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Cheil Worldwide (030000 KS) Publicis’ Potential Stake Purchase to Renew Attention on Enterprise Value

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Cheil Worldwide (030000 KS) Publicis’ Potential Stake Purchase to Renew Attention on Enterprise Value Cheil Worldwide (030000 KS) Publicis’ potential stake purchase to renew attention on enterprise value Media Publicis’ potential stake purchase will impact shares for some time According to a Bloomberg report published on January 13 th , the French advertising Company Update company Publicis Groupe is considering a tender offer for a 30% stake in Cheil January 18, 2016 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 (Maintain) Buy Cheil Worldwide’s shares for some time. The world’s third-largest advertising group, Publicis has a market cap of W15.3tr and Target Price (12M, W) 30,000 gross profit of W12.4tr (based on 2015F forecast), which are, respectively, 6.5 times and 13 times those of Cheil Worldwide. One common denominator between the two Share Price (01/15/16, W) 20,550 companies is Samsung Electronics (SEC); Publicis handles SEC’s global media buying and creative businesses (mainly for the US market), while Cheil Worldwide serves as SEC’s Expected Return 46% 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 ) OP (15F, Wbn) 132 and Omnicom (no. 2). In December 2015, the firm lost its Procter & Gamble US media Consensus OP (15F, Wbn) 135 account to Omnicom and its L’Oréal US media account to WPP. Publicis also does not EPS Growth (15F, %) 0.7 have a significant subsidiary operating in China’s fast-growing digital marketing space . Market EPS Growth (15F, %) 21.0 We think Publicis took an interest in Cheil Worldwide because of the latter’s relationship P/E (15F, x) 23.3 with SEC and digital marketing presence in China. In particular, the continuation of the Market P/E (15F, x) 11.0 SEC ad business is likely to be the most important consideration behind the deal. KOSPI 1,878.87 4Q15 earnings likely affected by Europe headwind; China will be key in 2016 Market Cap (Wbn) 2,364 We believe Cheil Worldwide’s 4Q15 earnings were hurt by a temporary deteri oration in Shares Outstanding (mn) 115 Europe, where the November terrorist attacks in Paris likely had a negative impact on Free Float (%) 59.4 marketing activities in the region. Europe accounts for 21% of the company’s revenue Foreign Ownership (%) 24.9 and 13% of its net profit (based on 1Q15-3Q15 figures). Beta (12M) 1.12 52-Week Low 16,450 On the other hand, the company’s China operations likely continued solid growth in the 52-Week High 25,000 quarter, aided by the addition of new advertisers and seasonal peak effects . Looking (%)(%)(%) 1M1M1M 6M6M6M 12M12M12M ahead, the biggest earnings determinant in 2016 will likely be China, which has become Absolute -1.0 10.5 21.2 the company’s largest market , representing 30% of revenue and roughly half of net Relative 1.9 21.9 23.5 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. 160 Cheil Worldwide KOSPI 140 Reaffirm Buy and TP of W30,000 120 We reiterate our Buy rating and target price of W30,000 on Cheil Worldwide. We believe Publicis’ interest in taking a stake in Cheil Worldwide and the strong growth of 100 China’s digital ad market will bring renewed attention to the company’s enterpr ise 80 value. 1.15 5.15 9.15 1.16 Daewoo Securities CCo.,o., Ltd. 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 [Telecom Service / Media] OP (Wbn) 126 130 127 132 154 171 Jee-hyun Moon OP margin (%) 5.3 4.8 4.8 4.7 5.1 5.2 +822-768-3615 NP (Wbn) 94 99 102 102 120 132 [email protected] EPS (W) 817 857 883 890 1,040 1,148 ROE (%) 13.6 14.7 13.2 12.0 13.5 13.0 Nu-ri Ha +822-768-4130 P/E (x) 26.4 32.1 19.5 23.3 19.8 17.9 [email protected] P/B (x) 3.1 3.5 2.0 2.1 1.9 1.7 Notes: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, KDB Daewoo Securities Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. January 18, 2016 Cheil Worldwide Publicis’ interest in Cheil Worldwide Key consideration is SEC business One thing Publicis and Cheil Worldwide share in common is having SEC as a client. In our view, Publicis’ interest in Cheil Worldwide 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. TableTableTable 111.1. MMMajorMajor ad agency business for SEC and Samsung GGGroupGrouprouproup in the US Ad company Affiliated agency Agency business Cheil Worldwide McKinney Full-service ad agency Iris Worldwide Experimental promotion Publicis Leo Burnett Creative Starcom USA US media agency Tapestry Hispanic media agency Bartle Bogle Hegarty General ads Rosetta Digital marketing, customer management Source: Advertising Age, KDB Daewoo Securities Research Figure 111.1. DetailDetailssss of PublicisPublicis’’’’ potential friendly takeover Figure 222.2. PublicisPublicis’’’’ stock has fallenfallenfallen ononon loss of major advertisers (EUR) 80 Publicis share price 75 Publicis lost two of its US media accounts in Dec. 2015: - Procter & Gamble 70 -L’Oréal 65 60 Procter & Gamble starts ad agency 55 review in May 2015 50 1/15 3/15 5/15 7/15 9/15 11/15 1/16 Source: Bloomberg, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research Figure 333.3. PublicisPublicis’’’’ organic growth is slowest among the global Figure 444.4. PublicisPublicis’’’’ revenue concentrated in North America and top threethreethree Europe (%) Middle 7 WPP Omnicom Publicis East/Africa Latin America 3% 4% 6 Asia Pacific 11% 5 Europe 4 27% 3 2 North America 55% 1 0 2011 2012 2013 2014 2015F Notes: Based on 1Q-3Q15 average Notes: Based on 1Q-3Q15 cumulative revenue Source: Bloomberg, KDB Daewoo Securities Research Source: Company data, KDB Daewoo Securities Research KDB Daewoo Securities Research 2 January 18, 2016 Cheil Worldwide Enterprise value analysis Samsung business and China digital operations most important to EV In our view, Cheil Worldwide’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 Cheil Worldwide’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 555.5. Samsung GGGroupGroup is Cheil’s biggest advertiser and Figure 666.6. Cheil Worldwide ranks third among ChinaChina’’’’ss digital shareholder marketing agencies Notes: Sum of stakes held by Samsung C&T Corporation (12.64%), SEC (12.60%), Source: China Internet Weekly (2014), company data, PengTai, KDB Daewoo Samsung Card (3.04%), Samsung Life (special account), and executives. Securities Research Source: Company data, KDB Daewoo Securities Research TableTableTable 222.2. Calculation of target price using sssumsumumum----ofofofof----thethethethe----ppppartsartsartsarts methodology (Wbn, x, W) Category Valuation NotesNotesNotes Operating value 3,03,03,0813,0 818181 2016F net profit x Regional contribution based on 2016F net profit Korea 18 14.2 256 2016F avg. of low-growth global ad peers ChinaChinaChina 54 36.7 1,984 Applied 2016F avg. of Chinese adadad peerspeerspeers US and Europe 22 14.2 307 2016F avg. of low-growth global ad peers Other 26 20.2 534 2016F avg. of total global ad peers Investment asset value 17 Listed stock 4 Closing price as of end-3Q15 Unlisted stock 10 Book value as of end-3Q15 Investments in affiliated firms 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 115,041 Number of shares issued (‘000 shares) 121212-12 ---monthmonth tttargettarget 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, KDB Daewoo Securities Research KDB Daewoo Securities Research 3 January 18, 2016 Cheil Worldwide 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.
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