25 July 2006
Prospects dim for Korea's Cheil as World
Cup ad spending ends
By Geoffrey A. Fowler
The Wall Street Journal Asia
(c) 2006 Dow Jones & Company, Inc.
MILLIONS OF South Korean fans stayed up late to watch the ad-packed World Cup on TV this summer. But for all the devotion, shares of Cheil Communications Inc., Korea's dominant ad agency, face an uncertain future. Cheil's shares are falling fast due to everything from a slowing economy to dependence on the business of top Cheil client Samsung Electronics Co. to the impact of odd-numbered years on Cheil's revenue. Over the past 12 months, Cheil's shares have fallen 8.4%, while the Korean market's Kospi index is up nearly 17%, even after a recent selloff.
Cheil is the 18th-largest agency in the world by global revenue, as ranked by Advertising Age magazine. On Thursday, the company is expected to post a jump in second-quarter earnings, reflecting advertiser spending aimed at reaching those World Cup die-hards. But some analysts say the strong earnings are unlikely to help the stock much, because a recent boost in Korean advertising spending due to the World Cup is likely coming to an end. Last month, Deutsche Bank analyst Lee Jae Min downgraded Cheil to a "sell" rating from a "hold," predicting that the company's billings and earnings will weaken starting in the third quarter "in the absence of major sporting events and our cautious view on the domestic economy."
She predicts the stock could fall to 160,000
won ($168.43) over the next six months from 178,000 won at yesterday's close.
That was up 0.8% from Friday. The company's problems come amid a wider selloff
of Korean shares by international investors concerned about the stronger Korean
currency, rising oil prices and climbing U.S. interest rates, as well as geopolitical
tensions -- all of which damp the earnings of companies that export goods or
tap consumerism at home. The portion of Cheil shares held by foreign investors
has fallen from around 60% at the start of the year to about 40% now.
Worried about the sharp fall in its share price, Cheil intervened last month, buying back 2.2% of its issued stock. "We are confident that the stock price is now at the bottom of the curve and will rebound positively going forward, as our financial performance remains very strong," says Nam Young Ho, vice president of Cheil's corporate management division.
Many in the global media industry had hoped South Korea would become a leading growth driver, after ad spending grew almost 20% in 2002, on the back of that year's World Cup, which was co-hosted by Korea and Japan. Britain's WPP Group expanded rapidly in Korea, taking ownership of smaller agencies LG Ad and Diamond Ad.
But Korea's ad industry, particularly in the dominant TV and newspaper media, didn't continue to grow at that pace, and was flat or even receded in 2003, 2004 and 2005, following a consumer credit spree and subsequent pullback. For all of 2006, Aegis Group's world-wide media-buying company Carat predicts Korean ad spending will grow 4.4%. Cheil estimates a more aggressive growth rate of 6.3% for the Korean market.
Around the globe, ad spending often closely tracks gross domestic product and Cheil could also suffer from sluggish domestic spending. Last week, the Bank of Korea, the nation's central bank, reported a consensus of economists that "potential economic growth is sharply weakening" in South Korea. South Korea's economy grew 6.1% in the first quarter from a year earlier and is expected to have expanded around 5.5% in the second quarter.
Unlike the handful of giant international holding companies that own most of the world's big ad agencies, about half of Cheil's business comes from the sometimes volatile Korean market. Mr. Nam says Cheil feels it will be "relatively less affected by sluggish domestic spending" because its biggest clients are large companies like Samsung and KTF that "do not reduce their marketing budget because of fluctuations in sales or overall economy."
Yet some investors and analysts don't like the
degree to which Cheil has hitched itself to the fortunes of Samsung Group companies,
which made up 79% of Cheil's revenue -- and 95% of its overseas revenue -- last
year, and also own about 18% of Cheil's shares. "Cheil has been the only
play on traditional media in Korea," says Vivek Couto, an analyst with
Media Partners Asia in Hong Kong. "But for an ad agency
business to be so dependent on one brand is not particularly attractive."
For all that, Cheil remains a player to reckon with, and in addition to its substantial current operations, it could get a boost from new media. Korean consumers have been among the fastest in the world to adopt the Internet and other new technologies. In March, Korea began terrestrial digital multimedia broadcasts, known as DMB, which enables consumers to watch television through cellphones and other mobile devices. Depending on the technology's acceptance by consumers, and advertisers, DMB could introduce a whole new revenue stream for Cheil and, someday, ad agencies everywhere.
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Lina Yoon in Seoul contributed to this article.