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Company report

Telecoms, Media & Technology MediaEquity Korea

abcGlobal Research

Cheil Worldwide (030000)OverweightTarget price (KRW) Share price (KRW) Potential return (%)Dec HSBC EPS HSBC PE Performance Absolute (%) Relative^ (%) 2009a 794.02 17.5 1M 1.5 -2.9 2010e 660.38 21.0 3M 3.3 3.0

Initiate OW: Bullish on deregulation, overseas growth17,000 13,700 26.42011e 845.39 16.4 12M 5.3 -13.1

Koreas largest ad agency, CWW, is expanding overseas and can capture greater share of ad spend by affiliate SEC Deregulation should allow CWW to grow its share of the domestic market Initiate with OW and TP of KRW17,000 based on 19x 2011e PE, implying 26% potential return

Note: (V) = volatile (please see disclosure appendix)

Market leader. Cheil Worldwide (CWW) is the largest advertising company in Korea, specialising in agency services and production. It is the primary advertising firm for Samsung Electronics (SEC), the worlds largest consumer electronics company. CWW, currently ranked 19th, aims to be a global top 10 advertising company by 2012. Overseas expansion. After downsizing in 2009, CWW is expanding overseas again. The number of overseas employees rose 15% in 2H10 and it is tapping holdings of KRW440bn to fund overseas acquisitions. We assume two acquisitions a year (cKRW25bn each) to drive 15% CAGR in overseas billings over 2011-13e. 28 March 2011Howon Rim* Analyst The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8767 howonrim@kr.hsbc.com View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch

The Samsung factor. Samsung Group owns 18.3% of CWW and we estimate SEC accounts for 70% of consolidated billings. CWWs stronger overseas focus should help it win a bigger share of SECs growing global ad spend for smartphones, tablet PCs and smart TVs. CWW has a high correlation with SEC shares (R-square of 0.82). Deregulation. CWWs terrestrial ad market share (15.7%) and commission rate (10.6% vs. industry average 11%) are artificially capped by Korea Broadcast Advertising Corp (KOBACO). This may soon change as a bill that will ease these restrictions may be passed later this year. We forecast stable domestic ad market growth (+2.4% y-o-y) based on a high correlation with GDP, and HSBCs forecast of nearly 5% GDP growth in 2011-12e. Valuation. Our target PE of 19x 2011e EPS is CWWs four-year average historical high, which we think is reasonable based on: 1) stronger overseas growth; 2) the relationship with SEC; 3) domestic deregulation. Key catalysts are overseas acquisition announcements, news on deregulation, rising competition in the global consumer electronics market. Key risks are a high level of dependency on SEC, weaker domestic/global economy, delay in deregulation and significant KRW appreciation.

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Index^ Index level RIC BloombergSource: HSBC

KOSPI INDEX 2,037 030000.KS 030000 KS

Enterprise value (KRWb) Free float (%) Market cap (USDm) Market cap (KRWb)Source: HSBC

970 100 1,429 1,599

Cheil Worldwide (030000) Media 28 March 2011

abc

Financials & valuationFinancial statements Year to 12/2009a 12/2010e 12/2011e 12/2012e Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/NAV FCF yield (%) Dividend yield (%) 12/2009a 1.9 18.5 17.5 0.1 3.9 61.2 12/2010e 1.6 15.4 55.5 21.0 2.5 -0.6 2.4 12/2011e 1.5 11.8 35.1 16.4 2.3 3.3 2.7 12/2012e 1.1 7.9 283.5 13.4 2.0 7.6 3.0

Profit & loss summary (KRWb) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (KRWb) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (KRWb) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 65 780 413 1,032 455 4 -409 557 -23 0 65 839 440 1,120 446 3 -436 647 17 0 65 870 455 1,184 453 0 -455 707 26 0 64 938 506 1,298 493 -2 -508 783 3 86 -1 -74 -35 -26 56 23 -7 -13 -37 -28 -8 63 -7 -11 -37 -19 45 104 -7 -11 -44 -53 101 540 55 -8 47 19 100 100 -9 91 91 615 63 -7 56 16 134 134 -29 105 76 625 78 -7 70 9 119 119 -21 97 97 718 104 -7 96 9 146 146 -26 120 120

Note: * = Based on HSBC EPS (fully diluted)

Price relative16508 14508 12508 10508 8508 6508 4508 2009Cheil Worldwide Source: HSBC

16508 14508 12508 10508 8508 6508 4508 2010Rel to KOSPI INDEX

2011

2012

Note: price at close of 24 Mar 2011

Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV 791.45 794.02 8500.00 121096.99 912.65 660.38 340.00 5621.75 845.71 845.39 380.00 6144.67 1039.90 1039.57 420.00 6804.57 -35.7 -284.9 17.2 9.1 10.2 8.8 -73.4 -7.4 -243.0 -1733.9 12.6 9.8 10.2 9.1 -67.5 -6.9 28.7 264.9 14.4 8.5 12.4 11.3 -64.4 -5.9 49.4 544.8 16.1 9.6 14.4 13.4 -64.9 -4.9 -6.1 40.4 42.8 -7.4 5.2 13.8 13.9 17.7 33.5 -16.8 1.7 23.4 26.1 -11.3 28.0 14.9 33.6 37.0 23.0 23.0 12/2009a 12/2010e 12/2011e 12/2012e

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Cheil Worldwide (030000) Media 28 March 2011

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Global advertising agencies: Peer comparisons Cheil Worldwide Country Revenue* 11f 12f 13f 11f 12f 13f 11f 12f 13f 11f 12f 13f 11f 12f 13f 11f 12f 13f 11f 12f 13f 11f 12f 13f 11f 12f 13f 11f 12f 13f Korea 625 718 772 58 75 78 9.3 10.5 10.1 3.9 29.6 3.5 97 120 132 16.2 13.2 11.9 2.3 2.1 1.9 14.2 15.9 15.9 846 1,040 1,150 6,222 6,882 7,612 Omnicom Group US 13,175.9 13,804.2 13,896.5 1,640.3 1,784.8 NA 12.4 12.9 NA 12.5 8.8 NA 914.1 1,005.8 NA 15.6 13.3 12.0 3.2 3.0 NA 22.3 24.6 NA 3.2 3.7 3.9 13.9 15.1 NA Interpublic Group Cos Inc US 6,764.6 7,086.9 7,222.5 663.8 765.1 792.0 9.8 10.8 11.0 20.8 15.3 19.3 314.4 383.4 NA 20.8 16.8 NA 2.0 1.9 NA 13.1 15.1 NA 0.6 0.8 NA 5.6 6.0 NA Publicis Groupe SA France 7,406.7 7,782.8 7,823.4 1,185.0 1,289.5 1,381.6 16.0 16.6 17.7 10.3 8.8 16.6 785.6 864.1 843.4 14.2 12.9 11.9 2.2 1.9 NA 17.8 17.4 NA 3.5 3.9 NA 22.7 25.0 NA Dentsu Inc Japan 1,924 1,997 2,040 42 49 54 2.2 2.5 2.6 -23.1 16.6 9.1 613 711 746 17.3 21.1 19.3 1.1 1.1 1.1 6.6 5.7 6.2 0.0 1.3 1.4 22.3 23.7 24.4 Havas SA France 2,109.7 2,190.4 2,233.1 283.7 303.9 343.0 13.4 13.9 15.4 7.8 7.1 20.9 180.6 196.4 224.7 12.2 11.2 19.5 1.3 1.2 10.9 10.9 NA 0.4 0.5 0.3 4.0 4.2 NA

Operating profit*

Operating margin

OP growth

Net profit*

PE (x) PB (x) ROE (%) EPS*

BPS*

Source: Bloomberg, HSBC estimates * Note: Except for EPS and BPS, figures in KRWbn for CWW and USDm for other companies. EPS and BPS in KRW for CWW and USD for other companies.

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Cheil Worldwide (030000) Media 28 March 2011

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Investment summary Structural improvements underway growing overseas exposure

and stronger domestic presence from deregulation Captive demand underpins stable operations; potential growth

from SECs higher marketing spend for handsets and new devices Initiate with OW and TP of KRW17,000 based on 19x 2011e EPS,

the stocks four-year average historical high

IntroductionWe believe CWW, Koreas largest advertising company, is positioned to benefit from two structural changes:1

Its relationship with affiliate company, Samsung Electronics, should also be a growth driver as we expect its share of SECs increasing ad spend to increase. We see these three factors as the main earnings and share price drivers for CWW in the year ahead. In our view, they justify a return to historical high valuations seen during the past four years.

We expect the company to expand its global presence. It can strengthen its position in the domestic market as a result of pending deregulation.

2

PE band and significant events

(KRW) 17,000 15,000

Anticipation of Beijing Oly mpics in 2008 Anticipation of economic recov ery and stronger earnings grow th from 2Q07 Anticipation on domestic consumption

26x

21x

Further deregulation, higher ad spend by SEC, and ov erseas ex pansion 16x

13,000 11,000 9,000 7,000 5,000 3,000

recov ery , sports ev ents in 2006, launch of priv ate media representativ es 11x

Progress in deregulation as KCC Dim economic outlook from global financial crisis Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 announces new broadcasting channels

Jan 02

Jan 10

Jan 11

Jan 12

Note: Excluding disposal gain from Credu stake in 2010 Source: Quantiwise, HSBC

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Cheil Worldwide (030000) Media 28 March 2011

abc

Terrestrial advertising in Korea current value chain

Source: HSBC

Key beneficiary of easing regulationsWe expect CWWs position in the domestic ad market to strengthen after the government relaxes its grip on terrestrial advertising, the countrys largest market, which accounted for 23% of the total ad market in 2010. In 2008, the Constitutional Court of Korea ruled that the monopoly held by Korea Broadcast Advertising Corp (KOBACO) is a violation of the constitution. As a result, the government wants to allow private sector media representatives into the terrestr