Bought Chairman Chung Euisun's Stake for 200 Billion Won, Now Halved After 10 Years... Why Did Innocean's Second-Largest Shareholder Make a Painful Exit? [Why&Next]

Morgan Stanley PE Recovers 200 Billion Won Investment After 10 Years
Innocean Faces Decline in Americas Market... Negative Growth Realized This Year
Rival Cheil Worldwide Defends Performance, Share Price Also Rises

There is growing interest in the reasons behind the recent series of stake sales by Innocean’s second-largest shareholder this year. Innocean, the advertising affiliate of Hyundai Motor Group, had been a long-term investment for the shareholder even before its listing on the domestic stock market in 2015. However, as the stock price has been on a downward trend during this period, the investment value has been cut in half. Analysts attribute the recent move to recover investment funds to growing concerns that the advertising industry may enter a period of decline due to the rapid spread of generative artificial intelligence (AI) technologies.

In contrast, Cheil Worldwide, a competitor, has successfully defended its performance amid concerns over a global advertising market contraction, and its corporate value has soared to record highs since the beginning of the year.

According to the Financial Supervisory Service’s electronic disclosure system on the 19th, Innocean’s second-largest shareholder, NHPEA IV Highlight Holdings AB, disposed of its shares through six block trades from January to last month. The shares were sold at around 17,000 won per share, with one batch of 420,000 shares sold at 19,758 won in July. As a result, NHPEA IV’s holdings were reduced to 5 million shares, and its ownership stake dropped from 18% to 12.5%.

Corporate Value Drops... 100 Billion Won Investment Cut in Half

NHPEA IV is a special purpose company (SPC) registered in Sweden for tax efficiency by Morgan Stanley Private Equity Asia, headquartered in Hong Kong. Morgan Stanley PE acquired a 20% stake in Innocean for 100 billion won when the company was preparing for its initial public offering, purchasing shares owned by Chung Euisun, Chairman of Hyundai Motor Group. The decision was based on Hyundai Motor’s growth in overseas markets.

Prior to the listing, Innocean’s shares were held by Chairman Chung Euisun (40%), his older sister Jung Sungyi, Advisor (40%), and Honorary Chairman Chung Mongkoo (20%). Due to the Fair Trade Commission’s regulations on ‘internal trading,’ it was necessary for the owner family to sell some of their shares.

Innocean was listed on the Korea Exchange with a public offering price of 68,000 won per share, and Morgan Stanley PE chose to retain its shares rather than sell them in the offering, reflecting expectations for a rise in the stock price. However, due to the issuance of new shares, Morgan Stanley PE’s ownership stake was diluted to 18%.

However, as Innocean’s stock price has been declining for ten years, it has become difficult for the fund to recover its investment. After surpassing 80,000 won in the year following its listing, the stock price retreated and has been in steep decline since 2021. In April of this year, it fell to an all-time low of 16,290 won. Morgan Stanley PE secured about 3.8 billion won from this year’s share sales. The value of its remaining stake, based on the previous day’s closing price of 17,650 won, is about 88.2 billion won. Even taking into account the additional shares received through a free capital increase in 2023, this is far below the initial investment of 100 billion won.

Attractive as a Dividend Stock, but... AI Emergence Shakes Up Advertising Agencies

Jung Sungyi, Advisor and Largest Shareholder of Innocean

However, Morgan Stanley PE has collected more than 50 billion won in dividends from Innocean over the years. Innocean is considered a dividend stock, as its largest shareholder is Advisor Jung Sungyi, a third-generation member of the Hyundai Motor Group owner family. In fact, Innocean has paid dividends every year since its listing, and the amount has steadily increased. As a result, last year, Advisor Jung received 1.8 billion won in total compensation (including 1.2 billion won in salary and 600 million won in bonuses), but her dividend income was 8.3 billion won-4.6 times higher.

As of last year, Innocean’s dividend payout ratio was 46.9%, meaning nearly half of its net profit was distributed as dividends. Due to the drop in stock price, the cash dividend yield soared to 6.4%.

Despite the appeal of these dividends, Morgan Stanley PE’s decision to cut its losses and sell shares appears to reflect concerns that the advertising market could contract significantly with the rise of generative AI. As AI-based advertising production tools are developed, the role of traditional advertising agencies may diminish, potentially undermining their revenue structure.

This concern is also evident in Innocean’s recent performance. According to the company’s latest semiannual report, sales in the third quarter of this year were 491.5 billion won, down 4% from the same period last year. Gross profit, excluding production costs, increased by 4.4% to 248.3 billion won, but the company’s core cash cow, media agency services, declined from 17.2 billion won to 15.8 billion won. In particular, overseas media agency revenue shrank from 1.7 billion won to 300 million won.

Media agency services involve analyzing the effectiveness of various media to select the optimal channels for advertising, and in 2021, they accounted for more than half of Innocean’s gross profit. However, since the emergence of generative AI in 2023, sales have declined and the proportion dropped to about 35% in the third quarter of this year.

Cheil Worldwide Delivers Strong Results... Corporate Value Soars

This contrasts with the revenue structure of Cheil Worldwide, the advertising affiliate of Samsung Group. At Cheil Worldwide, media agency revenue accounts for less than 10%, with advertising production making up the overwhelming majority. As of the third quarter of this year, the proportion of media agency revenue had shrunk to just 2%. Both companies secure stable advertising volumes from their parent groups, but Cheil Worldwide’s cumulative gross profit from media agency services reached 69.9 billion won through the third quarter, up 2.6% from the same period last year.

As a result, Cheil Worldwide continues to show solid growth. In the third quarter of this year, its sales rose 10.85% year-on-year to 1.1889 trillion won. Gross profit for the period increased by 7% to 457.4 billion won. The company’s headquarters recorded gross profit of 101 billion won; although revenue from large non-affiliated advertisers declined, the company explained that it was able to defend its performance by focusing on dot-com and retail clients. In fact, as Cheil Worldwide expanded its advertising agency business into dot-com and commerce, its digital share rose to 54%, up 5% from last year. Based on these strong results, Cheil Worldwide’s stock price has jumped 22% so far this year.

Innocean has also promoted Executive Vice President Kim Jeonga, Chief Creative Officer (CCO), to President and CEO earlier this month, strengthening its advertising production division. She is the first female CEO in Hyundai Motor Group’s history.

However, the outlook for Innocean’s stock price remains uncertain. If Morgan Stanley PE decides to sell all of its remaining shares, the overhang pressure could intensify. The securities industry also notes that the overhang issue creates uncertainty for the stock price, making it necessary to monitor the situation. Kim Hoejae, a researcher at Daishin Securities, explained, “Due to slower growth in the Americas, we project this year’s gross profit growth rate at 6%, which is lower than the five-year average of 13%.”