Initiation: cleaning up in the house-product market 1 ...asiaresearch.daiwacm.com/eg/cgi-bin/files/Coway_140423.pdf · Other non-current liabilities 18 14 27 31 37 37 37 38 Total

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■ Investment case We initiate coverage of Coway, a major manufacturer of household wellbeing products for rent and sale, with a Buy (1) rating. We expect the company to see steady earnings growth over 2014-16 from: 1) its growing rental business in Korea (with rises in its monthly rental fees and customer base), and 2) ODM sales internationally, on the back of increasing demand for its environmental household products, for which the household penetration rate is low domestically but where Coway dominates. As such, despite Korea’s private-consumption growth running at a low single-digit percentage annually, we believe the company’s earnings growth will outpace that of the other Korea consumer stocks we cover, and forecast an EPS CAGR of 16% over 2014-16.

■ Catalysts Growing environmental social issues and rising wellbeing trend among consumers. Koreans’ increasing desire to maintain their wellbeing, along with the growing awareness of air-pollution and water-quality issues, are likely to accelerate rental and buying demand for Coway’s household wellbeing products in the coming years. Also, the company is continually introducing new products to cross-sell through its sales network (known as Cody). Strong China ODM client base and demand for air cleaners should drive export sales. Coway has a solid ODM client base in China, where air-pollution concerns are driving strong demand for its air cleaners. We forecast a robust 20% YoY export sales CAGR for 2014-16. ■ Valuation We have an SOTP-based 6-month target price of KRW98,000, valuing the rental operation with a DCF methodology and adding in the treasury shares’ value. Our target price implies a 2014E PER of 26x and 23% share-price upside potential. We believe Coway’s steady earnings stream, capital-light operation, strong balance sheet and solid dividend yield justifies a PER premium to its domestic peer group.

■ Risks The main risk to our view is the entry of a large number of competing players in the world’s expanding market for household wellbeing products.

Consumer Discretionary / Korea021240 KS

23 April 2014

Coway

Initiation: cleaning up in the house-product market

• Growing rental business driving its domestic operation; solid ODM client base in China should support export sales growth

• Has a steady earnings stream, strong balance sheet, capital-light operation and sound dividend yield

• Above factors along with our 16% 2014-16E EPS CAGR should support its high valuation; initiating with a Buy rating

Source: FactSet, Daiwa forecasts

Consumer Discretionary / Korea

Coway021240 KS

Target (KRW): 98,000Upside: 23.4%22 Apr price (KRW): 79,400

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Coway (LHS) Relative to KOSPI (RHS)

(KRW) (%)

12-month range 50,100-79,700Market cap (USDbn) 5.903m avg daily turnover (USDm) 14.64Shares outstanding (m) 77Major shareholder Coway Holdings (30.9%)

Financial summary (KRW)Year to 31 Dec 14E 15E 16ERevenue (bn) 2,082 2,228 2,375Operating profit (bn) 377 439 499Net profit (bn) 280 328 374Core EPS (fully-diluted) 3,754 4,391 5,013EPS change (%) 10.7 17.0 14.2Daiwa vs Cons. EPS (%) 2.9 7.3 15.0PER (x) 21.2 18.1 15.8Dividend yield (%) 2.5 3.0 3.5DPS 2,000 2,400 2,800PBR (x) 5.6 4.9 4.3EV/EBITDA (x) 10.5 9.2 8.0ROE (%) 27.1 28.0 28.1

Sang Hee Park(82) 2 787 9165

[email protected]

How do we justify our view?How do we justify our view?

Consumer Discretionary / Korea 021240 KS 23 April 2014

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Cleaning up in the house-product market ..................................................................................... 6

Steady cash inflow from the domestic rental operation ............................................................. 6

Growing presence overseas, especially in China ....................................................................... 10

Strategies for Coway’s non-core assets ...................................................................................... 12

Key financials matrix ................................................................................................................. 13

Valuation appeal ........................................................................................................................ 15

Risks ........................................................................................................................................... 18

Company background ................................................................................................................ 18

Contents


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Growth outlook Coway: operating-profit growth, YoY (2011-16E)

For 2014-16, we forecast CAGRs of 15% in operating-profit and 16% in EPS. We expect this to be achieved on the back of: 1) an increase in the monthly rental fee for those customers that signed up to rent its products fromApril 2013, 2) a rise in the number of customers renting its products in Korea, 3) strong ODM orders from China, given consumers’ increasing environmental concerns and desire for wellbeing, 4) falling interest expenses as we expect debt to decline, and 5) the company’s efforts to strengthen its sales force to drive sales volume.

Source: Company, Daiwa forecasts

Valuation Coway: 12-month forward PER bands

The stock is trading currently at a 2014 PER of 21.2x (based on our EPS forecast), which is at the upper end of its past-10-year trading range of 12-24x. We believe Coway warrants a high PER due to the steady earnings growth we expect over our forecast horizon and a solid dividend yield (2.5% for 2014E based on our DPS and at its current share price), and a strong and improving balance sheet.

Source: FnGuide, Daiwa forecasts

Earnings revisions Coway: consensus EPS-forecast revisions (2014-15E)

The Bloomberg-consensus 2014-15 EPS forecasts for Coway were raised over the course of 2013, on expectations of brightened earnings prospects, as the company’s main shareholder since 2012, Coway Holdings (MBK Partners), brought about a focus on reducing excess costs, disposing of non-core assets and optimising the working-capital structure. Our 2014-15 EPS forecasts are 3-7% above those of the consensus as we expect a faster increase in Coway’s rental customer base. We believe the consensus forecasts will be raised in the months ahead to factor this in.

Source: Bloomberg

How do we justify our view?

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Key assumptions

Profit and loss (KRWbn)

Cash flow (KRWbn)


Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016E

Number of subscribers (1,000, year-end)

3,899 4,145 4,450 4,607 4,800 4,950 5,150 5,350

Rental revenue YoY growth (%) 5.2 4.9 11.0 7.4 4.6 5.8 4.9 4.7

Outright product sales revenue YoY growth (%)

35.9 23.4 29.3 5.0 18.9 15.5 13.2 11.5

Membership revenue YoY growth (%) 1.2 7.1 8.8 0.3 6.8 3.6 6.8 6.8Cosmetics revenue YoY growth (%) n.a. n.a. 191.9 (1.4) 13.6 8.0 5.7 4.1

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ERental 1,009 1,059 1,175 1,262 1,320 1,397 1,466 1,535Outright product sales 215 265 343 360 428 494 559 624Other Revenue 188 195 192 185 186 190 203 216Total Revenue 1,412 1,519 1,710 1,807 1,934 2,082 2,228 2,375Other income 0 0 0 0 0 0 0 0COGS (460) (494) (552) (605) (652) (702) (753) (807)SG&A (747) (796) (869) (974) (949) (1,002) (1,037) (1,069)Other op.expenses 0 0 0 0 0 0 0 0Operating profit 204 229 289 228 333 377 439 499Net-interest inc./(exp.) (9) (14) (24) (27) (14) (6) (3) 0Assoc/forex/extraord./others 8 22 (40) (39) 31 10 10 10Pre-tax profit 203 237 225 161 351 381 446 509Tax (49) (59) (48) (42) (97) (101) (118) (135)Min. int./pref. div./others 0 0 0 0 0 0 0 0Net profit (reported) 153 177 177 120 253 280 328 374Net profit (adjusted) 153 177 177 120 253 280 328 374EPS (reported)(KRW) 2,034 2,327 2,370 1,614 3,392 3,754 4,391 5,013EPS (adjusted)(KRW) 2,034 2,327 2,370 1,614 3,392 3,754 4,391 5,013EPS (adjusted fully-diluted)(KRW) 2,034 2,327 2,370 1,614 3,392 3,754 4,391 5,013DPS (KRW) 1,010 1,050 1,050 1,050 1,660 2,000 2,400 2,800EBIT 204 229 289 228 333 377 439 499EBITDA 354 383 441 400 522 587 670 751

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016EProfit before tax 203 237 225 161 351 381 446 509Depreciation and amortisation 150 154 152 172 189 210 231 252Tax paid 49 59 48 42 97 101 118 135Change in working capital (57) (32) (44) (30) 3 (21) (21) (21)Other operational CF items (34) (104) (65) 84 (122) (158) (160) (193)Cash flow from operations 312 314 318 429 518 513 614 682Capex (227) (234) (299) (295) (246) (300) (300) (300)Net (acquisitions)/disposals 22 (44) (59) (8) (17) (10) (10) (10)Other investing CF items (71) (19) 14 2 204 (27) (97) (98)Cash flow from investing (276) (296) (344) (301) (58) (337) (407) (408)Change in debt 51 55 213 21 (266) (146) (60) (112)Net share issues/(repurchases) 0 0 0 0 0 0 0 0Dividends paid (65) (77) (80) (78) (78) (124) (149) (179)Other financing CF items (39) 2 (97) (17) (32) 0 0 0Cash flow from financing (52) (20) 36 (74) (377) (270) (209) (291)Forex effect/others 0 0 0 0 0 0 0 0Change in cash (17) (3) 9 55 82 (94) (2) (17)Free cash flow 85 80 18 134 272 213 314 382

Financial summary


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Balance sheet (KRWbn)

Key ratios (%)


Company profile

Established on 2 May 1989, Coway develops and manufactures household wellbeing products for sale and rent. Its products include water purifiers, air cleaners, bidets, and mattresses. Over the past few decades the company has ranked consistently as No. 1 in Korea in terms of its brand power, market share, and sales volume. Coway also exports its products, mainly to China, and has 4 overseas subsidiaries. Its main shareholder is Coway Holdings Inc, with a 30.9% stake.

As at 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ECash & short-term investment 64 57 65 119 201 108 106 89Inventory 55 73 73 41 41 44 47 50Accounts receivable 195 207 240 278 266 286 306 327Other current assets 197 241 134 253 134 154 174 194Total current assets 509 579 511 691 642 592 634 660Fixed assets 418 454 535 594 597 656 694 713Goodwill & intangibles 241 223 263 265 258 152 153 154Other non-current assets 102 183 267 151 143 266 281 296Total assets 1,271 1,440 1,576 1,702 1,641 1,665 1,762 1,823Short-term debt 240 104 275 406 318 172 112 0Accounts payable 29 38 29 29 30 32 34 37Other current liabilities 273 298 231 285 289 326 331 337Total current liabilities 542 441 534 720 637 530 478 373Long-term debt 30 220 267 148 0 0 0 0Other non-current liabilities 18 14 27 31 37 37 37 38Total liabilities 590 675 828 899 674 567 515 411Share capital 41 41 41 41 41 41 41 41Reserves/R.E./others 640 724 708 762 927 1,058 1,206 1,371Shareholders' equity 681 765 748 803 967 1,098 1,247 1,412Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 1,271 1,440 1,576 1,702 1,641 1,665 1,762 1,823EV 6,330 6,391 6,600 6,558 6,241 6,188 6,130 6,005Net debt/(cash) 206 267 477 435 117 64 6 (89)BVPS (KRW) 8,826 9,916 9,704 10,408 12,543 14,240 16,167 18,309

Year to 31 Dec 2009 2010 2011 2012 2013 2014E 2015E 2016ESales (YoY) 7.4 7.6 12.6 5.7 7.0 7.6 7.1 6.6EBITDA (YoY) 6.9 8.0 15.3 (9.4) 30.6 12.5 14.1 12.1Operating profit (YoY) 7.4 12.0 26.2 (21.1) 46.3 13.3 16.3 13.7Net profit (YoY) 18.8 15.5 0.0 (32.4) 111.4 10.7 17.0 14.2Core EPS (fully-diluted) (YoY) 17.3 14.4 1.9 (31.9) 110.2 10.7 17.0 14.2Gross-profit margin 67.4 67.5 67.7 66.5 66.3 66.3 66.2 66.0EBITDA margin 25.1 25.2 25.8 22.1 27.0 28.2 30.1 31.6Operating-profit margin 14.5 15.1 16.9 12.6 17.2 18.1 19.7 21.0Net profit margin 10.9 11.7 10.4 6.6 13.1 13.5 14.7 15.8ROAE 24.0 24.5 23.4 15.4 28.6 27.1 28.0 28.1ROAA 13.1 13.1 11.7 7.3 15.1 16.9 19.1 20.9ROCE 23.8 22.4 24.3 17.2 25.2 29.5 33.4 36.0ROIC 19.6 17.9 20.1 13.7 20.7 24.7 26.7 28.5Net debt to equity 30.3 34.9 63.7 54.1 12.1 5.9 0.5 net cashEffective tax rate 24.4 25.1 21.4 25.8 27.8 26.5 26.5 26.5Accounts receivable (days) 44.5 48.3 47.7 52.4 51.4 48.4 48.5 48.6Current ratio (x) 0.9 1.3 1.0 1.0 1.0 1.1 1.3 1.8Net interest cover (x) 21.7 16.2 12.3 8.3 24.4 61.3 139.1 n.a.Net dividend payout 49.6 45.1 44.3 65.1 48.9 53.3 54.7 55.9Free cash flow yield 1.4 1.3 0.3 2.2 4.4 3.5 5.1 6.2

Financial summary continued …


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Cleaning up in the house-product market

Steady cash inflow from the domestic rental operation

The leading provider of environmental living goods for monthly rental fee Coway rents and sells wellbeing products to consumers, with its main revenue contributors being water purifiers, air cleaners and bidets. The company also offers a water-softening unit and food-waste disposal unit, but the sales of these account for less than 5% of total sales. Coway recently added mattresses to its range to expand its product portfolio. Coway offers 2 options to customers. 1. A customer can pay a monthly rental fee for all the products and services, and after 5 years the ownership of the products is transferred to the consumer. 2. A customer can buy items up front and has the option to subscribe to maintenance services by paying monthly membership fees (see below for more details). For 2013, 68% of Coway’s revenue was generated by its rental operation and 22% from product sales. Coway receives cash in the following ways.

• It collects monthly rental fees on its products and related services (ie, changing filters, maintenance) provided by its Cody sales ladies. After 5 years of monthly payments, the customer becomes the owner of the product. The average monthly rental fee is around KRW23,000.

• It receives a one-off lump sum when it sells a product. The average selling price is around KRW604,000.

• It receives monthly membership fees from customers who decide to subscribe to the maintenance services for purchased products. The average monthly membership fee is about KRW13,800.

• It receives monthly membership fees from customers who decide they want to receive maintenance services after the transfer of product ownership, once the 5-year rental payments finish. The average monthly membership fee in this case is around KRW13,800.

Coway: revenue breakdown by business division (2013)

Source: Company

Note: Product sales include outsourcing, overseas ODM sales, cosmetics, and water-treatment operation

Coway: products available to rent on a monthly basis

Source: Company

Monthly rental income fees

68.3%

Product sales22.1%

Rental registration fees

0.7%

Membership fees8.9%


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Coway: rental revenue breakdown by product category (2013)

Source: Company

Growing demand for goods relating to environmental protection Increasing concerns about environmental issues (ie, air pollution and water pollution), growing awareness of the need for wellbeing, especially as Korea’s GDP level rises and the population ages, are some of the key drivers of demand for wellbeing goods in Korea. A recent report from the Korea Environment Institute said that the number of those aged 65 and above being hospitalised for respiratory-related diseases from 2006-10 rose by 9% a year as the density of ultrafine dusts (PM2.5) increased by 10 ㎍/sq m. For all age groups, the number of hospitalised patients increased by 1% a year over the same period under an identical level of increase in the density. It is the first time a correlation between the density level of ultrafine dusts and respiratory diseases has been shown to exist. The Korea Environment Institute also estimated that should the density of ultrafine dusts decline to the World Health Organization’s annual average standard of 20 ㎍/sq m, the number of hospitalised respiratory patients aged 65 and above would decline by 5,375 patients annually.

Average daily number of hospitalised respiratory patients in Seoul

Source: Company

Water purifiers to reduce impact of water pollution The market for water purifiers in Korea was worth about KRW1.6tn as at the end of 2012, according to an industry source, and it grew by 12% last year, fuelled by concerns about the quality of tap water and polluted mineral water springs. In spite of the claims made by various media that Korea’s tap water is safe to drink, the general public’s habitual suspicions about the safety of tap water is unlikely to change in the future. As such, we forecast the Korea water-purifier market to post steady sales growth of 10% a year for the next 3 years. More than 100 companies produce water purifiers in Korea and there are 3 leading players: Coway, Chungho Nice, and Tongyang Magic. However, over the past few years, we have seen more new entrants, including Kyowon L&C and LG Electronics. Yellow dust storms from China are driving demand for air cleaners We believe that the value of Coway’s air-cleaner market is likely to increase strongly in the coming years due to concerns about the yellow dust storms blowing in from China and the high ultra-fine dust density in Korea. We believe that the air-cleaner market size is likely to reach KRW500bn in 2014, up 66% YoY. Coway’s sales growth in this category, however, may not rise as fast as the industry sales growth given the increasing market competition – more companies are entering the market and we are seeing intense competition from LG Electronics and Samsung Electronics, which are expanding their production capacity.

Water purifier57.6%

Bidet18.4%

Air cleaner15.7%

Water softner5.9%

Food-waste disposal unit

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Mattress1.8%

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The dominant market player due to strong brand power and Cody sales network Coway’s products dominate the market Coway has a 40-50% share of its key product categories, such as water purifiers, bidet and air-purifier products. In each of these categories, the No.2 player’s market share is not even half that of Coway’s. But given the strong industry sales growth dynamics, Coway’s competitors are also trying to strengthen their market positions, which is why Coway’s market share has been declining for the past 5 years, as shown in the following table. However, we believe that there is room for more than just one player in the market, and that the aggressive attempts to expand by Coway’s competitors will boost the size of the overall market for these wellbeing products, the household penetration rate for which remains low. Coway: market shares in Korea for each product category

(%) 2007 2008 2009 2010 2011 2012

Water purifiers Coway 55.7 57.1 52.3 56.1 54.7 50.1Chungho Nice 8.6 7.7 11.1 9.6 11.6 14.2Tongyang Magic NA NA NA NA 7.1 6.5

Bidets Coway 47.7 47.8 48.4 46.9 46.9 42.9Novita 23.6 14.2 20.5 20.6 19.5 22.9Tongyang Magic NA NA NA NA 8.9 7.9Daelim 4.9 6.9 8.1 10.1 NA NA

Air cleaners Coway 51.7 40.5 49.9 45.2 44.0 41.1Samsung Electronics 8.2 11.7 5.0 11.2 12.5 12.8LG Electronics NA 13.1 16.0 8.2 8.0 11.2

Source: Companies

Note: Market shares for top-3 players

Number of sales ladies is on the rise Cody is the name of Coway’s female sales force. Cody’s sales ladies provide monthly maintenance services, such as changing the filters for water purifiers and air purifiers. The company trains its Cody sales ladies to cross-sell other products to existing customers, and currently the company’s average product per customer is 1.6. The growing number of working women in Korea is helping to drive more of workforce into Cody’s network. We estimate that the average monthly commission income at Cody is about KRW2.1m. As at the end of last year, there were 12,714 Cody sales ladies compared with 10,000 at the end of 2007, but down from 13,663 at the end of 2012. As Coway has become focused on becoming more cost efficient, it put less emphasis on expanding last year. However, in 2014, Coway plans to add more sales ladies to drive sales growth. This will result in a rise in personnel-related expenses over the immediate term.

Coway: number of Cody sales ladies


Strong cash generating business model Main costs are product costs and sales commission Coway’s main cost items are its actual product costs, installation costs, and the sales commissions it pays to Cody. As illustrated in the following chart, Coway’s water purifier rental operation generates strong cash flow, as its service fees (from the services provided by the Cody ladies) are relatively high compared with its product components costs and the commission paid to its sales ladies. Our analysis of the company’s cash flow shows that Coway’s rental operation for its wellbeing goods should achieve break-even point within a year of a customer signing up. In the first month after a new customer signs up to rent a product, Coway’s cash outflow is at its highest, as the company needs to book the product costs and the sales commissions to Cody. However, in subsequent months, the rental operation does not require a lot of additional costs other than the maintenance commission fees paid to Cody, and costs relating to replacing filters and after-service parts changes.

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Coway: cash-flow analysis for its water-purifier rental business (KRW) 1M 1Y 2Y 3Y 4Y 5YCash inflow Registration fee 90,909 90,909 Rental fee 32,000 384,000 384,000 339,273 339,273 339,273Total cash inflow 122,909 474,909 384,000 339,273 339,273 339,273 Cash outflow COGS 169,738 169,738 Maintenance commission 33,000 33,000 33,000 33,000 33,000

Installation 14,761 14,761 Filter and after-sales parts 4,205 21,658 7,929 17,934 20,552 Sales commission 96,192 133,600 Other variable cost 3,017 32,626 32,948 33,380 33,082 32,995Total cash outflow 283,708 387,930 87,606 74,309 84,016 86,547 Net cash flow (160,799) 86,979 296,394 264,964 255,257 252,726Accumulated cash flow (160,799) 86,979 383,373 648,337 903,594 1,156,320

Source: Company

Note: 1) Registration fees and rental fees exclude VAT, 2) Cash outflow includes only variable costs in sales, 3) other variable costs: maintenance, repair and operating – MRO, after-sales fees, etc, and 4) average usage period for a water purifier is 4 years

Main areas of earnings-growth potential Increase in rental subscription fees Coway increased its monthly rental subscription fees by 5.5% on average in April 2013 for new subscribers. This was the first increase since the 5% increase in 2006. We believe that the 5.5% increase will result in a 2% increase in its monthly ARPU in 2014 and a further 1.3% increase in 2015. Room for net subscribers to grow We forecast Coway to add around 190,000-240,000 new subscribers over 2014-16 (around 170,000 for rental services and 40,000 for membership services). Coway had 5.8m subscribers as at the end of 2013. We forecast the number of subscribers to rise by about 4% per annum over our forecast period. Over 2013, the number of monthly rental subscribers increased by 190,000; however, the number of membership subscribers declined by 67,000, as some membership subscribers switched back to subscribing to the company’s monthly rental services, ahead of the price increase in April 2013.

Coway: number of subscribers


Note: Includes rental and membership subscribers at year-end

The majority of Coway’s subscribers sign up for water purifiers, while about 20% subscribe to bidet services and 16% to air-purifier services. We believe the household penetration rates of Coway’s main products are still relatively low compared with some developed countries, and see room for growth based on increasing consumer demand for a clean and healthy living environment. Coway: household market penetration


Cancellation rate declining gradually The economic situation always has an impact on Coway’s cancellation rate. If Korea’s economic growth remains sound, there are likely to be fewer subscriber cancellations. Daiwa forecasts a mild recovery in the economy, with GDP rising to 3.4% YoY for 2014 from 3.0% YoY for 2013, after hitting a low in 1H13, and we assume the number of subscriber cancellations for Coway to be about 500,000 or less a year from 2014. Given that we expect the total number of subscribers to rise, the actual cancellation rate should fall and remain at below 0.9% over 2014-16. For 2009-12, the cancellation rate was 1-1.09%, and this fell to 0.88% in 2013.

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Coway: cancellation rate


Note: The cancellation rate for a year is the average of the monthly cancellation rates (cancellation rate at month “M” = number of cancellations at month “M” / total number of rental accounts at month “M-1”)

Providing rental services for a new product category – mattresses Coway is able to use the Cody network to cross-sell other/new products. One of Coway’s key focuses has been to come up with new products, and an example of this was the food-waste disposal unit. However, the strong demand for this product was short-lived and sales growth had been stagnant since 2011, growing at less than 5% YoY a year for 2011 and 2012. Currently, Coway is using its Cody network to sell mattresses and then provide a regular cleaning service for the mattresses. As at the end of 2011, the company started renting its mattresses on a monthly basis. Now reaching the third year of its operation, the monthly rental income for its mattresses was only 2% of the 2013 revenue, but we forecast this to rise to 6% of total rental revenue income by 2016. Coway’s efforts to gain share from Korea’s leading mattress competitors have focused on making the product more affordable through its monthly rental payment scheme, and also by offering free regular cleaning services, which its competitors do not offer.

Coway: key sales assumptions (KRWbn) 2012 2013 2014E 2015E 2016ERental total 1,261.9 1,320.2 1,397.2 1,466.2 1,535.2YoY growth (%) 7% 5% 6% 5% 5%No. of subscribers (1,000, year-end) 4,607.0 4,799.9 4,949.9 5,149.9 5,349.9Net adds (1,000) 157.0 192.9 150.0 200.0 200.0Monthly ARPU (KRW) 23,221.5 23,390.7 23,884.1 24,195.0 24,368.6YoY growth (%) 2% 1% 2% 1% 1% Water purifiers 733.8 760.2 788.2 818.2 848.2Bidets 233.9 243.5 258.5 268.5 278.5Air cleaners 196.7 206.9 216.9 226.9 236.9Water softeners 79.6 77.3 75.3 73.3 71.3Food-waste disposal units 8.2 9.1 10.1 11.1 12.1Mattress 6.9 23.2 48.2 68.2 88.2 Rental registration total 23.8 13.2 11.4 12.0 12.6YoY growth (%) -23% -45% -14% 5% 5% Outright product sales 359.8 428.0 494.3 559.4 623.6YoY growth (%) 5% 19% 16% 13% 11% Outsourcing 74.3 90.2 105.2 120.2 135.2Exports (Mainly ODM) 109.6 144.6 184.6 224.6 264.6Others 176.0 193.2 204.5 214.6 223.8 Membership total 161.3 172.3 178.6 190.7 203.7YoY growth (%) 0% 7% 4% 7% 7%No. of subscribers (1,000) 1,133 1,066 1,106 1,147 1,189Net adds (1,000) 131 (67) 40 41 42Monthly ARPU (KRW) 12,591 13,057 13,449 13,853 14,268 Cosmetics total 67.2 76.4 82.5 87.2 90.7YoY growth (%) -1% 14% 8% 6% 4%Source: Company, Daiwa forecasts

Growing presence overseas, especially in China

Coway’s overseas (combined exports and overseas affiliates) sales CAGR was 25% for 2009-13. Overseas sales accounted for about 15% of consolidated revenue, and we forecast this to rise to 17-18% for 2016. Most of Coway’s export sales are to its ODM clients in China. The company has been tapping the overseas market with its wellbeing products in order to boost sales growth, and exports its products (mainly water purifiers and air purifiers) to its 4 overseas subsidiaries (in the US, Malaysia, China, and Thailand).

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Coway: export sales breakdown

Source: Company

Note: Subsidiaries’ export sales are parent-based figures, meaning they are sales from the parent company to its overseas subsidiaries

Strong ODM exports to China We forecast an export sales CAGR of 20% YoY for 2014-16 We forecast export sales to rise by 28% YoY for 2014 versus 32% YoY for 2013. For 2014-16, we forecast an exports sales CAGR of 20% YoY. Coway’s ODM business generated an operating-profit margin of 3% up until 2012, and this improved to 10% in 2013, on the back of an improved sales volume. About 80% of Coway’s export revenue is derived from its ODM business, which makes products for the global electronic goods companies and are mostly sold to China. Sales to one single global electronics goods company alone increased by 133% YoY for 2013, with this company’s share of the China air-cleaner business at about 50% for the same year. We estimate that Coway’s annual orders from this company accounted for about 40% of Coway’s total export revenue for 2013, and this contract for air purifiers runs until 2015. Air cleaners: an underpenetrated market in China, with a household penetration rate of less than 1% Coway’s main export to China is its air purifier, due to the bad air pollution in the country, and the situation is driving strong sales growth for Coway’s ODM air purifiers. According to Guangzhou Daily, the value of the China air-purifier market more than doubled to CNY5bn in 2013, from CNY2.2bn for 2012, and the total number of units sold reached more than 3m in 2013. However, the household penetration rate in China of air purifiers is only 0.1%. As such, we believe the air-purifier market size will continue to more than double over 2014-16. The TechSci Research Institution estimates sales of air purifiers in China will increase at a CAGR of 36% over 2014-16.

Given the strong industry growth dynamics in the air-purifier market, more players are entering the China air-purifier market, including domestic China players and international makers, such as Samsung Electronics, Toshiba, and Panasonic, some of which have announced plans to set up production plants in the country. Sales performances in Malaysia and the US Of Coway’s 4 overseas subsidiaries, revenue for the Malaysia operation accounts for 41% of the total, and the US accounts for 22%. These two entities have posted solid subscriber growth, and revenue increased by about 30% YoY for both countries last year. Once the number of Coway subscribers reaches 100,000, rental operations start to go beyond break-even point. In Malaysia, the number of subscribers has surpassed 161,000 and in the US there were about 74,000 subscribers at the end of 2013. Malaysia to see a sales CAGR of about 20% over 2014-16E Coway’s Malaysia operation is localised and mainly sells water purifiers, which are widely used by consumers in the country. The company will continue to focus on expanding its network and increase the number of subscribers in Malaysia for this product. The Malaysia entity delivered incremental increases in revenue of KRW15-19bn each year over 2010-13, and we expect this trend to continue over 2014-16. This would translate into a 20% sales CAGR for 2014-16. Coway’s Malaysia affiliate posted a 7% operating margin for 2013, and we forecast the margin to be maintained at this level over 2014-16. US operation is centred around the Korean community; likely to remain loss-making Coway’s US operation revolves around the Korean community in the US and its sales growth rose continuously by a double-digit percentage YoY over 2010-13. As sales volume has not yet reached critical mass, the US affiliate remains loss-making. However, the operating loss has diminished every year since 2012, from KRW5.6bn in 2011 to KRW1.4bn in 2013. Coway is unlikely to make a profit in this market until its subscriber base reaches 100,000. As Coway expands its geographical coverage within the US, we expect it to add 10,000-15,000 subscribers a year over 2014-16, and that the company will secure 100,000 subscribers in 2016. Restructuring in China and Thailand Coway is currently restructuring its China and Thailand subsidiaries. Rather than focusing on the rental businesses in these 2 countries, Coway is now

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focusing more on outright product sales, and on reducing its operating losses. Sales growth for these 2 overseas entities are likely to remain lacklustre, but we expect operating losses to decline over 2014-16. In 2013, Coway liquidated its Japan entity, which it established in 2003, as it had been continuously loss-making and was highly leveraged. Coway: revenue and net income trends for the overseas affiliates (KRWbn) 2010 2011 2012 2013 2014E 2015E 2016EMalaysia Sales 21.0 39.9 54.4 71.9 86.3 103.6 124.3Operating profit -4.9 -1.4 1.9 5.1 6.0 7.3 8.7Net profit -3.6 -2.7 3.1 3.5 4.5 5.5 6.5 US Sales 10.1 16.4 30.4 38.9 46.6 56.0 67.2Operating profit -2.7 -5.6 -1.6 -1.3 -1.1 -0.8 -0.5Net profit -2.7 -5.9 -1.5 -1.4 -1.1 -0.8 -0.5 China Sales 46.4 55.1 58.1 44.9 44.0 43.2 42.3Operating profit 10.1 6.6 0.0 -4.6 -3.8 -2.8 -1.8Net profit 4.5 6.2 -0.3 -5.8 -4.8 -3.8 -2.8 Thailand Sales 6.8 8.9 12.3 12.3 12.3 12.3 12.3Operating profit -2.5 -3.0 -2.0 -3.2 -3.1 -2.1 -1.1Net profit -2.9 -3.2 -1.7 -4.6 -3.6 -2.6 -1.6


Strategies for Coway’s non-core assets

Water-treatment business could still be sold Until the change in Coway’s major shareholder, to Coway Holdings (the holding vehicle of MBK Partners) from Woongjin Holdings in 2012, the water-treatment business had been considered Coway’s future long-term earnings growth driver, on the back of the growing demand for water filters. However, the supply of water in Korea remains constant, although we could see a drought due to changes in climate conditions, such as global warming, and ongoing air pollution. Woongjin group’s long-term plan was to create synergies with Woongjin Chemical in the development of water-treatment filters and with Kukdong E&C on the construction of water-treatment plants. However, when MBK Partners became the major shareholder in Coway, it sold Coway’s 56% stake in Woongjin Chemical to Toray Advanced Materials Korea (2013).

Coway’s water-treatment operation (which accounts for 3% of total sales) and its 100% stake in Green Entech, a water-treatment engineering company that has biochemical water-purifying technology, could be put up for sale in the future, as MBK Partners is likely to dispose of non-core assets that have no relation to its core operations. The company has not announced any detailed plans in terms of the timeline. According to the Yonhap News Wire in July 2013, Coway was in talks with a third-party regarding the sale of the water-treatment business, but due to issues on pricing, the sale was put on hold. However, according to the news wire, the company is willing to sell this business for the right price. Revenue from the water-treatment business was W57bn for 2013, 3% of Coway’s total revenue. Cosmetics-sales growth driven by home-shopping channel Coway entered the cosmetics business in 2010, focusing on the door-to-door channel with the premium brand, Re:NK. While it was generally expected in the market that the company would be competitive in this area due to its strong presence and expertise in door-to-door channel sales, the sales performance of the cosmetics operation has been disappointing. Coway: Re:NK

Source: Company

About 2 years after Coway’s entry to the door-to-door cosmetics channel, overall cosmetics industry sales growth started to slow, particularly in the high-end cosmetics channels, as consumers became price-conscious, leading to the low-end brand shops increasing in popularity compared with the premium brands.


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Coway’s network of sales ladies for its cosmetics division is separate from those at its living-goods operation. As industry sales growth has weakened, the number of sales ladies has been declining since 2012, and we expect this trend to continue over 2014-16. Despite the slowdown in door-to-door channel sales, we forecast sales growth of 8% YoY for the cosmetics division in 2014. Coway’s plans to expand channel distribution to the home-shopping channel should help drive sales growth. In 2013, sales from the home-shopping channel accounted for 13% of total cosmetics sales. For 2014, we forecast home-shopping channel sales to rise by more than 30% YoY, more than offsetting the 5% YoY decline we expect in the door-to-door channel sales. Coway also sells health supplements through the door-to-door channel network. Sales from this source account for 26% of total cosmetics sales. Given the annual 20-30% YoY industry growth in the health-supplement business currently, according to industry sources, we forecast health-supplement sales to increase by 22-32% YoY for Coway over 2014-16. Coway: cosmetics revenue breakdown (2011-16E) (KRWbn) 2011 2012 2013 2014E 2015E 2016E

Total cosmetics sales 68.2 67.2 76.4 82.5 87.2 90.7 YoY change 192% -1% 14% 8% 6% 4%Door-to-door 49.4 46.9 44.6 42.3Home shopping channel 10.0 13.5 15.5 16.3Health supplements 17.0 22.1 27.1 32.1 No. of beauty planners 2,718 2,298 1,794 1,594 1,395 1,197 Net adds 344 (420) (504) (200) (199) (198)Source: Company, Daiwa forecasts

Key financials matrix

Key balance sheet items As a rental operator, there are some key items that differentiate Coway from a regular manufacturer. Other the tangible assets related to its rental products, the largest items on the balance sheet are prepaid expenses and advance receipts. These items stem from the difference between the cash inflow/outflow from the company’s registration fees and the installation fees, and its accounting on the income statement describe these as revenue and expenses. Prepaid expenses The installation fee in the first year of a subscription is a one-time cash outflow. However, on the income statement, this is accounted for over a 60-month period under the costs of goods sold. On the balance sheet, the large amount of prepaid expenses is related to this one-time installation fee cash outflow, which is the one-time installation fee paid less the sum of the total installation fee booked in the income statement. Rental assets

• Coway depreciates the rental products on a monthly basis over a period of 5 years using a straight-line method. However, should the customer decide to cancel a subscription before the mandatory 2-year usage period, the company writes off the assets on the remaining value and depreciates the asset at once.

• Asset depreciation falls under COGS.

• From a consumer standpoint, customers can cancel their subscription before the 2-year mandatory usage period, after paying a penalty equating to 10% of the remaining fees.

• Impairment losses on rental assets are one of the swing factors under SG&A. This is related to the losses booked from cancellations, which equate to the residual value of the rental assets.

Accrued revenue The registration fee that a customer pays when first subscribing is spread over 60 months on the income statement. The cash inflow takes place in the first year. Due to the difference between the cash inflow and the accounting on the income statement, under Coway’s liabilities, the total registration fee booked on the income statement is subtracted from the actual cash inflow as accrued revenue.


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Key financial statement items and flow Income statement Balance sheet

Revenue Liabilities - Monthly rental fee - Registration fee, a one-time cash inflow but accounted for as revenue over 60 months

Accrued revenue - total registration fees less the accumulated registration fees accounted under revenue

- Membership fee - Outright product sales (including ODM products, cosmetics )

COGS Assets - Cody commissions for maintenance services

- Straight-line depreciation on the rental assets

Rental assets - rental products are depreciated on a monthly basis or all at once when a rental is cancelled

- Installation fee, a one-time cash outflow but accounted for as COGS over 60 months

Prepaid expenses – the total installation fee less the accumulated value accounted for under COGS

- Filter and after-service parts costs - COGS related to the cosmetics - ODM product costs

SG&A - Commission expenses – one-time fees paid to the Cody sales ladies related to the outright product sales

- Impairment loss on rental assets recognised from cancellations (the residual value of the rental asset is written off)

Source: Compiled by Daiwa

16% EPS CAGR over 2014-16E We expect Coway to achieve steady earnings growth over 2014-16, driven by the following.

• An increase in the monthly subscription fee for new customers, which was introduced last year.

• A rise in the number of rental subscribers, given growing environmental concerns and increased awareness about health-related issues.

• A reduction in interest expenses as the company’s debt level falls.

• Increases in sales volume on the back of sales-network expansion.

Investment costs for expansion to rise for 2014 For 2014, we forecast sales to rise by 7.6% YoY to KRW2.1tn, operating profit to increase by 13% YoY to KRW377bn, and net profit to grow by 11% YoY to KRW280bn. In 2014, Coway plans to expand the number of sales ladies and invest more on recruiting than in 2013 as it focuses on boosting sales volume. As a result, we forecast the company’s operating-profit margin to expand by only 0.9pp YoY to 18%, not as much as the 4.6pp YoY expansion to 17.2% for 2013 but still an all-time high.

Our 2014-16 net profit forecasts are 0-12% higher than those of the consensus Our earnings forecasts are higher than those of the Bloomberg consensus as we factor in a slightly higher rental-subscriber growth. This is because we expect demand to remain strong on the back of a low household penetration rate and rising environmental issues (ie, yellow dust). Coway: Daiwa vs. consensus forecasts (2014-16E)

2014E 2015E 2016E

(KRWbn) Daiwa BBG Diff. (%) Daiwa BBG Diff.(%) Daiwa BBG Diff. (%)

Sales 2,082 2,074 0.4 2,228 2,224 0.2 2,375 2,362 0.6 YoY growth (%) 7.6 7.3 7.1 7.2 6.6 6.2Operating profit 377 362 4.3 439 397 10.6 499 433 15.4 YoY growth (%) 13.3 8.6 16.3 9.7 13.7 8.9Net profit 280 279 0.4 328 313 4.7 374 333 12.4 YoY growth (%) 10.7 9.9 17.0 12.2 14.2 6.4Source: Bloomberg, Daiwa forecasts

Annual capex of about KRW300bn Most of Coway’s capex over 2014-16 should be related to the production of the rental products. We forecast KRW300bn in capex per annum, of which about KRW260bn is related to the rental products and about KRW40bn is regular maintenance capex. Strong free cash flow over 2014-16E with a sustainable ROE of 27-28% We forecast Coway to have an annual free cash flow of W250bn over 2014-16. This is likely to be used to: 1) reduce the company’s existing debt, and 2) pay out dividends. In 2013, the company used most of its cash to reduce debt. We expect Coway to pay down most its outstanding debt (KRW117bn as at the end of 2013) by the end of 2015. Coway’s business is capital-light and its operating-profit margin is high as the fixed costs element is not significant. Over 2014-16, we forecast an ROE of 27-28%. Coway: free cash flow (2011-16E)


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Coway: net debt and net-gearing ratio


Dividend-payout policy Coway’s dividend payout ratio ranged from 45-65% over 2010-13. As the company pays down its debt fully and the business is capital-light, we believe that the major shareholder’s interest is in receiving more dividend income. We forecast a 53-56% dividend-payout ratio over the next 3 years, which implies a dividend yield of about 3%/year.

Valuation appeal

Target price of KRW98,000, implying 23% upside potential

We use an SOTP methodology to value Coway, given the company’s steady cash-flow generation from its product rental operations and product sales. We add in the value of its 2.6m treasury shares based on our target price. In our DCF analysis we use the following assumptions.

• A WACC of 9.0% using the assumptions of risk-free rate of 3.0% and a market-risk premium of 6.0%.

• We assume a 3.5% perpetual growth rate, fairly in line with the long-term growth projector of Korea’s economic growth.

Our 6-month target price is KRW98,000, implying 23% upside potential from the current share price. Our target price implies a 2014E PER of 26x (based on our EPS forecast).

We initiate coverage of Coway with a Buy (1) rating. This is premised on the steady earnings growth we expect over 2014-16, from the company’s growing rental business in Korea (with rises in its monthly rental fees and customer base), and ODM sales internationally from growing demand for its environmental household products, for which the domestic household penetration is low but where Coway dominates. As such, despite Korea’s private-consumption growth still running at a low single-digit percentage, we believe Coway’s earnings growth will outpace that of the other Korea consumer stocks we cover, and forecast an EPS CAGR of 16% over 2014-16.

Coway: valuation (KRWbn) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022ENet profit 280 328 374 404 436 471 509 550 594 + Depreciation 201 221 241 261 281 301 321 341 361 + Amortisation 8 9 10 11 12 13 14 15 16 + Provisions on severance payment 19 20 21 23 25 27 29 31 33 + Cash flow from WC change (21) (21) (21) (23) (25) (27) (29) (31) (33) + Other WC 17 (15) (15) (15) (15) (15) (15) (15) (15)Operating cash flow 513 614 682 666 720 777 837 899 965 - Capex 300 300 300 309 318 328 334 341 348 - Net increase in investments 10 10 10 10 10 10 10 10 10FCF 203 304 372 347 392 439 492 548 608Discount rate 92% 84% 77% 71% 65% 60% 55% 50% 46%Present value 186 256 287 246 255 262 269 275 280Terminal value 5,365Net debt 64Treasury shares 262Total value 7,599Target price per share (KRW) 98,000

Source: Daiwa forecasts

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Should continue to trade at high valuation multiples Coway has outperformed the KOSPI by 50% over the past one year, on the back of a series of quarterly earnings surprises in 2013. These were driven by asset disposals and cost-cutting efforts under the new management, Coway Holdings, after it took over from Woongjin group in early 2013. The stock’s past-10-year PER trading range had been 12-24x. The low was at 12x in 2012 – Coway was up for sale that year and its earnings had deteriorated due to a lack of strategic direction from the Woongjin group, which had been experiencing financial difficulties. Currently, the stock is trading at 21x 2014E PER, which is below its past-10-year high, and remains attractive. Despite the stock’s share-price outperformance against the KOSPI, we see further room for share-price upside and expect the rerating of the stock over the past 12 months to continue as:

• Earnings growth for 2014-15 could exceed the consensus expectations, on the back of the company’s plans to expand its sales network and growing domestic demand for environmental household products given ongoing concerns about air pollution and consumers’ growing demand for products that can boost their wellbeing.

• Coway’s balance sheet is already strong and we expect it to strengthen on the back of more non-core asset disposals. The water-treatment business and cosmetics operations could be the next to be sold off.

• We forecast Coway to see a sustainable 3% dividend yield over 2014-15 given its abundant cash flow (thanks to its capital-light operation and strong balance sheet.

• We believe the major shareholder, Coway Holdings, is focused on maximising Coway’s value.

Meanwhile, we have looked at S1, which is trading at a 2014 PER of 23x based on Daiwa’s forecasts, which we believe is the closest comparable to Coway, as S1’s earnings are driven by the monthly collection of subscription fees from customers for security service systems. S1 has also traded at high valuation multiples of 14-24x over the past 10 years. Over the past 10 years, S1 has demonstrated the following: steady earnings from its rental operation, a capital-light operation, a high ROE of about 16-20% over 2003-11, and a strong balance sheet. Coway: 12-month forward PER bands


S1: 12-month forward PER


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Korea’s consumer sector: valuation comparison

BBG code

Mkt cap(KRWtn)

Share price (KRW) Rating

PER (x) PBR (x) EV/EBITDA (x) ROE (%) EPS growth (%) 13 14E 15E 13 14E 15E 13 14E 15E 13 14E 15E 13 14E 15E

Retailers Coway 021240 KS 6.1 79,400 Buy 23.4 21.2 18.1 6.3 5.6 4.9 12.0 10.5 9.2 28.6 27.1 28.0 110.2 10.7 17.0Lotte Shopping 023530 KS 9.5 323,000 Hold 11.9 10.0 9.5 0.6 0.6 0.5 8.2 8.3 7.9 5.1 5.7 5.7 (27.0) 19.4 5.4E-Mart 139480 KS 6.9 247,000 Hold 14.7 13.4 12.1 1.0 1.0 0.9 9.0 8.5 7.8 7.5 7.5 7.8 10.5 9.5 11.2Hyundai Dept Store 069960 KS 3.3 140,000 Buy 10.6 9.6 8.7 1.1 1.0 0.9 6.9 6.3 5.9 10.3 10.2 10.1 (7.2) 10.9 10.7Shinsegae 004170 KS 2.3 233,000 Hold 14.6 12.3 11.5 1.0 0.9 0.8 9.7 9.5 9.3 6.8 7.4 7.3 (2.5) 18.8 6.5GS Retail 007070 KS 2.2 361,000 Hold 14.2 11.7 9.8 2.9 2.3 1.8 7.3 6.0 4.9 23.3 21.9 20.7 (0.2) 21.2 19.9CJ O Shopping 035760 KS 2.1 27,700 Outperform 17.9 16.2 14.5 1.3 1.2 1.1 7.5 6.8 6.1 7.6 7.9 8.1 (3.3) 10.3 12.0Hyundai Home Shopping 057050 KS 1.9 157,000 Outperform 9.7 11.2 10.0 1.6 1.4 1.3 8.1 6.5 5.2 18.3 13.6 13.5 87.2 (13.8) 12.4Lotte Himart 071840 KS 1.8 74,300 Hold 13.6 12.0 10.9 1.1 1.0 0.9 10.5 9.2 8.1 8.4 8.7 8.8 85.7 12.7 10.0GS Home Shopping 028150 KS 1.6 246,700 Buy 12.4 11.5 10.6 2.0 1.8 1.6 5.4 4.8 4.1 17.6 16.5 15.6 22.0 8.0 8.7Cosmetics LG Household & Health Care 051900 KS 7.5 480,000 Outperform 21.0 19.9 18.1 5.0 4.1 3.5 13.1 12.2 11.2 26.4 22.7 20.7 17.4 5.6 9.7Amorepacific 090430 KS 7.3 1,248,000 Hold 27.3 23.0 20.3 2.9 2.5 2.3 14.2 12.0 10.3 10.9 11.7 11.8 (0.4) 18.6 13.5Consumer products KT&G 033780 KS 11.6 84,500 Hold 19.0 13.9 13.0 2.2 2.1 1.9 9.0 8.4 7.9 10.8 14.0 14.0 (22.9) 36.5 6.8Orion 001800 KS 4.7 791,000 Hold 25.6 22.4 20.0 4.2 3.6 3.1 15.5 14.8 13.7 15.3 15.2 14.7 3.4 14.5 11.8Hite Jinro 000080 KS 1.7 24,350 Hold 18.6 24.0 23.7 1.2 1.2 1.2 11.0 10.6 10.4 6.6 5.2 5.2 (10.6) (22.7) 1.3

Source: Bloomberg, Daiwa forecasts Note: Closing share prices as at 22 April 2014


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Risks

Chaebols eyeing health-related home appliances Leading domestic electronics goods companies (ie, LG Electronics and Samsung Electronics) as well as foreign brands are showing interest in becoming involved in the health-related living goods market (such as air purifiers and water purifiers), which overlaps with Coway’s business market. Unlike Coway’s rental services, the businesses of the chaebols focus on one-off product sales. In addition, we believe that Samsung Electronics’s and LG Electronics’s entry into this area could help increase the market size and benefit Coway, which currently dominates in this field. Management likely to focus on cost-cutting rather than investment As the current major shareholder is a private equity firm and its main interest is maximising value before selling on its stake, there is a risk that Coway could become focused on cost-cutting and be less interested in making investments for the company’s long-term business growth.

Company background

Coway was established in May 1989 as a manufacturer of water purifiers and is currently one of the leading developers and manufacturers of wellness products in Korea, selling and renting products ranging from water purifiers and air cleaners to bidets. The company was the first to launch a rental business in Korea, in 1998, and this proved to be a success with consumers preferring to rent water purifiers rather than making a lump-sum payment for purchases. In 2005, Coway merged with Woongjin Coway Development with the purpose of entering the overseas rental business and expanding the range of product lines to other wellness appliances. In order to emerge as a total water-treatment system supplier, Coway acquired Green Entech in 2010, a water-treatment engineering company that possessed biochemical water-purifying technology.

However, as the Woongjin group faced financial difficulties, Woongjin Holdings (its major shareholder) announced the sale of Coway in February 2012, hoping to revitalise the other businesses of the group by selling its cash cow. MBK Partners signed a formal agreement with Woongjin Holdings to acquire its stake in Coway, and Coway was sold in January 2013 with MBK Partners paying KRW1.2tn. Currently, Coway’s major shareholders include Coway Holdings, a special purpose entity formed by MBK Partners, which holds a 30.9% stake. Coway: shareholder structure

Source: Company

Coway Holdings (MBK Partners)

30.9%

Woori Bank5.8%

Lazard Ltd4.7%

Treasury shares3.2%

Others55.4%


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Daiwa’s Asia Pacific Research Directory

HONG KONG

Hiroaki KATO (852) 2532 4121 [email protected] Regional Research Head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected] Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected] Deputy Head of Regional Economics; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Taiwan)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong Research; Head of Hong Kong and China Property

Grace WU (852) 2532 4383 [email protected] Head of Greater China FIG; Banking (Hong Kong, China)

Jerry YANG (852) 2773 8842 [email protected] Banking (Taiwan); Insurance (Taiwan and China)

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong, China); Broker (China)

Winston CAO (852) 2848 4469 [email protected] Capital Goods – Machinery (China)

Alison LAW (852) 2532 4308 [email protected] Head of Regional Consumer; Consumer (Hong Kong/China); Gaming and Leisure (Hong Kong, China)

Jamie SOO (852) 2773 8529 [email protected]

Consumer (Hong Kong/China)

Anson CHAN (852) 2532 4350 [email protected]

Consumer (Hong Kong/China)

Eric CHEN (852) 2773 8702 [email protected] Pan-Asia/Regional Head of IT/Electronics; Semiconductor/IC Design (Regional)

Lynn CHENG (852) 2773 8822 [email protected]

IT/Electronics (Semiconductor)

Felix LAM (852) 2532 4341 [email protected] Head of Materials (Hong Kong, China); Cement and Building Materials (China, Taiwan); Property (China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected] Regional Head of Small/Mid Cap; Small/Mid Cap (Regional); Internet (China)

Jackson YU (852) 2848 4976 [email protected]

Small/Mid Cap (Regional)

Joey CHEN (852) 2848 4483 [email protected] Steel (China)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong, China); Transportation (Regional)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group; Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

SOUTH KOREA

Chang H LEE (82) 2 787 9177 [email protected] Head of Korea Research; Strategy; Banking

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Jun Yong BANG (82) 2 787 9168 [email protected] Tyres; Chemicals

Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery)

Sang Hee PARK (82) 2 787 9165 [email protected] Consumer/Retail

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software (Korea) – Internet/On-line Game

TAIWAN

Mark CHANG (886) 2 8758 6245 [email protected] Head of Taiwan Research

Steven TSENG (886) 2 8758 6252 [email protected]

IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Cement; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

SINGAPORE

Adrian LOH (65) 6499 6548 [email protected] Head of Singapore Research, Regional Head of Oil and Gas; Oil and Gas (ASEAN and China); Capital Goods (Singapore)

Benjamin LIM (65) 6321 3086 [email protected]

Oil and Gas (ASEAN and China); Capital Goods (Singapore)

Angeline LOH (65) 6499 6570 [email protected] Banking/Finance, Consumer/Retail

David LUM (65) 6329 2102 [email protected] Property and REITs

Evon TAN (65) 6499 6546 [email protected] Property and REITs

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Head of ASEAN & India Telecommunications; Telecommunications (China, ASEAN & India)

Jame OSMAN (65) 6321 3092 [email protected] Telecom (ASEAN & India); Pharmaceuticals and Healthcare (Singapore)


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Daiwa’s Offices

Office / Branch / Affiliate Address Tel Fax

DAIWA SECURITIES GROUP INC

HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661

Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726

Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129

Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

Daiwa Capital Markets America Inc Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100

Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935

Daiwa Capital Markets Europe Limited 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600

Daiwa Capital Markets Europe Limited, Frankfurt Branch Trianon Building, Mainzer Landstrasse 16, 60325 Frankfurt am Main, Federal Republic of Germany

(49) 69 717 080 (49) 69 723 340

Daiwa Capital Markets Europe Limited, Paris Representative Office 36, rue de Naples, 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808

Daiwa Capital Markets Europe Limited, London, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441

Daiwa Capital Markets Europe Limited, Moscow Representative Office

Midland Plaza 7th Floor, 10 Arbat Street, Moscow 119002, Russian Federation

(7) 495 641 3416 (7) 495 775 6238

Daiwa Capital Markets Europe Limited, Bahrain Branch 7th Floor, The Tower, Bahrain Commercial Complex, P.O. Box 30069, Manama, Bahrain

(973) 17 534 452 (973) 17 535 113

Daiwa Capital Markets Hong Kong Limited Level 28, One Pacific Place, 88 Queensway, Hong Kong (852) 2525 0121 (852) 2845 1621

Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore 068809, Republic of Singapore

(65) 6220 3666 (65) 6223 6198

Daiwa Capital Markets Australia Limited Level 34, Rialto North Tower, 525 Collins Street, Melbourne, Victoria 3000, Australia

(61) 3 9916 1300 (61) 3 9916 1330

DBP-Daiwa Capital Markets Philippines, Inc 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines

(632) 813 7344 (632) 848 0105

Daiwa-Cathay Capital Markets Co Ltd 14/F, 200, Keelung Road, Sec 1, Taipei, Taiwan, R.O.C. (886) 2 2723 9698 (886) 2 2345 3638

Daiwa Securities Capital Markets Korea Co., Ltd. One IFC, 10 Gukjegeumyung-Ro, Yeouido-dong, Yeongdeungpo-gu, Seoul, 150-876, Korea

(82) 2 787 9100 (82) 2 787 9191

Daiwa Securities Capital Markets Co Ltd, Beijing Representative Office

Room 301/302，Kerry Center， 1 Guanghua Road，Chaoyang District， Beijing 100020, People’s Republic of China

(86) 10 6500 6688 (86) 10 6500 3594

Daiwa SSC Securities Co Ltd 45/F, Hang Seng Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai 200120, People’s Republic of China

(86) 21 3858 2000 (86) 21 3858 2111

Daiwa Securities Capital Markets Co. Ltd, Bangkok Representative Office

18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road, Lumpini, Pathumwan, Bangkok 10330, Thailand

(66) 2 252 5650 (66) 2 252 5665

Daiwa Capital Markets India Private Ltd 10th Floor, 3 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra East, Mumbai – 400051, India

(91) 22 6622 1000 (91) 22 6622 1019

Daiwa Securities Capital Markets Co. Ltd, Hanoi Representative Office

Suite 405, Pacific Palace Building, 83B, Ly Thuong Kiet Street, Hoan Kiem Dist. Hanoi, Vietnam

(84) 4 3946 0460 (84) 4 3946 0461

DAIWA INSTITUTE OF RESEARCH LTD

HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603

MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

New York Research Center 11th Floor, Financial Square, 32 Old Slip, NY, NY 10005-3504, U.S.A. (1) 212 612 6100 (1) 212 612 8417

London Research Centre 3/F, 5 King William Street, London, EC4N 7AX, United Kingdom (44) 207 597 8000 (44) 207 597 8550


- 21 -

Coway: share price and Daiwa recommendation trend

Source: Daiwa

Date Target price Rating Date Target price Rating Date Target price Rating

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

80,000

85,000

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov-

12

Dec-

12

Jan-

13

Feb-

13

Mar

-13

Apr-1

3

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

Nov-

13

Dec-

13

Jan-

14

Feb-

14

Mar

-14

Target price (KRW) Closing Price (KRW)

Share price and Daiwa recommendation trend


- 22 -

Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship

Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Blackgold International Holdings Ltd (BGG AU); Tosei Corporation (8923 JP); Modern Land (China) Co. Ltd (1107 HK); China Everbright Bank Company Limited (6818 HK); econtext Asia Ltd (1390 HK); Lotte Shopping Co (023530 KS).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research. Korea The developing analyst of this research and analysis material hereby states and confirms that the contents of this material correctly reflect the analyst’s views and opinions and that the analyst has not been placed under inappropriate pressure or interruption by an external party.

Name of Analyst : Sang Hee Park

Disclosure of Analysts’ Interests If an analyst engaging in or a person who exercises influences on the preparation or publication of a Research Report containing recommendations for general investors to trade financial investment instruments with regard to which the analyst or the influential person has personal interests and if the recommendations contained in the Report may have impacts on the personal interests, Daiwa Securities Capital Markets Korea Co., Ltd.(“Daiwa Securities Korea”)shall ensure that the Analyst or the influential person notifies that he/she has personal interests with regard to: 1. The equity, the equity-linked bonds and the instruments with the subscription right to the equity issued by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); 2. The stock option granted by the legal entity covered in the Research Report (or the legal entity subject to the investment recommendations); or 3. The equity futures, the equity options and the equity-linked warrants backed by the equity prescribed in the preceding Paragraph 1 as the underlying assets. Legal Entities subject to Research Report Coverage Restrictions Daiwa Securities Korea hereby states and confirms that Daiwa Securities Korea has no conflicts of interests with the legal entity covered in this Research Report: 1. In that Daiwa Securities Korea does NOT offer direct or indirect payment guarantee for the legal entity by means of, for instance, guarantee, endorsement, provision of collaterals or the acquisition of debts; 2. In that Daiwa Securities Korea does NOT own one-hundredth (or 1/100) or more of the total number of outstanding equities issued by the legal entity; 3. In that The legal entity is NOT an affiliated company of Daiwa Securities Korea pursuant to Sub-paragraph 3, Article 2 of the Monopoly Regulation and Fair Trade Act of Korea; 4. In that, although Daiwa Securities Korea offers advisory services for the legal entity with regard to an M&A deal, the size of the M&A deal does NOT exceed five-hundredths (or 5/100) of the total asset size or the total number of equities issued and outstanding of the legal entity; 5. In that, although Daiwa Securities Korea acted in the capacity of a Lead Underwriter for the initial public offering of the legal entity, more than one-year has passed since the IPO date; 6. In that Daiwa Securities Korea is NOT designated by the legal entity as the ‘tender offer agent’ pursuant to the Paragraph 2, Article 133 of the Financial Services and Capital Market Act or the legal entity is NOT the issuer of the equity subject to the proposed tender offer; this requirement, however applies until the maturity of the tender offer period; or 7. In that Daiwa Securities Korea does NOT have significant or material interests with regard to the legal entity. Disclosure of Prior Distribution to Third Party This report has not been distributed to the third party in advance prior to public release. The following explains the rating system in the report as compared to KOSPI, based on the beliefs of the author(s) of this report. "1": the security could outperform the KOSPI by more than 15% over the next six months. "2": the security is expected to outperform the KOSPI by 5-15% over the next six months. "3": the security is expected to perform within 5% of the KOSPI (better or worse) over the next six months. "4": the security is expected to underperform the KOSPI by 5-15% over the next six months. "5": the security could underperform the KOSPI by more than 15% over the next six months. “Positive” means that the analyst expects the sector to outperform the KOSPI over the next six months. “Neutral” means that the analyst expects the sector to be in-line with the KOSPI over the next six months “Negative” means that the analyst expects the sector to underperform the KOSPI over the next six months Additional information may be available upon request.


- 23 -

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain

This research material is issued/compiled by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.


- 24 -

Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the

amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices,

real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

Initiation: cleaning up in the house-product market 1 ...asiaresearch.daiwacm.com/eg/cgi-bin/files/Coway_140423.pdf · Other non-current liabilities 18 14 27 31 37 37 37 38 Total

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