Cheil Worldwide (030000 KS/Buy)

Foreign investor and overseas subsidiary Media trends ¢ Foreign investors’ attention shifting from shareholder return policy to growth Company Update ¢ Key issues: M&A strategy, China business, and current status/outlook of SEC business February 16, 2015 ¢ US business has generated a profit for the first time in three years; Previously acquired agencies appear to be faring well ¢ Maintain Buy and TP of W27,000 Daewoo Securities CCo.,o., Ltd.

[Telecom Service / Media] 1. Foreign investors’ primary focus is growth potential

Jee-hyun Moon +822-768-3615 Since the start of this month, foreign investors have been net buyers of Cheil Worldwide, [email protected] leading to an increasing percentage of foreign ownership. Investor sentiment has shown clear th signs of improvement following the company’s earnings release on January 29 . Below, we summarize highlights from our recent discussions with foreign investors.

Many foreign investors, including long-only funds, appeared more interested in the company’s growth outlook and strategy than in shareholder return policies (dividends, etc.). Investors

had questions regarding domestic affiliate advertisers like Samsung Electronics (SEC), as well as prospective foreign non-affiliate advertisers; we believe many of these questions were meant to assess the company’s future growth potential. In particular, some of the most frequently asked questions concerned the agency’s M&A strategy and China business. 1) M&A: Like other major global ad agencies, Cheil Worldwide is turning to inorganic opportunities, such as M&As, to drive growth. Recently, Cheil Worldwide acquired UK-based Iris Worldwide, in its largest acquisition to date. The agency is weighing further M&A deals by leveraging its W480bn cash pile.

In assessing potential M&A candidates, the agency takes several factors into consideration, including whether the company has a good reputation in the local market, has global advertisers in its account roster, and is competitive with global peers from SEC’s perspective. Cheil Worldwide sees China and India as the biggest growth markets, and digital and retail as the biggest growth categories. 2) China: China has become a fierce battleground for global ad agencies, as the local ad market is relatively free from regulations and is growing rapidly amid rising consumer spending. Cheil Worldwide has been making strides in China’s digital marketing segment, operating three brands in the country: Cheil China, Cheil PengTai (formerly known as OpenTide Greater China), and Bravo Asia. Cheil’s China business 1) is well-localized, 2) contributes the largest percentage of overseas gross profit, 3) has a higher exposure to non- affiliate advertisers, and 4) generates faster growth and higher profit margins relative to other regions.

China’s slowing GDP growth has raised some worries over the agency’s operations in the country. However, we believe China still has plenty of room for growth for advertising agencies. Currently, Cheil derives most of its China revenue in first-tier cities like Beijing and Shanghai. Going forward, the agency plans to expand its geographical coverage in line with the Chinese government’s urbanization efforts in the southern and western regions, which should open up more opportunities for growth. Meanwhile, affiliate clients (SEC, Cheil Industries, etc.), as well as local and global advertisers, are continuing to build up their marketing campaigns in China, offering good visibility on billings.

FY (Dec.) 12/11 12/12 12/13 12/14P 12/15F 12/16F Revenue (Wbn) 1,758 2,365 2,709 2,666 3,053 3,280 OP (Wbn) 107 126 130 127 154 171 OP margin (%) 6.1 5.3 4.8 4.8 5.0 5.2 NP (Wbn) 93 94 99 103 121 133 EPS (W) 811 817 857 897 1,048 1,152 ROE (%) 13.7 13.6 14.7 13.6 13.1 12.7 P/E (x) 23.4 26.4 32.1 19.2 18.7 17.0 P/B (x) 3.0 3.1 3.5 2.0 2.1 1.8 Notes: All figures are based on consolidated K-IFRS; NP refers to 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 DISCLOSURESDISCLOSURES & DISCLAIMERS IN APPENDIX 1 AATT THE END OF REPORT.

February 16, 2015 Cheil Worldwide

2. SEC to serve as a basis for growth

Cheil Worldwide generates 70% of its revenue from SEC-related marketing campaigns, and is looking for additional opportunities in line with SEC’s business and marketing trends. SEC is now trying harder to achieve more efficient marketing spending, as its handset business has passed the rapid growth stage. We expect SEC to expand the share of its marketing budget allotted to emerging markets, as developed markets already have high smartphone penetration.

However, this strategy is unlikely to affect Cheil Worldwide meaningfully, given that SEC’s marketing via traditional media in advanced markets accounts for a low proportion of Cheil Worldwide’s revenue. The ad agency’s SEC-related revenue mainly stems from non-media and non-traditional advertising, including exhibitions, campaigns, and retail/digital marketing, which tend to generate steady revenue regardless of economic conditions.

Retail marketing activities are commonly used in emerging countries, especially China, India, and African countries; such activities involve direct contact with consumers. In addition, new media marketing (including digital marketing) is likely to be used widely in such countries going forward. Cheil Worldwide has strengths in these kinds of marketing campaigns.

Having SEC as a major customer not only ensures high earnings visibility for Cheil Worldwide, but also makes it easier to acquire overseas ad agencies, given SEC’s attractiveness as a client for foreign ad agencies.

McKinney, which Cheil Worldwide acquired in 2012, has secured orders for SEC’s US media ads. In addition, Iris Worldwide, a UK-based ad agency specializing in digital and retail marketing that Cheil Worldwide recently acquired, is likely to find opportunities amid SEC’s increasing non-media marketing activities.

Figure 1. Cheil Worldwide’s SECSECSEC marketing campaigns mainly take thththeth e form of nonnon----traditionaltraditional media * Galaxy S5 & Note 4 * Sochi 2014 Winter Olympic Games

Source: KDB Daewoo Securities Research

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3. Earnings guidance reflects Cheil Worldwide’s efforts to resume growth

For 2015, Cheil Worldwide projects high single-digit growth in gross operating profit based on its existing businesses. Factoring in the recent acquisition of Iris Worldwide and the potential boost from further M&A activities, the company aims to achieve 20% growth in gross operating profit.

Domestic businesses: The economic slowdown and toughened regulations on large conglomerates’ related-party transactions are weighing on the company’s domestic growth. Factors that could boost domestic growth include 1) the company’s business diversification efforts, including the launch of the animation character merchandise business, under the Beyond unit, 2) the growth of the mobile game and electronic payment markets and increasing advertising expenses by competing market players, 3) the easing of government restrictions on advertising of certain items, and 4) base effects from last year’s weak performance.

Overseas businesses: Cheil Worldwide’s overseas operations are expected to maintain double- digit growth. Its competitiveness in China is strengthening, with its Chinese subsidiary recently rising to third place (from fourth) among the country’s digital ad agencies. The European business has been sluggish, but the acquisition of Iris Worldwide is anticipated to rejuvenate growth. In addition, we believe the company will continue to carry out non-media and non-traditional marketing activities (such as exhibitions, campaigns, and digital & retail marketing—activities in which it has a competitive edge) for group affiliates, namely SEC and Cheil Industries. Through M&As, the company is also seeing a steady increase in its pool of non-Samsung-affiliated clients.

Earnings outlook: We believe Cheil Worldwide has more room for growth than other global advertising firms in light of its lower margin levels. Until the end of last year, the company recorded additional expenses related to its introduction of an enterprise resource planning (ERP) system, including outsourcing and depreciation costs. In 2H14, it also registered restructuring costs, including staff relocation in Europe. However, net profit is anticipated to improve going forward, thanks to 1) the dissipation of these negative factors and 2) budget reallocation based on growth in regional operations.

Table 111.1. Quarterly and annual earnings (Wbn, %) 1Q141Q141Q14 2Q142Q142Q14 3Q143Q143Q14 4Q14P 1Q15F 2Q15F 3Q15F 4Q15F 201320132013 2014P2014P2014P 2015F2015F2015F Revenue 634 679 602 752 725 811 728 788 2,709 2,666 3,053 Gross profit 171 208 188 225 196 234 219 282 698 793 931 Parent 50 73 61 76 54 72 60 73 276 259 259 Overseas 122 135 127 150 142 162 159 209 422 534 672 Contribution Parent 28.9 35.1 32.4 33.6 27.5 30.9 27.6 25.8 39.5 32.7 27.8 Overseas 71.1 64.9 67.6 66.4 72.5 69.1 72.4 74.2 60.5 67.3 72.2 Operating profit 21 44 23 39 24 57 32 41 130 127 154 OP margin 3.3 6.4 3.8 5.2 3.3 7.0 4.4 5.2 4.8 4.8 5.1 Net profit 14 37 17 35 20 43 25 32 102 102 121 Net margin 2.2 5.4 2.8 4.6 2.8 5.3 3.5 4.0 3.8 3.8 4.0 YoY Revenue 12.4 -4.7 -6.9 -4.4 14.5 19.5 21.1 4.8 14.6 -1.6 14.5 Gross profit 27.4 8.0 0.8 8.7 14.5 12.4 16.4 25.2 20.2 13.6 17.4 Parent -1.8 -1.9 -7.6 -10.7 8.8 -1.1 -1.0 -4.0 7.7 -5.9 0.0 Overseas 45.0 14.3 5.4 22.1 16.8 19.7 24.8 39.9 30.1 26.4 25.9 Operating profit 16.6 -17.1 -31.2 3.7 14.5 29.4 41.2 5.4 2.9 -2.5 21.7 Net profit 0.0 15.7 -37.6 15.7 48.0 16.8 53.0 -8.4 2.8 -0.7 18.8 Notes: All figures are based on consolidated K-IFRS; Net profit refers to net profit attributable to controlling interests and non-controlling interests Source: Company data, KDB Daewoo Securities Research estimates

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4. US operations turn to profit

Cheil Worldwide operates 47 branches/offices and seven advertising subsidiaries (acquired via M&As) in 40 countries outside Korea. Non-domestic revenue comes mostly from China, Europe, and the US. The company’s Chinese operations have posted steady growth, while operations in Europe are showing signs of recovery following a period of sluggishness. In addition, combined net profits/losses in the US region turned to black (1Q-3Q14 cumulative) following three years of net losses; these businesses are summarized below.

1) The Barbarian Group: Acquired by Cheil Worldwide in 2009, The Barbarian Group (TBG) is a New York-based digital-centered marketing firm. The company is well-known for Cinder, an open source coding platform, and for the “superdesk” it built in its work space, embodying the firm’s creative and open-minded corporate culture. Cinder, a free and open source library, won the first-ever Cannes Lions Innovation Grand Prix in 2013. SEC used Cinder to create CenterStage—an interactive, digital showroom featuring large touchscreens that give consumers an immersive experience with SEC’s home appliance products. CenterStage has been installed mostly in Best Buys and other retail stores in the US, but SEC is expanding CenterStage to Europe and possibly to China in the future. TBG’s “superdesk” is a white, serpentine desk that connects all employees and executives in the firm (without any compartments dividing business units); it was designed to reduce communication barriers among employees and inspire creativity. 2) McKinney: McKinney is a North Carolina-based advertising agency acquired by Cheil Worldwide in 2012. After the acquisition, the firm opened a branch office in New York to expand its business. Major clients include Nationwide Insurance, and billings are continuing to grow, aided by SEC’s Galaxy Tab ads. McKinney’s latest Super Bowl commercials were well- received in the market, while those made by its rival firm Ogilvy were widely criticized by both consumers and industry experts.

3) Iris Worldwide: London-based Iris Worldwide (which Cheil Worldwide acquired in January) specializes in digital and retail marketing, and is believed to have allocated sizable resources to its US operations. Recently, the company has been engaged in planning music festivals, setting up websites, and designing local stores for key customers. It has made efforts to acquire additional global accounts since being acquired by Cheil Worldwide.

Many companies are trying to attract young customers by sponsoring or hosting events such as music festivals, marathons, etc. For instance, Hyundai Card recently hosted concerts by singers from outside Korea, while Nike has hosted marathon events. Cheil Worldwide’s existing retail business has been focused on exhibitions, campaigns, and sports marketing, but the addition of Iris—with its creative approach to marketing—should help diversify Cheil Worldwide’s retail marketing business areas.

Figure 222.2. SECSECSEC’SEC ’’’ss CenterStage, developed by USUSUS-US ---basedbased TBG Figure 333.3. Nationwide InsuranceInsurance’’’’ss Super Bowl commercial using CinderCinder,, is, is an interactive, digital showroom mademademade by McMcMcKinneyMc Kinney

Source: Company data, KDB Daewoo Securities Research Source: Company data, Campaign Brief, KDB Daewoo Securities Research

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February 16, 2015 Cheil Worldwide

5. Maintain Buy with TP of W27,000

We retain our Buy rating on Cheil Worldwide. Uncertainties have been easing, as factors affecting the sluggishness of European operations and SEC-related sales have largely been dealt with. In addition, the valuation burden has eased significantly following recent corrections. And based on its Chinese operations and the possibility of further M&A deals, we think the stock could seek a premium going forward. The acquisition of Iris should boost European sales, while reinforcing the flagship digital and retail marketing units. In addition, Cheil Worldwide’s shareholder-friendly policies (such as stock buyback programs) should support the share price (e.g., by decreasing outstanding shares).

We maintain our target price of W27,000, which is based on the sum of the values of the company’s operations and investments. We plan to revisit our earnings forecasts and target price based on whether the company meets its earnings guidance and makes further M&A deals.

Figure 444.4. Since the start of this monthmonth,, f, foreignf oreign investors have switswitchedched to net buyers of Cheil Worldwide

Source: KDB Daewoo Securities Research

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February 16, 2015 Cheil Worldwide

APPENDIX 1

Important Disclosures & Disclaimers 222-2---YearYear Rating and Target Price History

Company (Code) DateDateDate RatingRatingRating Target Price (W) Cheil Worldwide Cheil Worldwide(030000) 10/24/2014 Buy 27,000 40,000 10/13/2014 Buy 31,000 04/21/2014 Buy 32,000 30,000 04/25/2013 Buy 34,000 03/15/2013 Buy 32,000 20,000 01/30/2013 Buy 28,000 10,000

0 Feb 13 Feb 14 Feb 15

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.

Disclosures As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subjec t 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 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.

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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 1934. 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.

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