三星證券美股達(dá)到巔峰還為時過早us stock market at peak too early for concern

SamsungStrategyWeekly

2017.9.6

USstockmarketatapeak?

Tooearlyforconcern

SeungMinYou

Chiefstrategist

82220207024

Ok

Analyst

82220207795

Moon

Analyst

82220207792

INDEXPERFORMANCE

(%)

KospiKosdaq

1W

1M

(0.9)(2.7)

3MYTD

0.616.4

18

1.4

1.3

48

Storyoftheweek

USstockmarketatapeak?TheS&P500cyclicallyadjustedpriceearningsratio(CAPE)isatapost-1999high.Citingthis,NobellaureateandYaleeconomicsprofessorRobertShillermentionedthepossibilityofamajorcorrectionintheUSstockmarket.Sometechnicalanalystsalsosidewithhim—eg,JasonGoepfert,presidentofSundialCapitalResearch,arguesthat74HindenburgOmensignals—atechnicalpatternportendingastockmarketcrash—haveappearedytd.Thatsaid,webelievethatitisprematuretosaythattheUSmarketispeaking.

Lookattheforest,notthetree:Wepointoutthreefactors:1)theUSmarket’sCAPEisinbettershapeintermsofqualitythanitwasin1999(thebubbleperiod);2)valuationsarenotathistoricallydemandinglevelswhencomparedtoexpectedreturnsofotherassets;and3)inflectionpointsinthepasthaveonlymaterializedwheninflationexpectationsarerelativelyhighandmonetarypolicytightensatanacceleratingpace,neitherofwhichseemimminent.Instead,wefocusonaCitigroup’sreboundingEconomicSurpriseIndexsinceend-June,expectingittodissipateearningsandvaluationconcerns.

Market§orviews

Market:DespitetheNorthKoreannuclearthreat,thetwomodelscomprisingtheKospiCompassstillhintatbullishness.Wethusrecommendexpandingexposuretoequitiesonincreasedmarketvolatility.Setthemodelaside,webelievethattherisksontheKoreanpeninsulaarenearingastrategiccriticalmassandheadingfordialogue.

Sector:Oursectorviewsarelargelyunchangedfromlastweek,withthesteel,non-ferrousmetal,banking,IThardware,andsemiconductorssectorsstillpreferredbasedontheirsolid2Hearningsoutlooks.Theutilitiesanddisplaysectors,however,haveslidinto

valuetraps.

Technical

KospiCompass SectorVEMmodel

(x)

P/E

P/B

ROE

Kospi

9.2

1.0

10.7

Kosdaq

14.6

2.1

14.3

10

Overbought

9

OverboughtBull

Bull

8

7

6

Bull

5

NeutralNeutralBearBearBear

Oversold

4

3

2

1

0

Oversold

-1

-1

BearBear

Bear

-3

-2

(%)

1M

3M

6M

Kospi

1.3

6.3

18.0

Kosdaq

26

68

152

Note:1-monthinvestmenthorizon;outcomesmaydifferfromtheopinionsofourequityanalystsSource:SamsungSecurities

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NorthKorea’snucleartest—NorthKoreatopursuedialogueafternearingaredline

NorthKoreaonSep3at12:30pmconducteditssixthnucleartestatitsPunggye-rinucleartestsiteinNorthHamgyongbukProvince.SouthKorea’smilitaryestimatedthenuclearyieldatatleast50ktTNT,whiletheUSGeologicalSurveyputthefigureat100ktTNT.NorthKorea’sNuclearWeaponsInstituteclaimsthegoalofthetestwastodevelopahydrogenbombthatcanbeloadedontoanintercontinentalballisticmissile(ICBM).Meanwhile,NorthKorea’sstatenewsagencysaidthatthedevelopmentwasdirectedbyitsleaderKimJong-un,goingastepfurtherfrompastremarksstatingthenationisstrivingtomakevariouskindsoflighterandsmallernuclearwarheads.

Thetestwaswidelyexpected.SouthKorea’sinformationagencieshadsaidthattheydetectedPyongyang’sintentiontoconductanucleartestandexpectedadetonationtooccuronSep9,NorthKorea’sFoundationDayholiday.Nevertheless,thesixthtest—alongsiderecentsuccessfullaunchesofanintermediate-rangeballisticmissileandICBM—showsthatthenationdoesindeedpossessmissile-readynuclearwarheads.TheNorthislikelytoshowoffitsabilitytohitthemainlandUSby:

1)firingtheHwasong-14ICBMonanordinaryangle;and2)carryingoutmorenucleartests.

Paradoxically,theheightenedrisksontheKoreanpeninsulamayactuallyleadNorthKoreaandtheUStothenegotiationtable,asdemandfordialoguefrominterestedparties(eg,SouthKorea,China,andJapan)shouldrise.Indeed,NorthKorealikelydevelopsnuclearweaponstoseeklong-termsecurityguaranteesforitsregime,whiletheUSseekstoeliminateanynuclearthreats.We,contrarytosomeconcerns,believechancesofmilitaryconflictsontheKoreanpeninsulaareextremelylow,asneithertheNorthnortheUScanachievetheirrespectivegoalinasafemannerviamilitaryoptions.

Theonsetofandactualnegotiationsbetweenthetwonationsshouldbebumpy.NorthKoreainApr2012reviseditsSocialistConstitutionanddeclareditasanuclearstate.Suchastatus,however,cannotbeacceptedbytheinternationalcommunityundertheTreatyontheNon-ProliferationofNuclearWeapons.TheUSdemandsthattheNorthmustgiveupitsentirenuclearprogramasaconditionfordialogue.OnevariableshouldbetheUSmidtermelectioninNov2018.DissolvingthenuclearthreatfromPyongyangwouldleavealastinglegacyforTrump,whosepoliticalstandinghasplummetedlately.TheNorth—whilewellawareofthis—isapproachingtheredline.

Theimpactonthefinancialmarketsshoulddifferaccordingtotimeframe.Inthenearterm,impactsshouldbelimited,asconcernsoverwarontheKoreanpeninsulalikelypeakedinAugust,andNorthKorea’ssixthnucleartestwaslargelyexpected.Impactsoncorporatefundamentalsalsoremainelusive.Overthemediumtolongterm,however,post-dialogueeventsshouldplayakeyrole.Forinstance,whetherSino-USrelationswillimproveorSouthKorea’sdefensecostswillrisewarrantcloseattention.

Contents

USstockmarketatitspeak?p3Sectorview p7

Appendix p10

USstockmarketembroiledinvaluationpeakdispute

CorrelationamongglobalandUSmarketshasweakened…

…butCAPEatpost-1999high

CAPEpooratreflectingchangeineconomicstructure

Keygrowthindustries’P/Esignificantlylowervslevelsin1997

USstockmarketatapeak?

Lookattheforest,notthetree

NobellaureateandYaleeconomicsprofessorRobertShillermentionedthepossibilityofamajorcorrectionintheUSstockmarketinaJulyinterviewwithCNBC.Hesaid,“l(fā)owvolatilitypairedwithaquestionableprice-earningsratiocouldwipeoutachunkofthestockmarket’svalue”whileaddingitcouldbe“thequietbeforethestorm”.Sometechnicalanalystshavesidedwithhim—eg,JasonGoepfert,presidentofSundialCapitalResearch,arguesthat74HindenburgOmensignals—atechnicalpatternportendingastockmarketcrash—haveappearedytd,secondonlytothe78recordedinNov2007.

Sincethe2008financialcrisis,correlationamongkeyglobalstockmarketshasweakenedduetochangeingrowthenginesandindustrialstructure.Thatsaid,USmarketsretaintheirinfluence,asseenatend-August,whentheyaccountedfor52%oftheMSCIACWorldIndex’smarketcap.Inanutshell,thedurationofmarketboomsdependsontheUS,soforecastingtheoutlookforthelatterisessentiallydoingthesameforglobalmarkets.Againstthisbackdrop,welookatwhethertheUSmarketispeakingfromthreeperspectives.

First,welookattheissuefromatechnicalperspective.Thecyclicallyadjustedpriceearningsratio(CAPE)wasinventedtomakeupforshortfallsoftraditionalP/Evaluations—ie,thelatterarebasedonshort-termearningsvolatility,sotheymakeitdifficulttogaugewhetheramarketisundervaluedorovervaluedfromalong-termperspective.AsCAPEisdefinedaspricedividedbytheaverageoftenyearsofearningsandadjustedforinflation,itoffersareasonablebasisforassessingmarketvaluationoverthelongterm.TheCAPEoftheUSS&P500haslatelyhoveredabove30x,apost-1999highandthethirdhighestinhistoryfollowing32.6xin1929and44.2xin1999.

BasedontheCAPEfigure,theUSmarketovervaluationargumentseemscompelling,butpointoutthatCAPEhascriticalweaknesses—eg,itispooratreflectingchangesinmarketstructureandrelatedimpacts,suggestingtheCAPE-backedargumentisflawed.Whenaneconomicstructurechanges,newgrowthindustriestendtobehighlyvalued,whichmaydistortthemarket’soverallvaluation.Ifthoseindustriesenterbubble-levelvaluationsandthebubblebursts,theresultingcrashmaynotbeindicativeofthehealthoftheoverallmarket.

Fittingthetitleofglobaleconomicleader,theUShasseenhigh-valuegrowthindustriesportionoftotalmarketcapremainhighoverthepastthreedecades—eg,thehealthcareandITsectorsaccountedforarespective9.3%and29.2%oftotalmarketcapin1999(theCAPEpeakperiod)andarenow14.7%and23.5%.In1999,thegrowthindustrieswereovervaluedonconsideringtheirprofitability,whichresultedindevastatingrepercussions.Now,thosegrowthindustries’P/Earemuchlowerthantheywerein1999.Inotherwords,theUSmarket’sCAPEisinbettershapeintermsofqualitythanitwasinthe1999bubbleperiod.Inourview,asimplecomparisonofCAPEbetween1999andnowisabsurd.

S&P500:CAPE

(x)50

45

40

35

30

25

20

15

10

5

0

Post-2000average25.5x

Post-1900average16.8x

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Sector End-Dec,1999

Portion(% P/E(x)*

End-Aug,2017

Portion(%) P/E(x)*

Source:R,SamsungSecurities

S&P500:Marketcapportionbysector

Energy

5.6

22.5

5.7

26.3

Materials

3.0

17.5

29

17.6

Industrials

9.9

20.7

10.1

17.2

ConsumerDiscretionary

12.7

25.0

12.1

19.1

ConsumerStaples

7.2

20.0

8.5

19.8

HealthCare

9.3

25.1

14.7

16.0

Financials

13.0

14.0

142

13.7

IT

29.2

44.5

23.5

18.2

TelecomServices

7.9

28.3

2.1

12.9

Utilities

2.2

12.5

3.3

18.4

Note:*12-monthforwardP/E

Source:ThomsonReuters,SamsungSecurities

Expectedreturnonequitieshigherthanthatonotherassets

ROEgapandearningsyieldgap

Second,wecompareexpectedreturnsofequitiesagainstthoseofotherassettypes,believingthisismorevaluablethansimplycomparinghistoricalvaluations,asthelattercannotreflectchangesinmarketvaluedependingonfundamentalsandthemacrosituation.Forinstance,stockvaluationsnowcannotbethesameastheywereatend-Dec1999,whichwaswhenbondinvestmentsbroughtinafixedreturnof8.1%(vs2.2%now).Comparisonofhistoricalvaluationthusrequiresanalysisofothermeasures,suchasROEgapandearningsyieldgap.Accordingtothosemetrics,theUSstockmarkethasyettoenteroverboughtterritory.

ROEgapreferstoROEless10-yrgovernmentbondyields,andmeasureshowmuchoutperformancecorporateactivitiescanmakerelativetolow-riskbondinvestments.Historically,,stockmarketsfallandrecessionsbeginwhentheROEgaptrendsdownward.Currently,theROEgapfortheUSstockmarketisreversingcourseandtrendingupward.Moreover,earningsyieldgap,whichreferstoearningsyield(theinverseoftheP/Eratio)less10-yrgovernmentbondyields,remainssteady.Thefigureisstillhighrelativetoapost-1990average.

S&P500:ROEgap*

(%pts)

16

14

12

10

8

6

4

2

0

(2)

(4)

(6)

1990

1993 1996 1999

2002 2005 2008

2011 2014 2017

Note:*12-monthtrailingROEless10-yearUST;shadedareasrefertorecessionperioddefinedbyNBERSource:Bloomberg,SamsungSecurities

S&P500:Earningyieldgap*

(%pts)10

8

6

4

2

0

(2)

(4)

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

+2SD

+1SD

Avg

-1SD

-2SD

Note:*1/(12-monthforwardP/E)less10-yearUST;shadedareasrefertorecessionperioddefinedbyNBERSource:ThomsonReuters,SamsungSecurities

Sixconditionsforvaluationpeak

Inflationexpectationsandmonetarypolicytobekey

Third,welookathistoricaldatatodetermineastockmarket’sovervaluation.Historically,thecriteriausedtodetermineifaUSbullrunisendingconsistof:1)Fedratehikes;2)anISMpeak;3)theeliminationofoutputgap;4)aprofitmarginpeak;5)inflationabovethelong-termaverage;and6)aninvertedyieldcurve.Thefirstfourconditionshavebeenmet(althoughnotintheorderlisted)butthelattertwo—whichplaythemostcriticalrole—havenot.

TheUSlong-shortspreaddeservesparticularattention,withtheyieldcurvehistoricallyinvertingsixmonthsbeforetheonsetofarecession.Currently,the2/10-yearand5/10-yearUSTspreadsstandat0.8%ptsand0.4%pts,respectively,suggestingtheongoingbullmarket’sdurationwillbedeterminedbytheFed’smonetarypolicy.Basedontheabove-statedsixcriteria,theUSeconomyisinthemidstofademand-drivenexpansion,andthestockmarketisinthelatterphaseofaboomcycle.Thatsaid,webelieveitisprematuretosaythattheUSmarketispeaking.InflectionpointsshouldmaterializeonlywheninflationexpectationsarehighandtheFedtightensitsmonetarypolicyatanacceleratingpace.

USequitymarketcycle-checklist

Indicator

Recentcycles

Current

①Fedratehkebegins

Feb1994,Jun2004

o

②ISMpeak

2004,2011,2014

o

③Outputgapcloses

1996,2005

o

④Profitmarginpeak

1997,2006,2012

o

⑤Inflation>long-termaverage

1999,2007

x

⑥Yieldcurveinversion

1998,2006

x

Note:Profitmargin=Corporateprofitsaftertax/GDPSource:CEIC,ThomsonReuters,Fred,SamsungSecurities

Anothertriggerofvaluationpeakdispute—economicandearningsmomentumslowdown

Economicsurpriseindextrendingup—apositive

Marketpeakingcontroversy-toopremature

Fallingcorporateearningsmomentumpresentsanothertriggerforthevaluationdispute.Thedisputehaslingeredsincestart-yearwhenITshares—FANGonesinparticular—drovethemarkethigherafterithadralliedonpolicyexpectationsfollowingthepresidentialelection.Disappointingeconomicindicatorssince2Q(amidheightenedexpectations),however,haveinstilleddoubtovermarketoutlooks.Wepointout,however,thateconomicmomentumdidnotslowenoughtoputachillonstockpreferencesandisimprovingoflate.

Forinstance,Citigroup’sEconomicSurpriseIndexistrendingupafterhittingabottomatend-June.Theweeklymeasureshowshowthedataareperforminguptoexpectations.TheUSstockmarket’sforwardEPShashistoricallymovedintandemwiththeESI,soareboundinthelatterhintsthatcorporateearningsmomentumwillimprove.Risingearningsexpectationsshoulddissipatedebateoveravaluationpeak.

Instead,weseelittleprogressonTrump’spolicyagendaasabiggerconcern,althoughsuchconcernsshouldeaseduetoHurricaneHarvey.TheaftermathofthehurricanecanlowerconsensusestimatesforUSGDPgrowthfor3Q,butmayboostthemfor4QGDPgrowthinlightofmassiverestorationprojects.Moreover,Trump’spolicyinitiatives—whichhavegonenowhereduetoconfrontationswithDemocraticPartyandwithintheRepublicanParty(eg,overtaxcutsandinfrastructureinvestments)—shouldbeonthetableagain.Allinall,wemaintainapositiveviewontheUSmarketandbelieveitisprematuretosaythatthemarketthereispeaking.

S&P50012-monthforwardEPSgrowthandUSEconomicSurpriseIndex

(pts)100

80

60

40

20

0

(20)

12-monthforwardEPSgrowth(RHS) (%)12

11

10

9

8

7

(40)

6

(60)

5

(80)

4

(100)

3

2015

2016

2017

Source:ThomsonReuters,SamsungSecurities

Contents

USstockmarketatitspeak?p3Sectorview p7

Appendix p10

Sectorview

Kospimoreattractivelyvalued

DespitetheNorthKoreannuclearthreat,thetwomodelscomprisingtheKospiCompassstillhintatbullishness.Wethusrecommendexpandingexposuretoequitiesonincreasedmarketvolatility.Settingthemodelaside,webelievethattherisksontheKoreanpeninsulaarenearingastrategiccriticalmassandareheadingfordialogue.Oursectorviewsarelargelyunchangedfromlastweek,withthesteel,non-ferrousmetal,banking,IThardware,andsemiconductorssectorsstillpreferredgiventheirbrightearningsoutlooksfor2H.Theutilitiesanddisplaysectors,however,haveslidintovaluetraps.

Kospi:Sectordashboard

Sector

Segment

1m

Totalreturn(%)

3m 12m

Ytd

ForwardP/E(x)

CurrentZ-score

ForwardP/B(x)

CurrentZ-score

Forward

ROE(x)*

ForwardEPSgrowth(%)

Current

Z-score

12mfwd1mchg3mchg

Kospi

(2.7)

0.6

160

16.4

9.2

(0.6)

1.0

(0.5)

10.7

(0.2)

19.0

1.3

6.3

Energy

Energy

1.9

10.9

35.1

30.2

8.2

0.3

1.1

0.4

13.1

0.2

18.0

(0.8)

(2.1)

Chemicals

5.0

10.8

279

22.9

8.7

(0.6)

1.1

(0.3)

13.0

0.0

18.0

2.6

3.8

Materials

Non-ferrousmetals

2.5

9.6

7.4

5.8

10.7

0.6

1.1

(0.1)

10.3

(0.9)

25.0

3.3

10.9

Steel

0.5

18.4

39.3

25.5

9.3

(0.2)

0.6

(0.7)

6.3

(0.7)

19.0

1.6

5.1

Construcion (7.2)

(11.8)

(3.5)

(0.9)

8.6

(1.8)

0.8

(0.9)

9.2

0.2

29.1

(0.1)

3.5

Machinery (5.5)

(4.3)

(4.5)

2.3

11.2

(0.7)

0.9

(0.7)

8.4

(0.6)

63.1

(2.1)

3.1

Industrials Shipbuilding (16.4)

(15.7)

52

2.3

34.1

0.1

0.7

(0.7)

2.1

(1.1)

1652.3

12.8

22.9

Tradingfirms, (3.2)

Capitalgoods

(7.3)

(5.0)

5.6

12.8

(0.1)

1.2

(0.4)

9.1

(0.6)

20.3

8.8

12.3

Transportation (2.3)

(2.9)

(2.2)

14.1

14.6

(0.4)

1.2

(0.7)

8.1

(0.1)

122.3

0.2

(1.9)

Autos&Autoparts(2.4)

(9.9)

(4.5)

(4.8)

7.1

0.0

0.6

(1.3)

8.5

(1.4)

16.8

0.6

(6.5)

Cosmetics, 0.1

(9.3)

(11.7)

0.1

19.8

0.9

2.7

0.8

13.6

(0.4)

36.4

(0.7)

(3.1)

Apparel,Toys

Consumer Hotel,Leisure

Discretionaryservices (7.1)

(3.7)

(9.4)

7.2

18.3

1.0

2.2

(0.6)

12.2

(2.5)

22.4

(1.0)

(0.4)

Media,Education(4.0)

(5.3)

(1.9)

4.8

15.5

0.8

1.3

(0.9)

8.4

(1.6)

24.3

0.4

1.4

Retail (10.5)

(17.1)

6.7

8.0

13.9

0.9

0.7

(1.0)

5.2

(1.6)

17.9

(3.7)

(1.7)

Consumer Consumer (2.4)

Staples Staples

(5.8)

(0.9)

6.2

14.4

(0.0)

1.4

(0.9)

9.4

(1.4)

20.7

(0.9)

0.0

Healthcare Healthcare 2.2

1.4

(7.6)

20.2

47.1

2.6

3.1

1.9

6.5

(1.5)

45.4

4.3

19.3

Banks (6.4)

8.2

34.8

27.1

7.4

(0.2)

0.6

(0.4)

8.0

(0.4)

3.3

0.0

9.2

Financials Securiies (9.8)

1.4

24.4

31.2

10.3

(0.4)

0.8

(0.4)

8.0

(0.2)

16.0

4.1

14.7

Insurance (9.1)

0.2

9.7

10.1

10.8

(0.6)

0.8

(1.0)

7.4

(0.9)

1.1

3.2

8.8

Software (2.2)

(3.3)

2.7

11.5

23.1

0.7

2.8

(1.2)

12.2

(1.7)

42.7

(0.4)

3.0

Hardware 10.2

24.8

79.6

81.2

17.8

1.2

1.6

0.1

9.1

(0.4)

85.1

5.2

22.3

IT Semiconductor(3.1)

6.3

51.3

32.1

6.5

(0.7)

1.3

(0.0)

19.1

1.2

23.8

2.4

14.6

Appliances 17.7

12.4

689

68.1

10.1

(0.2)

1.0

(0.0)

10.1

(0.1)

40.5

1.8

8.3

Display (0.4)

(3.6)

5.1

0.2

6.4

(0.2)

0.7

(1.2)

11.3

0.6

(30)

(1.7)

(17.8)

Telecom TelecomServices(10.4)

Services

(2.7)

112

12.3

9.0

(0.4)

1.0

(0.4)

10.6

(0.1)

9.8

0.3

5.0

Utilities

Utilities

(4.9)

(4.5)

(21.5)

(3.9)

6.7

0.0

0.4

(1.4)

5.9

0.2

6.0

(8.4)

(11.6)

Source:WiseFn,SamsungSecurities

BestofSamsung(Aug29–Sep4)1

Banking(OVERWEIGHT,Stillroomforcreditcoststofallfurther,Aug29):Banks’recurringprofitsimprovedremarkablyin2Q,drivenbydeclinesincreditcosts,whichhavebeentrendingdownintandemwithnewnon-performingloans.Ifbankswritebackloanlosses(astheydidover2005-2007),theirprovisioningwilldecline,addingimpetustoearnings,whichmaythentopmarketexpectations.Somenowexpectvaluation-gapplaystooutperformtheirlargerpeers,butwenotethatlargefinancialgroupshaveralliedthankstorobustearningsgrowthandnotbecausetheyhavetradedathighervaluationmultiples.Thus,weadviseinvestorstoremainfocusedonthebigthree—KBFinancialGroup,ShinhanFinancialGroup,andHanaFinancialGroup—whichshouldenjoyfurtherrobustearningsgrowth.

HyundaiMipoDockyard(010620,BUY,Financialsimproving,Sep1):HyundaiMipoDockyardattractednewordersworthUSD1.8boverJanuary-August(includeslastmonth’soneforabulkcarrier),whichexceedsitsfull-yeartargetofUSD1.6bandequals88%of2017salesguidance.Still,thefirmmightseeordermomentumdeceleratethroughyear-end,withitcontemplatingshipbuildingpricehikes,evenattheexpenseofordervolume.HMDmaybeunabletoavoidindustrywoesin2H—eg,poormomentumamidslowingsalesanddelayedsectorimprovements—butitneverthelessstandstogainfromassetdisposals,withthesaleofitsstakeinHIInvestment&Securitiesexpectedtoturnittoanet-cashpositionbyend-2017,whichwouldboostearningsvisibility.Intermsofvaluation,thefirmismoreexpensivethanitslargerpeersare(basedonP/B),butismoreattractivewhenvaluingitsassets.

Householdgoods(OVERWEIGHT,Augustexportsprovecompetitiveness,Sep1):Korea’scosmeticsexportsclimbed14%y-yinAugust,markingafourthstraightmonthofy-ygrowthintheteens,andwhilethedataareindicativeofmedium-tolong-termcompetitiveness,itseemsprematuretocallthisarecovery.Werecommendaccumulationofsharesfromalonger-termperspective,giventhesector’s:1)minimaldownsiderisk;2)solidcompetitiveness;and3)attractivevaluations.OurtoppicksremainLGHousehold&HealthCareandAbleC&C.

HyundaiHomeShopping(057050,BUY,Share-pricegainstocontinuethrough2018,Sep4):Ourforecastshavetheparent-basedoperatingprofitofHyundaiHomeShoppingleapingarespective21.9%and36.4%y-ytoKRW28.5bandKRW46.1bin3Qand4Q,whilewealsoexpectitsconsolidatedpre-taxprofittorise15.2%and11.1%,respectively,toKRW200.6bandKRW222.8bthisyearandin2018.Suchsolidearningsmomentumshouldbeledbythefirm’sprofitabilityfocus,briskmobilesalesgrowth,thereversalofSOcommissionsin2H17,andgrowingequity-methodcontributionsfromthelikesofHandsomeandHCN(whichoughttooffsetlossesbyHyundaiRentalCare).SharesinHHSareupsome30%ytd,butstilltradeatanundemanding9.6x2018P/E.OurBUYratingand12-monthtargetpriceofKRW175,000remainunchanged,giventhefirm’ssolidprospects.

1Summariesofselectindustryandcompanyreportspublishedoverthepastweek

Sector

Ticker

Company

Price(KRW)

Marketcap

Valuation(2017,x,%)

Current Target

(KRWt)

P/E

P/B

EV

/EBITDA

EPS

growth

ROEDividend

yield

SeptemberSamsungModelPortfolio

SamsungModelPortfolio

Energy

A096770

SKInnovation

188,500

n/a

17.4

11.3

1.0

5.5

(17.1)

8.7

2.0

Materials

A011170

LotteChemical

403,000

500,000

13.8

6.2

1.2

4.4

20.5

21.3

1.0

A051910

LGChem

373,000

420,000

26.3

14.9

1.8

6.8

44.8

13.3

1.5

A005490

Posco

347,000

415,000

30.3

11.3

0.6

6.2

96.5

6.2

1.0

A010130

KoreaZinc

510,000

590,000

9.6

13.4

1.5

7.0

20.9

12.4

2.0

Industrials

A010120

LSIndustrialSystems

57,800

71,000

1.7

14.7

1.5

7.3

46.4

10.6

2.1

A079550

LIGNex1

82,500

90,000

1.8

18.2

2.6

12.6

29.3

14.9

1.1

A010620

HyundaiMipoDockyard

99,200

134,000

2.0

10.2

0.8

10.4

463.5

8.3

0.0

A089590

JejuAir

37,700

50,000

1.0

9.8

2.8

4.6

88.4

32.2

1.3

A028670

PanOcean

6,290

7,200

3.4

21.1

1.3

11.1

61.8

6.3

0.0

Consumer

A018880

HanonSystems

11,850

13,000

6.3

20.6

3.2

9.8

4.9

16.1

0.6

Discretionary

A064960

S&TMotiv

51,000

65,000

0.7

9.0

1.0

4.6

146.2

11.6

2.4

A161390

HankookTire

58,700

75,000

7.3

8.9

1.1

4.8

(6.0)

13.0

0.7

A071840

LotteHimart

68,900

90,000

1.6

10.7

0.8

6.3

25.7

7.8

0.7

A034230

Paradise

14,700

17,500

1.3

n/a

1.3

143.0

Turnedneg

(1.1)

2.0

Consumer

A033780

KT&G

112,500

140,000

15.4

14.7

1.9

7.6

(14.4)

14.3

3.4

Staples

A051900

LGH&H

953,000

1,210,000

14.9

24.7

5.2

15.3

13.9

22.8

0.8

HealthCare

A243070

Huons

77,000

71,000

0.5

17.2

3.9

12.1

79.4

25.8

0.0

A145720

Dentium

58,700

68,000

0.6

21.4

2.8

15.2

53.7

24.4

0.2

Financials

A105560

KBFinancialGroup

54,900

71,000

23.0

6.6

0.7

0.0

48.2

10.5

3.5

A086790

HanaFinancialGroup

48,300

59,000

14.3

6.8

0.6

n/a

49.8

8.6

3.5

A032830

SamsungLifeInsurance

113,000

140,000

22.6

13.9

0.7

n/a

(26.7)

0.1

2.0

A071050

KoreaInvestmentHoldings

64,200

95,000

3.6

8.5

1.0

n/a

71.9

12.9

2.1

IT

A029460

KCTech

26,150

27,000

0.9

13.0

2.1

n/a

39.9

19.3

0.6

A005930

SamsungElectronics

2,324,000

2,800,000

301.6

9.0

1.5

3.6

88.7

20.0

0.3

A000660

SKHynix

68,700

84,000

50.0

4.7

1.4

2.4

258.1

36.4

1.2

A095610

TES

30,200

37,000

0.6

11.2

3.0

6.9

54.6

30.8

0.8

A036570

NCsoft

396,000

500,000

8.7

17.3

3.7

10.3

83.9

24.0

1.4

TelecomServices

A017670

SKTelecom

252,000

310,000

20.3

8.0

1.0

5.4

52.6

15.2

3.6

Utilities

A015760

Kepco

43,100

54,000

27.7

6.2

0.4

4.6

(37.1)

6.1

3.5

Note:BasedonSep1close

Source:WiseFn,SamsungSecurities

Contents

USstockmarketatitspeak?p3Sectorview p7

Appendix p10

Appendix

SectorVEMmodel

Asthenamesuggests,oursectorVEMmodelratestherelativeattractivenessofsectorsbasedonvaluation,earnings,andmomentum.WeusetheKospiasabenchmark.Valuationismeasuredbythez-scoreof12-monthforwardP/Erelativeto10-yeardata.EarningsaremeasuredbyEPSforecastchangesoverthepastthreemonths.Momentumismeasuredbyshare-priceperformanceoverthepastthreemonths.Eachfactorcanhaveapositiveandnegativevalue.Forexample,‘positivevaluation’(PV)meansthesectoristradingatadiscounttothebenchmark.‘Positiveearnings’(PE)meanstheearningsoutlookisrelativelystrong.‘Positivemomentum’(PM)meansshareshaveoutperformedtheKospi.Bycombiningthesefactors,wehaveidentifiedeightphasesastockcanbein,andforeachphase,oneoffourreadingsispossible:valuetrap,cheap,expensive,andovervalued.Asforsectorclassification,weusedWI26standardsasprovidedbyWiseFn.Back-testingWI26sectorperformancesagainsttheKospisuggeststherecommendationsarevalidbasedonperformancesoverthefollowing1-3months.Butasinvestmentrecommendationsaremadeonaweeklybasis,wesetaone-monthinvestmenthorizon.

SectorVEMmodel

Valuetrap

Cheap

Expensive

Overvalued

PV NV

NE

PE

NE

NM

PM

NM

PM

NM

PM

NM

PM

Note:Using1-monthinvestmenthorizon;

Basedonstrategicmodel,thuscandifferfromequityanalysts’opinionsV:Valuation,E:Earnings,M:Momentum,P:Positive,N:Negative

Source:SamsungSecurities

KospiCompass

OurKospiCompassisthesynthesisofaTechnicalCompassandFundamentalCompasstodeterminewheretheKospiis.Solelydata-based,itpaysnoheedtoanalysts’subjectiveideas.TheTechnicalCompassusesfourtechnicalindicators(seetablebelow)toidentifytheKospi’sphase.Ifthecombinedscoreofthetechnicalindicatorsisbetween-1and0,themarketisdeemedtobeoversold.Acombinedscoreof1to3putsthemarketinabearphase;4to5inaneutralphase;6to8inabullphase;and9to10atoverbought.TheFundamentalCompassissimilartotheVEMmodel,exceptthatitmeasurestheKospiitself(ratherthanasector’sattractivenessrelativetothebenchmark)basedonvaluation,earnings,andmomentum.Asaresult,theVEMmodel’s‘valuetrap’and‘expensive’phasesareusedidenticallyfortheFundamentalCompass,whilethe‘overweight’and‘underweight’phasesarere-termed‘bull’and‘bear.’

Technicalcompass

Indicator Measures

GroupMomentumOscillator Above90%:5pts;60%-90%:4pts;40%-60%:3pts;10%-40%:2pts;be