INNOCEAN Worldwide (214320 KS ) Buying David & Goliath in first -ever acquisition Advertising INNOCEAN to acquire D&G, US creative agency for Kia, for W78.3bn th Company Report On December 14 , INNOCEAN Worldwide disclosed that it has agreed to acquire David & Goliath LLC (D&G), the LA-based US ad agency that has handled creative marketing December 15, 2017 in North America for Kia Motors (Kia; 000270 KS, Trading Buy, TP: W38,000, CP: W32,500). We believe that INNOCEAN Worldwide, which had been seeking an M&A deal to internalize Kia’s North America creative duties from 2018, chose to acquire the automaker’s current agency. (Maintain) Buy Deal structure: 1) INNOCEAN Worldwide will increase capital of W32.8bn in wholly- owned subsidiary INNOCEAN Worldwide Holdings (IWH). 2) IWH will acquire a 100% Target Price (12M, W) ▲ 96,000 stake in D&G, paying 50% in January 2018 and the remaining 50% over the next four years, based on the agreed percentages (tied to annual earnings; see Figure 1). Share Price (12/14/17, W) 75,100 D&G earnings: In 2016, the US ad agency recorded revenue of W52.1bn, gross profit of W49bn, and net profit of W4.2bn. Revenue and net profit for 1H17 are estimated at Expected Return 28% W24.7bn and W2.3bn, respectively. Given that business tends to be seasonally concentrated in the latter half of the year, 2017 full-year earnings look likely to grow YoY. OP (17F, Wbn) 114 Key variables for 2018: M&A effects, new car models, and events Consensus OP (17F, Wbn) 111 M&A effects: In addition to Kia, the D&G acquisition should also increase INNOCEAN’s EPS Growth (17F, %) 8.5 exposure to foreign non-affiliates. Kia is estimated to account for roughly 60% of Market EPS Growth (17F, %) 45.6 D&G’s gross profit. The rest consists of local advertisers, such as Universal Studios P/E (17F, x) 21.2 (media), HBO (media), and Jack in the Box (food; JACK, CP: US$103.11). Market P/E (17F, x) 10.1 Reflecting the acquisitio n and consolidation of D&G, we are raising our 2018 gross KOSPI 2,469.48 profit estimate for INNOCEAN Worldwide by 9%. We forecast that the North America region will contribute 55% of the company’s 2018 gross profit, up 8%p YoY. The Market Cap (Wbn) 1,502 company should also benefit from the U S tax reform, which is expected to lower the Shares Outstanding (mn) 20 corporate tax rate from 35% to 21% from 2019. Free Float (%) 57.0 Foreign Ownership (%) 32.9 New car marketing: Major affiliate clients Hyundai Motor (HMC; 005380 KS, Trading Beta (12M) 0.61 Buy, TP: W177,000, CP: W150,500) and Kia have a number of new models lined up fo r 52-Week Low 56,200 2018. In the US, HMC is set to release the Genesis G70, an electric Kona, and fuel-cell electric vehicles. In particular, the automaker will beef up its SUV lineup (Santa Fe, 52-Week High 77,800 Kona, Tucson, etc.), and begin selling its Genesis G70 globally. Meanwhile, Kia plans to (%) 1M 6M 12M launch a new Forte in the US, while sales of Kia Stinger are anticipated to gather steam. Absolute -1.8 19.8 24.3 Relative 0.4 15.1 2.6 Events: As official sponsors of FIFA, HMC and Kia plan to actively take advantage of the 2018 Russia World Cup to market their new models. Other sporting events, like the 160 INNOCEAN Worldwide KOSPI Super Bowl, the Australian Open, and the Genesis Open (PGA tour) will also likely be 140 used as platforms for marketing. 120 Maintain Buy and raise TP to W96,000 100 We maintain our Buy call on INNOCEAN Worldwide and raise our target price to W96,000 (from W93,000). We are positive on: 1) the solid earnings visibility of the 80 12.16 4.17 8.17 12.17 company’s first acquisition, funded by its ample cash holdings (equal to half of its market cap); 2) the company’s growth strategy, focused on strengthening its overseas Mirae Asset Daewoo Co., Ltd. ca pabilities ; and 3) expected ROE improvement. [ Internet/Game/Advertising ] FY (12) 12/14 12/15 12/16 12/17F 12/18F 12/19F Revenue (Wbn) 745 988 1,052 1,178 1,449 1,550 Jee -hyun Moon +822 -3774 -1640 OP (Wbn) 83 93 99 114 133 142 [email protected] OP margin (%) 11.1 9.4 9.4 9.7 9.2 9.2 NP (Wbn) 82 70 65 71 82 89 EPS (W) 4,551 3,696 3,267 3,546 4,100 4,451 ROE (%) 21.5 13.7 10.4 10.4 11.2 11.2 P/E (x) - 18.9 17.5 21.2 18.3 16.9 P/B (x) - 2.3 1.7 2.1 2.0 1.8 Dividend yield (%) - 1.3 1.7 1.4 1.7 1.8 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates December 15, 2017 INNOCEAN Worldwide INNOCEAN to acquire David & Goliath Figure 1. INNOCEAN Worldwide to acquire D&G Source: Company data, DART, Mirae Asset Daewoo Research Figure 2. D&G’s TV commercial for Kia (North America) Source: David & Goliath, Mirae Asset Daewoo Research Figure 3. D&G’s local advertisers (North America) Source: David & Goliath, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 December 15, 2017 INNOCEAN Worldwide Earnings and forecasts Table 1. Quarterly and annual earnings (Wbn, %) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17F 2016 2017F 2018F Revenue 275 237 232 308 287 266 275 349 1,051 1,178 1,449 Gross profit 89 96 88 109 93 98 96 125 381 412 492 Parent 27 33 31 38 26 33 30 44 129 133 133 Consolidated 62 62 57 71 67 65 67 81 252 279 360 - Americas 39 38 37 50 46 42 46 58 165 192 269 % of gross profit Parent 30.0 34.9 35.6 34.6 27.8 33.9 30.8 35.2 33.9 32.2 27.0 Consolidated 70.0 65.1 64.4 65.0 72.2 66.1 69.2 64.8 66.1 67.8 73.0 - Americas 43.9 40.1 42.4 46.3 49.6 42.8 48.0 46.1 43.3 46.5 54.5 Operating profit 20 27 22 31 21 26 25 41 99 114 133 OP margin 7.4 11.2 9.4 10.2 7.4 9.7 9.2 11.8 9.5 9.7 9.2 Net profit 17 23 16 21 14 25 20 29 78 88 102 Net margin 6.3 9.9 6.9 6.9 4.9 9.3 7.3 8.4 7.4 7.5 7.0 YoY Revenue 21.1 14.1 -3.7 -1.5 4.5 12.3 18.8 13.4 6.4 12.0 23.0 Gross profit 27.7 30.3 13.6 12.4 4.0 2.8 9.2 14.8 20.0 8.1 19.5 Parent 11.4 11.6 -0.7 -19.8 -3.7 -0.1 -5.6 16.7 -2.5 2.7 0.2 Consolidated 36.3 43.0 23.4 41.8 7.4 4.3 17.3 14.5 36.2 10.9 28.6 - Americas 62.9 60.0 38.4 83.3 17.4 9.5 23.6 14.2 61.2 16.0 40.1 Operating profit 13.0 34.3 10.1 -11.7 5.6 -2.8 16.7 31.7 7.0 14.5 16.7 Net profit 11.1 45.1 -8.3 -26.3 -18.3 5.2 25.8 38.2 0.0 13.2 15.5 Notes: Consolidated K-IFRS; for advertising firms such as INNOCEAN Worldwide, gross profit reflects top line; net profit is attributable to controlling interests and non-controlling interests. Source: Company data, Mirae Asset Daewoo Research estimates Table 2. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 17F 18F 17F 18F 17F 18F Revised overseas earnings estimates Revenue 1,178 1,295 1,178 1,449 0.0 11.9 upwards Gross profit 412 453 412 492 0.0 8.7 Reflects North America M&A Operating profit 114 123 114 133 0.0 8.0 Revised SG&A estimates upwards Net profit 88 95 88 102 0.4 7.4 EPS 3,533 3,796 3,546 4,100 0.4 8.0 OP margin 9.7 9.5 9.7 9.2 Net margin 7.5 7.3 7.5 7.0 Notes: All figures are based on consolidated K-IFRS; net profit is attributable to controlling interests and non-controlling interests; EPS is attributable to controlling interests Source: Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 3 December 15, 2017 INNOCEAN Worldwide Valuation Table 3. Sum-of-the-parts valuation (Wbn, x, W) Details Operating value (1) 1,226 2018F net profit Target multiple Regional percentage based on 2018 estimates Asia 24 17.6 431 Asian ad firms’ average 2018F P/E Americas/Europe 41 13.2 539 US ad firms’ average 2018F P/E Other 16 15.7 256 Global ad firms’ average 2018F P/E Investment value (2) 18 Unlisted 2 Book value, available-for-sale, as of end-3Q17 Affiliates 16 Book value, joint ventures/investments, as of end-3Q17 Total asset value (1+2 = 3) 1,244 Consolidated basis as of end 3Q17, excluding acquisition Net debt (4) -659 payment Net asset value (3-4) 1,903 No.