Cheil Worldwide (030000 KS ) Watch for China recovery and growth in India Advertising 1Q18 preview: Likely to report strongest performance among domestic ad firms Company Update Among major domestic ad-related firms, we expect Cheil Worldwide to deliver the April 10, 2018 strongest results for 1Q18. At the domestic parent business, earnings in the typically weak month s of January/February were likely supported by work related to Samsung Electronics’ (SEC; 005930 KS/CP: W2,460,000) PyeongChang Winter Games sponsorship, as well as advertising for the games’ Organizing Committee. In March, (Maintain) Buy the company likely benefited from robust marketing activities by non-affiliate advertisers. Target Price (12M, W) 25,000 On the overseas front, we believe growth continued to b e driven by affiliate business, including marketing for SEC’s new S9 smartphone. The company likely saw new Share Price (04/09/18, W) 18,850 business from SEC affiliate Harman and DuPont in the Americas, while continuing steady growth in Europe. Expected Return 33% China to recover this year One potential catalyst this year is the recovery of China earnings. China’s earnings contribution hit a high in 2015, when 27% of revenue and 41% of net profit OP (18F, Wbn) 177 (consolidated) came from the country. As a result, the market began to recognize the Consensus OP (18F, Wbn) 180 stock as a China play. In 2017, however, China’s contribution fell to 24% of revenue and 8% of net profit, as revenue and net profit declined 8% and 65% YoY, respectively. This EPS Growth (18F, %) 2.5 was largely because of changes in Samsung’s marketing strategy and dwindling local Market EPS Growth (18F, %) 16.8 business from non-aff iliate Korean firms, which led to a decline in the company’s China P/E (18F, x) 16.6 digital media ad operations. Market P/E (18F, x) 9.3 KOSPI 2,444.08 Domestic stocks related to China’s consumption have been rebounding this year. Korea-China relations are beginning to show signs of recovering from the THA AD Market Cap (Wbn) 2,169 fallout, with a bilateral economic committee meeting set to take place this month for Shares Outstanding (mn) 115 the first time in two years. In response to the unfavorable environment in China last Free Float (%) 59.6 year, Cheil Worldwide focused on expanding its e-commerce operations rather than its digital media ads. If digital media ad operations in China recover this year on Foreign Ownership (%) 32.0 improving business conditions, we could see a material improvement in China profits. Beta (12M) 0.61 52-Week Low 17,750 Watch for earnings growth in India 52-Week High 21,800 Among the company’s overseas operations, India has emerged as a standout. In 2017, India overtook China to generate the highest profit among overseas subsidiaries. (%) 1M 6M 12M Revenue and net profit from India expanded 40% and 31% YoY, respectively, Absolute -2.8 3.6 3.6 accounting for 5% and 13% of consolidated revenue and net profit, respectively. India Relative -2.2 1.5 -8.8 is one of the most important emerging markets for SEC, which controls the largest smartphone market share (25%) in the country. Recently, competition with Chinese 130 Cheil Worldwide KOSPI brands such as Xiaomi has been intensifying in India, highlighting the n eed for SEC to 120 ramp up marketing to defend market share. This should prove beneficial to Cheil 110 Worldwide. 100 Reaffirm Buy and TP of W25,000 90 We reaffirm our Buy call on Cheil Worldwide with a target price of W25,000. We expect 80 3.17 7.17 11.17 3.18 stable near-term earnings and look for visible growth in India earnings and a recovery in China earnings this year. Following the company’s decision late last year to double its dividend payout to 60%, dividend yield also looks attractive at around 4%. Mirae Asset Daewoo Co., Ltd. [ Internet/Game/Advertising ] FY (Dec.) 12/15 12/16 12/17 12/18F 12/19F 12/20F Revenue (Wbn) 2,807 3,233 3,375 3,643 3,782 3,932 Jee -hyun Moon +822 -3774 -1640 OP (Wbn) 127 150 157 177 189 201 [email protected] OP Margin (%) 4.5 4.6 4.7 4.9 5.0 5.1 NP (Wbn) 80 88 127 130 139 147 EPS (W) 691 767 1,105 1,133 1,206 1,282 ROE (%) 9.6 11.4 15.8 14.5 14.2 14.2 P/E (x) 29.9 20.5 19.2 16.6 15.6 14.7 P/B (x) 2.2 1.7 2.2 1.8 1.7 1.6 Dividend Yield (%) 1.4 1.9 3.6 4.1 4.4 4.7 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 April 10, 2018 Cheil Worldwide Recovery of China earnings Cheil Worldwide to join the rebound of China plays, albeit with a lag One potential catalyst this year is the recovery of China earnings. In 2017, revenue and net profit from China declined 8% and 65% YoY, respectively, as changes in Samsung’s marketing strategy and dwindling local business from non-affiliate Korean firms led to a decline in the company’s China digital media ad operations. Domestic stocks related to China’s consumption have been rebounding this year. Korea- China relations are beginning to show signs of recovering from the THAAD fallout, with a bilateral economic committee meeting set to take place this month for the first time in two years. In response to the unfavorable environment in China last year, Cheil Worldwide focused on expanding its e-commerce operations rather than its digital media ads. We think digital media ad operations could recover YoY in 2018, spurred by the resumption of local marketing by Korean non-affiliate advertisers and a pickup in business from local advertisers. Figure 2. Cheil Worldwide to join the rebound of China plays Figure 1. China plays were hit hard by THAAD headwinds with a time lag (1/16=100) Cheil Worldwide Hotel Shilla Lotte Shopping (1/18=100) Cheil Worldwide Hotel Shilla Lotte Shopping 175 AmorePacific Cosmax Orion 160 AmorePacific Cosmax Orion Studio Dragon Studio Dragon 150 145 125 130 100 115 75 100 2/16 4/17 9/17 50 Announcement of THAAD Additional 85 THAAD deployment in THAAD deployment Seongju deployment 25 70 1/16 7/16 1/17 7/17 1/18 1/18 2/18 3/18 4/18 Note: For Orion and Studio Dragon, 100 refers to listing dates Source: Thomson Reuters, Mirae Asset Daewoo Research Source: Thomson Reuters , Mirae Asset Daewoo Research Figure 3. Major Chinese subsidiaries saw revenue decline in Figure 4. Chinese net profit began to decline in 2016 and 2017 deteriorated further in 2017 (Wbn) (Wbn) Cheil China (L) (%) PengTai e-Commerce (L) 1,000 Cheil China 40 48 PengTai Interactive Advertising (L) 40.6 PengTai e-Commerce Chinese contributions to consolidated net profit (R) 800 PengTai Interactive Advertising 30 36 600 20 24 400 10 12 7.5 200 0 0 0 -10 -12 07 08 09 10 11 12 13 14 15 16 17 07 08 09 10 11 12 13 14 15 16 17 Source: Company data, Mirae Asset Daewoo Research Note: Chinese contributions to consolidated net profit are based on the combined net profits of three Chinese subsidiaries Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 April 10, 2018 Cheil Worldwide Growth in India India overtakes China as top overseas subsidiary With China moving to the sidelines last year, India emerged as a standout. In 2017, India generated the highest profit among the company’s overseas subsidiaries, overtaking China. Revenue and net profit from India expanded 40% and 31% YoY, respectively, accounting for 5% and 13% of consolidated revenue and net profit, respectively. India is one of the most important emerging markets for SEC, which controls the largest smartphone market share (25%) in the country. Recently, competition with Chinese brands such as Xiaomi and Vivo has been intensifying in India. While SEC has failed to maintain its market share in China, we believe the smartphone company sees India as a strategic market and will defend its market share there by ramping up marketing. This should prove beneficial to Cheil Worldwide’s India subsidiary. Figure 5. In 2017, India subsidiary generated the highest profit among overseas subsidiaries, overtaking its Chinese counterpart (Wbn) (Wbn) 200 Revenue from Cheil India (L) 40 Net profit from Cheil India (R) Overall net profits from Chinese subsidiaries (R) 150 30 100 20 50 10 0 0 07 08 09 10 11 12 13 14 15 16 17 Note: Overall net profits from Chinese subsidiaries are based on the combined net profits of three subsidiaries (Cheil China, PengTai e -Commerce , PengTai Interactive Advertising ); Source: Company data, Mirae Asset Daewoo Research Figure 6. SEC faces growing competition from Chinese brands in India, which could benefit Cheil Worldwide (%) 100 80 Other Micromax 60 Oppo Lenovo 40 Vivo Xiaomi SEC 20 0 2013 2014 2015 2016 2017 Source: IDC, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 April 10, 2018 Cheil Worldwide Earnings forecasts Earnings growth to be geared towards 2H18 Looking at the domestic parent business, we believe earnings in the typically weak months of January/February were supported by work related to SEC’s PyeongChang Winter Games sponsorship, as well as advertising for the games’ Organizing Committee.