Domestic Ad Market to Face Difficulties 1H20
The author is an analyst of NH Investment & Securities. She can be reached at hzl.lee@nhqv.com. -- Ed.
Advertising Industry: Amid unfavorable industry environment, differentiating factors required
Reflecting the unfavorable external environment caused by Covid-19, we downgrade our rating on the advertising industry to Neutral. Going forward, we advise employing a selective investment approach focusing on companies that: 1) are securing stable advertising volume; and 2) boast differentiated digital capabilities.
Reflecting economic concerns, downgrade rating to Neutral
We downgrade our rating on the advertising industry from Positive to Neutral in light of concerns that economic slowdown stemming from the spread of Covid-19 will prolong beyond 1H20 and fears that the advertising market will shrink as the advertising industry is highly sensitive to economic conditions. Upon mitigation of Covid-19 concerns, the pace of recovery in the advertising industry is likely to prove relatively sluggish compared to that for other sectors.
Domestic ad market to face difficulties 1H20 due to Covid-19
Weighed upon by the Covid-19 crisis, the outlook for both consumers and businesses has deteriorated. In March, the consumer sentiment index (CSI) plunged 18.5p m-m to 78.4, and the business survey index (BSI) dropped 16p m-m to 53, touching levels witnessed during the financial crisis. While these figures likely reflect peak concerns, as they were gathered at a time when the domestic and overseas Covid-19 situation was deteriorating rapidly, a recovery to previously favorable levels will likely take some time. With recovery for business-related indices looking some way off, the domestic advertising industry is likely to face a tough environment for some time.
Look to firms with: 1) stable advertising volume; and 2) differentiated digital capabilities
The advertising industry’s current 2020E P/E of 14x is higher than the historical band low of 11x. Given the possibility of a prolonged unfavorable external environment due to Covid-19, expectations for a near-term recovery in business conditions and significant share price rebounds look difficult to justify. We advise employing a selective investment approach focusing on firms that: 1) are securing stable advertising volume; and 2) boast differentiated digital capability.
We suggest Cheil Worldwide as our sector top pick, noting that the firm has secured large electronics, video, and telecommunications equipment companies (which made relatively strong showings in the BSI) as captive clients, and that it is responding to the impact of Covid-19 with online promotions and online commerce platform businesses via its differentiated digital capabilities. We expect Cheil’s relative stability in the advertising industry to stand out.