Investment Strategy Issue

Preferred stocks
Big benefits from policy changes
Contents
I. Preferred stocks were strictly sidelined..... 2 II. Cross-country comparison of preferred stock discount ............................................................ 6 III. Discount factors are disappearing ....... 10 IV. Merits of preferred stocks to draw attention ........................................................................ 16 V. Top picks ..................................................................... 20

April 15, 2013

Markets disinterest vs. rapid removal of discount

The price gap between preferred and common stocks currently stands at 65% with preferred nearing record lows compared to common since the Asian financial crisis in 1997-1998. In the 2002 report, The value of corporate voting rights and control: A cross-country analysis, Tatiana Nenova of the World Bank presented a model to analyze and interpret the security-value differences between share classes, which still proves effective although more than a decade has passed. According to the report, the price gap averaged 48% in Korea and is explained at 17%p law enforcement, 11%p investor protection, 12%p takeover regulations, 3%p power-concentrating corporate charter provisions and 5%p others. A decade after the reports release, the discount factors have quickly been removed but preferred stocks are still not in the scope of investors interest.

Prime beneficiaries of the new administrations policy changes

The market has long neglected preferred stocks and their discount is fundamentally owed to the difference in the voting rights value between controlling and minority shareholders. The value represents each partys accessibility to enterprise value (EV) and is a function of corporate transparency. With greater transparency, controlling shareholders private profits shrink and minority shareholders profit erosion diminishes. That in turn narrows the difference in EV enjoyed by the two parties and leads to a fast recovery of the value of preferred stocks, which by nature have no attached voting rights. For the past two years, the controlling shareholders abusive practice has been curbed by the revised commerce law and gift taxes imposed on the conglomerates habit of awarding excessive orders to their affiliates. Moreover, the main idea of the new administrations proposal of economic democracy as one of its four 2013 economic pillars is to empower minority shareholders and improve corporate transparency by introducing the multiple derivate action and cumulative/electronic voting systems. Second, vigorous holding company transitions by corporations and the resulting stable ownership help ease fears about hostile M&As, which devalued preferred stocks in the past. We believe the falling value of voting rights will lead to a re-valuation of preferred stocks. Assuming the price gap between preferred and common stocks would narrow to 2-20%, on par with the level of advanced countries, preferred stocks upside potential would be more than 100%.

Preferred stocks deserve fresh attention

Preferred stock prices tend to move in lockstep with their associated common stocks. But we believe preferred stocks merit more than being a proxy investment for common stocks for three reasons. First, a thinner price premium for voting privileges is unavoidable given the new government's commitment to improve management transparency. To reflect a narrower premium, preferred stocks now trade at all-time lows. We believe preferred stocks deserve reassessment. Second, there is a list of 39 preferred stocks that offer dividend yields higher than the 2.85% average of corporate bond yields (AA-). With a 5.5% average yield, preferred stocks would make an attractive investment in the low-growth and low-interest rate environment. Third, the preferred stocks' trading liquidity has been undermined by constant share price drops. But considering a large free-float, we expect liquidity to quickly pick up once the stock prices rebound. We selected the top picks among attractive preferred stocks, including Samsung Electronics preferred, considering dividend, valuation, financial stability and market cap.

Hoon Lee, CFA

82-2-3276-6158 hoon.lee@truefriend.com

JJ Park
82-2-3276-6560 jj.park@truefriend.com

Contents

I. Preferred stocks were strictly sidelined ................................................................................................................ 2

1. Preferred stocks trading at record lows compared to common 2. Reasons for extreme undervaluation of preferred stocks

II. Cross-country comparison of preferred stock discount ................................................................. 6

1. Causes of discount 2. Case study: Crawford

III. Discount factors are disappearing.......................................................................................................................... 10

1. Shrinking value of voting rights 2. Disadvantages of preferred stocks are not significant 3. Healthy preferred stocks to draw attention with the implementation of unqualified preferred stock withdrawal system in Jul

IV. Merits of preferred stocks to draw attention ................................................................................................. 16

1. Narrower price gap between preferred and common to 2-20% 2. Attractive dividend yields in the low-growth period 3. Decent investment returns despite de-rating so far 4. Attention to small and mid-cap stocks

V. Top picks ......................................................................................................................................... 20

1. Top pick selecting criteria: Dividend yield, price gap with common stocks, market cap and financial structure 2. Top 30 preferred stocks by dividend yield 3. Top 30 preferred stocks by price gap 4. Top 30 preferred stocks by market cap

Issue report

I. Preferred stocks were strictly sidelined

1. Preferred stocks trading at record lows compared to common
Price gap between preferred and common stocks stands at 65% The prices of the top 50 preferred stocks by market cap now stand at 35.4% of their respective common stocks, translating to a 64.6% price gap. Looking at the past 20 years, the price gap between preferred and common stocks was a mere 10-25% until 1993. But preferred stocks with no voting rights started to lose investor appeal as concerns grew about hostile M&A attempts on the governments decision to lift the ceiling on foreign ownership of Korean companies. Accordingly, the gap temporarily widened to ~75% right after the International Monetary Fund (IMF) bailout in 1998. While the price difference briefly narrowed to 20%, the gap moved to widen in 2007 and after. Except during the IMF bailout, preferred stocks now trade at record lows compared to common.
Figure 1. Relative price of preferred stocks compared to common
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Apr-93 Apr-96 Apr-99 Apr-02 Apr-05 Apr-08 Apr-11

Note: Relative price of preferred stocks (top 50 by market cap) =preferred stock prices/common stock prices (for preferred stocks in top 50 market cap group) Source: Korea Investment & Securities

2. Reasons for extreme undervaluation of preferred stocks

Preferred stocks are overly discounted to common due primarily to their features as being non-voting and non-cumulative. Other reasons include little trading volume, disinterest among investors and low dividend yields. Most preferred stocks traded on the exchange are non-cumulative, non-participating and non-voting equity securities that pay an additional dividend equal to 1% of par value (e.g., W50 for W5,000 par value). The preferred stocks of such a nature were first issued by Dongyang Beer (now Oriental Brewery or OB) in 1986. Companies rushed to issue preferred stocks as a way to raise capital with little worry about having to control stake dilution and dividend. And the vigorous issuance continued until the government announced plans to amend the regulation related to non-voting preferred stock issues in Mar 1990. Non-voting preferred stocks with a fixed additional (1%) dividend were a less attractive investment compared to bonds due to small dividend payout, and compared to commons stocks as well due to non-voting status.

Disadvantages of non-voting and non-cumulative preferred stocks

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Table 1. Preferred stock types

Type Old preferred stock Features - Senior to common in terms of dividend or distribution of remaining assets - Receives 1%p more dividend than common based on face value - Non-cumulative, non-participating and perpetual - Senior to common in terms of dividend or distribution of remaining assets - Minimum dividend rate is determined at the time of issue in the articles of association; Converted to common at a 1:1 ratio after a specified period (three to 10 years) - If a dividend is missed, it accumulates and must be paid before the stock can be converted to common - Cumulative, participating and term-based - Unpaid or omitted dividend in any one term is accumulated and paid in any future term - The right to receive a dividend expires whenever the dividend is not declared - Unpaid or omitted dividend in any one term need not be paid in any future term - Along with a common stock, a participating preferred has the opportunity to receive an extra dividend equal to a specified rate - Receives only the dividend that equals a specified rate and cannot participate in an extra dividend - Holders have the right to vote - Holders do not have the right to vote (most preferred stocks in Korea are such type) - Includes the option to convert to common shares at a fixed price after a predetermined date - Holders have the right to redeem the stock at a preset price after a defined date - Has seniority in its right to receive a dividend

New preferred stocks

Cumulative preferred stock Dividend accumulation Non-cumulative preferred stock Participating preferred stock Participation Non-participating preferred stock Voting rights Preferred stock with voting rights Preferred stock without voting rights Convertible preferred stock Convertibility/ redeemability Redeemable preferred stock

Source: Korea Investment & Securities, Analysis of Determinants in Price Gap between Preferred Stocks and Common Stocks by Lee Sang-il (2011)

Table 2. History of preferred stock issues

Period Description - Koreas first preferred stocks were issued in May 1969 for Jeonju Paper that was fully acquired by Korea Investment Development Corp. (now UBS Hana Asset Management) - Preferred stocks were more attractive than common in terms of rights as they were issued during times of urgency such as company restructuring - Companies issued preferred stock that featured voting rights, cumulative, participatory and with a duration of three years to perpetual - Preferred stock without voting rights was guaranteed a dividend at a level similar to the key interest rate - The government encouraged the issuance of preferred stock by revising the Furtherance of the Capital Market Act that allowed a company to issue preferred stock without voting rights up to 50% of all shares - Dongyang Beer (OB) first started issuing 1% preferred stock without voting rights (same type as currently in use) that pay 1%p more dividend based on face value than common stock dividend - Some scholars challenged the legality of the 1% preferred stock without voting rights but it was widely issued thanks to a booming stock market and positive response from investors - The government did not place any restrictions regarding issuance other than a 15% discount to the issue price of common shares - With the stock markets drop from 2H89, controlling shareholders first started selling the 1% preferred stock - As preferred stocks were considered the main culprit behind falling share prices, the Ministry of Finance (now the Ministry of Strategy & Finance) turned toward curbing the issuance of 1% preferred shares, which helped maintain the price gap between preferred and common at a constant level - Investment sentiment on preferred stocks eroded significantly due to amended related laws in 1994 - The Securities Supervisory Service (now Financial Supervisory Service) reintroduced measures to stabilize supply/demand of preferred stock without voting rights in Nov 1994 to promote the stocks - Common stock with voting rights gained more relative value due partly to measures taken by companies to protect management rights with the legalization of hostile takeovers in 1998 - New preferred shares emerged in 1999-2000, the interim dividend payment was introduced and preferred stocks gained strength on economic recovery - After the price gap between preferred and common stocks repeatedly kept narrowing and widening, the gap has been expanding since 2008

1) Introductory period (pre-1986): Issuance of corporate bond-type preferred stock

2) Active period (1986 to Feb 1990): Emergence of 1% preferred stock without voting rights

3) Regulatory period (Mar 1990 to Dec 1996)

4) Stabilization period (Dec 1996 to present)

Source: Analysis of Determinants in Price Gap between Preferred Stocks and Common Stocks by Lee Sang-il (2011)

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1) Overly neglected by investors due to non-voting status Preferred stocks with non-voting rights were very ignored by investors as hostile M&A attempts and the succession of management rights became headline issues in Koreas stock market. Non-voting preferred stocks went through the first round of de-rating in 1994 when the raised limit on foreign ownership and repeal of the 10% ownership ceiling in a general corporation upon the amendment to the Securities and Exchange Act in Jan stoked concerns about hostile M&A attempts. Non-voting preferred stocks were even considered non-stocks by market investors. The price difference between preferred stocks and common widened to as much as 75% during the IMF bailout. After brief ups and downs, the relative price of preferred stocks compared to common has been on a downturn since 2007. Non-voting preferred stocks were left out of investors interest as corporate governance and stable management rights became issues in Koreas stock market. In reality, there were only limited cases of foreign investors making hostile M&A attempts toward Korean companies as seen in the management threat to SK Corp. from Sovereign Asset Management. But voting rights became a very critical concern for investing in Korean companies, which we attribute to their relatively weak management transparency.
Table 3. Price gap between preferred and common stocks
Key factors for determining preferred stocks price gap Preferred stocks price gap to common = value of voting rights (corporate transparency) dividend yield
Source: Korea Investment & Securities

Basically, the price gap between preferred and common stocks reflects the value of voting rights, which is closely correlated with corporate transparency. That is, the value of voting rights represents different accessibility to EV between controlling and minority shareholders. With no-voting rights attached, preferred stockholders have much weaker accessibility to EV than holders of common stocks. Much research suggests a 2-37% premium is placed on the voting rights in the global market, or 2-20% in advanced countries where transparent management is in place. With greater transparency, the controlling shareholders' private profits shrink and minority shareholders' opportunity costs significantly diminish. That in turn narrows the difference in EV enjoyed by the two parties. But the controlling shareholders of Koreas conglomerates had a habit of awarding excessive orders to affiliates as a way to maximize private wealth. In addition, the controlling shareholders took advantage of the circular ownership structure to control the entire group with a tiny stake and to use the business for private interest. The abusive practices of the controlling shareholders were a major cause of the so-called Korea discount. Minority shareholders can oppose any controlling shareholders decision that may undermine corporate transparency by exercising voting rights at the general shareholders meeting. A lack of the voting rights can put preferred stockholders at a disadvantage compared to common stockholders, which leads to a price discount. The concerns are deepening with some companies buying back only common stocks, not preferred, when they decided to support share prices with buybacks.

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2) Weak appeal as a dividend vehicle Koreas preferred stocks lost much of their appeal to investors due to the features such as fixed additional dividend of 1% (e.g., W50 for W5,000 par value) and non-cumulative dividend payment. To offset the disadvantages owed to non-voting rights, it is essential to offer policies to enhance shareholder value, such as a lofty dividend, but the additional 1% was not attractive enough to draw investors interest to preferred stocks. Furthermore, the old preferred stocks do not ensure a stable dividend payment due to their non-cumulative feature. As preferred stocks lost appeal to long-term investors as a dividend vehicle, there was nothing to buttress the prices when the stock market went through a downturn period. Common stocks can rebound on bargain-hunting demand although the stock market is trending downward, but preferred stocks are neglected, resulting in high price volatility.
Table 4. Key features of old preferred stocks currently in circulation
Description 1% dividend Non-cumulative - When a company decides to pay a common stock dividend, a 1%p based on face value (W5,000 in face value would see an additional W50 per share) is added to the common stock dividend and then paid - Holders would not receive missed dividends but they would receive dividends in a given year if the company decides to pay dividends the same year Outcome Low dividend appeal Low dividend stability

Source: Korea Investment & Securities

3) Limited trading volume and investors disinterest not causes but consequences It is true that small trading liquidity and disinterest among investors have led to a lengthy de-rating of preferred stocks. But the problems are not causes but the consequences of preferred stocks poor share performance. That is, constant share price drops undermined trading liquidity and investors interest in preferred stocks, which created a vicious cycle by dragging the prices down further.

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II. Cross-country comparison of preferred stock discount

1. Causes of discount
Features of preferred stocks vary by country Many countries allow preferred stocks to be issued but their features vary by country. Preferred stocks with different voting privileges than common stocks are actively issued in Brazil, Canada, Denmark, Finland, Germany, Italy, Norway, Mexico, Sweden and Switzerland along with Korea. In those countries, the major shareholders use preferred stocks as a way to raise capital with no threat to controlling rights. Countries such as Australia, Chile, France, Hong Kong, South Africa, the UK and US also allow preferred stocks with different voting rights by law but the actual issue is not as active. In contrast, discriminatory voting rights are prohibited in some countries such as Belgium, China, Japan, Singapore and Spain. Preferred stocks offer a fixed dividend and contain a convertible feature to common stocks in Southeast Asian countries such as Indonesia, Malaysia, the Philippines, Taiwan and Thailand. In this report, we narrow our analysis to general preferred stocks traded in Koreas stock market, i.e., preferred stocks with discriminatory voting privileges and dividend and a non-convertible feature. In this section II, we refer to preferred stocks with those features as preferred stocks. Preferred stocks tend to trade at a discount to common in the worlds stock markets. In the 2002 report, The value of corporate voting rights and control: A cross-country analysis, Tatiana Nenova of the World Bank presented a model to analyze and interpret the security-value differences between share classes.
Figure 2. Preferred stocks discount by country
(%) 60 50 40 30 20 10 0

Our analysis is on preferred stocks with discriminatory voting rights and dividend and non-convertible feature

Generally, preferred stocks are discounted to common

Sweden

Brazil

Mexico

US

UK

Canada

South Africa

Australia

France

Denmark

Norway

Common law

French civ il law

Scandinav ian civ il law

Note: 1) Preferred stock discount=100(preferred stock price/common stock price*100) 2) Based on 2002 data Source: Nenova (2002), Korea Investment & Securities

Germany

German civ il law

Korea

Chile

Italy

Issue report

Price gaps varied by country: A much wider gap in French civil law countries

Although more than a decade has passed, Nenovas report still resonates and presents important implications. According to the report, first, preferred stocks trade at a discount to common in most countries. Second, the price gap varies by country. For example, the gap was less than 5% in the US, Canada, Denmark and Sweden whereas it was as wide as 50% in Korea. Third, the legal environment appears to affect the price gap. The magnitude of price difference varied widely even across developed countries, and the gap was much wider in French civil law countries. According to Nenovas analysis, the price gap was lowest for the Scandinavian civil law group of countries, followed by common law countries, German civil law countries and French civil law countries. The report says that such a minimal discount to preferred stocks in Scandinavian civil law countries was because the legal environment and social norms discourage the controlling parties from abusing the minority. In contrast, the price gap was wide in French civil law countries where investor protection is weaker. As such, the legal protection of investors and minority shareholders would be a key variable to the price gap between preferred and common stocks.
Figure 4. Rank of investor protection in the World Banks Doing Business survey
(rank) 90 80 2012 2013

Governance structure and investor protection by law are key variables to the price gap between preferred and common stocks

Figure 3. Price gap between preferred and common stocks by legal origin
(%) 25

20

70 60 50

15

10

40 30

20 10

0 French civil law German civil law Common law Scandinavian civil law 0 France Italy Korea

Source: Nenova (2002), Korea Investment & Securities

Source: The World Bank, Korea Investment & Securities

Koreas investor protection is fast improving according to World Bank survey

Of note, Koreas legal environment for investor protection has fast improved recently. The World Bank has worked out an investor protection index in its Doing Business survey. Korea made a great leap from 79th, similar to France, in 2012 to 49th in 2013 in terms of investor protection. Although there is a still long way to go, we view such rapid improvement in Korea as encouraging. Then to what degree could the legal environment such as a corporate governance mechanism and investor protection affect the preferred stocks discount? Nenova suggests the legal environment variables explain 68% of the cross-country variation in the value of preferred stocks. That is, the price gap will narrow when there is a refined legal framework such as tighter enforcement, better general investor protection, stricter takeover regulations and less use of corporate charter provisions concentrating control in the hands of dominant shareholders. For example, Nenovas analysis showed that the price gap was largest in Korea at 48%, and the gap would be reduced by 17%p with law enforcement, 11%p with investor protection, 12%p by takeover regulations and 3%p by corporate charter provisions (together 43%p). Given the analysis, the preferred stocks discount to common in Korea could ease from 48% to 5% if the legal environment is improved to match the level of developed countries.

If legal environment improves dramatically, Korean preferred stocks discount to common could ease from 48% to 5%

Issue report

Figure 5. Price gap between preferred and common stocks in Korea and influence by legal environment variable
(%, %p) 60 50 40 30 Inv estor protection: 11%p 20 Takeov er regulation: 12%p 10 Corporate charter prov isions: 3%p 0 Price gap (common stock price-pref . stock price) Af ter ref ined legal f ramework Law enf orcement: 17%p

Note: 1) Price gap = 1 - (preferred stock price/common stock price) 2) Based on 2002 data Source: Nenova (2002), Korea Investment & Securities

2. Case study: Crawford

US-based Crawford: Family-owned company, Class A (preferred) value amounts to 80% of Class B (common) The case of US-based Crawford & Co. also provides some implications of preferred stock investment. The company processes outsourced insurance claims and is owned by the Crawfords with a 58% stake. Crawford has two classes of common stock outstanding: Class A without voting rights and Class B with rights. Instead of voting rights, Class A Common Stock offers a ~1%p higher dividend yield than Class B, amounts to 80% of Class Bs market cap and accounts for 30% of the total EV.
Figure 7. Crawfords EV
(USD mn) 600 Others 24.63% 500

Figure 6. Crawfords shareholder structure

400 300 Crawford family 57.9% Suntrust Banks Inc. 6.11% 200

F&C Asset 5.08%

100 0 CRD/A CRD/B Market cap Cash Debt Enterprise value

Blackrock 6.28%

Source: Bloomberg, Korea Investment & Securities

Source: The World Bank, Korea Investment & Securities

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Price gap between Crawfords preferred and common stocks fluctuates along with market conditions

Theoretically, Crawfords Class A Common Stock does not deserve a discount to Class B Common Stock because of the companys very stable governance structure with a near-60% majority shareholder s stake and a sizable market cap (80% of Class B) of preferred stocks (Class A). Since Class A shares offer a 1%p higher dividend yield than Class B, it would be no surprise if the preferred stocks trade at a premium to the common. We examined how the price gap between Crawfords preferred and common stocks trended since 1991. In 1994-1997 and in 2004-2006, the gap was near zero or preferred stocks traded at higher prices than common. Interestingly, the two periods coincide with when the economy was relatively stable after a recession. In contrast, Crawfords preferred stocks traded at much lower prices than common when the economy was shaky in the early 1990s, early 2000s and after 2008.

During economic instability, Crawfords preferred stocks are discounted due to less effective reflection of inside information

Then, how does economic instability lead to a discount for Crawfords preferred stocks that are the same as common, other than with respect to voting rights, despite the stable governance structure? The answer lies in the markets view that common stocks held by majority shareholders reflect information faster than preferred stocks at a time of large external uncertainties. Since investors believe a companys inside information is faster reflected in common stocks, they pay a premium over common.
Figure 8. Price gap between Crawfords preferred and common stocks
(%) 60 50 40 30 20 10 0 (10) 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Source: Bloomberg, Korea Investment & Securities

Investment on Koreas preferred stocks promising as financial crisis-related uncertainties subsided and the nations institutions are fast improving

Based on Nenovos report and Crawfords example, the price gap between preferred and common stocks tends to narrow with a better corporate governance structure, stronger investor protection and less economic uncertainties. If that is true, then there is a good chance the price gap will likely shrink worldwide. That is because the uncertainties that have been fueled by the global financial crisis since 2008 are gradually being addressed albeit at a very moderate pace. In particular, serious consideration is needed for Corporate Koreas preferred stocks since they used to post the widest price gap with common due to the conglomerates ownership structure and legal and institutional issues. As illustrated by the World Banks Doing Business 2013, Korea is fast improving in terms of its corporate governance and investor protection. Despite such positive changes, preferred stocks are now valued less than in 2002 with the price gap expanded to 64.6% now.

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III. Discount factors are disappearing

1. Shrinking value of voting rights
1) Animated holding company transition and ensuing stable management rights Voting rights value shrinks The practice of valuing preferred stocks less than common originates in the threat of hostile M&A. At a time of animated M&A activities, voting rights matter and thus investors turn away from preferred stocks. However, Koreas top 10 companies by market cap include five holding firm affiliates (LG Chem, LG Electronics, LG Household & Healthcare, AmorePacific and Doosan) and three Samsung and Hyundai Motor affiliates (Samsung Electronics, Samsung F&M and Hyundai Motor). In effect, a hostile M&A strategy could not be used for the above firms due to the stable ownership for the former group and the market cap size for the latter. S-Oil and Shinyoung Securities, the remaining two in the top 10, cannot be deemed as exposed to any M&A risk. Moreover, the shift to a holding company is gaining pace among not only conglomerates but small/midsize enterprises (SMEs). While each company has its reasons, the transition is taking place mainly to strengthen the share ownership by spinning off a holding company and an operating entity from a main company then followed by a share swap. That in turn stabilizes management rights. Indeed, four (SK, LG, GS and Hanjin) of the 10 largest corporate groups in Korea have established a holding company, the path taken by 33 listed firms in Korea over the past five years. Considering the holding company transition is the most efficient way to secure stable management rights, more companies will likely follow suit and in turn there would be less concern about hostile takeover. Then, the threat of M&A should not further widen the price gap between preferred and common stocks.
Table 5. Listed companies holding company transition over the past five years
Holding company Woongjin Holdings JW Holdings Chinyang Holdings S&T Holdings SBS Media Holdings Dongsung Holdings LS Corp Hitejinro Holdings Poongsan Holdings Iljin Holdings KISCO Holdings KB Financial Group Pulmuone Holdings Doosan Hansae Yes24 Holdings Youngone Holdings CNH Established Jan 1, 2008 Jan 1, 2008 Jan 7, 2008 Feb 5, 2008 Mar 4, 2008 May 14, 2008 Jul 2, 2008 Jul 3, 2008 Jul 3, 2008 Jul 4, 2008 Sep 3, 2008 Sep 29, 2008 Sep 30, 2008 Jan 1, 2009 Jun 30, 2009 Jul 2, 2009 Sep 30, 2009 Subsidiaries 7 6 9 3 8 7 5 4 4 6 3 9 6 9 2 2 6 SubSub-subsubsidiaries subsidiaries 15 3 0 4 9 3 21 8 2 5 1 6 9 9 1 1 1 1 0 0 0 0 0 1 0 0 0 0 1 0 2 0 0 0 Holding company Daesung Holdings Established Oct 1, 2009 Subsidiaries 9 2 12 3 8 3 4 4 2 9 6 3 10 11 15 4 Subsubsidiaries 0 12 4 4 20 0 5 1 1 19 0 0 3 5 4 10 Sub-subsubsidiaries 0 1 0 0 1 0 0 0 0 0 0 0 0 0 0 0

Hanjin Shipping Holdings Dec 1, 2009 KC Green Holdings Jan 1, 2010

Wooree Lighting Holdings Jan 1, 2010 Kolon Corp. CS Holdings Humax Holdings SJM Holdings Hanmi Science Jan 1, 2010 Jan 5, 2010 Mar 31, 2010 Jan 1, 2011 Jan 1, 2011

Daesung Group Holdings Jan 1, 2011 BS Financial Group DGB Financial Group Samyang Holdings InterPark Corp. Nice Holdings AK Holdings Mar 15, 2011 May 7, 2011 Nov 3, 2011 Jan 1, 2012 Aug 23, 2012 Sep 1, 2012

Source: Fair Trade Commission, Korea Investment & Securities

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2) New administrations better transparency policy empowers minority shareholders The preferred stock discount is owed to the difference in voting rights value between controlling and minority shareholders. The value is important for a company facing a hostile takeover. However, what it fundamentally represents is each shareholder partys accessibility to EV that is linked to corporate transparency. Similar to their peers in developed countries, majority shareholders in Korea enjoyed surplus profits, which were not shared with minority shareholders, via a management rights premium when selling their companies. Not only that, controlling shareholders have often been cited as maximizing private profits through the practice of unfairly awarding affiliate orders to a company they set up. Such opaque transparency gave rise to a different level of accessibility between controlling and minority shareholders. That in turn led to an excessive price plunge for preferred stocks whose rights are not guaranteed due to the lack of voting rights. But on Mar 28, the new administration proposed economic democracy as one of the four economic policy directions along with jobs creation, livelihood security and risk management. Policies for economic democracy include a ban on conglomerates practice of unfair internal trade among affiliates, reinforced measures for pension/public funds voting rights execution, introduction of a multiple derivative action system and phase-in of the cumulative/electronic voting systems. As the new administrations corporate policy focuses on empowering minority shareholders and improving corporate transparency, such efforts will considerably narrow the price gap between preferred and common stocks.
Table 6. Four major economic policies
Jobs creation Aggressive management of macro policies Tasks Establish favorable conditions for the dual economic drivers of domestic demand and exports Improve employment-friendly policies
Source: Korea Investment & Securities

Stabilize public welfare Stabilize consumer prices Ease financial, housing and education burdens of low-income households Enhance customized welfare system

Economic democracy Bolster management transparency and responsibility Provide a system for fair competition Protect the economically weak

Enhance risk management Strengthen risk response plans Provide tools to counter each risk factor

First, the practice of affiliates awarding orders to a company governed by their controlling shareholder is a good example of controlling shareholders maximizing their profits at the cost of minority shareholders profit erosion. Such a practice will likely be strictly regulated by imposing gift taxes, expanding the items defined as unfair affiliate aid and adopting a multiple derivative action system.
Table 7. Multiple derivative actions
Policy Description - Intended for shareholders that have held more than 5/100,000 of total shares in a parent company for more than six months - Shareholders of a parent company that suffered losses due to illegal activities by a subsidiary can file a lawsuit against the board directors of the subsidiary - Under current law, shareholders of a parent company can file a lawsuit against the management of its subsidiary but the multiple derivative action (double derivative action) allows shareholders to bring a derivate suit against a grandchild company as well

Multiple derivative action

Source: Korea Corporate Governance Service, Korea Investment & Securities

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In particular, a derivative action allows shareholders to file a lawsuit against the companys directors and/or employees for the companys losses triggered by their illegal action. For example, let us say a parent companys controlling shareholder established a subsidiary and used it to generate private profits. In that case, a minority shareholder of the parent company can impose a sanction due to the practice. The same can be done even if the involved company was a sub-subsidiary. At present, a bill to adopt the multiple derivative lawsuit system is being proposed to the National Assembly. Once the system is introduced, a minority shareholder of a parent company can file a damages claim on behalf of a subsidiary/sub-subsidiary against a controlling shareholder s private profiteering. Second, the electronic and cumulative voting systems are very effective in strengthening minority shareholders profits. A phase-in of the systems would bring a significant change to minority shareholders participation in the execution of management rights. 1) The electronic voting system is an alternative to the shadow system which reflects the voting rights of minority shareholders who are absent at a shareholders meeting in proportion to the votes cast by the shareholders present at the meeting. The electronic voting system will make it easier for minority shareholders who are not present at the meeting to exercise their rights. 2) When electing two or more board directors, the cumulative voting system grants each share an identical number of voting rights as the number of board directors to be elected. As the system allows minority shareholders to cast all their votes to a single candidate, it increases the chance for a candidate who represents minority shareholders profits to win the election. At present, only 34 or 5% of Kospi-listed firms have adopted the system.
Table 8. Key policy directions of the new administration
Policy Description - When electing two or more directors, shareholders may cast votes equal to the number of shares owned multiplied by the number of directors to be elected - Minority shareholders can pool their votes to elect a director who can represent their interests - No. of listed companies that have adopted cumulative voting: Kospi 34 (4.79%) and Kosdaq 27 (3.03%) - If policy measures are finalized in 1H13, a public hearing will be held in Aug to enforce the adoption of cumulative voting - Allows minority shareholders who cannot attend a shareholders meeting to exercise their votes online - Cuts the cost of holding a shareholders meeting and can prevent major shareholders from making one-sided decisions by encouraging shareholders, including minority, to participate in the shareholders meeting - No. of listed companies that have adopted electronic voting: Kospi 74 (10.42%) and Kosdaq 71 (7.98%) - If policy measures are finalized in 1H13, a public hearing will be held in Aug to enforce the adoption of electronic voting

Cumulative voting

Electronic voting

Source: Korea Corporate Governance Service, Korea Investment & Securities

Third, the government has amended the Commerce Law over the past two years to improve corporate transparency. Related efforts include tax revision to levy gift taxes on controlling shareholders who profited from the practice of unfair internal trades, prohibiting business opportunity appropriation and expanding the definition of directors2 in restricting trade with their own companies.

Directors earlier meant only board members but now include major shareholders and special-interest parties. Such measures have legally stipulated controlling shareholders can no longer seek private profits via affiliates, which before was routine. As minority shareholders profits will no longer be eroded by the controlling shareholders unfair practices, the difference in the value of their voting rights should narrow considerably.

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Table 9. Deemed gift tax imposed on companies favoring subsidiaries/affiliates

Issues & reasons for revision Revised commercial law - Establish grounds for imposing a gift tax on profits made from transactions between special-interest parties - Shareholders subject to the tax are major shareholders (individuals) who are the controlling shareholders (incl. relatives) of a benefiting entity whose stake in the entity (incl. indirect ownership) exceeds the limited ownership stake of 3% - Conditions for taxation: Percentage of transactions between special-interest parties exceeds the normal transaction percentage of 30% Deemed gift tax on profits: Benefiting entitys NOPLAT x (transaction percentage with special-interest party - 30%) x (stake ownership - 3%)

Deemed gift tax imposed on companies favoring subsidiaries/affiliates

Favoritism toward subsidiaries/affiliates allows major shareholders to make unfair profits and erodes the value of minority shareholders

Source: Korea Investment & Securities, Presentation of main revisions to the Commercial Law for companies (Ministry of Justice, Apr 2011), Trends in Capital Market System (Capital market analyst Kim Su-yeon, May 2011)

2. Disadvantages of preferred stocks are not significant

Differences exist in dealing with preferred stocks but do not necessarily mean they are disadvantaged A common misconception in the stock market is that companies discriminate against preferred shareholders. A notable example is the exclusion of preferred stocks during buybacks. But a closer look at the top 10 preferred stocks by market cap tells a different story. We found that not all preferred stocks were excluded from share buybacks and companies just followed different policies when dealing with their preferred stocks. Samsung Electronics, commanding the top spot in preferred stock market cap, carried out three share buybacks since 2005. Every time, it bought back both common and preferred stocks. It was also true for Samsung F&M. In contrast, Hyundai Motor started buying back only common stocks since its last simultaneous repurchase in 2005. LG Chem and LG Household & Health Care have also been steady buyers of common stocks. On the other hand, Doosan Corp., a long-time follower of common stocks during buybacks, cancelled preferred stocks along with common in Mar 2012, resulting in greater preferred shareholder value. This shows that companies have policy differences in dealing with their preferred stocks. But it does not necessarily mean preferred stocks are disadvantaged in shareholder friendly policy due to their low weighting of controlling shareholders.
Table 10. Treasury share purchases by major company
Company Samsung Electronics Date Sep 6, 2005 Jun 4, 2006 Mar 21, 2007 Apr 26, 2005 Oct 18, 2007 Hyundai Motor Jan 21, 2010 Sep 1, 2010 Oct 28, 2011 LG Chem LG H&H Samsung F&M Doosan Corp. May 18, 2005 Sep 28, 2006 Oct 2, 2012 Jan 27, 2012 Mar 8, 2012 (retired) Common 3,800,000 2,600,000 2,800,000 11,000,000 1,665,630 2,218,120 1,686,330 1,979,740 568,000 937,000 1,400,000 300,000 4,072,978
(shares)

Preferred 300,000 400,000 400,000 1,000,000 90,000 373,058

Source: Korea Investment & Securities

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3. Healthy preferred stocks to draw attention with the implementation of unqualified preferred stock withdrawal system in Jul
Introduction of the new system should prompt reassessment of preferred stocks and shed a new light on healthy stocks For investors, preferred stocks have not been an easy investment to trade due to their poor liquidity even considering their low market cap. But we believe such weak liquidity is the outcome of the stocks pullback. In 1993 and 1997 when preferred stocks were much favored by investors, their weighting of trading value in the Kospis total was large at 7% and 5%, respectively. But now, the figure is less than 2%. Given the shallow ownership of preferred stocks among major shareholders, the weighting of the shares that can be easily put on the market is heavy. Nevertheless, the trading value of preferred stocks is low for their market cap, and we believe the main reason is weak share prices. But if the stocks are properly reassessed in line with share price gains, the liquidity concern should ease substantially.
Figure 9. Trading value: Preferred stocks vs. Kospi
8% 7% 6% 5% 4% 3% 2% 1% 0% Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11

Pref ./Kospi 52-week av g. trading v alue

Source: Korea Investment & Securities

In addition, preferred stocks with poor liquidity will probably be designated as administrative issues or even delisted starting from this Jul. At present, some stocks with low market cap and scarce trading volume are experiencing sharp price fluctuations, which we believe contributes to investors distorted perception of preferred stocks. Under the new system, stocks with less than 100 shareholders in the business report, less than 50,000 listed shares as of the end of half-year, less than 10,000 monthly trading volume in a half-year or market cap remaining below W500mn for 30 straight days would be designated as administrative issues. Conditions for delisting would be the delisting of common stocks, less than 100 shareholders for two straight years, less than 50,000 listed shares for two straight half-years, or less than 10,000 monthly trading volume for two straight half-years. With the new rules, the overall undervaluation of preferred stocks due to the extreme movement of only a few should ease considerably.

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Table 11. Conditions for designation as administrative issues or delisting

Type Designated as administrative issues Common stocks designated as administrative issues Less than 100 shareholders in the business report Less than 50,000 listed shares as of end Formal requirement of a half-year Less than 10,000 monthly trading volume* in a half-year Market cap remains below W500mn for 30 straight days Qualitative requirement Delisting Delisting of common stocks Less than 100 shareholders for two straight years Less than 50,000 listed shares for two straight half-years Less than 10,000 monthly trading volume for two straight half-years Unable to meet a specified condition** after market cap falls short of requirement In case share transfer is restricted In case delisting is required to protect public interests and investors

* (no. of trading days in a half-year / no. of trading days for a given company in a half-year) x total trading volume in a half-year / 6 ** Specified condition: Market cap stays above W500mn for 10 straight days and for more than 30 days during the 90 days after being designated as an administrative issue Source: KRX, Financial News

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IV. Merits of preferred stocks to draw attention

As preferred stock prices tend to move in lockstep with their associated common, their correlation coefficient is as high as 0.95-0.98. For preferred stocks to become attractive, an excess return over common needs to be guaranteed. We believe preferred stocks merit attention as an alternative investment to common. First, given the preferred stocks undervalued status trading at all-time lows, the price gap between preferred and common stocks has only limited room to expand. As the Park administration is committed to improving management transparency, there will likely be a thinner price premium for voting privileges attached to common stocks and the resulting re-evaluation of preferred. Second, investment in preferred stocks can be rewarding given solid dividend yields and gains from share rallies. Among them, 39 stocks offer dividend yields of more than 2.85%, the average yield of corporate bonds rated AA-. Third, top-tier preferred stocks in terms of market cap realized similar returns as their common over the past 13 years even when overall preferred stocks passed through de-rating phases. Moreover, stocks with dividend yields of more than 3% performed better than their common. Fourth, investors are aggressively buying small and mid-cap stocks that have investment appeal. As such, attractive preferred stocks should also enter the scope of investors interest.

1. Narrower price gap between preferred and common to 2-20%

Reassessment of preferred stocks to begin in earnest Although there is room for discussion about preferred stocks appropriate price compared to common, the current gap of 64.6% with preferred nearing all-time lows seems excessive. Given the fundamental reason for the large price gap is preferred stocks discount to common due to no voting rights, the new governments commitment to improve management transparency should regulate the profit erosion among minority shareholders caused by the excessive influence of controlling shareholders and thus considerably diminish voting privileges. If corporate transparency improves to the level of advanced countries, the price gap between preferred and common stocks would narrow to 2-20%. If so, a valuation re-rating of preferred stocks should drive their upside to more than 100% from the current price level. As the price gap is more likely to narrow than widen, the room for a re-rating of preferred stocks seems noteworthy.
Figure 10. Relative share prices of top 50 preferred stocks by market cap to common
90% Pref ./Common stock price 80% 70% 60% 50% 40% 30% 20% 10% 0% Apr-93 Apr-96 Apr-99 Apr-02 Apr-05 Apr-08 Apr-11

Source: Korea Investment & Securities

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2. Attractive dividend yields in the low-growth period

Preferred stocks fat dividend yields As the price of preferred stocks is only 35% of their associated common, a 1%p more dividend policy for preferred stocks is giving them fat dividend yields. Among preferred stocks, 39 offer dividend yields higher than 2.85%, a level above the current market interest rate. Moreover, the average yield for the top 10 preferred stocks by dividend yield is as high as 7.9%. As the Korean economy has entered the low-growth period and bond yields are trending down, equity investors are lowering their expected rates of return. In such circumstances, the fat dividend yields of preferred stocks that beat the market interest rate would offer sufficient appeal for equity investors.
Table 12. Preferred stocks with higher dividend yields than corporate bond (AA-) yields
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Stock Daishin Securities pref. Bookook Securities pref. Doosan Corp. pref. Hanyang Securities pref. Kumho Petrochemical pref. Hyundai Securities 2-pref. B Shinyoung Securities pref. TS Corp. pref. Woori Investment & Securities pref. Korea Investment Holdings pref. Kolon Industries pref. Kolon Corp. pref. Samyang Genex Corp. pref. Yuhwa Securities pref. SK Innovation pref. GS Holdings pref. Daekyo pref. B Hitejinro Holdings pref. Ilsung Construction pref. B Daeduck GDS pref. Dividend yield 11.3% 9.9% 8.3% 8.0% 8.0% 7.5% 6.8% 6.7% 6.4% 6.2% 6.0% 6.0% 6.0% 5.8% 5.6% 5.6% 5.6% 5.4% 5.3% 5.2% Rank 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 Stock Noroo Paint pref. Samyang Holdings pref. LG Chem pref. Hanwha pref. SK Holdings pref. Samsung F&M pref. LG Corp. pref. S-Oil pref. Taeyang Metal Industrial pref. Noroo Holdings pref. LG Hausys Hanwha Chemical pref. Daewoo Securities SEMCO pref. Sebang pref. Kumkang Kind pref. Samsung SDI pref. SK Chemicals pref. Green Cross Holdings 1-pref. Dividend yield 5.1% 4.9% 4.7% 4.6% 4.6% 4.6% 4.5% 4.5% 4.4% 4.4% 4.4% 4.3% 4.1% 3.7% 3.7% 3.5% 3.4% 3.3% 2.9%

Note: 1) 2012 DPS 2) Apr 4, 2013 close Source: Korea Investment & Securities

3. Decent investment returns despite de-rating so far

Sufficient alternative investment to common stocks The prices of preferred stocks have constantly de-rated but the top 10 stocks by market cap have delivered similar returns as their common since 2000 (incl. share price gains and dividend yields). For example, the top 10 preferred stocks in terms of market cap realized a similar annual average return as their common over the past 13 years (preferred 26.7% vs. common 25.4%). Furthermore, five delivered better returns in more years during the period. This shows there is no big difference between investing in preferred and common stocks. In comparison, among preferred stocks with dividend yields of more than 3%, all (except AmorePacific) such as LG Chem, Samsung F&M, S-Oil, Shinyoung Securities and Doosan Corp. gave better returns than their common. All in all, given their potential for a valuation re-rating, we believe preferred stocks merit attention as an alternative investment to common stocks.

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Table 13. Past returns: Preferred vs. common stocks

Samsung Electronics pref. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Avg. -64.70 53.33 28.93 56.63 19.77 64.63 -0.09 -11.39 -34.46 90.62 22.98 -4.80 24.75 18.9 Samsung Electronics -47.39 54.44 10.40 37.52 -2.54 45.16 -7.96 -7.76 -16.11 68.23 15.06 11.27 36.17 15.1 Hyundai Motor pref. -31.24 139.38 56.95 54.44 18.49 118.43 -42.40 -7.22 -61.23 231.19 52.91 5.13 12.54 42.1 Samsung F&M pref. -58.26 89.63 73.91 -2.64 28.03 109.97 -11.04 34.86 -31.81 29.32 -2.30 -14.42 17.11 20.2 Hyundai Motor -38.45 111.56 7.73 66.43 0.38 70.99 -30.59 7.55 -44.52 190.17 50.00 21.19 4.94 32.1 Samsung F&M -27.90 79.05 21.25 2.25 20.78 54.84 22.34 59.11 -25.46 8.35 8.05 -3.35 7.59 17.5 LG Chem pref. NM 86.61 101.01 33.51 2.59 67.73 -36.49 60.39 -22.62 125.91 104.94 -30.94 -1.42 40.9 S-Oil pref. 4.89 162.06 -9.44 47.33 112.78 71.17 -0.64 56.39 -20.01 3.95 33.91 4.81 11.67 36.8 LG Chem NM 56.92 100.67 25.90 -26.23 40.29 -25.05 109.82 -18.33 112.53 70.31 -15.49 3.75 36.3 S-Oil 18.14 95.41 -11.56 86.62 122.99 15.20 5.85 39.06 -8.50 -8.31 70.55 15.18 6.50 34.4 LG LG Electronics Electronics pref. NM NM -38.91 32.13 38.59 64.61 -45.25 47.61 -37.49 55.05 -15.34 -43.12 -16.16 3.8 Shinyoung Securities pref. -42.54 82.13 2.26 14.68 26.09 116.82 -5.11 47.15 -45.42 46.73 18.63 -5.97 23.59 21.5 NM NM -30.13 33.88 5.46 42.84 -37.99 74.78 -24.79 56.77 -9.92 -36.64 -5.12 6.3 Shinyoung Securities -32.84 25.88 1.12 -6.27 27.07 134.39 20.52 74.60 -65.52 56.78 6.83 -22.92 23.29 18.7 LG H&H pref. NM 131.01 43.93 0.58 18.60 59.81 55.86 32.94 -38.44 84.65 15.92 30.74 53.47 40.8 Doosan Corp. pref. -47.37 34.94 -37.11 -5.53 44.30 168.98 45.68 164.38 -73.28 41.77 77.04 -26.29 13.90 30.9

(%)

LG H&H NM 105.51 30.17 -15.47 -7.59 103.57 124.14 50.98 -9.44 60.11 32.36 28.64 35.97 44.9 Doosan Corp. -32.59 6.28 -52.82 29.89 -10.09 183.90 51.96 232.17 -48.34 -8.08 69.23 -7.94 -14.66 30.7

AmorePacific AmorePacific pref. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Avg. NM NM NM NM NM NM 10.41 -5.74 -50.21 91.72 4.65 -12.34 39.29 11.1 NM NM NM NM NM NM 46.23 21.31 -13.78 42.48 15.18 -0.27 16.59 18.2

Annual avg. return for the past 13 years Preferr ed Commo n 26.7 25.4

Note: Annual returns include cash dividends as of Dec 26 of each year Source: Korea Investment & Securities

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4. Attention to small and mid-cap stocks

Small and mid-cap stocks receive more attention While large-cap stocks have been the major investment target for domestic and overseas investors so far, investment in small and mid-cap stocks has been sharply increasing over the past year. Of note, unlike the past, domestic institutional investors have remained net buyers of small and mid-caps worth W1.37trn, breaking away from their usual habit of large-cap-centered investment. Such a net purchase trend shows the switch of investor interest from market cap to the investment merit of an individual stock. Although preferred stocks have relatively smaller market caps on the share pullback so far, we believe they have a rising chance to be added to investment portfolios given their fat dividend yields and the falling value of voting rights in line with a greater focus on management transparency.
Table 14. Institutional and foreign net purchases of small and mid-caps in 2012
(W bn)

Mid-cap net purchase (A) Institutions Foreign investors

Source: Korea Investment & Securities

Small-cap net purchase (B) 77.8 38.5

Small and mid-cap net purchase (A+B) 1,373.5 (226.0)

1,295.7 (187.4)

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V. Top picks
1. Top pick selecting criteria: Dividend yield, price gap with common stocks, market cap and financial structure
Chose top picks considering dividend yield, price gap and market cap The prices of preferred stocks are closely correlated with their associated common shares. But we selected attractive preferred stocks considering dividend yield, the price gap with common stocks and valuation, sufficient market cap for investment and stable financial structure. Based on the criteria, we chose the preferred stocks of seven companies Samsung Electronics, Doosan Corp., Woori Investment & Securities, SK Innovation, LG Chem, Samsung F&M and Hyundai Motor as our top picks. The stocks offer an average dividend yield of 4.7%, attractive valuation with a 60.4% price gap with the common stocks and market caps worth W71.3bn-20trn.
Table 15. Top preferred stock picks
Code 005935 005385 051915 000815 000155 005945 096775 Stock Samsung Electronics pref. Hyundai Motor pref. LG Chem pref. Samsung F&M pref. Doosan Corp. pref. Woori Investment & Securities pref. SK Innovation pref. Market cap 20,002,082 2,016,332 682,788 263,021 185,927 86,618 71,285 Dividend yield 0.9% 2.6% 4.7% 4.6% 8.3% 6.4% 5.6%
(W mn)

Price gap Debt-to-equity 42.2% 63.9% 64.8% 62.3% 66.9% 60.1% 62.5% 49.05% 153.64% 54.02% 426.89% 85.78% 618.73% 106.94%

Note: Apr 4 close Source: Korea Investment & Securities

2. Top 30 preferred stocks by dividend yield

Table 16. Top 30 preferred stocks by dividend yield
Rank Stock 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Daishin Securities pref. Bookook Securities pref. Doosan Corp. pref. Hanyang Securities pref. Kumho Petrochemical pref. Shinyoung Securities pref. TS Corp. pref. Woori Investment & Securities pref. Korea Investment Holdings pref. Kolon Industries pref. Kolon Corp. pref. Samyang Genex Corp. pref. Yuhwa Securities pref. SK Innovation pref. GS Holdings pref. Dividend yield 11.3% 9.9% 8.3% 8.0% 8.0% 6.8% 6.7% 6.4% 6.2% 6.0% 6.0% 6.0% 5.8% 5.6% 5.6% Rank Stock 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Daekyo pref. B Hitejinro Holdings pref. Ilsung Construction pref. B Daeduck GDS pref. B Noroo Paint pref. Samyang Holdings pref. LG Chem pref. Hanwha pref. SK Holdings pref. Samsung Fire & Marine Ins. pref. LG Corp. pref. S-Oil pref. Taeyang Metal Industrial pref. Noroo Holdings pref. LG Hausys pref. Dividend yield 5.6% 5.4% 5.3% 5.2% 5.1% 4.9% 4.7% 4.6% 4.6% 4.6% 4.5% 4.5% 4.4% 4.4% 4.4%

Note: 1) Based on 2012 DPS 2) Apr 4 close 3) Excluded Hyundai Securities 2-preferred B as it has the features of a common stock with voting rights Source: Korea Investment & Securities

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3. Top 30 preferred stocks by price gap

Table 17. Top 30 preferred stocks by price gap
Rank Stock 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Daesang Corp. pref. Korea Circuit pref. Nexen Tire 1-pref. CJCJ pref. CJ Corp. pref. Daelim Ind. pref. Lotte Chilsung pref. Hotel Shilla pref. SK Chemicals pref. Kumho Petrochemical pref. Korea Investment Holdings pref. Sebang pref. LG Hausys pref. Namyang Dairy pref. Samsung Electro-Mechanics pref. Price gap 88.3% 81.8% 79.9% 79.4% 77.2% 77.0% 76.5% 75.0% 74.5% 74.4% 73.3% 73.3% 73.0% 72.4% 71.6% Rank Stock 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 LG Electronics pref. Samsung C&T pref. Kolon Industries pref. Korean Air pref. Daeduck GDS pref. LG H&H pref. Doosan Corp. 2-pref. B Hyundai Motor 3-pref. B Doosan Corp. pref. Samsung SDI pref. SK Holdings pref. BYC pref. AmorePacific pref. LG Chem pref. Hyundai Motor pref. Price gap 71.6% 71.3% 69.9% 69.5% 69.3% 69.1% 68.4% 67.1% 66.9% 66.1% 65.9% 65.6% 65.4% 64.8% 63.9%

Note: 1) Based on 1-preferred share prices 2) Apr 4 close 3) AmorePacific Group excluded due to almost nil trading volume Source: Korea Investment & Securities

4. Top 30 preferred stocks by market cap

Table 18. Top 30 preferred stocks by market cap
Rank Stock 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Samsung Electronics pref. Hyundai Motor 2-pref. B Hyundai Motor pref. LG Chem pref. LG Electronics pref. LG H&H pref. AmorePacific pref. Samsung Fire & Marine Ins. pref. S-Oil pref. Shinyoung Securities pref. Doosan Corp. pref. Hyundai Motor 3-pref. B Daishin Securities pref. Samsung C&T pref. CJCJ pref. Market cap 20,002,082 3,234,792 2,016,332 682,788 394,419 374,796 335,739 263,021 241,316 216,551 185,927 181,907 166,400 91,811 91,726 Dividend yield 0.9% 2.4% 2.6% 4.7% 1.1% 2.1% 2.0% 4.6% 4.5% 6.8% 8.3% 2.9% 11.3% 2.8% 2.6% Price gap 42.2% 60.8% 63.9% 64.8% 71.6% 69.1% 65.4% 62.3% 34.1% 10.7% 66.9% 67.1% 34.1% 71.3% 79.4% Rank Stock 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Woori Investment & Securities pref. Samsung Electro-Mechanics pref. Daelim Ind. pref. LG Corp. pref. Kumho Petrochemical pref. Daekyo pref. B Samsung SDI pref. CJ Corp. pref. Korea Investment Holdings pref. SK Innovation pref. Daewoo Securities pref. Daishin Securities 2-pref. B Namyang Dairy pref. Kolon Industries pref. GS Holdings pref. Market cap 86,618 82,704 80,750 78,558 77,704 75,668 75,313 74,587 72,056 71,285 64,256 58,100 47,665 44,701 43,639 Dividend yield 6.4% 3.7% 2.8% 4.5% 8.0% 5.6% 3.4% 2.1% 6.2% 5.6% 4.1% 12.4% 0.4% 6.0% 5.6%
(W mn)

Price gap 60.1% 71.6% 77.0% 62.1% 74.4% 42.3% 66.1% 77.2% 73.3% 62.5% 60.0% 39.9% 72.4% 69.9% 58.9%

Note: Excluded Ssangyong Cement Industry 4-preferred B as stocks were given voting rights due to unpaid dividends Source: Korea Investment & Securities

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