[2016 Outlook] Media Advertisement

Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S.

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.

Media Advertisement Growing ad agency

Take note of ad agency growth amid favorable changes in market environment

Media shined as one of the top performers in the Korean stock market this year. Content powered the sector, leading to an earnings recovery at broadcasters (SBS and CJ E&M mediadivision) and revenue expansion at filmmakers (CJ E&M film division, Showbox and NEW).

In 2016, we expect advertising to extend the media rally. Ad shares, which have been on the sidelines this year, appear undervalued to its content-focused peers. Meanwhile, operating conditions in the space are improving along with earnings.

Ad agencies see internal and external improvements

Ad earnings are picking up. In 2016, we forecast Cheil Worldwide, INNOCEAN Worldwideand Nasmedia (ad shares under KDB Daewoo Universe) to deliver combined revenue growth of 10%, operating profit growth of 15%, and net profit growth of 11% YoY.

In addition, we are seeing positive developments at advertisers and in ad media. At Cheil Worldwide, concerns of order reduction from Samsung Electronics have eased and the firm has managed to generate over 30% of its consolidated gross profit from non-affiliated advertisers this year. New media is also producing opportunities. Thanks to its Chinese digital marketing subsidiary Cheil PengTai, digital ads now account for 30% of the firm’s consolidated gross profit. Cheil PengTai is one of China’s top three digital marketers, contributing 30% of Cheil Worldwide’s revenue, and 49% of net profit (1- 3Q, cumulative).

INNOCEAN Worldwide is expected to launch a major ad campaign for the Hyundai Motor Company’s (HMC) new luxury brand, “Genesis”. The agency established a joint venture in the US to perform media buying for the firm.

Nasmedia is well positioned to benefit from the secular growth of internet/mobile, IPTV and online video ads. Furthermore, Korean and global internet firms are making significant strides in monetizing mobile traffic (mobile/video ads).

Present Overweight; Top pick is Cheil Worldwide

We present Overweight on media ads as fundamentals (earnings, corporate structure, etc.) are improving, and positive developments (advertisers and overseas earnings) have yet to be fully priced in.

Our top pick is Cheil Worldwide (030000 KS). We reiterate Buy and raise our target price from W28,000 to W30,000, in light of growing revenue/profit contributions from its Chinese subsidiary Cheil PengTai. In fact, we forecast 50% of Cheil Worldwide’s 2016 EPS to originate from China. We expect Cheil PengTai’s growth to be propelled by a rise in local advertisers, wider business coverage, and the expansion of digital marketing and e-commerce.

We also like INNOCEAN Worldwide (214320 KS) and Nasmedia (089600 KQ). We are initiating coverage of INNOCEAN Worldwide with Buy and a target price of W86,000.HMC’s launch of new luxury brand and joint venture operations in the US will likely boost INNOCEAN’s growth. We reiterate Buy on Nasmedia, but lower our target price from W73,000 to W58,000, as we anticipate earnings growth to slow next year.

Overweight (Maintain)

Industry Report

November 25, 2015

Daewoo Securities Co., Ltd.

[Telecom Service / Media]

Jee-hyun Moon +822-768-3615 [email protected]

Nu-ri Ha +822-768-4130 [email protected]

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KDB Daewoo Securities Research

Media (content) stocks outperform KOSPI in 2015; Ads to drive media rally in 2016

Note: Based on aggregate market cap

Source: KDB Daewoo Securities Research

Ad agencies link advertisers and ad media


Three stages of ad agency growth

Note: INNOCEAN is in late first stage, and Cheil is in mid second stage


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C O N T E N T S

I. Ad agency business 4 1. Ad business structure 4 2. Ad agency environment 5

II. Advertising firms’ growth phase 8 1. Three phases of growth 8 2. How to grow 9 3. Three steps in branding 11

III. Mid/long-term outlook and key issues 12 1. Structural overview 12 2. Growth strategies and challenges 14 3. Changes in advertiser brand strategies 15

IV. Valuation and investment strategy 16 1. Valuation approach 16 2. Global peer comparison 17

V. Key Recommendations 18 Cheil Worldwide (030000 KS) 19 Innocean Worldwide Inc. (214320 KS) 26 Nasmedia (089600 KQ) 35

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I. Ad agency business

1. Ad business structure

The advertising value chain comprises of advertisers, ad agencies, media representatives, and ad mediums. Payments made by advertisers are delivered to ad media through the value chain.

Advertisers can directly pay ad media, but advertising has become increasingly fragmented, as advertisers have grown in size, and advertising has become more specialized, requiring the services of ad agencies. Indeed, Samsung Electronics (SEC) relies on its ad agency Cheil Worldwide, HMC on INNOCEAN and Apple on Omnicom for advertising. Advertisers’ ad expenses are affected by their brand strategies, individual products/services, business environments and their financials.

Ad agencies plan/produce ads and buy ad media for advertisers. Ad agencies can directly contact ad media, but in most cases, they commission the task to media representatives due to regulatory issues and convenience. Since the ad agency business centers around advertisers, ad agency earnings hinge largely on advertisers (ad order volume, addition of new advertisers, loss of existing advertisers, etc.)

Media representatives work closely with ad media. They offer specialized services according to ad medium. KOBACO and Media Create are media representatives specializing in terrestrial broadcasts (KOBACO for KBS and MBC, and Media Create for SBS and provincial broadcast networks). Nasmedia and MezzoMedia are media representatives focused on new media (internet/mobile and IPTV VOD). Media representatives connect ad media with ad agencies, assist ad media with planning and operation, and measure ad effectiveness and deliver the results to ad agencies and advertisers.

Traditional ad media can be largely categorized into: 1) newspapers and magazines (print), and 2) terrestrial network and radio (radio wave). New media can be divided into: 1) pay TVs (cable TV/ general programming channels), 2) digital (online and mobile), and 3) out-of-home. Growth has slowed in the traditional media segment, but the number of ad media is limited, and deregulation is underway in terrestrial broadcasting. General elections and global sporting events next year should also be positive. New media has high growth potential, but competition is intense due to low barriers to entry and a large number of competitors.

For ad agencies, growth should be dictated by advertisers and ad media diversification, whereas for media representatives, expansion of business coverage and positioning in high-growth medium should be important.

Figure 1. Ad business value chain


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2. Ad agency environment

(1) Stands between advertisers and media companies

Ad firms (including ad agencies and media reps) stand between advertisers and media companies. As such, shares of ad firms would underperform, if either advertisers or media companies do not fare well.

Factors that are currently important to both advertisers and media companies are 1) large size and 2) economic conditions. Ad firms have been growing, as both advertisers and media companies are becoming larger. Large advertisers typically have more impact on ad firms’ earnings due to massive marketing campaigns. Media companies are increasingly becoming conglomerates via business reorganization, including M&As. In particular, SBS Media Holdings has one terrestrial TV network and seven cable TV channels, while CJ E&M holds 17 cable channels. Internet/mobile firms, such as Naver and Kakao, are increasing ad slots in line with traffic growth.

With regard to economic conditions, it should be noted that the first thing advertisers cut during an economic slowdown is marketing costs. For media firms, content production costs and the composition of ad products change depending on seasonality and economic conditions, affecting ad revenues.

Advertisers’ marketing strategies and ad spending/targets (brand, products, or services) are different at each stage of their growth. For example, Samsung Electronics mounted ad campaigns for new solution services, including Samsung Pay, this year. In addition, Hyundai Motor Company has been changing its brand strategy due to the spin-off of its luxury nameplate “Genesis”. Furthermore, advertisers who pursue global expansion can change the areas into which they focus on advancing. A decade ago, they focused on penetrating the US and European countries, but currently, they have shifted their focus to emerging Asian markets, including China.

For media firms, their growth trends have been differentiated. Although deregulation on traditional media firms is underway, it appears too late for them to reverse the current business environment. Meanwhile, the rapid growth of the digital media ad market, which is being driven by mobile firms, has been attracting keen attention. With the advent of the on-demand economy, digital ads are creating other market segments, including VOD ads and location-based search ads.

Under the current environment, ad firms need to focus on 1) attracting large advertisers, and 2) restructuring media business to streamline sluggish businesses and expand new, fast growing businesses.

Figure 2. Ad agencies link advertisers and ad media


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2) Performance of advertisers is key to ad firms’ share performance

Shares of ad agencies typically move in line with those of major advertisers. The four figures seen below compare the share performances of Samsung Electronics (SEC), Apple, Toyota, and Doosan with those of their respective ad agencies.

In 1H15, Cheil Worldwide, which is in charge of Samsung Electronics’ domestic media operations, and Publicis Groupe, which handles SEC’s global media operations, delivered better share performance than Samsung Electronics amid the launch of the Galaxy S6.

Similarly, shares of Omnicon and Dentsu have moved in line with their major clients Apple and Toyota, respectively. Oricom, an in-house advertising agency for Doosan Group, advanced more sharply than Doosan Corp. after Doosan won the downtown duty-free store license.

In this regard, Innocean is expected to enjoy the strongest advertiser momentum as its biggest client HMC will likely expand marketing activities with the launch of a luxury car brand Genesis.

Figure 3. Share performances of SEC, Cheil and Publicis Figure 4. Share performances of Apple and Omnicom

Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research

Figure 5. Share performances of Toyota, Dentsu and Publicis Figure 6. Share performances of Doosan and Oricom

Source: Thomson Reuters, KDB Daewoo Securities Research Source: Thomson Reuters, KDB Daewoo Securities Research

80

90

100

110

120

130

140

150

1/15 3/15 5/15 7/15 9/15 11/15

(1/15=100)

SEC Cheil Worldwide Publicis

80

90

100

110

120

130

1/15 3/15 5/15 7/15 9/15 11/15

(1/15=100)

Apple Omnicom Group

80

90

100

110

120

130

140

150

1/15 3/15 5/15 7/15 9/15 11/15

(1/15=100)

Toyota Motor

Dentsu

Publicis

0

100

200

300

400

500

90

100

110

120

130

1/15 3/15 5/15 7/15 9/15 11/15

(1/15=100)(1/15=100)

Doosan (L)

Oricom (R)

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(3) Media environment

In the media environment, the growth of digital media, including online media and mobile internet, is prominent. In Korea and China, digital ads have already become the largest segment in their respective ad markets. In the US, digital ads are rapidly catching up with TV ads. In all the three countries, digital ads are expected to display the strongest growth compared to other advertising media over the next four years. Accordingly, ad agencies need to expand investments in digital ads to pursue further growth, and such effort should positively affect their share performance.

Figure 7. Domestic ad media market: US$14.4bn in 2016 (digital to command 44% and TV 22%)

Figure 8. Chinese ad media market: US$53.6bn (digital to command 45% and newspaper 18%)

Figure 9. US ad media market: US$ 235.5bn (TV to command 32% and digital 26%)

Note: Based on foreign exchange rate forecasts from a single source

Source: PwC, KDB Daewoo Securities Research

0

5

10

15

20

11 12 13 14 15F 16F 17F 18F

(US$bn)

B2B and other Outdoor Digital TV Radio Magazine Newspaper

0

50

100

150

200

250

300

11 12 13 14 15F 16F 17F 18F

(US$bn)


0

10

20

30

40

50

60

70

11 12 13 14 15F 16F 17F

(US$bn)


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II. Advertising firms’ growth phase

1. Three phases of growth

In our view, ad firms go through three phases of growth.

First, they grow based on dependence on a handful of advertisers and media. In Korea, in-house agencies of large conglomerates, including Cheil Worldwide (Samsung), Innocean (Hyundai/Kia), and Oricom (Doosan), have achieved growth based on captive demand from group affiliates. Among unlisted firms, HS Ad (LG), Daehong Communications (Lotte), SK Planet (SK), and Hancomm (Hanwha) are affiliated with large conglomerates. At this growth stage, orders from affiliates are important, with ad agencies’ share performance moving in line with their major advertisers. Cheil Worldwide has gradually reduced its dependence on affiliate orders, while Innocean is still trying to wean itself from its dependence on Hyundai Motor and Kia Motors.

In the second growth phase, ad firms see the expansion of client base and diversification of media. They take a leap forward based on the experience in the first phase. In the earlier stage of the second phase, advertising media diversify from terrestrial TV to digital and non-media retail marketing with the development of advertisers’ brand strategies.

In the medium stage, non-affiliate orders as well as orders from group affiliates increase. The volume of affiliate orders cannot serve as a barometer for ad firms’ competitiveness as it is mostly determined by captive demand. However, steady growth in non-affiliate orders should indicate an improvement in competitiveness. In the later stage, firms make more aggressive efforts like JV establishments or M&As to increase non-affiliate orders, establish overseas network and improve media capabilities.

In the third growth stage, an ad firm grows into an advertising group with multiple brands under its umbrella. Although all the ad firms do not pursue this model, the majority of them are adopting it. An advertising group has a global network and the competiveness of its independent brands amounts to competitiveness of the entire group. Recently, the industry’s long-time norm in which advertisers in the same industry do not use the same ad agency is being breached. Advertisers tend to select a more competitive agency despite risks of conflict of interest.

Figure 10. Three stages of ad agency growth

Note: INNOCEAN is in the late first stage, and Cheil is in the middle second stage


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Table 1. Rank of global ad agencies

2014 Company name Headquarters Remarks Gross profit

1 WPP London Holding company of group W10-20tr

2 Omnicom Group New York Holding company of group

3 Publicis Groupe Paris Holding company of group

W6-10tr 4 Interpublic Group of Cos. New York Holding company of group

5 Dentsu Tokyo Holding company of group

6 Havas Puteaux, France Holding company of group W2tr

7 Alliance Data Systems Corp.'s Epsilon Irving, Texas Data-based marketing

8 Hakuhodo DY Holdings Tokyo Holding company of group

W1-2tr

9 IBM Corp.'s IBM Interactive Experience Armonk, N.Y. Digital marketing and consulting

10 Deloitte's Deloitte Digital New York Digital marketing and consulting

11 Accenture's Accenture Interactive New York/London Digital marketing and e-commerce consulting

12 MDC Partners New York Holding company of group

13 BlueFocus Communication Group Beijing Digital marketing in China

W0.5-1tr

14 Experian's Experian Marketing Services New York Digital marketing and consulting

15 Cheil Worldwide Seoul, Korea

16 DJE Holdings Chicago Promotions

17 Acxiom Corp. Little Rock, Ark. Digital marketing and consulting

18 PwC's Digital Services Hallandale Beach, Fla. Digital marketing and consulting

19 Aimia Montreal Data-based marketing

20 MC Group (Media Consulta) Berlin Comprehensive ad services

Source: Advertising Age (2015), KDB Daewoo Securities Research

2. Growth routes

(1) Organic

Given the cyclical nature of the ad market, it is dependent largely on the economy. Thus, we believe that organic growth of domestic ad agencies will converge to GDP growth over the long term. In 2016, Korea’s GDP growth is forecast at 2-3%.

Ad agencies will need to target the most active sectors in order to boost organic growth. For example, agencies could attract advertisers that focus on massive marketing activities amid robust growth, or could concentrate on relatively robust digital media.

Figure 11. Ad agency business closely follows economic cycles Figure 12. Positioning in high-growth segment is effective

Source: KDB Daewoo Securities Research Source: PWC, KDB Daewoo Securities Research

0

1

2

3

4

5

1Q14 1Q15 1Q16F 1Q17F

(YoY, %)

Korea GDP growth forecast

-0.7

1.0 1.9

4.9

15.3

5.2

-5

0

5

10

15

20

Ad total Newspaper Magazine Radio TV ad Internet ad

(%)

5-yr CAGR of domestic media ad estimates

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(2) Inorganic

A prime example of inorganic growth is through M&As. Ad agencies create synergies through M&As in the following two ways. 1) Existing accounts might place ad orders in recognition of the acquired agencies’ capability. And 2) by leaving acquired companies operated independently, ad agencies can increase account coverage without incurring conflicts between accounts in the same industry.

WPP, the world’s leading ad giant, is the best example of an ad company delivering growth through M&As. London-based WPP possesses hundreds of agencies under its arms around the world. We estimate that WPP began acquiring ad agencies in 1989, and took over 20 agencies in 1998 and 54 in 2014.

During the 1990s, WPP generated average annual gross profit growth of around 5%. However, after aggressive acquisitions, this figure jumped to 16% during the 2000s. While the company initially pursued M&As to increase its accounts, we believe it is now aiming to sharpen its competitiveness in new media such as digital media, and expand coverage in emerging markets (e.g. China).

Among domestic firms, Cheil Worldwide has been most aggressive in its M&A pursuits. The company acquired three agencies (US, UK, and China) in 2009, two (US and China) in 2012, and one (UK) in 2015. In particular, its acquisition of China-based Cheil PengTai (formerly OpenTide China; acquired in 2009) has been a standout, as the firm delivered nearly 400% revenue growth since the deal. Cheil Worldwide’s acquisition of Iris, its largest M&A, provided an immediate boost to earnings. We believe that Cheil Worldwide and other domestic ad agencies will continue to seek for growth via. M&As.

Figure 13. WPP’s M&As and gross profit: M&As boost growth

Note: 2015 is the consensus figures; Source: WPP, Bloomberg, and KDB Daewoo Securities Research

Figure 14. Cheil Worldwide’s M&As and gross profit: M&As were also positive

Note: 2015 is KDB Daewoo Securities estimates; Source: Cheil Worldwide and KDB Daewoo Securities Research

0

4

8

12

16

20

0

15

30

45

60

88 90 92 94 96 98 00 02 04 06 08 10 12 14

(US$bn)(deals)

Number of WPP M&A (L)

WPP gross profit (R)

0

200

400

600

800

1,000

0

1

2

3

4

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F

(Wbn)(deals)

Number of Cheil Worldwide M&As (L)

Chwil Worldwide gross profit (R)

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3. Three steps in branding

Ad agencies can grow, alongside changing brand strategies by key advertisers. In the process of looking for solutions suitable for advertisers’ situation and purpose, agencies could win an increase in marketing orders. In addition, as this marketing campaign will serve as a reference, they could attract additional accounts.

Generally speaking, corporate brand strategies tend to follow three steps with a focus on: 1) quantity, 2) quality, and 3) premium image. During the initial stages of branding, agencies focus on increasing public awareness. For a local brand to become global, it requires qualitative (mass) marketing capitalizing on conventional media (e.g., terrestrial broadcasters). Korean brands such as Samsung and Hyundai Motor underwent this step.

The second step is to boost consumer preference. If increased awareness does not lead to consumer buying, companies’ revenues would stagnate despite increased costs. During this step, while image advertising continues to progress as part of mass marketing efforts, ad agencies add target marketing (e.g., use of digital medium) to the strategy. Revenues tend to increase, gradually boosting margins.

Finally, the third step is to upgrade the brand image. The aim is to make consumers aspire to possess products or services and feel proud of their decision. Apple and Lexus are successful examples. To achieve this goal, agencies utilize social media (out of digital media), and rely on offline marketing activities (e.g., retail store marketing, experiential marketing). Apple is running Apple Store, while Toyota is operating dealerships that provide the Lexus experience. Companies that establish premium brands are capable of generating margin growth. Indeed, Apple and Toyota are yielding higher margins than peers thanks to its premium brand value.

Figure 15. Three stages of branding: Premium brand image can lead to earnings growth

Source: SEC, Cannes Lions Korea, and KDB Daewoo Securities Research

Figure 16. Global brand rank: Apple on top, Toyota in 6th, Samsung 7th, HMC 39th

Source: Interbrand(2015), KDB Daewoo Securities Research

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III. Mid/long-term outlook and key issues

1. Structural overview

(1) Mid/long-term outlook

From a structural standpoint, we see three trends that will define the ad industry in the medium to long term: fragmentation, integration, and economic association.

1) Fragmentation refers to the ecosystem expansion caused by the large number of ad firms emerging in the new media market (especially in mobile ads). Digital ads are turning into a long tail market because of their relatively low entry barrier. The number of ad firms is likely to continue to increase for some time, as there is still strong need for targeted ads in niche markets.

2) Integration can be defined as attempts to cross over industry boundaries. We are witnessing an increasing number of cases where advertisers own ad agencies (in-house ad agency) and media firms own media reps (e.g. CJ E&M’s MezzoMedia).

3) Economic association emphasizes the increasing role of internet and mobile companies in driving economic growth, and the importance of advertising as their key business model. For businesses, ads are important to earnings. For governments, the ad industry can be instrumental in spurring domestic demand and creating jobs.

(2) Key issues

In the domestic ad industry, one issue has been the growing presence of in-house ad agencies. Korea’s top ten ad firms consist of in-house ad agencies and those owned by the global big three. In the past decade, the top ten domestic firms have grown from 71% of gross billings in 2004 to 85% in 2014. Competition between domestic ad agencies has turned into a proxy fight between large conglomerate groups. The same goes for the new media rep market, where Nasmedia, MezzoMedia and Incross each represent the KT, CJ, and SK groups.

In the global ad industry, ad blocks have emerged as a key topic. Many consumers are averse to advertising, which presents a dilemma for content developers and distributors, for whom ads are their main source of revenue. This has touched off a heated debate over the legality of ad blocks and attempts to prevent ad-blocking users from accessing content. In the medium and long term, we believe ads will evolve into a new form of delivery that is met with little consumer resistance and blurs the lines between content and ads (native advertising, etc.).

Figure 17. Domestic mobile ad ecosystem: New media ads are fragmented

Source: Buzzvil(Oct. 2015), KDB Daewoo Securities Research

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Figure 18. In Korea, ad agencies affiliated with corporate groups dominate market (based on billings)

Source: Ad Market Trend (2015) KDB Daewoo Securities Research

Figure 19. Ad-blocks on internet stirs controversy

Source: Respective company data, KDB Daewoo Securities Research

Figure 20. Informative content ads gain popularity: a case of DELL ‘Native ad’

Source: NYTimes, Buisness Insider, KDB Daewoo Securities Research

36%

26%

8%

6%

3%

2%

1%

15%

Samsung: Cheil Worldwide

HMC: INNOCEAN Worldwide

LG: HS Ad

Lotte: Daehong Communications

SK: SK Planet

Omnicom: TBWA

WPP: Group M Search

Doosan: Oricom

Hanhwa: Hancom

Publicis: Leo Burnett

Other

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2. Growth strategies and challenges


Many ad firms are relying on inorganic growth through M&As to leap forward in the medium and long term. The number of global M&A deals has been on a steady rise, except in 2003 and 2009 when the global economy fell into a slump. The number of M&A deals so far in 2015 (as of mid-November) has already surpassed all of 2014. Most firms have been targeting digital ad agencies to strengthen their new media capabilities, or ad agencies in emerging markets, including China, to expand their local operations. Major domestic ad firms are also actively considering acquisitions to increase their size.

(2) Key issues

Ad agencies typically face two issues when seeking growth: synergy and profitability.

The M&A boom in the ad industry has brought much attention to the issue of synergy. For ad firms, advertiser synergy is an important factor in considering an M&A. The proposed merger between the world’s second-largest ad group, Omnicom, and the third-largest group, Publicis, (which was the industry’s largest deal ever) eventually fell through because of uncertainties about the deal’s potential synergies. The two firms had major advertisers who were rivals in their respective fields, such as Pepsi and Coca-Cola, Apple and SEC, and Verizon and AT&T.

It is also important for ad firms to focus on profit margins as they grow. Labor costs are usually fixed in manufacturing, but tend to be variable for ad agencies. Publicis had previously experienced a decline in margins when its top line was growing.

Figure 21. Global ad market M&As: Visible growth in recent years

Note: As of mid-November 2015

Source: Bloomberg, KDB Daewoo Securities Research

Figure 22. Publicis’ margin fell during top-line growth Figure 23. Publicis seems to have made advance investments

Source: Publicis, Bloomberg, KDB Daewoo Securities Research Source: Publicis, Bloomberg, KDB Daewoo Securities Research

10

12

14

16

18

0

2

4

6

8

00 02 04 06 08 10 12 14

(%)(EURbn)

Gross profit (L)

OP/gross profit (R)

-10

0

10

20

30

40

01 03 05 07 09 11 13

(YoY, %)Change in gross profit

Change in operating expense

0

100

200

300

400

500

600

700

800

90 92 94 96 98 00 02 04 06 08 10 12 14

(deals)

Global ad M&As

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3. Changes in advertiser brand strategies


When it comes to brand strategy, we believe globalization and consumer experience will become the key themes over the medium and long term. Many local brands are looking to position themselves as global brands. In particular, a growing number of brands based in Korea and China are moving beyond their borders and going global. As a result, ad agencies will face an increasing need to develop their brand planning capabilities and global networks.

Recently, consumer experience marketing has been gaining importance. Today’s consumers have more power over a company’s brand image than ever before. Consumers often write about their experience with a specific product or service on social media, which can quickly go viral. Another brand strategy on the rise is retail marketing, which helps brands engage consumers before they have voluntarily experienced a product. Key examples are SEC’s Galaxy S6 experience campaigns, Toyota’s independent dealerships for its Lexus brand, and HMC’s private show rooms for its new Genesis EQ900.

(2) Key issues

One recent development worth noting is the launch of new and individual brands. Judging from Toyota’s Lexus marketing strategy, we think HMC could expand retail marketing (separate dealerships) in addition to traditional ad campaigns for its new Genesis model. Another important event could be changes in brand identity. Heading into the year end, some companies could undergo management changes, which could potentially result in new advertising slogans or even overhauls in brand identity. Such changes would prove beneficial to ad agencies.

Figure 24. Brand globalization efforts Figure 25. Experiential marketing (SEC)

Source: Dreamstime, KDB Daewoo Securities Research Source: SEC, KDB Daewoo Securities Research

Figure 26. Independent brand launch by HMC Figure 27. Brand identity changes

Source: HMC, KDB Daewoo Securities Research Source: instantshift, KDB Daewoo Securities Research

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IV. Valuation and investment strategy

1. Valuation approach

There has been an increasing number of advertising IPOs around the world, especially in Asia. As a result, we now have a good number of listed companies that can serve as benchmarks, which adds more credence to average sector valuation.

Hence, we use average sector P/Es in valuing ad agencies under our coverage. In particular, we believe foreign benchmarks should be an important component of the valuation of domestic ad companies that have made significant progress in foreign markets, such as China.

Recently, a slew of media, ad and content companies have gone public on China’s Shenzhen Stock Exchange. Cheil Worldwide’s China operations, including its core subsidiary Cheil PengTai, are expected to deliver revenue of W1tr and net profit of W50bn in 2016.

Interestingly, we are seeing an increasing number of Chinese ad agencies that are comparable with Cheil PengTai in terms of either revenue or net profit (based on our 2016 figures). We thus believe it makes sense to value Cheil PengTai separately based on listed Chinese ad firms.

Figure 28. Cheil expands Chinese operations: Chinese peers should be considered for valuation

Source: Respective company data, KDB Daewoo Securities Research

Figure 29. Comparison of avg. P/E of ad agencies: China > Japan > Korea > US

Notes: Company names listed on Table 2


19.6

27.2

68.5

16.718.123.1

48.5

15.1

0

10

20

30

40

50

60

70

80

Korea Japan China West

(x)

2015F

2016F

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2. Global peer comparison

Looking at major global ad agencies, we notice that companies showing rapid growth in Asia are trading at higher premiums. In particular, Chinese ad stocks are fetching the highest multiples, with Beijing Tensyn Digital leading the way following impressive revenue growth of 76% in 2015.

At the country level, Korea’s ad sector is trading at an average P/E of 18x vs. 23x for Japan, 48x for China and 15x for Western countries, based on 2016F earnings. Although Korean ad shares are trading at a discount compared to Japan and China, we believe they have the potential to re-rate higher on the back of robust growth and progress in China.

Table 2. Earnings outlook for global ad agencies (Wbn)

Market

cap

Revenue Operating profit Net profit

14 15F 16F 14 15F 16F 14 15F 16F

Cheil Worldwide (Korea) 2,353 2,666 2,846 3,051 127 138 158 102 109 123

INNOCEAN Worldwide 1,344 745 939 1,098 83 92 107 84 86 93

Nasmedia 378 30 45 54 9 12 14 8 10 12

Dentsu (Japan) 19,227 7,053 6,422 7,988 1,281 966 1,351 773 618 868

Hakuhodo Dy Holdings 4,983 10,948 11,071 11,413 356 373 397 192 205 218

Asatsu-Dk 1,168 3,517 3,359 3,433 41 43 49 37 42 46

BlueFocus (China) 5,744 1,017 1,674 2,270 136 200 270 122 148 205

Guangdong Advertising 4,147 1,078 1,557 1,918 103 160 205 73 110 141

Beijing Tensyn Digital 3,222 142 219 287 17 26 40 15 24 36

Zhejiang Huamei Holding 2,558 251 266 284 28 39 49 32 37 46

WPP (UK) 34,000 19,993 21,487 21,606 2,610 3,057 3,107 1,868 2,174 2,320

Omnicom Group (US) 20,636 16,135 17,524 18,153 2,048 2,223 2,322 1,163 1,251 1,306

Publicis Groupe (France) 15,551 10,146 11,681 12,272 1,495 1,739 1,878 1,007 1,169 1,276

Interpublic Group (US) 10,940 7,939 8,776 9,109 830 1,018 1,124 503 554 632

Note: KDB Daewoo Securities estimates for Korean firms, Dentsu is believed to record gross profit as revenue


Table 3. Global ad agency valuations (x, %)

EV/EBITDA P/E P/B ROE

14 15F 16F 14 15F 16F 14 15F 16F 14 15F 16F

Cheil Worldwide (Korea) 9.5 11.4 9.7 19.5 22.0 19.4 2.0 2.1 1.9 13.2 12.4 13.5

INNOCEAN Worldwide - 9.7 7.9 - 17.5 17.1 - 2.9 2.6 21.5 17.0 16.2

Nasmedia 18.5 32.3 27.1 24.7 39.2 33.5 3.1 5.7 5.0 13.4 15.3 15.9

Dentsu (Japan) - 14.9 11.6 - 30.5 21.8 1.8 1.8 1.7 - 5.9 7.6

Hakuhodo Dy Holdings 7.4 9.7 9.2 24.3 23.3 22.0 1.9 1.9 1.8 8.4 8.0 8.2

Asatsu-Dk Inc - 13.3 12.2 25.8 27.8 25.5 1.1 1.0 1.1 4.0 3.4 4.1

BlueFocus (China) - 25.9 20.2 68.6 33.2 23.2 7.3 6.2 5.2 9.2 17.0 19.2

Guangdong Advertising - 26.2 20.5 43.2 34.1 25.5 9.7 7.7 5.9 27.0 24.1 23.7

Beijing Tensyn Digital - - - 162.2 134.8 88.6 23.3 19.9 16.2 16.4 14.7 17.7

Zhejiang Huamei Holding - - - 34.3 69.7 55.7 10.2 9.7 8.2 34.3 14.0 14.9

WPP (UK) 10.6 11.5 11.0 15.3 16.2 14.9 2.7 2.5 2.4 17.4 15.7 15.9

Omnicom Group (US) 8.9 9.8 9.4 16.9 16.8 15.7 7.2 6.6 6.3 39.0 39.5 43.8

Publicis Groupe (France) 11.0 9.4 8.7 15.5 13.5 12.3 2.0 2.0 1.8 14.7 15.4 15.8

Interpublic Group (US) 8.4 10.0 9.2 20.8 20.1 17.5 5.1 4.6 4.5 25.5 22.0 24.9

Global average 10.6 15.4 13.1 39.3 35.7 28.1 6.0 5.3 4.6 18.8 16.0 17.2

Note: KDB Daewoo Securities estimates for Korean firms, Beijing Tensyn Digital was excluded from the global P/E average


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November 25, 2015


V. Key Recommendations

Cheil Worldwide (030000 KS/Buy) Bet on Cheil PengTai

Investment point: Bet on Cheil PengTai to drive earnings growth Catalysts: China holds the solution Valuation: Reiterate Buy and Raise TP to W30,000; Our top pick

INNOCEAN Worldwide (214320 KS/Buy) Genesis brand launch and US joint venture lift expectations

Investment point: Positive changes in both advertisers and ad media Catalyst: HMC launches global luxury brand Genesis Valuation: Present Buy with TP of W86,000; Initiate coverage

Nasmedia (089600 KQ/Buy) Media rep befits the on-demand era

Investment point: New media ad business befits the on-demand economy Catalysts: Revenue growth to persist; Profit margins to improve Valuation: Lower TP to W58,000; Maintain Buy

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November 25, 2015


Investment point: Cheil PengTai to drive earnings growth

Our 2016 investment case for Cheil Worldwide is based on the firm’s Chinese subsidiary Cheil PengTai. Acquired in 2009 (previously named OpenTide Greater China), Cheil PengTai is a digital marketing agency operating in mainly three areas: strategic consulting, digital marketing, and e-commerce. The agency currently has 1,200 employees and has grown fivefold since the acquisition.

Cheil Worldwide’s China business (including Cheil PengTai) has been making an increasing contribution to overall earnings. For the first three quarters of 2015, China accounted for 30% of revenue and 49% of net profit. Growth in China has been driven by Cheil PengTai, which posted a 40% YoY jump in non-consolidated gross profit in 3Q15. For 2016, we expect the China business to generate revenue of roughly W1tr and net profit of approximately W50bn.

Cheil PengTai began operating a Korean mall on China’s second-largest online retailer JD.com in 4Q15 and has recently started to provide digital marketing services for corporate accounts on Tencent’s mobile messenger WeChat. Such moves should help drive China earnings in 2016.

Catalysts: China holds the solution

We believe China will be the solution for a number of challenges facing the company. First, the agency’s overreliance on its biggest advertiser has been a major source of the stock’s volatility. However, non-affiliated advertisers this year has grown to 35% of gross profit on a consolidated basis and to an estimated 60% of gross profit at Cheil PengTai. We believe China will continue to play an important role in diversifying its client base.

Meanwhile, global ad firms are all rushing to tap into the digital segment. Cheil PengTai not only covers the overall digital segment, but also has a strong presence in the underpenetrated e-commerce segment.

In terms of growth, we expect the China business to expand rapidly, driving overall top-line growth. As for margins, China generates a much higher net margin compared to other regions, and should thus contribute to overall margin expansion.

Valuation: Reiterate Buy and Raise TP to W30,000; Our top pick

We maintain our Buy call on Cheil Worldwide and raise our target price to W30,000 (from W28,000). We present the stock as our top pick in advertising. We believe the market will begin to price in the value of Cheil PengTai, which should receive a premium for its meaningful business performance and the successful listing of comparable peers in China.

Cheil Worldwide (030000 KS) Bet on Cheil PengTai

FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F

Revenue (Wbn) 2,365 2,709 2,666 2,846 3,051 3,276

OP (Wbn) 126 130 127 138 158 175

OP Margin (%) 5.3 4.8 4.8 4.8 5.2 5.3

NP (Wbn) 94 99 102 106 120 132

EPS (W) 817 857 883 921 1,044 1,150

ROE (%) 13.6 14.7 13.2 12.4 13.5 13.0

P/E (x) 26.4 32.1 19.5 22.0 19.4 17.6

P/B (x) 3.1 3.5 2.0 2.1 1.9 1.7

Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests

Source: Company data, KDB Daewoo Securities Research estimates

Media

(Maintain) Buy

Target Price (12M, W) 30,000

Share Price (11/24/15, W) 20,250

Expected Return 48%

OP (15F, Wbn) 138

Consensus OP (15F, Wbn) 138

EPS Growth (15F, %) 4.3

Market EPS Growth (15F, %) 22.3

P/E (15F, x) 22.0

Market P/E (15F, x) 11.4

KOSPI 2,016.29

Market Cap (Wbn) 2,330

Shares Outstanding (mn) 115

Free Float (%) 59.5

Foreign Ownership (%) 25.9

Beta (12M) 1.32

52-Week Low 16,450

52-Week High 25,000

(%) 1M 6M 12M

Absolute -1.0 -9.6 15.1

Relative 0.2 -3.8 12.9

80

100

120

140

160

11.14 3.15 7.15 11.15

Cheil Worldwide KOSPI

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November 25, 2015


Chinese digital marketing agency, Cheil PengTai

Since the 2009 acquisition, Cheil PengTai has grown steadily to become China’s third largest digital marketing agency in 2014, and the largest foreign-invested digital marketing agency in the country.

Headquartered in Beijing, Cheil PengTai has branch operations in Shanghai, Guangzhou, Hong Kong, Taiwan, and Seoul. Initially, its business was confined to research and consulting services, but later, expanded to include digital media and e-commerce. Now, digital media and e-commerce are the firm’s two biggest revenue contributors, with the former more profitable than the latter, but the latter presenting greater growth potential.

Localization is Cheil PengTai’s key growth driver. Over 90% of 700 head office staff are Chinese, and its advertisers include major local brands such as Industrial and Commercial Bank of China and China Mobile Communications.

Cheil PengTai delivered W505.8bn in revenue last year, and W487.1bn in the first three quarters of this year. Net profit came in at W15.3bn in 2014, and W24.1bn in 1-3Q15. Given that fourth quarter is traditionally its peak season, the firm’s full-year revenue and net profit are projected to surpass W600bn and 30bn, respectively. Cheil Worldwide’s overall China operations, including Cheil PengTai, posted W692bn in revenue last year, and W609bn in the first three quarters of this year. On a full-year basis, we expect aggregate China revenue to near W800bn this year, and W1tr in 2016. Aggregate China net profit was W29bn last year, and W34bn in 1-3Q15. In 2015 and 2016, we expect net profit to exceed W40bn and W50bn, respectively.

Figure 30. Chinese subsidiary Chei PengTai Figure 31. Third largest digital ad agency in China

Source: Company data, Pengtai, KDB Daewoo Securities Research Source: China Internet Weekly(2014), Company data, Pengtai, KDB Daewoo

Securities Research

Figure 32. Business breakdown: Consulting, digital marketing

and e-commerce Figure 33. Chinese advertisers account for 60% of gross profit

Source: Company data, Pengtai, KDB Daewoo Securities Research Source: Company data, Pengtai, KDB Daewoo Securities Research

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November 25, 2015


Digital media business in China

For Cheil PengTai, the digital media unit makes the biggest contribution to both top line and bottom line. The unit’s businesses include search engine marketing, social media operations, media purchase, promotions, media campaign, etc. Its business covers a big part of the digital media value chain, including platforms, content, and digital experiential solutions.

Cheil PengTai boasts wide digital media coverage in China. It has almost 180 partnerships with video providers, internet portals and shopping malls, the largest in China, including Baidu, Tencent, Sina.com, NetEase, Youku Tudou, and iQiyi.

Recently, Cheil PengTai has started to provide digital marketing services for corporate accounts on Tencent’s mobile messenger WeChat (also known as Weixin). Thus far, WeChat had only accepted corporate accounts from Chinese companies, but starting in December, Korean companies will be able to establish accounts thanks to Cheil PengTai.

Such addition of new media should help boost Cheil PengTai’s digital media profitability and growth potential. Just like in Korea, China is seeing growth in social media-based marketing. Chinese netizens value “relationship” in the digital context, and thus, digital marketing is anticipated to focus on relationship-based social marketing.

Figure 34. Cheil PengTai’s digital media campaign Figure 35. Cheil PengTai’s digital media value chain


Figure 36. Cheil PengTai’s ad media coverage Figure 37. Marketing for Tencent’s mobile messenger WeChat


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November 25, 2015


E-commerce business in China

If digital media is a cash cow for Cheil PengTai, e-commerce could be a rising star. Indeed, despite its late start, e-commerce is already catching up with digital media in revenue growth.

Cheil PengTai’s e-commerce service encompasses nearly every stage of e-commerce transactions. For instance, if a Korean company seeks to sell products on a Chinese e-commerce site, Cheil PengTai provides services such as: 1) translation, 2) design, 3) warehouse operations in Korea, 4) warehouse operations in China, 5) return services in China, 6) a Chinese office, 7) a call center, and 8) IT system development/operations.

In China, e-commerce businesses are largely divided into 1) agents that contact e-commerce sites such as Alibaba’s Tmall to sell goods on the sites, and 2) re-sellers that buy products from manufacturers and re-sell them on e-commerce platforms. Financial and inventory risk management is very important for the re-sellers. Cheil PengTai serves as both an agent and a re-seller, and handles online mall operations for Samsung Electronics, Cheil Industries, and Hotel Shilla.

China’s e-commerce transaction value showed a CAGR of 54% over the past six years, according to iResearch. We expect transaction value to reach W732tr in 2015, and W955tr in 2016. A growing number of Chinese e-commerce companies are opening websites offering services to Chinese consumers directly shopping overseas products. Given that 6mn out of 100mn Chinese outbound travelers last year chose to visit Korea, we believe this new segment will offer huge growth opportunities for Korean companies. Cheil PengTai was named an operator for the Korea mall of China’s second largest e-commerce site JD.com. This direct overseas purchase business, combined with existing e-commerce businesses, should boost the firm’s growth.

Figure 38. Cheil PengTai’s eight e-commerce service areas Figure 39. Cheil PengTai’s e-commerce business breakdown


Figure 40. Cheil PengTai’s e-commerce site coverage Figure 41. Operation of Korea mall within JD.Com from 4Q15


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November 25, 2015


Performance by country

Cheil Worldwide’s global operational performances reflect changes in the respective region’s business environments. In 2007, Korea made the biggest contribution to revenue and profit, followed by Europe, the US, and then, China. This year (1-3Q cumulative), however, China has become the biggest revenue generator, followed by Korea, Europe, and the US. In terms of net profit this year, China contributed the most, followed by other Asian countries, Europe and the Middle East.

Cheil’s global performances have been heavily affected by ad market growth, marketing spend by major advertisers, media positioning and M&As in the respective countries. Strategically important emerging markets, digital-focused businesses and increase in M&As (meaning additional investments) offered relatively favorable business environments.

Since early this year, we see visible growth in China’s contribution to revenue and net profit. As Cheil PengTai became the third largest ad agency in the country, growth has accelerated, and operating leverage appears to have increased, causing net profit to soar.

Figure 42. Cheil’s annual revenue by country: remarkable

growth since 2010

Figure 43. Revenue contribution by country: China at the top

since 2015

Source: Audited consolidated financial statements of Cheil Worldwide, KDB

Daewoo Securities Research



Figure 44. Annual net profit by country: steady growth in

China

Figure 45. Net profit contribution by country: remarkable

growth since 2015





0

200

400

600

800

07 08 09 10 11 12 13 14

(Wbn)

America Europe

China Other Asia

UAE Africa

Korea

0%

10%

20%

30%

40%

50%

60%

07 08 09 10 11 12 13 14 15.3Q

America Europe

China Other Asia

UAE Africa

Korea

(contribution)

-20

0

20

40

60

80

07 08 09 10 11 12 13 14

(Wbn) America EuropeChina Other AsiaUAE AfricaKorea

-20%

0%

20%

40%

60%

80%

07 08 09 10 11 12 13 14 15.3Q

America EuropeChina Other AsiaUAE AfricaKorea

(contribution)

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November 25, 2015


Earnings forecast and valuations

China is projected to continue to drive Cheil Worldwide’s growth next year, aided by the addition of new clients in 4Q15 (JD.com and Tencent). Cheil Worldwide’s earnings are also anticipated to improve after four years of stagnation, as China profits are relatively high.

In 2016, deregulation in the domestic ad market (total ad time cap) and the 2016 Summer Olympics (sponsored by Samsung Electronics) will likely boost Cheil Worldwide’s revenue. In China, the flourishing social media ad/direct overseas shopping segments will likely drive Cheil PengTai’s earnings.

We maintain our Buy call, and raise our target price from W28,000 to W30,000. In deriving our target price, we changed the base year of valuation from 2015 to 2016, and added a valuation premium for its Chinese operations, including Cheil PengTai.

Table 4. Quarterly and annual earnings trends and forecasts (Wbn, %)

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15F 2014 2015F 2016F

Operating revenue 634 679 602 752 575 743 683 844 2,666 2,846 3,051

Gross profit 171 208 188 225 206 242 237 272 793 956 1,007

Parent 50 73 61 76 52 69 63 79 259 263 259

Overseas 122 135 127 150 154 172 173 194 534 694 748

Share of gross profit

Parent 28.9 35.1 32.4 33.6 25.1 28.6 26.7 28.9 32.7 27.5 25.7

Overseas 71.1 64.9 67.6 66.4 74.9 71.4 73.3 71.1 67.3 72.5 74.3

Operating profit 21 44 23 39 24 42 27 45 127 138 158

OP margin 3.3 6.4 3.8 5.2 4.2 5.7 4.0 5.3 4.8 4.9 5.2

Net profit 14 37 17 35 18 34 18 39 102 109 123

Net margin 2.2 5.4 2.8 4.6 3.1 4.5 2.6 4.6 3.8 3.8 4.0

YoY growth

Operating revenue 12.4 -4.7 -6.9 -4.4 -9.2 9.4 13.6 12.3 -1.6 6.7 7.2

gross profit 27.4 8.0 0.8 8.7 20.0 16.0 25.7 21.0 13.6 20.6 5.3

Parent -1.8 -1.9 -7.6 -10.7 4.0 -5.3 3.6 4.0 -5.9 1.3 -1.4

Overseas 45.0 14.3 5.4 22.1 26.4 27.6 36.3 29.6 26.4 30.0 7.8

Operating profit 16.6 -17.1 -31.2 3.7 14.2 -3.4 18.4 14.4 -2.5 8.9 14.1

Net profit 0.0 15.7 -37.6 15.7 31.4 -8.4 7.2 12.8 -0.7 7.1 13.0

Note: K-IFRS consolidated; for ad agencies, consolidated gross profit represents net revenue; net profits attributable to controlling and non-controlling interests


Table 5. Sum-of-the-parts valuation methodology (Wbn, x, W)

Classification Value Notes

Operating value 3,098

2016F Net profit Multiple 2016 estimates for regional multiples

Korea 18 15.1 279 2016F average of global ad groups

China 55 34.0 1,882 Chinese peer group 2016F average

US and Europe 22 15.1 334 2016F average of global ad groups

Other 27 22.3 603 2016F avg. of global ad groups

Investment asset value 17

Listed stocks 4 As of end-3Q15 closing price

Unlisted stocks 10 As of end-3Q15 book value

Stakes in affiliates 4 As of end-3Q15 book value

Total asset value 3,115

Net borrowings -321 As of end-3Q15

NAV 3,436

No. of shares (‘000 shares) 115,041 No. of shares issued

TP (W) 30,000 Rounded up

Note: Chinese peer group is the average of BlueFocus, Guangdong Advertising and Zhejiang Huamei Holdings; Stakes in affiliates include only those stated in the

consolidated review reports


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November 25, 2015


Cheil Worldwide (030000 KS/Buy/TP: W30,000)

Comprehensive Income Statement (Summarized) Statement of Financial Condition (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F (Wbn) 12/14 12/15F 12/16F 12/17F

Revenue 2,666 2,846 3,051 3,276 Current Assets 1,523 1,532 1,729 1,951

Cost of Sales 1,873 1,890 2,044 2,195 Cash and Cash Equivalents 317 178 278 394

Gross Profit 793 956 1,007 1,081 AR & Other Receivables 899 1,009 1,080 1,160

SG&A Expenses 666 818 849 906 Inventories 0 0 0 0

Operating Profit (Adj) 127 138 158 175 Other Current Assets 307 345 371 397

Operating Profit 127 138 158 175 Non-Current Assets 321 402 405 402

Non-Operating Profit 13 12 12 12 Investments in Associates 5 6 14 15

Net Financial Income 3 5 4 6 Property, Plant and Equipment 101 93 91 90

Net Gain from Inv in Associates 0 0 0 0 Intangible Assets 151 230 224 219

Pretax Profit 140 150 170 187 Total Assets 1,844 1,934 2,134 2,353

Income Tax 38 41 47 51 Current Liabilities 905 1,023 1,095 1,173

Profit from Continuing Operations 102 109 123 136 AP & Other Payables 543 609 653 701

Profit from Discontinued Operations 0 0 0 0 Short-Term Financial Liabilities 18 28 28 28

Net Profit 102 109 123 136 Other Current Liabilities 344 386 414 444

Controlling Interests 102 106 120 132 Non-Current Liabilities 56 66 70 75

Non-Controlling Interests 0 3 3 3 Long-Term Financial Liabilities 0 2 2 2

Total Comprehensive Profit 92 115 123 136 Other Non-Current Liabilities 56 64 68 73

Controlling Interests 91 112 120 132 Total Liabilities 961 1,089 1,165 1,249

Non-Controlling Interests 1 3 3 3 Controlling Interests 879 831 951 1,083

EBITDA 160 177 196 212 Capital Stock 23 23 23 23

FCF (Free Cash Flow) 17 -9 135 144 Capital Surplus 118 118 118 118

EBITDA Margin (%) 6.0 6.2 6.4 6.5 Retained Earnings 857 963 1,083 1,215

Operating Profit Margin (%) 4.8 4.8 5.2 5.3 Non-Controlling Interests 4 15 18 22

Net Profit Margin (%) 3.8 3.7 3.9 4.0 Stockholders' Equity 883 846 969 1,105

Cash Flows (Summarized) Forecasts/Valuations (Summarized) (Wbn) 12/14 12/15F 12/16F 12/17F 12/14 12/15F 12/16F 12/17F

Cash Flows from Op Activities 56 2 155 164 P/E (x) 19.5 22.0 19.4 17.6

Net Profit 102 109 123 136 P/CF (x) 11.4 12.4 11.5 10.7

Non-Cash Income and Expense 71 80 80 82 P/B (x) 2.0 2.1 1.9 1.7

Depreciation 22 22 22 21 EV/EBITDA (x) 9.5 11.4 9.7 8.3

Amortization 12 16 16 16 EPS (W) 883 921 1,044 1,150

Others 37 42 42 45 CFPS (W) 1,506 1,640 1,766 1,890

Chg in Working Capital -77 -154 -6 -8 BPS (W) 8,704 9,679 10,723 11,873

Chg in AR & Other Receivables 10 -84 -71 -78 DPS (W) 0 0 0 0

Chg in Inventories 0 0 0 0 Payout ratio (%) 0.0 0.0 0.0 0.0

Chg in AP & Other Payables -60 27 41 45 Dividend Yield (%) 0.0 0.0 0.0 0.0

Income Tax Paid -45 -37 -47 -51 Revenue Growth (%) -1.6 6.8 7.2 7.4

Cash Flows from Inv Activities -127 16 -46 -48 EBITDA Growth (%) 1.9 10.6 10.7 8.2

Chg in PP&E -36 -10 -20 -20 Operating Profit Growth (%) -2.3 8.7 14.5 10.8

Chg in Intangible Assets -5 -2 -10 -10 EPS Growth (%) 3.0 4.3 13.4 10.2

Chg in Financial Assets -82 -25 -16 -18 Accounts Receivable Turnover (x) 3.0 3.1 3.0 3.0

Others -4 53 0 0 Inventory Turnover (x) 0.0 0.0 0.0 0.0

Cash Flows from Fin Activities 130 -159 0 0 Accounts Payable Turnover (x) 3.5 3.5 3.5 3.5

Chg in Financial Liabilities 5 12 0 0 ROA (%) 5.8 5.8 6.1 6.0

Chg in Equity 11 0 0 0 ROE (%) 13.2 12.4 13.5 13.0

Dividends Paid 0 0 0 0 ROIC (%) 24.6 22.2 23.0 25.3

Others 114 -171 0 0 Liability to Equity Ratio (%) 108.9 128.7 120.2 113.0

Increase (Decrease) in Cash 55 -139 100 115 Current Ratio (%) 168.3 149.8 157.9 166.3

Beginning Balance 262 317 178 278 Net Debt to Equity Ratio (%) -53.0 -39.9 -46.6 -52.7

Ending Balance 317 178 278 394 Interest Coverage Ratio (x) 68.8 47.6 43.8 48.5


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November 25, 2015


Investment point: Positive changes in both advertisers and ad media

INNOCEAN Worldwide is the advertising arm of the Hyundai Motor Group (HMG). Recently, we have noted some positive developments at its major advertisers and ad media.

1) Orders from Hyundai Motor Company (HMC) are anticipated to rise following the automaker’s decision to launch a new global luxury brand, “Genesis”.

2) Since its entry into the US market in 2008, INNOCEAN Worldwide’s US subsidiary has focused on traditional media such as Super Bowl TV ads, (the US subsidiary was consolidated to the parent in 2014). This year, it established Canvas Worldwide, a US joint venture, which will now directly handle operations for HMG in the US. As such, media revenue from the strategically important US market will likely expand.

Catalyst: HMC launches global luxury brand Genesis

Looking ahead, HMC is expected to launch a large-scale marketing campaign for the Genesis brand, with a focus on improving brand awareness and customer preference while strengthening brand positioning.

When Toyota launched its own luxury brand Lexus in the US, its marketing efforts in the US have positively affected its US ad agencies for an extended period. Marketing campaign was initially focused on brand agencies, but later expanded to retail channels, including dealerships and motor shows, and afterwards, to markets beyond the US.

The global luxury car segment attracts 10% of total car demand, with a CAGR of around 10%. HMC plans to release the EQ900 model under the Genesis brand in December this year, and roll out six more by 2020 (including SUVs). Genesis brand sales will likely pick up with the release of the Genesis G70 (a midsize sedan) in 2H17, and independent dealer shops may be able to sell the brand beginning in 2020. The volume and nature of INNOCEAN Worldwide’s marketing should change as the Genesis brand grows.

Valuation: Present Buy with TP of W86,000; Initiate coverage

We initiate our coverage of INNOCEAN Worldwide with Buy and a target price of W86,000. In 2016, we expect positive developments at the firm’s major advertisers and ad media. In deriving our target price, we applied an average 2016F P/E of listed Asian/US ad agencies to our 2016F EPS.

INNOCEAN Worldwide (214320 KS) Genesis launch and US joint venture lift expectations

FY (Dec.) 12/12 12/13 12/14 12/15F 12/16F 12/17F

Revenue (Wbn) 711 634 745 939 1,098 1,208

OP (Wbn) 106 82 83 92 107 117

OP Margin (%) 14.9 12.9 11.1 9.8 9.7 9.7

NP (Wbn) 80 71 82 76 82 89

EPS (W) 4,430 3,932 4,551 3,986 4,082 4,439

ROE (%) 32.4 22.6 21.5 17.0 16.2 15.8

P/E (x) - - - 17.5 17.1 15.7

P/B (x) - - - 2.9 2.6 2.4

Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests


Media

(Initiate) Buy


Share Price (11/24/15, W) 69,900

Expected Return 23%

OP (15F, Wbn) 92


EPS Growth (15F, %) -12.4


P/E (15F, x) 17.5


KOSPI 2,016.29

Market Cap (Wbn) 1,398


Free Float (%) 56.0


Beta (12M) 0.93

52-Week Low 51,300

52-Week High 72,500

(%) 1M 6M 12M

Absolute 13.8 0.0 0.0

Relative 15.2 0.0 0.0

80

180

280

380

480

11.14 3.15 7.15 11.15

Innocean Worldwide Inc.

KOSPI

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November 25, 2015


Company overview

INNOCEAN Worldwide has been seeking to become a global marketing firm since its incorporation, establishing an overseas subsidiary in the first year of business in 2005. Its captive market (HMG) ensures business stability for the firm. It has operations in 17 countries with 1,440 employees. It has more employees abroad than at home, with 70% of billings hailing from overseas. Captive market represents 62% of total orders in domestic operations, and 94% in overseas operations. As such, the company’s earnings and share price are dictated by orders from HMG.

Looking ahead, HMC’s Genesis brand launch, new vehicle releases by HMG, and UEFA Euro 2016 will likely affect INNOCEAN Worldwide’s performance. As the US joint venture commences operations, revenue from brand marketing and marketing for new volume seller models will likely pick up.

Since its IPO, 28% of the company was held by Chung Sung-yi, 2% by Chung Eui-sun, and 9% by Hyundai Motor’s Chung Mong-koo Foundation. The stock has overhang concerns, as the lock-up period for 27% of the shares issued (held by financial investors including NHPEA IV and Standard Chartered Korea) will end on January 17, 2016. The lock-up for 5% of the shares in the employee stock ownership program will end on July 17, 2016.

Figure 46. Shareholder composition Figure 47. Summary of domestic and overseas businesses

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

Figure 48. Advertisers (mostly Hyundai group affiliates) Figure 49. Sports marketing campaign for Hyundai/Kia


Chung Sung-Yi28%

Chung Eui-sun 2%

CMK Foundation 9%

NHPEAIV(MSPE)

18%Standard Chartered

Korea7%

STIC5%

Employee stock ownership 5%

Other24%

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November 25, 2015


Figure 50. Business areas

Source: Company data, KDB Daewoo Securities Research

Figure 51. Global network


Figure 52. Ad volume is strongly affected by new model releases by Hyundai/Kia


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November 25, 2015


HMC’s launch of new luxury brand Genesis

In November 2015, HMC announced that it will launch a luxury auto brand Genesis. Key executives include: Peter Schreyer (current CDO of Hyundai Motor Group), Luc Donckerwolke (former head of design for Bently), and Albert Biermann (head of vehicle test & high performance development for Hyundai Motor Group). At INNOCEAN Worldwide, Jeremy Craigen, global COO, will spearhead global branding for the new brand.

Looking ahead, HMC is expected to launch a large-scale marketing campaign for the Genesis brand, with a focus on improving brand awareness and customer preference, while strengthening brand positioning. Currently HMC and Kia Motors rank 39th and 74th, respectively, in Interbrand’s annual global brand value rankings, with Genesis placed out of the ranking.

HMC plans to launch the EQ900 model in December 2015 and six more models by 2020 under the Genesis brand. In our view, the differentiation of the brand will accelerate starting 2H17 with the launch of the G70 (a mid-sized sedan). The company also plans to open independent dealerships starting 2020.

The global luxury car market accounts for 10% of total car demand and is estimated to have grown at a CAGR of 10%. Luxury car sales are generally on the rise in major global markets. Of note, while the luxury car segment accounts for 30% of the entire car market in Germany and 10% in the US, the percentage stands at just 9% in China. However, China boasts the strongest growth in luxury car sales in the world. Currently, the luxury car and EV segments are driving up China’s automobile market. HMC is expected to target the luxury car segment with the Genesis brand in China.

Figure 53. HMC launches luxury brand “Genesis” in Nov 2015 Figure 54. Genesis brand: “Human-centered Luxury”

Source: HMC, KDB Daewoo Securities Research Source: HMC, KDB Daewoo Securities Research

Figure 55. Global automakers’ brand ranking: HMC 39th, Kia

74th

Figure 56. Share of high-end car sales by country: China has

room for growth

Source: Interbrand(2015), KDB Daewoo Securities Research Source: Bloomberg, KDB Daewoo Securities Research

57

89

2829 29

30

11 11 1112

0

5

10

15

20

25

30

35

2011 2012 2013 2014

(%) China Germany US

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November 25, 2015


Case study: Toyota

Toyota’s revenue and margins improved with the launch of its luxury brand Lexus. Toyota’s case should have important implications for HMC’s strategy.

Toyota is taking strict differentiation strategy for Lexus by defining it as “Truly Global Luxury Brand.” After unveiling the brand in 1989, the company launched the first global sales in the US, not in Japan. At the early stage, the company implemented various marketing strategies, including blind marketing, informative ads, performance highlights, issue ads, and word-of-mouth.

With regard to products and services, the company introduced cars with superior performances, provided premium services, and established a well-designed brand portfolio. At the early stage, the company employed a penetration pricing strategy and opened separate dealerships from Toyota’s to offer differentiated services.

Figure 57. Lexus’ brand concept: taking strict differentiation strategy for Lexus by defining it as “Truly Global Luxury Brand”

Source: Toyota, KDB Daewoo Securities Research

Table 6. Lexus’s success and implications for Korean automakers

Lexus → Implications for Korean automakers (HMC)

1. Strict differentiation from the Toyota brand → Creation of new premium brand

a) Spark customers’ curiosity through information ads a) Film ad highlighting the image of HMC’s new luxury brand

b) Emphasize performance b) Emphasize performance and comfort

c) Create issues c) Crash tests; autonomous driving test in Seoul

d) Strategically utilize word-of-mouth d) Target Mercedes Benz S Class, BMW 7 Series and Lexus LS

2. Superior performance and product quality → To strengthen durability and sensory quality

- Outweigh competitors in fuel efficiency, noise, weight, and maximum speed - Launch high-performance N Series in 2018

3. Premium services → Improvement in sales and service quality

- Excellent repair and maintenance services at dealerships - Private showroom for the EQ900 (private motor show for VI

- Strict training of sales and service employees based on Lexus Covenant

- Differentiate from Hyundai brand in customer experience;

independent dealerships starting 2020

4. Effective pricing policy (penetration pricing) → To shift from low to high prices to improve brand awareness

- Start at relatively lower prices and steadily increase - To support individual consumption tax for customers that

preorder EQ900

5. Establishment of brand portfolio → Establishment of model portfolio under the premium brand

- Flagship sedan, luxury SUV, luxury entry car, sports coupe - Four models over next five years, and six models by 2020

(mid-size sedan, large-size SUV, luxury sports coupe, mid-size SUV)

Source: Kim Hyun-chul, Yoon Seol (SNU/Keio University, 2008), KDB Daewoo Securities Research

Table 7. Toyota’s sales channels in Japan: Lexus has most channels (channel)

Directly operated Independent Total Notes

Toyota 4 45 49 Luxury channels

Toyopet 4 48 52 Leading channels for medium

Corolla 4 70 74 Volume retail channels centering on compact models

Netz 3 102 105 Targeting customers with new values for 21c

Lexus 166 Premium brand

Source: Toyota Annual Report, KDB Daewoo Securities Research

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November 25, 2015


Impact of car brand launch on ad agencies: Lexus Publicis & Dentsu

Toyota’s launch and branding of Lexus also had implications on ad agencies. Toyota appears to have carried out marketing activities via Dentsu in Japan and Publicis in the US.

Since Lexus’ unveiling of its luxury sedan LS400 in 1989 in the US, the automaker targeted the US market, without highlighting its Japanese origin. The brand was introduced in Asia a long time after its US launch. (Japan in 2005 and Vietnam in 2013). As such, Toyota’s launch of Lexus had a more significant impact on its ad agency in the US market.

Lexus was launched in the US by brand agency Team One, a subsidiary of Saatchi & Saatchi. The Lexus launch remains Team One’s most successful and is still the agency’s biggest client (maintains long-term contract). In fact, when Toyota/Lexus moved their office to Texas, Team One established an office there as well.

Publicis Groupe is expected to have seen a marked growth in advertising orders from Toyota in 1992. Zenith, another marketing arm of Publicis Groupe, carried out media buying for Toyota and Lexus in the US since 2001. In 2010, Toyota also awarded advertising orders for the European market to Saatchi & Saatchi’s European subsidiary.

Table 8. US ad agency for Lexus

Company Ad agency Role

Publicis Team One Lead ad agency, Chief Creative Officer, a subsidiary of Saatchi &

Saatchi

Rokkan Experiential marketing

Zenith

Media purchase, individual model branding, dealer marketing,

sales event

Interpublic Golin Promotions

IW Group Asian-American ads

Allison & Partners Promotions

George P. Johnson Experiential marketing

Jackson Spalding Promotions, CR, and VIP events

Precise Communications Promotions, media exchanges among different cultural regions

Walton Isaacson Digital, broadcast, experiential marketing, and media purchase

Source: Advertising Age(2015), KDB Daewoo Securities Research

Figure 58. Revenue trends of Toyota and Publicis

Source: Media reports, respective company data, Bloomberg, KDB Daewoo Securities Research

0

2

4

6

8

10

0

5

10

15

20

25

30

89 92 95 98 01 04 07 10 13

(EURbn)(JPYtr)

Toyota revenue (L)

Publicis revenue (R)

Started 'Team One'Lexus brand agency

Zenith Media picks upLexus business in 2001

Increase in Saatchi & Saatchi EU billings since 2010

* M&A effect:Publicis acquired digital ad agency

Sapient in 2015

Launch of Lexus in 1989

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November 25, 2015


Publicis Groupe’s long-term revenue trend should have been affected by various factors like M&As and other advertisers as well as Toyota. Since end-2000s, the company has unveiled its revenue breakdown by advertiser. Publicis’ revenue from automakers has grown steadily over the past six years. In particular, the expansion of Toyota- and Lexus-related advertising orders at its European network has greatly boosted growth in revenue from automakers.

Meanwhile, Dentsu, the leading ad agency in Japan, has competed with Saatchi & Saatchi in Europe for Lexus advertising orders since 2000. The company’s Lexus orders are estimated to have expanded sharply since 2005, when Toyota launched the brand in Japan. The company took charge of Lexus’ advertising in Canada since 2005, Australia since 2010, and Vietnam since 2013.

Toyota’s launch of the Lexus brand has positively affected its ad agencies over the long term. At earlier stages, orders were concentrated on branding agencies. After the completion of brand portfolio, the company has focused more on retail marketing via dealers and motor shows. At later stages, the company is turning to global marketing in line with its expansion into the global market beyond the US.

Figure 59. Auto ad revenue at Publicis on the rise over the past six years

Source: Media reports, Publicis, Bloomberg, KDB Daewoo Securities Research

Figure 60. Dentsu became a major Asian ad agency with the launch of Lexus brand

Source: Media reports, respective company data, Bloomberg, KDB Daewoo Securities Research

200

300

400

500

600

700

800

10

14

18

22

26

30

99 01 03 05 07 09 11 13 15F

(JPYbn)(JPYtr)

Toyota revenue (L)

Dentsu gross profit (R)

Introduced Lexus in Japan in 2005

Started Lexus ad agency in Australia in end-2010

Started Lexus ad agency in Vietnam in 2013

Dentsu received Lexus order from EUin end-2000

* M&A effect (Dentsu acquired Aegis-UK) in 2014

Started Lexus ad agency in Japan and Canada in 2005

0

200

400

600

800

1,000

1,200

09 10 11 12 13 14

(EURmn)

Publicis' revenue from auto advertisers

Increase in EU billings since 2010

Started Lexus marketing agency in Italy in 2012

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November 25, 2015


Valuation and earnings outlook

We initiate our coverage of INNOCEAN Worldwide with Buy and a target price of W86,000. In 2016, we expect positive changes in the firm’s major advertisers and ad media. In deriving our target price, we applied the average 2016F P/E of listed Asian/US ad agencies to our 2016F EPS.

Thanks to HMC’s launch of the Genesis brand, INNOCEAN Worldwide should see an increase in media ad orders in 2016. This year, the firm established Canvas Worldwide, a US joint venture, which will handle media-related operations for HMG in the US. As such, media revenue from the strategically important US market will likely expand.

In line with earnings growth, dividend payments are also anticipated to rise. INNOCEAN Worldwide has a track record of paying out dividends based on its target dividend payout ratio. Its target dividend payout ratio for 2014 was 15%. The company plans to raise the ratio to 30% over the medium- to long-term.

Table 9. P/E valuation and target price (x, W)

Classification Price multiple Profit TP Notes

2016F P/E avg. of global ad industry 21.0 Asian and US ad company average

2016F EPS of INNOCEAN 4,082 Attributable to controlling interest

Target price 86,000 Rounded up


Table 10. Quarterly and annual earnings trend and forecast (Wbn, %)

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15F 2014 2015F 2016F

Revenue 152 185 156 252 227 208 241 263 745 939 1,098

Gross profit 50 63 57 88 70 73 78 94 258 314 368

Parent 23 37 30 46 24 30 32 47 136 132 132

Consolidated 27 27 27 42 46 44 46 47 122 182 235

Operating 13 20 17 32 18 20 20 34 83 91 107

OP margin 8.9 11.1 10.9 12.8 7.9 9.5 8.2 12.8 11.2 9.7 9.7

Net profit 13 17 15 39 16 16 17 37 84 86 93

Net margin 8.7 9.4 9.4 15.6 6.8 7.8 7.2 14.0 11.3 9.2 8.4

YoY growth

Revenue 49.6 12.0 54.3 4.5 17.5 26.0 17.0

Gross profit 39.4 15.9 36.8 7.1 9.2 22.1 17.0

Parent 4.4 -18.5 4.9 1.3 4.0 -2.7 0.3

Consolidated 69.2 63.7 73.0 13.4 15.6 49.7 29.1

Operating 33.0 -3.7 15.9 4.3 1.6 9.3 17.0

Net profit 18.0 -6.6 19.4 -5.9 18.7 2.1 7.6

Note: K-IFRS consolidated (US subsidiary consolidated in 4Q14)


Figure 61. Earnings variables in the US since 2014 Figure 62. Dividend payout target (mid/long term): 30%


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Innocean Worldwide Inc. (214320 KS/Buy/TP: W86,000)


Revenue 745 939 1,098 1,208 Current Assets 1,081 1,155 1,350 1,508

Cost of Sales 487 624 730 803 Cash and Cash Equivalents 217 215 251 299

Gross Profit 258 315 368 405 AR & Other Receivables 640 646 756 831




Non-Operating Profit 26 19 22 24 Investments in Associates 14 14 17 18



Pretax Profit 109 111 129 141 Total Assets 1,174 1,245 1,440 1,598

Income Tax 25 25 37 40 Current Liabilities 725 725 848 933







Controlling Interests 75 70 79 86 Total Liabilities 747 747 873 961

Non-Controlling Interests 2 13 14 15 Controlling Interests 415 476 533 592


FCF (Free Cash Flow) 107 63 108 111 Capital Surplus 0 0 0 0

EBITDA Margin (%) 11.9 10.3 10.0 9.9 Retained Earnings 416 479 537 596


Net Profit Margin (%) 11.0 8.1 7.5 7.4 Stockholders' Equity 427 498 567 638


Cash Flows from Op Activities 109 63 108 111 P/E (x) - 17.5 17.1 15.7

Net Profit 84 86 93 101 P/CF (x) - 12.2 11.2 10.5

Non-Cash Income and Expense 14 22 31 32 P/B (x) - 2.9 2.6 2.4

Depreciation 4 4 3 2 EV/EBITDA (x) - 9.7 7.9 6.8

Amortization 1 1 1 1 EPS (W) 4,551 3,986 4,082 4,439

Others 9 17 27 29 CFPS (W) 5,444 5,716 6,214 6,665

Chg in Working Capital 17 -21 12 8 BPS (W) 23,072 23,766 26,648 29,587

Chg in AR & Other Receivables 1 -14 -106 -73 DPS (W) 7,000 900 1,200 1,500


Chg in AP & Other Payables 38 6 111 77 Dividend Yield (%) - 1.3 1.7 2.1

Income Tax Paid -23 -32 -37 -40 Revenue Growth (%) 17.5 26.0 16.9 10.0

Cash Flows from Inv Activities 26 -62 -45 -31 EBITDA Growth (%) 3.5 9.0 13.4 8.2

Chg in PP&E -2 0 0 0 Operating Profit Growth (%) 1.2 10.8 16.3 9.3

Chg in Intangible Assets 0 -1 0 0 EPS Growth (%) 15.7 -12.4 2.4 8.7

Chg in Financial Assets 7 -60 -45 -31 Accounts Receivable Turnover (x) 1.4 1.5 1.6 1.6

Others 21 -1 0 0 Inventory Turnover (x) 0.0 0.0 0.0 0.0

Cash Flows from Fin Activities -7 0 -24 -30 Accounts Payable Turnover (x) 0.9 1.0 1.0 1.0

Chg in Financial Liabilities 0 0 0 0 ROA (%) 8.2 7.1 6.9 6.6

Chg in Equity 0 0 0 0 ROE (%) 21.5 17.0 16.2 15.8

Dividends Paid -7 0 -24 -30 ROIC (%) 329.8 581.6 613.0 2,815.3

Others 0 0 0 0 Liability to Equity Ratio (%) 174.8 150.0 154.1 150.7

Increase (Decrease) in Cash 126 -2 36 48 Current Ratio (%) 149.0 159.2 159.1 161.6


Ending Balance 217 215 251 299 Interest Coverage Ratio (x) 2,371.1 0.0 0.0 0.0


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Investment point: New media ad business befits the on-demand economy

Nasmedia is a media rep with a wide digital coverage, incorporating online/mobile video and display ads, IPTV VOD ads, and digital outdoor ads.

We believe that Nasmedia’s image- and video-based ads will attract more attention amid the advent of the on-demand economy, as online/mobile video and IPTV VOD ads are exposed to users that enjoy on-demand content.

With the rise of on-demand economy, the number of advertisers has been increasing. Competition in the existing mobile game, social commerce, and film sectors has been intensifying, while the growth of the FinTech industry has been creating simple payment service providers and internet-only banks. In addition, on-demand service providers are currently mushrooming in a variety of markets, including transportation, moving services, home services, healthcare, beauty care, food delivery, and travel. Intense competition in these markets will likely increase the number of advertisers and ad volume for Nasmedia.

Catalysts: Revenue growth to persist; Profit margins to improve

Nasmedia has been cited as one the fastest-growing ad firms in 2015. We expect the company’s 2015 revenue, operating profit, and net profit to surge by 52%, 34%, and 28%, respectively. In particular, the IPTV ad unit is likely to deliver the strongest revenue growth (+88% YoY) thanks to structural factors, including changes in KT’s media business strategy and massive IPTV subscribers (now estimated at more than 10mn).

Now, investors will likely pay attention to whether Nasmedia will continue to grow rapidly and profit margins will improve in 2016, as OP margin and net margin should decline YoY due to costs in 2015, despite robust topline growth.

Valuation: Lower TP to W58,000; Maintain Buy

We reiterate our Buy rating on Nasmedia. The company is well positioned to benefit from the current new-media-led changes in the media market.

We lower our target price to W58,000 from W73,000. The pace of earnings improvement will likely slow YoY in 2016. In deriving our target price, we changed the base year from 2015F to 2016F earnings and revised our earnings estimates to reflect growth trends by unit and 3Q earnings results.

Nasmedia (089600 KQ) Media rep befits the on-demand era

FY (12) 12/12 12/13 12/14 12/15F 12/16F 12/17F

Revenue (Wbn) 23 25 30 45 54 62

OP (Wbn) 8 6 9 12 14 16

OP Margin (%) 34.8 24.0 30.0 26.7 25.9 25.8

NP (Wbn) 6 6 8 10 12 13

EPS (W) 887 681 965 1,235 1,445 1,627

ROE (%) 15.7 11.2 13.4 15.3 15.9 15.7

P/E (x) - 16.6 24.7 39.2 33.5 29.7

P/B (x) - 1.7 3.1 5.7 5.0 4.4

Note: All figures are based on non-consolidated K-IFRS


Media

(Maintain) Buy


Share Price (11/24/15, W) 48,400

Expected Return 20%

OP (15F, Wbn) 12


EPS Growth (15F, %) 28.0


P/E (15F, x) 39.2


KOSDAQ 687.86

Market Cap (Wbn) 399


Free Float (%) 30.7


Beta (12M) 0.75

52-Week Low 21,500

52-Week High 72,500

(%) 1M 6M 12M

Absolute -3.8 11.5 83.3

Relative -4.6 15.7 44.4

70

120

170

220

270

320

11.14 3.15 7.15 11.15

Nasmedia KOSDAQ

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November 25, 2015


On-demand era brings positive business environment for Nasmedia

Figure 63. On-demand ad: 1) Increasing number of ad slots on IPTV VOD (case of CJ E&M)


Figure 64. On-demand ad: 2) Segmented internet video ads relating to VOD by PC and

mobile (case of NAVER)


Figure 65. In the light of activating ‘On-demand Economy’, related advertisers to expand

marketing activities

Source: Kakao, T Times, KDB Daewoo Securities Research

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November 25, 2015


Earnings outlook and valuation

Table 11. Annual earnings trend and forecast (Wbn, %)

2012 2013 2014 2015F 2016F

Revenue 23 25 30 45 54

Online/mobile ads 19 17 21 30 36

IPTV ads 2.0 3.2 3.6 6.8 7.9

Digital outdoor ads 2.4 4.9 5.2 7.7 9.2

Proportion of revenue

Online/mobile ads 81.1 67.4 70.3 67.2 67.5

IPTV ads 8.5 12.8 12.1 15.0 14.7


Operating profit 8 6 9 12 14

OP margin 32.4 24.5 28.8 26.7 25.9

Net profit 6 6 8 10 12

Net margin 27.5 22.7 26.7 22.2 22.2

YoY

Revenue 8.3 5.5 20.5 52.0 18.3

Online/mobile ads 1.3 -12.3 25.7 45.2 18.9

IPTV ads 38.8 58.6 14.5 88.0 15.7


Operating profit -2.8 -20.4 42.0 34.2 19.4

Net profit 7.5 -13.0 41.7 28.1 16.9

Note: Based on non-consolidated K-IFRS


Table 12. Earnings forecast revisions (Wbn, W, %)

Previous Revised % chg. Notes

15F 16F 15F 16F 15F 16F

Revenue 46 57 45 54 -2.2 -5.3- Adjusted for 3Q earnings, revised up online/mobile

ad and down for all other

Operating profit 13 17 12 14 -7.7 -17.6- Reflected changes in revenue estimates and

revised SG&A estimates

Net profit 11 14 10 12 -9.1 -14.3

EPS 1,342 1,744 1,235 1,445 -8.0 -17.1

OP margin

Net margin 28.3 29.8 26.7 25.9

Revenue 23.9 24.6 22.2 22.2

Note: All figures are based on non-consolidated K-IFRS


Table 13. P/E valuation and target price (x, W)

Classification Price multiple Profit TP Notes

2016F P/E avg. of Korean & Chinese ad peers 40.0 Confer to Chinese highly growing digital marketing agency

2016F EPS of Nasmedia 1,445

Target price 58,000 Rounded

Note: Korean and Chinese ad agency peers are followed by Cheil Worldwide, BlueFocus, Guangdong Advertising, Beijing Tensyn Digital, Zhejiang Huamei Holdings


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November 25, 2015


Nasmedia (089600 KQ/Buy/TP: W58,000)


Revenue 30 45 54 62 Current Assets 90 122 143 162

Cost of Sales 0 0 0 0 Cash and Cash Equivalents 4 4 7 8

Gross Profit 30 45 54 62 AR & Other Receivables 59 89 105 121




Non-Operating Profit 1 1 1 Investments in Associates 0 0 0 0



Pretax Profit 10 13 15 17 Total Assets 98 139 160 178

Income Tax 2 3 4 4 Current Liabilities 33 66 77 84







Controlling Interests 8 10 12 13 Total Liabilities 35 68 80 87

Non-Controlling Interests 0 0 0 0 Controlling Interests 63 70 80 91


FCF (Free Cash Flow) 1 -13 5 7 Capital Surplus 22 22 22 22

EBITDA Margin (%) 30.0 26.7 25.9 25.8 Retained Earnings 36 44 54 65


Net Profit Margin (%) 26.7 22.2 22.2 21.0 Stockholders' Equity 63 70 80 91


Cash Flows from Op Activities 1 -3 5 7 P/E (x) 24.7 39.2 33.5 29.7

Net Profit 8 10 12 13 P/CF (x) 18.3 32.4 27.4 24.1

Non-Cash Income and Expense 3 2 3 3 P/B (x) 3.1 5.7 5.0 4.4

Depreciation 0 0 0 0 EV/EBITDA (x) 18.5 32.3 27.1 23.4

Amortization 0 0 0 0 EPS (W) 965 1,235 1,445 1,627

Others 3 2 3 3 CFPS (W) 1,304 1,495 1,768 2,005

Chg in Working Capital -9 -14 -7 -7 BPS (W) 7,587 8,533 9,688 11,025

Chg in AR & Other Receivables -2 -5 -3 -2 DPS (W) 290 290 290 290


Chg in AP & Other Payables -7 15 8 8 Dividend Yield (%) 1.2 0.6 0.6 0.6

Income Tax Paid -2 -3 -4 -4 Revenue Growth (%) 20.0 50.0 20.0 14.8

Cash Flows from Inv Activities 3 -11 -2 -2 EBITDA Growth (%) 50.0 33.3 16.7 14.3

Chg in PP&E 0 -9 0 0 Operating Profit Growth (%) 50.0 33.3 16.7 14.3

Chg in Intangible Assets 0 0 0 0 EPS Growth (%) 41.7 28.0 17.0 12.6

Chg in Financial Assets 4 -2 -2 -2 Accounts Receivable Turnover (x) 3.3 4.0 3.6 3.5

Others -1 0 0 0 Inventory Turnover (x) 0.0 0.0 0.0 0.0

Cash Flows from Fin Activities -1 14 -1 -4 Accounts Payable Turnover (x) 0.0 0.0 0.0 0.0

Chg in Financial Liabilities - - - - ROA (%) 8.2 8.6 8.0 8.0

Chg in Equity 0 0 0 0 ROE (%) 13.4 15.3 15.9 15.7

Dividends Paid -1 -2 -2 -2 ROIC (%) 23.5 20.0 17.7 18.2

Others - - - - Liability to Equity Ratio (%) 55.8 97.2 99.7 95.8

Increase (Decrease) in Cash 3 0 3 1 Current Ratio (%) 269.9 185.0 186.2 192.7


Ending Balance 4 4 7 8 Interest Coverage Ratio (x) 0.0 0.0 0.0 0.0


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November 25, 2015


APPENDIX 1

Important Disclosures & Disclaimers 2-Year Rating and Target Price History

Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price

Cheil Worldwide(030000) 11/24/2015 Buy 30,000 11/25/2013 Buy 34,000

10/21/2015 Buy 28,000 INNOCEAN Worldwide(214320) 11/24/2015 Buy 86,000

07/23/2015 Buy 26,000 Nasmedia(089600) 11/24/2015 Buy 58,000

06/11/2015 Buy 28,000 08/13/2015 Buy 73,000

04/24/2015 Buy 30,000 05/28/2015 Buy 52,000

10/24/2014 Buy 27,000 05/17/2015 Buy 44,000

10/13/2014 Buy 31,000 04/24/2015 Buy 40,000

04/21/2014 Buy 32,000 11/26/2014 Buy 33,000

Equity Ratings Distribution

Buy Trading Buy Hold Sell

72.77% 13.86% 13.37% 0.00%

* Based on recommendations in the last 12-months (as of September 30, 2015)

Disclosures

As of the publication date, Daewoo Securities Co., Ltd and/or its affiliates do not have any special interest with the subject company and do not own 1% or

more of the subject company's shares outstanding.

Analyst Certification

The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean

securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws and regulations thereof. Opinions

expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this

report. Daewoo Securities Co., Ltd. policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s

area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified

herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been

promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific

recommendations or views contained in this report but, like all employees of Daewoo Securities, the Analysts receive compensation that is impacted by

overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and

private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of

the Analyst or Daewoo Securities Co., Ltd. except as otherwise stated herein.

Disclaimers

This report is published by Daewoo Securities Co., Ltd. (“Daewoo”), a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange.

Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such information has not been

independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or

correctness of the information and opinions contained herein or of any translation into English from the Korean language. If this report is an English

translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this

report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising from the use hereof. This

report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to effect transactions in any

Stock Ratings Industry Ratings

Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving

Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes

Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening

Sell : Relative performance of -10%

Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆))

* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.

* Although it is not part of the official ratings at Daewoo Securities, we may call a trading opportunity in case there is a technical or short-term material

development.

* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of

future earnings.

* The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic

conditions.

0

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November 25, 2015


securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of

the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any

laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive or make any use hereof.

Information and opinions contained herein are subject to change without notice and no part of this document may be copied or reproduced in any manner or

form or redistributed or published, in whole or in part, without the prior written consent of Daewoo. Daewoo, its affiliates and their directors, officers,

employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a

purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or

agents. Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment

banking, market-making or other financial services as are permitted under applicable laws and regulations. The price and value of the investments referred to

in this report and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide to

future performance. Future returns are not guaranteed, and a loss of original capital may occur.

Distribution

United Kingdom: This report is being distributed by Daewoo Securities (Europe) Ltd. in the United Kingdom only to (i) investment professionals falling within

Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), and (ii) high net worth companies and other

persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as “Relevant

Persons”). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its

contents.

United States: This report is distributed in the U.S. by Daewoo Securities (America) Inc., a member of FINRA/SIPC, and is only intended for major institutional

investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance

thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that

they will direct commission income to Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed

herein should contact and place orders with Daewoo Securities (America) Inc., which accepts responsibility for the contents of this report in the U.S. The

securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or

sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements.

Hong Kong: This document has been approved for distribution in Hong Kong by Daewoo Securities (Hong Kong) Ltd., which is regulated by the Hong Kong

Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for

distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws

of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person.

All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Daewoo or

its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Daewoo and its

affiliates to any registration or licensing requirement within such jurisdiction.

KDB Daewoo Securities International Network

Daewoo Securities Co. Ltd. (Seoul) Daewoo Securities (Hong Kong) Ltd. Daewoo Securities (America) Inc.

Head Office

34-3 Yeouido-dong, Yeongdeungpo-gu

Seoul 150-716

Korea

Two International Finance Centre

Suites 2005-2012

8 Finance Street, Central

Hong Kong, China

320 Park Avenue

31st Floor

New York, NY 10022

United States

Tel: 82-2-768-3026 Tel: 85-2-2845-6332 Tel: 1-212-407-1000

Daewoo Securities (Europe) Ltd. Daewoo Securities (Singapore) Pte. Ltd. Tokyo Branch

41st Floor, Tower 42

25 Old Broad St.

London EC2N 1HQ

United Kingdom

Six Battery Road #11-01

Singapore, 049909

7th Floor, Yusen Building

2-3-2 Marunouchi, Chiyoda-ku

Tokyo 100-0005

Japan

Tel: 44-20-7982-8000 Tel: 65-6671-9845 Tel: 81-3- 3211-5511

Beijing Representative Office Shanghai Representative Office Ho Chi Minh Representative Office

2401A, 24th Floor, East Tower, Twin Towers

B-12 Jianguomenwai Avenue

Chaoyang District, Beijing 100022

China

Room 38T31, 38F SWFC

100 Century Avenue

Pudong New Area, Shanghai 200120

China

Suite 2103, Saigon Trade Center

37 Ton Duc Thang St,

Dist. 1, Ho Chi Minh City,

Vietnam

Tel: 86-10-6567-9299 Tel: 86-21-5013-6392 Tel: 84-8-3910-6000

Daewoo Investment Advisory (Beijing) Co., Ltd. Daewoo Securities (Mongolia) LLC PT. Daewoo Securities Indonesia

2401B, 24th Floor, East Tower, Twin Towers

B-12 Jianguomenwai Avenue,

Chaoyang District, Beijing 100022

China

#406, Blue Sky Tower, Peace Avenue 17

1 Khoroo, Sukhbaatar District

Ulaanbaatar 14240

Mongolia

Equity Tower Building Lt.50

Sudirman Central Business District Jl.

Jendral Sudirman Kav. 52-53, Jakarta Selatan

Indonesia 12190

Tel: 86-10-6567-9699 Tel: 976-7011-0807 Tel: 62-21-515-1140