26 January 2015 Asia Pacific/South Korea Equity Research Media / Advertising
Cheil Worldwide (030000.KS / 030000 KS) Rating UNDERPERFORM* Price (26 Jan 15, W) 17,800 Target price (W) 15,500¹ Upside/downside (%) -12.9 Mkt cap (W bn) 2,047.7 (US$ 1.9) Enterprise value (W bn) 1,818 Number of shares (mn) 115.04 Free float (%) 65.6 52-week price range 28,000.0 - 15,600.0 ADTO - 6M (US$ mn) 13.0 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months.
Research Analysts Taewon Kim 852 2101 6687
[email protected] Jung Il Lee 822 3707 3796
[email protected]
INITIATION
Still too early to turn positive ■ Initiating with UNDERPERFORM and TP of W15,500 (13% potential downside). Cheil Worldiwde Inc. is Korea's leading advertisement agency with a global outreach. Its main customer is Samsung Electronics (~60% of headquarter revenue). The company has been actively engaged in overseas M&A with focus on retail and digital business to grow its top line (~30% of its total revenue comes from acquired consolidated affiliates). The stock is a consensus buy with 17 buys among 21 coverages, according to Bloomberg. ■ Domestic ad market and SEC marketing spending outlook remains weak. We expect FY15 Korea advertisement market to remain sluggish on the back of still weak domestic economic outlook. Furthermore, we see further downside risk to SEC-related business from a shifting of marketing expense away from brand marketing to the distribution channel. ■ Catalysts and risks. Potential upside risks include positive surprise to Korea GDP growth in FY15 from the drop in oil prices, recent stabilisation of SEC consensus EPS revision, any further positive overseas M&A deal completions, and the listing of another ad agency in Korea. 4Q14 earnings reporting is scheduled for 29th January. ■ Time to wait until valuation becomes less demanding. Our TP is based on FY15E EV/EBITDA of 8.5x. This is the average of the global peer group, which we believe is a fair multiple for Cheil Worldwide, as global peers are also actively engaged in M&As and regional diversification, with similar topline growth outlook, while boasting lower largest-client concentration risk.
Share price performance Price (LHS)
Rebased Rel (RHS)
40000 30000 20000 10000 0 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14
140 120 100 80 60
The price relative chart measures performance against the KOREA SE KOSPI IDX which closed at 1936.09 on 23/01/15 On 23/01/15 the spot exchange rate was W1084.8/US$1
Performance Over Absolute (%) Relative (%)
1M -0.8 -0.2
3M 12M 8.9 -34.9 8.3 -34.7
— —
Financial and valuation metrics Year Revenue (W bn) EBITDA (W bn) EBIT (W bn) Net profit (W bn) EPS (CS adj.) (W) Change from previous EPS (%) Consensus EPS (W) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
12/13A 2,709.3 157.5 130.0 102.3 889 n.a. n.a. 2.8 20.0 0 11.2 3.1 15.0 net cash
12/14E 2,700.4 162.3 128.2 100.1 870.2
12/15E 2,978.6 183.3 144.4 113.5 986.3
12/16E 3,239.6 196.1 153.4 120.3 1,045.8
879 -2.1 20.5 0 11.2 3.0 14.7 net cash
1,003 13.3 18.0 0 9.9 2.6 15.5 net cash
1,150 6.0 17.0 0 9.2 2.4 14.6 net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do
business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS
BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access
26 January 2015
Focus tables and charts Figure 1: Cheil Worldwide—major businesses (HQ only)
Figure 2: Gross profit geographical breakdown CIS Africa Latin America 3% 1% 3%
Broadcasting 12.2%
SEA 4% SWA 5%
Print 8.9%
Domestic (Korea) 33%
Middle East 5%
Ad production 49.4%
North America 8% New media 29.5%
EU 14%
China 24%
Source: Company data (3Q14 YTD)
Source: Company data (3Q14)
Figure 3: SEC—biggest revenue contributor
Figure 4: SEC-related budget growth likely to be sluggish
70%
100%
60%
80%
50%
60%
40%
40%
30%
20%
20%
0%
10%
2010
2011
2012
2013
2014E
2015E
2016E
-20%
0% 2010
2011
2012
2013
3Q14 YTD
-40%
SEC's rev contribution to Cheil WW (HQ only)
Mobile & Handsets revenue YoY growth
Marketing expenses YoY growth
Source: Company data, Credit Suisse research
Source: Company data, Credit Suisse estimates
Figure 5: We expect domestic ad market to remain weak
Figure 6: Upside risk from M&A-driven top line growth
30%
100% 90%
25%
80% 20%
70% 60%
15%
50% 10%
40% 30%
5%
20% 0% 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014F
2015F
2016F
10% 0%
-5%
2010 -10% Korea ad market growth
2011
2012
% acquired portion
Korea GDP growth
2013
3Q14 YTD
% ex-acquired portion
Source: Company data, Bank of Korea, Credit Suisse estimates
Source: Company data, Credit Suisse research
Figure 7: Not cheap on P/E; multiple getting derated
Figure 8: TP based on global peer avg. of 8.5x EV/EBITDA
35
(x)
12
30
10
25
8
20
6
Global peer average
15
4
10
2
5 0
0 2010
2011
2012
2013
Cheil WW 1-year fwd P/E
Source: DataStream, Credit Suisse estimates
2014
2015
Cheil Worldwide
WPP
JCDecaux S.A.
Publicis
Omnicom Group Inc.
DENTSU INC.
Interpublic Group
Hakuhodo DY
Aimia
FY15E EV/EBITDA
Source: IBES estimates, Credit Suisse estimates
Cheil Worldwide (030000.KS / 030000 KS)
2
26 January 2015
Still too early to turn positive Domestic advertisement market outlook still weak We expect the domestic advertisement market growth to remain sluggish, albeit there should be some pick-up from the low base effect (FY15E 3.0% YoY growth versus 2.2% in FY14). We expect FY15E domestic media service sales to recover to 4.6% in FY15E from -3.9% in FY14E. Bank of Korea cut its FY15E GDP outlook to 3.4% from 3.9% on 15 January versus Bloomberg-weighted average estimate of 3.6%. On 23 January, 4Q14 Korea GDP growth fell further to 0.4% QoQ growth (versus 1.0% expectation). Christiaan Tuntono, Credit Suisse Korea economist, also maintains his cautious FY15 Korea domestic macro outlook.
Domestic economy showing no signs of material recovery
Downside risk to Samsung-related revenue growth We note that Cheil World's dependency on Samsung Electronics (SEC) remains high, as it is a part of the Samsung Group. We see that Samsung Galaxy has now established itself as a global smart device brand, which presents a case to reduce its global brand market spend and increase allocation to its distribution channel. We also identify the difficulty in forecasting the consolidated affiliate's revenue, which accounts for over 65% of total consolidated revenue. Hence, we provide a breakdown analysis of revenue growth trends separately for acquired affiliates and Samsung-related affiliates. For FY15E, we expect consolidated affiliate gross profit to grow by W103 bn, accounting for acquisition of Iris Worldwide and the existing 3Q14 YTD run rate, and Samsung-related revenue growth to stay in line with our SEC marketing spending forecast.
Samsung seeing quarterly revenue decline in FY14
Key investment risks We see a few potential upside risks to our cautious view. First, FY15E Korea GDP growth could see a positive surprise as the drop in oil prices may result in a better-than-expected impact on consumption and business operations. Second, SEC consensus EPS revision is showing signs of stabilisation, as Cheil Worldwide has corrected ~40% in the past one year. Third, any high-quality overseas M&A deal completions should help drive Cheil Worldwide's consolidated top line growth. Acquired subsidiaries account for 40% of total subsidiary revenue currently. Finally, we see risk from the listing of another ad agency in Korea (Hyundai Innocean), which may instil new client interest in the sector. The company is scheduled to report its FY14 annual earnings on 29 January.
Quality overseas M&As present top line growth upside risk among others
Initiate with UNDERPERFORM and TP of W15,500 Our target price of W15,500 is based on FY15E EV/EBITDA of 8.5x, which is the average of the global peer group. We note that its global peers are similarly actively engaged in M&As and regional diversification, but with lower single customer concentration risk. As such, we do not see the case for Cheil Worldwide to trade at a premium to the global comp multiple. We highlight that the stock is currently undergoing a P/E multiple derating after having hit the peak of 30x in early 2014, as Samsung global smartphone sales increased.
TP based on global peer group's FY15E EV/EBITDA average multiple of 8.5x
Cheil Worldwide (030000.KS / 030000 KS)
3
26 January 2015
Cheil Worldwide 030000.KS / 030000 KS Price (26 Jan 15): W17,800, Rating:: UNDERPERFORM, Target Price: W15,500, Analyst: Taewon Kim Target price scenario Scenario Upside
TP 22,000
Central Case
15,500
Downside 13,000 Income statement (W bn) Sales revenue Cost of goods sold SG&A Other operating exp./(inc.) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV Recurring PBT Exceptionals/extraordinaries Taxes Profit after tax Other after tax income Minority interests Preferred dividends Reported net profit Analyst adjustments Net profit (Credit Suisse) Cash flow (W bn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Disposals of fixed assets Acquisitions Divestments Associate investments Other investment/(outflows) Investing cash flow Equity raised Dividends paid Net borrowings Other financing cash flow Financing cash flow Total cash flow Adjustments Net change in cash Balance sheet (W bn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt Non-current provisions Other non-current liab. Total liabilities Shareholders' equity Minority interests Total liabilities & equity
%Up/Dwn Assumptions 23.60 50% premium on forward EV/EBITDA FY15E 8.5x forward EV/EBITDA, the (12.92) average of global peer comp (26.97) 30% discount to forward EV/EBITDA 12/13A 12/14E 12/15E 12/16E 2,709 2,700 2,979 3,240 2,012 1,907 2,074 2,247 567.8 664.8 759.7 838.9 (27.5) (34.1) (38.9) (42.7) 157.5 162.3 183.3 196.1 27.5 34.1 38.9 42.7 130.0 128.2 144.4 153.4 (5.2) (2.6) (2.4) (2.5) 3.4 4.5 4.5 4.5 — — — — 138.6 135.3 151.3 160.4 — — — — 36.3 35.2 37.8 40.1 102.3 100.1 113.5 120.3 — — — — — — — — — — — — 102.3 100.1 113.5 120.3 — — — — 102.3 100.1 113.5 120.3 12/13A 12/14E 12/15E 12/16E 130.0 128.2 144.4 153.4 — — — — — — — — — — — — (196.2) (67.6) (34.2) (30.2) (66.2) 60.6 110.2 123.3 (40.4) (39.6) (45.2) (49.6) (106.6) 20.9 65.0 73.7 — — — — — — — — — — — — — — — — 202.7 (196.6) (64.0) (72.7) 162.3 (236.2) (109.2) (122.3) — — — — — — — — — — — — (124.5) 133.5 (1.0) (1.0) (124.5) 133.5 (1.0) (1.0) (28.4) (42.2) — — — — — — (28.4) (42.2) — — 12/13A 12/14E 12/15E 12/16E 300.2 250.0 260.0 270.0 909 1,110 1,224 1,331 — — — — 134.3 91.1 161.7 229.3 1,344 1,451 1,646 1,831 113.4 118.9 125.2 132.2 — — — — 153.7 164.1 175.7 184.2 93.6 190.0 207.0 222.2 1,705 1,924 2,154 2,369 609.0 739.8 816.1 887.6 13.2 20.0 20.0 20.0 — — — — 360.9 410.2 467.7 513.3 983 1,170 1,304 1,421 — — — — — — — — 52.9 63.8 72.2 79.4 1,036 1,234 1,376 1,500 668.6 690.1 777.7 869.0 — — — — 1,705 1,924 2,154 2,369
Key earnings drivers Korea ad market growth SEC mkt exp growth Acq affiliates rev growth
12/13A 0.02 0.08 0.22 — —
12/14E 0.02 (0.09) 0.07 — —
12/15E 0.03 0.01 0.20 — —
12/16E 0.06 0.10 0.13 — —
Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) (W) DPS (W) BVPS (W) Operating CFPS (W) Key ratios and valuation Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Interest cover (x)
12/13A 115.0 889 — 5,811 (576) 12/13A
12/14E 115.0 870 — 5,999 526 12/14E
12/15E 115.0 986 — 6,760 958 12/15E
12/16E 115.0 1,046 — 7,554 1,072 12/16E
14.6 2.8 2.8 2.8
(0.3) (1.4) (2.1) (2.1)
10.3 12.7 13.3 13.3
8.8 6.2 6.0 6.0
5.81 4.80 5.11 3.77
6.01 4.75 5.01 3.71
6.15 4.85 5.08 3.81
6.05 4.74 4.95 3.71
20.0 3.06 — (30.9) 0.65 11.2 13.5
20.5 2.97 — 33.8 0.67 11.2 14.2
18.0 2.63 — 18.6 0.61 9.9 12.5
17.0 2.36 — 16.6 0.55 9.2 11.7
15.0 35.6 1.59 1.07 0.74 2.55
14.7 22.5 1.40 1.06 0.74 2.79
15.5 21.7 1.38 1.05 0.75 2.77
14.6 19.9 1.37 1.05 0.75 2.73
(42.9) (1.82) (25.0)
(33.3) (1.42) (49.3)
(30.9) (1.31) (61.2)
(28.8) (1.27) (61.9)
Source: Company data, Thomson Reuters, Credit Suisse estimates. 12MF P/E multiple 30 25 20 15 10 5 0 2010
2011
2012
2013
2014
2013
2014
12MF P/B multiple 4.0 3.5
3.0 2.5 2.0
1.5 1.0 0.5 0.0 2010
2011
2012
Source: IBES
Cheil Worldwide (030000.KS / 030000 KS)
4
26 January 2015
Domestic advertisement market outlook still weak No sign of near-term domestic market turnaround We expect domestic advertisement market growth to remain sluggish in FY15, but believe there should be some pick up from the low base effect (FY15E 3.0% YoY growth versus 2.2% in FY14). On 16 January, Bank of Korea cut its FY15E GDP forecasts to 3.4% from 3.9% (versus Bloomberg weighted average estimate of 3.6%). 4Q14 Korea GDP growth fell further to 0.4% QoQ growth (versus previous 1.0% expectation by the BoK). Figure 9: Latest Korea GDP trend bodes negative
Recent data suggest slow 2015 ahead for Korea economy
Figure 10: Consumer confidence also downtrending
10%
120
8%
110
6% 4%
100
2%
90
0%
80
-2%
70 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
-4%
60
2008
Real Korea GDP growth
2009
2010
2011
2012
2013
2014
Consumer Sentiment Index
Source: Bank of Korea
Source: Bank of Korea
Figure 11: CS expects modest recovery in real private consumption from low base (%)
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
1.27 0.30
4.26 5.52
2.75 0.83
2.25 -0.48
2.18 4.24
2.90 3.00
3.40 2.90
3.50 3.00
Korea Growth in Real Private Consumption Korea Growth in Real Fixed Investment Source: Company data, Credit Suisse estimates
Figure 12: Composite business condition side tracking
Figure 13: Domestic economy showing weak momentum
115 110 105 100 95 90 85 80 Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13
Feb-14 Sep-14
Korea Composite Business Conditions (all industries)
Source: Company data, Credit Suisse research
Source: CEIC, Credit Suisse
Cheil Worldwide (030000.KS / 030000 KS)
5
26 January 2015
Earnings estimates' downward revision underway The company acknowledges that the domestic advertisement market has reached saturation, but expects FY15 to be a normalisation year and expects the market to slowly recover, driven by new media and mobile. Thus, we believe traditional media service revenue will revert to positive growth (FY15E +2% YoY) from the low YoY base effect and expect new media business to maintain its solid growth (FY15E +5% YoY). Having said that, our estimates are still below consensus, despite the notable earnings revision to street estimates, most recently following the big 3Q14 earnings miss. The company is scheduled to report its FY14 annual earnings on 29 January. Figure 14: We expect weak GDP growth to suppress advertisement spending
Ad market, a leveraged play on GDP growth
30% 25% 20% 15% 10% 5%
0% 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014F
2015F
2016F
-5% -10% Korea ad market growth
Korea GDP growth
Source: Company data, Bank of Korea, Credit Suisse estimates
Figure 15: Consensus estimates still getting revised down 30,000
KRW
1,600
28,000
Consensus estimates downgrades still underway
1,500
26,000
1,400
24,000
1,300
22,000 20,000
1,200
18,000
1,100
16,000
1,000
14,000
900
12,000
10,000
800 Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Cheil WW share price
Jan-14
Jul-14
Jan-15
2014E EPS revision (RHS)
Source: Company data, Bloomberg, Credit Suisse research
Cheil Worldwide (030000.KS / 030000 KS)
6
26 January 2015
Margin weakness may also continue The company's overseas businesses boast lower margin profile since they are mostly media buying service (media representatives) businesses with lower ROI potential as they also entail labour force and the commensurate cost rise. While the quarterly overseas gross profit trend does show some fluctuation owing to M&A events and related consulting fee, we believe the growth strategy remains firm. Furthermore, although the domestic labour cost base is expected to increase at a steady low single digit YoY growth, overseas growth is driving the overall consolidated cost base. The company does, however, expect labour cost to be controlled to 55% of gross profit, and the operating margin to be stable from high-teens to low-20% range. Figure 16: Domestic market OPM
Growth accompanying commensurate cost increase
Domestic market now boasts low single digit OPM
16% 14% 12%
10% 8% 6% 4% 2% 0% 2010
2011
2012
2013
3Q14 YTD
Domestic
Source: Company data, Credit Suisse research
Figure 17: HQ personnel status and labour costs rise, though there has been recent stabilisation 1400
120
1200
100
1000
80
800 60
600 40
400
20
200 0
0 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
Number of employees
Total labor related costs (RHS, W bn)
Source: Company data, Credit Suisse research
Cheil Worldwide (030000.KS / 030000 KS)
7
26 January 2015
Figure 18: Cheil Worldwide’s 2013-16E earnings CS Estimates W bn Sales Gross profit Domestic Overseas SG&A Operating profit Non-operating items Profit before tax Net profit b/f min. int. Net profit aft. min int. Gross margin Operating margin Pretax margin Net margin
YoY growth rate
Consensus estimates
2013
2014E
2015E
2016E
2014E
2015E
2016E
2014E
2015E
2016E
2709.3 697.8 275.7 422.1 (567.8) 130.0 8.6 138.6 102.3 98.5
2700.4 792.9 278.0 514.9 (664.8) 128.2 7.1 135.3 100.1 96.0
2978.6 904.2 286.3 617.9 (759.7) 144.4 6.9 151.3 113.5 108.9
3239.6 992.3 302.3 690.0 (838.9) 153.4 7.0 160.4 120.3 115.3
(0.3)% 13.6% 0.8% 22.0% 17.1% (1.4)% (17.3)% (2.4)% (2.1)% (2.6)%
10.3% 14.0% 3.0% 20.0% 14.3% 12.7% (3.4)% 11.8% 13.3% 13.5%
8.8% 9.8% 5.6% 11.7% 10.4% 6.2% 1.7% 6.0% 6.0% 5.9%
2721.0 794.0
2957.0 846.9
3201.0 910.4
124.8
144.1
162.4
139.2 97.2
150.0 110.0
168.2 123.4
25.8% 4.8% 5.1% 3.6%
29.4% 4.7% 5.0% 3.6%
30.4% 4.8% 5.1% 3.7%
30.6% 4.7% 5.0% 3.6%
29.2% 4.6% 5.1% 3.6%
28.6% 4.9% 5.1% 3.7%
28.4% 5.1% 5.3% 3.9%
Source: Company data, Credit Suisse estimates
Cheil Worldwide (030000.KS / 030000 KS)
8
26 January 2015
Downside risk to Samsung-related revenue growth SEC-related business growth momentum slowing We see that one of key reasons behind Cheil Worldwide's 40% share price fall over the past one-year period has been rising concerns over Samsung Electronics' smart device sales and marketing expenses in FY15/16. Historically, the two companies' top line has indeed shown high correlation. With SEC accounting for over 60% of domestic revenue where Cheil Worldwide boasts many other domestic clients, we believe that SEC's revenue contribution within its non-acquired overseas revenue would be considerably higher than 60%.
Revenue and share price has shown high correlation to that of SEC
Figure 19: SEC marketing expense and Cheil WW revenue
Figure 20: SEC marketing expense has been a function of
trend shows correlation…
its revenue
4,500
W bn
900
4,000
800
3,500
700
3,000
600
2,500
500
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400
1,500
300
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200
500
100
0
0 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 2015 qtly avg. SEC marketing expenses Cheil WW revenue (RHS)
Source: Company data, Credit Suisse estimates
70,000
4,500
W bn
4,000
60,000
3,500 50,000
3,000
40,000
2,500
30,000
2,000 1,500
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2Q11 3Q11
4Q11 1Q12
2Q12 3Q12 SEC revenue
4Q12 1Q13
2Q13 3Q13
4Q13 1Q14 2Q14
SEC marketing expenses (RHS)
3Q14 4Q14E 2015 qtly avg.
Source: Company data, Credit Suisse estimates
Figure 21: Rise of SEC as the global smartphone market share leader now presents a high base to its revenue growth
70%
We see that SEC accounts for over 60% of Cheil WW's revenue (HQ only)
60% 50% 40% 30% 20% 10% 0% 2010
2011
2012
2013
3Q14 YTD
SEC's rev contribution to Cheil WW (HQ only) Source: Company data, Credit Suisse research
Cheil Worldwide (030000.KS / 030000 KS)
9
26 January 2015
Figure 22: SEC is dominant among the Samsung clients
Figure 23: Ad-related expense as % of parent revenue
100%
9.0%
90%
8.0%
80%
7.0%
70%
6.0%
60%
5.0%
50%
4.0%
40%
3.0%
30%
2.0%
20%
1.0%
10%
0.0%
0%
2005
2006
Samsung Total
2007
2008
Cheil Industries Inc.
2009
2010
2011
Samsung Electronics
2012
2005
2013
2006
2007
Samsung Total
Samsung C&T
Source: Company data, Credit Suisse research
2008
Cheil Industries Inc.
2009
2010
2011
Samsung Electronics
2012
2013
Samsung C&T
Source: Company data, Credit Suisse research
SEC marketing expense has been a function of its revenue, and our SEC analyst Keon Han expects the level to decline slightly over the next couple of years. Figure 24: CS estimates marketing as % of SEC revenue will decline YoY Marketing spending as % of Total SEC Revenue Marketing spending as % of Total SEC Mobile Revenue
2014E
2015E
2016E
6.3% 11.8%
6.0% 11.2%
6.0% 11.1%
Source: Credit Suisse estimates
Figure 25: Samsung dependency is still high despite the diversification thus far 70% 60%
60%
50% 40% 30% 20% 10%
5%
3%
0% Cheil Worldwide (HQ)
Interpublic
Omnicom
Top client revenue portion
Source: Company data, Credit Suisse research
Cheil Worldwide (030000.KS / 030000 KS)
10
26 January 2015
We expect continued product launches of flagship product series such as Galaxy S and Galaxy Note series, as well as the new wearable products to help support Samsung's top line growth. On the other hand, we note that SEC's actual total revenue has fallen QoQ throughout 2014, despite the GS5 and GN4 launches as global smartphones market is becoming increasingly more competitive and commoditised. Figure 26: Product launch cycle continues, but revenue declining in 2014 40,000
SEC has actually shown quarterly revenue decline throughout 3Q14 YTD
GN3
W bn
GS5
35,000 GN2
30,000
GS4
25,000 20,000
GS3
GS2
15,000
GN1
GS1
10,000
GN4, Alpha
5,000
4Q14E
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
-
SEC Handset revenue
Source: Company data, Credit Suisse research
Potential shift in marketing spending budget? We see potential downside risk stemming from any change in SEC marketing budget allocation. We believe any shift of existing advertisement budget to various product subsidies-related budget would negatively impact Cheil Worldwide. Continued smartphone commoditisation as well as increasing competitive threats from emerging market smartphone makers boasting lower price points with relatively high specification present a threat to SEC's global leading total smartphones market share.
We see potential for SECrelated marketing revenue to decline further
We believe Samsung Galaxy has now been firmly established (versus Samsung Omnia smartphones models following the Anycall brand for the feature phone products), and hence we see this as another potential reason for Samsung to reduce its Galaxy brand marketing budget and relocate its ammo to its distribution channel. This is difficult to quantify due to the lack of disclosure, but we see potential divergence between SEC total marketing spending and Cheil Worldwide's top line growth going forward. Last, but not the least, we do note that Cheil Worldwide's dependency on its largest client still remains high versus global comps, as do all other major Korea advertisement agencies. For instance, less than 5% of Interpublic Group's FY13 revenue were from its largest client, and around 21% from its top ten largest clients.
Little visibility to its consolidated affiliates' revenue Currently, Cheil Worldwide only provides further revenue breakdown details on its headquarter revenue (into traditional media, new media, and production). Due to the growth of SEC's global business, however, ~65% of total gross profit are now generated from overseas affiliates.
Large portion of Cheil Worldwide revenue is difficult to forecast
To resolve this issue, we identified overseas affiliates acquired by Cheil Worldwide which boast non-Samsung client base. As of 3Q14, 40% of overseas consolidated revenues were from acquired affiliates. For this segment, we assumed +W50 bn annual increase (annualising 3Q14 YTD incremental revenue run rate) in revenue from non-Samsungrelated subsidiaries from its organic growth. Additionally, we assumed +100 bn increase in
We breakdown overseas revenue into acquired affiliates and other affiliates (i.e. Samsung related business)
Cheil Worldwide (030000.KS / 030000 KS)
11
26 January 2015
gross profit from the acquisition of Iris Worldwide. For revenue growth projection of nonacquired affiliates (or what we believe to be mostly Samsung group related), we used the same growth rate as our SEC marketing expense growth rate assumption for FY15E/16E (0.9%/10.4%). Given the flattish YoY growth seen from the consolidated affiliates as of 3Q14 YTD, we believe our estimates are not too conservative. Figure 27: ~40% of overseas rev. from acquired affiliates
Figure 28: ~65% of total gross profit from overseas 1,200
3,500 3,000
1,000
2,500 800
2,000 600
1,500
400
1,000 500
200
0 2010
2011
2012
Domestic media services Overseas consolidated (Acquired)
2013
2014E
2015E
2016E
Domestic production Overseas consolidated (Samsung related)
Source: Company data, Credit Suisse estimates
0 2010
2011
2012
2013
2014E
Domestic traditional media
Domestic new media
Domestic production/promotion
Overseas affiliate
2015E
2016E
Source: Company data, Credit Suisse estimates
Cheil Worldwide (030000.KS / 030000 KS)
12
26 January 2015
Key investment risks We see the following potential risks to our cautious call on Cheil Worldwide.
Low oil price may be boon to Korea GDP growth Christiaan Tuntono, CS Korea economist, notes potential positive surprise to Korea GDP growth from the drop in oil prices, which may result in a better-than-expected impact on consumption and business operations. He maintains his cautious base case view on FY15 Korea economic outlook, but in any positive surprise scenario, the advertisement market would see leveraged positive growth rate. We, however, currently believe that the advertisement market as a percentage of Korea GDP will decline further to 0.69% in FY15E from 0.70% in FY14E, given the continued weakness in GDP growth.
Oil price may be a boost to Korea ad market
SEC EPS revision stabilisation Cheil Worldwide share price and EPS estimates have exhibited close correlation with those of SEC in the past, and Cheil Worldwide has corrected ~40% over the past one year during the SEC EPS downtrade cycle. However, we note that SEC has shown rebounds in both its share price and EPS estimates over the past three months. Figure 29: SEC seeing share price rebounds 1,600,000
Figure 30: Stabilising SEC FY15E estimate revision 30,000
KRW
1,500,000
26,000
Stock price gap widening
1,400,000
24,000
1,300,000
KRW
300,000
1,600,000
250,000
1,400,000 200,000
22,000
1,200,000
20,000
1,200,000 150,000
18,000
1,100,000
16,000
1,000,000
14,000
900,000 800,000 Jan-14
1,800,000
28,000
1,000,000
SEC 15E EPS revision stabilizing and share price rebounding
100,000
800,000
12,000 10,000 Mar-14
May-14
Jul-14
Samsung Electronics
Sep-14
Nov-14
Jan-15
600,000 Jul-11
50,000
Jan-12
Jan-13
SEC share price
Cheil Worldwide (RHS)
Source: Company data, Bloomberg, Credit Suisse research
Jul-12
Jul-13
Jan-14
Jul-14
Jan-15
2015E EPS revision (RHS)
Source: Company data, Bloomberg, Credit Suisse research
M&As driving the consolidated top line growth Top line contribution continues through acquisition of brand name ad agencies We believe Cheil Worldwide's overseas M&A activities may help support its consolidated subsidiary's top line growth, despite the potential slowdown in existing Samsung-related businesses. China, one of highest-growing large markets globally (FY14-16E CAGR 12% in ad spending), is the company's biggest single market accounting for 24.3% of 3Q14 total gross profit (36% of overseas gross profit). Its first overseas entry was made in 1992 and overseas offices continue to increase in number as Samsung Electronics' global footprint grows. For instance, seven new offices were established in FY14 as of end-3Q14, bringing the total to 46 offices in 39 countries. More importantly, however, management is actively seeking to expand its advertising coverage by engaging in overseas M&A of quality agencies in their respective local markets.
China accounts for 24% of 3Q14 total gross profit already, and growing
Cheil Worldwide (030000.KS / 030000 KS)
13
26 January 2015
Figure 31: Potential upside from more active M&As
Figure 32: Samsung-related revenue to recover
300.0
350 300
250.0
250 200
200.0
150 100
150.0
50 100.0
0
-50
50.0
2010
2011
2012
2013
2014E
2015E
2016E
-100 -150
-
2011
2012
2013
2014E
2015E
2016E
-200
Acquired affiliates annual revenue increase (W bn)
Non-acquired affiliates annual revenue increase (W bn)
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
A new domestic comp? There is currently no peer company to Cheil Worldwide listed in Korea. For instance, GIIR (035000.KS, Not rated) has been less active on the M&A front with smaller global outreach and also lacks brokerage coverage due to its smaller market capitalisation. Other media comparables, such as SBS (034120.KS, Not rated) and CJ E&M (130960.KQ, Not rated), have sizeable market capitalisation but have different business models. However, Hyundai Innocean, the second largest ad agency in Korea, is gearing for listing this year and is already in talks with local securities firms, according to local media such as the Korea Economic Daily. We note that Cheil Worldwide has been a clear market leader in both domestic and overseas markets, and hence may command certain valuation premium within the domestic listed ad agencies.
Potential listing of Hyundai Innocean in FY15 may be positive catalyst to draw attention to the stock
Figure 33: Hyundai Innocean financials (Unit: W bn) Sales OP OPM NP NPM
2012
2013
710.5 105.8 14.9% 81.9 11.5%
656.3 90.1 13.7% 77.6 11.8%
Source: FSS filing
Figure 34: Hyundai Innocean major ownership structure Major shareholders
Ownership
Number of shares owned
ES Chung (vice-chairman of HMC Group) SY Chung (eldest daughter of HMC Group chairman) Hyundai CMK Foundation
10.0% 40.0% 10.0%
18,000 72,000 18,000
HMC Group-related ownership
60.0%
108,000
STIC Investment Consortium (Dec 13~) Morgan Stanley PE (Aug 14~) Standard Chartered Bank (Aug 14~) Isola Capital (Aug 14~)
10.0% 20.0% 7.5% 2.5%
18,000 36,000 13,500 4,500
100.0%
180,000
Total Source: FSS filing, Credit Suisse research
Cheil Worldwide (030000.KS / 030000 KS)
14
26 January 2015
Initiating with UNDERPERFORM with TP of W15,500 Our target price is based on FY15E EV/EBITDA of 8.5x, the average of Cheil Worldwide's global peer group. We note that its peers are similarly actively engaged in M&As globally as well as regional diversification, but with lower single customer concentration. As such, we do not see the case for Cheil Worldwide to trade at a premium to the global comp multiple. We highlight that the stock is currently undergoing a P/E multiple derating after having hit the peak of 30x in early 2014 as Samsung Electronics' global smartphone sales momentum reached its peak.
TP based on FY15E EV/EBITDA of 8.5x, the average of global peers
Valuation is still demanding Figure 35: P/E multiple has been derating since hitting peak of ~30x in early 2014 35
(x)
30 25 20 15 10 5 0 2010
2011
2012
2013
2014
2015
Cheil WW 1-year fwd P/E
Source: DataStream, Credit Suisse estimates
Figure 36: Our TP is based on FY15E EV/EBITDA of 8.5x, the global peer average 12
Demanding valuation versus some of the global players
10
Global peer average 8 6 4 2 0
Cheil Worldwide
WPP
JCDecaux S.A.
Publicis
Omnicom Group Inc.
DENTSU INC.
Interpublic Group
Hakuhodo DY
Aimia
FY15E EV/EBITDA Source: IBES estimates, Credit Suisse estimates
Cheil Worldwide (030000.KS / 030000 KS)
15
26 January 2015
M&A-driven overseas growth continues, but priced in Cheil Worldwide has been active on M&A front The company's first overseas M&A deal was made in 2008, and ever since, Cheil Worldwide has been the most active ad agency on the M&A front among the Korea advertisement agencies. Overseas expansion started in the US, followed by Europe and most recently China. More importantly, management sees that the localisation process is well in progress. Most recently, the company recruited Malcolm Poynton, a seasoned professional with proven track record at global ad agencies, such as Ogilvy & Mather and Saatchi & Saatchi, and appointed him as Global CCO (Chief Creative Officer) in January 2015. The new global CCO is expected to manage and consolidate business globally from over 40 offices around the world and to focus on expanding local client bases.
Management is committed to growing its overseas business
Figure 37: Cheil Worldwide's aggressive overseas expansion via acquisitions Acquired company
Country
Iris Worldwide U.K. Bravo Asia China McKinney U.S. One Agency Middle East Open Tide Greater China China The Barbarian Group (TBG) U.S. Beattie McGuinness Bungay (BMB) U.K.
Date 2014.11 2012.08 2012.07 2011.12 2009.09 2009.12 2008.05
Current stake Consideration Price assuming Major clients (Initial stake) (W bn) 100% stake (W bn) 65% (65%) 43.3 66.6 SEC, Shell, Adidas, Mini 100% (100%) Undisclosed n.a Porsche, Hennessy, AIA 100% (100%) 57.6 57.6 Lenovo, Nationwide, Mizuno 100% (70%) Undisclosed n.a DU 98.1% (95%) Undisclosed n.a Baidu 100% (47%) 12 25.3 Apple, Google, GE, CNN 75% (49%) 15.4 59.2 Carling, ING Direct, Diageo
Source: Company data, Credit Suisse research
We highlight the most recent acquisition of Iris Worldwide as a material boost to FY15 top line as in Iris WW recorded FY13 gross profit of W88.5bn, or 9.8% of FY15E total gross profit of Cheil WW. Figure 38: Cheil Worldwide's most recent acquisition—Iris WW (UK) Cheil WW - Iris WW acquisition (11/25/2014) Consideration (W bn) Consideration (GBP mn) KRW/GBP Acquiring stake Assumed firm price - 100% stake (W bn) 2013 firm-wide gross profit (W bn) Purchase consideration/2013 GP *Cheil WW disclosed plans to acquire the remaining 35% stake from 2017 to 2019
43.3 25.0 1730.9 65% 66.6 88.5 0.75x
Source: Company data, Credit Suisse research
We note that in recent years acquired affiliates have shown slightly lower net profit margin profile versus the non-acquired affiliates, but we do not see a material gap between the two.
Cheil Worldwide (030000.KS / 030000 KS)
16
26 January 2015
Figure 39: Net revenue breakdown by region (annual) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Figure 40: NPM comparison—margin accretive? 4.5%
4.0% 3.5% 3.0% 2.5%
2.0% 1.5% 1.0% 0.5%
2010
2011
Domestic
Americas
2012 Europe
2013 Asia
China
3Q14 YTD
0.0% 2010
Others
2011
2012
Acquired portion NPM
2013
Source: Company data, Credit Suisse research
Source: Company data, Credit Suisse research
Figure 41: Acquisition driving net revenue
Figure 42: Albeit, less evident on net income
100%
100.0%
90%
90.0%
80%
80.0%
70%
70.0%
60%
60.0%
50%
50.0%
40%
40.0%
30%
3Q14 YTD
Ex acquired portion NPM
30.0%
20%
20.0%
10%
10.0%
0%
2010
2011 % acquired portion
2012
2013
3Q14 YTD
0.0% 2010
% ex-acquired portion
2011
2012
% acquired portion
Source: Company data, Credit Suisse research
2013
3Q14 YTD
% ex-acquired portion
Source: Company data, Credit Suisse research
Figure 43: Overseas accounts for ~65% of total gross profit 600.0
66.0% 64.0%
500.0
62.0% 400.0
60.0%
300.0
58.0% 56.0%
200.0
54.0% 100.0
52.0%
-
50.0% 2011
2012 Overseas gross profit
2013
2014E
Overseas gross profit %
Source: Company data, Credit Suisse estimates
Cheil Worldwide (030000.KS / 030000 KS)
17
26 January 2015
Figure 44: China expected to post highest advertising expense growth rate among large market segments Region/country North America Western Europe Asia Pacific (China) Central/Eastern Europe South America Middle East/Africa Others Total
Advertising expense
% of total advertising expense 2013
2014E
2015E
Advertising expense growth rate
2013
2014E
2015E
2016E
2016E
2013
2014E
2015E
2016E
178.87 101.05 149.17 40.95 25.00 39.70 4.41 10.39 508.60
187.50 102.81 159.10 45.72 26.73 44.37 4.72 11.47 536.71
196.07 105.19 171.63 51.19 28.57 49.06 4.95 12.62 568.10
204.43 35.2% 34.9% 34.5% 33.9% 107.67 19.9% 19.2% 18.5% 17.9% 185.40 29.3% 29.6% 30.2% 30.8% 57.37 8.1% 8.5% 9.0% 9.5% 30.73 4.9% 5.0% 5.0% 5.1% 55.40 7.8% 8.3% 8.6% 9.2% 5.14 0.9% 0.9% 0.9% 0.9% 13.89 2.0% 2.1% 2.2% 2.3% 602.66 100.0% 100.0% 100.0% 100.0%
3.5% -0.9% 5.8%
4.8% 1.7% 6.7% 11.6% 6.9% 11.8% 7.1% 10.4% 5.5%
4.6% 2.3% 7.9% 12.0% 6.9% 10.6% 4.9% 10.0% 5.8%
4.3% 2.4% 8.0% 12.1% 7.5% 12.9% 3.7% 10.1% 6.1%
5.8% 9.5% 1.4% 9.3% 3.9%
Source: Company data, Credit Suisse research
M&As to help grow its retail and digital businesses The company intends to taking the majority stake of potential targets with focus on growing the digital and retail segment. We agree with this strategy since it would be more costly to organically grow its presence in a timely manner. Currently, six subsidiaries, which have all been acquired, account for 25% of the company's consolidated revenue. Given the sluggish advertisement market seen across the global markets, we believe the risk of overpaying is also minimised. The risk may be that this has also been the strategy undertaken by key global companies such as Dentsu and Omnicom. For instance, in FY14 alone, Dentsu executed 14 acquisitions in 12 countries.
Management is focused on growing its retail and digital businesses through quality M&As
Cheil Worldwide's parent company's cash and cash equivalent balance stands at cW60 bn, while consolidated balance is at c.W250 bn as of 3Q14. However, including the proceeds from the 11.5 mn treasury shares worth W220 bn in December 2014, we see room for the company to engage in further acquisitions. Moreover, given the share price correction seen in FY14, we do not rule out the potential for the company to increase share holder return through measures such as dividends. Note that the company has not paid dividends since FY11. However, we do not see the case for valuation premium versus global peers We acknowledge that Cheil Worldwide is headed in the right direction to expand its client base in the right business segments and regions. However, we also highlight that many of its global peers such as Dentsu, Omnicom and Interpublic Group are also engaged in not too different growth strategies. Unless SEC global sales momentum is rekindled and/or Cheil Worldwide completes high-quality M&As to drive its earnings, we do not find a strong case for Cheil Worldwide to trade at a valuation premium to global peers, given its similar revenue growth outlook and higher client concentration risk. Figure 45: Three-year revenue CAGR growth Company Cheil Worldwide WPP Omnicom Group Inc. Publicis Interpublic Group Dentsu JCDecaux
2010
2011
2012
2013
2014E
26.3% 5.7% 5.2% 8.7% 2.9% 5.0% 4.4%
15.4% 3.3% 3.3% 7.2% 2.3% 8.0% 3.8%
8.0% 4.6% 3.6% 10.3% 3.8% 8.6% 4.1%
6.1% 4.8% 4.2% 10.6% 4.6% 9.2% 5.1%
8.2% 8.0% 4.7% 11.8% 4.6% 4.5% 6.5%
Source: IBES estimates, Credit Suisse estimates
Cheil Worldwide (030000.KS / 030000 KS)
18
26 January 2015
Figure 46: Cheil Worldwide GP geography breakdown CIS Africa Latin America 3% 1% 3% SEA 4%
Figure 47: Omnicom revenue geography breakdown Latin America Africa & Middle East 2% 3% Asia Pacific 11%
SWA 5%
Domestic (Korea) 33%
Middle East 5% North America 8%
North America 56%
EU 28%
EU 14%
China 24%
Source: Company data (3Q14)
Source: Company data (3Q14)
Figure 48: Interpublic revenue geography breakdown
Figure 49: Dentsu revenue geography breakdown
Latin America 6%
Other 6%
APAC 13%
Asia Pacific 12% Americas 16% Japan 51%
US 58%
Continental EU 9% UK 9%
Source: Company data (3Q14)
EMEA 20%
Source: Company data (1H14)
Cheil Worldwide (030000.KS / 030000 KS)
19
26 January 2015
Figure 50: Cheil Worldwide—DCF analysis Year to Dec.
2012
2013
Operating Income (EBIT)
126.38
Tax Provision Marginal Tax Rate Net Interest Tax Shield on Net Interest Adjusted Tax
37.86 27.6% (15.35) 4.23 42.09
36.30 26.2% (5.19) 1.36 37.66
35.17 26.0% (2.60) 0.68 35.85
84.29
92.32
92.33
NOPAT YoY % Add : Depreciation (Less) Capex (Less) Incr. in w orking capital Free Cash Flow s Terminal Value
128.18
2015E 144.42 37.82 25.0% (2.36) 0.59 38.41 106.01
2016E 153.43 40.10 25.0% (2.48) 0.62 40.72 112.70
2017E 161.56 42.15 25.0% (2.54) 0.64 42.79 118.78
2018E 175.60 45.66 25.0% (2.54) 0.64 46.29 129.30
2019E 189.21 49.06 25.0% (2.54) 0.64 49.70 139.51
2020E 200.82 51.96 25.0% (2.54) 0.64 52.60 148.22
9.5%
0.0%
14.8%
6.3%
5.4%
8.9%
7.9%
6.2%
18.14 (51.74) (38.75)
27.51 (40.38) (191.80)
34.10 (39.65) (69.52)
38.88 (45.21) (38.11)
42.67 (49.62) (35.75)
45.59 (53.01) (25.33)
48.43 (56.31) (23.51)
51.13 (59.45) (21.71)
53.64 (62.37) (19.83)
11.94
(112.35)
17.26
61.57
70.00
86.02
97.91
109.48
119.65 2,234
7.9% 1.00
7.9% 1.08
7.9% 1.16
7.9% 1.25
7.9% 1.35
7.9% 1.46
61.57
64.90
73.95
78.04
80.90
81.98
WACC (%) Discounting Factor
Discounted NPV Value PV Terminal Value Net Cash/(Debt) Value of equity No. of shares (m) Value per share (KRW)
129.98
2014E
441 1,531 (240) 1,809 115 15,724
2.5% Grow th rate to perpetuity (g)
Source: Credit Suisse estimates
Cheil Worldwide (030000.KS / 030000 KS)
20
Cheil Worldwide
(030000.KS / 030000 KS)
Figure 51: Global valuation comp Company Cheil Worldwide GIIR CJ E&M Seoul Broadcast Nasmedia KT Skylife CJ HelloVision Hyundai HCN Korea Media/Advertising Average WPP Omnicom Group Inc. Publicis Interpublic Group DENTSU INC. Hakuhodo DY Holdings Inc. ASATSU-DK INC. JCDecaux S.A. Aimia Global Advertising Average
Current Target Up/down Ticker Rating Price Price % 030000.KS U 17,800 15,500 (12.9) 035000.KS NR 6,770 NR NR 130960.KQ NR 38,200 NR NR 034120.KS NR 28,550 NR NR 089600.KQ NR 22,850 NR NR 053210.KS NR 16,550 NR NR 037560.KS NR 8,640 NR NR 126560.KS NR 4,540 NR NR WPP.L OMC.N PUBP.PA IPG.N 4324.T 2433.T 9747.T JCDX.PA AIM.TO
O NR O NR NR NR NR O O
15 74 67 21 4,765 1,168 2,905 31 14
16 NR 72 NR NR NR NR 33 22
8.2 NR 6.8 NR NR NR NR 7.5 60.0
P/E (x) P/B (x) EV/EBITDA (x) ROE % 13A 14E 15E 16E 13A 14E 15E 16E 13A 14E 15E 16E 13A 14E 15E 16E 20.0 20.5 18.0 17.0 3.1 3.0 2.6 3.0 11.2 10.8 9.6 9.0 15.3 14.5 14.6 13.8 285.1 19.6 31.5 10.9 8.7 9.5 55.0 18.3 19.4 19.1 26.4 32.7 34.4 35.5 75.6 26.3 32.0
23.0 12.6 10.4 10.8 15.5 18.4 17.7 18.6 20.7 33.8 23.7 41.4 30.2 12.5 24.1
34.2 15.3 18.8 9.7 8.5 10.0 16.4 16.5 16.3 16.5 17.7 34.9 21.6 32.8 24.9 11.3 21.4
22.6 15.6 15.8 8.7 6.7 9.4 13.7 14.7 15.0 15.6 15.4 27.0 20.2 29.7 20.7 10.9 18.8
1.2 0.9
1.0 1.0
1.0 0.9
0.9 0.9
2.0 0.8 1.0 1.5 2.4 5.3 2.9 3.9 2.0 2.0 0.9 2.7 4.0 2.9
1.8 0.7 0.9 1.4 2.2 5.9 2.6 3.8 1.6 1.9 1.0 2.6 5.4 3.0
1.6 0.7 0.8 1.3 2.1 6.0 2.4 3.7 1.6 1.8 0.9 2.5 6.8 3.1
1.4 0.6 0.8 1.3 2.2 5.7 2.6 3.6 1.5 1.7 0.9 2.6 5.4 2.9
Dividend yield % Market cap 13A 14E 15E 1/26/2015 0.0
0.0
0.0
0.0 1.4 0.7 2.5 0.8 0.9 0.9 2.4 2.5 1.9 1.8 0.7 1.0 1.1 1.7 5.2 2.0
0.0 1.9 0.7 2.8 0.9 0.9 1.0 2.7 2.8 2.1 2.1 0.8 1.3 1.4 1.9 5.2 2.2
4.5
3.3
2.5
0.4 4.8
20.2 (0.6)
2.8 6.0
3.9 5.6
0.0 2.1
9.1
4.5 4.6
3.5 4.4
3.0
10.1 11.9 9.7 11.7 9.3 11.3
6.1 11.7 9.3 11.1 8.5 12.0 4.2
5.2 4.8 10.9 10.1 8.5 7.8 9.8 9.3 7.6 6.8 7.8 6.7 7.4 6.7
11.8 16.3 11.7
11.5 7.8 9.5
10.3 7.0 8.7
19.4 9.6 10.7 10.0 14.0 28.4 15.6 15.0 6.5 6.0 2.9 3.6 15.0 11.9
14.8 7.0 8.9 10.8 12.4 30.7 14.5 19.1 5.3 8.1 2.2 8.7 42.9 16.0
14.8 7.0 8.9 9.0 12.8 34.4 15.0 19.1 4.7 8.3 2.9 10.1 60.2 18.6
14.8 7.0 8.9 9.0 13.3 37.8 14.5 19.1 5.6 8.6 3.1 11.3 71.0 20.5
2.7 0.9 0.9 1.1 2.3 2.2 1.6 1.5 0.7 0.7 4.9 1.6 4.9 2.3
9.1 6.8 7.9
1,897 104 1,371 483 175 733 620 454 730 29,194 18,455 16,663 8,611 11,684 3,701 1,039 7,683 1,899 10,992
Source: Company data, IBES estimates, Credit Suisse estimates (all market caps in USD mn)
26 January 2015
21
26 January 2015
Appendix Figure 52: Cheil Worldwide—major businesses (HQ only)
Figure 53: Gross profit geographical breakdown CIS Africa Latin America 3% 1% 3%
Broadcasting 12.2%
SEA 4%
Print 8.9%
SWA 5%
Domestic (Korea) 33%
Middle East 5%
Ad production 49.4%
North America 8% New media 29.5%
EU 14%
Source: Company data (3Q14 YTD)
China 24%
Source: Company data (3Q14)
Figure 54: Cheil Worldwide ranks among the top 15 global ad agencies 2013 Rank Korea 1
Cheil Worldwide
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Innocean Worldwide HS Ad Daehong Communications SK Planet M&C TBWA Korea Oricom Hancomm LBest Leo Burnett GroupM Korea (Media) McCann Korea Carat Korea (Media) Dentsu Korea (Media) BBDO Korea Welcomm Publicis Worldwide Diamond Ogilvy Group JWT ADventure Hakuhodo Cheil Grey Worldwide Korea
2013 Rank Global 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
WPP Omnicom Group Publicis Group Interpublic Group of Cos. Dentsu Inc. Havas Hakuhodo DY Holdings Alliance Data Systems Corp's Epsilon IBM Corp.'s IBM Interactive Experience MDC Partners Experian's Experian Marketing Services Sapient Corp's SapientNitro Acxiom Corp. DJE Holdings Cheil Worldwide
16 17 18 19 20
Aimia BlueFocus Communication Group Media Consulta PwC's PwC Digital Asatsu-DK
Source: KFAA Ad Agency Research Report (Mar 2014)
Cheil Worldwide (030000.KS / 030000 KS)
22
26 January 2015
Figure 55: Company history Year
Major events / landmarks
1973 1977
Founded as a house agency for Samsung Group Ad billings exceeded W10 bn Initiated the first Annual Consumer Research of Korean ad industry Published the industry's first annual advertising yearbook Ad billings exceeded W100 bn Korea's first ad agency to win prize at the Clio Awards Established the industry's first overseas network in Tokyo, Japan Korea's first ad agency to win the silver prize in Cannes Lions Established a branch in New York City—first overseas office established Korea's first ad agency to win the gold prize in Cannes Lions First in the industry to list on Korea Stock Exchange Set up JV 'Hakuhodo-Cheil' with Hakuhodo Japan Staged the opening ceremony for the 2002 FIFA World Cup Ad billings exceeded W1tn Executed Korean cultural events for the 2005 APEC Summit Ad billings exceeded W2 tn Changed the company name (English) to the current 'Cheil Worldwide' Acquired shares in BMB (UK)—first overseas M&A Korea’s first ad agency to win the silver prize at the Young Lions Competition of Cannes Lions First in the industry to win the grand prize at the Korea Ad Awards for three consecutive years Acquired the Barbarian Group (US) Acquired Opentide China (CN) Executed comprehensive PR activities for the 2010 G20 Seoul Summit Korea’s first ad agency to win the grand prize at Cannes Lions Established 'One Agency' in Dubai, UAE Acquired McKinney (US) Acquired Bravo (CN) Won the highest number of prizes at Cannes among Korean ad agencies (12 in main categories) The industry’s first to sweep the grand prizes of major ad awards, including Cannes Lions, Spikes Asia, and Clio Awards Established GCSC(Good Company Solution Center) Established the DnA Center Acquired Iris Worldwide (UK)
1979 1987 1988 1991 1992 1997 1998 2000 2002 2005 2007 2008
2009
2010 2011 2012
2013
2014
Source: Company data, Credit Suisse research
Figure 56: Cheil Worldwide major shareholders—a Samsung group company Samsung C&T and affiliated parties 28.4% Others 41.7%
Korea National Pension Service 11.3%
Treasury 6.0%
Korea Investment Management 6.4%
Matthews International Funds 6.2%
Source: Latest FSS Filing (Jan 2015)
Cheil Worldwide (030000.KS / 030000 KS)
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26 January 2015
Figure 57: Korea ad market assumptions 2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
7,797 -2.4% 0.8% 2.8%
7,256 -6.9% 0.7% 0.7%
8,450 16.5% 0.7% 3.5%
9,200 8.9% 0.7% 3.7%
9,385 2.0% 0.7% 2.3%
9,589 2.2% 0.7% 3.0%
9,800 2.2% 0.7% 3.5%
10,098 3.0% 0.7% 3.8%
10,654 5.5% 0.7% 4.0%
11,307 6.1% 0.7%
12,017 6.3% 0.7%
1,900 277 1,658 480 860 1,190
1,671 223 1,501 439 779 1,243
1,931 257 1,644 489 965 1,547
640 766 26
625 737 39
749 806 63
2,078 260 1,709 524 1,174 1,856 60 845 573 122
1,931 236 1,654 508 1,322 1,954 210 911 542 119
1,827 225 1,545 465 1,383 2,003 460 965 581 137
1,700 200 1,450 480 1,400 2,100 775 975 586 134
1,717 189 1,406 485 1,418 2,247 1,040 986 592 19
1,751 184 1,384 490 1,436 2,467 1,290 996 598 58
1,804 181 1,373 495 1,454 2,729 1,506 1,007 604 154
1,894 180 1,368 499 1,472 2,966 1,683 1,018 610 326
TV
-9.9%
-12.0%
15.5%
7.6%
-7.1%
-5.4%
-7.0%
1.0%
2.0%
3.0%
5.0%
Radio Newspaper Periodicals CATV Internet Mobile Outdoor Production Others
-1.4% -6.9% -0.7% 3.6% 16.7%
-19.4% -9.5% -8.7% -9.4% 4.5%
15.0% 9.5% 11.4% 23.8% 24.5%
1.5% 4.0% 7.1% 21.7% 20.0%
-5.9% -2.7% 26.0%
-2.3% -3.8% 46.9%
19.9% 9.4% 63.4%
-9.4% -4.7% -3.2% -6.6% -3.1% -8.4% 12.6% 4.6% 5.3% 2.5% 250.0% 119.0% 12.7% 7.8% 5.9% -29.0% -5.4% 7.2% 94.4% -2.8% 15.0%
-11.0% -6.1% 3.2% 1.3% 4.8% 68.5% 1.1% 0.9% -2.1%
-5.5% -3.1% 1.0% 1.3% 7.0% 34.2% 1.1% 1.0%
-2.7% -1.5% 1.0% 1.3% 9.8% 24.0% 1.1% 1.0%
-1.4% -0.8% 1.0% 1.3% 10.6% 16.8% 1.1% 1.0%
-0.7% -0.4% 1.0% 1.3% 8.7% 11.7% 1.1% 1.0%
-85.9%
24.4% 3.6% 21.3% 6.2% 11.0% 15.3%
23.0% 3.1% 20.7% 6.0% 10.7% 17.1%
22.8% 3.0% 19.5% 5.8% 11.4% 18.3%
8.2% 9.8% 0.3%
8.6% 10.2% 0.5%
8.9% 9.5% 0.7%
17.3% 2.0% 14.8% 4.9% 14.3% 21.4% 7.9% 9.9% 6.0% 1.4%
17.0% 1.9% 13.9% 4.8% 14.0% 22.3% 10.3% 9.8% 5.9% 0.2%
Korea ad mkt Korea advertisement mkt (W bn) % change Ad mkt to nominal GDP GDP growth rate Breakdown by value (W bn) TV Radio Newspaper Periodicals CATV Internet Mobile Outdoor Production Others YoY % change
209.0% 165.4% 111.4%
% of total TV Radio Newspaper Periodicals CATV Internet Mobile Outdoor Production Others
22.6% 2.8% 18.6% 5.7% 12.8% 20.2% 0.7% 9.2% 6.2% 1.3%
20.6% 2.5% 17.6% 5.4% 14.1% 20.8% 2.2% 9.7% 5.8% 1.3%
19.1% 2.3% 16.1% 4.8% 14.4% 20.9% 4.8% 10.1% 6.1% 1.4%
16.4% 1.7% 13.0% 4.6% 13.5% 23.2% 12.1% 9.4% 5.6% 0.5%
16.0% 1.6% 12.1% 4.4% 12.9% 24.1% 13.3% 8.9% 5.3% 1.4%
15.8% 1.5% 11.4% 4.2% 12.3% 24.7% 14.0% 8.5% 5.1% 2.7%
Source: Company data, Credit Suisse estimates
Cheil Worldwide (030000.KS / 030000 KS)
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26 January 2015
Companies Mentioned (Price as of 26-Jan-2015) ASATSU-DK INC. (9747.T, ¥2,905) Acxiom (ACXM.OQ, $19.34) Aimia (AIM.TO, C$13.75) Alliance Data Systems (ADS.N, $298.54) Bluefocus (300058.SZ, Rmb26.79) CJ E&M (130960.KQ, W38,200) CJ HelloVision (037560.KS, W8,640) Cheil Worldwide (030000.KS, W17,800, UNDERPERFORM, TP W15,500) DENTSU INC. (4324.T, ¥4,765) Experian (EXPN.L, 1162.0p) GIIR (035000.KS, W6,770) Hakuhodo DY Holdings Inc. (2433.T, ¥1,168) Hyundai HCN (126560.KS, W4,540) International Business Machines Corp. (IBM.N, $155.87) Interpublic Group (IPG.N, $20.59) JCDecaux S.A. (JCDX.PA, €30.7) KT Skylife (053210.KS, W16,550) Nasmedia (089600.KQ, W22,850) Omnicom Group Inc. (OMC.N, $74.36) Oricom (010470.KQ, W4,760) Publicis (PUBP.PA, €67.42) Samsung Electronics (005930.KS, W1,389,000) Sapient (SAPE.OQ, $24.9) Seoul Broadcast (034120.KS, W28,550) WPP (WPP.L, 1479.0p)
Disclosure Appendix Important Global Disclosures Taewon Kim and Jung Il Lee, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for Cheil Worldwide (030000.KS) 030000.KS Date 31-Jan-12 13-Apr-12 25-Oct-12 16-Oct-13
Closing Price (W) 17,400 19,600 23,300 25,400
Target Price (W) 14,500 24,000 20,400
Rating N O* U NR
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L O U T PERFO RM
U N D ERPERFO RM N O T RA T ED
Cheil Worldwide (030000.KS / 030000 KS)
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26 January 2015
3-Year Price and Rating History for Samsung Electronics (005930.KS) 005930.KS Date 14-Mar-12 30-Apr-12 26-Jun-12 27-Nov-12 06-Feb-13 27-Jan-14 07-Jul-14 08-Jul-14 28-Aug-14 07-Oct-14
Closing Price (W) 1,250,000 1,390,000 1,139,000 1,416,000 1,427,000 1,292,000 1,292,000 1,295,000 1,242,000 1,162,000
Target Price (W) 1,490,000 1,610,000 1,700,000 1,720,000 1,900,000 1,760,000 1,740,000 1,720,000 1,700,000 1,680,000
Rating O *
O U T PERFO RM
* Asterisk signifies initiation or assumption of coverage.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10 15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
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Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution
Rating
Versus universe (%)
Of which banking clients (%)
Outperform/Buy* 46% (54% banking clients) Neutral/Hold* 38% (50% banking clients) Underperform/Sell* 14% (44% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Cheil Worldwide (030000.KS / 030000 KS)
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26 January 2015
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-andanalytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for Cheil Worldwide (030000.KS) Method: Our TP of W15,500 is based on FY15E EV/EBITDA of 8.5x, which is the average of global peer group that are also actively engaged in acquisitions and regional diversification, but with lower largest customer concentration. We used basic EPS using total share count commensurate with what Bloomberg consensus is indicating. Risk:
Key risks to our view and TP of W15,500 include better than expected domestic economy from low oil price impact, better than expected Samsung group related ad spending, and better than expected execution of overseas M&As.
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Cheil Worldwide (030000.KS / 030000 KS)
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Cheil Worldwide (030000.KS / 030000 KS)
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Cheil Worldwide (030000.KS / 030000 KS)
MD0203
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