‘Hanjin Returns to People’s Arms’
Strictly Private & Confidential
Korea Corporate Governance
Improvement (KCGI) Fund
January 2019
kcgifund.com
valuehanjin.com
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
I. A Five-Year Plan to Restore Trust in Hanjin
2-2. Hanjin Group Crisis from KCGI’s Perspective
- 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
I. A Five-Year Plan to Restore Trust in Hanjin
2-3. Hanjin Group Crisis from KCGI’s Perspective
- 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
I. A Five-Year Plan to Restore Trust in Hanjin
2-4. Hanjin Group Crisis from KCGI’s Perspective
- 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
I. A Five-Year Plan to Restore Trust in Hanjin
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
I. A Five-Year Plan to Restore Trust in Hanjin
3-2. KCGI’s Proposed Measures
- 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
I. A Five-Year Plan to Restore Trust in Hanjin
3-3. KCGI’s Proposed Measures
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
I. A Five-Year Plan to Restore Trust in Hanjin
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. A Five-Year Plan to Restore Trust in Hanjin
I N D E X I A Five-Year Plan to Restore Trust in Hanjin
II Present Status of Hanjin Group
III Korea Discount and the Way Forward
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
• Market Cap: 135.2 bn
• Credit Rating: n/a
• Market Cap: 644.2 bn
• 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
II. Present Status of Hanjin Group
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
52 Week High 39,500 KRW
52 Week Low 25,050 KRW
Exchange KOSPI
Market Cap 3.13 trillion KRW
Portion, foreign shareholders 20.61%
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
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2
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1
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2
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3
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4
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5
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6
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8
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0
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1
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2
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1
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3
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4
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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
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2
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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
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0
17-1
1
17-1
2
18-0
1
18-0
2
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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
II. Present Status of Hanjin Group
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
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4
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5
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1
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4
17-0
5
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8
17-0
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0
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1
17-1
2
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1
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2
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3
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18-0
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18-0
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18-0
7
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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
52 Week High 34,300 KRW
52 Week Low 16,500 KRW
Exchange KOSPI
Market Cap 577.5 bn KRW
Portion, foreign shareholders 5.78%
Category Numbers
Share Price(2018/12/28) 53,800 KRW
52 Week High 57,700 KRW
52 Week Low 19,650 KRW
Exchange KOSPI
Market Cap 644.2 bn KRW
Portion, foreign shareholders 11.99%
17Resources: Fnguide
1-3. Hanjin Group
- Stock Price Trend of Hanjin Group Major Listed Companies (2016 - 2018)
II. Present Status of Hanjin Group
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
Operating Profits 81 134 154 268 270
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
II. Present Status of Hanjin Group
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
Operating Profits 168 160 131 137 142
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
Operating Profits 155 140 140 138 123
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
II. Present Status of Hanjin Group
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
II. Present Status of Hanjin Group
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
II. Present Status of Hanjin Group
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
II. Present Status of Hanjin Group
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
II. Present Status of Hanjin Group
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)
II. Present Status of Hanjin Group
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
II. Present Status of Hanjin Group
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)
II. Present Status of Hanjin Group
5-1. Jinair
- Performance and major indicators
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
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) 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
II. Present Status of Hanjin Group
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
II. Present Status of Hanjin Group
-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
II. Present Status of Hanjin Group
6-1. Hanjin
- Performance and major indicators
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
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) 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
II. Present Status of Hanjin Group
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)
II. Present Status of Hanjin Group
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
II. Present Status of Hanjin Group
7. KAL Hotel Network
- Performance and major indicators
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
II. Present Status of Hanjin Group
8. Jungseok Enterprise, TOPAS Travel Info.
- Performance and major indicators
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
Operating Profits 168 160 131 137 142
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
Liabilities Ratio 48% 47% 33% 30% 31%
EBITDA 172 167 147 153 158
Category 2013 2014 2015 2016 2017
Sales 538 403 413 405 412
Operating Profits 155 140 140 138 123
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
Liabilities Total 652 818 500 492 453
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
Liabilities Ratio 18% 22% 24% 24% 21%
EBITDA 206 199 195 194 176
(KRW 100 mil)(KRW 100 mil)
Resources: Annual ReportsResources: Annual Reports35
Reevaluation through IPO?
II. Present Status of Hanjin Group
9. Hanjin Tour and Jedong Leisure
- Performance and major indicators
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
Liabilities Total 192 245 245 260 334
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
Liabilities Ratio 120% 153% 157% 43% 61%
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
Liabilities Ratio 13% 13% 13% 13% 13%
EBITDA (28) (25) (26) (25) (25)
(KRW mil)
Resources: Annual ReportsResources: Annual Reports36
II. Present Status of Hanjin Group
• 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
II. Present Status of Hanjin Group
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
II. Present Status of Hanjin Group
10-3. Normalization of JAL
- 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
II. Present Status of Hanjin Group
10-4. Normalization of JAL
- 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
II. Present Status of Hanjin Group
10-5. Normalization of JAL
- 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
II. Present Status of Hanjin Group
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
II. Present Status of Hanjin Group
11-2. Korean Air’s Aerospace Division (MRO)
- 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
II. Present Status of Hanjin Group
• 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
II. Present Status of Hanjin Group
11-4. Korean Air’s Aerospace Division (MRO)
- 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)
II. Present Status of Hanjin Group
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
II. Present Status of Hanjin Group
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
II. Present Status of Hanjin Group
12-2. Competitor Analysis
- 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
II. Present Status of Hanjin Group
12-3. Competitor Analysis
- 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
II. Present Status of Hanjin Group
12-4. Competitor Analysis
- 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
II. Present Status of Hanjin Group
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
II. Present Status of Hanjin Group
12-6. Competition Comparisons
- 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
Airlines CountryMarket Cap
(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
II. Present Status of Hanjin Group
12-6. Competition Comparisons
- Performance of major airlines and their financial standings
Resources: Bloomberg54
Airlines CountryMarket Cap
(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
Airlines CountryMarket Cap
(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
II. Present Status of Hanjin Group
I N D E X I A Five-Year Plan to Restore Trust in Hanjin
II Present Status of Hanjin Group
III Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
280 trillion
247 trillion
136 trillion 1.13 times
Apple
Samsung
Electronics
Operating
profits
74 trillion
60 trillion
33 trillion 1.23 times
Apple
Samsung
Electronics
Turnover
68
III. Korea Discount and the Way Forward
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
3.9 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
7.4 timesKorea Discount
4.6 timesKorea Discount
69
III. Korea Discount and the Way Forward
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
Reference: Thomson Reuters
U.S. EU Japan China Korea U.S. EU Japan China Korea
70
III. Korea Discount and the Way Forward
2-5. Korea Discount (cont’d)
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
2-9. Korea Discount (cont’d)
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
Reference: Thomson Reuters
(%)(KRW)
KOSPI 12-months
estimated EPS (left)
KOSPI discount rate
(right)
77
III. Korea Discount and the Way Forward
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
Reference: Thomson Reuters
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
III. Korea Discount and the Way Forward
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
Reference: Thomson Reuters
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
III. Korea Discount and the Way Forward
• 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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
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
III. Korea Discount and the Way Forward
4-3. Corporate Governance and the role of Private Equity Funds (PEF) (cont’d)
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
III. Korea Discount and the Way Forward
4-3. Corporate Governance and the role of Private Equity Funds (PEF) (cont’d)
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
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
(approx. KRW 44 billion)
• 2018.12 Laucnched Project Fund II
(approx. KRW 26 billion)
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
Net income attributable to
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
Accounts and other receivable 131 469 64 64 72 83
Other current assets 1 4 5 14 21 11
Non-Current Assets 7,197 13,954 16,051 15,873 17,155 17,109
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
Total Liabilities 2,918 3,053 3,277 3,679 4,291 3,953
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
Shareholder's Equity 5,396 12,258 13,060 12,577 14,961 15,181
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%
Total Debt to Total Assets 32.4% 17.6% 16.5% 21.7% 18.9% 12.3%
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
Interest expense 45 108 102 133 164 123 92
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)
Summarized Income Statement Summarized Balance Sheet(KRW 100 mil) (KRW 100 mil)
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
Non-Current Assets 14,973 15,707 20,573 20,870 19,612 19,835
Property, plant and equipment 9,571 10,173 12,878 13,366 12,563 12,790
Investment properties 251 250 248 95 110 109
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
Current Liabilities 4,799 5,797 6,007 9,486 6,853 7,642
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
Non-Current Liabilities 6,234 5,904 11,685 8,187 8,993 7,591
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
Total Liabilities 11,033 11,700 17,692 17,673 15,846 15,233
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%
Total Debt to Total Assets 58.4% 67.0% 52.6% 32.1% 31.1% 40.7%
Net Debt to EBITDA 12.7x 12.9x 13.5x 12.4x 7.1x 10.0x
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
Summarized Income Statement Summarized Balance Sheet(KRW 100 mil) (KRW 100 mil)
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
Accounts and other receivable 1,922 2,000 1,974 1,996 2,030 1,817
Other current assets 195 210 241 629 1,501 766
Non-Current Assets 14,426 15,515 14,481 14,897 14,937 15,486
Property, plant and equipment 9,001 9,401 9,436 9,453 9,072 9,224
Investment properties 251 250 248 95 110 109
Intangible assets 175 190 160 153 141 131
Investments in associates 1,139 1,609 3,159 3,636 4,032 4,314
Other non-current assets 3,860 4,065 1,476 1,559 1,582 1,708
Total Assets 17,041 19,041 17,475 18,423 19,218 19,186
Current Liabilities 4,425 5,714 5,566 5,969 6,490 7,112
Accounts and other payable 1,567 1,648 1,668 1,764 2,902 1,608
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
Non-Current Liabilities 5,611 5,402 4,669 4,340 4,394 3,225
Bonds 3,696 2,737 2,094 2,447 2,377 885
Long-term debt 375 994 1,265 663 742 1,035
Other non-current liabilities 1,540 1,672 1,310 1,229 1,275 1,306
Total Liabilities 10,036 11,116 10,234 10,308 10,885 10,337
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%
Total Debt to Total Assets 40.3% 40.1% 39.9% 38.6% 34.7% 37.4%
Net Debt to EBITDA 9.0x 8.2x 9.0x 17.7x 11.4x 13.0x
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
Selling and administrative
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)
Summarized Income Statement Summarized Balance Sheet(KRW 100 mil) (KRW 100 mil)
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
Accounts and other receivable 10,117 10,123 9,514 7,269 7,570 9,106
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
Non-Current Assets 197,806 185,177 208,912 206,285 210,664 214,737
Property, plant and equipment 155,039 157,781 178,507 178,733 189,073 194,266
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
Other non-current assets 38,589 22,328 24,363 20,254 14,732 14,093
Total Assets 229,204 234,657 241,804 239,565 246,487 255,021
Current Liabilities 77,588 74,419 84,504 91,311 66,381 67,350
Accounts and other payable 8,412 6,982 8,701 8,462 9,180 9,594
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
Non-Current Liabilities 124,214 138,227 132,309 129,511 142,594 151,639
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
Other non-current liabilities 13,084 12,104 13,912 14,772 14,957 15,364
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
Shareholder's Equity 27,402 22,012 24,990 18,744 37,511 36,032
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%
Total Debt to Total Assets 66.8% 69.6% 66.9% 68.0% 60.2% 60.6%
Net Debt to EBITDA 8.6x 7.8x 6.0x 5.2x 5.2x 7.1x
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
Selling and administrative
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
Net income attributable to
owners -2,250 -6,354 -5,650 -5,649 7,915 4,123 -624
Net income attributable to
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
Summarized Income Statement Summarized Balance Sheet(KRW 100 mil) (KRW 100 mil)
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
Accounts and other receivable 9,819 9,388 9,175 7,018 7,211 8,805
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
Non-Current Assets 180,389 190,276 201,754 198,304 202,031 205,957
Property, plant and equipment 150,498 151,207 168,034 162,660 171,776 176,668
Investment properties 589 592 735 793 788 781
Intangible assets 3,422 3,206 2,848 3,792 3,398 2,845
Other non-current assets 25,880 35,271 30,136 31,059 26,069 25,663
Total Assets 209,643 214,204 230,489 227,060 234,231 242,932
Current Liabilities 66,888 63,507 84,281 82,693 65,946 67,108
Accounts and other payable 8,513 6,992 8,690 8,300 9,026 9,600
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
Non-Current Liabilities 120,049 130,900 123,245 127,836 131,563 140,048
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
Other non-current liabilities 11,985 11,305 12,831 13,810 14,106 14,330
Total Liabilities 186,937 194,407 207,526 210,529 197,509 207,156
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%
Total Debt to Total Assets 66.5% 68.1% 66.6% 67.7% 59.0% 59.2%
Net Debt to EBITDA 8.0x 7.3x 5.9x 5.2x 4.9x 6.9x
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
Summarized Income Statement Summarized Balance Sheet(KRW 100 mil) (KRW 100 mil)
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
Accounts and other receivable 79 108 199 259 307 458
Other current assets 42 81 89 145 291 276
Non-Current Assets 260 288 405 872 991 915
Property, plant and equipment 113 92 71 407 519 339
Intangible assets 1 1 5 7 9 70
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%
Total Debt to Total Assets 17.2% 11.1% 6.3% 15.6% 9.2% 6.3%
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
Interest expense 25 21 20 31 49 39 24
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