cheil hsbc mar11
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abcGlobal Research
Market leader. Cheil Worldwide (CWW) is the largest advertising company in Korea,
specialising in agency services and production. It is the primary advertising firm for
Samsung Electronics (SEC), the world’s largest consumer electronics company. CWW,
currently ranked 19th, aims to be a global top 10 advertising company by 2012.
Overseas expansion. After downsizing in 2009, CWW is expanding overseas again. The
number of overseas employees rose 15% in 2H10 and it is tapping holdings of
KRW440bn to fund overseas acquisitions. We assume two acquisitions a year
(cKRW25bn each) to drive 15% CAGR in overseas billings over 2011-13e.
The Samsung factor. Samsung Group owns 18.3% of CWW and we estimate SEC
accounts for 70% of consolidated billings. CWW’s stronger overseas focus should help it
win a bigger share of SEC’s growing global ad spend for smartphones, tablet PCs and
smart TVs. CWW has a high correlation with SEC shares (R-square of 0.82).
Deregulation. CWW’s terrestrial ad market share (15.7%) and commission rate (10.6% vs.
industry average 11%) are artificially capped by Korea Broadcast Advertising Corp
(KOBACO). This may soon change as a bill that will ease these restrictions may be passed
later this year. We forecast stable domestic ad market growth (+2.4% y-o-y) based on a high
correlation with GDP, and HSBC’s forecast of nearly 5% GDP growth in 2011-12e.
Valuation. Our target PE of 19x 2011e EPS is CWW’s four-year average historical high,
which we think is reasonable based on: 1) stronger overseas growth; 2) the relationship
with SEC; 3) domestic deregulation. Key catalysts are overseas acquisition
announcements, news on deregulation, rising competition in the global consumer
electronics market. Key risks are a high level of dependency on SEC, weaker
domestic/global economy, delay in deregulation and significant KRW appreciation.
Overweight Target price (KRW) 17,000 Share price (KRW) 13,700 Potential return (%) 26.4
Dec 2009a 2010e 2011 e
HSBC EPS 794.02 660.38 845.39 HSBC PE 17.5 21.0 16.4
Performance 1M 3M 12M
Absolute (%) 1.5 3.3 5.3 Relative^ (%) -2.9 3.0 -13.1
Note: (V) = volatile (please see disclosure appendix)
28 March 2011
Howon Rim* Analyst The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 3706 8767 howonrim@kr.hsbc.com
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report:
The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Telecoms, Media & Technology Media Equity – Korea
Company report
Enterprise value (KRWb) 970Free float (%) 100Market cap (USDm) 1,429Market cap (KRWb) 1,599
Source: HSBC
Index^ KOSPI INDEXIndex level 2,037RIC 030000.KSBloomberg 030000 KS
Source: HSBC
Cheil Worldwide (030000)
Initiate OW: Bullish on deregulation, overseas growth
Korea’s largest ad agency, CWW, is expanding overseas and can capture greater share of ad spend by affiliate SEC
Deregulation should allow CWW to grow its share of the domestic market
Initiate with OW and TP of KRW17,000 based on 19x 2011e PE, implying 26% potential return
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Financials & valuation Financial statements
Year to 12/2009a 12/2010e 12/2011e 12/2012e
Profit & loss summary (KRWb)
Revenue 540 615 625 718EBITDA 55 63 78 104Depreciation & amortisation -8 -7 -7 -7Operating profit/EBIT 47 56 70 96Net interest 19 16 9 9PBT 100 134 119 146HSBC PBT 100 134 119 146Taxation -9 -29 -21 -26Net profit 91 105 97 120HSBC net profit 91 76 97 120
Cash flow summary (KRWb)
Cash flow from operations 86 23 63 104Capex -1 -7 -7 -7Cash flow from investment -74 -13 -11 -11Dividends -35 -37 -37 -44Change in net debt -26 -28 -19 -53FCF equity 56 -8 45 101
Balance sheet summary (KRWb)
Intangible fixed assets 0 0 0 0Tangible fixed assets 65 65 65 64Current assets 780 839 870 938Cash & others 413 440 455 506Total assets 1,032 1,120 1,184 1,298Operating liabilities 455 446 453 493Gross debt 4 3 0 -2Net debt -409 -436 -455 -508Shareholders funds 557 647 707 783Invested capital -23 17 26 3
Ratio, growth and per share analysis
Year to 12/2009a 12/2010e 12/2011e 12/2012e
Y-o-y % change
Revenue -6.1 13.8 1.7 14.9EBITDA 40.4 13.9 23.4 33.6Operating profit 42.8 17.7 26.1 37.0PBT -7.4 33.5 -11.3 23.0HSBC EPS 5.2 -16.8 28.0 23.0
Ratios (%)
Revenue/IC (x) -35.7 -243.0 28.7 49.4ROIC -284.9 -1733.9 264.9 544.8ROE 17.2 12.6 14.4 16.1ROA 9.1 9.8 8.5 9.6EBITDA margin 10.2 10.2 12.4 14.4Operating profit margin 8.8 9.1 11.3 13.4EBITDA/net interest (x) Net debt/equity -73.4 -67.5 -64.4 -64.9Net debt/EBITDA (x) -7.4 -6.9 -5.9 -4.9CF from operations/net debt
Per share data
EPS reported (fully diluted) 791.45 912.65 845.71 1039.90HSBC EPS (fully diluted) 794.02 660.38 845.39 1039.57DPS 8500.00 340.00 380.00 420.00NAV 121096.99 5621.75 6144.67 6804.57
Valuation data
Year to 12/2009a 12/2010e 12/2011e 12/2012e
EV/sales 1.9 1.6 1.5 1.1EV/EBITDA 18.5 15.4 11.8 7.9EV/IC 55.5 35.1 283.5PE* 17.5 21.0 16.4 13.4P/NAV 0.1 2.5 2.3 2.0FCF yield (%) 3.9 -0.6 3.3 7.6Dividend yield (%) 61.2 2.4 2.7 3.0
Note: * = Based on HSBC EPS (fully diluted)
Price relative
4508
6508
8508
10508
12508
14508
16508
2009 2010 2011 2012
4508
6508
8508
10508
12508
14508
16508
Cheil Worldwide Rel to KOSPI INDEX
Source: HSBC Note: price at close of 24 Mar 2011
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Global advertising agencies: Peer comparisons
Cheil Omnicom Interpublic Publicis Dentsu Havas Worldwide Group Group Cos Inc Groupe SA Inc SA
Country Korea US US France Japan France Revenue* 11f 625 13,175.9 6,764.6 7,406.7 1,924 2,109.7 12f 718 13,804.2 7,086.9 7,782.8 1,997 2,190.4 13f 772 13,896.5 7,222.5 7,823.4 2,040 2,233.1 Operating profit* 11f 58 1,640.3 663.8 1,185.0 42 283.7 12f 75 1,784.8 765.1 1,289.5 49 303.9 13f 78 NA 792.0 1,381.6 54 343.0 Operating margin 11f 9.3 12.4 9.8 16.0 2.2 13.4 12f 10.5 12.9 10.8 16.6 2.5 13.9 13f 10.1 NA 11.0 17.7 2.6 15.4 OP growth 11f 3.9 12.5 20.8 10.3 -23.1 7.8 12f 29.6 8.8 15.3 8.8 16.6 7.1 13f 3.5 NA 19.3 16.6 9.1 20.9 Net profit* 11f 97 914.1 314.4 785.6 613 180.6 12f 120 1,005.8 383.4 864.1 711 196.4 13f 132 NA NA 843.4 746 224.7 PE 11f 16.2 15.6 20.8 14.2 17.3 12.2 (x) 12f 13.2 13.3 16.8 12.9 21.1 11.2 13f 11.9 12.0 NA 11.9 19.3 19.5 PB 11f 2.3 3.2 2.0 2.2 1.1 1.3 (x) 12f 2.1 3.0 1.9 1.9 1.1 1.2 13f 1.9 NA NA NA 1.1ROE 11f 14.2 22.3 13.1 17.8 6.6 10.9 (%) 12f 15.9 24.6 15.1 17.4 5.7 10.9 13f 15.9 NA NA NA 6.2 NAEPS* 11f 846 3.2 0.6 3.5 0.0 0.4 12f 1,040 3.7 0.8 3.9 1.3 0.5 13f 1,150 3.9 NA NA 1.4 0.3 BPS* 11f 6,222 13.9 5.6 22.7 22.3 4.0 12f 6,882 15.1 6.0 25.0 23.7 4.2 13f 7,612 NA NA NA 24.4 NA
Source: Bloomberg, HSBC estimates * Note: Except for EPS and BPS, figures in KRWbn for CWW and USDm for other companies. EPS and BPS in KRW for CWW and USD for other companies.
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Introduction We believe CWW, Korea’s largest advertising
company, is positioned to benefit from two
structural changes:
1 We expect the company to expand its global
presence.
2 It can strengthen its position in the domestic
market as a result of pending deregulation.
Its relationship with affiliate company, Samsung
Electronics, should also be a growth driver as we
expect its share of SEC’s increasing ad spend
to increase.
We see these three factors as the main earnings
and share price drivers for CWW in the year
ahead. In our view, they justify a return to
historical high valuations seen during the past
four years.
Investment summary
Structural improvements underway – growing overseas exposure
and stronger domestic presence from deregulation
Captive demand underpins stable operations; potential growth
from SEC’s higher marketing spend for handsets and new devices
Initiate with OW and TP of KRW17,000 based on 19x 2011e EPS,
the stock’s four-year average historical high
PE band and significant events
3,000
5,000
7,000
9,000
11,000
13,000
15,000
17,000
Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
Further deregulation, higher
ad spend by SEC, and
ov erseas expansion
(KRW)26x
21x
16x
11x
Anticipation on domestic consumption
recov ery , sports events in 2006, launch
of private media representativ es
Anticipation of Beijing Oly mpics in 2008
and stronger earnings grow th from 2Q07Anticipation of economic recov ery
Progress in deregulation as KCC
announces new broadcasting channelsDim economic outlook from global financial crisis
Note: Excluding disposal gain from Credu stake in 2010 Source: Quantiwise, HSBC
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Key beneficiary of easing regulations We expect CWW’s position in the domestic ad
market to strengthen after the government relaxes
its grip on terrestrial advertising, the country’s
largest market, which accounted for 23% of the
total ad market in 2010.
In 2008, the Constitutional Court of Korea ruled
that the monopoly held by Korea Broadcast
Advertising Corp (KOBACO) is a violation of the
constitution. As a result, the government wants to
allow private sector media representatives into the
terrestrial advertising market to compete with
KOBACO. The related bill is pending approval by
the National Assembly.
We believe the passing of the bill should benefit
CWW in the following four ways:
Advertising price: average pricing is likely to
rise as it would be determined by competition
between advertisers based on the actual level
of demand rather than by KOBACO.
Market share: CWW’s terrestrial ad market
share (15.7% as of the end of 2010) should
rise as it is in effect limited by KOBACO.
Commission rate: CWW’s commission rate of
10.6% (vs. industry average of 11.2%) is
likely to rise after it is no longer artificially
decided by KOBACO.
Ad production revenue: The resulting change
should expand the market which should also
lead to growth in the ad production market.
We think the bill may be passed later this year
because new broadcasting companies sanctioned
by the KCC (Korea Communications
Commission) in December 2010 are preparing to
launch services in 4Q 2011.
If the bill is not passed, the three existing
terrestrial broadcasters (KBS, MBC, SBS) are
likely to lose terrestrial advertising market share
as the current restrictions imposed by KOBACO
would weaken their competitiveness against the
new broadcasting companies. As such, we think
there will be significant pressure on the
government to pass the bill near the launch of new
broadcasting companies, which we expect to
happen around 4Q this year.
Terrestrial advertising in Korea – current value chain
Source: HSBC
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Korea terrestrial advertising – commission rates and market share, 2010
% Commission rate Market share
Cheil Worldwide 10.6 15.7 Inotion 10.6 10.3 HS Ad 10.7 7.0 SK M&C 10.4 5.1 Daehong 11.4 4.5 Welcomm 11.2 2.9 Phoenix 10.8 2.7 JWU 11.3 2.5 Hancomm 11.4 2.3 Alchemedia 11.3 2.0
Source: KOBACO
Global expansion CWW is the 19th largest advertiser in the world in
terms of sales (as of 2009) and has ambitions to
be ranked within the global top 10 by 2012.
We like the company’s strategic decision to focus
on overseas markets as domestic ad market
growth is structurally slowing down.
CWW downsized its overseas exposure in 2009 in
order to restructure and increase overall efficiency
at a time when Samsung Electronics was reducing
marketing spending as a result of the gloomy
economic outlook. The company is now seeking
to strengthen its overseas presence again, as can
be seen from the increase in the number of its
overseas entities, which rebounded in 2010.
The company is seeking to expand overseas
through acquiring overseas assets and organic
growth. We think the overseas acquisition strategy
is positive as this would give CWW immediate
access to an established client base. We think
CWW’s cash and equivalents, which we estimate
at around KRW440bn, are sufficient to fund
acquisitions. In 2009, CWW acquired three
overseas entities, with each transaction amounting
to cKRW25bn. CWW says it is currently viewing
two or more acquisition targets in the US and
China which the company may acquire as early as
this year.
We expect CWW’s focus on overseas growth to
result in a 15% CAGR in its overseas billings
during 2011-13e. This should raise both the
company’s top line (from increase in parent-level
overseas billings) and equity-method gains from
an increase in overseas subsidiaries’ billings
(based on K-GAAP).
Global marketer ranking in 2009 Korea domestic ad market – structural slowdown in growth
Ranking Marketer2009 Sales
(USD bn)
1 WPP 13.60
2 Omnicom 11.72
3 Publicis 6.29
4 Interpublic 6.03
5 Dentsu 3.11
6 Aegis 2.11
7 Havas 2.01
19 Cheil Worldwide 0.31
0
2
4
6
8
10
1975 1980 1985 1990 1995 2000 2005 2010
(KRW tr)
Strong
grow th
Slower
grow th
Source: Advertising Age Source: Whitepaper on Korea advertising market, HSBC
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The SEC factor Captive market provides stability
CWW is an affiliate of Samsung Group. The
major shareholder is Samsung C&T which holds a
12.64% stake in the company (Samsung affiliate
ownership totals 18.3%). As a result, CWW has a
captive market which provides business stability.
Looking at the company’s consolidated billings,
we estimate Samsung Electronics (SEC) accounts
for 70% of total billings, or 45% and 85% of
CWW’s domestic and overseas billings,
respectively. We estimate other Samsung
affiliates to account for an additional 10%. Hence,
in total 80% of CWW’s consolidated billings
comes from Samsung Group.
SEC’s marketing spend to increase
We expect SEC will raise its marketing budget in
order to enhance its brand awareness/loyalty for
all its consumer electronics products and secure
the leading position in smartphones and new
devices amid intensifying competition.
Its billings depends heavily on SEC’s handset
strategy as SEC’s related ad spending is estimated
to account for 30-40% of CWW’s consolidated
billings. We believe SEC’s plans to continue to
increase its handset market share globally, and the
launch of new smartphone models such as the
newer version of Galaxy S in 2011, will raise the
marketing budget.
We also expect SEC’s focus on securing a leading
position in new devices such as tablet PCs
CWW: Overseas expansion resumed from 2010 CWW: Overseas billings to increase
0
10
20
30
40
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Office
BranchFirm
-
500
1,000
1,500
2,000
2,500
3,000
'05 '06 '07 '08 '09 '10 '11e '12e '13e
50%
55%
60%
65%
70%Ov erseasOv erseas as % of total billing
Source: Company data Source: Company data
Cheil Worldwide ownership structure SEC’s marketing expense vs. CWW’s billings
Others
81%
Samsung
C&T
13%
Samsung
Card
3%
Samsung
Electronics
3%
-
2
4
6
8
10
'05 '06 '07 '08 '09 '10 '11e '12e
-
1,000
2,000
3,000
4,000
SEC's cosolidated marketing ex pense (LHS)
CWW's conslidated billing (RHS)(KRW tr) (KRW bn)
Source: Company data Source: Company data, HSBCe
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(Galaxy tab) and smart TVs, will require higher
ad spend.
Specifically, we expect SEC’s marketing expense
as a percentage of total sales to increase from
5.0% in 2010 to 5.3% in 2011, implying 15% y-o-
y increase in SEC’s marketing budget in 2011e.
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Stable domestic market According to our analysis, domestic ad market
shows a high correlation with Korea’s GDP (R-
square with GDP is 0.76). As such, we expect a
mild growth of domestic ad market in 2011 based
on GDP growth of 4.9%.
Korea GDP vs. domestic ad market
R2 = 0.758
5
6
6
7
7
8
8
9
5,000 6,000 7,000 8,000 9,000 10,000 11,000
Source: Bank of Korea, HSBC
Earnings estimates We expect CWW’s net profit to grow 18% in
2011 (excluding disposal gain of KRW29bn from
Credu stake sale in 2010) and 23% in 2012.
The three main drivers for CWW’s earnings
growth for 2011 are overseas billings growth,
increasing ad spend by SEC, and deregulation in
terrestrial advertising.
We expect overseas billings to increase at a
CAGR of 23% during 2011-13e. This should
translate into greater overseas revenue and net
equity method gain going forward.
We expect SEC’s marketing expense as a
percentage of total sales to increase from 5.0%
in 2010 to 5.3% in 2011, implying 15% y-o-y
increase in SEC’s marketing budget in 2011e.
As a result, CWW’s consolidated billings
should increase as SEC accounts for 70%.
Due to deregulation in the terrestrial ad
market, we expect CWW to increase its
market share and commission rate.
Valuation and risks Our target price of KRW17,000 is based on 19x
2011e PE, which is the average historical high
during the past four years. We believe this is
reasonable, given the company’s stronger
overseas growth outlook, greater share of SEC’s
increasing ad spend, and anticipated benefits from
domestic deregulation on top of stable growth of
the domestic advertising market.
Our target price of KRW17,000 implies 26%
potential return. Under HSBC’s research model,
the Neutral band for non-volatile Korean stocks is
5-15%; we therefore initiate coverage of Cheil
Worldwide with an Overweight rating.
Catalysts: 1) Announcement of overseas
acquisitions; 2) news of deregulation (especially
private media representatives); 3) heightening
competition in the global consumer
electronics market.
Downside risks: 1) Weaker-than-expected
domestic/global economic conditions; 2) delay in
deregulation; 3) significant KRW appreciation; 4)
high level of dependency on SEC.
HSBC vs. Consensus
___________ HSBC_____________ ___________Consensus____________ _____________ Diff_______________(KRWbn) 2011e 2012e 2013e 2011e 2012e 2013e 2011e 2012e 2013e
Sales 624.9 718.0 772.3 657.0 711.7 750.7 -4.9% 0.9% 2.9% Operating profit 58.0 75.2 77.8 61.4 71.1 73.7 -5.5% 5.7% 5.5% OP Margin 9.3% 10.5% 10.1% 9.3% 10.0% 9.8% -0.1ppt +0.5ppt +0.3ppt Net profit 97.3 119.6 132.3 103.0 116.6 123.9 -5.6% 2.6% 6.8% NP Margin 15.6% 16.7% 17.1% 15.7% 16.4% 16.5% -0.1ppt +0.3ppt +0.6ppt
Source: Bloomberg, HSBC estimates
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PE bands PB bands
3,000
8,000
13,000
18,000
Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12
(KRW) 26x21x
16x
11x
3,000
8,000
13,000
18,000
Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12
(KRW) 3.6x
2.9x
2.2x
1.5x
Source: Company data, Quantiwise, HSBC estimates Source: Company data, Quantiwise, HSBC estimates
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CWW ready to return to its historical high PE ratio Our target price of KRW17,000 for CWW shares
is based on 19x 2011e EPS, which is near the
four-year average historical high. We believe this
is justified given the company’s stronger overseas
growth outlook, greater share of SEC’s increasing
ad spend, and anticipated benefits from
deregulation in the domestic market on top of
stable growth of domestic ad market (R-square
with GDP is 0.76). GDP expected to grow 4.9%
and 4.8% in 2011e and 2012e, respectively,
according to HSBC forecasts.
CWW is trading below the global peer average in
terms of PE multiple. We believe this is due to its
weaker presence in the overseas ad market.
However, we think this should change as we
expect CWW’s overseas exposure to increase on
the back of both acquisitions and organic growth.
Valuation and risks
Stronger overseas growth, positive impact of deregulation and
higher ad spend by SEC
Key downside risks include slower-than-expected economic
recovery, delay in deregulation, significant KRW appreciation and
high dependency on SEC
Initiate OW with a TP of KRW17,000 based on PE of 19x, the
four-year historical high; shares trade at 16x 2011e EPS
PE bands and significant events
3,000
5,000
7,000
9,000
11,000
13,000
15,000
17,000
Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
Further deregulation, higher
ad spend by SEC, and
ov erseas ex pansion
(KRW)26x
21x
16x
11x
Anticipation on domestic consumption
recov ery , sports ev ents in 2006, launch
of priv ate media representativ es
Anticipation of Beijing Oly mpics in 2008
and stronger earnings grow th from 2Q07Anticipation of economic recov ery
Progress in deregulation as KCC
announces new broadcasting channelsDim economic outlook from global financial crisis
Note: Excluding disposal gain of Credu stake in 2010 Source: Quantiwise, HSBC
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CWW is also increasing its client base to reduce
its reliance on SEC. CWW’s stronger overseas
presence should help gain a bigger share of SEC’s
ad spend and also help the company to add more
overseas advertisers and help lessen its
dependency on overseas billings on SEC, which
we estimate at 85%.
Our target price of KRW17,000 implies 26%
potential return. Under HSBC’s research model,
the Neutral band for non-volatile Korean stocks is
5-15%; we therefore initiate coverage of CWW
with an Overweight rating.
High correlation with SEC There is a high correlation between the share price
performance of CWW and SEC. R-square
between the two is 0.82 (2002-present).
HSBC analyst Nam Park has an Overweight
rating on SEC with a target price of
KRW1,139,000, which implies 25% potential
return from the current share price (KRW910,000
as of 25 March 2011).
He notes that the market is too focused on shorter-
term ASP-driven negatives. However, he
identifies upside risks that could drive positive
reassessment of SEC’s prospects. He highlights
SEC’s ability to continue generating double-digit
operating margins, led by its richer product mix,
improving cost structure and conglomerate nature.
He also notes that telecoms and digital media
margin expansion should help offset declines in
semiconductors and LCDs.
High correlation between CWW and SEC share performance
R2 = 0.8165
50
100
150
200
250
300
350
50 100 150 200 250 300
Source: Quantiwise, HSBC
Given CWW’s high correlation with SEC, we
believe the positive share trend outlook of SEC
has positive implications for CWW share trend
going forward.
Relative share price trend: CWW vs. SEC vs. KOSPI
0
50
100
150
200
250
300
350
Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11
CWW
SEC
KOSPI
Source: Quantiwise, HSBC
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Downside risks to our call Weaker-than-expected domestic/global
economic conditions: As marketing spend is
highly correlated with overall economic
conditions, weaker-than-expected economic
conditions in Korea or globally could present
downside risk to our earnings estimates.
Delay in easing of regulation: There is rising
anticipation of further deregulation in the
terrestrial advertising market. If the extent of
deregulation is milder or there is further delay
in introduction of private media
representatives (which we expect may happen
later later), this could weigh on the shares.
Our 2012e EPS forecast declines by 12.5% if
the bill to allow private media representatives
is delayed to 2H 2012 from our current
expectation of 2H 2011.
Significant strengthening of KRW: CWW’s
subsidiaries generally receive payments in
USD or EUR. As such, there is a risk that
overseas subsidiary earnings may deteriorate
with significant KRW appreciation.
High dependency on SEC: SEC accounts for
70% of CWW’s consolidated billings. High
dependency on SEC is a positive earnings
driver in periods when SEC’s advertising
budget increase. However, CWW’s high
dependency on SEC is a risk as CWW would
see significant earnings decline if SEC
decides to reduce costs.
Key catalysts Announcement of overseas merger:
Strengthening overseas capacity should
enable CWW to better handle SEC’s
increasing ad spend, leading to greater
overseas billings.
News of easing regulation: With the launch
of private media representatives, CWW may
increase its commission rate and terrestrial ad
market share.
Heightening competition in the global
consumer electronics market: Growing
competition in the global consumer
electronics market, including smartphones,
tablet PCs and smart TVs, should lead to
greater ad spend by SEC.
Samsung Electronics Valuation
To value Samsung Electronics, we use an average
of PB (2.2x target multiple, rolled over to 2011e
from 2010e), sum-of-the-parts and DCF
valuations (methodology unchanged, i.e. 12%
WACC with risk-free rate 4%, equity risk
premium 8%, and β of 1) to derive a 12-month
target price of KRW1,139,000 (unchanged).
Risks
Downside risks to our rating and estimates include
the following:
Weak consumer IT demand due to protracted
delay in recovery of the global economy
Strengthening KRW versus other currencies,
notably the EUR, USD, JPY
Sharp increases in industry-wide production
capacity in memory and TFT-LCD, leading to
faster than expected ASP declines
Price and margin erosion on key products
such as handsets on intensifying competition
Aggressive launch of a raft of new products
such as 3DTV by restructured Japanese
competitors. Japanese competitors could also
start lowering ASPs to regain market share
Resolution of any outstanding IP and
regulatory disputes
SEC is covered by our analyst, Nam Park,
+852 2996 6591, nampark@hsbc.com.hk
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Overseas billings growth CWW is focusing on expanding overseas as the
domestic ad market growth is slowing down and
SEC continues to increase its overseas presence as
a global company.
CWW says it is looking at least two companies in
the US and China and notes that potential
acquisitions may happen as early as this year. We
think CWW’s cash and equivalents, which we
estimate at KRW440bn, are sufficient to fund
acquisitions. We assume two overseas
acquisitions per year (cKRW25bn each) over
2011-13e, the same level of acquisition for CWW
in 2009. There could be more substantial
acquisitions going forward, but we make this
assumption due to limited visibility.
CWW downsized the number of overseas
subsidiaries in 2009 due to the poor economic
outlook and resulting reduction in SEC’s
marketing expenditure. SEC’s consolidated
marketing expense declined by 3% from
KRW6.8trn to KRW6.6trn in tandem with the
economic downturn resulting from the global
financial crisis in 2009.
Earnings forecasts
Overseas billings growth of 23% during 2011-13e driven by
overseas acquisitions and organic growth
SEC’s increasing advertisement spending to drive consolidated
billings to grow by 16% during the same period
Deregulation to benefit CWW on higher commission rate and
greater market share in the terrestrial ad market
Overseas billings trend Equity method gain trend
-
500
1,000
1,500
2,000
2,500
3,000
'05 '06 '07 '08 '09 '10 '11e '12e '13e
50%
55%
60%
65%
70%Ov erseasOverseas as % of total billing
0
20
40
60
80
100
'06 '07 '08 '09 '10 '11e '12e '13e
0%
50%
100%
150%
200%
OPEquity method gainEquity method gain as % of OP
(KRW bn)
Source: Company data, HSBC Source: Company data, HSBC
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Cheil Worldwide (030000) Media 28 March 2011
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However, from 2010, CWW started expanding
overseas again through organic growth, as seen
from the rebound in number of
overseas subsidiaries.
We expect overseas billings to rise at a CAGR of
23% during 2011-13e. This should translate into
greater overseas revenue and increase in net
equity gain going forward. Specifically, we expect
net equity method gain of CWW to have a CAGR
of 29% during 2011-13e.
Increasing ad spend by SEC We estimate SEC’s ad spending to account for
80% of CWW’s consolidated billings. As a result,
there is a high correlation between SEC’s ad
spending and CWW’s consolidated billings.
We expect the strong market growth of new
electronic devices such as smartphones, tablet PCs,
and smart TVs, amid intensifying competition,
should lead to increased ad spending by SEC.
Specifically, SEC plans to launch a full line-up of
smartphones (from high end handsets to mass
targeted handsets) in 2011 and also build a
diversified tablet PC line-up during the year.
Through these efforts, SEC aims to achieve more
than 100% growth in smartphone shipments in
2011 and exceed overall market growth of more
than 40%, which should lead to continued growth
in global handset market share.
SEC plans to focus more on increasingly popular
high-end TVs such as LED, 3D, and smart TVs in
2011. Specifically, for LED TVs, SEC expects its
portion to increase among LCD TVs from 20% in
2010 to 51% in 2011.
We expect SEC’s marketing expense as a
percentage of total sales to increase from 5.0% in
2010 to 5.3% in 2011, implying a 15% y-o-y
increase in SEC’s marketing budget in 2011e.
Opportunity from deregulation in terrestrial advertising We expect CWW to benefit from the deregulation
of the terrestrial ad market in Korea. Due to the
anticipated launch of new broadcasting companies
around 4Q this year, and possible legislation to
allow private media representatives, we think
CWW may be able to increase its market share
and commission rate for terrestrial ads, which is in
effect currently limited by KOBACO.
As a result, we expect CWW to increase its
market share in the overall domestic ad market to
14.7% by 2013 from 12.8% in 2010.
Sensitivity analysis
As the new broadcasting companies are preparing
to launch their services from 4Q 2011, we believe
there is a high chance that the government may
allow the entry of private media representatives
SEC’s marketing spending vs. CWW’s billings Domestic market share to increase from deregulation
0
2
4
6
8
10
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10e '11e
3%
4%
4%
5%
5%
6%
6%
Total marketing spendingMarketing as % of sales
(KRW tr)
-
2,000
4,000
6,000
8,000
10,000
'06 '07 '08 '09 '10 '11e '12e '13e
10%
11%
12%
13%
14%
15%
Domestic ad marketCWW's domestic billingDomestic M/S
(KRW bn)
Source: Company data, HSBC Source: Company data, HSBC
16
Cheil Worldwide (030000) Media 28 March 2011
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by then. As a result, we assumed meaningful
impact from the deregulation to start from 2012.
Specifically, we assume that through increasing
commission rate and greater market share, CWW
will increase its domestic billings market share
from 13% in 2011 to 14.5% in 2012. This
indicates a 14% increase in CWW’s domestic
billings in 2012. Our net profit forecast in 2012
increases by 18% (excluding the disposal gain
from Credu stake sale of KRW29bn) in part due
to the impact from deregulation.
+0.However, we note the associated risk as the
regulatory approval process is difficult to predict
and there is a possibility of a delay. If we assume
the entry of private media representatives gets
delayed to 2012, our EPS forecast for 2012
declines by 12.5%.
HSBC vs. consensus
____________HSBC _____________ ___________Consensus____________ _____________ Diff_______________(KRW bn) 2011e 2012e 2013e 2011e 2012e 2013e 2011e 2012e 2013e
Sales 624.9 718.0 772.3 657.0 711.7 750.7 -4.9% 0.9% 2.9% Operating profit 58.0 75.2 77.8 61.4 71.1 73.7 -5.5% 5.7% 5.5% OP Margin 9.3% 10.5% 10.1% 9.3% 10.0% 9.8% -0.1ppt +0.5ppt +0.3ppt Net profit 97.3 119.6 132.3 103.0 116.6 123.9 -5.6% 2.6% 6.8% NP Margin 15.6% 16.7% 17.1% 15.7% 16.4% 16.5% -0.1ppt +0.3ppt +0.6ppt
Source: Bloomberg, HSBC estimates
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Cheil Worldwide (030000) Media 28 March 2011
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Balance Sheet
Balance Sheet Profit and Loss Year to Dec (W bn) 2010 2011E 2012E 2013E 2014E Year to Dec (W bn) 2010 2011E 2012E 2013E 2014E
Total Assets 1,120.2 1,183.7 1,298.1 1,406.5 1,502.0 Net Sales 614.6 624.8 717.9 772.3 780.0 Current Assets 842.0 872.8 941.4 1,000.7 1,046.5 Growth (%) 13.8 1.7 14.9 7.6 1.0 Cash & Cash Equivalents 29.3 40.7 87.6 117.3 154.2 Export ratio (%) 0.0 0.0 0.0 0.0 0.0 St. Investment Assets 410.5 414.6 418.8 422.9 427.2 Cost of Sales 402.6 399.0 459.5 496.0 500.9 Accounts Receivable 275.8 289.6 304.1 327.1 330.4 Growth (%) 12.4 (0.9) 15.2 7.9 1.0 Inventory 0.0 0.0 0.0 0.0 0.0 Gross Profit 212.0 225.9 258.4 276.3 279.1 Others 126.5 127.8 131.1 133.4 134.8 Gross Margin(%) 34.5 36.1 36.0 35.8 35.8 Non-current Assets 278.2 310.9 356.6 405.8 455.5 SG&A Expenses 156.2 167.8 183.1 198.5 166.2 Investment Assets 193.1 225.9 271.5 320.7 370.3 Growth (%) 16.0 7.4 9.2 8.4 (16.2)Tangible Assets 64.7 64.5 64.3 64.2 64.1 Operating Profit 55.8 58.1 75.2 77.9 112.9 Intangible Assets 0.1 0.1 0.1 0.0 0.0 Growth (%) 17.7 4.0 29.6 3.5 45.0 Total Liabilities 464.6 467.9 506.3 530.9 528.9 Operating Margin(%) 9.1 9.3 10.5 10.1 14.5 Current Liabilities 430.8 436.8 476.9 508.1 510.9 Non-Operating Inc (Exp) 77.9 60.6 70.7 83.4 67.7 Accounts Payable 253.2 257.4 295.7 318.1 321.3 Interest Income 16.4 8.6 9.3 10.1 10.8 St. Debt 1.1 1.2 1.2 1.2 1.2 Interest Expenses 0.4 0.1 (0.0) (0.1) (0.2)Current Portion of Lt. Debt 0.0 0.0 0.0 7.0 5.0 Net F/X (0.5) 2.4 5.2 5.2 5.2 Others 176.5 178.3 180.0 181.8 183.4 Net Asset Disposal 29.0 0.0 0.0 0.0 0.0 Non-current Liabilities 33.8 31.1 29.4 22.7 18.0 Net Equity Method 31.7 32.8 45.7 49.2 49.6 Bonds 0.0 0.0 0.0 0.0 0.0 Net Other non-Op 1.8 16.9 10.5 18.9 1.8 Lt. Debt 2.3 (0.7) (2.7) (9.7) (14.7) Pre-tax Profit from Cont. Op 133.8 118.6 145.9 161.3 180.6 Others 31.5 31.8 32.1 32.4 32.7 Income Taxes 28.8 21.4 26.3 29.0 32.5 Total Stockholders Equity 655.6 715.8 791.7 875.7 973.1 Profit from Cont. Op 105.0 97.3 119.6 132.3 148.1 Paid-in Capital 23.0 23.0 23.0 23.0 23.0 Profit from Discont. Op 0.0 0.0 0.0 0.0 0.0 Capital Surplus 112.9 112.9 112.9 112.9 112.9 Net Profit 105.0 97.3 119.6 132.3 148.1 Capital Adjustment (31.4) (31.4) (31.4) (31.4) (31.4) Growth (%) 15.3 (7.3) 23.0 10.6 12.0 Other Accumulated Earnings 28.4 28.4 28.4 28.4 28.4 Net Margin(%) 17.1 15.6 16.7 17.1 19.0 Retained Earnings 522.6 582.8 658.7 742.7 840.1 EBITDA 62.8 65.2 82.4 85.1 120.1 Total Debt 3.5 0.5 (1.5) (1.5) (8.5) Growth (%) 13.9 3.8 26.4 3.2 41.2 Net Debt(Cash) (436.3) (454.9) (507.8) (541.7) (589.9) Dividend Payout (%) 35.4 44.9 40.4 38.3 34.2
Source: Company data, HSBC
Cash Flow
Cash Flow Key Ratios Year to Dec (W bn) 2010 2011E 2012E 2013E 2014E Year to Dec 2010 2011E 2012E 2013E 2014E
Cash Flows from Operating 23.3 62.5 103.6 89.2 105.8 EPS (won) 913 846 1,040 1,150 1,287 Net Profit 105.0 97.3 119.6 132.3 148.1 Adj. EPS (won) 660 845 1,040 1,149 1,287 Depreciation 7.0 7.1 7.2 7.2 7.2 BPS (won) 5,699 6,222 6,882 7,612 8,459 Amortization 0.0 0.0 0.0 0.0 0.0 DPS (won) 340 380 420 440 440 Equity Method Loss(Gain) (31.7) (32.8) (45.7) (49.2) (49.6) PER (x) 15.7 16.9 13.8 12.4 11.1 Investment Asset Disp Loss(Gain) (29.0) 0.0 0.0 0.0 0.0 Adj. PER (x) 21.7 16.9 13.8 12.4 11.1 Tangible Asset Disp Loss(Gain) (0.0) (0.0) (0.0) (0.0) (0.0) PBR (x) 2.5 2.3 2.1 1.9 1.7 Changes in Working Capital (51.3) (12.6) 21.3 (2.9) (2.0) PCR (x) 22.0 21.9 20.0 17.9 15.3 Others 23.3 3.5 1.2 1.7 2.2 EV/ EBITDA (x) 19.2 18.2 13.8 13.0 8.8 Cash Flows from Investing (13.2) (10.9) (11.0) (11.1) (11.3) PEG (x) 2.0 1.1 na na naSt. Investment Assets Dec.(Inc.) (119.7) (4.1) (4.1) (4.2) (4.2) Dividend Yield (%) 2.4 2.7 2.9 3.1 3.1 Investment Securities Dec.(Inc.) 115.7 0.0 0.0 0.0 0.0 Profitability Tangible Assets Dec.(Inc.) (6.8) (6.8) (6.9) (7.0) (7.0) Operating Margin (%) 9.1 9.3 10.5 10.1 14.5 Others (2.4) 0.0 0.0 0.0 0.0 EBITDA Margin (%) 10.2 10.4 11.5 11.0 15.4 Free Cash Flow 10.2 51.6 92.5 78.0 94.6 Pre-tax Profit Margin(%) 21.8 19.0 20.3 20.9 23.2 Cash Flows from Financing (37.3) (40.1) (45.7) (48.3) (57.6) Net Margin (%) 17.1 15.6 16.7 17.1 19.0 St. Debt Inc.(Dec.) (1.0) 0.0 0.0 0.0 0.0 ROA (%) 9.8 8.4 9.6 9.8 10.2 Cur. Por. of Lt. Debt Inc.(Dec.) 0.0 0.0 0.0 7.0 (2.0) ROE (%) 17.2 14.2 15.9 15.9 16.0 Bonds Inc.(Dec.) 0.0 0.0 0.0 0.0 0.0 ROIC (%) 125.2 76.5 110.9 141.7 202.7 Lt. Debt Inc.(Dec.) 0.0 (3.0) (2.0) (7.0) (5.0) Stability Share Capital Inc.(Dec.) 0.0 0.0 0.0 0.0 0.0 Debt Ratio (%) 70.9 65.4 64.0 60.6 54.4 Dividend Paid (37.1) (37.1) (43.7) (48.3) (50.6) Net Debt Ratio (%) (66.5) (63.5) (64.1) (61.9) (60.6)Others 0.8 0.0 0.0 0.0 0.0 Interest Coverage (x) 144.3 608.4 na na naChange in Cash (27.2) 11.5 46.8 29.7 37.0 Activity Beginning Cash 56.4 29.3 40.7 87.6 117.3 Asset Turnover (x) 0.6 0.5 0.6 0.6 0.5 Ending Cash 29.3 40.7 87.6 117.3 154.2 Receivables Turnover (x) 1.7 1.6 1.7 1.8 1.8 Capex/ Sales (%) 1.1 1.1 1.0 0.9 0.9 Inventory Turnover (x) 0.0 0.0 0.0 0.0 0.0 Depreciation/ Sales (%) 1.1 1.1 1.0 0.9 0.9 Payables Turnover (x) 2.4 2.4 2.6 2.5 2.4 Depreciation/ Capex (%) 103.1 104.3 103.8 103.4 103.0 Working Capital Turnover (x) (12.4) (27.4) (24.4) (19.3) (19.7)
Source: Company data, HSBC estimates
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Cheil Worldwide (030000) Media 28 March 2011
abc
Company profile Cheil Worldwide (CWW) is the largest
advertising company in Korea, with expertise in
ad agency services and production. The company
is an affiliate of Samsung Group, which owns an
18.3% stake, providing a large captive market.
Samsung Group’s advertising is estimated to
represent 80% of CWW’s consolidated billings
(Samsung Electronics also estimated to account
for 70%) in 2010.
In Korea, major groups generally own an ad
agency in order to internally monetize their
advertising needs, and to have an ad agency that
can better respond to their advertisement strategy.
An ad agency in a group is required to closely
work with their group counterparts, and is
rewarded with a concentrated group ad budget.
This has been one of the main growth drivers for
major group-related ad agencies such as CWW
and Innocean, which has seen significant growth
for the past several years on the back of increasing
global ad spend by Hyundai Motors group.
CWW reflects the total billings related to ad
production as revenue. For ad agency services, only
the commission received is reflected as revenue.
According to CWW, commission rates vary
considerably; TV and radio advertisements generate
the least commission rate at around 11% and
Internet and cable shows the highest (17-20%).
Cheil Worldwide’s ownership structure Ad agency and related group overview
Others
81%
Samsung
C&T
13%
Samsung
Card
3%
Samsung
Electronics
3%
Ad agency Group
Cheil Worldwide Samsung
Innocean Hyundai Motor
HS Ad LG
SK M&C SK
Daehong Lotte
Oricom Doosan
Grape Hyundai
Source: Financial Supervisory Service Source: HSBC
Company analysis
No.1 ad company in Korea in terms of consolidated billings
Global expansion and deregulation in terrestrial advertising to be
the key share price drivers
Captive share of SEC’s increasing advertising spend provides
both stability and growth
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Cheil Worldwide (030000) Media 28 March 2011
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Consolidated billings indicate the sum of the
billings that CWW’s parent company and
subsidiaries received. Parent billings consist of
domestic and overseas billings, which are
eventually translated into CWW’s revenue. The
overseas billings generated from CWW’s overseas
subsidiaries are eventually reflected as equity-
method gain (or loss).
TV, radio, newspaper and magazine advertising
(the four largest media) represented 37% of
domestic gross profit in 2010. Cable TV and
Internet accounted for 22%, and promotion and ad
production 41%.
Economic conditions Advertising market growth shows a high
correlation with GDP (R-square of 0.76). HBSC
expects Korea’s GDP to grow by 4.9% in 2011
compared with 6.1% for 2010. We expect Korean
companies to continue to increase advertising
spending in 2011 to promote their brands and
products, but at a slower rate than in 2010 due to
lack of major events such as the World Cup and
Winter Olympics.
As a result, we expect relatively moderate 2.5%
growth in the domestic advertising market in 2011
(vs 16.5% in 2010) and the advertising market to
reach KRW8.7trn.
Commission rate Cheil Worldwide’s gross profit from domestic market
0%
5%
10%
15%
20%
TV a
nd ra
dio
New
spap
ers
Mag
azin
es
Cab
le T
V
Inte
rnet
Promotion
ad
production
41%
Cable TV
Internet
22%
TV radio
newspaper
magazine
37%
Source: Company data Source: Company data
Market share in the domestic ad market Foreign ownership
Daehong4.9%
Others57.6%
HS Ad6.1%
Innocean9.1%
SK M &C6%
CheilWW16.3%
-600
-400
-200
0
200
400
600
Jan10
Mar10
May10
Jul10
Sep10
Nov10
Jan11
34
36
38
40
42
44
46
Foreign net buyForeign ow nership
(KRW (%)
Source: KOBACO (2009) Source: Quantiwise
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Cheil Worldwide (030000) Media 28 March 2011
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Global expansion CWW was the 19th largest advertiser in the world
(as of 2009) and aims to be a top 10 player by
2012. We think the company’s overseas focus is
the right strategy as domestic market growth has
structurally slowed down.
CWW is focusing both an organic growth and
overseas acquisition in order to expand its
overseas operations. After the downsizing in 2009
following the financial crisis, CWW started to
expand its overseas branch again from 2010. The
number of overseas employees rose 15% in 2H10.
CWW also plans to expand in the Middle East and
Africa (markets SEC is focusing on).
On the acquisition front, CWW acquired Beattie
McGuinness Bungay (BMB) in England in 2008,
and The Barbarian Group (TBG) in the US in 2009.
The company also established Herezie in France
and acquired Opentide China in 2010. In 2011,
CWW plans to strengthen its presence in countries
such as the US and China where it is considering at
least two potential acquisition targets.
We believe CWW’s strengthening overseas
capability is positive as it better positions CWW
in the global economic recovery. We expect
CWW’s overseas billings to increase from
KRW1.3trn in 2010 to KRW2trn in 2012. We
believe this strong growth will be backed by SEC
increasing its smartphone market share and the
fast-growing market for new devices such as,
tablet PCs and smart TVs.
Overseas expansion again from 2010 Overseas billings to increase
0
10
20
30
40
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Office
BranchFirm
-
500
1,000
1,500
2,000
2,500
3,000
'05 '06 '07 '08 '09 '10 '11e '12e '13e
50%
55%
60%
65%
70%Ov erseasOv erseas as % of total billing
Source: Company data Source: Company data, HSBC estimates
Global marketer ranking in 2009 Domestic ad market structurally slowing down
Ranking Marketer2009 Sales
(USD bn)
1 WPP 13.60
2 Omnicom 11.72
3 Publicis 6.29
4 Interpublic 6.03
5 Dentsu 3.11
6 Aegis 2.11
7 Havas 2.01
19 Cheil Worldwide 0.31
0
2
4
6
8
10
1975 1980 1985 1990 1995 2000 2005 2010
(KRW tr)
Strong
grow th
Slower
grow th
Source: Advertising Age Source: Whitepaper on Korea advertising market, HSBC
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Cheil Worldwide (030000) Media 28 March 2011
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Deregulation We expect the main impact from deregulation to
come from the entry of private media
representatives. The constitutional court has ruled
that the current monopoly of KOBACO (Korea
Broadcast Advertising Corp) in the terrestrial
advertising market is a violation of the constitution.
Until now, KOBACO has decided/restricted
advertising prices, commission rates and
advertising slots. This distorted the terrestrial
advertising market and did not reflect underlying
demand. With the entry of private media
representatives, we believe terrestrial advertising
(which accounts for 23% of domestic
advertisement market) will better reflect market
dynamics due to competition between media
representatives and benefit CWW:
Advertising prices
Advertising prices are likely to rise with the
introduction of private media representatives as
they will be based on competition between
advertisers. We expect ad agencies, including
CWW, to benefit from this.
Market share
We believe CWW will be the key beneficiary as
the company’s market share in terrestrial
advertising is low considering it is the leading
company in the domestic market. Its share was
only 15.7% in 2010.
This is mainly due to KOBACO’s policy of
restricting a major company like CWW from having
a substantial market share. Also, low industry entry
barriers have led to strong competition.
In Japan, ad agencies also work as media
representatives for terrestrial ads, and hence there
is no government entity like KOBACO. In this
environment, the top player Dentsu accounts for
roughly 50% of market share. Furthermore, for
prime time terrestrial ad slots, the top three ad
agencies have around 80% time share.
We think the main reason for the substantial
terrestrial ad market share of leading ad agencies
is due to economies of scale. Major ad agencies
can buy ad slots in bulk given their strong
advertiser base. As a result, we think CWW can
receive a discount from terrestrial broadcasters
which can then be shared with advertisers. We
think the introduction of private media reps will
help CWW to attract more advertisers.
Commission rate
CWW’s commission rate (commission/billings)
for terrestrial ads should rise from 10.6%, which
Terrestrial ad – current value chain
Source: HSBC
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Cheil Worldwide (030000) Media 28 March 2011
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is below the industry average of 11% and 12-13%
for smaller players under the KOBACO
monopoly. Also, the introduction of private media
representatives should result in competition
between KOBACO and private media
representatives, which in turn could lower their
portion of commissions (currently 2.8%) and raise
advertising agencies’ commission rates.
Ad production revenue
The resulting change should expand the market
which should also lead to growth in the ad
production market.
Although we admit that it is difficult to forecast the
timing of the legislation to allow private media
representatives, we think the pressure on the
government should rise substantially near the end of
this year. This is because new broadcasting
companies are currently preparing to launch their
broadcasting services from 4Q 2011. Without the
private media representatives, terrestrial
broadcasting companies would be at a disadvantage
due to restrictions imposed by KOBACO.
SEC’s marketing to increase We believe ad spend on consumer electronics will
rise for the following reasons:
Launch of new electronic devices: As the
market is opening up strongly for new devices
such as smartphones, tablet PCs and smart
TVs, we believe there is need for electronic
companies to invest (including marketing
expenditure) in these devices to secure a
leading position in the market.
Heightening competition: We expect a wide
range of product launches this year which
should increase competition and, in turn,
marketing expenditure.
Brand perception/awareness becoming
more important: In terms of quality, product
differentiation is becoming more difficult for
devices such as LCD TVs. As such, brand
perception and awareness are likely to play a
bigger role.
As a result, we expect SEC to increase its ad
spending going forward. Specifically, we expect
SEC to increase marketing expense as a
percentage of consolidated sales from 5.0% in
2010 to 5.3% in 2011e. This indicates a 15% y-o-
y increase in SEC’s marketing expense in 2011e.
Comparison of broadcasters
Terrestrial broadcasters
New broadcasters
Cable TV operators
Service providers
MBC, KBS, SBS Chosun Ilbo, Joongang Ilbo, Donga Ilbo, Maeil Economy newspaper
C&M, HCN, OnMedia, etc.
Coverage Nationwide Nationwide Local Program variety General
program General program
Specialized program
Capital requirement
High High Low
Commercial breaks
Not allowed Allowed Allowed
Sponsorship advertising
Not allowed Allowed Allowed
Source: HSBC
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Cheil Worldwide (030000) Media 28 March 2011
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Shareholder policy CWW’s payout ratio has remained steady at around
40% during 2004-09. CWW plans to maintain its
payout ratio at a similar level (based on earnings
excluding one-off gains) for the time being despite
its cash and cash equivalent holdings of KRW440bn.
We think this is due to the company’s need for
sufficient funds to expand overseas. CWW’s payout
ratio in 2010 reached 35%, lower compared to
previous years. However, excluding the disposal
gain of Credu stake (KRW29bn) in 4Q 2010,
payout ratio reached 45%.
The major shareholders of CWW include
Samsung affiliates and four mutual funds – Korea
Investment Trust Management (Korea ITMC),
Morgan Stanley Investment Management (MSIM),
Matthews International Capital (Matthews), and
Schroders. These shareholders account for 52% of
CWW’s total stake.
KRW appreciation A strengthening KRW could deteriorate equity-
method gains as CWW’s subsidiaries receive
payments mainly in USD or EUR.
However, we note that a strengthening KRW
would be positive for overseas acquisitions.
SEC’s product line-up
Smartphone Tablet PC Smart TV
Model Galaxy Mini S5570
Galaxy SL Galaxy Fit Galaxy Ace Galaxy 4G Galaxy S II Galaxy Tab 10.1 Sliding PC 7 UN55D8000YF Full HD 3D LED
Size (mm) 100.4 x 60.8 x 12.1
123.7 x 64.2 x 10.6
110.2 x 61.2 x 12.6
112.4 x 59.9 x 11.5
122.4 x 64.5 x 9.9
125.3 x 66.1 x 8.5
246.2 x 170.4 x 10.9
265.9 x 174.8 x 19.8
1232.6 x 707.2 x 29.7
Weight (g) 105 131 n/a 113 118 116 599 989 21.8kgMemory 2GB embedded,
max 32GB Max 32GB Max 32GB 2GB embedded,
max 32GB16GB
embedded, max 32GB
16GB/32GB embedded
16 or 32 GB 32 or 64 GB SSD
Camera 3.15MP 5MP 5MP 5MP 5MP 8MP 8MP/2.0MP 1.3MPScreen size (inch)
3.14 4.0 3.3 3.5 4.0 4.3 10.1 10.1 46-65
OS Android OS, v.2.2 (Froyo)
Android OS, v.2.2 (Froyo)
Android OS, v.2.2 (Froyo)
Android OS, v.2.2 (Froyo)
Android OS, v.2.2 (Froyo)
Android OS, v.2.3
(Gingerbread)
Android v.3.0 (Honeycomb)
Windows 7 Home Premium
CPU 600MHz 800MHz 600MHz 800MHz ARM11 1GHz ARM Cortex
Dual-core 1GHz ARM
1GHz dual core Intel Atom 1.66 GHz
Source: SEC, HSBC
Major shareholders Dividend trend
0%
5%
10%
15%
20%
Samsung
affiliates
Korea
ITMC
MSIM Matthew s Shroders
0
100
200
300
400
500
'04 '05 '06 '07 '08 '09 '10 '11e '12e '13e
0%
10%
20%
30%
40%
50%
DPS (LHS) Pay out ratio (RHS)
Source: Company data Source: Company data, HSBC
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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Howon Rim and Nam Park
Important disclosures
Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
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stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities
As of 25 March 2011, the distribution of all ratings published is as follows: Overweight (Buy) 51% (23% of these provided with Investment Banking Services)
Neutral (Hold) 36% (21% of these provided with Investment Banking Services)
Underweight (Sell) 13% (19% of these provided with Investment Banking Services)
Share price and rating changes for long-term investment opportunities
Samsung Electronics (005930.KS) Share Price performance KRW Vs HSBC
rating history
Source: HSBC
Recommendation & price target history
From To Date
N/R Overweight (V) 17 June 2009 Overweight (V) Overweight 29 January 2010 Target Price Value Date
Price 1 800000.00 17 June 2009 Price 2 940000.00 30 July 2009 Price 3 1021000.00 05 October 2009 Price 4 1139000.00 23 March 2010
Source: HSBC
402000
602000
802000
1002000
Mar
-06
Sep-
06
Mar
-07
Sep-
07
Mar
-08
Sep-
08
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
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HSBC & Analyst disclosures Disclosure checklist
Company Ticker Recent price Price Date Disclosure
SAMSUNG ELECTRONICS 005930.KS 880000.00 24-Mar-2011 2, 6, 11Source: HSBC
1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company. 4 As of 28 February 2011 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 31 January 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services. 6 As of 31 January 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-investment banking-securities related services. 7 As of 31 January 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures 1 This report is dated as at 28 March 2011. 2 All market data included in this report are dated as at close 24 March 2011, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
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Disclaimer * Legal entities as at 31 January 2010 'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. - Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank Argentina S.A., HSBC Saudi Arabia Limited., The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch.
Issuer of report The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch
7th Floor, HSBC Building
25, 1-ka, Bongrae-dong
Chung-ku, Seoul 100-161, Korea
Telephone: +822 3706 8700/3
Fax: +822 3706 8797
Website: www.research.hsbc.com
This document has been issued by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HSBC") for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch. In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. It may not be further distributed in whole or in part for any purpose. © Copyright. The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch 2011, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch MICA (P) 142/06/2010 and MICA (P) 193/04/2010
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Global Stephen Howard Analyst, Global Sector Head +44 20 7991 6820 stephen.howard@hsbcib.com
Europe Dominik Klarmann, CFA Analyst +49 211 910 2769 dominik.klarmann@hsbc.de
Nicolas Cote-Colisson Analyst +44 20 7991 6826 nicolas.cote-colisson@hsbcib.com
Luigi Minerva Analyst +44 20 7991 6928 luigi.minerva@hsbcib.com
Antonin Baudry +33 1 56 52 43 25 antonin.baudry@hsbc.com
Manish Beria, CFA Analyst +91 80 3001 3796 manishberia@hsbc.co.in
Amit Sachdeva Analyst +91 80 3001 3795 amit1sachdeva@hsbc.co.in
Dhiraj Saraf, CFA Analyst +91 80 3001 3773 dhirajsaraf@hsbc.co.in
Sunil Rajgopal Analyst +91 80 3001 3794 sunilrajgopal@hsbc.co.in
Americas Richard Dineen Analyst +1 212 525 6707 richard.dineen@us.hsbc.com
Sean Glickenhaus Analyst +1 212 525 4131 sean.x.glickenhaus@us.hsbc.com
Anthony McCutcheon Credit Strategist +1 212 525 4198 anthony.c.mccutcheon@us.hsbc.com
Keith Kitagawa Credit Strategist +1 212 525 5160 keith.m.kitagawa@us.hsbc.com
Enrique Gomez-Tagle Media +52 55 5721 2167 enrique.gomeztagle@hsbc.com.mx
Global Emerging Markets (GEMs) Hervé Drouet Analyst +44 20 7991 6827 herve.drouet@hsbcib.com
Emerging Europe, Middle East & Africa (EMEA) Kunal Bajaj Analyst +971 4 507 7200 kunalbajaj@hsbc.com
Vangelis Karanikas Analyst +30 210 696 5211 vangelis.karanikas@hsbc.com
Avshalom Shimei Analyst +972 3 710 1197 avshalomshimei@hsbc.com
Bülent Yurdagül Analyst +90 212 376 46 12 bulentyurdagul@hsbc.com.tr Specialist Sales
Timothy Maunder-Taylor +44 20 7991 5006 tim.maunder-taylor@hsbcib.com
Thomas Koenen +49 211 910 4402 thomas.koenen@hsbc.de
Myles McMahon +852 2822 4676 mylesmacmahon@hsbc.com.hk
Asia Steven C Pelayo Analyst +852 2822 4391 stevenpelayo@hsbc.com.hk
Tse-yong Yao Analyst +852 2822 4397 tse-yongyao@hsbc.com.hk
Nam Park Analyst +852 2996 6591 nampark@hsbc.com.hk
Carolyn Poon Analyst +852 2996 6586 carolynpoon@hsbc.com.hk
Tucker Grinnan Analyst +852 2822 4686 tuckergrinnan@hsbc.com.hk
Neale Anderson Analyst +852 2996 6716 neale.anderson@hsbc.com.hk
Henry Lee Associate +813 5203 4412 henry.lee@hsbc.co.jp
Shishir Singh Analyst +852 2822 4292 shishirkumarsingh@hsbc.com.hk
Jenny Lai Head of Research, Taiwan +8862 8725 6020 jennylai@hsbc.com.tw
Frank Su Analyst +8862 8725 6025 frankkssu@hsbc.com.tw
Jerry Tsai Analyst +8862 8725 6023 jerrycytsai@hsbc.com.tw
Percy Panthaki Analyst +91 22 2268 1240 percypanthaki@hsbc.co.in
Rajiv Sharma Analyst +91 22 2268 1239 rajivsharma@hsbc.co.in
Yogesh Aggarwal Analyst +91 22 2268 1246 yogeshaggarwal@hsbc.co.in
Anil Kumar T Analyst +91 80 3001 3749 anil.kumar.tulsiram@hsbc.co.in
Yolanda Wang Analyst +8862 8725 6027 yolandayywang@hsbc.com.tw
Carrie Liu Analyst +8862 8725 6024 carriecfliu @hsbc.com.tw
Brian Sohn Analyst +822 3706 8765 briansohn@kr.hsbc.com
Howon Rim Analyst +822 37068767 howonrim@kr.hsbc.com
Luis Hilado Analyst +65 6239 0656 luishilado@hsbc.com.sg
Hui Dong Analyst +852 2822 4202 huidong@hsbc.com.hk
Joyce Chen Associate +8862 8725 6022 joycechchen@hsbc.com.tw
Soyun Shin Associate Analyst +822 3706 8774 soyunshin@kr.hsbc.com
Global Telecoms, Media & Technology Research Team
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