Guangdong Advertising:Strong growth in digital advertising and attractive valuation;Buy

Source of opportunity.

    Guangdong Advertising (GDAD) is the largest domestic advertising group inChina in terms of revenue. We are positive on the shares for two mainreasons: (1) Fast transition from traditional to digital marketing. We expectGDAD’s digital marketing ratio to rise to 43% in 2018 from 24% in 2015,driven by ad spending shifting to internet media and growing client base.

    (2) Valuation. We view the current 23X 2016 P/E as attractive (vs average of37X in our media coverage) with 28% EPS CAGR in 2015-18E. We reiterateBuy with an unchanged 12-month target price of Rmb18.83, implying 33%upside.

    Catalyst.

    (1) Since its IPO in 2010, GDAD has acquired about 20 companies, at a rate of3 to 4 each year, and it has used M&A as a key strategy to drive additionalgrowth. Although the company has become the largest local player, it hasonly a 3% share of the China market, still much smaller in terms of totalbillings compared with international players such as WPP (WPP had aboutRmb30bn of billings in China in 2015 while GDAD had about Rmb9.6bn). Weexpect GDAD to continue to consolidate the fragmented market. (2) Firmmargins. While GDAD is more focused on topline growth to enhance itsoperating bargaining power through scale expansion, its margins are largelyfirm (EBIT margin 9.4% in 2018E, vs. 8.1% in 2015). Also, we believe financialexpense could drop assuming the announced private placement (up toRmb2.2bn) completes later in 2016. We already expect faster bottom-linegrowth (34%/28% in 2016/17) than top-line growth (24%/23% in 2016/17).

    Valuation.

    We maintain our estimates and incorporate the share count change due tothe 1:1.3 stock split on May 20. Our 12m target price is unchanged atRmb18.83 (18X 2020E EPS discounted back to 2016E using a COE of 8%).

    Key risks.

    Key risks: Slower topline growth, failure of M&A.