Media/ads
The author is an analyst for Shinhan Securities. She can be reached at inhae.ji@shinhan.com -- Ed.
Leading indicator of media sector turnaround
We note that the upturn in share prices of domestic media plays including production studios is closely linked to the recovery of ad market conditions at home. With the drop in domestic ad spend amid the economic slowdown causing a steeper decline in programming revenue booked from domestic broadcasters, production houses have been struggling with weak earnings even with larger distribution rights revenue secured from overseas markets.
The earnings data coming out of ad industry bellwether Cheil Worldwide is thus important for the media sector as a whole. For 2Q23, the company is expected to post gross profit of KRW414.4bn and operating profit of KRW83.8bn. Earnings should have declined on a YoY basis as in 1Q23, but at a slower pace in 2Q23, meeting market expectations.
Despite the cutback of ad budgets amid the macroeconomic slowdown, we believe Cheil Worldwide is seeing a slower decline in captive sales at home and a rise in captive order volume overseas for marketing solutions on various media platforms. In addition, aside from India where media solutions account for a larger portion of earnings, new client additions are driving double-digit top-line growth in the major overseas markets of North America and China.
Stronger 2H vs. 1H after earnings bottom in 1Q & seasonal peak in 2Q
Unfortunately, we have yet to pick up clear signs of ad market recovery. While resumption of ad spend on the turnaround of the economy will likely take more time, Cheil Worldwide is nonetheless expected to report an upturn in earnings for 2Q23 from bottom levels recorded in 1Q23.
As the second quarter is typically a strong season for Cheil Worldwide, it is still too early to confirm whether the stronger performance expected for 2Q23 was driven by seasonal demand alone or by an actual upturn in ad market conditions. However, we note that orders are growing for digital marketing and promotional ads, which can positively affect sales while reducing the inventory burden. The company is also expected to outperform rivals in defending margins as the beneficiary of continuously rising demand for direct-to-consumer and owned media marketing. While the pace and extent of earnings growth remain uncertain, we still believe Cheil Worldwide stands to deliver stronger performance in 2H23 vs. 1H23.
Retain BUY with shares trading at historically low valuations
We retain BUY on Cheil Worldwide but lower our target price by 11% to KRW28,000 with earnings forecasts slightly adjusted in reflection of weakened investor sentiment toward the ad sector amid growing macro uncertainties. We find that the company’s PER, PBR, and dividend yields are near the low end of their historical bands, even after factoring in down-adjusted earnings projections that reflect the market downturn.
We believe now is the time to focus on Cheil Worldwide, given its: 1) stronger ability to defend margins vs. rivals; 2) cheap share valuations that offer bottom-fishing opportunities; and 3) current standing as the ad industry bellwether that will be closely watched for signals of a media sector upturn.