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聚焦2020年展望广告行业入门

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聚焦2020年展望广告行业入门

 

 Media

 Advertising

 101:

 A

 Primer

 with

 a

 Focus

 on

 the

 2020 Outlook

   Comprehensive

 overview

 of

 the

 advertising

 industry.

 In

 this

 primer,

 we examine macroeconomic trends, the domestic and international markets, and the major media that participate in this industry.  An analysis of key industry trends, including: the drivers of slower industry organic

 revenue

 growth,

 with

 a

 review

 of

 cyclical

 and

 structural

 factors including overcapacity, in-housing, pressure in the FMCG vertical, and impact of consulting firms. We also provide a deeper look the evolving strategies of the major holding companies in the face significant industry change.  Close

 look

 at current

 macro

 trends

 and health

 of the

 ad market in

 2020. We detail

 advertising

 patterns through

 economic cycles,

 highlighting how

 we expect 2020 to shape up on a global and regional basis.  Detailed

 examination

 of

 the

 business

 model

 of

 an

 ad

 agency

 (advertising and

 marketing

 services company).

 We discuss the structure of an ad agency holding

 company,

 study

 the

 growth

 drivers

 behind

 the

 agencies

 and

 other businesses, and highlight current trends that influence its outlook.  Company-specific

 outlooks. We

 provide

 pertinent

 financial

 information

 and investment summaries for five of the top advertising agencies that we cover in the

 industry:

 Interpublic,

 Omnicom,

 WPP,

 Publicis,

 and

 Dentsu,

 including

 an overview of each company’s business mix and client base.  Recession

 weighs

 on

 stocks,

 but

 fundamentals

 likely

 to outperform

 other traditional

 media. The

 highly

 diversified

 business

 models

 of

 the

 advertising and marketing services companies and variable cost structures provide a buffer to

 earnings

 in

 weak

 economic

 periods.

 Good

 balance

 sheets

 and

 limited exposure to any one vertical also minimizes risks in these unprecedented times. While

 ad

 spending

 historically

 has

 lagged

 an

 economic

 downturn,

 we

 don’t necessarily see that to be the case with national advertising in this cycle given the unique nature of this disruption and could see declines lessening a bit in Q3. We also believe the agencies will weather the storm better than most companies and expect the stocks to outperform while the economic climate remains weak. For

 U.S.-based

 names,

 we

 like

 IPG

 and

 OMC,

 both

 rated

 Overweight.

 In Europe,

 we

 prefer

 WPP

 (Overweight)

 to

 Publicis

 (Neutral)

 as

 it

 trades

 on an EV/NOPAT discount. In Japan, we rate Dentsu Neutral. Global Equity Research 03

 May

 2020

 Media

 Alexia

 S.

 Quadrani

 AC

 (1-212)

 622-1896

 alexia.quadrani@jpmorgan.com

 Bloomberg

 JPMA

 QUADRANI

 <GO>

 J.P.

 Morgan

 Securities

 LLC

 David

 Karnovsky,

 CFA

 (1-212)

 622-1206

 david.karnovsky@jpmorgan.com

 J.P.

 Morgan

 Securities

 LLC

 Anna

 Lizzul

 (1-212)

 622-6139

 anna.lizzul@jpmorgan.com

 J.P.

 Morgan

 Securities

 LLC

 Zilu

 Pan

 (1-212)

 622-6522

 zilu.pan@jpmorgan.com

 J.P.

 Morgan

 Securities

 LLC

 European

 Media

 &

 Internet Daniel

 Kerven

 AC

 (44-20)

 7134-3057

 daniel.kerven@jpmorgan.com

 Bloomberg

 JPMA

 KERVEN

 <GO>

 J.P.

 Morgan

 Securities

 plc

 Marcus

 Diebel

 AC

 (44

 20)

 7742-4447

 marcus.diebel@jpmorgan.com

 Bloomberg

 JPMA

 DIEBEL

 <GO>

 J.P.

 Morgan

 Securities

 plc Internet,

 Games,

 Media Haruka

 Mori

 AC

 (81-3)

 6736-8632

 haruka.mori@jpmorgan.com Bloomberg

 JPMA

 MORI

 <GO> JPMorgan

 Securities

 Japan

 Co.,

 Ltd.

 See page 116 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com

  Table of Contents Executive Summary

 ........................................................................ 3 The Advertising Market

 ................................................................ 14 International Trends

 ..................................................................... 24 Dissecting Advertising Spending

 ............................................. 26 The Advertising and Marketing Services Company

 ............. 50 Advertising and Marketing Services Company Growth Drivers

 .............................................................................................. 61 Industry Trends

 .............................................................................. 65 Compensation Structure

 ............................................................. 75 Financial Outlook

 .......................................................................... 76 Valuation

 .......................................................................................... 79 Company Profiles

 .......................................................................... 81 WPP Group (Overweight)

 ............................................................ 82 Omnicom Group (Overweight)

 ................................................... 88 Interpublic Group (Overweight)

 ................................................. 93 Publicis Groupe (Neutral)

 ........................................................... 98 Dentsu Group (Neutral)

 .............................................................. 103 Appendix I: Billings

 ..................................................................... 110 Appendix II: Working Capital Changes

 ................................. 111 Appendix III:

 Glossary

 .............................................................. 112

 Executive Summary

 Agencies

 saw

 a

 moderation

 in organic

 growth

 in

 2019

 following a

 year

 of

 acceleration

 2019 was another volatile year for agency holding company stocks. Organic growth for the industry slowed to the lowest levels of the cycle, and sentiment remained negative sending valuations to their lowest levels in recent years. The challenges for the industry and bear case which continue to have momentum include: 1) overcapacity and reduced client conflict have provided greater leverage to clients in terms of both pricing and service; 2) marketers are moving more commoditized functions in-house in an effort to lower costs, sometimes with the help of consultants or ad-tech service firms; 3) client verticals such as FMCG remain under pressure, which is translating into a reduced scope of creative work; and 4) holding companies are burdened by underperforming non-core businesses which they are still in the process of divesting. We dig into each of these deeper below; however, we note that even amid this disruptive environment, we"ve seen significant divergence in organic growth, with some agencies outperforming and even thriving. This demonstrates, in our view, that the agency model is hardly broken, and that a well-executed offering can continue to provide substantial value-add to marketers. Furthermore, while creative remains an area under clear pressure, full service agencies are benefitting from stronger demand for media, events, and other marketing services disciplines.

 Table 1: Big 4 Agencies Stock Performance vs. S&P 500 & MSCI Europe

  Year

 Big

 4

 S&P

 500

 MXEU

 2020

 YTD

 -32.8%

 -13.1%

 -19.3%

 2019

 7.0%

 28.9%

 22.4%

 2018

 -11.4%

 -6.2%

 -13.1%

 2017

 -17.0%

 19.4%

 7.3%

 2016

 9.0%

 9.5%

 -0.5%

 2015

 7.2%

 -0.7%

 5.5%

 2014

 2.2%

 11.4%

 4.1%

 2013

 53.0%

 29.6%

 16.4%

 2012

 21.0%

 13.4%

 13.4%

 2011

 -8.6%

 0.0%

 -10.9%

  Source:

 Bloomberg.

 Note:

 Big

 4

 is

 average

 performance

 of

 IPG,

 OMC,

 PUB,

 and

 WPP.

  Agency Organic Growth in 2019 Aggregate agency organic growth was 0.2% in 2019, decelerating from 1.6% in 2018, and was the lowest level of growth in the economic cycle despite ongoing robust ad spend. In Q4’19, the industry went negative for the first time since 2009. Across seven holding companies that we track, growth decelerated in 2019 for all with the exception of Omnicom (2.8% from 2.6% prior), which saw notable improvements in advertising and healthcare offset softer CRM. IPG was again the best performing group on an annual basis, though it saw a slowing to 3.3% (from 5.5%), largely driven by new business losses (FCA, VW, US Army) at the end of 2018. Consistent with the theme of competition and pricing pressure described

 above, we did not observe the account losses translate to equivalent growth at winning agencies. We saw a similar dynamic for WPP (organic moved to -1.6% from -0.4%), where losses from Ford appeared to outpace gains to Omnicom; outside of GTB (dedicated Ford agency), WPP cited softness at other specialist agencies

 (AKQA, Geometry). At PUB, organic moved to -2.3% from 0.1%, with management calling out a 200bps impact from attrition (i.e. existing clients spending less), media losses, and a repositioning at Sapient. Dentsu"s International business (Dentsu Aegis Network) saw a significant deceleration last year (organic was -1% from +4.3% in 2018), driven by headwinds in the APAC region where the network announced a restructuring at the end of 2019. For agencies that disclose it (WPP, OMC) PR moved from positive to negative.

 Figure 1: Ad Agency Aggregate Organic Growth Historical by Year

 Source:

 Company

 reports

 and

 J.P.

 Morgan

 estimates.

 Note:

 Total

 includes

 IPG,

 OMC,

 WPP, PUB,

 HAV,

 MDCA

 (from

 Q1’12;

 excludes

 ACCENT),

 and

 Dentsu

 Aegis

 Network

 (from

 Q4’14).

 Figure 2: Ad Agency Aggregate Organic Growth Historical Quarter

 Source:

 Company

 reports

 and

 J.P.

 Morgan

 estimates.

 Note:

 Total

 includes

 IPG,

 OMC,

 WPP, PUB,

 HAV,

 MDCA

 (from

 Q1’12;

 excludes

 ACCENT),

 and

 Dentsu

 Aegis

 Network

 (from

 Q4’14).

  Figure 3: Organic Revenue Growth by Company, 2019

 Source:

 Company

 reports

 and

 J.P.

 Morgan

 estimates.

  Looking by region, North America industry growth, measured as an average of the Big-4 holding companies, moved to firmly negative territory (-0.9%) after two straight years of flattish performance. International markets decelerated to +1.8% (from 3.0% the year prior). While this gap could be partly explained b...

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