The author is an analyst of NH Investment & Securities. She can be reached at hzl.lee@nhqv.com. -- Ed.
We expect Innocean’s consolidated 1Q21 OP to come slightly below consensus due to an absence of new car model releases. But, with its captive advertisers’ marketing of new cars set to begin in earnest in 2Q21, Innocean’s earnings growth should pick up steam from 2H21. And, we believe that expectations remain valid towards strengthening of the firm’s digital advertising capabilities via M&As.
To see strong 2021 earnings growth momentum via captive advertisers alone
We anticipate that Innocean will enjoy a sharp earnings turnaround in 2021, with sales being propelled by: 1) increased marketing by captive advertisers following the additions of new brands and CI changes; and 2) a demand recovery for non-captive advertisers. Innocean should also bear the fruits of its ongoing (since last year) efforts to streamline its cost structure.
Captive advertisers alone should be sufficient to spur earnings growth at Innocean this year. In detail, we believe that captive advertisers will engage in active marketing related to: 1) the addition of new brands (IONIQ); 2) a change of CI (Kia); and 3) global expansion (Genesis). In particular, we view the choice to debut the G80 EV at the Shanghai Motor Show as evidencing the strong commitment of the Genesis series makers to the Chinese market. And, with predictions rising that Korean players will be able to resume full-scale marketing (which has been almost absent for a long time) in China, Innocean stands to be a beneficiary.
Expectations remain valid towards strengthening digital advertising capabilities via M&As
Innocean is considering additional M&As involving global digital advertising players. After acquiring small/mid-sized Korean partners in 1H21, we believe that the firm is now aiming to buy up stakes in global mid-sized players. By beefing up its digital advertising capabilities through M&As, Innocean should not only be better able to respond to advertising market trends (digital marketing expansion), but also put in place mid/long-term earnings growth engines.
Earnings for 1Q21 to slightly miss consensus, but upswing is nearing
We expect Innocean to report consolidated 1Q21 GP of W310.1bn (-10% y-y) and OP of W21.6bn (-20% y-y), with both figures coming in slightly below recently downwardly revised consensus.
For headquarters, 1Q21 earnings will likely prove sluggish due to an absence of marketing for captive advertisers’ new car models. As both the IONIQ and the Staria models were in the pre-launch stage in 1Q21, the execution of related advertising budgets through marketing should begin in earnest in 2Q21, in turn pushing up 2H21 earnings. Looking at Innocean’s overseas operations, y-y earnings growth was likely sapped by high-base effects (as 1Q20 earnings came before the impact of Covid-19).