CJ Logistics Hanjin Lotte globallogic

Korea PostalService

Logen

Handling volume (Left)Market share (Right)

(Million Box) (%)(KRW mil)


6-3. Hanjin

- Hanjin’s investment assets (listed securities and stakes in unlisted companies)

Abundant investment assets/resources to support its business activities

• As of the end of 3Q 2018, Hanjin had investments in listed companies including GS Home Shopping, KL-Net, POSCO,

Hana Financial Group, and ISE commerce. It also had stakes in unlisted companies including The One Energy, Uiwang

ICD, etc.

• Its investment in GS Home Shopping has some strategic purpose, but most of Hanjin’s investments in listed securities

are simply investment purpose.

• Hanjin’s interest expenses amount to KRW 40 billion a year. Hanjin should seriously consider selling out idle lands and

liquid listed securities. From a long-term perspective the proceeds can be invested in automation facilities to boost its

competitiveness in logistics.

Hanjin’s investment assets

Resources: Annual Reports(Shinhan Financial Investments)33

Listed Securities Initial Acquisition Purpose Quantity (shares) Portion (%)Market value

(KRW mil)

GS Home Shopping, Inc 1998.12.30 bolstering business practices 229,630 3.5 46,511.7

KL-Net, Inc 1998.03.31 Simple Investments 232,800 0.96 787.3

POSCO 2007.07.04 Simple Investments 20,000 0.02 5,135.3

Hana Financial Group, Inc 2007.04.10 Simple Investments 200,000 0.07 9,363.0

ISE Commerce, Co, Ltd 2004.04.30 bolstering business practices 743,190 2.9 2,984.7

Total 64,782.0

Unlisted Companies Initial Acquisition Purpose Quantity (shares) Portion (%)Market value

(KRW mil)

The One Energy, Co, Ltd 2018.06.27 bolstering business practices 17,165 43.69 2,403

Uiwang ICD, Co. Ltd. 1992.01.02 bolstering business practices 128,600 12.86 643

Yangan ICD, Co. Ltd. 1992.01.02 bolstering business practices 315,778 15.79 298

Entob, Co. Ltd. 2000.08.25 Simple Investments 220,000 6.88 2,620

JTBC, Co. Ltd. 2011.04.20 bolstering business practices 840,000 0.75 192

Incheon fund for creative economy &Innovation 2016.05.12 Simple Investments 1,800 19.35 2,400

Dangjin Port, Co, Ltd 2011.06.17 bolstering business practices 60,000 10 300

Busan Port Terminal, Co. Ltd. 1990.05.25 bolstering business practices 186,170 1.63 679

Incheon Inner Port terminal operation, Co, Ltd. 2018.05.31 bolstering business practices 413,600 10.97 4,136

Total 13,671


7. KAL Hotel Network


Established in 2001 the company specializes in Hotel,

Leasing and Tourism business

• KAL Hotel Network is a 100% subsidiary of Hanjin Kal.

• Established in May 2001 the company secured its current

business model after receiving in-kind investment from Korean

Air’s hotel division in 2013.

• Currently operating Incheon Grand Hyatt, Jeju KAL Hotel,

Seoguipo KAL Hotel, and Seoguipo Jeju Paradise Hotel.

However, Seoguipo Jeju Paradise Hotel has been practically

abandoned for 10 years.

• Incheon Grand Hyatt Hotel, which was expanded in 2014, is

suffering from chronic losses due to low occupancy rates and

high depreciation costs. Jeju KAL Hotel and Seoguipo KAL Hotel

are also experiencing losses due to renovation projects.

• Operating profits have been in the red since 2015. As of 3Q

2018, the company recorded an operating loss of KRW 5 billion.

• The company needs to reevaluate the feasibility of the hotel

division. It is the time to consider selling Seoguipo Jeju Paradise

Hotel which has been practically abandoned for 10 years.

• Asset total as of end-2017 was KRW 495.7 billion , with 100.8

billion KRW in land and KRW 345.1 billion in structures. The

book value on Hanjin Kal is KRW 292.5 billion.

Category 2013 2014 2015 2016 2017

Sales 855 996 1,013 1,055 982

Operating Profits 87 7 (39) (27) (253)

OP Margin 10.1% 0.7% -3.8% -2.6% -25.8%

Net Income 53 (8) (145) (117) (320)

NI Margin 6.2% -0.8% -14.3% -11.1% -32.6%

Total Dividends Paid 0 0 0 0 0

Dividend payout ratio 0% 0% 0% 0% 0%

Assets Total 5,086 5,524 5,373 5,153 4,957

Land 1,013 1,013 1,013 1,013 1,008

Structures 1,727 3,803 3,695 3,549 3,451

Liabilities Total 1,991 2,447 2,441 2,333 2,452

Long-term debts 1,803 2,250 2,250 2,150 2,250

Capital Total 3,095 3,076 2,932 2,823 2,505

Deficit (299) (318) (463) (572) (890)

Gross borrowings 1,803 2,250 2,250 2,150 2,250

Net borrowings 788 1,968 1,959 1,864 2,029

Liabilities Ratio 50% 39% 40% 40% 45%

EBITDA 153 127 135 141 (84)

Resources: Annual Reports

(KRW 100 mil)

34


8. Jungseok Enterprise, TOPAS Travel Info.


Significantly undervalued compared to its asset value

• Hanjin Kal owns 48.3% and President Cho, Yang-Ho owns 20.6% of Jungseok

Enterprise.

• Specializes in property lease and building mangement. Book Value is KRW 90.2 bn.

• As of the end of 3Q 2018 the book value of property investment was KRW 219.6 bn

(Land KRW 168.5 bn and buildings 51.1 bn). The fair market value is KRW 310.8 bn

(Land 229.2 bn, and buildings 81.6 bn)

• Sogong-Dong Hanjin building and land (BV KRW 143.1 bn), Incheon Jungseok

building (BV 8.15 bn), Busan Jungseok building and land (BV 5.1 bn) are

undervalued compared to market price.

• Hanjin Kal owns 94.4% of TOPAS. The company specializes in airline scheduling and

ticketing systems.

• Average operating profits margin reached 40% in 2016. The company has already

been vetted by the market as the Korea Stock Exchange invited the company to list

bck in 2005. Its dividend payout ratio is 100%.

• The company’s shares were once held by Chairman Cho’s children. They were sold to

Hanjin Kal after the current government administration came into power.

• Although its asset value is not high its high profit margin could lead to a reevaluation

through IPO. (P/E of 15x or more is possible as a tourism-related business)

Category 2013 2014 2015 2016 2017

Sales 584 531 595 341 355


OP Margin 28.7% 30.1% 22.0% 40.2% 40.0%

Net Income 130 125 103 104 96

NI Margin 22.3% 23.5% 17.3% 30.5% 27.0%

Total dividend paid 100 100 112 112 100

Dividend Payout Ratio 77% 80% 109% 108% 104%

Assets Total 391 423 369 349 339

Cash and cash equivalent 183 48 51 12 152

Short term

financial instruments70 230 210 240 100

Liabilities Total 128 135 91 82 78

Capital Total 264 288 278 267 262

Gross Borrowings 0 0 0 0 0

Net Borrowings -253 -278 -261 -252 -252


EBITDA 172 167 147 153 158

Category 2013 2014 2015 2016 2017

Sales 538 403 413 405 412


OP Margin 28.9% 34.7% 33.9% 34.1% 29.9%

Net Income 133 128 92 159 93

NI Margin 24.7% 31.8% 22.3% 39.3% 22.6%

Total dividend paid 3 28 27 59 54

Dividend Payout Ratio 2% 22% 29% 37% 58%

Assets Total 3,588 4,166 2,763 2,581 2,584

real estate Investments 2,310 2,300 2,288 2,196 2,222


Capital Total 2,936 3,348 2,262 2,089 2,131

Gross Borrowings 85 47 193 20 0

Net borrowings -216 -203 27 -85 -70


EBITDA 206 199 195 194 176

(KRW 100 mil)(KRW 100 mil)

Resources: Annual ReportsResources: Annual Reports35

Reevaluation through IPO?


9. Hanjin Tour and Jedong Leisure


Hanjin Tour: growth and recovery in profitability to be

achieved through reorganization

• Hanjin Tour is under 100% control of Hanjin Kal. The company specializes in

tourism services. The company is maintaining five domestic branches and five

international offices. Its annual sales is around KRW 40 bn.

• Operating losses expanded after Emily Lee Cho took office as CEO. She

resigned in May of 2018.

• Normalization effort is needed. Though it is an affiliate of Hanjin Group, annual

sales is lower than its competitors (Hana Tour and Mode Tour). It is suffering

from chronic operating losses.

Jedong Leisure: owns KRW 28 bn worth of non-

business related land assets

• Jedong Leisure is under 100% control of Hanjin Kal. The company was

established in 2003 for golf course operation, catering, lodging, and sales of

Jeju-do local specialty products.

• The company invested KRW 12bn to acquire 1,114 acres of land in 2007

around Yangpyeong, Gyeonggi Province with KRW 12 bn. After more than one

decade the lot has contributed nothing to the company’s sales.

• With only 6 million KRW of annual sales the company continues to suffer severe

operating losses. This company seems to have been set up for land investment.

It should sell its idle land properties.

Category 2013 2014 2015 2016 2017

Sales 259 351 385 376 376

Operating Profits (24) 2 (2) (4) (63)

OP Margin -9.2% 0.6% -0.5% -1.1% -16.8%

Net Income (19) 8 0 2 (62)

NI Margin -7.5% 2.3% 0.0% 0.5% -16.5%

Total Dividend Paid 0 0 0 0 0

Dividend Payout Ratio 0.0% 0.0% 0.0% 0.0% 0.0%

Assets Total 352 404 401 402 416

Cash and Cash equivalent 74 91 100 71 124


Capital Total 160 159 156 142 82

Deficit (13) (14) (17) (31) (91)

Gross borrowings 0 0 0 0 0

Net borrowings -166 -189 -182 -204 -151


EBITDA (24) 2 (2) (4) (63)

(KRW 100 mil)

Category 2013 2014 2015 2016 2017

Sales 6 6 6 6 6

Operating Profits (28) (25) (26) (25) (25)

OP Margin -466.7% -416.7% -433.3% -416.7% -416.7%

Net Income 23 15 16 (17) (16)

NI Margin 383.3% 250.0% 266.7% -283.3% -266.7%

Total Dividend Paid 0 0 0 0 0

Dividend Payout

Ratio0.0% 0.0% 0.0% 0.0% 0.0%

Assets Total 30,259 30,288 30,302 30,321 30,334

Real estate

Investments (land)28,448 28,448 28,448 28,448 28,448

Liabilities Total 3,481 3,496 3,492 3,496 3,491

Capital Total 26,778 26,810 26,792 26,826 26,843

Gross borrowings 0 0 0 0 0

Net borrowings -1,092 -1,118 -1,089 -1,131 -1,140


EBITDA (28) (25) (26) (25) (25)

(KRW mil)

Resources: Annual ReportsResources: Annual Reports36


• Japan Air Lines(JAL) applied for legally managed workout process on January 19, 2010. After graduating from the workout on March 28, 2011,

the company relisted on Japanese exchange on September 19, 2012.

• JAL’s successful graduation from legal receivership is considered to be the result of 1) Downsizing, 2) Improvement in profitability,

and 3) Improvement of financial structure.

1) Downsizing

① Route reorganization: Cut down to 47 domestic routes (FY2012) from 67 routes (FY2009) = reduction of 20 routes

Cut down to 112 international routes (FY2012) from 153 routes (FY2009) = reduction of 41 routes

② Selling large jumbo jets: Sold 95 aircraft, including all of 73 jumbo jets (B747-400, A300-600 and others)

③ Reforming fleet composition: The company reduced the number of aircraft types from 7 to 5, This was done through culling inefficient aircraft and

deploying newer jets. By streamlining its fleet and lowering the average age of aircraft. JAL’s aircraft assets were reduced drastically from 723.5 billion

JPY (FY2008) to 369.5 billion JPY (FY2011).

10-1. Japan Air Lines Normalization

- Swiftly got back on its feet after entering legal receivership

International routes cancelled by JAL JAL’s fleet streamlined

Departure Destination Departure Destination

Narita Denpasar Kansai Seoul

Narita Qingdao Kansai Singapore

Narita Hangzhou Kansai Kuala Lumpur

Narita Xiamen Kansai Denpasar

Narita San Francisco Kansai Hanoi

Narita Mexico City Kansai Beijing

Narita Sao Paulo Kansai Dalian

Narita Hawaii Island Kansai Hangzhou

Narita Brisbane Kansai Guanzhou

Narita Amsterdam Kansai Hong Kong

Narita Rome Kansai Busan

Narita Milan Kansai Guam

Airplane Seats FY2008 FY2009 FY2010 FY2011

Jumbo

jets

B747 266-416 51 43 8 0

B777 245-500 43 46 46 46

Midsized

jets

A300 292 22 22 12 0

B767 227-261 49 47 45 49

B787 186 0 0 0 2

Small

jets

B737 144-176 41 50 54 59

MD90 150 16 16 16 13

BD81 163 14 9 0 0

Regional Embrarer.etc 36-76 43 45 46 46

Total 279 278 227 215

Average 11.7 10.8 9.2 9

Resources: Lufthansa Group Annual ReportResources: Morgan Stanley37


54,885 54,053 53,962 53,010 51,98249,201

47,526

30,875

0

10,000

20,000

30,000

40,000

50,000

60,000

F3/03 F3/04 F3/05 F3/06 F3/07 F3/08 F3/09 F3/12

10-2. Normalization of JAL

- Scale down, then focus on profitable business areas

2) Improving profitability

① Downsizing the personnel and reforming retirement pension system: In order to normalize its business and thereby graduate from the

workout process JAL scaled down the organization first. The company’s workforce was reduced by more than 30%. Average wage was

cut by 20%. Also the company managed to cut 30% of retirement pensions, which was putting severe strain on JAL’s financial health.

JAL did this by convincing its retirees. The reduction of workforce was achieved mainly through massive sale of subsidiaries/affiliates.

The total number of subsidiaries/affiliates went from over 100 + to 50’s. The physical layoff was kept to around 10%.

② Saving fuel costs: By selling older jumbo jets and restructuring the routes, the company saved fuel costs and thereby improve

profitability.

JAL’s workforce Trend of JAL’s CASK

Resources: JAL, UBSResources: JAL, Morgan Stanley

(Unit: JPY/ASK)(Persons)

38



- Required aggressive support of the government

3) Improving financial structures

① Aggressive support from the government: After the application for receivership in January of 2010 the Japanese government took

an active role in supporting JAL , the national flag airline. The workout program got started when Japanese Enterprise Training for

Innovative Communities (ETIC) invested 362.1 billion JPY in JAL.

② Forgiving liabilities: After the Japanese government decided to provide support to JAL in October of 2010 Japanese banks forgave

583.7 billion JPY of debt.

③ However, these financial support contributed less than 1/3rd in allowing JAL to achieve the current debt ratio of 70%. Most of the

improvements came from asset sales and improved business efficiency based on Amoeba management by Messrs. Inamori and

Morita.

Trend in Net Assets of JAL

(Unit: JPY bil)

Resources: JAL, UBS39



- Conclusion

• Suffered from chronic deficit due to (a) lax attitude of being a leading company in Japan, (b) excessive investment in aircraft, and (c) operation of uncompetitive

routes.

• This led to a ballooning of debt, and JAL ended up applying to delist the company and to start the receivership process.

JAL bankruptcy is somewhat different in nature to the present status of Korean Air. However, one important lesson is that Korean Air’s current high debt ratio

makes the company vulnerable to even minor fluctuations in market environment.

• Korean Air can learn from JAL’s success in transforming to a sustainable enterprise. The transformation was achieved through a drastic debt reduction and active

risk management/hedging of fuel cost.

JAL Performance before and after reorganization

Category Unit FY2008 FY2011 Reorganization details

Sales JPY bil 1,951 1,2051.Downsizing

-Reforming routes

-selling jumbo jets

-reforming fleet composition

EBITDA JPY bil 67 288

Operating Profits JPY bil -51 205

Ordinary Profits JPY bil -82 198

Net Profits JPY bil -63 187

EBITDA Margin Ratio % 3.4 23.9 2. Improving profitability

-reducing number of employees

-reducing fuel cost

-reforming routes

Operating Profits Ratio % -2.6 17.0

Ordinary Profits Ratio % -4.2 16.4

Net Profit Ratio % -3.2 15.5

Cash JPY bil 173 272

3. Improving financial structures

-Supprt from ETIC

-Debt forgiveness

Assets Total JPY bil 1,751 1,088

Capital JPY bil 175 389

Corporate Bonds JPY bil 802 57

Lease liabilities JPY bil 604 378

Cash flows from

operating activitiesJPY bil 32 257

Cash flows from

investment activitiesJPY bil -106 -147

FCF JPY bil -74 109

Cash flows from financial

activitiesJPY bil -117 -274

Liabilities Ratio x 4.59 0.15

Liabilities Ratio

(Incl. lease Liabilities )X 8.05 1.12

Net Liabilities Ratio X 7.05 0.42

Capital Ratio % 10 35.7

ROE % -36.2 48

Air fuel USD/bbl 113 128

Exchange rates JPY/USD 103 79

Resources: JAL, UBS40



- Financial status and income statement before and after reorganization

(JPY mil) FY2008 FY2011 Change

Assets Total 1,750,679 1,087,627 -663,052

Current Assets 487,029 468,355 -18,674

Non-current Assets 1,262,580 619,271 -643,309

Tangible fixed Assets 1,031,021 478,831 -552,190

Aircraft equipment 723,590 369,502 -354,088

Intangible Assets 79,548 42,960 -36,588

Investment and Assets 152,010 97,480 -54,530

Total Liabilities

and Capital1,750,679 1,087,627 -663,052

Liabilities Total 1,553,907 673,766 -880,141

Current Liabilities 649,897 298,475 -351,422

Short-term

borrowings2,911 561 -2,350

Current portion of

long-term liabilities128,426 10,197 -118,229

Non-current

Liabilities904,010 375,290 -528,720

Long-term borrowings 567,963 46,512 -521,451

Defined benefit

obligation154,800 154,800

Capital Total 196,771 413,861 217,090

(JPY mil) FY2008 FY2011 Change

Sales 1,951,158 1,204,813 -746,345

Operating Costs 2,002,043 999,891 -1,002,152

Fuel Costs 232,901 -

Landing and controlling fees 71,696 -

upkeep 23,548 -

Selling concessions

(Air Transportaition)22,345 -

Aircraft costs 91,276 -

Service Costs 22,548 -

Wages 213,608 -

Ancillary costs for

travel agencies - -

Other costs 321,962 -

Operating Profits -50,884 204,922 255,806

Other Income 31,341 10,330 -21,011

Other Costs 62,634 17,564 -45,070

Ordinary Profits -82,177 197,688 279,865

Special Gains 44,604 10,119 -34,485

Special Losses 21,440 7,903 -13,537

EBT -59,014 199,904 258,918

Current Corporate Tax 3,181 12,046 8,865

Deffered Corporate tax 22 △ 3,716 -3,738

Net Income -63,194 191,574 254,768

Net Income attributable to

controlling shareholders186,616 -

Net Income attributable to

non-controlling shareholders4,957 -

Resources: JAL IR41


11-1. Korean Air’s Aerospace Division (MRO)

- Status

• Aerospace Division (MRO) of Korean Air carries out various duties: (a) manufacturing fuselage of Boeing and Airbus aircraft, (b)

developing MD helicopters, (c) maintenance and repair of civil aircraft, and (d) overhaul of US Armed Forces equipment.

In 2016 Korean Air considered splitting off the division as a separate company. This would have helped Korean Air improve its

financial structure. When the oil prices started to plummet the management changed their mind and put the plan on hold.

• Total assets of the Aerospace division amount to KRW 1.2 trillion. In 2015 the company recorded sales of 913.5 bn and operating

profits of 119.5 bn when it received more orders from Boeing and Airbus. After 2017, however, the order backlog started to go down.

With sales decreasing the company suffered operating losses.

• For the first three quarters of 2018 the company recorded an operating profit. The company earnings are getting more stable.

Resources: Annual Reports42

Trend and Performance of Aerospace Division

(KRW 100 mil)

9,135 8,989

7,280

4,714

1,195 1,111

-325147

-1,000

1,000

3,000

5,000

7,000

9,000

2015 2016 2017 2018.3Q

Sales Operating Profits



- A service divsion with ample potential to grow

• As of early 2018, there were around two thousand MRO employees working in Korea. Most of them work for the major airlines such as Korean Air and Asiana

Airlines.

This number is too low compared to overseas airports that serve the similar number of passengers as Incheon.

• Therefore, Low Cost Carriers have limited access to maintenance services, leading to more cancellations compared to Full Service Carriers.

• Moreover the number of air passengers are expected to continue rising. Also one or two new Korean LCCs are expected to be set up in 2019. Considering

such market demand the number of MRO workforce must go up.

• Taking notice of MRO markets, new entrants are eager to enter the market. A new maintenance complex is to be set up in Incheon Airport.

• Aerospace Division of Korean Air is currently in charge of maintenance work for all of Jinair’s 27 aircrafts and some of Tway Air’s 24 aircrafts.

• Considering rapid growth of LCC market and the technical prowess of the company, there is ample room to grow.

• In the long term the company can expand to cover the Asian market and even become a global player in the aircraft maintenance market.

Number of air passengers at major hub airports and estimated MRO workforce (2016)

Airport Air passengers (2016) MRO Workforce

Atlanta 104,171,935 6,500

Beijing 94,393,454 6,000

Haneda, Tokyo 79,699,762 2,400

Hong Kong 70,305,857 5,500

Incheon(2018) 68,259,763 2,000

Jakarta 58,195,484 3,450

San Francisco 53,099,282 3,500

Resources: Incheon City Hall

(Persons)

43


• Lufthansa Technik AG(LHT), the former MRO division of Lufthansa Group, split from the group in 1994. LHT has been successfully leading

their business independently since then.

• LHT is an MRO(Maintenance, Repair and Overhaul) service provider that provides their expertise to airlines, leasing companies, maintenance

companies, corporates and VIP air transport operators. LHT has 57 affiliates around the world as well as 800 customer corporations and 31

maintenance centers. Deutsche Lufthansa AG owns 100% of LHT.

• LHT’s MRO sales take up 10% of gross sales of the Lufthansa group.

LHT Snapshot Sales breakdown of Lufthansa Group(2017)

2014 2015 2016 2017

Sales 4,545,857 5,415,736 5,365,165 5,731,049

Operating

Costs4,123,077 4,970,502 4,982,342 5,350,988

EBIT 432,777 447,804 410,295 410,543

EBT 319,925 318,580 310,807 376,926

Total

Assets3,897,765 4,454,509 5,038,047 5,492,783

Total

Liabilities3,897,765 4,454,509 5,038,047 5,492,783

Employees 20,085 20,289 20,708 21,194

(EUR thou, Persons)

Resources: Lufthansa Group Annual ReportResources: LHT Annual Report

63.6%

Network Airlines

11.4%

Point-to-Point

Airlines

10.0%

MRO

7.2%

Catering7.0%

Logistics

0.8%

others

44

II. Present Status of Hanjin Group11-3. Korean Air’s Aerospace Division (MRO)

- Possibility of emulating the success of Lufthansa Technik

11-3. Korean Air’s Aerospace Division (MRO) (cont’d)

- Possibility of emulating the success of Lufthansa Technik

• It is easy to assume that MRO business would come mostly from a captive airline in the group. In the case of LHT majority of its sales come from

outside of the group.

• The portion of third-party sales has been gradually increasing with the advent of Low Cost Carriers. 66% of LHT’s operating profits come from third-

party customers.

• This is an appropriate case study to determine the potential of Korean Air’s Aerospace Division if it were to become independent.

• Just like the Lufthansa Group Hanjin Group also has a Full Service Carrier and Low Cost Carier.

• If Aerospace division is split from Korean Air and develops into a specialized MRO service provider, Hanjin Kal can expect synergy among

affiliates. It can also benefit from the growing MRO markets.

Breakdown of LHT’s salesSimilarity between Lufthansa Group and

Hanjin Group

(EUR mil, %)

Resources: Chosun DailyResources: LHT Annual Report

FSC LCC Air Services

Lufthansa

Deutsche

Lufthansa AGEurowings

Lufthansa

Techniks

- Long-range routes

centered around

four hub airports

- Provides first class

and premium services

- Germany domestic lines,

short range european

routes

- minimized service

- non passenger air

services such as aircraft

maintenance and repairs

Hanjin Kal Korean Air Jinair

Korean Air

Aerospace division

(splitted)

45

62%

64%

65%

66%

59%

60%

61%

62%

63%

64%

65%

66%

67%

0

1,000

2,000

3,000

4,000

5,000

6,000

2014 2015 2016 2017

External sales Internal sales

Portion of external sales



- Conslusion

• Considering the past performance of the Aerospace division and the size of assets, the spun-off company may be valued at 1 trillion KRW or higher.

• If Korean Air keeps a 51% stake and sells the remaining 49% the cash influx to Korean Air could be 500 billion KRW or more.

• If the funds are then spent on repayment of debts, Korean Air’s debt ratio would be reduced.

• This could serve the national interest as well. Korean LCCs are currently using international maintenance service providers. The LCCs can later

switch over to Korean Air’s MRO subsidiary.

Aircraft owned by domestic low cost carriers

(aircrafts)

Resources: Air Portal

(%)

6381

101

122

144

0%

10%

20%

30%

0

50

100

150

200

2014 2015 2016 2017 2018

Total LCC aircrafts (Left) YoY (Right)


47

11-5. Korean Air’s Aerospace’s Division (MRO)

- Lufthansa Technik financial statements and income statments

2014 2015 2016 2017

Total Assets 3,897,765 4,454,509 5,038,047 5,492,783

Non-current Assets 2,399,444 2,792,111 3,304,422 3,556,740

Intangible Assets 51,867 51,385 56,632 64,772

Tangible Assets 965,790 1,045,668 1,120,624 1,123,874

Recovable Aircraft parts 1,017,541 1,315,773 1,520,641 1,666,877

Share of Associates’ Assets 113,769 132,074 216,081 246,746

Other Assets 26,175 31,434 60,876 65,515

Bonds and other Assets 224,301 215,776 329,568 388,955

Current Assets 1,498,321 1,662,398 1,733,625 1,936,043

Inventory 444,454 483,172 523,135 625,779

Bonds and other sssets 1,040,165 1,161,102 1,189,285 1,276,880

Cash and cash equivalent 12,294 16,556 19,583 31,961

Assets on sale 1,407 1,568 1,622 1,423

Total Capital and Liabilities 3,897,765 4,454,509 5,038,047 5,492,783

Equity Capital 501,954 822,824 855,256 1,240,280

Non-current Liabilities 2,183,737 613,138 2,879,714 2,854,667

Provisions 693,678 538,253 838,779 861,671

Financial Liabilities 35,785 28,741 44,167 24,601

Other Liabilities 1,454,274 46,143 1,996,767 1,968,395

Current Liabilities 1,212,075 3,018,548 1,303,077 1,397,836

Provisions 277,682 342,111 376,539 281,714

Financial Liabilities 16,676 18,577 5,133 12,805

Other Liabilities 917,716 2,657,860 921,405 1,103,318

2014 2015 2016 2017

Gross Income 4,545,857 5,415,736 5,365,165 5,731,049

Sales 4,336,848 5,099,145 5,413,607 5,403,593

Intragroup Sales 1,663,779 1,843,185 1,626,124 1,835,284

External Sales 2,673,069 3,255,960 3,517,483 3,568,309

Other Income 209,009 316,591 221,558 327,456

Gross Operating Costs 4,123,077 4,970,502 4,982,342 5,350,988

Wages 1,186,142 1,317,095 1,272,271 1,356,237

Material Cost 2,154,078 2,655,663 2,717,527 3,038,732

Depreciation 93,218 103,035 106,888 119,613

Other Costs 689,639 894,710 885,656 836,406

Operating Profits 422,780 445,234 382,824 380,061

Profits based on

equity method9,996 2,570 27,472 30,482

Earnings Before

Interest and Taxes(EBIT)432,777 447,804 410,295 410,543

Adjustments -52,619 6,594 1,020 4,284

Adjusted EBIT 379,157 454,398 411,315 414,827

Financial gains or losses -112,851 -129,224 -89,488 -33,617

Interest gains or losses -25,162 -36,490 -36,399 -29,940

Transactional

gains or losses- 13,892 -161 -

Financial Liabilities

gains or losses-87,690 -106,626 -52,928 -3,678

Earnings Before Taxes (EBT) 319,925 318,580 310,807 376,926

(EUR thou)(EUR thou)

Resources: Lufthansa Technik Annual Report47


12-1. Competitor Analysis

- Comparison of four airlines: Cathay Pacific/ Singapore Airlines/ Delta/Korean Air

• Overview

- Comparing four airlines: Cathay Pacific(Hong Kong), Singapore Airlines(Singapore), Delta Air Lines (United States), Korean Air.

- Korean Air can match Cathay Pacific and Singapore Airlines in terms of sales and the number of aircrafts.

- However, Korean Air has a much higher debt ratio. Based on the 2018 estimate Korean Air is expected to suffer an operating loss.

• Comparative analysis of performance indicators

- Korean Air has a lower gross profit margin (GPM) compared to other three international airlines. Cathay Pacific is suffering from the growth

of Chinese Low Cost Carriers (LCC).

Snapshot (2018E Market Consensus) Performance Indicators (as of 2017)

(USD mil)

Cathay

Pacific

Singapore

AirlinesDelta Korean Air

Country Hong Kong Singapore United States Korea

Market Cap(end of

2018)5,514 8,123 34,624 2,806

Sales 11,561 11,781 44,424 11,561

Net Income 144 538 3,865 -42

Debt Ratio 207% 88% 283% 557%

Aircrafts (2017) 149 107 856 164

Cathay PacificSingapore

AirlinesDelta Korean Air

(HKD mil) (SGD mil) (USD mil) (KRW bil)

Sales 97,284 15,806 41,244 12,092

Gross Profits 24,499 6,478 21,910 2,101

GP Margin(%) 25.2% 41.0% 53.1% 17.4%

Operating

Profits-2,279 1,088 6,114 940

OP Margin(%) -2.3% 6.9% 14.8% 7.8%

Net Income -888 893 3,577 792

NI Margin(%) -0.9% 5.6% 8.7% 6.5%

Resources: Investing.comResources: Bloomberg48



- Comparative Analysis of four airlines’ fleet

• Comparing aircraft

- All four airlines operate many B777s (Boeing) and A330s (Airbus).

- Besides Delta the three Asian airlines have similar sales volume and number of aircrafts. As shown below Korean Air owns too many aircrafts

compared to its market cap.

- Among the Asian airlines Korean Air operates the highest number of aircraft types. Cathay Pacific and Singapore Airlines each operate four types.

Current Fleet of four airlines (as of 2017)

(KRW bil)

B717 B737 B747 B757 B767 B777 B787 A319 A320 A321 A330 A340 A350 A380 MD88 MD90Total

Aircrafts

Market Cap

/Total aircrafts

Cathay

Pacific20 70 37 22 149 37.01

Singapore

Airlines48 21 21 17 107 75.91

Delta 91 176 116 80 18 57 62 34 42 6 109 65 856 40.45

Korean Air 35 34 51 5 29 10 164 17.11

Resources: Annual Report from each airline49



- Comparing depreciation costs of four airlines

• Comparing depreciation costs of tangible and intangible assets.

- Comparing depreciation costs of tangible and intangible assets, as reported on cash flow statements of four airlines.

- Due to the difference in accounting standards of each country, different useful lifespan is used for depreciation.

- Korean Air uses 15 years or lower. This practice of using short useful lifespan, coupled with the high number of aircrafts compared to the

company size, leads to high depreciation cost to sales. Korean Air’s depreciation to cost ratio was the highest among four airlines. Some

suggested in 2015 that Korean Air is overestimating depreciation.

(“Korean Air, 0 Won of voluntary corporate tax, for last 20 years?”(Tax Bulletin, March 23, 2015),

http://www.joseilbo.co.kr/news/htmls/2015/03/20150323252450.html

Depreciation Costs

(KRW bil)

Useful Lifespan

(years)2014 2015 2016 2017 Total aircraft As a % of 2017 sales

Cathay Pacific 20~27 yrs 1,182 1,340 1,332 1,282 149 9.6%

Singapore Airlines 15~20 yrs 1,301 1,305 1,329 1,348 107 10.7%

Delta 20~32 yrs 1,947 2,151 2,299 2,395 856 5.4%

Korean Air 6~15 trs 1,593 1,651 1,752 1,693 164 14.0%

* Applied BoK exchange rates, at the end of each year.

Resources: Annual Repor from each airline50



- Comparative analysis of four airlines’ response to oil price fluctuations

• Jet fuel hedging practices

- Cathay Pacific and Singapore Airlines currently hedge their fuel cost. Delta used to hedge, but recently liquidated all of their hedging

portfolio.

- Between 2014 and 2015, Cathay, Singapore and Delta suffered sizable losses due to the sudden decrease in oil prices caused by the shale

gas revolution. Among them, Cathay Pacific suffered a massive loss with a high level of exposure to hedging positions at around 70

USD/bbl.

- Delta began to liquidate their fuel hedging portfolio from 2016. For Delta there was no gain or loss from jet fuel hedging in 2018.

- Singapore Airlines is currently hedging at around 71 USD/bbl level and Cathay Pacific is hedging at a higher level.

Gross value of fuel hedging derivatives holdings Gain or loss from fuel hedging

2014 2015 2016 2017

Jet fuel(USD/bbl) 110.48 76.475 56.75 67.25

Cathay Pacific

(HKD mil)-14,307 -21,291 -9,610 -2,828

Singapore Airlines

(SGD mil)-572 -598 -224 612

Delta

(USD mil)-1,848 -672 -297 -66

Korean Air No fuel hedging

Resources: Annual Report, each airlineResources: Annual Report, each airline

2014 2015 2016 2017

Jet fuel(USD/bbl) 110.48 76.475 56.75 67.25

Cathay Pacific

(HKD mil)-911 -8,474 -8,456 -6,377

Singapore Airlines

(SGD mil)-457 -927 -269 73

Delta

(USD mil)-2,258 -935 -281 -33

Korean Air No fuel hedging

51


12-5. Competition Comparisons

- Changes in major airlines’ fleet (2010-2017)

Cathay Pacific Delta

2010 2011 2012 2013 2014 2015 2016 2017

A330 32 33 37 35 40 42 41 37

A340 15 13 11 11 11 7 4

A350 10 22

B747 46 45 44 39 32 27 21 20

B777 35 41 46 55 64 70 70 70

Total 128 132 138 140 147 146 146 149

2010 2011 2012 2013 2014 2015 2016 2017

B747 7 1

B777 66 59 57 58 57 54 53 48

A330 19 19 20 26 29 28 23 21

A350 1 11 21

A340 5 5 5

A380 11 16 19 19 19 19 19 17

Total 108 100 101 103 105 102 106 107

Singapore Airlines Korean Air

2010 2011 2012 2013 2014 2015 2016 2017

B717 13 52 87 91 91

B737 83 81 83 95 114 133 152 176

B747 16 15 16 16 13 9 7

B757 180 170 167 154 140 126 117 116

B767 92 95 92 95 95 93 85 80

B777 18 18 18 18 18 18 18 18

A319 57 57 56 57 57 57 57 57

A320 69 69 68 69 69 69 69 62

A321 15 34

A330 32 32 32 32 32 36 40 42

A350 6

MD88 117 117 117 117 117 116 116 109

MD90 19 29 50 65 65 65 65 65

DC9 39 24 18 12

CRJ 93 68

Total 815 775 717 743 772 809 832 856

2010 2011 2012 2013 2014 2015 2016 2017

B747 18 17 15 14 14 11 6 4

7478-8I 0 4 7 10

B777 28 31 32 34 34 37 38 40

B737 30 34 40 40 39 39 39 35

B787 0 0 0 0 0 0 0 5

A330 21 23 23 23 24 29 29 29

A300 8 7 3 2

A380 0 5 6 8 10 10 10 10

CS300 0 0

B747F 24 24 23 19 17 17 13 13

B747-8F 0 0 2 4 5 6 7 7

B777F 0 0 2 3 4 5 11 11

Total 129 141 146 147 147 158 160 164

Resources: Annual Report each airline52



- Performance of major airlines and their financial standings

Resources: Bloomberg53

Airlines CountryMarket Cap

(USD mil)

Income Statement

Sales

(USD mil)

EBIT

(USD mil)

EBITDA

(USD mil)

Net Income

(USD mil)

OPM

(%)

Net Income Ratio

(%)

2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E

FSC

Korean Air Korea 2,806.3 11,561.3 11,916.7 758.7 985.4 2,318.5 2,495.7 -42.4 315.8 6.4 7.5 -0.4 2.6

Asiana Airlines Korea 764.1 6,089.7 6,336.4 246.3 270.5 546.6 619.6 15.2 69.7 3.9 4.0 0.3 1.1

Japan Air Lines Japan 12,290.9 12,661.2 13,210.1 1,556.7 1,534.7 2,569.2 2,644.4 1,166.9 1,087.6 11.9 11.8 9.2 8.2

ANA Japan 12,382.3 18,254.0 18,374.8 1,556.2 1,471.6 2,948.5 2,908.7 1,226.4 963.0 8.2 8.2 6.7 5.2

Air China China 14,981.0 19,802.0 22,178.3 1,764.0 2,344.4 4,077.6 4,699.4 1,009.3 1,300.5 7.2 9.3 5.1 5.9

China Eastern Airlines China 9,384.4 16,820.2 19,089.7 1,394.4 1,772.3 3,752.5 4,317.8 612.0 850.7 4.1 7.6 3.6 4.4

China Southern Airlines China 10,489.3 21,234.0 24,176.3 913.3 1,298.2 2,722.2 2,936.2 538.0 738.8 3.8 6.7 2.5 3.0

Singapore Airlines Singapore 8,122.7 11,780.7 11,989.2 712.7 699.5 1,963.2 1,733.1 538.1 513.6 6.1 6.4 4.6 4.3

Cathay Pacific Airways Hong Kong 5,513.9 13,770.3 14,390.4 241.6 554.5 1,663.8 2,096.3 143.7 422.6 1.8 4.7 1.0 2.9

Delta US 34,623.7 44,424.2 46,609.6 5,437.3 6,224.6 7,755.9 8,749.1 3,865.4 4,461.0 12.2 13.6 8.7 9.6

American Airlines US 14,757.0 44,679.6 46,710.3 3,275.0 3,925.4 5,389.0 6,584.6 2,141.0 2,599.9 7.4 9.1 4.8 5.6

United Airlines US 22,625.4 41,172.3 43,569.7 3,615.1 3,999.6 5,875.2 6,574.3 2,396.8 2,724.9 8.6 9.6 5.8 6.3

Deutsche Lufthansa AG Germany 10,665.5 41,172.8 42,681.5 3,141.2 3,045.4 5,393.2 5,396.0 2,249.9 2,161.1 7.8 7.7 5.5 5.1

Air France France 4,434.0 30,332.0 31,586.4 1,492.9 1,421.8 4,655.3 4,475.8 659.5 709.9 4.8 4.5 2.2 2.2


(USD mil)

Multiple Indicator Financial Indicators

P/E

(X)

P/B

(X)

ROE

(%)

EV/EBITDA

(X)

Liabilities Ratio

(%)

Current Ratio

(%)

2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E Currrent

FSC

Korean Air Korea 2,806.3 n/a 8.1 0.9 0.8 -0.5 10.6 6.5 6.0 557.1 557.1 54.0

Asiana Airlines Korea 764.1 40.7 9.3 0.7 0.7 0.8 6.9 6.5 5.7 588.2 588.2 34.5

Japan Air Lines Japan 12,290.9 10.8 11.2 1.3 1.2 12.7 11.7 3.8 3.6 69.5 69.5 172.9

ANA Japan 12,382.3 9.6 12.3 1.3 1.2 14.3 10.6 5.8 5.5 156.1 156.1 115.9

Air China China 14,981.0 17.3 11.3 1.2 1.1 6.7 9.4 5.5 4.8 148.4 148.4 28.8

China Eastern Airlines China 9,384.4 15.0 8.9 1.2 1.0 7.6 11.3 4.7 4.1 290.8 290.8 22.8

China Southern Airlines China 10,489.3 17.6 10.1 1.3 1.2 7.2 11.1 7.0 6.5 249.7 249.7 25.7

Singapore Airlines Singapore 8,122.7 15.2 16.5 0.8 0.8 5.1 5.2 5.3 5.9 88.4 88.4 75.9

Cathay Pacific Airways Hong Kong 5,513.9 42.6 11.8 0.7 0.7 1.7 5.3 7.6 6.0 207.4 207.4 79.5

Delta US 34,623.7 9.2 7.5 2.5 2.0 27.6 27.9 5.4 4.8 283.1 283.1 42.2

American Airlines US 14,757.0 8.1 5.9 12.8 4.5 -520.8 314.9 6.4 5.3 1,209.1 1,209.1 61.1

United Airlines US 22,625.4 10.0 8.2 2.1 1.7 25.3 26.1 5.5 4.9 380.6 380.6 56.1

Deutsche Lufthansa AG Germany 10,665.5 4.7 4.9 0.8 0.7 18.5 16.1 2.5 2.5 277.9 277.9 87.3

Air France France 4,434.0 6.0 5.9 1.2 1.0 20.3 16.6 2.7 2.8 709.6 709.6 81.9



- Performance of major airlines and their financial standings

Resources: Bloomberg54


(USD mil)

Income Statements

Sales

(USD mil)

EBIT

(USD mil)

EBITDA

(USD mil)

Net Income

(USD mil)

OPM

(%)

Net Income Ratio

(%)

2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E

LCC

Jinair Korea 501.5 931.7 1,122.2 97.7 121.1 109.6 137.5 75.4 93.6 9.5 9.3 6.8 14.9

Jejuair Korea 799.9 1,114.6 1,303.4 100.0 115.7 132.9 163.3 84.6 96.4 8.9 9.2 7.6 7.4

Spring Airlines China 4,199.5 1,952.6 2,326.1 196.8 267.7 405.7 490.1 222.7 288.5 11.0 12.5 11.4 12.4

Interglobe Aviation India 6,390.4 3,530.8 4,075.0 611.9 134.2 542.2 215.3 404.1 159.7 n/a n/a 11.4 3.9

Jet Airways India India 439.0 3,779.5 3,829.5 53.6 -329.7 180.0 -211.5 65.8 -383.8 n/a n/a 1.7 -10.0

Vietjet Air Vietnam 2,792.9 2,322.5 2,783.2 296.9 339.6 314.8 389.4 240.8 271.6 12.6 12.4 10.4 9.8

Cebu Air Philippines 842.7 1,424.9 1,631.5 133.9 179.2 282.8 351.1 111.8 128.7 9.7 10.1 7.8 7.9

AirAsia X Malaysia 239.5 1,180.7 1,335.8 4.9 22.6 14.5 36.1 -11.3 5.6 -0.3 1.4 -1.0 0.4

Southwest Airlines US 26,315.9 21,939.5 23,609.7 3,142.4 3,433.7 4,304.9 4,775.6 2,374.7 2,632.7 14.4 14.9 10.8 11.2

Jetblue Airways US 4,873.5 7,654.8 8,296.5 692.5 798.3 1,169.1 1,326.3 469.1 554.8 9.0 10.0 6.1 6.7

Spirit Airlines US 3,897.9 3,310.4 3,826.5 444.8 622.3 622.0 830.0 299.1 400.0 12.9 15.8 9.0 10.5

Allegiant Air US 1,644.3 1,661.7 1,809.1 236.0 299.8 358.3 437.0 152.9 191.7 14.1 17.0 9.2 10.6

Westjet Airlines Canada 1,428.9 3,480.7 3,822.1 99.4 186.9 417.7 519.1 54.7 117.1 2.7 4.3 1.6 3.1

Ryanair Ireland 13,182.7 8,350.6 8,711.4 1,967.0 1,432.3 2,651.5 2,139.6 1,698.2 1,229.5 16.5 15.3 20.3 14.1

Easyjet UK 5,387.4 7,503.0 8,237.2 783.2 757.3 1,054.7 1,082.1 594.0 588.7 9.4 9.2 7.9 7.1

Wizz Air Swiss 3,534.6 2,343.6 2,667.4 356.7 353.1 463.4 458.2 342.0 332.9 13.6 13.7 14.6 12.5


(USD mil)

Multiple Indicators Financial Indicators

P/E

(X)

P/B

(X)

ROE

(%)

EV/EBITDA

(X)

Liabilities Ratio

(%)

Current Ratio

(%)

2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E Current

LCC

Jinair Korea 501.5 8.3 6.8 1.9 1.5 25.8 25.0 1.8 1.2 -124.8 -108.8 171.5

Jejuair Korea 799.9 9.4 8.3 2.2 1.8 25.8 23.7 4.0 3.2 141.5 141.5 122.2

Spring Airlines China 4,199.5 18.3 14.4 2.3 2.0 13.3 14.4 11.6 9.6 143.4 143.4 121.5

Interglobe Aviation India 6,390.4 18.2 39.7 n/a 5.9 44.0 6.1 9.5 22.5 198.5 198.5 239.0

Jet Airways India India 439.0 6.5 n/a n/a n/a -7.8 37.0 10.4 n/a -281.5 -281.5 50.3

Vietjet Air Vietnam 2,792.9 10.9 9.7 4.3 3.2 45.1 38.7 9.1 7.4 198.8 198.8 127.0

Cebu Air Philippines 842.7 7.9 6.9 1.1 1.0 11.8 13.7 5.4 4.3 174.2 174.2 74.2

AirAsia X Malaysia 239.5 n/a 120.0 1.1 1.1 -8.7 -2.1 24.1 9.7 381.9 381.9 49.8

Southwest Airlines US 26,315.9 11.3 9.7 2.3 1.9 23.0 20.3 6.0 5.4 140.7 140.7 69.7

Jetblue Airways US 4,873.5 12.3 9.1 1.0 0.8 12.7 10.2 4.7 4.2 102.3 102.3 50.4

Spirit Airlines US 3,897.9 17.3 8.9 2.0 1.7 15.9 18.2 7.9 6.0 133.2 133.2 197.9

Allegiant Air US 1,644.3 10.6 8.5 2.5 2.1 25.3 28.7 7.1 5.8 297.9 297.9 98.4

Westjet Airlines Canada 1,428.9 25.5 12.6 0.9 0.8 3.9 7.3 4.6 3.7 193.8 193.8 103.9

Ryanair Ireland 13,182.7 8.3 11.2 2.4 2.4 30.3 22.9 5.7 6.7 176.6 176.6 122.7

Easyjet UK 5,387.4 11.3 9.2 1.4 1.2 15.6 14.6 4.7 4.5 114.6 114.6 97.1

Wizz Air Swiss 3,534.6 13.5 12.9 3.1 2.1 25.3 20.3 5.0 4.8 72.5 72.5 186.9


I N D E X I A Five-Year Plan to Restore Trust in Hanjin



IV About KCGI

55

Protectionism ->

Overinvestment

Hyper Growth ->

High Leverage

Tradition of Family

Succession ->

High Gift/Inheritance

Taxes

1-1. Korean chaebol

- A fallen “star”: from a global competitor creating jobs at home and abroad to a “dog”

Korean economy rises

From the ashes of the

Korean War

Compressed growth was

required due to scarcity of

Capital and no history of

modern business

or capitalism

Infant industries entrusted to

few elite chaebol

and overprotected by

the nation and the public

To achieve hyper

growth

companies took on

high levels of debt

High debt ratio/intra-group

shareholding

→ 1997 Foreign Exchange Crisis →

Reduction of debt ratio but stronger

intra-group shareholding

As owner families’

stakes went down to

very low levels it is

difficult to pass on

control to the next

generation

Confucian culture of

succession to the

eldest son

Possibly the world’s

highest gift and

inheritance tax rates

Strong desire to

evade taxes and

seek loopholes

Focused only on specific

industries and business

groups [overinvestment in the manufacturing sector]

▶ Inflexible industrial structure

▶ No new engines of growth

Lack of strong Rule of Law allows

owner families to get away with

breaches of duty and illegal acts

▶ Business ethical standards

have fallen to the bottom

Possibly the world’s lowest

dividend payout ratio and

highest level of tunneling

▶ Korea Discount

▶ No entrepreneurial spirit

56

III. Korea Discount and the Way Forward

“Wealth never survives three generations.”

“Keeping wealth is harder than creating wealth.”Korea

“Rice fields never survive three generations.”China

“Shirtsleeves to shirtsleeves in three generations….”U.S.

“Clogs to clogs in three generations.”Ireland

70% of family businesses end up being sold before succession to second generation.

14% remains for the grandchildren and only 4% remains for the great grandchildren.

Similar findings in most countries.

“Start with rice paddies, and end up with rice

paddies after three generations.”Japan

1-2. Empty hands to empty hands in three generations: Law of Entropy

Research by John L. Ward

57


Reference: Innosight analysis based on public S&P data sources

1-3. Rise and Fall of Companies

Changes in company lifespan

0

5

10

15

20

25

30

35

40

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

(Avera

ge L

ife S

pan)

Average S&P500 company lifespan in gradual decrease

• When estimated back in 1964 S&P 500 companies lasted on average 33 years. When estimated in 2016 the average lifespan

of S&P companies went down to 24 years.

Over the next 12 years the average lifespan is expected to go down further to 13 years.

• This fall in average company lifespan is due to the rapid growth of private equity, M&A, and startup companies.

• One-half of the component companies in S&P500 will likely be replaced within the next 10 years.

According to Innosight Analysis (a) retailers will be hit severely and (b) finance, energy, travel, real estate, and healthcare industries

will be reorganized.

• Companies that fail to adapt to changes in customer needs will fall to the wayside.

58


1-4. Companies have a short lifespan

Reference: S&P Dow Jones Indices; Credit Suisse

0%

2%

4%

6%

8%

10%

12%

0

0.5

1

1.5

2

2.5

1990 1993 1996 1999 2002 2005 2008 2011 2014

S&P Turnover & U.S M&A Volume 1990-2016

(Trilli

ons o

f 2015 U

.S D

olla

rs)

Reference: Thomson Reuters, S&P Dow Jones Indices; Credit Suisse

0

10

20

30

40

50

60

2000 2002 2004 2006 2008 2010 2012 2014 2016

M&A

Failure

Other

Causes for the removal of S&P500 companies

(Num

ber

of

Rem

ovals

)

U.S. M&A Volume (Left) S&P500 TURNOVER (Right) FORTUNE TURNOVER (Right)

59


1-5. Malthusian Law of Population and Taxes

Note: It is assumed that all inheritance taxes would be paid in kind. (N: the number of descendants

Inherited capital (1+I )n=

After-tax inheritance×[(1+R(1-T )]n

+ WT +WE

I : Inflation rate

T : Effective corporate tax rate

R : Pre-tax rate of return of inherited company

WT : Profits from Tunneling

WE : Group profits siphoned off by major

shareholder family

• In order for a single child to maintain the same level of

stake in the company that her parents had she would

have to earn 7.1% per annum for 30 years

• For many companies that were founded after the Korean War

(1950 – 1953) the third generation is taking over.

• The third generation owners wish to keep control in the family.

They are thus tempted to engage in tunneling and siphoning off

profits of listed companies.

(Assumptions: Maximum inheritance tax rate of 65% (based on

50% tax + 30% surcharge for major shareholders), maximum

income tax rate of 41.8%, corporate income tax rate of 22%, and

inflation rate of 2%)

Over time family ownership will inevitably go down

3-generation succession is practically impossible,

considering taxes and increase in the number of

descendants.

1st: 50%

2nd: 17.5%/N

3rd: 6.15%/N

60


1-6. Succession of Capital, but which Capital?

Note: 1), 2), 3) are defined by James E. Hughes, Jr. ‘Family wealth’. 4) is defined by the author.

1) Financial capital : Cash, stock, bond, real estate, etc.

2) Intellectual capital : Education, e.g., how to catch a fish

3) Human capital : Individual as a member of the family → Emphasis on each child’s

happiness

4) Social Capital : Virtues, philanthropy, good reputation, close family and friends,

respect from society, etc.

2), 3), and 4) are harder to pass down the generation as

compared to 1). It is, however, much more important.

Components of Family Wealth

1)Financial

Capital

2)Intellectual

Capital

3)Human

Capital

4)Social

Capital

61


1-7. Issues in Succession

Reference: KCGI

Reference: James E. Hughes, Jr. ‘Family wealth’

• Mission statement: To record and share family history

• To prepare a mission statement containing the purpose, vision and value

• of the family

• Family rite: To form a common bondage

• Periodic evaluation: To evaluate the families’ human and intellectual

• Capital on a regular basis

• Risk control: To manage internal and external risks based on

the families’ balance sheet

• To dedicate enough time and to have a long-term perspective

In family wealth preservation short-term should be 20 years, mid-term

should be 50 years, and long-term should be100 years

Solution

• Definition of wealth: Most of the past and current societies

define wealth preservation in terms of financial capital only.

• Quality over quantity: Societies often neglect qualitative aspects

Driving power: Each generation should realize that they need to create

• and build as if they were the first generation.

• Long-term over short-term: Most think they are investing with

a long-term perspective, but use short-term evaluation methods

• Time investment: Many families do not dedicate enough time to focus on

• wealth preservation issues.

Why wealth does not last for three generations?

• To broaden the candidate pool for company succession: Son-in-law,

foster children, professional management, outright sale, etc.

• To establish a unique corporate culture by recording and sharing

the founding spirit, history, and mission statement

• To manage qualitative risk factors such as reputation, employees

• satisfaction, customer satisfaction, etc.: Righteous management,

• transparent management, shareholder-friendly management

• Have the next generation take responsibility for even small business

• decisions, “Do not let your kid dwell on the passenger seat!”

• Decisively stepping down from management after passing 70 years of age

To invest enough time and money on educating the next generations

Solution

• Malthusian Law and taxes: over time family ownership will inevitably

• go down

• Who gets what?

• Lack of entrepreneurial spirit or mission

• Stagnant growth: no bold challenges for future growth

• Lack of management education: Incapability, ambiguos decision-

making process, reckless investment, boredom

• Challenges from outside shareholders and management experts:

Rise of pension funds and activist funds

Issues in succession

62


1-8. Family balance sheet

Reference: James E. Hughes, Jr. ‘Family wealth’, KCGI

Short-term risk factors

• Income tax, market value change, financial market change, lack of mission statement,

lack of financial education.

Mid-term risk factors (internal)

• Disease, death, divorce, addiction, unemployment, imprisonment due to illegal actions,

worsened reputation due to delinquency (‘Gapjil’, drug, sexual harassment).

• Malthusian Law (exponential increase in family members), creditors, health issues,

principal-agent issues, making too short sighted investment plans (less than 50 years).

Mid-term risk factors (external)

• Inflation, bad relations with fiduciaries, inheritance tax, transfer tax, property tax,

Acts of God, political system changes, physical impairment.

Long-term risk factors

• Family management failure, a short-term approach rather than a long-term one,

management failure due to neglect of human-intellectual-social capitals.

• Financial Capital

• Intellectual Capital

• Human Capital

• Social Capital

• Each family member pursuing happiness

• Is the family human-intellectual-social capital increasing faster than family liabilities?

• Is the whole family actively participating in maintaining the business? = human integration

• Tangible/intangible capital that is beneficial to even the 7th generation.

Credit

Each family member’s four categories of

assets (=capital=property)

C a p i t a l

L i a b i l i t i e sA s s e t s

Debit

63


1-9. Successful Succession: How?

Reference: James E. Hughes, Jr. ‘Family wealth’, KCGI

• Financial capital is secondary. It is only a mean for maintaining the human and intellectual capitals.

• Value and performance are to be evaluated based on short-term (20 years), mid-term (50 years), and long-term

(100 years) plans.

• As some small short-term matters can later become important in the long term internal and external risk factors

• should be well monitored and maintained.

• Law of entropy should be overcome by achieving compounded growth.

Financial Capital

• Some sort of mechanism or system is required so that each member’s knowledge can be collected and shared.

• Some sort of performance measurement of each family member: this will help foster healthy competition and help

• in making fair compensation decisions.

• Multi-intelligence should be developed (Prof. Howard E. Gardner of Harvard Univ.).

[7 types of intelligence: language, math, space, body, inner self, outer self, and environment]

• Each member should learn family history, and should strive to fulfill her own role.

Intellectual Capital

• Physical capacity should be maximized for ultimate happiness.

(top level of medical service should be provided to avoid major illnesses or addictions)

• Each member’s basic needs should be satisfied, and any member in crisis should receive help.

• Each member should feel proud and pursue happiness by working on appropriate tasks.

• Human capital should be geographically diversified.

• Mission statement should guide each member to find spiritual happiness. It should also help guide each member

in their business management activities and philanthropic activities.

Human Capital

• Family members and neighbors should get along well altogether.

• Proper education and firm discipline in order to make each member good citizens.

• Each member should be encouraged to get involved with public work such as job creation, volunteer work, and

• donations to charity.

• Do not try to own. Just manage/govern.

Social Capital

Action plan

64


1) Need a system that can

prevent wealth shift

- Prevent tunneling

(business given to family companies should

be a breach of corporate opportunity and

considered a gift and taxed as such).

- Nurture the development of market

watchdogs.

- Forming a favorable long-term investment

condition for funds.

2) Need to relieve

tax pressure

- Inheritance-gift tax rate should be

reduced to 30% or lower.

- Dividend income should be excluded from

the comprehensive income tax.

3) Need to change public

perception of corporate succession

- Emphasis on intellectual,

human, and social capitals.

- Son-in-law can be better than the son, the

foster child can be better than the son-in-law,

and an outright sale of the company could be

better than succession to the foster child.

- Companies eventually fail!

- Do not try to own. Just govern/manage!

Solution

1-10. Conclusion: Inheritance Pressure ➔

Tunneling/Propping/Expropriation ➔ Korea Discount

Inheritance-

Gift tax

Side effect

- Unfair wealth shift among shareholders

Tunneling: Favoring private family companies over listed companies

Propping: Obsessed with appearance, subsidies to affiliates

Expropriation: Siphoning off listed companies’ profits for personal

gain and luxury consumption (through many schemes like

expropriation, spin-off, merger, etc.)

- Korea Discount

Inheritance

Culture and

Company

succession

• Confucian culture of succession

to the eldest son living in the 21st century

• But mentally stuck in the

Chosun Dynasty

• Owner families focused only

• On avoiding/reducing inheritance

• tax and increasing stake in the group

• Not only tax reduction but outright

• evasion

• Some 2nd and 3rd generation lacking

• proper education: lack of management skills

• Society issues such as overhanded behavior

• ‘Gapjil’ and illegal acts

antipathy towards chaebols

• World’s highest gift and

• inheritance tax (60 - 65%)

• Dividend income tax

(Maximum of 50% if health insurance added)

vs. Capital gains tax (22%)

• Tax arbitrage possible

Issues

65


2-1. Financial system in crisis

Causes for crisis

1. Triple nutcracker

Threat from China

Recovery of Japan

Reshoring of

U.S.

2. Antipathy towards chaebols

• Weak transparency,

Weak regulation on tunneling/favoritism

Tunneling/Favoritism

‘Gapjil’

Moving Personal Wealth

Overseas

• Jury is Out on

Chaebols’ Ethical

Standards

• Public crisis as chaebols have lost trust as fiduciaries

3. Reduced ownership level and lack of growth engines

Reduced ownership levels

Many company owner families have less than 10% stake

Limits to overprotecting

chaebol elites

Lack of vision

Growth coming solely

from innovative

companies

Weak domestic sales,

Weak global growth

Rising demand

for fair distribution such

as dividends

4. Growth of pension funds and activist funds

Stewardship code introduced

Rise of shareholder activism

66


60 years following the Korean War many companies are being handed over to third generation: sharply

reduced ownership levels

The term ‘owner’ becoming inappropriate when they own only a 2% stake.

2-2. Chaebol system in crisis

Reference: : Fair Trade Commission 2014

2.14.4

48.2

2.32.04.2

48.3

2.2

0

20

40

2013 2014

(%)

Ownership levels of major groups that have group chairman

Chairman Chairman’s

family

Affiliates Miscellaneous

67


2-3. Korea Discount

(Market value and USD/KRW exchange rate as of 2018.11.11., turnover and operating profits as of 2017.4Q-2018.3Q)

Reference : Yahoo Finance

Comparison among Apple / Google / Samsung (in KRW)

Market

capitalization

1,066 trillion

299 trillion

817 trillion 3.6 timesKorea Discount

Apple

Samsung

Electronics

Google

280 trillion

247 trillion

136 trillion 1.13 times

Apple

Samsung

Electronics

Google

Operating

profits

74 trillion

60 trillion

33 trillion 1.23 times

Apple

Samsung

Electronics

Google

Turnover

68


2-4. Korea Discount (cont’d)

Comparison based on Valuation Figures

Note: Forward-looking P/E, Trailing P/B

Reference : Thomson Reuters, Bloomberg

Price to

Earnings(P/E)

Ratio

Apple

Samsung

Electronics

14.35x

6.47x

Google 25.14x

U.S. 24.26x

OECD 14.6x

Korea 9.0x

2.7 timesKorea Discount


Price to

Book(P/B)

Ratio

Apple

Samsung

Electronics

8.6x

1.2x

Google 4.3x

U.S. 4.0x

OECD 1.6x

Korea 0.86x



69


16.7

13.3 12.6

11.1

7.9

0

2

4

6

8

10

12

14

16

18

(times)

P/ E Ratio of Major Countries

• P/E: Korea (7.9 times), U.S. (16.7 times), EU (13.3 times), Japan (12.6 times), China (11.1 times).

• P/B: Korea (0.9 times), U.S. (3.1 times), EU (1.6 times), China (1.5 times), Japan (1.2 times).

• For companies with technology, know-how and entrepreneurial spirit there is no incentive to list in Korea.

Korea is forcing high-technology companies to list overseas

Innovation is being stifled by a web of regulations

Note) MSCI 12-months forward-looking

Reference: Thomson Reuters

3.1

1.6 1.5

1.2

0.9

0

1

1

2

2

3

3

4

(times)

P/B Ratio of Major Countries

Note) MSCI 12-months forward-looking


U.S. EU Japan China Korea U.S. EU Japan China Korea

70



2-6. Public is Angry at Chaebols’ Unethical Behavior

Tunneling: Favoring private family companies over listed companies

Parent

company

Second-tier

subsidiary

10% stake

30% stake

30% stake

1000

300

90

9

Dividend flow

Private family company

receiving the Group’s

profitable business

100%

stake

Tunneling

12.8

First-tier

subsidiary

Net of Taxes 5.2

Dividend of 10

Tunneling to private

companies more

advantageous than

receiving dividends from

listed companies

Main reason behind

the

world’s lowest

dividend payout ratio

Dividends will likely

increase after

reorganization to holding

company structure

Assuming highest

income tax bracket

(41.8%)

Net of Taxes 5.2

(Corporate tax 22%)

Major

shareholder

71


2-7. Low Growth Environment will test Management Quality

Low growth and income inequality• Due to a decline in productive workforce Korea will face negative growth in the next decade. Slowdown in consumption will be more

problematic than slowdown in production.

According to an estimate by the UN Korea’s per capita consumption in 2025 is expected to be 12% lower than that of 2010

We have less than two years of golden time left.

• As the current government measures are artificial they are not likely to solve the key issues of production efficiency and demand

increase. As such the measures could just end up raising economic volatility.

• If the Korean economy stays the current course and fails to break through with new growth engines the next decade looks bleak. There

are some wild cards like the unification of the Korean peninsula or a radical change in immigration policy.

0

1,000

2,000

3,000

4,000

5,000

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070

(USD)

Structural reform, Reunification,

Successful immigration policy

Government

intervention Failure

Trend of Korea’s per capita consumption (UN est.) and policy variables

Reference: UN

72


Chinese companies on the way up / Korean companies standing still

• In Year 2000 both China and Korea had 12 companies among the World’s 500 top corporates. Since then the number of

• Chinese companies in the World’s Top 500 skyrocketed to 110 by Year 2016.

• Korean companies are actually losing competitiveness. The number of Korean companies in the World’s Top 500 went

down from 17 in Year 2015 to 15 in Year 2016.

2-8. Korea Discount

Reference: Fortune Global 500 (2014), the Federation of Korean Industries

Korean and Chinese Companies among the World’s Top 500 Corporates

120

100

80

60

40

20

0

(Unit)

12 each

2000 2002 2004 2006 2008 2010 2012 2014 2016

110

15

China Korea

73



Households have no money to spend

• Personal Gross Disposable Income (PGDI) as a % of Gross National Income (GNI)was 77% in 1975. This fell to 56% in 2013.

• The main driver of savings is the corporate sector rather than the household sector: dividends and wages should go up.

Reference: the Bank of Korea, Shinhan Investment Corporation

Time to shift the income from companies to households

80

75

70

65

60

55

(%)

1975 1980 1985 1990 1995 2000 2005 2010

23

20

17

14

11

8

(%)

PGDI/GNI (left) Corporate savings ratio (right)

74


Dividend payout ratio of major countries Dividend yield of major indices

60.2 58.1

47.9 45.6

39.9 39.1

33.7 32.6 30.9

20.4

0

10

20

30

40

50

60

70(%)

0

1

2

3

4

5

6

7

8

9

10

'02.01 '04.01 '06.01 '08.01 '10.01 '12.01 '14.01 '16.01 '18.01

(%)

2-10. Korea Discount: Why?

Low dividend payout ratio compared to other major countries

• Low dividend payout ratio is one of the main causes for the Korea discount.

The Taiwan stock market has many similarities with the Korean stock market. YTD 2018 Taiex (Taiwan

Capitalization Weighted Stock Index) is up by 1.4%. This compares with KOSPI which is down 7.9% YTD 2018.

• Dividend yield of Taiwan (4%) is twice as high as that of KOSPI (2%).

Reference : BloombergReference : Bloomberg

S&P500

Dividend yield

Taiex

Dividend yield

U.K.

KOSPI

Dividend yield

Taiwan EU France Germany H.K. U.S. China. Japan Korea

75


0

10

20

30

40

50

60

70

80

1%

2%

3%

4%

5%

6%

7%

Dividend payout ratio and dividend yield

2-11. Korea Discount: Why? (cont’d)

Korea’s extremely low dividends• Major shareholders prefer tunneling and siphoning profits over dividend issuance → World’s lowest dividend payout

ratio and dividend yield

• Regulatory authorities are stepping up their efforts to stop tunneling. Minority shareholders are demanding higher

dividends as companies’ cash reserves are rising while return on equity (ROE) is going down.

Korea Discount can be eliminated if tunneling were prohibited and dividends were raised. As the 10 million small

individual investors benefit from increased dividends the domestic economy would enjoy a true income-led growth.

Genuine opportunity to shift from ‘real estate capitalism’ to ‘financial capitalism’.

Reference: Thomson Reuters, Shinhan Investment Corporation

Estimated 12-months dividend payout ratio (right, %)

Estimated 12-months dividend yield (left, %)

Th

aila

nd

Austr

alia

Fin

land

Sw

eden

Port

ugal

Sp

ain

Sw

itzerla

nd

Pola

nd

Italy

South

Afr

ica

Fra

nce

Sin

gapore

Norw

ay

Mala

ysia

Belg

ium

Pakis

tan

Bra

zil

Chile

Canada

Hong K

ong

Taiw

an

Phili

ppin

es

Germ

any

Denm

ark

Indonesia

U.S

.

Mexic

o

Chin

a

Tu

rkey

Ja

pa

n

Indonesia

Gre

ece

Russia

Arg

entin

a

Kore

a

U.K

.

76


0

2

4

6

8

10

12

14

16

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

'05.01 '06.01 '07.01 '08.01 '09.01 '10.01 '11.01 '12.01 '13.01 '14.01 '15.01 '16.01 '17.01 '18.01

2010.05

Greece relief loan

2011.08

U.S. credit rating

downgrade

Earnings momentum necessary for eliminating the Korea Discount

2-12. Eliminating the Korea Discount

Korea Discount can be eliminated with (a) corporate earnings growth and (b)

stronger role of institutional investors

Companies in the KOSPI has shown positive earnings growth since 2016. The market is still implying a high discount rate.

• Under the current administration many new investment opportunities may arise with North Korea (NK).

• For the Korean stock market the most important factor is not the geopolitical risk posed by nuclear North Korea. The most important

factor is the improvement in corporate governance.

• Shareholders’ interest must be enhanced through (a) capital efficiency coming from improved governance and (b) higher dividends.

• At the present the Korean stock market is dominated by large groups and cyclical industries. This dominance should be lowered,

and there should be more investments in the Fourth Industrial Revolution sectors.

Note)MSCI, 12-months


(%)(KRW)

KOSPI 12-months

estimated EPS (left)

KOSPI discount rate

(right)

77


2-13. Eliminating the Korea Discount (cont’d)

• As institutional investors strengthen their role companies would use their capital more efficiently. The adoption and proper

implementation of the Stewardship Code can help eliminate the Korea Discount.

• Case of U.K., Malaysia, Germany and Taiwan: the adoption of the Stewardship Code led to a lower market required yield (Cost of

Equity). This in turn led to an expansion of the P/E multiple (average multiple of 15 times).

• Case of U.S., Australia, Canada, Japan: High capital efficiency led to P/E multiple expansion (average multiple of 17 times).

Korean companies need to focus on P/E expansion in the mid to long-term

U.S.Australia

CanadaJapan

U.K. Malaysia

Germany

Taiwan

Korea

2

3

4

5

6

7

8

9

10

11

12

3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0

(FCF/market capitalization, %)

(COE, %)

Size of circle = P/E multiple

Adoption of Stewardship Code Elimination of stock market discount factor

Monitoring function strengthenedCapital efficiency goes upP/E multiple expansion

Note)MSCI, 12-months


Category COE(%)FCF/Mkt

(%)

P/E

(times)

Capital

efficiency

U.S. 5.6 4.7 18.5

Australia 6.8 4.8 16.1

Canada 6.9 5.1 16.8

Japan 6.2 5.6 17.3

Stewardship

code

U.K. 4.5 7.3 15.2

Malaysia 6.1 7.1 16.7

Germany 6.8 9.9 14.0

Taiwan 6.4 10.8 14.0

Korea 10.4 7.8 10.0

Korea Discount can be eliminated with (a) corporate earnings growth and (b)

stronger role of institutional investors

78


2-14. Eliminating the Korea Discount (cont’d)

Global activist funds are marching into Asian markets

• Global activist funds are engaging with more and more Asian companies → this implies attractive valuation, which means

we should expect more intervention.

• Stewardship Code is getting adopted throughout Asia: Malaysia, Hong Kong, Taiwan, Singapore, Korea, etc.

• In the U.S., campaigns for board seats are decreasing, but M&A-related demands are steadily rising.

• In Asia demands related to the company’s major business decisions are increasing. Campaigns for board seats are rising

more slowly.

Note)MSCI, 12-months based


9

32

52

85

0

10

20

30

40

50

60

70

80

90

(%)

320 in 2014350 in 2015

44 in 201458 in 2015

21 in 201432 in 2015

13 in 201424 in 2015

Number of Asian companies targeted by activist funds

U.S. Europe Asia Asia (except Japan)

Percentage increase in the number of companies

targeted by activist funds

(2015 vs. 2014)

79


• Stewardship Code is the basic principle setting out good practice for institutional investors as stewards.

• Essential function: Institutional investors, as both shareholders of investee companies and fiduciaries of clients/beneficiaries, must monitor the

investee company management and engage with thel management.

• Management risk of investee companies to be reduced and confidence in fiduciaries to be strengthened by expanding the role of the

institutional investors (monitoring management boards and exercising shareholder rights).

• This will be the crucial turning point for eliminating the Korea Discount.

Significance- Emphasizing the fiduciary responsibility of the institutional investor.

- Self-regulating standard for institutional investors.

Main role- Actively participating in the investee company’s decision-making process, preventing company misbehavior and pushing for transparent

management.

- Emphasizing the shareholder responsibility to push for improvement in corporate governance.

Who it applies to - Institutional investors that own Korean listed shares as well as proxy consulting companies and investment advisory companies

How it is applied- Institutional investors are not legally required to adopt the Code.

- Once an institutional investor adopts the Code and makes it public the investor would be required to publicly disclose how it has discharged its

responsibilities.

7 principles

- 1. Publicly disclose their policy on how they will discharge their stewardship responsibilities.

- 2. Publicly disclose their conflict prevention policy.

- 3. Regular monitoring of their investee companies.

- 4. Establish clear guidelines on when they will escalate their activities to protect and enhance shareholder value.

- 5. Establish a clear policy on voting and disclosure of voting activity.

- 6. Report periodically on their stewardship and voting activities.

- 7. Develop internal capability and professionalism in order to effectively discharge their steward responsibilities.

Stewardship code encouraging institutional investor intervention

3-1. Stewardship Code: Eye of the Storm

Stewardship Code: Emphasis on responsibility of institutional investors

Reference: National Pension80


Growth of SRI (2014 vs. 2016) Regional Breakdown of SRI (2016)

Region 2014 2016Growth over

period

Europe 10,775 12,040 11.7%

United States 6,572 8,723 32.7%

Canada 729 1,086 49.0%

Australia/

New Zealand148 516 247.5%

Asia ex Japan 45 52 15.7%

Japan 7 474 6,689.6%

Total 18,276 22,890 25.2%

3-2. Stewardship Code: Eye of the Storm (cont’d)

Total size of Socially Responsible Investment globally: USD 22.9 trillion

(About 25% increase from end-2014 to end-2016)

• Of the total professionally managed assets globally about 26% is managed by the SRI strategy.

• SRI strategy in Europe represent 52.6% of global SRI total. This is because SRI strategy is used to fulfill asset managers’ fiduciary

• responsibilities.

• In Australia / New Zealand more than half of all professionally managed assets are SRI strategy.

Reference: 2016 Global Sustainable Investment Review, GSIAReference: 2016 Global Sustainable Investment Review, GSIA

52.6%38.1%

4.7%

2.3%0.2% 2.1%

22.9trillion

Europe

United States

Canada

Australia/NZ

Asia ex Japan

Japan

(USD bil)

81


3-3. Current SRI status in U.S.

Steep rise in U.S. after the Global Financial Crisis

From end-2007 to end-2016 SRI went up 3.2 times

Reference: Report on US Sustainable, Responsible and Impact Investing Trends 2016, US SIF

Trend of SRI in U.S.

14,000

(USD bil)

12,000

10,000

8,000

6,000

4,000

2,000

0

1995 1997 1999 2001 2003 2005 2007 2010 2012 2014 2016

2,711

8,723

3.2 timesCompany-related strategy

ESG factor-included strategy

Overlapping strategy

82


3-4. Current SRI status in U.S. (cont’d)

7 different types of SRI:

‘negative screening’ is the most frequently used

• Size of SRI with ‘negative screening’ amounts to USD 15.2 trillion, while the ‘ESG Integration’ amounts to USD 10.4 trillion.

• Size of ‘Impact Investing’ and ‘Sustainability themed investing’ grew by 140% (from end-2014 to end-2016).

Size of SRI by type (2014 vs. 2016)

(USD bil)

Negative screening

3,000

ESG Integration

Company-related activity

Shareholder action

Standard-based screening

Positive screening

Sustainability theme investment

Impact/local/social investment

6,000 9,000 12,000 15,000 18,000

12,04615,023

7,52710,369

5,9198,365

4,3856,120

8901,030

138331

101248

2014

2016

Reference: National Pension Service83


514

847

1,261

1,732

2,184

2,494 2,541

2,201

1,334

-281-500

0

500

1,000

1,500

2,000

2,500

3,000

2013 2015 2020 2025 2030 2035 2040 2045 2050 2055

3-5. Current SRI status of Korea National Pension Service (NPS)

• To fulfill its responsibility to ‘improve and diversify the outsourced management styles for domestic equity and to contribute to the

domestic financial market development’ NPS introduced SRI back in 2006: but at end-2016 it was lingering at 6.2% of its total domestic

equity portfolio.

• Merger between Samsung C&T Corporation and Cheil Industries → Criticized first as a rubber stamp shareholder and later as an

accomplice → Elliott vs Samsung.

• NPS holds a dominant position in the domestic SRI market, but NPS has failed to develop this strategy since adoption in 2006.

Compared to the size of the global SRI managed assets NPS’s SRI is extremely small..

Growth of NPS: Assets under management (estimates) Size of SRI at NPS

(Unit : USD tril)

8

0

2007 2009

6

4

2

2008 2010 2011 2012 2013 2014 2015 2016

6.46.9

3.4

0.4

Responsible investment size (USD 1 trillion)

Responsible investment/domestic stock(%)

Reference: National Pension ServiceReference: National Pension Service

84


Elliott’s Proxy Contest of Cheil/Samsung Merger: Nothing Gained

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

0

50,000

100,000

150,000

200,000

250,000

2015.6.4 Elliott Management

Opposed the merger resolution between Cheil Industries and

Samsung C&T

2015.7.17 Merger resolution passed

3-6. Stewardship Code: Eye of the Storm

Elliott positioned to win the game

But due to a lack of knowledge of Korean tradition and norms, they are framed as a ‘foreign hedge fund’

Foreign speculator vs. Local Business Owner

Reference: Quantiwsie

Volume

(stock)

Share Price

of Cheil

(KRW)

85


50.2%

19.9%

11.7%8.5% 9.7%

0%

20%

40%

60%

Board_related Activism M&A Activism Balance sheet Activism Operational Activism Other

Activist funds by type of campaign (based on 2015)

3-7. Stewardship Code: Eye of the Storm (cont’d)

Campaign “Shareholder activism”: One must study without greed!

Shareholder activism will be the foundation for overcoming the Korea Discount.

• It is important to have a calling for corporate governance improvement.

• It is important to slowly gain traction for the campaign.

• Rather than demanding huge dividends or treasury share purchases the activist investor must study how the company can

achieve long-term growth and stability.

Reference: Activist Insight

86


Activists’ demand for corporate governance improvement leads to good long-

term performance

Performance of major shareholder activists

Rank Shareholder activist

Number of public

activities

Number of new

investmentsAverage investment

(USD mil) Investment return

2013 2015 2013 2015 2013 2015 2013 2015

1 Elliott Management 10 18 6 19 726 7,600 23.6% 6.4%

2 Carl Icahn 14 7 8 8 1,200 9,700 40.8% 19.4%

3 Third Point Partners 5 7 9 29 376 71,600 73.4% -1.0%

4 Starboard Value 11 7 10 26 139 7,400 43.4% 0.1%

5 Trian Fund Management 5 4 60,700 0.9%

6 ValueAct Capital Partners 3 7 12 8 386 26,000 73.5% 2.1%

7 Land & Buildings 5 4 5,500 18.3%

8 Bulldog Investors 5 11 11 16 10.5 300 15.6% -4.2%

9 GAMCO Investors 13 8 3 6 68.1 3,300 54.6% -12.2%

10 Pershing Square 5 5 4 5 961 30,400 13.8% -18.4%

3-8. Home-Grown Activist Funds Must Emerge

Reference: Activist Insight

• Cahl C. Icahn and Elliott Fund are known to have achieved investment returns of 30% and 20% per annum, respectively, over the

last 35 years.

• Shareholder activism in the U.S., Europe, Japan and all other parts of the world is becoming an effective way to monitor major

shareholders and professional management.

87


Corporate governance = decision-making process

Corporate

Governance

Ownership

structure

Major shareholder

Employeestock ownership

Internal shareholder

External shareholder

Affiliated persons(relative, family members, board members)

Minorityshareholder

Pension, asset management,

securities companies,

insurance, bank, etc.

Institutionalinvestor

Foreigninvestor

Korea POST, MOEF,

Ministry of Labor, etc.Government

Regular shareholders’ meeting

Extraordinary shareholders’ meeting

Inside director

Outside director

Internal: auditor, audit committee

External: accounting firm

CEO, executives, employees

Management

structure

Shareholders’

meeting

Board

Audit

committee

Professional

Management

4-1. Company organization structure

-Must move away from all decisions being made by major shareholders

88


Various stakeholders surrounding the company

4-2. Corporate Governance and Corporate Social Responsibility (CSR)

• Transparent management, shareholder-focused management, and social responsibility are necessary

for sustainable management.

Corporate Governance

1. Ownership structure:

internal and external shareholders

2. Management structure:

Shareholders’ meeting, board, audit committee

Employee,

labor unionCreditor

Partner

companiesCustomer

Corporate

activity

Society

Social

Responsibility

Media

Transparency

Nation

Legal & Tax

Environment

Environment

89


The Role of PEF

To perform four different roles simultaneously ..• To develop a framework for funds to invest for a long term, thereby allowing them to help companies achieve long-term growth

• When pension funds outsource to investment managers pensions should refrain from short-term performance evaluation and

frequent redemptions.

• To encourage PEF and other funds to monitor investee companies and to exercise their stewardship responsibilities.

1 2

3 4

PEF as a new form of corporate governance Improvement in corporate governance

and management transparency

A supporter for smooth family business

succession and management stability

Accelerate governance improvement

through enterprise group restructuring

and finding new growth engines

90


4-3. Corporate Governance and the role of Private Equity Funds (PEF)

PEF as a new form of corporate governance: Korea is in the midst of a transition from owner management to professional management

• Rising possibility of changes in ownership and/or management

1) Threat of losing management control due to sharply

reduced ownership levels

2) Conflicts among siblings (sometimes leading to businesses getting

split up)

3) Restructuring becomes a must and new business areas must be

found.

4) More and more descendants are showing no interest in

management.

Ownership transition through PEFPEF can be a bridge between owner management

and professional management (help the development

of a healthy pool of professional managers)

Management type and PEF

Professional

management

Lack of in-house

developed professional

management promotion

Ownership

management

PEF+professional

management

brought in from

outside

Professinal

management

promoted from

within

91


4-3. Corporate Governance and the role of Private Equity Funds (PEF) (cont’d)

Supporter of family business succession and inheritance

• Smooth succession and inheritance are difficult for many reasons: Descendants too young or not capable, conflicts among siblings, lack of

resources to pay gift/inheritance tax, lack of capital to finance new growth areas, etc.

• When some siblings wish to cash out their stake and reinvest only a portion.

• When some siblings wish to sell their stake and other siblings wish to keep their stake.

• PEF taking over the to-be-inherited shares can be an objective third party and give the descendants a call option. PEF can provide bridge

• financing and business synergy as well as guaranteeing an opportunity to regain control.

Management consulting and financial support: PEF professionals can check the management capability of descendants who lack experience

and help groom them.

Illustration of the role of PEF

PEF

Investment

Cash Payment

Share handover

Tax payment,

Loan repayment

Investment

Fund Stake

Fund Stake, Call Option

Part of the cash received gets invested as subordinated shares

Seller

(Current owner/manager,

descendants, etc.)

Investor 1

: GP+

Senior LP

Investor 2

: Junior LP

92



Corporate governance and improving transparency

• Unlike the case of owner management it is unlikely for PEF to engage in tunneling, propping or expropriation. As a general partner (GP) of other

funds PEF can bring synergy with among investee companies.

• As GP is subject to demands from limited partners (LP) the decision-making process and information transparency will likely improve.

• As PEF wishes to achieve high investment returns dividends issued by investee companies are likely to rise. This could help eliminate the

Korea Discount.

• In terms of behavior activist funds are somewhere between hedge fund and PEF. Activist funds can help improve shareholders’ interest by

demanding corporate governance changes.

• Since Korea has a big room for improvement in corporate governance activist funds are well positioned to achieve high investment returns.

PEF’s tasks in corporate governance

1 2

3 4

Active management participation

to improve corporate governance

Enhancement of enterprise value through

greater transparency and

shareholder-focused management

Supporter of family business succession

and inheritance by building trust with

various stakeholders

Provide investee companies investment opportunities

by leveraging PEF’s professionalism and global network

93



I A Five-Year Plan to Restore Trust in HanjinI N D E X



IV About KCGI

94

Introduction

Company Name: Korea Corporate Governance Improvement

(KCGI) Co., Ltd.

Management: Sung Boo KANG (CEO)

Executive Team:

• Nam Kyu KIM EVP (CSO/CCO)

• Min Seok SHIN EVP (CIO)

• Tae Doo CHUNG SVP

No. of employees: 6

Company Size (as of end-Sept 2018):

• Assets KRW 1,082 million

• Capital KRW 1,057 million

Assets under Management (as of end-2018): approximately KRW

230 billion

History:

• 2018.07 Established the Company

• 2018.08 Launched a blind pool fund

(approx. KRW 160 billion)

• 2018.11 Launched Project Fund I


• 2018.12 Laucnched Project Fund II


Organization Chart

Portfolio

General Information and History

HANJIN KAL

Corp.

10.81%

Hanjin

Transportation

Co., Ltd.

8.03%

Innowireless

Co., Ltd.

18.57%

1. Introduction

CEO

Investment Committee

General

Management

Investment

Management

Risk/

Compliance

95

IV. About KCGI

Korean culture-maker: Pioneer on a mission to improve corporate governance in a “Korean way”

• KCGI wishes to contribute to the establishment of a proper corporate governance culture in Korea. We have learned from the experience

of foreign activist funds who sometimes overlooked Korea’s unique culture and norms. We will carefully blend the global best practices

with our on-the-ground knowledge of the relevant legal and market environment.

1

2. KCGI Engagement & Activism Concept

KCGI Engagement & Activism Concept

Cohesive sentinel: Promoter of overall shareholder welfare through checks and balances rather than fighting over corporate control

• KCGI aims to bring a balance of power between controlling and minority shareholders of our investee companies. KCGI would like to

see a fair distribution of benefits among shareholders.

2

Growth helper: Advisor/helper working together with investee companies on long-term growth strategies

• KCGI would like to act as a management consultant, advisor and helper to investee companies. In particular KCGI would like to

contribute to the formulation of their long-term growth strategies. We will remain humble and constantly learn from global best

practices..

3

Investment partner: Companion/partner for investee companies’ sustainable development

• KCGI, as a long-term investor, aims to maximize investment returns as our investee companies increase their enterprise value and

engage in sound and sustainable management.

4

96

IV. About KCGI

GSE Strategy

3. KCGI Strategy

2. Succession

Strategy

Invest in companies that are facing succession issues. KCGI can help engineer various investment

structures as well as create synergies by bringing in strategic investors.

KCGI can also advise on succession planning and provide the required financing.

3. ESG Responsible

Investment Strategy

Invest in companies or industries with high ESG scores or improving ESG scores. As a long-term

investor KCGI can be flexible in their investment decisions. This allows KCGI to consider many

investment factors besides financial performance.

1. Governance

Improvement Strategy

Value destruction by controlling shareholders → governance improvement and synergy creation

→ maximization of enterprise value

Buy out the controlling shareholder or engage actively as a second or third largest shareholder.

97

IV. About KCGI

Advisory & Consulting Experience

Consulting on governance and business restructuring for major corporate groups in Korea

Gave special lectures at Seoul National Univ. Sogang Univ. , Pusan National Univ. and others

Served as an advisory committee member on numerous occasions for the Ministry of Public Administration and Security, Korea Deposit Insurance Corporation, three major ratings agencies,

Ministry of Finance and Economy, Korea Development Bank, Seoul National Univ. Endowment Fund, Community Chest of Korea, and Gyeonggi-do Start-up Committee

Chief Executive Officer

4. KCGI Team Members

Sung Boo KANG

• 2018.08 ~ present CEO of KCGI Co., Ltd.

• 2015.04 ~ 2018.07 CEO of LK Investment Partners Co., Ltd.

• Previously Credit Analyst at Daewoo Securities, Tongyang Securities, and Shinhan Investment Corp. Research Center

At Shinhan, Sung Boo was the Head of Fixed Income Team and Head of Global Asset Strategy Team

• MBA in Financial Management, Seoul National University

• BA in Economics, Yonsei University

Transactions at KCGI

• KCGI Private Equity Fund 1 (KRW 160 billion Blind Pool Fund)

• Innowireless Co., Ltd.(KOSDAQ) Buyout + CB (KRW 44 billion with HELIOS Co., Ltd. as co-GP)

• KCGI Private Equity Fund 1 – 1 (KRW 26 billion)

Transactions at LK

• Private equity investments in five companies, including Yojin C&E Co., Ltd. and Hyundai Cement Co., Ltd.

Awards

2008 – 2014 Voted Best Analyst in the category of credit, fixed income, holding company and asset allocation by Korea’s major media,

including Korea Economic Daily, Maeil Business News, Fn-Guide, and Chosun Ilbo

2013 Selected Best Analyst by Korea Financial Investment Association

2009 Awarded the Grand Prize for the Highest Spirit by Tongyang Group

Publications

Annual publication of a reference book on Korean and global corporate governance since 2006

Various columns for Maeil Business News and other leading dailies and weeklies

98

IV. About KCGI

Executive Team

4. KCGI Team Members (cont’d)

Nam Kyu KIM EVP

• Partner, Chief Strategy Officer and Chief Compliance Officer. Most recently Nam Kyu was a senior counsel in the Legal

Department of Samsung Electronics. Prior to that he was the Head of Compliance & Risk Management Team at

Samsung Medison and S1. He worked on M & A and other financial transactions at Accolade, Inc.

• Member of Korean Bar (completed the 34th Class at the Judicial Research and Training Institute of the Supreme Court

of Korea)

• LLM and LLB from Korea University

Min Seok SHIN EVP

• Partner and Chief Investment Officer. A financial expert with 16 years of experience as a securities analyst.

• After graduating from Hanyang University with a degree in mathematics Min Seok started his career at Daewoo

Securities (now merged into Mirae Asset Daewoo) Research Center in 2007. Since then he served as the head of

industrial materials team at leading securities companies such as Shinhan Investment Corp. and Hana Financial

• Investment. Throughout his career he maintained an excellent reputation in the transportation/utility sector.

• In particular he has been specializing in the analysis of corporate governance issues in Korea’s transportation industry.

• As a founding member Taedoo has been in charge of setting up KCGI Private Equity Fund 1 (KRW 160 billion) and

KCGI Private Equity Fund 1 – 1 (KRW 26 billion). He analyzed and helped execute the investment in Innowireless Co.,

Ltd. management buyout deal (KRW 44 billion).

• He gained experience in the private equity market in Korea by working on various transactions at VOGO Fund.

• BS in Applied Mathematics from Columbia University

Tae Doo CHUNG SVP

99

IV. About KCGI

Main Issues in Airline Industry

- Oil Price / Exchange Rate / Valuation of Liabilities

• $1 increase in Korean Air jet fuel price ⇒ 33 billion won increase in jet fuel expenses.

• $11.7 increase in 2017 ⇒ 400 billion won increase in jet fuel expenses.

• Increasing pressure on oil price due to recent international situation.

• Agreement on cutback in production among oil-producing countries/shale oil production rise in N.America

/Strong dollar expected with a rise in U.S. interest rates.

⇒ Limited possibility of a sharp rise in oil price due to these inflexible factors.

• Improvement in fuel efficiency by investing in new planes.

Oil Price

Low possibility of a sharp

increase of pressure on

oil price

• Higher exchange rate ⇒ higher pressure on oil price, lease payment, finance lease liabilities,

foreign currency loans, etc.

• 41 won decrease in 2017 average won-dollar exchange rate

⇒ cost saving effect of 70 billion won in oil and lease payments.

• Recent increase in U.S. interest rates / trade war issue along with currency volatility.

Exchange Rate

KRW-USD currency

fluctuation

Need to monitor

• Revised accounting standards in 2019 ⇒ addition of future operating lease payments as liabilities.

• Korean Air’s low dependence on operating leases.

• 1.89 trillion won for future operating payments as of the end of 2017

(12.7% of the total loans, 14.8 trillion won).

Valuation

of LiabilitiesFuture operating lease

payments

Add as liabilities

100

Appx. Issues in airline industry

Asset Efficiency Improvement and Return of Shareholders’ Interest

- Re-evaluation of unused assets

Land assets owned by Korean Air

Jongno-gu Songhyeon-dong land

about 36,000m2

Gyeongbok

gung

Palace

Incheon Yuldo about 109,000m2Jeju Island Jeongseok Airport

about 1,256,000m2

← Incheon

Int’l Airport

Incheon

Station

Cyprus CC

Gasi-ri

Booyoung

CC

• Purchase price in 2008-290 billion won, Current

book value-about 363 billion won,

Estimated market price-over 530 billion won.

• Seven-star hotel/Cultural Complex building

project miscarried due to opposing residents &

legal issues.

• Possible to improve the financial structure by

selling the land to repay loans.

• Current book value-about 189 billion won

(officially assessed land price-about 107 billion

won).

• Known as currently unused land in a factory site.

• Better to sell the land for the advantage of proximity

to Incheon Int’l Airport & Incheon Station to replay

loans.

• Purchase in 1997, current book value- 45 billion

won.

• The officially assessed land price of Gasi-ri rose by

40% over the last 2~3 years due to investment

demands from Chinese people and the 2nd airport

construction plan, prices of surrounding lands are

100,000~150,000 won per 3.3m2.

• The officially assessed price of lands(836,000m2)

confirmed on a certified copy of register is about 92

billion won.

Data source: analyst reports, journal articles, certified copies of register

*The above lands may differ in area from the actual data because these are based on certified copies of register with a reference to analyst reports and journal articles.

101

Appx. Unused lands status

Land assets owned by subsidiaries

Jeju Island Jedong Ranch

Jeongseok

Airport

Jeju Island Folk Village about 165,000m2 KAL Hotel Network-owned Hotels

Jeju Haevichi

• Jeju-si Jocheon-eup Gyorae-ri and Pyoseon-myeon

Gasi-ri areas-about 15 Mm2.

• Operated by Korea Airport Service, jointly owned by

ilwoo foundation, Jedong Leisure, Jungseok

Enterprise, etc.

• Estimated land value-over 450 billion won based on a

market price of surrounding lands(about 100,000 won

per 3.3m2 ).

• 5 times larger than Seoul Yeouido, 4.5 times larger

than NY Central Park, accounting for 1% of Jeju

Island.

• Ownership of about 165,000m2 of Jeju Folk

Village by Korean Airport Service, a

subsidiary of Korean Air.

• Officially assessed land price for

about156,000m2 verified on the certified copy

of register- about 28.2 billion won.

• Possible to develop this non-cultural

properties.

• Jeju KAL Hotel: land-about 12,000m2,

publicly assessed price-about18.7 billion won.

• Seogwipo KAL Hotel: land-about 70,000m2,

publicly assessed price-about 39.3 billion won.

• Paradise Hotel Jeju: about 40,000m2,

publicly assessed price-about 22.9 billion won.

• Grand Hyatt Incheon land owned by Incheon

Int’l Airport Corporation.

Jeju KAL

Hotel

Paradise

Hotel Jeju

Seogwipo

KAL Hotel

Data source: analyst reports, journal articles, certified copies of register

*The above lands may differ in area from the actual data because these are based on certified copies of register with a reference to analyst reports and journal articles102

Asset Efficiency Improvement and Return of Shareholders’ Interest

- Re-evaluation of unused assets

Appx. Unused lands status

Loss of over 800 billion won for Hanjin Shipping support

- No pressure on additional support with the declaration of bankruptcy on Feb. 2017

Cash

Flow

Emergency

loan support

KRW 250 bn.

loan

Participation in

KRW 400 bn.

paid-in capital

increase

Perpetual EB

TRS settlement

KRW 128.2 bn.

payment

2013.12 2014.12 2015.12 2016.12 2017.12

HJSApplication to start

recovery proceedings

HJSDeclaration of

bankruptcy

Non-operating

incomes

and

expenses

TRS-related

derived income

KRW +5.7 bn.

TRS-related

derived loss

KRW (-)14.6 bn.

• Investment in stocks 444.8 bn. won impairment loss

• 252.6 bn. won on impairment losses including hybrid bonds

• TRS-related derived loss KRW (-)111.6 bn.

Loss of over KRW 800 billion caused by the decision made to financially support

HJS.

With the declaration of bankruptcy from HJS, no more burden of additional financial support within the group.

103

Appx. Decision making for Hanjin Shipping support

Div. OwnershipShareholding

(%)BV

Estimated

sale/dev./

re-EVAL

Increment

against BV

from

sale/dev./

re-EVAL

Upside Remarks

Jongno-gu

Songhyeon-dong

land 36,000m2Korean Air 30.0% 3,630 5,300 1,670 500

Purchase price in 2008-290 bn. won, current BV-363 bn. won,

estimated market price-over 530 bn. won, seven-star

hotel/cultural complex building project miscarried due to opposing

residents & legal issues.

Incheon Yuldo

109,000m2 Korean Air 30.0% 1,890 3,000 1,110 333

Current BV-189 bn. won,

Currently not used as a warehouse in a factory site, over 300 bn.

won in estimated selling value as the proximity to Incheon Int’l

Airport & Incheon Station.

Jeju Island

Jeongseok Airport

1,256,000m2Korean Air 30.0% 450 1,971 1,521 456

Purchase in 1997, current BV-45 bn. won, the officially assessed

price of Gasi-ri rising by 40% over the last 2~3 years due to

investment demands from Chinese people and the 2nd airport

construction plan, its officially assessed price-110,000 won/m2,

estimated market value-200 bn. won given such assessed price

reflecting 70% of the market value.

Jeju Island

Jedong Ranch

Jedong

Leisure, etc.75.0% 2,480 4,500 2,020 1,515

Jointly owned by Korea Airport Service, Jedong Leisure,

Jungseok Enterprise, ilwoo foundation, etc., estimated land area-

15 Mm2, estimated land value-over 450 bn. won based on a

market price of surrounding lands(about 100,000 won per 3.3m2),

5 times larger than Seoul Yeouido, 4.5 times larger than NY

Central Park, accounting for 1% of Jeju Island.

KAL Hotel

Network-

Owned Hotels

KAL Hotel

Network100.0% 4,459 8,918 4,459 4,459

Operating Jeju KAL Hotel, Seogwipo KAL Hotel, Paradise Hotel

Jeju, & Grand Hyatt Incheon about 445.9 bn. won value of

tangible assets such as lands and buildings owned by KAL Hotel

Network.

Sum 7,262

Data source: analyst reports, journal articles, certified copies of register*The above lands may differ in area from the actual data because these are based on certified copies of register with a reference to analyst reports and journal articles104

Appx. Valuation(Upside detail on real estate sale/development/re-evaluation)

Hanjin Kal Consolidated Financial Statements

- Korean Air and Hanjin are excluded from the consolidated FS

Summarized Income Statement Summarized Balance Sheet

Category 2013 2014 2015 2016 2017 2018.3Q

Current Assets 3,742 3,378 3,306 3,785 7,256 7,739

Cash and cash equivalents 972 980 1,211 832 2,463 744

Short-term investments 2,036 1,646 1,261 2,020 3,717 5,736

Accounts and other receivable 481 414 539 589 580 753

Other current assets 253 338 295 344 496 505

Non-Current Assets 10,510 20,790 19,844 16,835 20,502 19,605

Property, plant and equipment 5,099 6,050 5,807 5,970 5,925 5,625

Investment properties 3,222 3,164 3,209 3,161 3,130 3,115

Intangible assets 80 102 90 69 56 107

Investments in associates

(Equity method securities)60 10,967 10,115 6,696 10,593 10,027

Other non-current assets 2,049 507 624 940 798 732

Total Assets 14,252 24,168 23,150 20,620 27,758 27,344

Current Liabilities 2,747 3,072 3,662 7,603 7,363 5,451

Accounts and other payable 524 566 747 917 1,046 1,101

Short-term debt, etc. 1,678 1,705 1,529 5,001 3,641 1,650

Current finance lease

obligations17 21 25 131 175 194

Other current liabilities 527 780 1,360 1,554 2,501 2,507

Non-Current Liabilities 3,933 4,795 5,069 1,988 3,297 4,649

Long-term debt, etc. 2,995 3,125 3,545 699 2,250 3,043

Finance lease obligations 135 120 103 341 281 146

Other non-current liabilities 803 1,549 1,421 948 766 1,460

Total Liabilities 6,681 7,866 8,731 9,591 10,661 10,099

Equity Attributable to Owners

of the Parent Company5,865 13,995 13,223 10,017 15,214 15,148

Capital stock 722 1,325 1,333 1,493 1,493 1,493

Retained earnings 138 2,455 208 -5,219 -2,942 -2,871

Other reserves 5,004 10,214 11,682 13,743 16,663 16,526

Non-Controlling Interests Equity 1,707 2,307 1,197 1,013 1,883 2,097

Shareholder's Equity 7,571 16,302 14,419 11,030 17,097 17,245

Total Liabilities

& Shareholder's Equity14,252 24,168 23,150 20,620 27,758 27,344

Total Debt 4,826 4,971 5,203 6,172 6,347 5,032

Net Debt 1,817 2,344 2,730 3,320 168 -1,449

Debt Ratio 88.2% 48.3% 60.6% 87.0% 62.4% 58.6%

Total Debt to Total Assets 33.9% 20.6% 22.5% 29.9% 22.9% 18.4%

Net Debt to EBITDA 5.0x 2.4x 2.6x 2.5x 0.1x -0.9x

(KRW 100 mil)

Category 2013 2014 2015 2016 2017 2017.3Q 2018.3Q

Revenue 2,414 6,250 7,223 9,910 11,497 8,511 10,066

Cost of revenue 1,878 4,789 5,631 7,980 9,324 6,751 7,788

Gross profit 536 1,460 1,592 1,930 2,172 1,761 2,279

Operating expenses 246 705 849 941 1,019 734 1,072

Operating Profit 290 755 743 990 1,153 1,027 1,207

Interest income 37 88 56 50 67 43 98

Interest expense 74 188 221 251 290 220 180

Income(loss) on

investment in associate1 2,024 -2,429 -2,035 1,771 808 -354

Other income 20 1,251 52 194 129 79 75

Other expenses 76 68 113 3,467 153 108 165

Net income before income

tax198 3,862 -1,913 -4,519 2,676 1,629 682

Income tax 36 869 139 -555 385 253 265

Net Income 162 2,993 -2,052 -3,964 2,291 1,376 417

Net income attributable to

owners129 2,175 -2,164 -4,068 2,219 1,335 130


the non-controlling

interests33 818 112 104 72 41 287

EBITDA 365 975 1,039 1,349 1,582 1,350 1,551

EBITDA Margin 15.1% 15.6% 14.4% 13.6% 13.8% 15.9% 15.4%

GP Margin 22.2% 23.4% 22.0% 19.5% 18.9% 20.7% 22.6%

OP Margin 12.0% 12.1% 10.3% 10.0% 10.0% 12.1% 12.0%

(KRW 100 mil)

105

Appx. Hanjin Kal FS

Hanjin Kal Separate Financial Statements

Summarized Income Statement Summarized Balance Sheet(KRW 100 mil) (KRW 100 mil)

Category 2013 2014 2015 2016 2017 2018.3Q

Current Assets 1,116 1,357 286 384 2,098 2,025

Cash and cash equivalents 384 284 201 289 88 64

Short-term investments 600 600 16 16 1,918 1,867




Property, plant and equipment 310 351 301 298 296 295

Investment properties 626 587 643 661 657 653

Investments in subsidiaries 5,000 4,982 4,585 4,585 4,894 4,894

Investments in associates

(Equity method securities)0 8,016 10,503 10,047 11,219 11,219

Other non-current assets 1,262 19 19 282 89 49

Total Assets 8,313 15,311 16,337 16,256 19,252 19,134

Current Liabilities 943 935 1,009 2,914 4,279 2,435

Accounts and other payable 20 16 28 21 29 27

Short-term debt, etc. 900 900 900 2,830 3,641 1,650

Other current liabilities 23 19 81 63 609 757

Non-Current Liabilities 1,975 2,118 2,268 765 12 1,519

Bonds 1,794 1,796 1,797 699 0 697

Other non-current liabilities 181 323 471 66 12 821


Capital stock 722 1,325 1,333 1,493 1,493 1,493

Retained earnings -37 177 235 -948 1,436 1,656

Other reserves 4,710 10,755 11,492 12,032 12,032 12,032


Total Liabilities

& Shareholder's Equity8,313 15,311 16,337 16,256 19,252 19,134

Total Debt 2,694 2,696 2,697 3,529 3,641 2,347

Net Debt 1,710 1,812 2,480 3,224 1,635 416

Debt Ratio 54.1% 24.9% 25.1% 29.3% 28.7% 26.0%


Net Debt to EBITDA 13.8x 5.2x 8.8x 7.6x 3.6x 1.0x

Category 2013 2014 2015 2016 2017 2017.3Q 2018.3Q

Revenue 147 418 416 601 588 499 520

Operating expenses 25 77 141 182 141 104 113

Operating Profit 122 342 275 420 447 394 407

Interest income 10 30 7 3 7 4 19


Other income 0 0 4 0 2,840 0 0

Other expenses 114 23 31 1,855 0 0 3

Net income before

income tax-27 241 154 -1,566 3,129 275 331

Income tax 9 20 57 -426 741 15 37

Net Income -37 221 96 -1,140 2,389 260 294

EBITDA 124 347 281 426 453 399 412

EBITDA Margin 84.4% 83.0% 67.5% 70.9% 77.0% 80.1% 79.2%

OP Margin 83.0% 81.8% 66.1% 69.9% 76.0% 79.1% 78.2%

106

Appx. Hanjin Kal FS (cont’d)


Category 2013 2014 2015 2016 2017 2018.3Q

Current Assets 3,101 3,852 4,464 4,505 4,926 4,590

Cash and cash equivalents 680 1,480 1,689 1,628 1,125 1,510

Short-term investments 20 9 64 48 56 66

Accounts and other receivable 2,183 2,123 2,384 2,105 2,416 2,202

Other current assets 218 241 326 724 1,330 813




Equity method securities 487 481

Investments in associates 600 772 461 469

Other non-current assets 4,665 4,803 7,447 7,409 6,939 6,935

Total Assets 18,074 19,559 25,037 25,376 24,538 24,425


Accounts and other payable 1,727 1,713 1,916 2,119 3,068 1,787

Short-term debt, etc 1,079 1,150 1,106 1,644 1,190 1,018

Other current liabilities 1,993 2,934 2,985 5,723 2,595 4,836


Bonds 3,696 2,737 2,291 2,447 2,377 885

Long-term debt 922 1,476 7,151 3,507 3,527 3,669

Other non-current liabilities 1,616 1,691 2,243 2,232 3,090 3,037


Equity Attributable to Owners of

the Parent Company 6,928 7,748 7,174 7,553 7,172 7,656

Capital stock 599 599 599 599 599 599

Retained earnings 4,294 4,682 5,586 5,951 5,418 6,081

Other reserves 2,035 2,467 989 1,004 1,156 977

Non-Controlling Interests Equity 113 111 171 149 1,520 1,536

Shareholder’s Equity 7,041 7,859 7,345 7,703 8,692 9,192

Total Liabilities & Shareholder’s

Equity 18,074 19,559 25,037 25,376 24,538 24,425

Total debt 10,561 13,102 13,173 8,141 7,621 9,953

Net Debt 9,861 11,613 11,420 6,465 6,440 8,377

Debt ratio 156.7% 148.9% 240.9% 229.4% 182.3% 165.7%



Category 2013 2014 2015 2016 2017 2017.3Q 2018.3Q

Revenue 14,996 15,328 16,417 17,648 18,126 13,471 14,216

Cost of revenue 14,126 14,304 15,414 16,732 17,171 12,785 13,344

Gross profit 871 1,024 1,003 916 955 687 872

Selling and administrative

expense468 499 592 1,069 739 535 561

Operating Profit 402 526 411 -153 216 152 311

Interest income 20 28 128 33 36 34 49

Interest expense -364 -369 387 690 1,430 1,278 402

Other profit/loss -36 434 1,089 1,418 647 737 826

Equity method gain 15 17 113 117 71 60 34

Equity method loss -97 -37 52 53 8 7 6

Net income before

income tax-60 598 1,302 671 -468 -301 813

Income tax 24 180 -316 296 2 11 195

Net income -84 418 987 376 -470 -311 618

EBITDA 778 897 843 522 904 669 835

EBITDA Margin 5.2% 5.9% 5.1% 3.0% 5.0% 5.0% 5.9%

GP Margin 5.8% 6.7% 6.1% 5.2% 5.3% 5.1% 6.1%

OP Margin 2.7% 3.4% 2.5% -0.9% 1.2% 1.1% 2.2%

107

Hanjin Consolidated Financial StatementsAppx. Hanjin FS


Category 2013 2014 2015 2016 2017 2018.3Q

Current Assets 2,615 3,526 2,994 3,526 4,281 3,700

Cash and cash equivalents 484 1,315 754 875 724 1,075

Short-term investments 14 1 25 25 26 42


Other current assets 195 210 241 629 1,501 766





Investments in associates 1,139 1,609 3,159 3,636 4,032 4,314


Total Assets 17,041 19,041 17,475 18,423 19,218 19,186



Short-term debt, etc. 887 1,150 1,100 1,590 1,185 1,005

Other current liabilities 1,971 2,916 2,798 2,614 2,403 4,499


Bonds 3,696 2,737 2,094 2,447 2,377 885

Long-term debt 375 994 1,265 663 742 1,035



Capital stock 599 599 599 599 599 599

Retained earnings 4,353 4,841 5,641 6,495 6,597 7,288

Other reserves 2,053 2,485 1,001 1,20 1,137 962

Shareholder’s Equity 7,005 7,925 7,241 8,114 8,333 8,848

Total Liabilities

& Shareholder’s Equity 17,041 19,041 17,475 18,423 19,218 19,186

Total debt 6,865 7,642 6,973 7,113 6,677 7,177

Net Debt 6,368 6,326 6,193 6,212 5,927 6,061

Debt ratio 143.3% 140.3% 141.3% 127.0% 130.6% 116.8%



Category 2013 2014 2015 2016 2017 2017.3Q 2018.3Q

Revenue 12,551 13,064 15,422 15,839 16,118 12,007 12,477

Cost of revenue 11,850 12,265 14,689 15,336 15,592 11,622 12,019

Gross profit 702 799 734 504 526 385 458


expense351 378 410 545 405 300 297

Operating Profit 351 420 324 -41 121 85 161

Interest income 30 38 129 41 45 44 75

Interest expense -325 -336 335 285 442 357 224

Other profit/loss -196 455 1,039 1,488 519 617 832

Net income before

income tax-141 576 1,157 1,203 242 389 844

Income tax 14 148 -258 -318 71 96 208

Net income -154 428 899 884 170 292 635

EBITDA 706 771 690 351 519 382 466

EBITDA Margin 5.6% 5.9% 4.5% 2.2% 3.2% 3.2% 3.7%

GP Margin 5.6% 6.1% 4.8% 3.2% 3.3% 3.2% 3.7%

OP Margin 2.8% 3.2% 2.1% -0.3% 0.7% 0.7% 1.3%

108

Hanjin Separate Financial StatementsAppx. Hanjin FS (cont’d)


Category 2013 2014 2015 2016 2017 2018.3Q

Current Assets 31,398 49,480 32,891 33,280 35,823 40,284

Cash and cash equivalents 11,268 7,966 9,675 10,899 7,612 14,411

Short-term investments 532 590 1,120 1,769 5,105 2,282


Inventories 4,643 4,302 4,906 5,647 6,827 10,641

Other current assets 4,839 26,499 7,676 7,695 8,708 3,844



Investment properties 686 1,756 3,095 3,249 3,223 3,300

Intangible assets 3,492 3,312 2,947 4,050 3,635 3,077


Total Assets 229,204 234,657 241,804 239,565 246,487 255,021



Short-term debt, etc. 48,937 43,954 47,956 49,649 29,647 27,590

Current Finance lease obligations 8,714 9,572 12,345 17,145 11,783 12,284

Other Current Liabilities 11,524 13,911 15,502 16,056 15,771 17,881


Long-term debt, etc. 45,343 54,313 29,826 28,312 43,055 49,294

Finance lease obligations 50,199 55,473 71,554 67,743 63,968 65,372

Deferred revenue 15,588 16,338 17,018 18,683 20,615 21,609


Total Liabilities 201,802 212,646 216,813 220,822 208,976 218,989Equity Attributable to Owners

of the Parent Company 26,470 20,909 23,871 17,607 36,294 34,779

Capital stock 2,989 2,989 3,698 3,698 4,798 4,798

Retained earnings 19,672 13,895 7,943 -1,929 5,767 4,494

Other reserves 3,809 4,025 12,231 15,838 25,730 25,487

Non-Controlling Interests Equity 932 1,102 1,119 1,137 1,217 1,253


Total Liabilities & Shareholder's Equity 229,204 234,657 241,804 239,565 246,487 255,021

Total Debt 153,194 163,311 161,680 162,849 148,453 154,541

Net Debt 141,394 154,755 150,885 150,181 135,736 137,848

Debt Ratio 736.4% 966.0% 867.6% 1178.1% 557.1% 607.8%



Category 2013 2014 2015 2016 2017 2017.3Q 2018.3Q

Revenue 118,487 119,097 115,448 117,319 120,922 89,852 97,256

Cost of revenue 107,536 103,895 95,174 94,352 99,912 73,550 80,708

Gross profit 10,951 15,202 20,274 22,966 21,011 16,301 16,548


expense 11,146 11,249 11,443 11,758 11,613 9,103 10,199

Operating Profit -196 3,953 8,831 11,208 9,398 7,198 6,349

Interest income 1,058 527 563 514 729 578 1,050

Interest expense 5,267 6,331 5,160 5,586 5,307 3,582 4,093

Income(loss) on investment

in associate -452 71 175 -1,123 113 116 8

Other income 7,331 5,369 3,859 5,110 14,931 8,347 2,671

Other expenses 7,175 8,007 13,132 17,297 8,647 6,831 6,344

Net income before income tax -4,701 -4,417 -4,864 -7,174 11,217 5,826 -361

Income tax -1,129 -1,569 -855 -1,606 3,198 1,621 214

Continuing operations

net income -3,572 -2,848 -4,009 -5,568 8,019 4,205 -575

Discontinued operations

net income -263 -3,281 -1,621 0 0 0 0

Net income -3,836 -6,129 -5,630 -5,568 8,019 4,205 -575


owners -2,250 -6,354 -5,650 -5,649 7,915 4,123 -624


the non-controlling interests -1,586 224 20 80 104 82 49

EBITDA 16,432 19,884 25,340 28,723 26,328 19,914 19,493

EBITDA Margin 13.9% 16.7% 21.9% 24.5% 21.8% 22.2% 20.0%

GP Margin 9.2% 12.8% 17.6% 19.6% 17.4% 18.1% 17.0%

OP Margin -0.2% 3.3% 7.6% 9.6% 7.8% 8.0% 6.5%

109

Korean Air Consolidated Financial StatementsAppx. Korean Air FS


Category 2013 2014 2015 2016 2017 2018.3Q

Current Assets 29,253 23,929 28,736 28,756 32,200 36,976

Cash and cash equivalents 10,025 4,101 6,989 7,460 5,758 10,810

Short-term investments 105 92 203 1,176 4,108 885


Inventories 4,520 4,167 4,757 5,493 6,658 10,469

Other current assets 4,784 6,181 7,612 7,610 8,465 6,007




Intangible assets 3,422 3,206 2,848 3,792 3,398 2,845


Total Assets 209,643 214,204 230,489 227,060 234,231 242,932



Short-term debt, etc. 38,255 33,122 47,816 41,230 29,586 27,530Current Finance lease obligations 8,714 9,572 12,345 17,145 11,783 12,283Other Current Liabilities 11,405 13,821 15,431 16,019 15,551 17,695


Long-term debt, etc. 42,277 47,785 21,843 27,599 32,874 38,760

Finance lease obligations 50,199 55,473 71,554 67,743 63,968 65,349

Deferred revenue 15,588 16,338 17,018 18,683 20,615 21,609



Capital stock 2,989 2,989 3,698 3,698 4,798 4,798

Retained earnings 15,922 13,075 8,174 -1,978 6,901 6,393

Other reserves 3,795 3,732 11,091 14,812 25,022 24,585

Shareholder's Equity 22,706 19,797 22,963 16,531 36,721 35,776Total Liabilities

& Shareholder's Equity 209,643 214,204 230,489 227,060 234,231 242,932

Total Debt 139,445 145,952 153,558 153,717 138,211 143,922

Net Debt 129,315 141,759 146,366 145,081 128,345 132,227

Debt Ratio 823.3% 982.0% 903.7% 1273.5% 537.9% 579.0%



Category 2013 2014 2015 2016 2017 2017.3Q 2018.3Q

Revenue 117,124 116,804 113,084 115,029 118,028 87,881 94,408

Cost of revenue 106,064 101,711 92,865 92,180 96,602 71,576 77,882

Gross profit 11,059 15,093 20,219 22,849 21,426 16,305 16,526

Selling and administrative expense 11,239 11,368 11,627 12,059 11,865 9,052 10,006

Operating Profit -180 3,725 8,592 10,790 9,562 7,253 6,520

Interest income 1,077 540 683 688 711 497 1,076

Interest expense 4,657 6,275 4,975 5,451 5,005 3,555 3,702

Other income 7,316 4,430 3,771 4,869 14,965 8,380 2,728

Other expenses 7,568 7,841 13,061 18,317 8,052 6,743 6,288

Net income before income tax -4,011 -5,421 -4,990 -7,421 12,181 5,833 335

Income tax -1,068 -1,815 -913 -1,507 3,102 1,545 179

Continuing operations net income -2,943 -3,606 -4,077 -5,914 9,079 4,288 156

Discontinued operations net income 38 0 0 0 0 0 0

Net income -2,905 -3,606 -4,077 -5,914 9,079 4,288 156

EBITDA 16,205 19,497 24,913 28,085 25,976 19,645 19,065

EBITDA Margin 13.8% 16.7% 22.0% 24.4% 22.0% 22.4% 20.2%

GP Margin 9.4% 12.9% 17.9% 19.9% 18.2% 18.6% 17.5%

OP Margin -0.20% 3.20% 7.60% 9.40% 8.10% 8.25% 6.91%

110

Appx. Korean Air FS (cont’d)

Korean Air Separate Financial Statements


Category 2013 2014 2015 2016 2017 2018.3Q

Current Assets 627 979 1,630 2,151 3,992 4,451

Cash and cash equivalents 126 349 632 317 423 283

Short-term investments 380 441 710 1,430 2,970 3,434



Non-Current Assets 260 288 405 872 991 915

Property, plant and equipment 113 92 71 407 519 339


Other non-current assets 145 196 328 458 463 506

Total Assets 886 1,267 2,035 3,023 4,983 5,366

Current Liabilities 539 794 1,384 1,854 2,327 2,238

Accounts and other payable 239 284 499 661 753 804

Current Finance lease

obligations 17 21 25 131 175 194

Other Current Liabilities 282 489 860 1,061 1,399 1,240

Non-Current Liabilities 170 174 138 389 338 260

Finance lease obligations 135 120 103 341 281 146

Deferred revenue 14 28 8 6 12 14

Other non-current liabilities 21 25 27 43 44 100

Total Liabilities 709 967 1,522 2,243 2,665 2,498

Capital stock 270 270 270 270 300 300

Retained earnings -92 30 243 510 1,103 1,652

Other reserves 0 0 0 -1 915 916

Shareholder's Equity 178 300 513 779 2,318 2,868

Total Liabilities

& Shareholder's Equity 886 1,267 2,035 3,023 4,983 5,366

Total Debt 152 141 128 472 457 339

Net Debt -354 -650 -1,214 -1,275 -2,937 -3,378

Debt Ratio 399.0% 322.4% 296.4% 287.9% 115.0% 87.1%


Net Debt to EBITDA -3.6x -3.3x -3.7x -2.1x -2.6x -3.4x

Category 2013 2014 2015 2016 2017 2017.3Q 2018.3Q

Revenue 2,833 3,511 4,613 7,197 8,884 6,564 7,819

Cost of revenue 2,607 3,122 3,976 6,206 7,340 5,354 6,339

Gross profit 226 389 637 990 1,544 1,210 1,480

Selling and

administrative expense155 220 340 468 575 430 630

Operating Profit 71 169 297 523 969 780 850

Interest income 11 19 24 30 47 30 66


Other income 13 20 30 60 110 68 53

Other expenses 18 25 38 82 114 83 140

Income(loss) on

investment in associate0 0 0 6 3 4 4

Net income before

income tax52 161 292 505 965 759 809

Income tax 9 31 65 112 224 183 209

Net Income 42 131 227 393 741 576 600

EBITDA 99 196 325 620 1,143 908 996

EBITDA Margin 3.5% 5.6% 7.0% 8.6% 12.9% 13.8% 12.7%

GP Margin 8.0% 11.1% 13.8% 13.8% 17.4% 18.4% 18.9%

OP Margin 2.5% 4.8% 6.4% 7.3% 10.9% 11.9% 10.9%

111

Jin Air Consolidated Financial StatementsAppx. JinAir FS

Waikiki Resort Hotel – Belongs to Hanjin Kal

Hotel location View of the hotel

Hotel

Location

112

Appx. Waikiki Resort Hotel

LA Wilshire Grand Center – Belongs to HIC, Korean Air subsidiary

Hotel location View of the hotel

113

Appx. LA Wilshire Grand Center

Four hotels being operated by KAL Hotel Network

Jeju KAL Hotel Seogwipo KAL Hotel

Paradise Hotel Jeju Grand Hyatt Incheon

114

Appx. KAL Hotel Network

Other land and real estates owned

Jeongseok Building - Owned by Jeongseok Corp. Jeongseok flight museum - Owned by Korean Air

Jeongseok airfield - Owned by Korean AirWangshan Marina – Owned by

Wangshan Leisure Development

115

Appx. Other land and real estates owned

Bird's-eye view of Jedong Ranch

Jeongseok

airfield

Korean Airport Service

Jeju GwangcheonsuJedong

ranch

Jeongseok

flight museum

116

Appx. Other land and real estates owned

Documents

Hanjin Returns to People’s Arms’valuehanjin.com/data/file/eng_03/3537654168_nGrfcXZz_a12... · 2020-01-28 · ‘Hanjin Returns to People’s Arms’ Strictly Private & Confidential