Monthly

March 4, 2010

Korea Strategy

March stock market: inflection point of mid-term upcycle

Strategist Clemens Kang Erin Kim

March stock market to be highly volatile

We recommend increasing equity weightings in the following cases: 1) when the Kospi falls to the low-1,500p range, which would offer valuation merit; or 2) after mid-March, when negatives should fade. Given rising concerns over economic recovery and highly volatile stock market conditions, we advise investors focus on low-P/B plays rather than growth stocks. Valuations should be attractive, as the Korean market is trading at a 2010E P/B of 1.2x, lower than the major developed markets and emerging markets. In particular, utilities and telecom plays trading at low P/Bs have been showing solid share performance since the beginning of the year. However, for a contrarian approach, we advise focusing on: 1) the banking sector (2010E P/B of 0.9x), which was hit hardest the financial crisis; and 2) the insurance sector (2010E P/B of 1.1x), which is expected to suffer from increased supply following the massive IPOs of major life insurers this year.

822)768-7614, clemens.kang@wooriwm.com 822)768-7535, erin.kim@wooriwm.com

Lawrence Kim Jun Hong

822)768-7574, lawrence.kim@wooriwm.com 822)768-7583, jun.hong@wooriwm.com

Jenny Kim (RA) Economist June Park Sun Yoo

822)768-7853, jenny.kim@wooriwm.com

822)768-7588, june.park@wooriwm.com 822)768-7124, sun.yoo@wooriwm.com

Helen Hwang

Focus on weakening economic momentum trend

We recommend investors closely monitor the pace of Koreas economic recovery this month. We expect Koreas LEI to turn downward in 1Q. With Chinas National Peoples Congress slated for Mar 5, the government is likely to discuss yuan appreciation. If so, concerns over continued tightening policies are expected to add to market uncertainties. However, the expected yuan revaluation should help improve developed nations real economies.

822)768-7601, helen.hwang@wooriwm.com

Elijah Kim (RA)

822)768-7488, elijahjh@wooriwm.com

Woori I&S does not have a stake greater than or equal to 1% in companies mentioned in this material as of the preparation date. Woori I&S has not provided this material to any institutional investors or other third party in advance. The Korean version of this material was distributed on February 26, 2010. The analyst and his/her spouse do not own any securities of the companies mentioned in this material as of the preparation date. Woori Investment & Securities is an issuer and LP (liquidity provider) of ELWs taking Shinsegae, HDS, Hyundai Motor, Kia Motors, Hyundai Mobis, KBFG, HFG, IBK, Daewoo Securities, Samsung Card, HHI, SHI, GS E&C, Hyundai E&C, KAL, Hyundai Steel, LGChemical, S-Oil, KOGAS, KT, SKT, Amorepacific, SEC, and LGE as an underlying asset. Among the recommended companies, Woori I&S has a Buy rating on "Shinsegae, HDS, Cheil Worldwide, Handsome, Hyundai Motor, Kia Motors, Hyundai Mobis, KBFG, Busan Bank, IBK, HHI, SHI, GS E&C, Hyundai E&C, Sungkwang Bend, KAL, Glovis, Hyundai Steel, LG Chemical, Hanwha Chem, S-Oil, KOGAS, KT, SKT, Daesang, Amorepacific, Hanmi Pharm, SEC, Eugene Tech, LGE, Techno Semichem, Ace Digitech, LIG Insurance, and Meritz F&M" and Hold rating on HFG and Honam Petrochem. SW Hitech, Hanil E-Hwa, Sejong Industrial, Daewoo Securities, Samsung Card, and Hanwha are not our coverage. This report correctly reflects the analysts opinion and was written without any external influence or intervention.

Contents
March stock market outlook March stock market: inflection point of mid-term upcycle I. March stock market outlook 1. Kospi forecast: rangebound at 1,500~1,700p, but may fall below lower end - Fact 1. Economic and earnings momentum weakening - Fact 2. Uncertainties mount in March 2. Investment strategy: March a critical inflection point for long/short positions 1) Shift strategy to overweighting when trading range falls 2) Strategy: maintain overweight on low-P/B plays given increasing volatility II. March economic outlook 1. Worsening of macro momentum to be confirmed in LEI 1) Macro momentum negative due to impending fall of LEI 2) Decline in LEI to be limited 3) Macroeconomic momentum to turn around from 3Q10 2. Five implications of yuan appreciation 1) Options available for China: higher loan rates and yuan appreciation 2) 3 scenarios for yuan appreciation 3) Five implications of yuan appreciation III. Model portfolio evaluation 1. Model Portfolio 2. Model portfolio performance evaluation IV. Chart Book 1. Economic cycle 2. Earnings 3. Valuation/ Momentum 4. Capital Flow 26 36 40 44 3 5

13 15

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20 21 23 25

I. March stock market outlook

1. Kospi forecast: rangebound at 1,500~1,700p, but may fall below lower end 2. Investment strategy: March a critical inflection point for long/short positions

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March stock market outlook (summary)

[Kospi outlook and investment strategy]
Strategist Clemens Kang (822-768-7614)

Fact 1. Economic and earnings momentum weakening Koreas economy hit bottom in Dec 2008, two months later than China. Koreas LEI likely entered a downcycle around Jan 2010 following a 12-month recovery, similar to the pattern shown by China. In Korea, the inventory cycle is entering a contraction phase and earnings momentum (ie, growth) and earnings revision ratio are falling, sending a strong signal of deterioration for major fundamental indices. Fact 2. Uncertainties increasing in March due to seasonality Seasonality should add to uncertainties in March. There are several negatives in the financial market, including: 1) US banking regulation; 2) Chinas reserve ratio hikes; and 3) credit risk of Western European countries. These are affecting the domestic and overseas financial markets. In addition, there are several events slated for March (Chinas National Peoples Congress, end of fiscal year for Koreas non-banking financial institutions, and a possible reduction in Japans yen carry capital). Moreover, large-scale IPOs are concentrated in 1H10, including Korea Life (W2tn) and Samsung Life (W4tn). As for Western Europe, bond maturities are concentrated over February~April. When seasonal issues are piled on to the negatives mentioned above, this is likely to hurt investor sentiment and liquidity. Investment strategy: March stock marketinflection point of mid-term upcycle We recommend increasing equity weightings in the following cases: 1) when the Kospi falls to the low-1,500p range, which would offer valuation merit; or 2) after midMarch, when negatives should fade. Given worsening fundamentals and uncertainties expected in March, we believe the economic bottom that we are predicting for 1H10 is likely to come in the second half of March. We expect March to be the inflexion point of a mid-term upcycle. Meanwhile, considering rising concerns over economic recovery and highly volatile stock market conditions, we advise investors to focus on low-P/B plays rather than growth stocks. Valuations should be attractive, as the Korean market is trading at a 2010E P/B of 1.2x, lower than the major developed markets and emerging markets. In particular, utilities and telecom plays trading at low P/Bs have been showing solid share performance since the beginning of the year. Meanwhile, for a contrarian approach, we advise focusing on: 1) the banking sector (2010E P/B of 0.9x), which was hit hardest the financial crisis; and 2) the insurance sector (Hyundai M&F, LIG Insurance, Meritz F&M, Dongbu Insurance; 2010E P/B of 1.1x), which is expected to suffer from increased supply following the massive IPOs of major life insurers this year

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I. March stock market: uncertainties increase due to seasonality

1. Kospi forecast: rangebound at 1,500~1,700p, but may fall below lower end
Fact 1. Economic and earnings momentum weakening
China and Korea showing strong signals of economic downturn China peaked in Oct 2009 and Korea in Dec 2009: China and Korea have entered contraction phases, after showing the fastest recoveries among the global economies since the subprime meltdown. China recovered for about 12 months after its LEI hit bottom in Nov 2008, with LEI peaking in Oct 2009 and then falling for three straight months (Nov 2009~Jan 2010). Similarly, Korea hit bottom in Dec 2008 and sustained recovery for 12 months. Koreas LEI is estimated to have a entered downturn from Jan 2010. In Korea, the inventory cycle has entered contraction and earnings momentum (ie, growth) and earnings revision ratio are falling, sending strong signals for deterioration of fundamental indices.

Koreas LEI enters downturn following China

(% y-y) 15 10 5 0 -5 -10 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

Developed countries likely to enter contraction in 2Q10

(% y-y) 30 25 20 15 10 5 0 -5 -10 -15 '08.1 '08.4 '08.7 '08.10 '09.1 '09.4 '09.7 '09.10 '10.1 Europe China US Korea

Korea's LEI China's LEI

Source: NSO, National Bureau of Statistics, Bloomberg

Source: OECD, Bloomberg, Woori I&S Research Center

Koreas inventory cycle enters contraction

(Inventory % y-y) 20 15 10 As of Jan, 2009 5 0 -30 -20 -10 -5 0 -10 Recovery -15 -20 10 20 Dec 30 (%) Contraction 30 20 10 0 -10 -20 -30

Koreas earnings mtm, revision ratio fall sharply

(%) 60 40 20 0 -20 -40 -60 -80 '08.1 '08.3 '08.6 '08.9 '08.12 '09.3 '09.5 '09.8 '09.11 '10.2

Earnings momentum (LHS) Earnings revision ratio (RHS)

(Shipment % y-y)

Source: Bloomberg

Source: CBOE, Bloomberg, Woori I&S Research Center

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1H10: economic downturn for Korea; delayed consumption recovery for developed countries

Rapid consumption recoveries unlikely for developed countries, including US, in 1H10: In addition to the gradual weakening of Koreas economy, recoveries in employment and consumption in developed countries, including the US, have also been disappointing. US consumption indices, which drew much attention at end-2009 and early 2010, have started deteriorating again, and corporate bankruptcies and the jobless rate are weighing on economic recovery. In our 2010 stock market outlook (published Nov 2009), we forecast that the stock market would enter a correction in 1H10 due to growing uncertainties (economic downturn in Korea and delayed recoveries in developed countries). In light of recent developments, we maintain our previous assumptions that: 1) domestic economic conditions and corporate earnings momentum will likely slow in Jan~Feb 2010; and 2) consumer spending in advanced nations will rebound from 3Q.

However, we note that economic and earnings momentum are only expected to slow, not turn negativeie, many are revising down 2010 GDP growth estimates from 5.5~6.0% to 5.2~5.5%. As such, economic and earnings momentum should continue to expand in absolute terms. If so, any corrections in the financial markets should remain tolerable.

US retail sales and consumer confidence

(% y-y) 6 5 4 3 2 1 0 -1 -2 -3 '08.1 '08.4 '08.7 '08.10 '09.1 '09.4 '09.7 '09.10 '10.1 Retail sales (LHS) Conference Board confidence index(RHS) (1985=100) 90 80 70 60 50 40 30 20 10 0

Woori I&S 2010 outlook

(growth rate) 2006

07.9
4Q09

ST cycle MT cycle
Assumption 1: Short-term, med-term cycles to downtrend in 1H10 2Q~3Q10

2006

1H10

(time)

Assumption 2: with MT cycle plunging on financial crisis, new MT cycle to begin 2Q~3Q10 when US job mkt and consumption should recover

Source: Bloomberg

Source: CBOE, Bloomberg, Woori I&S Research Center

Post-1990 Korean economy: cycle narrows after crisis

(p) 2000 1500 1000 500 0 '90 '92 '94 '96 '99 '01 '03 '06 '08 '10 Kospi (LHS) Y-Y chg in LEIs (RHS) (% y-y) 20 15 10 5 0 -5 -10

Source: Woori I&S Research Center

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Fact 2. Uncertainties mount in March

Financial markets tend to be uncertain in March With fundamentals showing visible signs of slowing, uncertainties are mounting for the financial markets. In particular, the financial markets tend to be increasingly uncertain in March, and this year is no exception, given: 1) US banking regulation; 2) China lifting its reserve ratio; and 3) rising credit risks in Western Europe. All these factors are weighing on the Korean financial markets. Historically, March has seen many negatives, such as Chinas two major political events, the closing of the books for firms with fiscal years ending in March, and issues related to the yen carry trade. This year, we expect Korea Life Insurance (W2tn) and Samsung Life (W4tn) to be ready for their IPOs in 1H, and risks in Western Europe may undermine investor sentiment and liquidity, with massive amounts of bonds maturing over February~April.

Potential negatives for the financial markets in/around March

Seasonal factors Non-market factors

Japanese firms, Korean non-banking financial firms with fiscal years ending Mar Possible yuan appreciation and tightening measures around Natl Peoples Congress in early-Mar Massive IPOs scheduled for Mar in Korea (W10tn)

Greece likely to issue massive TBs around Apr Stricter regulation on financials by advanced nations

+?

Source: Woori I&S Research Center

Countries with sovereign risk

Eastern Europe

US

UK Southern Europe Venezuela Dubai Japan

Argentina

Source: Woori I&S Research Center

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Western European risks already seen in Mar 2009 (CDS premium)

(bp) 450 400 350 300 250 200 150 100 50 0 '08.1 '08.3 '08.5 '08.7 '08.9 '08.11 '09.1 '09.3 '09.5 '09.7 '09.9 '09.11 '10.1 Italy Spain Portugal Greece Ireland

Source: Woori I&S Research Center

Southern European bonds maturing in March~April

( EUR bn) 35 30 25 20 15 10 5 0 Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Greece Portugal Spain

Source: Woori I&S Research Center

Korea: post-2000 IPOs and corporate bond issuance

( Wtn) 12 10 8 6 4 2 0 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10E IPO CP issuance

Source: Woori I&S Research Center

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2. Investment strategy: March a critical inflection point for long/short positions

1) Shift strategy to overweighting when trading range falls
Lower end of postSep 2009 Kospi range to be tested in March We expect the stock markets to remain jittery in March given current economic conditions and seasonal factors. In particular, the Kospi could correct further in March, falling below its post-Sep 2009 range (low-1,500p~low-1,700p). Historically, rangebound movement was often seen in bear markets and lasted no longer than two quarters.

Recommend buying on dips, or waiting till mid-March

We advise two strategies: 1) buying on dips when the index falls to the low-1,500p level; or 2) buying stocks in mid-March when negatives should be fully exposed. Given the slowing momentum of fundamentals and potential negatives, we expect the stock market to trough in mid/late-March and believe this will be a critical inflection point for long/short positions.

P/E band
(P) 2,500 2,000 1,500 1,000 500 0 '97.1 '98.1 '99.1 '00.1 '01.1 '02.1 '03.1 '04.1 '05.1 '06.1 '07.1 '08.1 '09.1 '10.1

KOSPI 10x 8x

12x 9x 6x

Source: Woori I&S Research Center

Average stock market performance by quarter since 2000

(%) 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 -0.5 1Q 2Q -0.2 3Q 4Q 1.5

1Q 3Q

2Q 4Q

4.0

4.1

Source: Woori I&S Research Center

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2) Strategy: maintain overweight on low-P/B plays given increasing volatility

Korean stock market still very attractive In light of increasing volatility and uncertainties, we recommend focusing on value plays rather than growth plays in March. As Koreas P/B is still very undervalued compared to the major stock markets, we believe Korea will merit attention. Currently, the Korean stock market is trading at a P/B of 1.2x, which is undervalued vs major economies and emerging nations.

Reasons to watch shares with low P/B

Investors are advised to monitor shares with low P/Bs, as: 1) earnings momentum softened in 4Q; and 2) Koreas economic recovery should continue in 1H (despite the slowing rise in LEI) and the impact of Chinas exit strategy should be limited, suggesting that P/B will climb back to the historic-average level. Market volatility expanded in February due to Chinas reserve ratio hike, US financial regulation reform, and concerns over defaults by European countries. Against this backdrop, we recommend investors focus on sectors with attractive P/Bs and sectors expected to show earnings improvement in 2010.

Korea, undervalued relative to major countries

(x) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
USA Germany Brazil Hong Kong Australia Taiwan Japan France Korea China India UK Indonesia Russia

Low P/B plays that posted high returns in 2010

(return , %) 40 30 20 10 0 -10 -20 -30 0 1 2 3 4 5 (P/B, x) 6 Lower the P/B, higher the return

Trailing P/B

Source: Thomson Reuters, Woori I&S Research Center

Note: Based on P/B as of early 2010, stock perf as of Feb 25; based on large caps Source: FnGuide, Woori I&S Research Center

P/B having substantial impact on share prices in 2010

Correlation to factor

Lower program trading led to diverging performance by stock

(%) -5 0 5 10 15 20 Program trading portion (10d avg, LHS, reversed) Daily return gap by stock (10d avg, RHS) (%p) 15 13 11 9 7 5 3

0.20 0.15 0.10 0.05 0.00 -0.05 EV/EBITDA -0.10 Low P/B Low P/E Low High ROE

High EPS

1 -1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1

High OP

growth

growth

25 '07.1

Note: Correlation between stock performance of large caps and factors in 2010 Source: Thomson Reuters, Woori I&S Research Center

Source: Woori I&S Research Center

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Recommend contrarian strategy for banking and insurance from midMarch

Among low P/B plays, the utilities and telecom sectors stand out. However, as these sectors have been favored by the market since early 2010, we recommend constructing a contrarian investment strategy for banking and insurance from mid/late March, as banking and insurance were hardest hit by financial market instability and are being pressured by share supply burden due to the listing of life insurers. Banking (2010 P/B of 0.9x) and insurance (adj P/B of 1.1x based on Hyundai M&F, LIG, Meritz, and Dongbu) are showing low P/Bs and should enjoy improving earnings in 2010. Banking already appears substantially undervalued compared to its fundamentals, and its investment merit should increase, given that: 1) asset quality and profitability should stabilize, with both asset growth (quantitative) and NIM/credit cost (qualitative) exceeding 2009 levels; and 2) M&A potential should justify valuation premiums. Meanwhile, insurance looks attractive, as: 1) valuation remains attractive; and 2) profits should improve, led by the second-tier insurers (eg, Hyundai M&F, LIG, and Meritz), which suffered excess amortization in 2010. We recommend Industrial Bank of Korea (IBK), Busan Bank, LIG Insurance, and Meritz F&M.

Banking sector P/B band

(X) 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 '00.1 '02.1 '04.1 '06.1 '08.1 '10.1 Sector average P/B (x) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 '00.1

Insurance sector P/B band

Average adj. P/B

'02.1

'04.1

'06.1

'08.1

'10.1

Source: FnGuide, Woori I&S Research Center

Note: Based on adj. P/B average of four insurers (Hyundai M&F, LIG, Mertiz, Dongbu Insurance). Adj. indicators include catastrophe reserves Source: FnGuide, Woori I&S Research Center

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Low P/B plays 1banking

Busan Bank Highest NIM growth and solid asset growth expected; ROE should easily meet our estimate of 14.3% Direct exposure to shipbuilding, shipping, steel (regarded as risky group) stood at W2.4tn at end-2009, comprising only 12% of total loans Coverage ratio stands at 137%, indicating sufficient buffer for potential insolvencies 2010 ROE estimated at 12.46%; solid operating profit expected on stable loan growth Credit cost to improve on conservative asset control through sustained demarketing P/B of 0.85x appears attractive given solid margins

IBK

Source: Woori I&S Research Center

Valuation for banking sector top picks

Valuation P/B 2009E 2010F (x) (x) 1.2 1.0 1.0 0.9 Earnings momentum (growth y-y) NOR OP 2009E 2010F 2009E 2010F (%) (%) (%) (%) -8.3 6.0 26.5 8.0 -23.0 -16.3 88.8 26.3

Company

Code

P/E 2009E 2010F (x) (x) 10.6 12.2 7.4 6.9

ROE 2009E 2010F (%) (%) 12.2 8.1 14.3 12.5

Banking Banking

Busan Bank IBK

005280 024110

Note: Based on Feb 25 closing prices and our estimates Source: Woori I&S Research Center

Low P/B plays 2insurance

LIG Insurance FY09 adj P/B stands at 1.0x; valuation multiples yet to reflect better efficiency (eg, lower combined ratio) Stable auto loss ratio relative to second-tier insurers Investment asset growth improving rapidly FY10 adj P/B stands at only 0.9x Specialized insurer focusing on protection-type insurance; thanks to highest protection-type portion of top five, long-term loss ratio lowest Low long-term loss ratio to continue by focusing on protection-type insurance policies

Meritz F&M

Source: Woori I&S Research Center

Valuation for insurance sector top picks

Valuation Adj. P/B 2009E 2010F (x) (x) 1.0 1.1 0.8 0.9 Earnings momentum (growth y-y) Earned premium OP 2009E 2010F 2009E 2010F (%) (%) (%) (%) 12.1 14.1 11.9 8.0 44.1 TTP 32.3 24.1

Company

Code

Adj. P/E 2009E 2010F (x) (x) 6.4 5.2 4.9 4.2

Adj. ROE 2009E 2010F (%) (%) 17.0 23.2 18.2 22.9

Insurance Insurance

LIG Insurance Meritz F&M

002550 000060

Note: Based on Feb 25 closing prices and our estimates; adj. indicators include catastrophe reserves Source: Woori I&S Research Center

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II. March economic outlook

1. Worsening of macro momentum to be confirmed in LEI 2. Five implications of yuan appreciation

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March economic outlook (summary)

Economist June Park (822-768-7588)

Worsening of macro momentum to be confirmed in LEI Macroeconomic momentum is expected to deteriorate in March, and this should be borne out by the LEI. In particular, Koreas consumer sentiment is deteriorating and the trade and current accounts have turned from surpluses to deficits. The European credit crisis also adds to concerns. Overall, we advise investors to be aware of worsening macro momentum. We believe macro momentum will only improve when private demand recovers (consumption and investment)we expect to see macro momentum to turn around from late 2Q10 or early 3Q10, as the governments policy stance (fiscal spending in 1H10 and delayed interest rate hike) is favorable for consumption and investment growth. In addition, the decline in LEI is unlikely to continue for longwe believe the recent decline is merely part of a minor cycle. Focus on yuan appreciation: five implications The global economy is also slowing. Appreciation of the yuan is likely to be a major issue, as it should contribute to global recovery. We expect the yuan to strengthen around April following the National Peoples Congress in March. Appreciation should have a negative impact on the financial markets in short run, but have a positive impact on the global economy longer term. We foresee the following implications. First, Chinas growth driver should shift from export to consumption. A stronger yuan would likely hurt Chinas exports, but should boost consumption, contributing to stable growth. Second, developed nations, including the US, should also enjoy growth momentum, in addition to China. Third, a stronger yuan may mean strength for emerging market currencies and weakness for advanced market currencies. While the dollar should soften against emerging market currencies, it will likely appreciate vs developed market currencies, including the euro and yen. Fourth, yuan appreciation would likely trigger rate hikes around the world earlier than expected, including in the US, as it could add to inflationary pressure. Fifth, a strong yuan should benefit the export of high-end Korean goods.

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1. Worsening of macro momentum to be confirmed in LEI

1) Macro momentum negative due to impending fall of LEI
LEI likely fell in January Januarys LEI (y-y change) figure is scheduled to be released this week. Expectations are widespread that LEI fell in January, as the CCCI fell for first time in 10 months. We believe a decline in Januarys LEI is highly likely given worsening consumer sentiment and trade/current account deficits. In addition, considering that China, which alongside Korea showed the fastest recovery, also saw a fall in LEI in December, a drop in Koreas LEI would not be surprising.

No stock market momentum seen during LEI fall

A decline in LEI implies a worsening of macroeconomic momentum. In addition, lingering credit crises in Europe are also likely to have a negative impact on Korea. Accordingly, we recommend investors maintain conservative stances until China and Koreas LEIs recapture upward momentum and the European credit crises are resolved.

Koreas consumer confidence and trade balance

($bn) 8 6 4 2 0 -2 -4 -6 '08.7 '08.10 '09.1 '09.4 '09.7 '09.10 '10.1 80 70 -5 -10 '00 '01 100 90 5 0 Trade balance (LHS) Consumer confidence index (RHS) (Index) 120 110 (% y-y) 15 10

Koreas LEI to fall following China

Korea's LEI China's LEI

'02

'03

'04

'05

'06

'07

'08

'09

Source: BOK

Source: CBOE, Bloomberg, Woori I&S Research Center

LEI fall
Reason 1. Asian economic crisis 2.The collapse of IT bubble 3. Household credit crisis 4. Economic cycle 5. Economic cycle 6. Global financial crisis Correction from external/domestic shock Correction from minor cycle Average
Note: y-y change in LEI and month-end Kospi Source: NSO, KRX, Woori I&S Research Center

LEI fall Start End 1997.08 1998.03 1999.08 2000.12 2002.04 2003.05 2004.02 2005.01 2006.01 2006.08 2007.11 2008.12 -

Duration Months 7 16 13 11 7 13 12.3 10.0 11.2

Stock market correction During (%) Monthly avg (%) -30.8 -4.4 -46.2 -2.9 -24.8 -1.9 5.6 0.5 -3.4 -0.5 -41.0 -3.2 -35.7 -2.9 1.1 0.0 -23.4 -2.1

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2) Decline in LEI to be limited

Three characteristics of Koreas LEI since 1997 Since the Asian economic crisis of 1997, Koreas LEI trend can be summarized as follows: 1) the economic cycle is shortening; 2) the LEI is showing rising bottoms; and 3) the distances between troughs and peaks are narrowing. In general, declines in LEI accelerated when coupled with crises, such as the foreign currency crisis, the collapse of IT bubble, and the subprime meltdown.

Decline in LEI to be limited

The good news is that the recent decline in LEI merely seems to be a part of a minor cycle, and that a drastic decline looks unlikely. In particular, the governments policy stance (fiscal spending in 1H10 and delayed interest rate hike) is favorable for consumption and investment growth, making a substantial fall in LEI unlikely.

Koreas LEI: rising bottom and reduced volatility

(% y-y) 20 15 10 5 0 -5 -10 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 bottom is rising narrowing range LEI change_y-y basis

Source: NSO, Woori I&S Research Center

3) Macroeconomic momentum to turn around from 3Q10

Macro momentum to strengthen when private demand recovers Private demand (such as consumption, investment) must rise if macroeconomic momentum and the LEI are to improve. We expect macro momentum to turn around as soon as late2Q10, or early 3Q10 at the earliest. Moreover, as the government is expected to maintain fiscal spending and low interest rate in 1H10, private demand may recover earlier than expected, which would boost macro momentum.

Policies favorable for domestic demand and delayed rate hikes to prop up economic momentum

With stimulus packages losing traction from 4Q09, economic momentum is showing signs of slowing. However, we believe the expected decline in LEI is part of a Kitchin Cycle (which can be seen during economic recoveries), such that the downtrend in LEI should prove short-lived and small in scope.

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2. Five implications of yuan appreciation

1) Options available for China: higher loan rates and yuan appreciation
China lifts reserve ratio twice? Chinas major tightening policies are: 1) lifting the reserve ratio; 2) raising the loan rate; and 3) strengthening the yuan. It has already increased the reserve ratio twice and is likely to do so two more times.

Higher loan rate and yuan appreciation likely in 2Q

We believe China will turn to the other two options in implementing its tightening stance. Specifically, it will likely outline an exit strategy at the upcoming March National Peoples Congress and carry out the tightening measures in 2Q.

China to find best way minimize negative impact of tightening measures

Of the three available tightening measures, raising the reserve ratio would be aimed at absorbing excess liquidity and curbing asset bubbles, a soft and indirect effort to sustain economic growth. On the other hand, raising the loan rate and strengthening the yuan would be more direct and stronger measures to resolve an overheating economy by controlling domestic demand and exports. In particular, higher loan rates target consumer spending and investment, while yuan appreciation targets exports. But rather than focusing on only one of the two stronger options, we think China will try to find the best way to minimize the negative impact of tightening.

Despite concerns over tightening, positives linger

Meanwhile, market participants are concerned about the tightening policies having negative impacts on global economic recovery. However, we believe tightening will yield more positives than negatives.

China unlikely to take aggressive tightening measures

In addition, Chinas tightening measures are unlikely to be aggressive, as it is aiming to dissipate economic uncertainties, and aggressive tightening policies may offset the positives of its stimulus measures. We believe China will raise the loan rate twice this year (54bp) and let the yuan appreciate 5% vs the dollar. As such, we believe concerns about Chinas tightening are excessive.

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2) 3 scenarios for yuan appreciation

3 scenarios for a stronger yuan 1) One-shot: control speculative money inflow and raising flexibility of monetary policies vs hurting exporters We believe China will opt for one of the following three scenarios for yuan appreciation.

1. One-shot appreciation China may let the yuan appreciate 5% all at once. This would curb speculative money inflow and give more room to maneuver for monetary policies following appreciation. However, it may also give the impression that it succumbed to pressure from the US. The worry is that if China opts for one-shot, the US may ask for an even stronger yuan, which would wreak havoc on Chinese exporters. Thus, we believe the government is unlikely to take this option.

2) Gradual: less damage to economy vs raising forex uncertainties

2. Gradual appreciation Gradual appreciation would cause less damage to the economy, as the government could control the harm to exporters by controlling the pace of appreciation, giving exporters time to adjust. However, market participants would increasingly expect a stronger yuan, which could in turn attract speculative money and raise forex uncertainties.

3) Increasing yuan volatility & gradual appreciation: most likely option, doing least damage to economy

3. Increasing yuan volatility & gradual appreciation A third option would be to increase yuan volatility while appreciating the currency gradually. This would minimize the negative impact on exporters. We think this is the most likely option, as China has often increased yuan volatility since it shifted to the floating forex rate system, and this option would probably do the least damage to the economy.

Three scenarios for yuan appreciation

(CNY/USD) 8.5 8.0 7.5 7.0 6.5 6.0 '06 '07 '08 '09 '10

yuan/dollar rate (LHS) Chg (RHS)

(%) 40 30 20 10 0 -10 -20 -30 -40 -50

Source: Bloomberg, Woori I&S Research Center

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3) Five implications of yuan appreciation

Impact of yuan appreciation No matter which method is adopted, a stronger yuan will impact Chinese and global economies, monetary policies, and the timings of exit strategies. We see five major implications of a stronger yuan.

1) Increasing role of consumption in economic growth

First, a stronger yuan would lower the contribution of exports to Chinas GDP growth and eventually slow economic growth. However, it would also help increase consumer spending, thereby bolstering the contribution of consumption in economic growth.

2) Growth momentum to spread to advanced nations

Second, yuan appreciation may help spread Chinas growth momentum to the rest of the world. The US is now seeing the manufacturing sector improve, with the jobless rate expected to peak in 1Q10. If the yuan is appreciated, the US would likely enjoy higher exports, manufacturing utilization, hiring, and consumer spending, giving traction to its economic recovery.

3) Stronger emerging currencies weaker advanced currencies

Third, a strong yuan would likely accelerate the trend of stronger emerging market currencies and weaker advanced country currencies. If so, the won would also be likely to strengthen again, after softening from January. Meanwhile, we would expect the dollar to weaken against emerging market currencies, but remain strong against other advanced market currencies such as the euro and yen.

4) Growing global inflationary pressure

Fourth, yuan appreciation could increase global inflationary pressure and advance the implementation of exit strategies. In particular, if the US economy picks up on a robust manufacturing sector and exports backed by a stronger yuan, the US could raise rates as soon as 2010.

5) Margin erosion for exporters due to strong won

Fifth, export of high-end goods (eg, home appliances, LCD) should increase following yuan appreciation. We believe the impact on overall export would be limited, as competition between Korean and Chinese goods is not intense. However, margins for exporters could dwindle due to a subsequently strengthened won.

Five expected changes following yuan revaluation

Yuan revaluation

Increased contribution of consumption to Chinese economic growth

Accelerating economic recovery in developed countries

Differentiating currency values between emerging and developed countries

Expansion of global inflation

Impact on Korean exports

Exports contribution to growth to dwindle due to softening export growth Consumptions contribution to growth to expand in line with Chinese government measures to bolster consumption

Chinas resilient growth to spread to developed countries US export growth higher utilization rate at manufacturing sectorincreased payrollsaccelerating recovery on consumption expansion

Strength of emerging country currencies weakness of developed country currencies Upward pressure expected on Korean won US dollar to remain weak against emerging country currencies and strong against developed country currencies

Growing global inflation to advance implementation of exit strategies If economy recovers smoothly in US, rate hike could be advanced to 2010

China-bound export of high-end goods to increase Impact on overall export to be limited as competition with Chinese goods should not be intense Exporters margins to drop due to strong won

Source: Woori I&S Research Center

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III. Model portfolio evaluation

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Model portfolio sector/stock weighting

Sector Code Stock Rating Benchmark (KOSPI200, %)
11.8 4.4 1.5 0.3 0.0 7.4 3.5 1.0 2.0 15.8 11.7 1.4 0.4 0.7 4.1 0.5 0.4 15.6 4.2 2.1 0.9 4.6 0.7 0.6 6.8 0.6 0.4 14.7 9.9 1.0 4.8 2.0 0.4 0.2 3.2 0.8 2.7 0.3 3.6 1.6 1.9 4.0 0.0 0.5 1.2 0.1 27.4 19.3 17.1 8.1 2.1 -

MP weight Chg in MP (%) weight (%p)

14.9 5.4 3.0 1.5 0.9 9.5 4.0 1.2 2.2 0.7 0.7 0.7 16.5 12.8 5.4 3.7 3.7 3.7 1.8 1.9 12.7 3.5 1.0 2.5 3.0 1.0 1.0 1.0 6.2 2.2 2.0 2.0 10.9 5.0 5.0 5.9 2.8 2.0 1.1 1.5 1.5 4.5 4.5 5.6 2.8 2.8 3.4 1.7 1.7 1.0 1.0 29.0 19.4 18.4 1.0 9.6 4.0 2.8 2.8 0.0 0.0

Over/ under (%p)

3.1 1.0

Price Market cap (3/3, won) (Wbn)

Consumer discretionary Consumer cyclical Retail Retail Dur cons gds/apparel Auto Auto/part Auto/part Auto/part Auto/part Auto/part Auto/part Financials Banking Banking Banking Banking Securities/insurance Securities Credit card Industrial materials Shipbuilding Shipbuilding Shipbuilding Construction/machinery Construction Construction Machinery Transportation/holding co Transportation Transportation Holding company Materials Steel/metal Steel/metal Chemical/materials Chemical Chemical Chemical Energy Energy Utility Utility Telecom service Telecom service Telecom service Consumer staples Food&bev/tobacco Household goods Health care Health care IT Semicon/equipment Semicon/equipment Semicon/equipment IT Hardware/SW IT hardware IT hardware IT hardware

A004170 A069960 A020000 A005380 A000270 A012330 A015750 A007860 A033530

Shinsegae HDS Handsome HMC Kia Motors Hyundai Mobis SW Hitech Hanil E-Hwa Sejong Industrial

Buy Buy Buy Buy Buy Buy -

536,000 100,500 13,500 0.0 2.1 114,500 22,400 147,000 14,750 5,590 8,510 1.3 0.0 0.7 1.1 34,250 12,250 13,350 1.3 -0.4 19,600 51,900 0.0 0.0 -2.9 -0.7 212,500 24,600 0.0 -1.6 91,400 61,600 26,350 0.0 -0.6 59,300 101,000 43,300 0.0 0.0 0.0 -3.8 -4.9 88,700 1.1 215,500 121,500 14,700 0.0 0.0 -1.3 -1.7 55,300 1.8 48,000 2.0 44,700 171,500 0.0 -0.6 6,900 800,000 0.0 0.0 0.0 -0.2 110,000 1.6 0.1 771,000 9,010 0.0 1.5 108,500 19,000 18,950

10,109 2,282 333 25,222 8,730 14,310 443 220 171

A086790 A005280 A024110 A006800 A029780

HFG Busan Bank IBK Daewoo Securities Samsung Card

Hold Buy Buy -

7,256 2,287 7,289 3,726 6,382

A009540 A010140 A006360 A000720 A014620 A003490 A086280 A000880

HHI SHI GS E&C Hyundai E&C Sungkwang Bend Korean Air Glovis Hanwha

Buy Buy Buy Buy Buy Buy Buy -

16,150 5,680 4,661 6,860 754 4,268 3,788 3,246

A004020 A051910 A011170 A009830 A010950 A036460 A030200 A017670 A001680 A090430 A008930

Hyundai Steel LG Chemical Honam Petrochem Hanwha Chem S-Oil KOGAS KT SKT Daesang Amorepacific Hanmi Pharm

Buy Buy Hold Buy Buy Buy Buy Buy Buy Buy Buy

7,530 14,281 3,871 2,062 6,226 3,710 11,672 13,848 231 4,677 1,049

A005930 A084370 A066570 A036830 A036550

SEC Eugene Tech LGE Techno Semichem Ace Digitech

Buy Buy Buy Buy Buy

113,568 116 15,694 279 440

Note 1: As of Mar 3 2: Overweight: Consumer cyclicals, auto, banking, chemical/materials, utility, semicon/equipment, IT hardware/SW Underweight: Securities/insurance, shipbuilding, construction/machinery, transportation/holding co, steel/metal, energy, telecom service, consumer staples, health care 3: * Newly added: none / Removed: Cheil Worldwide and KBFG

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MP Valuation Table
Sector Code Company P/E (X) '09E
Consumer discretionary Retail Dur cons gds/apparel Retail Consumer cyclicals Auto/part Auto/part Auto/part Auto/part Auto/part Auto/part Auto/part Financials Banking Banking Banking Banking Securities/insurance Securities Credit card Industrial materials Shipbuilding Shipbuilding Shipbuilding Construction/machinery Construction Construction Machinery Transportation/holding co Transportation Transportation Holding company Materials Steel/metal Steel/metal Chemical/materials Chemical Chemical Chemical Energy Energy Utility Utility Telecom service Telecom service Telecom service Consumer staple Food&bev/tobacco Household goods Health care Health care IT Semicon/equipment Semicon/equip Semicon/equip IT hardware/SW IT hardware IT hardware IT hardware Note: As of Feb 25 Source: Woori I&S Research Center A004170 Shinsegae A020000 Handsome A069960 HDS 17.6 6.5 9.4

'10F
14.8 5.7 8.7

Valuation EPS growth P/B (X) (%) '09E '10F '09E '10F
-1.0 -3.3 7.4 18.8 15.3 7.8 2.2 0.6 1.3 2.0 0.6 1.1

ROE (%) '09E

13.8 10.6 14.8

Qtrly EPS Growth(%)

Performance Absolute(%) 1M 3M

'10F '09Q3 '09Q4E

14.4 10.6 14.0 26.6 -2.4 9.5 23.8 21.2 -1.1

1.7 -3.5 -7.8 -12.3 -4.0 -15.5

A005380 A000270 A012330 A015750 A007860 A033530

HMC Kia Motors Hyundai Mobis SW Hitech Hanil E-Hwa Sejong Industrial

9.2 5.5 8.8 4.3 4.6 4.0

7.8 96.8 6.6 1,098.0 8.1 35.8 5.1 160.1 4.5 25.2 4.2 177.2

17.6 -17.5 9.1 -15.4 1.7 -2.9

1.6 1.4 2.1 3.9 -

1.4 1.2 1.7 3.3 -

13.5 22.9 25.5 30.5 30.8 25.1

14.0 16.4 23.1 21.0 0.0 0.0

-33.2 -32.3 5.9 -

45.2 -44.5 -2.6 -

2.7 11.4 0.3 16.7 14.8 24.6

14.0 21.2 -2.0 17.2 15.5 27.8

A086790 HFG A005280 Busan Bank A024110 IBK A006800 Daawoo Securities A029780 Samsung Card

27.7 7.8 11.3 14.1 10.5

8.6 7.1 7.2 13.3 12.0

-46.8 -19.7 -27.7 53.6 129.3

220.1 9.8 57.4 6.0 -12.2

0.8 1.1 0.9 0.7 1.2

0.7 1.0 0.8 0.6 1.1

2.8 13.7 8.8 10.6 14.6

8.4 14.3 12.4 10.3 11.5

-12.9 57.7 3.7 7.4 8.7 1,172.5 -

-0.3 -8.7 -3.7 -14.0 -0.7 -5.0 -5.4 -4.3 -5.7 -4.0

A009540 HHI A010140 SHI A006360 GS E&C A000720 Hyundai E&C A014620 Sungkwang Bend A003490 Korean Air A086280 Glovis A000880 Hanwha

7.5 8.5 11.6 14.5 13.5

6.3 5.9 10.4 9.9 10.1 6.7 17.2 7.3

-4.9 6.8 0.6 21.9 -20.3 RR 61.3 130.6

18.4 43.4 11.0 46.2 33.4 TTP 11.1 -35.1

2.2 2.1 1.3 2.2 3.0 1.7 4.7 1.7

1.6 1.6 1.3 1.8 2.4 1.4 3.7 1.5

32.5 26.4 12.0 15.4 25.1 -2.2 27.0 32.1

28.9 30.2 12.4 20.0 26.3 20.9 24.1 16.5

17.5 14.1 5.9 28.2 59.3 -22.8 15.6 -

-7.7 45.6 89.1 88.7 128.2 24.9 82.3 -

2.7 -3.9

28.9 0.6

-7.8 -26.3 -12.9 -18.2 -10.6 -14.5 -2.5 15.9 1.2 -17.1 -9.1 -0.9

19.1 4.7

A004020 Hyundai Steel A051910 LG Chemical A011170 Honam Petrochem A009830 Hanwha Chem A010950 S-Oil A036460 KOGAS A030200 KT A017670 SKT A001680 Daesang A090430 Amorepacific A008930 Hanmi Pharm

7.2 9.8 4.8 6.1 24.7 16.0 24.5 9.5 13.8 20.9 24.9

10.1 9.9 6.2 6.3 10.3 9.3 7.1 8.2

27.4 65.8 TTP 661.4 -42.6 -28.0 -19.4 3.2

-28.8 -1.6 -22.9 -3.8 141.0 71.8 245.2 15.4 241.3 21.2 33.0

1.3 2.8 1.1 0.8 1.7 0.8 1.3 1.7 0.7 4.3 2.8

1.2 2.3 0.9 0.7 1.5 0.7 1.1 1.5 0.6 3.6 2.4

19.7 29.1 25.1 13.6 7.1 5.2 4.7 12.1 4.8 18.9 10.6

12.1 23.5 16.0 11.8 15.3 7.7 14.1 13.0 14.8 19.7 12.5

-70.0 -31.4 -30.6 -24.1 103.5 RR 16.4 -5.2 -7.0 18.2 31.3

34.3 66.2 -11.9 TTP TTP 34.9 TTP 28.1 -7.1 105.9 -6.4

-1.1 -3.4 7.2 -3.3 3.9 -5.5 -6.6 -2.8

10.6 3.7 30.2 15.6 -7.2 -3.0 10.3 -2.5

4.0 1,060.7 17.2 32.3 18.7 -41.5

-7.0 -13.6 -1.8 -12.3 -2.7 -9.7

A005930 SEC A084370 Eugene Tech A066570 LGE A036830 Techno Semichem A036550 Ace Digitech

11.4 14.9 7.6 10.2 25.7

7.2 6.0 8.2 8.1 10.5

75.2 TTP 324.9 46.1 101.4

57.9 148.0 -8.0 25.7 145.7

2.0 4.6 1.7 1.6 4.6

1.7 2.6 1.5 1.3 3.0

15.9 25.4 21.8 16.2 19.4

22.0 44.1 16.8 17.5 34.6

11.1 227.4 -62.9 12.5 57.8

12.5 -21.1 259.1 29.9 95.5

-12.6 -4.1 -2.8 -6.9 -15.4

-1.7 48.7 1.4 6.5 9.5

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Model portfolio performance evaluation

Strategist Kim Lawrence/Clemens Kang (822-768-7574)

Model portfolios cumulative return beats benchmark by 9.71%p

Woori I&S model portfolio declined 0.4% in February (Feb 1~25), outperforming the Kospi by 0.92%p (Kospi fell 1.32% over the period). Meanwhile, our model portfolios cumulative return since inception (Aug 2, 2005) stands at 53.54%, beating the Kospi200s cumulative return of 43.84% by 9.71%p.

Overweighting of auto/parts contributed most to returns

In February, stock picking was more profitable than sector allocation. By sector, the largest contributor to our monthly gains was the overweighting of auto/parts (by more than 4%p), followed by consumer cyclicals and chemical/materials. However, our overweighting of telecom service and utilities and underweighting of steel/metal hurt our portfolio. As for stock picking, Hyundai Motor and small/medium-sized auto/parts makers contributed the most to returns. We also saw substantial contributions from Hana Financial Group (HFG) and Hyundai Steel. However, telecom service and utilities underperformed the market, failing to serve as defensive sectors, and hurting the performance of our model portfolio.

Cumulative MP return
(%) 14 12 10 8 6 4 2 0 -2 '05.8 '06.1 '06.7 '07.1 '07.7 '08.1 '08.7 '08.12 '09.6 '09.12 100 80 (2005. 8. 2=100) 200 180 160 140 120

Relative to BM (LHS) Kospi200 MP

Source: Woori I&S Research Center

Evaluation of MP return (sector allocation)

(bp) 10 8 6 4 2 0 -2 -4 -6 -8 -10 Sector-allocation effect
(bp) 4 3 2 1 0 -1 -2 -3 -4

Evaluation of MP return (stock picking)

Stock-picking effect

Semicon/equipment

Chemical/materials

Steel/metal

Construction/machinery

Steel/metal Banking Transport/holding co Consumer staple Construction/machine Utility Semicon/equipment Energy Health care

Consumer cyclicals

Energy

Consumer staple

IT hardware/SW

Auto

Shipbuilding

Banking

Telecom service

Note: Feb 12 ~ Feb 25, 2010 Source: Woori I&S Research Center

Transport/holding co

Note: Feb 12 ~ Feb 25, 2010 Source: Woori I&S Research Center

Consumer cyclicals Shipbuilding Shipbuilding Auto IT hardware/SW Chemical/materials Chemical/materials Chemical/materials Chemical/materials Chemical/materials

Non-banking

Health care

Utility

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Model portfolio evaluation

KOSPI200
Code Company Weight (%) 100.0 11.6 4.3 1.4 0.3 0.2 0.0 7.4 3.7 0.9 2.0 0.0 0.0 0.0 15.6 11.6 3.8 1.3 0.4 0.7 4.0 0.5 0.4 15.7 4.3 2.2 0.9 4.6 0.7 0.6 0.0 6.8 0.6 0.0 0.4 14.6 9.9 0.9 4.7 2.0 0.3 0.2 3.2 0.8 3.0 0.3 3.8 1.8 2.0 4.0 0.0 0.5 1.2 0.1 27.3 19.1 16.9 0.0 8.2 2.2 0.0 0.0

MP
Weight (%) 100.0 16.4 4.4 1.5 1.0 1.0 0.9 12.0 5.0 2.0 2.2 1.0 1.0 0.8 15.2 12.8 4.8 3.0 2.5 2.5 2.4 1.2 1.2 14.7 4.0 2.0 2.0 4.5 1.8 1.7 1.0 6.2 2.2 2.0 2.0 9.2 4.0 4.0 5.2 2.3 1.9 1.0 1.5 1.5 3.9 3.9 6.0 3.0 3.0 3.4 1.7 1.7 1.0 1.0 28.7 18.6 17.6 1.0 10.1 4.5 2.8 2.8

Over/
Under (%p) 0.0 4.8 0.1

Return (%) Sector/ stock -0.56 2.3 4.2 5.6 5.0 8.1 -1.4 1.1 -1.7 1.9 4.6 3.0 5.5 0.8 -0.9 -1.4 -4.0 5.5 1.3 2.7 0.4 1.6 -0.6 0.1 -1.2 -4.3 1.4 0.0 -3.3 -3.9 -4.8 1.0 1.2 7.9 -5.9 0.9 0.3 6.9 2.0 2.4 9.1 2.4 1.0 2.7 -7.5 -2.1 -4.2 -8.0 -0.9 -0.5 4.1 1.7 -0.1 -0.9 -1.7 -1.4 -1.9 -0.7 -2.3 -7.8 0.0 -9.8 MP -0.39 0.34 0.20 0.08 0.05 0.08 -0.01 0.14 -0.09 0.04 0.10 0.03 0.05 0.01 0.08 0.1 -0.19 0.16 0.03 0.07 0.01 0.02 -0.01 -0.16 -0.06 -0.09 0.03 -0.17 -0.06 -0.07 -0.05 0.07 0.03 0.16 -0.12 0.53 0.3 0.28 0.25 0.06 0.17 0.02 0.04 0.04 -0.08 -0.08 -0.27 -0.24 -0.03 0.10 0.07 0.03 0.0 -0.01 -0.96 -0.34 -0.33 -0.01 -0.6 -0.35 0.00 -0.27 Bench mark -0.56 0.26 0.18

Performance (%) Stock

Effect (bp) Sector allocation -18.8 13.5 0.7 Stock picking 36.6 2.3 1.7 2.1 0.8 3.9 -5.1 0.6 -14.3 1.5 7.5 1.9 4.3 -0.3 24.9 24.8 -12.7 20.6 6.7 10.2 0.2 1.4 -1.2 -18.3 -0.96 -6.2 5.2 -17.6 -6.1 -6.7 -4.8 0.3 0.3 13.8 -13.8 41.1 26.2 26.2 14.9 1.0 13.5 0.4 2.6 2.6 21.18 21.2 -1.32 -11.4 10.0 11.62 7.9 3.7 -0.8 -0.8 -46.8 -7.7 -8.4 0.7 -39.1 -24.7 6.5 -20.9

Contribution (bp)

Total A004170 A069960 A030000 A020000 Consumer disc Consumer cyclical Shinsegae HDS Cheil Worldwide Handsome Auto/parts HMC Kia Motors Hyundai Mobis SW Hitech

2.8 4.8 1.4 0.8 3.9 -5.6 -2.9 0.8 3.4 1.9 4.3 -0.4 -2.6 6.9 2.7 4.1 1.2 -1.0 -3.1 2.6 -3.4 -3.9 -4.8 0.2 6.9 -6.9 6.6 0.4 7.1 0.4 1.7 5.4 -3.8 3.3 4.6 2.2 -0.8 -0.5 0.7 -5.5 2.3 -7.5

4.6

0.08

1.7

7.9

A005380 A000270 A012330 A015750 A007860 Hanil E-Hwa A033530 Sejong Industrial Financials Banking A105560 KBFG A086790 HFG A005280 Busan Bank A024110 IBK Non-banking A006800 Daewoo Securities A029780 Samsung Card Industrial materials Shipbuilding A009540 HHI A010140 SHI Construction/mach A006360 GS E&C A000720 Hyundai E&C A014620 Sungkang Bend Transport/holdco A003490 Korean Air A086280 Glovis A000880 Hanwha Materials Steel/metal A004020 Hyundai Steel Chemical/materials A051910 LG Chem A011170 Honam petrochem A009830 Hanwha Chem Energy A010950 S-Oil Utility A036460 KOGAS Telecom service A030200 KT A017670 SKT Consumer staples A001680 Daesang A090430 Amorepacific Health care A008930 Hanmi Pharm IT Semicon/equipment A005930 SEC A084370 Eugene Tech IT hardware/SW A066570 LGE A036830 KH Vatec A036550 Ace Digitech

-0.4 1.2

-0.14 -0.16

-0.4 -0.8

0.1 -0.9

-1.6 -1.0 -0.3 -0.1

0.02 0.02 -0.05 0.00

1.0 0.7 -0.6 0.6

-1.5 -0.7 0.2 0.0

-0.6

0.07

1.6

-0.9

-5.4 -5.9 0.5

0.13 0.03 0.09

1.4 0.9 2.6

-7.8 -5.3 1.3

-1.7 0.9 2.2 -0.6 -0.2 1.4 -0.5 1.9

0.03 -0.22 -0.16 -0.02 0.00 -0.46 -0.27 -0.19

1.5 -7.0 -3.6 0.1 0.4 -1.1 -0.8 -1.8

-2.5 -6.5 -8.1 0.0 -0.1 -1.6 0.4 -3.3

17.8 43.7 22.6 9.2 5.6 8.6 -0.8 21.1 -5.8 4.9 11.3 3.6 6.0 1.1 16.9 14.4 -16.6 18.2 4.7 8.1 2.6 2.6 0.0 -8.0 -3.46 -7.5 4.0 -14.8 -5.0 -5.6 -4.2 10.3 3.9 17.0 -10.6 58.1 29.8 29.8 28.3 6.9 18.4 3.0 4.9 4.9 -5.93 -5.9 -23.18 -22.3 -0.9 11.81 8.0 3.8 -0.4 -0.4 -80.1 -23.1 -22.9 -0.2 -57.0 -32.7 1.6 -25.9

Note: 1. As of Feb 25, 2010 2. Sector outperformance = Kospi sector return Kospi return; stock outperf = stock return Kospi sector return; market outperf = stock return Kospi return 3. Contribution = outperf vs market x stock weight; sector allocation = sector outperformance x (MP weight - Kospi sector weight); stock-picking = stock outperf x MP weight 4. Period: Feb 12~ 25, 2010

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IV. Chart Book

1. Economic cycle 2. Earnings 3. Valuation/momentum 4. Capital flow

Strategy Monthly

www.wooriwm.com

I. Economic cycle
Korean and US LEI
(% y-y) 15 10 5 0 -5 -10 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Korea LEI(LHS) US LEI(RHS) (% y-y) 10 8 6 4 2 0 -2 -4 -6 1,000 500 0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1

Korea: inventory cycle and Kospi

(P) 2,500 2,000 1,500 KOSPI(LHS) Inv Cycle (RHS, SA) (% y-y) 40 30 20 10 0 -10 -20 -30 -40

Source: NSO, US Conference Board, Datastream

Source: NSO

Korea: cyclical component of coincident composite index

(%p) 4 3 2 1 0 -1 -2 '07.1 '07.5 '07.9 '08.1 '08.5 '08.9 '09.1 '09.5 '09.9 '10.1 0 -5 -10 Monthly gap(LHS) LEI 12M smoothed chg(RHS) (% y-y) 15 10 5

Korea: inventory and shipment index

('05=100) 140 130 120 110 100 90 80 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 Shipment index Inventory index

Source: NSO, Woori I&S Research Center

Source: NSO, Woori I&S Research Center

Korea: manufacturing inventory/shipment cycle

(Inventory % y-y) 20 15 10 As of Jan, 2009 5 0 -30 -20 -10 -5 0 -10 Recovery -15 -20 10 20 Dec 30

Korea: inventory/shipment
(%) ('000) Inventory/shipment (LHS) New payrolls (reversed, RHS) -300 -200 -100 0 100 200 300 400 500 600 '05.1 '05.7 '06.1 '06.7 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7

Contraction

140 130 120 110 100 90 80

(Shipment % y-y)

Source: NSO, Woori I&S Research Center

Source: NSO, Woori I&S Research Center

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Korea: semiconductor inventory/shipment

(%) 300 250 200 150 100 50 0 '06.1 '06.7 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7

Korea: steel inventory/shipment

(%)

Semiconductor

180 160 140 120 100 80 60 40 20 0 '06.1 '06.7

Steel

'07.1

'07.7

'08.1

'08.7

'09.1

'09.7

Source: NSO, Woori I&S Research Center

Source: NSO, Woori I&S Research Center

Korea: auto inventory/shipment

(%) 190 170 150 130 110 90 70 '06.2 '06.8 '07.2 '07.8 '08.2 '08.8 '09.2 '09.8

Korea: home appliance inventory/shipment

(%) 180 160 140 120 100 80 60 '06.2 '06.8 '07.2 '07.8 '08.2 '08.8 '09.2 '09.8

Auto/parts

Home appliance

Source: NSO, Woori I&S Research Center

Source: NSO, Woori I&S Research Center

Korea: electronic equipment inventory/shipment

(%) 140 130 120 110 100 90 80 70 '06.1 '06.7 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7

Korea: heavy industry and chemical inventory/shipment

(%) 140 130 120 110 100 90 80 '06.2 '06.8 '07.2 '07.8 '08.2 '08.8 '09.2 '09.8

Electronic equipment

Heavy industry and chemical

Source: NSO, Woori I&S Research Center

Source: NSO, Woori I&S Research Center

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Korea: LEI
(index) 130 125 120 115 110 105 100 '07.1 '07.6 '07.11 '08.4 '08.9 '09.2 '09.7 '09.12 0 -5 -10 LEI(LHS) LEI 12M smoothed chg(RHS) (% y-y) 15 10 5

Korea: changes in LEI

(%p) 4 3 2 1 0 -1 -2 '07.1 '07.5 '07.9 '08.1 '08.5 '08.9 '09.1 '09.5 '09.9 '10.1 0 -5 -10 Monthly gap(LHS) LEI 12M smoothed chg(RHS) (% y-y) 15 10 5

Source: NSO

Source: NSO

Korea: LEI by sector

(%) 30 20 10 0 -10 -20 -30 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 Domestic External Financial

Korea: LEI domestic demand

(%p,p) 15 10 5 0 -5 -10 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 Job openings/job seekers Inventory cycle CEI

Source: NSO

Source: NSO

Korea: LEI external

(% m-m) 30 25 20 15 10 5 0 -5 -10 -15 -20 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 Machinery orders (LHS) Imports of capital goods (LHS) Net barter terms of trade (RHS) (% m-m) 6 4 2 0 -2 -4 -6

Korea: LEI financial

(%p,p) 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 -15 LT-ST interest rate gap (RHS) Kospi (LHS) Liquidity of financial institutions (LHS) (% m-m) 10 5 0 -5 -10

Source: NSO

Source: NSO

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Korea: industrial output

(%) 40 30 20 10 0 -10 -20 -30 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Industrial Output (y-y) Industrial Output (m-m)

Korea: CSI and service industrial output

(index) 120 110 100 90 80 70 '08.7 '08.10 '09.1 '09.4 '09.7 '09.10 '10.1 CSI (LHS) Service industrial output (RHS) (% y-y) 6 5 4 3 2 1 0 -1 -2

Source: NSO, Woori I&S Research Center

Source: BOK, NSO, Woori I&S Research Center

Korea: export growth to China and US

(% y-y) 60 40 20 0 -20 -40 -60 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 Export to China Export to US

Korea: trade balance

(% y-y) 60 40 20 0 -20 -40 -60 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Trade Balance(RHS) Export Growth(LHS) Import Growth(LHS) ($100mn) 80 60 40 20 0 -20 -40 -60

Source: NSO

Source: NSO

Korea: unemployment rate

(%) '07.1 3.0 3.5 4.0 4.5 5.0 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 400 300 200 100 0 SA jobless rate, inverted (LHS) Chg in the number of employeed (12m cumulative, RHS) -100 -200 -300 ('000)

Won/Y100 rate vs won/dollar rate

(won) 1,700 1,500 1,300 1,100 900 700 500 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Won/dollar rate Won/Y100 rate

Source: NSO

Source: Thomson Reuters

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Korea: private consumption and GDP

(% y-y) 12 10 8 6 4 2 0 -2 -4 -6 Q3 2000 Q3 2002 Q3 2004 Q3 2006 Q3 2008 Private Consumption GDP

Korea: retail sales

(% y-y) 20 15 10 5 0 -5 '06.1 '06.7 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 Nominal retail sales

Source: BOK, Woori I&S Research Center

Source: NSO, Woori I&S Research Center

Korea: consumer sentiment

(base=100) 140 120 100 80 60 40 20 '08.7 '08.11 '09.3 '09.7 '09.11 Consumer Present Situation Index (LHS) Consumer Expectation Index (RHS) (base=100) 130 120 110 100 90 80 70 60 50 40

Korea: CPI
(% y-y) 7 6 5 4 3 2 1 0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 CPI Core CPI

Source: BOK

Source: NSO

Korea and US: interest rates

(%) 6 5 4 3 2 1 0 '07.1 '08.1 '09.1 '10.1 BOK interest rate US federal fund rate

Korea: 3-yr KTB, 5-yr treasury, gap

(%) 7 6 5 4 3 2 1 0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Interest Gap (Korea-US) 3Y KTB 5Y Treasury

Source: BOK, FRB

Source: Thomson Reuters

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US: industrial output, utilization rate

(% y-y) 10 5 0 -5 -10 -15 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 (%) 83 81 79 77 75 73 71 69 67 65

US: ISM manufacturing, non-manufacturing index

(base=50) 65 60 55 50 45 40 35 30 25 20 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 ISM manufacturing index ISM non-manufacturing

Industrial output (LSH) Utilization rate (RHS)

Source: Federal Reserve

Source: ISM

US: initial jobless claim, payroll chg

('000) 700 600 500 400 300 200 '07.1 '07.11 '08.9 '09.7 Initial jobless claim(LHS) Payroll chg(RHS) ('000) 400 200 0 -200 -400 -600 -800 -1,000

US: unemployment rate and total employment trends

(%) 11 10 9 8 7 6 5 4 '07.1 '07.9 '08.5 '09.1 '09.9 Unemployment rate (LHS) US total employment (RHS) (mn) 148 146 144 142 140 138 136 134 132

Source: Employment training administration, Bureau of Labor Statistics

Source: Bureau of Labor Statistics

US: retail sales and marginal propensity to consume

(% y-y) 10 5 0 -5 -10 -15 1Q03 1Q04 Retail sales (LHS) Marginal propensity to consume (RHS) 1Q05 1Q06 1Q07 1Q08 1Q09 -5 -1 (x) 1

US: consumer confidence index

('66=100) 120 100 80 60 -3 40 20 0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Michigan Confidence Index (LHS) Conference Board Index (RHS) ('85=100) 120 100 80 60 40 20 0

Source: Bureau of Economic Analysis, Woori I&S Research Center

Source: University of Michigan, Conference Board

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US: S&P Case-Shiller Housing Price Index

(index) 210 200 190 180 170 160 150 140 130 '07.1 '08.1 '09.1 '10.1 S&P Case-Shiller housing price index

US: mortgage loan delinquency and foreclosure rates

(%) 14 12 10 8 6 4 2 0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Mortgage foreclosure rate (LHS) Mortgage delinquency rate (RHS) (%) 35 30 25 20 15 10 5

Source: S&P Case Shiller

Source: Bloomberg non-agency database

US: housing prices and new construction orders

(Index) 225 220 215 210 205 200 195 '07.1 '07.6 '07.11 '08.4 '08.9 '09.2 '09.7 '09.12 US housing price index(purchase only, LHS) New home construction (RHS) ('000) 1,800 1,600 1,400 1,200 1,000 800 600 400

US: new and existing home sales trends

(% y-y) 50 40 30 20 10 0 -10 -20 -30 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 200 0 800 600 400 Existing home sales index (LHS) New home sales (RHS) ('000) 1,200 1,000

Source: Federal Housing Finance Agency, Census Bureau

Source: US Census Bureau, National Association of Realtors

US: Housing Affordability Index

(Index) 190 170 150 130 110 90 '07.1 '07.11 '08.9 '09.7 HAI (LHS) Housing price/disposable income per capita (RHS) (x) 9 8 7 6 5 4

US: NAHB Housing Market and Pending Home Sales Index

(index) 50 40 30 20 10 0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 0 100 NAHB housing market index (LHS) Pending home sales index (RHS) (index) 150

50

Source: National Association of Realtors, Bureau of Economic Analysis

Source: NAHB, Bloomberg

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China: PMI manufacturing index

(index) 70 65 60 55 50 45 40 35 30 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 PMI: manufacturing index PMI: new orders PMI: production

China: PMI raw material/finished goods inventory

(index) 55 50

45 40 35 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 PMI: raw material inventory PMI: finished goods inventory

Source: National Bureau of Statistics

Source: National Bureau of Statistics

China: output of stimulus-affected sectors

(% y-y) 60 50 40 30 20 10 0 -10 -20 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 50 0 -50 Steel (LHS) Steel products (LHS) Cement (LHS) Paints (RHS) (% y-y) 200 150 100

China: export and import growth

(% y-y) 100 80 60 40 20 0 -20 -40 -60 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Export Import

Source: National Bureau of Statistics, CEIC

Source: General Administration of Customs

China: retail sales

(% y-y) 24 22 20 18 16 14 12 10 '07.1 '07.5 '07.9 '08.1 '08.5 '08.9 '09.1 '09.5 '09.9 Nominal retail sales Real retail sales

China: liquidity
(% y-y) 40 35 30 25 20 15 10 '07.1 '08.1 '09.1 '10.1 Financial institution loans M2

Source: National Bureau of Statistics

Source: PBoC

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Japan, China, Europe: industrial output

(%, y-y) 10 0 -10 -20 -30 -40 -50 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Japan(LHS) Europe(LHS) China(RHS) 0 10 5 (%, y-y) 25 20 15

Japan, China, Europe: retail sales

(%, y-y) 4 2 0 -2 -4 -6 -8 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Japan(LHS) Europe(LHS) China(RHS) (%, y-y) 8 6 4 2 0 -2 -4

Source: Eurostat, Statistics Bureau of MIC, National Bureau of Statistics of China

Source: Eurostat, Statistics Bureau of MIC, National Bureau of Statistics of China

Japan, China, Europe: PPI

(%, y-y) 10 5 0 -5 -10 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Japan China Europe

Japan, China, Europe: CPI

(%, y-y) 10 8 6 4 2 0 -2 -4 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Japan China Europe

Source: Eurostat, Statistics Bureau of MIC, National Bureau of Statistics of China

Source: Eurostat, Statistics Bureau of MIC, National Bureau of Statistics of China

Japan, China, Europe: unemployment rate

(%) 6.0 5.5 5.0 4.5 4.0 3.5 3.0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Japan (LHS) China (LHS) Europe (RHS) (%) 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0

Japan, China, Europe: interest rate

(%) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 '07.1 '08.1 '09.1 '10.1 China Savings deposit 1yr(LHS) Europe (LHS) Japan (RHS) (%) 0.6 0.5 0.4 0.3 0.2 0.1 0.0

Source: Eurostat, Statistics Bureau of MIC, National Bureau of Statistics of China

Source: BOJ, People's Bank of China, ECB

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CRB commodity price index

(Index) 550 500 450 400 350 300 250 200 150 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 CRB CRB Industrials CRB non-energy

Gold and silver prices

($/oz) 1,300 1,200 1,100 1,000 900 800 700 600 500 '07.1 '07.6 '07.10 '08.3 '08.8 '09.1 '09.6 '09.11 12 10 18 16 14 Gold (LHS) Silver (RHS) ($/oz) 22 20

Source: CRB, Bloomberg

Source: CMX commodity exchange, Bloomberg

Crude oil prices

($/bbl) 150 130 110 90 70 50 30 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Brent WTI Dubai

Natural gas and gasoline prices

($/MMBtu) 16 14 12 10 8 6 4 2 0 '07.1 '07.6 '07.10 '08.3 '08.8 '09.1 '09.6 '09.11 Natural gas (LHS) Gasoline (RHS) (Cents/Gal) 400 350 300 250 200 150 100 50 0

Source: BFOE, WTI, Bloomberg

Source: NYMEX, Bloomberg

Non-ferrous metal commodity prices

($/mt) 4,000 Alluminium (LHS) Lead (LHS) Copper (RHS) ($/mt) 10,000 8,000 3,000 6,000 2,000 4,000 1,000 '07.1 '07.6 '07.10 '08.3 '08.8 '09.1 '09.6 '09.11 2,000

Agricultural commodity prices

($/bu) 1,900 ($/bu) Wheat (LHS) Soybean (LHS) Corn (RHS) 1,400 400 900 200 400 '07.1 '07.6 '07.10 '08.3 '08.8 '09.1 '09.6 '09.11 0 800 600

Source: LME, Bloomberg

Source: CBOT, Bloomberg

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II. Corporate earnings

Earnings momentum cycle based on correlation between corporate earnings (3-month change in FY2 EPS) and shares

Feb 2010 Developed market Earnings Momentum Cycle

Contraction USA Singapore Switzerland Australia Greece MSCI The World Austria Spain Netherlands Japan Belgium Germany Finland Portugal Canada

Expansion Sweden NorwayUnited Kingdom Hong Kong France

Italy New Zealand Ireland Recession

Denmark Recovery

Feb 2010 Emerging market Earnings Momentum Cycle

Contraction Taiwan Chile Indonesia EMG Korea Mexico Turkey China PhilippinesIndia Brazil Malaysia Jordan

Expansion PeruIsrael ThailandPakistan Hungary Russia Colombia Poland Czech Republic Argentina

Morocco Egypt

Recession

South Africa Recovery

Feb 2010 Korea Earnings Momentum Cycle

Contraction
Semi/Equip Steel/Non-ferrous Internet/SW MSCI KOREA, Chemicals Automobiles Consumer Svc Banks, Utilities Cons Dur/App H&P Prd Retailing Construction Other Materials Fd/Bev/Tob Insurance Shipbuilding/Machine Energy Coml Svs Telecomms Conglomerates

Expansion

Media

Transpt

Recession

Other Capital Goods Pharm/Biotec Div Financials Trading IT Hardware

Recovery

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US earnings momentum
(%) 5 0 -5 -10 -15 -20 -25 -30 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 USA FY2 EPS 3m chg (LHS) USA Index (RHS) (P) 1,600 1,400 1,200 1,000 800 600 400 200 0

UK earnings momentum
(%) 10 0 UK FY2 EPS 3m chg (LHS) UK Index (RHS) (P) 2,500 2,000 1,500 -10 1,000 -20 -30 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 500 0

Source: Thomson Reuters

Source: Thomson Reuters

Korea earnings momentum

(%) 20 15 10 5 0 -5 -10 -15 -20 -25 -30 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Korea FY2 EPS 3m chg (LHS) Korea Index (RHS) (P) 600 500 400 300 200 100 0

Taiwan earnings momentum

(%) 30 20 10 0 -10 -20 -30 -40 -50 -60 -70 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Taiwan FY2 EPS 3m chg (LHS) Taiwan Index (RHS) (P) 400 350 300 250 200 150 100 50 0

Source: Thomson Reuters

Source: Thomson Reuters

China earnings momentum

(%) 15 10 5 0 -5 -10 -15 -20 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 China FY2 EPS 3m chg (LHS) China Index (RHS) 100 80 60 40 20 0 (P) 120

India earnings momentum

(%) 10 5 0 -5 -10 -15 -20 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 400 200 0 India FY2 EPS 3m chg (LHS) India Index (RHS) (P) 1,000 800 600

Source: Thomson Reuters

Source: Thomson Reuters

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Korea semicon/equip earnings momentum

(%) 80 60 40 20 0 -20 -40 -60 -80 -100 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Semi/Equip FY2 EPS 3m chg (LHS) Semi/Equip Sector Index (RHS) 250 200 150 100 50 0 (P) 300

Korea IT hardware earnings momentum

(%) 80 60 40 20 0 -20 -40 -60 -80 -100 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 IT Hardware FY2 EPS 3m chg (LHS) IT Hardware Sector Index (RHS) (P) 300 250 200 150 100 50 0

Source: Thomson Reuters

Source: Thomson Reuters

Korea auto earnings momentum

(%) 40 30 20 10 0 -10 -20 -30 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Automobiles FY2 EPS 3m chg (LHS) Automobiles Sector Index (RHS) (P) 700 600 500 400 300 200 100 0

Korea steel/metal earnings momentum

(%) 30 20 10 0 -10 -20 -30 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 400 200 0 Steel/Non-ferrous FY2 EPS 3m chg (LHS) Steel/Non-ferrous Sector Index (RHS) (P) 1,000 800 600

Source: Thomson Reuters

Source: Thomson Reuters

Korea shipbuilding/machinery earnings momentum

(%) 25 20 15 10 5 0 -5 -10 -15 -20 -25 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Shipbuilding/Machine FY2 EPS 3m chg (LHS) Shipbuilding/Machine Sector Index (RHS) (P) 250 200 150 100 50 0

Korea chemical earnings momentum

(%) 30 20 10 0 -10 -20 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Chemicals FY2 EPS 3m chg (LHS) Chemicals Sector Index (RHS) (P) 800 700 600 500 400 300 200 100 0

Source: Thomson Reuters

Source: Thomson Reuters

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Korea retail earnings momentum

(%) 10 5 0 -5 -10 -15 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Retailing FY2 EPS 3m chg (LHS) Retailing Sector Index (RHS) (P) 3,500 3,000 2,500 2,000 1,500 1,000 500 0

Korea durable goods earnings momentum

(%) 10 5 0 -5 -10 -15 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Cons Dur/App FY2 EPS 3m chg (LHS) Cons Dur/App Sector Index (RHS) (P) 1,000 800 600 400 200 0

Source: Thomson Reuters

Source: Thomson Reuters

Korea construction earnings momentum

(%) 15 10 5 0 -5 -10 -15 -20 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Construction FY2 EPS 3m chg (LHS) Construction Sector Index (RHS) (P) 600 500 400 300 200 100 0

Korea telecom earnings momentum

(%) 15 10 360 5 0 -5 280 -10 -15 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 240 320 Telecomms FY2 EPS 3m chg (LHS) Telecomms Sector Index (RHS) (P) 400

Source: Thomson Reuters

Source: Thomson Reuters

Korea banking earnings momentum

(%) 30 20 10 0 -10 -20 -30 -40 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 100 0 300 200 Banks FY2 EPS 3m chg (LHS) Banks Sector Index (RHS) (P) 500 400

Korea insurance earnings momentum

(%) 15 10 5 0 -5 -10 -15 -20 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Insurance FY2 EPS 3m chg (LHS) Insurance Sector Index (RHS) (P) 600 500 400 300 200 100 0

Source: Thomson Reuters

Source: Thomson Reuters

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III. Valuation/Momentum

Performance, by country
(%) 8 Countries with top share price growth 2010.1.25 ~ 2010.2.24 Countries with bottom share price growth

EM ASIA Colombia

-8 WORLD EM AC World AC ex US

Belgium Mexico Switzerland

South Africa Austrailia

Finland Denmark

USA Egypt

Philippines Hong kong

Peru Germany

Morocco Sweden

Brazil Ireland

Netherlands France Singapore

Venezuela Pakistan

Indonesia Austria

Source: Bloomberg, MSCI

Koreas P/E band

(P) 2,000 1,800 1,600 1,400 1,200 1,000 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 KOSPI 10x 12x 9x 11x 13x

Koreas P/B band

(P) 2,000 1,800 1,600 1,400 1,200 1,000 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 KOSPI 1.3x 1.5x 1.2x 1.4x 1.6x

Source: Thomson Reuters

Source: Thomson Reuters

P/E trends for developed markets and Korea

(X) 25 20

P/E trends for emerging markets and Korea

(X) 17 15 13 Emerging market EM Asia KOREA

WORLD Pacific

Europe KOREA

15 10

11 9 7

5 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1

5 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1

Source: Thomson Reuters

Source: Thomson Reuters

Sri Lanka Korea

China Malaysia

Israel Canada

United Thailand

New India

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Performance, by region and country

Sector / Market Energy Materials Industrials Consumer disc Staples Healthcare Financials IT Telecom service Utility AC World -3.1 -2.8 -0.6 -1.0 1.3 -1.6 -1.5 -1.4 -2.9 -3.7 Compared to one month ago (%) EM EM ASIA US Korea -3.4 -2.7 -2.6 0.5 -0.5 3.6 -2.8 -5.7 -1.0 -4.1 -2.6 -4.2 -2.8 -0.6 -1.1 -1.0 -2.0 -5.8 -1.4 -2.6 -2.0 -0.9 2.1 4.1 3.0 -1.0 3.0 -0.4 -2.8 -2.8 -0.4 -5.8 -2.1 2.8 0.0 0.1 -1.2 -9.8 -4.4 -2.3 Taiwan 0.0 -0.6 -3.1 -5.7 0.7 0.0 -5.1 -5.0 -4.5 AC World -5.6 -3.7 1.4 1.2 0.5 0.3 -4.6 1.0 -6.2 -3.4 Compared to three months ago (%) EM EM ASIA US Korea -6.9 -2.6 1.1 0.0 2.5 10.0 -6.0 0.3 -1.9 0.8 -5.5 -2.0 0.1 0.5 -0.9 2.8 -9.5 0.6 0.1 -1.2 -5.5 -4.7 2.5 4.1 0.0 1.3 0.4 -0.4 -6.1 -1.6 -3.3 -2.1 4.9 5.3 -6.2 5.2 -9.4 2.3 4.0 14.0 Taiwan -2.0 3.5 -3.4 -11.7 -6.6 0.0 -9.3 -2.6 -3.6 -

MSCI AC world vs emerging market

('07.1 = 100) MSCI EM 140 120 100 80 60 40 '07.1 '07.8 '08.3 '08.10 '09.5 '09.12 MSCI AC WORLD

Kospi large-cap vs S&P500 Index

('07.1=100) 155 135 115 95 75 55 35 '07.1 '07.8 '08.3 '08.10 '09.5 '09.12

KOSPI Large Cap S&P500

Source: Bloomberg, MSCI

Source: Bloomberg, MSCI

Koreas value and growth stocks

('07.1=100) 170 150 130 110 90 70 50 '07.1 '07.8 '08.3 '08.10 '09.5 '09.12 Korea Value(LHS) Korea Growth(LHS) Value/Growth(RHS) (%P) 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9

Korea, China, and Taiwan indices

('07.1 = 100) 160 Taiwan stock market (LHS) KOSPI(LHS) Hangseng H share index(RHS) ('07.1 = 100) 300

120

200

80

100

40 '07.1 '07.8 '08.3 '08.10 '09.5 '09.12

Source: Bloomberg, MSCI

Source: Bloomberg

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Korea: consumer cyclicals

('07.1 = 100) Consumer discretionary 185 Financials 165 IT 145 125 105 85 65 45 '07.1 '07.8 '08.3 '08.10 '09.5 '09.12

US: consumer cyclicals

('07.1 = 100) 140 120 100 80 60 40 20 '07.1 '07.8 '08.3 '08.10 '09.5 '09.12 Consumer discretionary Financials IT

Source: Bloomberg, MSCI

Source: Bloomberg, MSCI

Korea: defensive sectors

('07.1 = 100) 140 130 120 110 100 90 80 70 60 50 '07.1 '07.8 '08.3 '08.10 '09.5 '09.12 Telecom services Utilities Consumer staples

US: defensive sectors

('07.1 = 100) 125 115 105 95 85 75 65 55 45 '07.1 '07.8 '08.3 '08.10 '09.5 '09.12

Telecom services Utilities Consumer staples

Source: Bloomberg, MSCI

Source: Bloomberg, MSCI

IT: DRAM price vs Philadelphia Semiconductor Index

($) 3.0 2.5 2.0 1.5 1.0 0.5 '07.10 '08.3 '08.7 '08.12 '09.5 '09.9 '10.2 1G DDR2 1Gb(128x8) 667Mhz (LHS) Philadelphioa semiconductor index (RHS) (index) 500 450 400 350 300 250 200 150

IT: NAND price vs Philadelphia Semiconductor Index

($) 12 10 8 6 4 2 0 '07.10 '08.3 '08.7 '08.12 '09.5 '09.9 '10.2 NAND MLC 16G(2Gx8) (LHS) Philadelphioa semiconductor index (RHS) (index) 500 450 400 350 300 250 200 150

Source: Thomson Reuters

Source: Thomson Reuters

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Petrochem: synthetic resin price index, chem sector index

('07.1=100) 200 180 160 140 120 100 80 60 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Price index for synthetic resin for general use Korea chemical sector index

Petrochem: Chinas chem stock, Koreas chem sector index

('07.1=100) 400 350 300 250 200 150 100 50 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Sinopec Shanghai(LHS) Korea chemical sector index ('07.1=100) 210 190 170 150 130 110 90 70 50

Note: petrochem price index is average of PE/PP/PS/ABS/PVC prices Source: Thomson Reuters

Source: Thomson Reuters

Steel: Chinas HR price vs POSCO

(won) 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 '07.1 '07.10 '08.8 '09.6 POSCO (LHS) Shanghai HR Coil price (RHS) (yuen/ton) 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500

Steel: global steel share performance

('07.1=100) 300 250 200 150 100 50 0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Korea steel sector index US Steel Nippon Steel

Source: Thomson Reuters

Source: Thomson Reuters

Transportation: BDI vs Hanjin Shipping

('07.1=100) 300 Hanjin shipping BDI

Transportation: global shipping share performance

('07.1=100) 250 200 Hanjin shipping China shipping Dev Nippon yusen

200

150 100 50

100

0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1

0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1

Source: Thomson Reuters

Source: Thomson Reuters

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IV. Capital flow

Global capital market: Libor and TED spread

(%) 7 6 5 4 3 2 1 0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 US 3M Libor Ted Spread

Global capital mkt: US CDS premium by investment grade

(bp) 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 '08.1 '08.4 '08.7 '08.10 '09.1 '09.4 '09.7 '09.10 '10.1 High Yield (LHS) Investmentgrade (RHS) (bp) 350 300 250 200 150 100 50

Source: Bloomberg

Source: Bloomberg

Global capital mkt: CDS premium for US financial inst

(bp) 1,400 1,200 1,000 800 600 400 200 0 '08.1 '08.4 '08.7 '08.10 '09.1 '09.4 '09.7 '09.10 '10.1 Morgan Stanley (LHS) Goldman Sachs (RHS) (bp) 600 500 400 300 200 100 0

Global capital market: CDS premium for US automakers

(bp) 2,000 1,600 1,200 800 400 0 '08.1 '08.4 '08.7 '08.10 '09.1 '09.4 '09.7 '09.10 '10.1 Goodyear (LHS) FORD (RHS) (bp) 18,000 15,000 12,000 9,000 6,000 3,000 0

Source: Bloomberg

Source: Bloomberg

Global capital market: CDS premium for Asian countries

(bp) 800 700 600 500 400 300 200 100 0 '08.1 '08.4 '08.7 '08.10 '09.1 '09.4 '09.7 '09.10 '10.1 Korea (LHS) China (LHS) Japan (RHS) (bp) 140 120 100 80 60 40 20 0

Global capital mkt: CDS premium for Koreas major fin inst
(bp) 1,000 800 600 400 200 0 '08.1 '08.4 '08.7 '08.10 '09.1 '09.4 '09.7 '09.10 '10.1 Hana Financial Group Woori Financial Group Shinhan Financial Group KB holdings

Source: Bloomberg

Source: Bloomberg

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Koreas bond market: major bond yield

(%) 10.0 8.0 6.0 3yr Corporate bond (AA-) 3yr KTB Key Rate

Koreas bond market: KTB credit spread

(% p) 7.0 3yr KTB - key rate(LHS) 3yr(AA-) - key rate (LHS) 3yr (BBB-) - key rate (RHS) (%p) 12.0 10.0 5.0 8.0 3.0 6.0 4.0 1.0 2.0 -1.0 0.0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1

4.0 2.0 0.0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1

Source: Bloomberg, KIS Rating

Source: Bloomberg, KIS Rating

Korea bond mkt: credit spread for bank debenture (AAA)

(% p) 4.0 1yr (AAA) 3.0 2yr (AAA) 3yr (AAA) 2.0

Korea bond mkt: credit spread for corporate bonds (AA-)

(% p) 5.0 1yr (AA-) 4.0 3.0 2.0 2yr (AA-) 3yr (AA-)

1.0

1.0 0.0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1

0.0

Source: Bloomberg, KIS Rating

Source: Bloomberg, KIS Rating

Koreas bond mkt: credit spread for corporate bonds (A-)

(% p) 5.5 4.5 3.5 2.5 1.5 0.5 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 1yr(A-) 2yr(A-) 3yr(A-)

Koreas bond mkt: credit spread for corporate bonds (BBB-)

(% p) 10.0 8.0 6.0 4.0 2.0 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 1yr (BBB-) 2yr (BBB-) 3yr (BBB-)

Source: Bloomberg, KIS Rating

Source: Bloomberg, KIS Rating

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Koreas stock market: capital trends

(Wtn) 170 120 70 20 -30 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Savings-type (LHS) Equity-type (LHS) Bond-type (RHS) (Wtn) 0 -4 -8 -12 -16 -20 -24

Koreas stock market: capital inflow to equity funds

(Wtn) 2 0 -2 -4 -6 -8 -10 -12 '09.1 '09.3 '09.5 '09.7 '09.9 '09.11 '10.1 Daily accum. balance in domestic equity type fund (inc. ETF) Daily accum. balance in domestic equity type fund (ex. ETF)

Source: BOK, FnGuide

Source: KOFIA

Koreas stock mkt: capital inflow to domestic equity funds

(Wtn) 95 85 75 65 55 45 35 25 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Domestic fund balance (LHS) Overseas fund balance (RHS) (Wtn) 70 60 50 40 30 20 10 0

Koreas stock market: overseas equity fund balance

(Wbn) 25,000 20,000 15,000 10,000 5,000 0 '08.1 '08.6 '08.10 '09.2 '09.6 '09.10 China BRICs Asia Emerging India

Source: KOFIA

Source: Zeroin, Woori I&S Research Center

Sector weightings at growth funds, relative to market cap

(%p) 3 2 1 0 -1 -2 -3

Foreigners sector weightings, relative to market cap

(%p) 7 6 5 4 3 2 1 0 -1 -2 -3

Chemical Commercial Capital goods Auto/parts Trade Insurance Internet/SW Media Durables Banking Real Estate Medical Equip Steel Household goods Pharma/bio-tech Materials Construction Consumer Service Energy Transportation Semiconductor/Equip Machinery Retail Security Telecom Food&Bev Utilities Holding Company Shipbuilding #N/A

Note: as of Feb 25, 2010 Source: FnGuide, Woori I&S Research Center

Note: as of Feb 25, 2010 Source: FnGuide, Woori I&S Research Center

Semiconductor/Equip Banking Steel Telecom Internet/SW Auto/parts Insurance Household goods Food&Bev Real Estate Retail Medical Equip Energy Media Consumer Service Commercial Construction Materials Holding Company Durables Pharma/bio-tech Capital goods Trade IT Hardware Transportation Machinery Utilities Shipbuilding Chemical Security

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Korea: customer deposit vs loan-based stock trading

(Wtn) 17 15 13 11 9 7 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Customer deposit (LHS) Loan-based stock trading(RHS) (Wtn) 5 4 3 2 1 0

Korea: net buying trends, by investor

(Wtn) 10 0 -10 -20 -30 -40 -50 -60 -70 '07.1 '07.7 '08.1 '08.7 '09.1 '09.7 '10.1 Foreign (LHS) ITC (RHS) Pension fund (RHS) (Wtn) 20 15 10 5 0 -5 -10 -15 -20 -25

Source: FnGuide, Woori I&S Research Center

Source: FnGuide, Woori I&S Research Center

IT: foreign net buying trend

(%) 6 5 5 4 4 '06.10 '07.4 '07.10 '08.4 '08.10 '09.4 '09.10 IT hardware

Transportation: foreign net buying trend

(%) 8 8 7 7 6 6 5 5 4 4 3 '06.10 '07.4 '07.10 '08.4 '08.10 '09.4 '09.10 Auto

Source: FnGuide, Woori I&S Research Center

Source: FnGuide, Woori I&S Research Center

Steel: foreign net buying trend

(%) 13 12 11 10 9 8 7 6 '06.10 '07.4 '07.10 '08.4 '08.10 '09.4 '09.10 Steel/metal

Banking: foreign net buying trend

(%) 17 16 15 14 13 12 11 10 '06.10 '07.4 '07.10 '08.4 '08.10 '09.4 '09.10 Banking

Source: FnGuide, Woori I&S Research Center

Source: FnGuide, Woori I&S Research Center

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Disclosures The research is based on current public information that Woori I&S considers reliable, but Woori I&S does not represent it as accurate or complete and it should not be relied on as such. Furthermore, the research does not take into account particular investment objectives, financial situations or individual client needs, and Woori I&S is in no way legally responsible for future returns or loss of original capital. All materials in this report are the intellectual property of Woori I&S. Copying, distributing, transmitting, transforming or lending of this material without Woori I&S' consent is prohibited.

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