Cheil Worldwide ( KS)

Transcription

1 ( KS) Publicis potential stake purchase to renew attention on enterprise value Media Company Update January 18, 2016 (Maintain) Buy Publicis potential stake purchase will impact shares for some time According to a Bloomberg report published on January 13 th, the French advertising company Publicis Groupe is considering a tender offer for a 30% stake in Cheil Worldwide. While neither side has made an official comment on the report, no corrections have been issued so far and the market is now weighing a potential M&A deal between the two companies. We believe such speculation will have an impact on s shares for some time. Target Price (12M, W) 30,000 Share Price (01/15/16, W) 20,550 Expected Return 46% OP (15F, Wbn) 132 Consensus OP (15F, Wbn) 135 EPS Growth (15F, %) 0.7 Market EPS Growth (15F, %) 21.0 P/E (15F, x) 23.3 Market P/E (15F, x) 11.0 KOSPI 1, Market Cap (Wbn) 2,364 Shares Outstanding (mn) 115 Free Float (%) 59.4 Foreign Ownership (%) 24.9 Beta (12M) Week Low 16, Week High 25,000 (%) 1M 6M 12M Absolute Relative KOSPI The world s third-largest advertising group, Publicis has a market cap of W15.3tr and gross profit of W12.4tr (based on 2015F forecast), which are, respectively, 6.5 times and 13 times those of. One common denominator between the two companies is Samsung Electronics (SEC); Publicis handles SEC s global media buying and creative businesses (mainly for the US market), while serves as SEC s global non-media agency and full-service agency in Asia (Korea and China). In terms of growth, Publicis lags far behind WPP (the world s no. 1 advertising company) and Omnicom (no. 2). In December 2015, the firm lost its Procter & Gamble US media account to Omnicom and its L Oréal US media account to WPP. Publicis also does not have a significant subsidiary operating in China s fast-growing digital marketing space. We think Publicis took an interest in because of the latter s relationship with SEC and digital marketing presence in China. In particular, the continuation of the SEC ad business is likely to be the most important consideration behind the deal. 4Q15 earnings likely affected by Europe headwind; China will be key in 2016 We believe s 4Q15 earnings were hurt by a temporary deterioration in Europe, where the November terrorist attacks in Paris likely had a negative impact on marketing activities in the region. Europe accounts for 21% of the company s revenue and 13% of its net profit (based on 1Q15-3Q15 figures). On the other hand, the company s China operations likely continued solid growth in the quarter, aided by the addition of new advertisers and seasonal peak effects. Looking ahead, the biggest earnings determinant in 2016 will likely be China, which has become the company s largest market, representing 30% of revenue and roughly half of net profit. With the LTE penetration rate reaching 30%, China s digital ad market is expanding rapidly, which should benefit the company s subsidiary Cheil PengTai. Reaffirm Buy and TP of W30,000 We reiterate our Buy rating and target price of W30,000 on. We believe Publicis interest in taking a stake in and the strong growth of China s digital ad market will bring renewed attention to the company s enterprise value. Daewoo Securities Co., Ltd. [Telecom Service / Media] Jee-hyun Moon jeehyun.moon@dwsec.com Nu-ri Ha nuri.ha@dwsec.com FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F Revenue (Wbn) 2,365 2,709 2,666 2,835 3,039 3,263 OP (Wbn) OP margin (%) NP (Wbn) EPS (W) ,040 1,148 ROE (%) P/E (x) P/B (x) Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the t U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

2 Publicis interest in Key consideration is SEC business One thing Publicis and share in common is having SEC as a client. In our view, Publicis interest in is attributable to its need to maintain its business with SEC (one of its most important advertisers) and reduce its high sales exposure to the US and Europe. Table 1. Major ad agency business for SEC and Samsung Group in the US Ad company Affiliated agency Agency business McKinney Full-service ad agency Iris Worldwide Publicis Leo Burnett Creative Starcom USA Tapestry Bartle Bogle Hegarty Rosetta Source: Advertising Age, Experimental promotion US media agency Hispanic media agency General ads Digital marketing, customer management Figure 1. Details of Publicis potential friendly takeover Figure 2. Publicis stock has fallen on loss of major advertisers (EUR) 80 Publicis share price Publicis lost two of itsus media accounts in Dec. 2015: -Procter & Gamble -L Oréal Procter & Gamble starts ad agency review in May /15 3/15 5/15 7/15 9/15 11/15 1/16 Source: Bloomberg, Figure 3. Publicis organic growth is slowest among the global top three Source: Thomson Reuters, Figure 4. Publicis revenue concentrated in North America and Europe (%) WPP Omnicom Publicis Asia Pacific 11% Latin America 4% Middle East/Africa 3% Europe 27% North America 55% F Notes: Based on 1Q-3Q15 average Source: Bloomberg, Notes: Based on 1Q-3Q15 cumulative revenue Source: Company data, 2

3 Enterprise value analysis Samsung business and China digital operations most important to EV In our view, s enterprise value lies primarily in its Samsung Group business and China digital marketing operations. Our target price of W30,000 assumes the company keeps its contracts with group affiliates and reflects the operating value of the China business. Group affiliates, including SEC, contribute 65% of s gross profit (based on 1Q15-3Q15 figures). Group affiliates are also the company s biggest shareholder, holding a combined stake of 28.6%. China has become the company s largest market, representing 30% of revenue and 49% of net profit. With the LTE penetration rate reaching 30%, China s digital ad market is expanding rapidly. This should benefit the company s consolidated subsidiary Cheil PengTai, which ranks third among China s digital marketing agencies and first among foreign-owned digital marketing agencies. The no. 1, 2, 6, and 7 digital marketing agencies in China are all local companies. The no. 4 and 8 agencies belong to Japan s Dentsu Inc. (the world s fifth-largest ad company), the no. 5 and 9 agencies are part of WPP s network, and the no. 10 agency is owned by Omnicom. Despite being the world s third-largest ad company, Publicis does not have a single digital marketer that ranks within the top ten. Figure 5. Samsung Group is Cheil s biggest advertiser and shareholder Figure 6. ranks third among China s s digital marketing agencies Notes: Sum of stakes held by Samsung C&T Corporation (12.64%), SEC (12.60%), Samsung Card (3.04%), Samsung Life (special account), and executives. Source: Company data, Source: China Internet Weekly (2014), company data, PengTai, KDB Daewoo Securities Research Table 2. Calculation of target price using sum um-of of-the the-parts methodology (Wbn, x, W) Category Valuation Notes Operating value 3,081 net profit x Regional contribution based on net profit Korea avg. of low-growth global ad peers China ,984 Applied avg. of Chinese ad peers US and Europe avg. of low-growth global ad peers Other avg. of total global ad peers Investment asset value 17 Listed stock Unlisted stock Investments in affiliated firms 4 Closing price as of end-3q15 10 Book value as of end-3q15 4 Book value as of end-3q15 Total asset value 3,099 Net debt -321 As of end-3q15 Net asset value 3,420 Number of shares outstanding ( 000 shares) 115,041 Number of shares issued 12-month target price (W) 30,000 Rounded Notes: Chinese ad peer group is average of BlueFocus, Guangdong Advertising, Beijing Tensyn Digital, Zhejiang Huamei Holdings, and Simei Media; Investment in affiliated firms based on consolidated earnings review report; Financial data as of end-3q15 (2015 audit report not yet released) Source: Bloomberg, 3

4 Earnings forecasts Europe setback only temporary; China will be key in the long term We believe 4Q15 earnings in Europe suffered a temporary deterioration due to the terrorist attacks in Paris. On the other hand, the company s China operations likely continued solid growth in the quarter, aided by the addition of new advertisers and the growing digital marketing market. Table 3. Quarterly and annual earnings (Wbn, %) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15F F Revenue ,666 2,835 3,039 Gross profit ,003 Parent Overseas Gross profit contribution Parent Overseas Operating profit OP margin Net profit Net margin YoY Revenue Gross profit Parent Overseas Operating profit Net profit Notes: All figures are based on consolidated K-IFRS; For advertising firms such as, gross profit reflects net revenue; Net profit is attributable to controlling interests and non-controlling interests. Source: estimates Table 4. Earning forecast revisions (Wbn, W, %) Previous Revised % chg. 2015F 2015F 2015F Revenue 2,846 3,051 2,835 3, Revised down Europe revenue estimates Gross profit 956 1, , Notes Operating profit Reflects top-line revision Net profit EPS 921 1, , OP margin Net margin Notes: All figures are based on consolidated K-IFRS; Net profit is attributable to controlling interests and non-controlling interests; EPS is based on controlling interests Source: estimates Figure 7. Paris attacks likely affected marketing in Europe Figure 8. New advertisers and high growth in China Source: WSJ, Source: Company data, 4

5 ( KS/Buy/TP: W30,000) Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F Revenue 2,666 2,835 3,039 3,263 Current Assets 1,523 1,515 1,708 1,926 Cost of Sales 1,873 1,885 2,036 2,186 Cash and Cash Equivalents Gross Profit ,003 1,077 AR & Other Receivables ,066 1,145 SG&A Expenses Inventories Operating Profit (Adj) Other Current Assets Operating Profit Non-Current Assets Non-Operating Profit Investments in Associates Net Financial Income Property, Plant and Equipment Net Gain from Inv in Associates Intangible Assets Pretax Profit Total Assets 1,844 1,917 2,112 2,328 Income Tax Current Liabilities 905 1,010 1,081 1,159 Profit from Continuing Operations AP & Other Payables Profit from Discontinued Operations Short-Term Financial Liabilities Net Profit Other Current Liabilities Controlling Interests Non-Current Liabilities Non-Controlling Interests Long-Term Financial Liabilities Total Comprehensive Profit Other Non-Current Liabilities Controlling Interests Total Liabilities 961 1,075 1,150 1,233 Non-Controlling Interests Controlling Interests ,079 EBITDA Capital Stock FCF (Free Cash Flow) Capital Surplus EBITDA Margin (%) Retained Earnings ,079 1,211 Operating Profit Margin (%) Non-Controlling Interests Net Profit Margin (%) Stockholders' Equity ,095 Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F Cash Flows from Op Activities P/E (x) Net Profit P/CF (x) Non-Cash Income and Expense P/B (x) Depreciation EV/EBITDA (x) Amortization EPS (W) ,040 1,148 Others CFPS (W) 1,506 1,592 1,732 1,856 Chg in Working Capital BPS (W) 8,704 9,647 10,687 11,835 Chg in AR & Other Receivables DPS (W) Chg in Inventories Payout ratio (%) Chg in AP & Other Payables Dividend Yield (%) Income Tax Paid Revenue Growth (%) Cash Flows from Inv Activities EBITDA Growth (%) Chg in PP&E Operating Profit Growth (%) Chg in Intangible Assets EPS Growth (%) Chg in Financial Assets Accounts Receivable Turnover (x) Others Inventory Turnover (x) Cash Flows from Fin Activities Accounts Payable Turnover (x) Chg in Financial Liabilities ROA (%) Chg in Equity ROE (%) Dividends Paid ROIC (%) Others Liability to Equity Ratio (%) Increase (Decrease) in Cash Current Ratio (%) Beginning Balance Net Debt to Equity Ratio (%) Ending Balance Interest Coverage Ratio (x) Source: Company data, estimates 5

6 APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price (030000) 11/24/2015 Buy 30,000 10/21/2015 Buy 28,000 07/23/2015 Buy 26,000 06/11/2015 Buy 28,000 04/24/2015 Buy 30,000 10/24/2014 Buy 27,000 10/13/2014 Buy 31,000 04/21/2014 Buy 32,000 01/09/2014 Buy 34,000 (W) 40,000 30,000 20,000 10,000 0 Jan 14 Jan 15 Jan 16 Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ), Target price ( ), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Equity Ratings Distribution Buy Trading Buy 71.08% 11.76% 17.16% 0.00% * Based on recommendations in the last 12-months (as of December 31, 2015) Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Analyst Certification The research analysts who prepared this report (the Analysts ) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein. Disclaimers This report is published by Daewoo Securities Co., Ltd. ( Daewoo ), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof. Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment Hold Sell 6

7 banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Distribution United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons ). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction. KDB Daewoo Securities International Network Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc. Head Office 34-3 Yeouido-dong, Yeongdeungpo-gu Seoul Korea Two International Finance Centre Suites Finance Street, Central Hong Kong, China 320 Park Avenue 31st Floor New York, NY United States Tel: Tel: Tel: Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch 41st Floor, Tower Old Broad St. London EC2N 1HQ United Kingdom Six Battery Road #11-01 Singapore, th Floor, Yusen Building Marunouchi, Chiyoda-ku Tokyo Japan Tel: Tel: Tel: Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office 2401A, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue Chaoyang District, Beijing China Room 38T31, 38F SWFC 100 Century Avenue Pudong New Area, Shanghai China Suite 2103, Saigon Trade Center 37 Ton Duc Thang St, Dist. 1, Ho Chi Minh City, Vietnam Tel: Tel: Tel: Daewoo Investment Advisory (Beijing) Co., Ltd. 2401B, 24th Floor, East Tower, Twin Towers B-12 Jianguomenwai Avenue, Chaoyang District, Beijing China Daewoo Securities (Mongolia) LLC #406, Blue Sky Tower, Peace Avenue 17 1 Khoroo, Sukhbaatar District Ulaanbaatar Mongolia PT. Daewoo Securities Indonesia Tel: Tel: Tel: Equity Tower Building Lt.50 Sudirman Central Business District Jl. Jendral Sudirman Kav , Jakarta Selatan Indonesia