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Page 1: Cheil HSBC Mar11

abcGlobal Research

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 world’s 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.

The Samsung factor. Samsung Group owns 18.3% of CWW and we estimate SEC

accounts for 70% of consolidated billings. CWW’s stronger overseas focus should help it

win a bigger share of SEC’s 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. CWW’s 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 HSBC’s forecast of nearly 5% GDP growth in 2011-12e.

Valuation. Our target PE of 19x 2011e EPS is CWW’s 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.

Overweight Target price (KRW) 17,000 Share price (KRW) 13,700 Potential return (%) 26.4

Dec 2009a 2010e 2011 e

HSBC EPS 794.02 660.38 845.39 HSBC PE 17.5 21.0 16.4

Performance 1M 3M 12M

Absolute (%) 1.5 3.3 5.3 Relative^ (%) -2.9 3.0 -13.1

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

28 March 2011

Howon Rim* Analyst The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8767 [email protected]

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

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

Telecoms, Media & Technology Media Equity – Korea

Company report

Enterprise value (KRWb) 970Free float (%) 100Market cap (USDm) 1,429Market cap (KRWb) 1,599

Source: HSBC

Index^ KOSPI INDEXIndex level 2,037RIC 030000.KSBloomberg 030000 KS

Source: HSBC

Cheil Worldwide (030000)

Initiate OW: Bullish on deregulation, overseas growth

Korea’s 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

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Financials & valuation Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e

Profit & loss summary (KRWb)

Revenue 540 615 625 718EBITDA 55 63 78 104Depreciation & amortisation -8 -7 -7 -7Operating profit/EBIT 47 56 70 96Net interest 19 16 9 9PBT 100 134 119 146HSBC PBT 100 134 119 146Taxation -9 -29 -21 -26Net profit 91 105 97 120HSBC net profit 91 76 97 120

Cash flow summary (KRWb)

Cash flow from operations 86 23 63 104Capex -1 -7 -7 -7Cash flow from investment -74 -13 -11 -11Dividends -35 -37 -37 -44Change in net debt -26 -28 -19 -53FCF equity 56 -8 45 101

Balance sheet summary (KRWb)

Intangible fixed assets 0 0 0 0Tangible fixed assets 65 65 65 64Current assets 780 839 870 938Cash & others 413 440 455 506Total assets 1,032 1,120 1,184 1,298Operating liabilities 455 446 453 493Gross debt 4 3 0 -2Net debt -409 -436 -455 -508Shareholders funds 557 647 707 783Invested capital -23 17 26 3

Ratio, growth and per share analysis

Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue -6.1 13.8 1.7 14.9EBITDA 40.4 13.9 23.4 33.6Operating profit 42.8 17.7 26.1 37.0PBT -7.4 33.5 -11.3 23.0HSBC EPS 5.2 -16.8 28.0 23.0

Ratios (%)

Revenue/IC (x) -35.7 -243.0 28.7 49.4ROIC -284.9 -1733.9 264.9 544.8ROE 17.2 12.6 14.4 16.1ROA 9.1 9.8 8.5 9.6EBITDA margin 10.2 10.2 12.4 14.4Operating profit margin 8.8 9.1 11.3 13.4EBITDA/net interest (x) Net debt/equity -73.4 -67.5 -64.4 -64.9Net debt/EBITDA (x) -7.4 -6.9 -5.9 -4.9CF from operations/net debt

Per share data

EPS reported (fully diluted) 791.45 912.65 845.71 1039.90HSBC EPS (fully diluted) 794.02 660.38 845.39 1039.57DPS 8500.00 340.00 380.00 420.00NAV 121096.99 5621.75 6144.67 6804.57

Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

EV/sales 1.9 1.6 1.5 1.1EV/EBITDA 18.5 15.4 11.8 7.9EV/IC 55.5 35.1 283.5PE* 17.5 21.0 16.4 13.4P/NAV 0.1 2.5 2.3 2.0FCF yield (%) 3.9 -0.6 3.3 7.6Dividend yield (%) 61.2 2.4 2.7 3.0

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

Price relative

4508

6508

8508

10508

12508

14508

16508

2009 2010 2011 2012

4508

6508

8508

10508

12508

14508

16508

Cheil Worldwide Rel to KOSPI INDEX

Source: HSBC Note: price at close of 24 Mar 2011

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Global advertising agencies: Peer comparisons

Cheil Omnicom Interpublic Publicis Dentsu Havas Worldwide Group Group Cos Inc Groupe SA Inc SA

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

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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Introduction We believe CWW, Korea’s largest advertising

company, is positioned to benefit from two

structural changes:

1 We expect the company to expand its global

presence.

2 It can strengthen its position in the domestic

market as a result of pending deregulation.

Its relationship with affiliate company, Samsung

Electronics, should also be a growth driver as we

expect its share of SEC’s 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.

Investment summary

Structural improvements underway – growing overseas exposure

and stronger domestic presence from deregulation

Captive demand underpins stable operations; potential growth

from SEC’s higher marketing spend for handsets and new devices

Initiate with OW and TP of KRW17,000 based on 19x 2011e EPS,

the stock’s four-year average historical high

PE band and significant events

3,000

5,000

7,000

9,000

11,000

13,000

15,000

17,000

Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12

Further deregulation, higher

ad spend by SEC, and

ov erseas expansion

(KRW)26x

21x

16x

11x

Anticipation on domestic consumption

recov ery , sports events in 2006, launch

of private media representativ es

Anticipation of Beijing Oly mpics in 2008

and stronger earnings grow th from 2Q07Anticipation of economic recov ery

Progress in deregulation as KCC

announces new broadcasting channelsDim economic outlook from global financial crisis

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

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Key beneficiary of easing regulations We expect CWW’s position in the domestic ad

market to strengthen after the government relaxes

its grip on terrestrial advertising, the country’s

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

terrestrial advertising market to compete with

KOBACO. The related bill is pending approval by

the National Assembly.

We believe the passing of the bill should benefit

CWW in the following four ways:

Advertising price: average pricing is likely to

rise as it would be determined by competition

between advertisers based on the actual level

of demand rather than by KOBACO.

Market share: CWW’s terrestrial ad market

share (15.7% as of the end of 2010) should

rise as it is in effect limited by KOBACO.

Commission rate: CWW’s commission rate of

10.6% (vs. industry average of 11.2%) is

likely to rise after it is no longer artificially

decided by KOBACO.

Ad production revenue: The resulting change

should expand the market which should also

lead to growth in the ad production market.

We think the bill may be passed later this year

because new broadcasting companies sanctioned

by the KCC (Korea Communications

Commission) in December 2010 are preparing to

launch services in 4Q 2011.

If the bill is not passed, the three existing

terrestrial broadcasters (KBS, MBC, SBS) are

likely to lose terrestrial advertising market share

as the current restrictions imposed by KOBACO

would weaken their competitiveness against the

new broadcasting companies. As such, we think

there will be significant pressure on the

government to pass the bill near the launch of new

broadcasting companies, which we expect to

happen around 4Q this year.

Terrestrial advertising in Korea – current value chain

Source: HSBC

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Korea terrestrial advertising – commission rates and market share, 2010

% Commission rate Market share

Cheil Worldwide 10.6 15.7 Inotion 10.6 10.3 HS Ad 10.7 7.0 SK M&C 10.4 5.1 Daehong 11.4 4.5 Welcomm 11.2 2.9 Phoenix 10.8 2.7 JWU 11.3 2.5 Hancomm 11.4 2.3 Alchemedia 11.3 2.0

Source: KOBACO

Global expansion CWW is the 19th largest advertiser in the world in

terms of sales (as of 2009) and has ambitions to

be ranked within the global top 10 by 2012.

We like the company’s strategic decision to focus

on overseas markets as domestic ad market

growth is structurally slowing down.

CWW downsized its overseas exposure in 2009 in

order to restructure and increase overall efficiency

at a time when Samsung Electronics was reducing

marketing spending as a result of the gloomy

economic outlook. The company is now seeking

to strengthen its overseas presence again, as can

be seen from the increase in the number of its

overseas entities, which rebounded in 2010.

The company is seeking to expand overseas

through acquiring overseas assets and organic

growth. We think the overseas acquisition strategy

is positive as this would give CWW immediate

access to an established client base. We think

CWW’s cash and equivalents, which we estimate

at around KRW440bn, are sufficient to fund

acquisitions. In 2009, CWW acquired three

overseas entities, with each transaction amounting

to cKRW25bn. CWW says it is currently viewing

two or more acquisition targets in the US and

China which the company may acquire as early as

this year.

We expect CWW’s focus on overseas growth to

result in a 15% CAGR in its overseas billings

during 2011-13e. This should raise both the

company’s top line (from increase in parent-level

overseas billings) and equity-method gains from

an increase in overseas subsidiaries’ billings

(based on K-GAAP).

Global marketer ranking in 2009 Korea domestic ad market – structural slowdown in growth

Ranking Marketer2009 Sales

(USD bn)

1 WPP 13.60

2 Omnicom 11.72

3 Publicis 6.29

4 Interpublic 6.03

5 Dentsu 3.11

6 Aegis 2.11

7 Havas 2.01

19 Cheil Worldwide 0.31

0

2

4

6

8

10

1975 1980 1985 1990 1995 2000 2005 2010

(KRW tr)

Strong

grow th

Slower

grow th

Source: Advertising Age Source: Whitepaper on Korea advertising market, HSBC

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The SEC factor Captive market provides stability

CWW is an affiliate of Samsung Group. The

major shareholder is Samsung C&T which holds a

12.64% stake in the company (Samsung affiliate

ownership totals 18.3%). As a result, CWW has a

captive market which provides business stability.

Looking at the company’s consolidated billings,

we estimate Samsung Electronics (SEC) accounts

for 70% of total billings, or 45% and 85% of

CWW’s domestic and overseas billings,

respectively. We estimate other Samsung

affiliates to account for an additional 10%. Hence,

in total 80% of CWW’s consolidated billings

comes from Samsung Group.

SEC’s marketing spend to increase

We expect SEC will raise its marketing budget in

order to enhance its brand awareness/loyalty for

all its consumer electronics products and secure

the leading position in smartphones and new

devices amid intensifying competition.

Its billings depends heavily on SEC’s handset

strategy as SEC’s related ad spending is estimated

to account for 30-40% of CWW’s consolidated

billings. We believe SEC’s plans to continue to

increase its handset market share globally, and the

launch of new smartphone models such as the

newer version of Galaxy S in 2011, will raise the

marketing budget.

We also expect SEC’s focus on securing a leading

position in new devices such as tablet PCs

CWW: Overseas expansion resumed from 2010 CWW: Overseas billings to increase

0

10

20

30

40

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Office

BranchFirm

-

500

1,000

1,500

2,000

2,500

3,000

'05 '06 '07 '08 '09 '10 '11e '12e '13e

50%

55%

60%

65%

70%Ov erseasOv erseas as % of total billing

Source: Company data Source: Company data

Cheil Worldwide ownership structure SEC’s marketing expense vs. CWW’s billings

Others

81%

Samsung

C&T

13%

Samsung

Card

3%

Samsung

Electronics

3%

-

2

4

6

8

10

'05 '06 '07 '08 '09 '10 '11e '12e

-

1,000

2,000

3,000

4,000

SEC's cosolidated marketing ex pense (LHS)

CWW's conslidated billing (RHS)(KRW tr) (KRW bn)

Source: Company data Source: Company data, HSBCe

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(Galaxy tab) and smart TVs, will require higher

ad spend.

Specifically, we expect SEC’s marketing expense

as a percentage of total sales to increase from

5.0% in 2010 to 5.3% in 2011, implying 15% y-o-

y increase in SEC’s marketing budget in 2011e.

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Stable domestic market According to our analysis, domestic ad market

shows a high correlation with Korea’s GDP (R-

square with GDP is 0.76). As such, we expect a

mild growth of domestic ad market in 2011 based

on GDP growth of 4.9%.

Korea GDP vs. domestic ad market

R2 = 0.758

5

6

6

7

7

8

8

9

5,000 6,000 7,000 8,000 9,000 10,000 11,000

Source: Bank of Korea, HSBC

Earnings estimates We expect CWW’s net profit to grow 18% in

2011 (excluding disposal gain of KRW29bn from

Credu stake sale in 2010) and 23% in 2012.

The three main drivers for CWW’s earnings

growth for 2011 are overseas billings growth,

increasing ad spend by SEC, and deregulation in

terrestrial advertising.

We expect overseas billings to increase at a

CAGR of 23% during 2011-13e. This should

translate into greater overseas revenue and net

equity method gain going forward.

We expect SEC’s marketing expense as a

percentage of total sales to increase from 5.0%

in 2010 to 5.3% in 2011, implying 15% y-o-y

increase in SEC’s marketing budget in 2011e.

As a result, CWW’s consolidated billings

should increase as SEC accounts for 70%.

Due to deregulation in the terrestrial ad

market, we expect CWW to increase its

market share and commission rate.

Valuation and risks Our target price of KRW17,000 is based on 19x

2011e PE, which is the average historical high

during the past four years. We believe this is

reasonable, given the company’s stronger

overseas growth outlook, greater share of SEC’s

increasing ad spend, and anticipated benefits from

domestic deregulation on top of stable growth of

the domestic advertising market.

Our target price of KRW17,000 implies 26%

potential return. Under HSBC’s research model,

the Neutral band for non-volatile Korean stocks is

5-15%; we therefore initiate coverage of Cheil

Worldwide with an Overweight rating.

Catalysts: 1) Announcement of overseas

acquisitions; 2) news of deregulation (especially

private media representatives); 3) heightening

competition in the global consumer

electronics market.

Downside risks: 1) Weaker-than-expected

domestic/global economic conditions; 2) delay in

deregulation; 3) significant KRW appreciation; 4)

high level of dependency on SEC.

HSBC vs. Consensus

___________ HSBC_____________ ___________Consensus____________ _____________ Diff_______________(KRWbn) 2011e 2012e 2013e 2011e 2012e 2013e 2011e 2012e 2013e

Sales 624.9 718.0 772.3 657.0 711.7 750.7 -4.9% 0.9% 2.9% Operating profit 58.0 75.2 77.8 61.4 71.1 73.7 -5.5% 5.7% 5.5% OP Margin 9.3% 10.5% 10.1% 9.3% 10.0% 9.8% -0.1ppt +0.5ppt +0.3ppt Net profit 97.3 119.6 132.3 103.0 116.6 123.9 -5.6% 2.6% 6.8% NP Margin 15.6% 16.7% 17.1% 15.7% 16.4% 16.5% -0.1ppt +0.3ppt +0.6ppt

Source: Bloomberg, HSBC estimates

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PE bands PB bands

3,000

8,000

13,000

18,000

Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12

(KRW) 26x21x

16x

11x

3,000

8,000

13,000

18,000

Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12

(KRW) 3.6x

2.9x

2.2x

1.5x

Source: Company data, Quantiwise, HSBC estimates Source: Company data, Quantiwise, HSBC estimates

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CWW ready to return to its historical high PE ratio Our target price of KRW17,000 for CWW shares

is based on 19x 2011e EPS, which is near the

four-year average historical high. We believe this

is justified given the company’s stronger overseas

growth outlook, greater share of SEC’s increasing

ad spend, and anticipated benefits from

deregulation in the domestic market on top of

stable growth of domestic ad market (R-square

with GDP is 0.76). GDP expected to grow 4.9%

and 4.8% in 2011e and 2012e, respectively,

according to HSBC forecasts.

CWW is trading below the global peer average in

terms of PE multiple. We believe this is due to its

weaker presence in the overseas ad market.

However, we think this should change as we

expect CWW’s overseas exposure to increase on

the back of both acquisitions and organic growth.

Valuation and risks

Stronger overseas growth, positive impact of deregulation and

higher ad spend by SEC

Key downside risks include slower-than-expected economic

recovery, delay in deregulation, significant KRW appreciation and

high dependency on SEC

Initiate OW with a TP of KRW17,000 based on PE of 19x, the

four-year historical high; shares trade at 16x 2011e EPS

PE bands and significant events

3,000

5,000

7,000

9,000

11,000

13,000

15,000

17,000

Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12

Further deregulation, higher

ad spend by SEC, and

ov erseas ex pansion

(KRW)26x

21x

16x

11x

Anticipation on domestic consumption

recov ery , sports ev ents in 2006, launch

of priv ate media representativ es

Anticipation of Beijing Oly mpics in 2008

and stronger earnings grow th from 2Q07Anticipation of economic recov ery

Progress in deregulation as KCC

announces new broadcasting channelsDim economic outlook from global financial crisis

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

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CWW is also increasing its client base to reduce

its reliance on SEC. CWW’s stronger overseas

presence should help gain a bigger share of SEC’s

ad spend and also help the company to add more

overseas advertisers and help lessen its

dependency on overseas billings on SEC, which

we estimate at 85%.

Our target price of KRW17,000 implies 26%

potential return. Under HSBC’s research model,

the Neutral band for non-volatile Korean stocks is

5-15%; we therefore initiate coverage of CWW

with an Overweight rating.

High correlation with SEC There is a high correlation between the share price

performance of CWW and SEC. R-square

between the two is 0.82 (2002-present).

HSBC analyst Nam Park has an Overweight

rating on SEC with a target price of

KRW1,139,000, which implies 25% potential

return from the current share price (KRW910,000

as of 25 March 2011).

He notes that the market is too focused on shorter-

term ASP-driven negatives. However, he

identifies upside risks that could drive positive

reassessment of SEC’s prospects. He highlights

SEC’s ability to continue generating double-digit

operating margins, led by its richer product mix,

improving cost structure and conglomerate nature.

He also notes that telecoms and digital media

margin expansion should help offset declines in

semiconductors and LCDs.

High correlation between CWW and SEC share performance

R2 = 0.8165

50

100

150

200

250

300

350

50 100 150 200 250 300

Source: Quantiwise, HSBC

Given CWW’s high correlation with SEC, we

believe the positive share trend outlook of SEC

has positive implications for CWW share trend

going forward.

Relative share price trend: CWW vs. SEC vs. KOSPI

0

50

100

150

200

250

300

350

Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11

CWW

SEC

KOSPI

Source: Quantiwise, HSBC

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Downside risks to our call Weaker-than-expected domestic/global

economic conditions: As marketing spend is

highly correlated with overall economic

conditions, weaker-than-expected economic

conditions in Korea or globally could present

downside risk to our earnings estimates.

Delay in easing of regulation: There is rising

anticipation of further deregulation in the

terrestrial advertising market. If the extent of

deregulation is milder or there is further delay

in introduction of private media

representatives (which we expect may happen

later later), this could weigh on the shares.

Our 2012e EPS forecast declines by 12.5% if

the bill to allow private media representatives

is delayed to 2H 2012 from our current

expectation of 2H 2011.

Significant strengthening of KRW: CWW’s

subsidiaries generally receive payments in

USD or EUR. As such, there is a risk that

overseas subsidiary earnings may deteriorate

with significant KRW appreciation.

High dependency on SEC: SEC accounts for

70% of CWW’s consolidated billings. High

dependency on SEC is a positive earnings

driver in periods when SEC’s advertising

budget increase. However, CWW’s high

dependency on SEC is a risk as CWW would

see significant earnings decline if SEC

decides to reduce costs.

Key catalysts Announcement of overseas merger:

Strengthening overseas capacity should

enable CWW to better handle SEC’s

increasing ad spend, leading to greater

overseas billings.

News of easing regulation: With the launch

of private media representatives, CWW may

increase its commission rate and terrestrial ad

market share.

Heightening competition in the global

consumer electronics market: Growing

competition in the global consumer

electronics market, including smartphones,

tablet PCs and smart TVs, should lead to

greater ad spend by SEC.

Samsung Electronics Valuation

To value Samsung Electronics, we use an average

of PB (2.2x target multiple, rolled over to 2011e

from 2010e), sum-of-the-parts and DCF

valuations (methodology unchanged, i.e. 12%

WACC with risk-free rate 4%, equity risk

premium 8%, and β of 1) to derive a 12-month

target price of KRW1,139,000 (unchanged).

Risks

Downside risks to our rating and estimates include

the following:

Weak consumer IT demand due to protracted

delay in recovery of the global economy

Strengthening KRW versus other currencies,

notably the EUR, USD, JPY

Sharp increases in industry-wide production

capacity in memory and TFT-LCD, leading to

faster than expected ASP declines

Price and margin erosion on key products

such as handsets on intensifying competition

Aggressive launch of a raft of new products

such as 3DTV by restructured Japanese

competitors. Japanese competitors could also

start lowering ASPs to regain market share

Resolution of any outstanding IP and

regulatory disputes

SEC is covered by our analyst, Nam Park,

+852 2996 6591, [email protected]

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Overseas billings growth CWW is focusing on expanding overseas as the

domestic ad market growth is slowing down and

SEC continues to increase its overseas presence as

a global company.

CWW says it is looking at least two companies in

the US and China and notes that potential

acquisitions may happen as early as this year. We

think CWW’s cash and equivalents, which we

estimate at KRW440bn, are sufficient to fund

acquisitions. We assume two overseas

acquisitions per year (cKRW25bn each) over

2011-13e, the same level of acquisition for CWW

in 2009. There could be more substantial

acquisitions going forward, but we make this

assumption due to limited visibility.

CWW downsized the number of overseas

subsidiaries in 2009 due to the poor economic

outlook and resulting reduction in SEC’s

marketing expenditure. SEC’s consolidated

marketing expense declined by 3% from

KRW6.8trn to KRW6.6trn in tandem with the

economic downturn resulting from the global

financial crisis in 2009.

Earnings forecasts

Overseas billings growth of 23% during 2011-13e driven by

overseas acquisitions and organic growth

SEC’s increasing advertisement spending to drive consolidated

billings to grow by 16% during the same period

Deregulation to benefit CWW on higher commission rate and

greater market share in the terrestrial ad market

Overseas billings trend Equity method gain trend

-

500

1,000

1,500

2,000

2,500

3,000

'05 '06 '07 '08 '09 '10 '11e '12e '13e

50%

55%

60%

65%

70%Ov erseasOverseas as % of total billing

0

20

40

60

80

100

'06 '07 '08 '09 '10 '11e '12e '13e

0%

50%

100%

150%

200%

OPEquity method gainEquity method gain as % of OP

(KRW bn)

Source: Company data, HSBC Source: Company data, HSBC

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However, from 2010, CWW started expanding

overseas again through organic growth, as seen

from the rebound in number of

overseas subsidiaries.

We expect overseas billings to rise at a CAGR of

23% during 2011-13e. This should translate into

greater overseas revenue and increase in net

equity gain going forward. Specifically, we expect

net equity method gain of CWW to have a CAGR

of 29% during 2011-13e.

Increasing ad spend by SEC We estimate SEC’s ad spending to account for

80% of CWW’s consolidated billings. As a result,

there is a high correlation between SEC’s ad

spending and CWW’s consolidated billings.

We expect the strong market growth of new

electronic devices such as smartphones, tablet PCs,

and smart TVs, amid intensifying competition,

should lead to increased ad spending by SEC.

Specifically, SEC plans to launch a full line-up of

smartphones (from high end handsets to mass

targeted handsets) in 2011 and also build a

diversified tablet PC line-up during the year.

Through these efforts, SEC aims to achieve more

than 100% growth in smartphone shipments in

2011 and exceed overall market growth of more

than 40%, which should lead to continued growth

in global handset market share.

SEC plans to focus more on increasingly popular

high-end TVs such as LED, 3D, and smart TVs in

2011. Specifically, for LED TVs, SEC expects its

portion to increase among LCD TVs from 20% in

2010 to 51% in 2011.

We expect SEC’s marketing expense as a

percentage of total sales to increase from 5.0% in

2010 to 5.3% in 2011, implying a 15% y-o-y

increase in SEC’s marketing budget in 2011e.

Opportunity from deregulation in terrestrial advertising We expect CWW to benefit from the deregulation

of the terrestrial ad market in Korea. Due to the

anticipated launch of new broadcasting companies

around 4Q this year, and possible legislation to

allow private media representatives, we think

CWW may be able to increase its market share

and commission rate for terrestrial ads, which is in

effect currently limited by KOBACO.

As a result, we expect CWW to increase its

market share in the overall domestic ad market to

14.7% by 2013 from 12.8% in 2010.

Sensitivity analysis

As the new broadcasting companies are preparing

to launch their services from 4Q 2011, we believe

there is a high chance that the government may

allow the entry of private media representatives

SEC’s marketing spending vs. CWW’s billings Domestic market share to increase from deregulation

0

2

4

6

8

10

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10e '11e

3%

4%

4%

5%

5%

6%

6%

Total marketing spendingMarketing as % of sales

(KRW tr)

-

2,000

4,000

6,000

8,000

10,000

'06 '07 '08 '09 '10 '11e '12e '13e

10%

11%

12%

13%

14%

15%

Domestic ad marketCWW's domestic billingDomestic M/S

(KRW bn)

Source: Company data, HSBC Source: Company data, HSBC

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Cheil Worldwide (030000) Media 28 March 2011

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by then. As a result, we assumed meaningful

impact from the deregulation to start from 2012.

Specifically, we assume that through increasing

commission rate and greater market share, CWW

will increase its domestic billings market share

from 13% in 2011 to 14.5% in 2012. This

indicates a 14% increase in CWW’s domestic

billings in 2012. Our net profit forecast in 2012

increases by 18% (excluding the disposal gain

from Credu stake sale of KRW29bn) in part due

to the impact from deregulation.

+0.However, we note the associated risk as the

regulatory approval process is difficult to predict

and there is a possibility of a delay. If we assume

the entry of private media representatives gets

delayed to 2012, our EPS forecast for 2012

declines by 12.5%.

HSBC vs. consensus

____________HSBC _____________ ___________Consensus____________ _____________ Diff_______________(KRW bn) 2011e 2012e 2013e 2011e 2012e 2013e 2011e 2012e 2013e

Sales 624.9 718.0 772.3 657.0 711.7 750.7 -4.9% 0.9% 2.9% Operating profit 58.0 75.2 77.8 61.4 71.1 73.7 -5.5% 5.7% 5.5% OP Margin 9.3% 10.5% 10.1% 9.3% 10.0% 9.8% -0.1ppt +0.5ppt +0.3ppt Net profit 97.3 119.6 132.3 103.0 116.6 123.9 -5.6% 2.6% 6.8% NP Margin 15.6% 16.7% 17.1% 15.7% 16.4% 16.5% -0.1ppt +0.3ppt +0.6ppt

Source: Bloomberg, HSBC estimates

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Balance Sheet

Balance Sheet Profit and Loss Year to Dec (W bn) 2010 2011E 2012E 2013E 2014E Year to Dec (W bn) 2010 2011E 2012E 2013E 2014E

Total Assets 1,120.2 1,183.7 1,298.1 1,406.5 1,502.0 Net Sales 614.6 624.8 717.9 772.3 780.0 Current Assets 842.0 872.8 941.4 1,000.7 1,046.5 Growth (%) 13.8 1.7 14.9 7.6 1.0 Cash & Cash Equivalents 29.3 40.7 87.6 117.3 154.2 Export ratio (%) 0.0 0.0 0.0 0.0 0.0 St. Investment Assets 410.5 414.6 418.8 422.9 427.2 Cost of Sales 402.6 399.0 459.5 496.0 500.9 Accounts Receivable 275.8 289.6 304.1 327.1 330.4 Growth (%) 12.4 (0.9) 15.2 7.9 1.0 Inventory 0.0 0.0 0.0 0.0 0.0 Gross Profit 212.0 225.9 258.4 276.3 279.1 Others 126.5 127.8 131.1 133.4 134.8 Gross Margin(%) 34.5 36.1 36.0 35.8 35.8 Non-current Assets 278.2 310.9 356.6 405.8 455.5 SG&A Expenses 156.2 167.8 183.1 198.5 166.2 Investment Assets 193.1 225.9 271.5 320.7 370.3 Growth (%) 16.0 7.4 9.2 8.4 (16.2)Tangible Assets 64.7 64.5 64.3 64.2 64.1 Operating Profit 55.8 58.1 75.2 77.9 112.9 Intangible Assets 0.1 0.1 0.1 0.0 0.0 Growth (%) 17.7 4.0 29.6 3.5 45.0 Total Liabilities 464.6 467.9 506.3 530.9 528.9 Operating Margin(%) 9.1 9.3 10.5 10.1 14.5 Current Liabilities 430.8 436.8 476.9 508.1 510.9 Non-Operating Inc (Exp) 77.9 60.6 70.7 83.4 67.7 Accounts Payable 253.2 257.4 295.7 318.1 321.3 Interest Income 16.4 8.6 9.3 10.1 10.8 St. Debt 1.1 1.2 1.2 1.2 1.2 Interest Expenses 0.4 0.1 (0.0) (0.1) (0.2)Current Portion of Lt. Debt 0.0 0.0 0.0 7.0 5.0 Net F/X (0.5) 2.4 5.2 5.2 5.2 Others 176.5 178.3 180.0 181.8 183.4 Net Asset Disposal 29.0 0.0 0.0 0.0 0.0 Non-current Liabilities 33.8 31.1 29.4 22.7 18.0 Net Equity Method 31.7 32.8 45.7 49.2 49.6 Bonds 0.0 0.0 0.0 0.0 0.0 Net Other non-Op 1.8 16.9 10.5 18.9 1.8 Lt. Debt 2.3 (0.7) (2.7) (9.7) (14.7) Pre-tax Profit from Cont. Op 133.8 118.6 145.9 161.3 180.6 Others 31.5 31.8 32.1 32.4 32.7 Income Taxes 28.8 21.4 26.3 29.0 32.5 Total Stockholders Equity 655.6 715.8 791.7 875.7 973.1 Profit from Cont. Op 105.0 97.3 119.6 132.3 148.1 Paid-in Capital 23.0 23.0 23.0 23.0 23.0 Profit from Discont. Op 0.0 0.0 0.0 0.0 0.0 Capital Surplus 112.9 112.9 112.9 112.9 112.9 Net Profit 105.0 97.3 119.6 132.3 148.1 Capital Adjustment (31.4) (31.4) (31.4) (31.4) (31.4) Growth (%) 15.3 (7.3) 23.0 10.6 12.0 Other Accumulated Earnings 28.4 28.4 28.4 28.4 28.4 Net Margin(%) 17.1 15.6 16.7 17.1 19.0 Retained Earnings 522.6 582.8 658.7 742.7 840.1 EBITDA 62.8 65.2 82.4 85.1 120.1 Total Debt 3.5 0.5 (1.5) (1.5) (8.5) Growth (%) 13.9 3.8 26.4 3.2 41.2 Net Debt(Cash) (436.3) (454.9) (507.8) (541.7) (589.9) Dividend Payout (%) 35.4 44.9 40.4 38.3 34.2

Source: Company data, HSBC

Cash Flow

Cash Flow Key Ratios Year to Dec (W bn) 2010 2011E 2012E 2013E 2014E Year to Dec 2010 2011E 2012E 2013E 2014E

Cash Flows from Operating 23.3 62.5 103.6 89.2 105.8 EPS (won) 913 846 1,040 1,150 1,287 Net Profit 105.0 97.3 119.6 132.3 148.1 Adj. EPS (won) 660 845 1,040 1,149 1,287 Depreciation 7.0 7.1 7.2 7.2 7.2 BPS (won) 5,699 6,222 6,882 7,612 8,459 Amortization 0.0 0.0 0.0 0.0 0.0 DPS (won) 340 380 420 440 440 Equity Method Loss(Gain) (31.7) (32.8) (45.7) (49.2) (49.6) PER (x) 15.7 16.9 13.8 12.4 11.1 Investment Asset Disp Loss(Gain) (29.0) 0.0 0.0 0.0 0.0 Adj. PER (x) 21.7 16.9 13.8 12.4 11.1 Tangible Asset Disp Loss(Gain) (0.0) (0.0) (0.0) (0.0) (0.0) PBR (x) 2.5 2.3 2.1 1.9 1.7 Changes in Working Capital (51.3) (12.6) 21.3 (2.9) (2.0) PCR (x) 22.0 21.9 20.0 17.9 15.3 Others 23.3 3.5 1.2 1.7 2.2 EV/ EBITDA (x) 19.2 18.2 13.8 13.0 8.8 Cash Flows from Investing (13.2) (10.9) (11.0) (11.1) (11.3) PEG (x) 2.0 1.1 na na naSt. Investment Assets Dec.(Inc.) (119.7) (4.1) (4.1) (4.2) (4.2) Dividend Yield (%) 2.4 2.7 2.9 3.1 3.1 Investment Securities Dec.(Inc.) 115.7 0.0 0.0 0.0 0.0 Profitability Tangible Assets Dec.(Inc.) (6.8) (6.8) (6.9) (7.0) (7.0) Operating Margin (%) 9.1 9.3 10.5 10.1 14.5 Others (2.4) 0.0 0.0 0.0 0.0 EBITDA Margin (%) 10.2 10.4 11.5 11.0 15.4 Free Cash Flow 10.2 51.6 92.5 78.0 94.6 Pre-tax Profit Margin(%) 21.8 19.0 20.3 20.9 23.2 Cash Flows from Financing (37.3) (40.1) (45.7) (48.3) (57.6) Net Margin (%) 17.1 15.6 16.7 17.1 19.0 St. Debt Inc.(Dec.) (1.0) 0.0 0.0 0.0 0.0 ROA (%) 9.8 8.4 9.6 9.8 10.2 Cur. Por. of Lt. Debt Inc.(Dec.) 0.0 0.0 0.0 7.0 (2.0) ROE (%) 17.2 14.2 15.9 15.9 16.0 Bonds Inc.(Dec.) 0.0 0.0 0.0 0.0 0.0 ROIC (%) 125.2 76.5 110.9 141.7 202.7 Lt. Debt Inc.(Dec.) 0.0 (3.0) (2.0) (7.0) (5.0) Stability Share Capital Inc.(Dec.) 0.0 0.0 0.0 0.0 0.0 Debt Ratio (%) 70.9 65.4 64.0 60.6 54.4 Dividend Paid (37.1) (37.1) (43.7) (48.3) (50.6) Net Debt Ratio (%) (66.5) (63.5) (64.1) (61.9) (60.6)Others 0.8 0.0 0.0 0.0 0.0 Interest Coverage (x) 144.3 608.4 na na naChange in Cash (27.2) 11.5 46.8 29.7 37.0 Activity Beginning Cash 56.4 29.3 40.7 87.6 117.3 Asset Turnover (x) 0.6 0.5 0.6 0.6 0.5 Ending Cash 29.3 40.7 87.6 117.3 154.2 Receivables Turnover (x) 1.7 1.6 1.7 1.8 1.8 Capex/ Sales (%) 1.1 1.1 1.0 0.9 0.9 Inventory Turnover (x) 0.0 0.0 0.0 0.0 0.0 Depreciation/ Sales (%) 1.1 1.1 1.0 0.9 0.9 Payables Turnover (x) 2.4 2.4 2.6 2.5 2.4 Depreciation/ Capex (%) 103.1 104.3 103.8 103.4 103.0 Working Capital Turnover (x) (12.4) (27.4) (24.4) (19.3) (19.7)

Source: Company data, HSBC estimates

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Company profile Cheil Worldwide (CWW) is the largest

advertising company in Korea, with expertise in

ad agency services and production. The company

is an affiliate of Samsung Group, which owns an

18.3% stake, providing a large captive market.

Samsung Group’s advertising is estimated to

represent 80% of CWW’s consolidated billings

(Samsung Electronics also estimated to account

for 70%) in 2010.

In Korea, major groups generally own an ad

agency in order to internally monetize their

advertising needs, and to have an ad agency that

can better respond to their advertisement strategy.

An ad agency in a group is required to closely

work with their group counterparts, and is

rewarded with a concentrated group ad budget.

This has been one of the main growth drivers for

major group-related ad agencies such as CWW

and Innocean, which has seen significant growth

for the past several years on the back of increasing

global ad spend by Hyundai Motors group.

CWW reflects the total billings related to ad

production as revenue. For ad agency services, only

the commission received is reflected as revenue.

According to CWW, commission rates vary

considerably; TV and radio advertisements generate

the least commission rate at around 11% and

Internet and cable shows the highest (17-20%).

Cheil Worldwide’s ownership structure Ad agency and related group overview

Others

81%

Samsung

C&T

13%

Samsung

Card

3%

Samsung

Electronics

3%

Ad agency Group

Cheil Worldwide Samsung

Innocean Hyundai Motor

HS Ad LG

SK M&C SK

Daehong Lotte

Oricom Doosan

Grape Hyundai

Source: Financial Supervisory Service Source: HSBC

Company analysis

No.1 ad company in Korea in terms of consolidated billings

Global expansion and deregulation in terrestrial advertising to be

the key share price drivers

Captive share of SEC’s increasing advertising spend provides

both stability and growth

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Consolidated billings indicate the sum of the

billings that CWW’s parent company and

subsidiaries received. Parent billings consist of

domestic and overseas billings, which are

eventually translated into CWW’s revenue. The

overseas billings generated from CWW’s overseas

subsidiaries are eventually reflected as equity-

method gain (or loss).

TV, radio, newspaper and magazine advertising

(the four largest media) represented 37% of

domestic gross profit in 2010. Cable TV and

Internet accounted for 22%, and promotion and ad

production 41%.

Economic conditions Advertising market growth shows a high

correlation with GDP (R-square of 0.76). HBSC

expects Korea’s GDP to grow by 4.9% in 2011

compared with 6.1% for 2010. We expect Korean

companies to continue to increase advertising

spending in 2011 to promote their brands and

products, but at a slower rate than in 2010 due to

lack of major events such as the World Cup and

Winter Olympics.

As a result, we expect relatively moderate 2.5%

growth in the domestic advertising market in 2011

(vs 16.5% in 2010) and the advertising market to

reach KRW8.7trn.

Commission rate Cheil Worldwide’s gross profit from domestic market

0%

5%

10%

15%

20%

TV a

nd ra

dio

New

spap

ers

Mag

azin

es

Cab

le T

V

Inte

rnet

Promotion

ad

production

41%

Cable TV

Internet

22%

TV radio

newspaper

magazine

37%

Source: Company data Source: Company data

Market share in the domestic ad market Foreign ownership

Daehong4.9%

Others57.6%

HS Ad6.1%

Innocean9.1%

SK M &C6%

CheilWW16.3%

-600

-400

-200

0

200

400

600

Jan10

Mar10

May10

Jul10

Sep10

Nov10

Jan11

34

36

38

40

42

44

46

Foreign net buyForeign ow nership

(KRW (%)

Source: KOBACO (2009) Source: Quantiwise

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Global expansion CWW was the 19th largest advertiser in the world

(as of 2009) and aims to be a top 10 player by

2012. We think the company’s overseas focus is

the right strategy as domestic market growth has

structurally slowed down.

CWW is focusing both an organic growth and

overseas acquisition in order to expand its

overseas operations. After the downsizing in 2009

following the financial crisis, CWW started to

expand its overseas branch again from 2010. The

number of overseas employees rose 15% in 2H10.

CWW also plans to expand in the Middle East and

Africa (markets SEC is focusing on).

On the acquisition front, CWW acquired Beattie

McGuinness Bungay (BMB) in England in 2008,

and The Barbarian Group (TBG) in the US in 2009.

The company also established Herezie in France

and acquired Opentide China in 2010. In 2011,

CWW plans to strengthen its presence in countries

such as the US and China where it is considering at

least two potential acquisition targets.

We believe CWW’s strengthening overseas

capability is positive as it better positions CWW

in the global economic recovery. We expect

CWW’s overseas billings to increase from

KRW1.3trn in 2010 to KRW2trn in 2012. We

believe this strong growth will be backed by SEC

increasing its smartphone market share and the

fast-growing market for new devices such as,

tablet PCs and smart TVs.

Overseas expansion again from 2010 Overseas billings to increase

0

10

20

30

40

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Office

BranchFirm

-

500

1,000

1,500

2,000

2,500

3,000

'05 '06 '07 '08 '09 '10 '11e '12e '13e

50%

55%

60%

65%

70%Ov erseasOv erseas as % of total billing

Source: Company data Source: Company data, HSBC estimates

Global marketer ranking in 2009 Domestic ad market structurally slowing down

Ranking Marketer2009 Sales

(USD bn)

1 WPP 13.60

2 Omnicom 11.72

3 Publicis 6.29

4 Interpublic 6.03

5 Dentsu 3.11

6 Aegis 2.11

7 Havas 2.01

19 Cheil Worldwide 0.31

0

2

4

6

8

10

1975 1980 1985 1990 1995 2000 2005 2010

(KRW tr)

Strong

grow th

Slower

grow th

Source: Advertising Age Source: Whitepaper on Korea advertising market, HSBC

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Deregulation We expect the main impact from deregulation to

come from the entry of private media

representatives. The constitutional court has ruled

that the current monopoly of KOBACO (Korea

Broadcast Advertising Corp) in the terrestrial

advertising market is a violation of the constitution.

Until now, KOBACO has decided/restricted

advertising prices, commission rates and

advertising slots. This distorted the terrestrial

advertising market and did not reflect underlying

demand. With the entry of private media

representatives, we believe terrestrial advertising

(which accounts for 23% of domestic

advertisement market) will better reflect market

dynamics due to competition between media

representatives and benefit CWW:

Advertising prices

Advertising prices are likely to rise with the

introduction of private media representatives as

they will be based on competition between

advertisers. We expect ad agencies, including

CWW, to benefit from this.

Market share

We believe CWW will be the key beneficiary as

the company’s market share in terrestrial

advertising is low considering it is the leading

company in the domestic market. Its share was

only 15.7% in 2010.

This is mainly due to KOBACO’s policy of

restricting a major company like CWW from having

a substantial market share. Also, low industry entry

barriers have led to strong competition.

In Japan, ad agencies also work as media

representatives for terrestrial ads, and hence there

is no government entity like KOBACO. In this

environment, the top player Dentsu accounts for

roughly 50% of market share. Furthermore, for

prime time terrestrial ad slots, the top three ad

agencies have around 80% time share.

We think the main reason for the substantial

terrestrial ad market share of leading ad agencies

is due to economies of scale. Major ad agencies

can buy ad slots in bulk given their strong

advertiser base. As a result, we think CWW can

receive a discount from terrestrial broadcasters

which can then be shared with advertisers. We

think the introduction of private media reps will

help CWW to attract more advertisers.

Commission rate

CWW’s commission rate (commission/billings)

for terrestrial ads should rise from 10.6%, which

Terrestrial ad – current value chain

Source: HSBC

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is below the industry average of 11% and 12-13%

for smaller players under the KOBACO

monopoly. Also, the introduction of private media

representatives should result in competition

between KOBACO and private media

representatives, which in turn could lower their

portion of commissions (currently 2.8%) and raise

advertising agencies’ commission rates.

Ad production revenue

The resulting change should expand the market

which should also lead to growth in the ad

production market.

Although we admit that it is difficult to forecast the

timing of the legislation to allow private media

representatives, we think the pressure on the

government should rise substantially near the end of

this year. This is because new broadcasting

companies are currently preparing to launch their

broadcasting services from 4Q 2011. Without the

private media representatives, terrestrial

broadcasting companies would be at a disadvantage

due to restrictions imposed by KOBACO.

SEC’s marketing to increase We believe ad spend on consumer electronics will

rise for the following reasons:

Launch of new electronic devices: As the

market is opening up strongly for new devices

such as smartphones, tablet PCs and smart

TVs, we believe there is need for electronic

companies to invest (including marketing

expenditure) in these devices to secure a

leading position in the market.

Heightening competition: We expect a wide

range of product launches this year which

should increase competition and, in turn,

marketing expenditure.

Brand perception/awareness becoming

more important: In terms of quality, product

differentiation is becoming more difficult for

devices such as LCD TVs. As such, brand

perception and awareness are likely to play a

bigger role.

As a result, we expect SEC to increase its ad

spending going forward. Specifically, we expect

SEC to increase marketing expense as a

percentage of consolidated sales from 5.0% in

2010 to 5.3% in 2011e. This indicates a 15% y-o-

y increase in SEC’s marketing expense in 2011e.

Comparison of broadcasters

Terrestrial broadcasters

New broadcasters

Cable TV operators

Service providers

MBC, KBS, SBS Chosun Ilbo, Joongang Ilbo, Donga Ilbo, Maeil Economy newspaper

C&M, HCN, OnMedia, etc.

Coverage Nationwide Nationwide Local Program variety General

program General program

Specialized program

Capital requirement

High High Low

Commercial breaks

Not allowed Allowed Allowed

Sponsorship advertising

Not allowed Allowed Allowed

Source: HSBC

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Shareholder policy CWW’s payout ratio has remained steady at around

40% during 2004-09. CWW plans to maintain its

payout ratio at a similar level (based on earnings

excluding one-off gains) for the time being despite

its cash and cash equivalent holdings of KRW440bn.

We think this is due to the company’s need for

sufficient funds to expand overseas. CWW’s payout

ratio in 2010 reached 35%, lower compared to

previous years. However, excluding the disposal

gain of Credu stake (KRW29bn) in 4Q 2010,

payout ratio reached 45%.

The major shareholders of CWW include

Samsung affiliates and four mutual funds – Korea

Investment Trust Management (Korea ITMC),

Morgan Stanley Investment Management (MSIM),

Matthews International Capital (Matthews), and

Schroders. These shareholders account for 52% of

CWW’s total stake.

KRW appreciation A strengthening KRW could deteriorate equity-

method gains as CWW’s subsidiaries receive

payments mainly in USD or EUR.

However, we note that a strengthening KRW

would be positive for overseas acquisitions.

SEC’s product line-up

Smartphone Tablet PC Smart TV

Model Galaxy Mini S5570

Galaxy SL Galaxy Fit Galaxy Ace Galaxy 4G Galaxy S II Galaxy Tab 10.1 Sliding PC 7 UN55D8000YF Full HD 3D LED

Size (mm) 100.4 x 60.8 x 12.1

123.7 x 64.2 x 10.6

110.2 x 61.2 x 12.6

112.4 x 59.9 x 11.5

122.4 x 64.5 x 9.9

125.3 x 66.1 x 8.5

246.2 x 170.4 x 10.9

265.9 x 174.8 x 19.8

1232.6 x 707.2 x 29.7

Weight (g) 105 131 n/a 113 118 116 599 989 21.8kgMemory 2GB embedded,

max 32GB Max 32GB Max 32GB 2GB embedded,

max 32GB16GB

embedded, max 32GB

16GB/32GB embedded

16 or 32 GB 32 or 64 GB SSD

Camera 3.15MP 5MP 5MP 5MP 5MP 8MP 8MP/2.0MP 1.3MPScreen size (inch)

3.14 4.0 3.3 3.5 4.0 4.3 10.1 10.1 46-65

OS Android OS, v.2.2 (Froyo)

Android OS, v.2.2 (Froyo)

Android OS, v.2.2 (Froyo)

Android OS, v.2.2 (Froyo)

Android OS, v.2.2 (Froyo)

Android OS, v.2.3

(Gingerbread)

Android v.3.0 (Honeycomb)

Windows 7 Home Premium

CPU 600MHz 800MHz 600MHz 800MHz ARM11 1GHz ARM Cortex

Dual-core 1GHz ARM

1GHz dual core Intel Atom 1.66 GHz

Source: SEC, HSBC

Major shareholders Dividend trend

0%

5%

10%

15%

20%

Samsung

affiliates

Korea

ITMC

MSIM Matthew s Shroders

0

100

200

300

400

500

'04 '05 '06 '07 '08 '09 '10 '11e '12e '13e

0%

10%

20%

30%

40%

50%

DPS (LHS) Pay out ratio (RHS)

Source: Company data Source: Company data, HSBC

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Howon Rim and Nam Park

Important disclosures

Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,

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stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 25 March 2011, the distribution of all ratings published is as follows: Overweight (Buy) 51% (23% of these provided with Investment Banking Services)

Neutral (Hold) 36% (21% of these provided with Investment Banking Services)

Underweight (Sell) 13% (19% of these provided with Investment Banking Services)

Share price and rating changes for long-term investment opportunities

Samsung Electronics (005930.KS) Share Price performance KRW Vs HSBC

rating history

Source: HSBC

Recommendation & price target history

From To Date

N/R Overweight (V) 17 June 2009 Overweight (V) Overweight 29 January 2010 Target Price Value Date

Price 1 800000.00 17 June 2009 Price 2 940000.00 30 July 2009 Price 3 1021000.00 05 October 2009 Price 4 1139000.00 23 March 2010

Source: HSBC

402000

602000

802000

1002000

Mar

-06

Sep-

06

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

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HSBC & Analyst disclosures Disclosure checklist

Company Ticker Recent price Price Date Disclosure

SAMSUNG ELECTRONICS 005930.KS 880000.00 24-Mar-2011 2, 6, 11Source: HSBC

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next

3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company. 4 As of 28 February 2011 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 31 January 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of investment banking services. 6 As of 31 January 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-investment banking-securities related services. 7 As of 31 January 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures 1 This report is dated as at 28 March 2011. 2 All market data included in this report are dated as at close 24 March 2011, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer * Legal entities as at 31 January 2010 'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. - Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank Argentina S.A., HSBC Saudi Arabia Limited., The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch.

Issuer of report The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch

7th Floor, HSBC Building

25, 1-ka, Bongrae-dong

Chung-ku, Seoul 100-161, Korea

Telephone: +822 3706 8700/3

Fax: +822 3706 8797

Website: www.research.hsbc.com

This document has been issued by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HSBC") for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch. In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. It may not be further distributed in whole or in part for any purpose. © Copyright. The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch 2011, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch MICA (P) 142/06/2010 and MICA (P) 193/04/2010

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Global Stephen Howard Analyst, Global Sector Head +44 20 7991 6820 [email protected]

Europe Dominik Klarmann, CFA Analyst +49 211 910 2769 [email protected]

Nicolas Cote-Colisson Analyst +44 20 7991 6826 [email protected]

Luigi Minerva Analyst +44 20 7991 6928 [email protected]

Antonin Baudry +33 1 56 52 43 25 [email protected]

Manish Beria, CFA Analyst +91 80 3001 3796 [email protected]

Amit Sachdeva Analyst +91 80 3001 3795 [email protected]

Dhiraj Saraf, CFA Analyst +91 80 3001 3773 [email protected]

Sunil Rajgopal Analyst +91 80 3001 3794 [email protected]

Americas Richard Dineen Analyst +1 212 525 6707 [email protected]

Sean Glickenhaus Analyst +1 212 525 4131 [email protected]

Anthony McCutcheon Credit Strategist +1 212 525 4198 [email protected]

Keith Kitagawa Credit Strategist +1 212 525 5160 [email protected]

Enrique Gomez-Tagle Media +52 55 5721 2167 [email protected]

Global Emerging Markets (GEMs) Hervé Drouet Analyst +44 20 7991 6827 [email protected]

Emerging Europe, Middle East & Africa (EMEA) Kunal Bajaj Analyst +971 4 507 7200 [email protected]

Vangelis Karanikas Analyst +30 210 696 5211 [email protected]

Avshalom Shimei Analyst +972 3 710 1197 [email protected]

Bülent Yurdagül Analyst +90 212 376 46 12 [email protected] Specialist Sales

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Thomas Koenen +49 211 910 4402 [email protected]

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Asia Steven C Pelayo Analyst +852 2822 4391 [email protected]

Tse-yong Yao Analyst +852 2822 4397 [email protected]

Nam Park Analyst +852 2996 6591 [email protected]

Carolyn Poon Analyst +852 2996 6586 [email protected]

Tucker Grinnan Analyst +852 2822 4686 [email protected]

Neale Anderson Analyst +852 2996 6716 [email protected]

Henry Lee Associate +813 5203 4412 [email protected]

Shishir Singh Analyst +852 2822 4292 [email protected]

Jenny Lai Head of Research, Taiwan +8862 8725 6020 [email protected]

Frank Su Analyst +8862 8725 6025 [email protected]

Jerry Tsai Analyst +8862 8725 6023 [email protected]

Percy Panthaki Analyst +91 22 2268 1240 [email protected]

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Yogesh Aggarwal Analyst +91 22 2268 1246 [email protected]

Anil Kumar T Analyst +91 80 3001 3749 [email protected]

Yolanda Wang Analyst +8862 8725 6027 [email protected]

Carrie Liu Analyst +8862 8725 6024 carriecfliu @hsbc.com.tw

Brian Sohn Analyst +822 3706 8765 [email protected]

Howon Rim Analyst +822 37068767 [email protected]

Luis Hilado Analyst +65 6239 0656 [email protected]

Hui Dong Analyst +852 2822 4202 [email protected]

Joyce Chen Associate +8862 8725 6022 [email protected]

Soyun Shin Associate Analyst +822 3706 8774 [email protected]

Global Telecoms, Media & Technology Research Team