High noon for robots in the land of the morning calm

2015-2016 has seen tremendous strides in Korea’s robotics sector—from the Korean team’s stunning win in the DARPA Challenge to the acquisition of Samsung Techwin by Hanwha Group, to the international partnerships between Israel Aerospace Industry (IAI) and Hankuk Carbon and strategic alliances between Miele and Yujin Robot in the cleaning robot segment. In the drone space, Pusan is now host to Asia’s largest drone show. In addition, the startup scene is thriving with smaller players such as UVify, Robo Block, and others attracting more interest because of their innovative technologies. The Internet of Things (IoT) is evolving into the Robot Internet of Things (RIoT) and companies with a view of the larger picture are positioned to benefit from this shift. Although many of the companies are US-based and include such names as Amazon (Echo home AI, AWS cloud computing services, drones, Kiva logistics robots, and its in-house robotics development program), Google with its robotics division, AI and machine learning development endeavors, cloud services, self-driving cars, and connected home business (Nest). In Korea, we have identified companies that also have a broad view of the emerging RIoT landscape and therefore have the opportunity to surf the swelling tsunami of socioeconomic change. In this regard we like Hanwha Techwin (012450.KS, Not rated) due to its potential to become a leader in the defense/security RIoT business. A strong player in the global defense and security business, Hanwha Group’s acquisition of Techwin (and its portfolio of technologies in robotics and drones) from Samsung Group puts it in a favorable place in the emerging RIoT defense space. We also note the strategic alliances being forged between international robotics companies and Korean partners, which we view as a vote of confidence in Korea’s prowess in robotics technologies. Hankuk Carbon will form a JV with IAI to develop next-generation vertical takeoff and landing (VTOL) drones for the Korean military with a view on expanding the business to the global market.

Service robots, medical robots, and drones: Korean players are underrated

Despite having the technological wherewithal and infrastructure in place to be a leader in the international RIoT

game, the Korean robotics industry is underrated relative to its global peers. Furthermore, the bulk of promising

Korean robotics makers and robotics component manufacturers are wanting in terms of effectively communicating

their marketing message to the global market. Within the global robotics community, however, there is swelling

interest in the Korean robotics sector and investments into promising Korean players are growing. We believe the

aforementioned weakness in marketing provides investors with an opportunity to invest in promising companies.

On the M&A front, we see some companies as potential targets due to their unique technologies. THINK Surgical,

Robot Biweekly NEUTRAL

Robotics Robert Cheek +822-3787-2301 r.cheek@hmcib.com

Major issues and conclusions - Korean Air Lines (003490.KS Marketperform) was awarded a government contract in 1Q16 to develop drones

for the Korean military. We believe this will create tremendous growth opportunities for KAL and related domestic component makers.

- Israel’s IAI and Hankuk Carbon (017960.KS , Not rated) to form JV to develop next-generation VTOL drones. - Yujin Robot (056080.KQ, BUY) is scheduled to launch its silver care robot GoCart in the EU in 4Q16 and the US

in 1Q17. The alliance with Germany’s Miele is deepening as demand for the Scout RX1 cleaning robot grows. - Curexo (060280.KQ, Not rated) receives a series of approvals from EU and US regulators for its TSolution One

Surgical System.

Industry and stock outlook - Government initiatives and foreign interest in Korean robotics-related companies to continue growing. - Several component manufactures and robot makers poised to benefit from increasing appetite for robotics - Growing interest in autonomous systems likely due to long-term growth outlook stemming from accelerating

investments in robotics and robotics component makers.

Rise of Asia’s quiet robotics powerhouse

Industry Note March 18, 2016

2

Robotics Robert Cheek +822-3787-2138 / r.cheek@hmcib.com

which is owned by Curexo was awarded the CE mark for its TSolution OneSurgical System for total hip arthroplasty (THA)procedures

in September 2015. The TSolution One Surgical System received 510(k) clearance from the US FDA for THA and cup placement procedures in

October 2015. In February 2016 the TSolution One Model 200 was FDA cleared for femoral canal and acetabular cup preparation for THA.

Fig 1. Global cleaning robot shipments Fig 2.Global aerial drone market

Source: ABI Research, HMC Investment Securities Source: Teal Group, HMC Investment Securities

Fig 3. Yujin Robot GoCart V1 and V2 Fig 4. Total discharges for knee/hip replacements

Source: Company data, HMC Investment Securities Source: JBIS.org, HMC Investment Securities

0

5

10

15

20

1Q15 2Q15 3Q15 4Q15 1Q16F

Note series S6/Edge S7(mn)

3

Robotics Robert Cheek +822-3787-2138 / r.cheek@hmcib.com

Fig 5. Hanwha Techwin’s folding propeller drone Fig 6. Hanwha Techwin’s mobile security robots

Source: Company data, HMC Investment Securities Source: Company data, HMC Investment Securities

Compliance note • The author(s) of this report does(do) not have any interests in the company(ies) covered herein.• HMC Investment Securities has not disclosed the material contained in this report to any institutional investor or third party prior to its publication. • The author(s) of this report does(do) not own more than 1% of the shares of the company(ies) covered in this report. • HMC Investment Securities has not taken part in securities issuance (DR, CB, IPO, and market making of the company(ies) covered in this report as lead manager for

the past six months. • This report accurately reflects the author(s)’s professional views and was written without any undue external influence or interference.

Investment rating HMC Investment Securities offers three sector investment ratings based on six-month forward fundamentals and share price outlook.

• OVERWEIGHT: Sector-wide fundamentals and share prices are expected to turn up. • NEUTRAL: No meaningful fundamental improvement is expected. • UNDERWEIGHT: Sector-wide fundamentals and share prices are expected to turn down.

HMC Investment Securities offers three company investment ratings based on the relative return expected in the following six months, based on the closing price on the date of rating declaration.

• BUY: Excess return of +15%p or more • MARKETPERFORM (M.PERFORM): Excess return of between -15%p and +15%p • SELL: Excess return of -15%p or less

Stock ratings distribution (January 1-December 31, 2015)

Rating Count % of rating category BUY

MARKETPERFORM SELL

12926 1

82.7 16.7 0.6

• This report has been prepared for informational purposes only and thus may not be reproduced or distributed without the prior written consent of HMC Investment Securities. • The information and statistical data contained herein were taken from sources believed to be reliable but in no way can be guaranteed and, therefore, final investment decisions should be

made based on each client’s own judgment. • This report cannot be used as evidence in any legal disputes related to the client’s investment decisions.