Cityneon Holdings - DBS Research 2016-05-30: Marvelous transformation

Cityneon Holdings - DBS Research 2016-05-30: Marvelous transformation .SI 

Cityneon Holdings - Marvelous transformation

  • Creator of innovative and interactive exhibitions, with the acquisition of VHE
  • Scalable business model with low execution risk
  • Potential for third IP, and to tap on other Walt Disney characters
  • Initiate with BUY, TP: S$1.03



Creator of innovative and interactive exhibitions,with exclusive IP rights for Avengers and Transformers. 

  • With the acquisition of Victory Hill Exhibitions (VHE) in September 2015, Cityneon has evolved to become a creator of innovative and interactive exhibitions, focusing on creating innovative and captivating content, and delivering engaging and interactive exhibitions to audiences. 
  • To date, it has secured two IP rights – The Avengers from Marvel in 2013 and Transformers from HASBRO in 2015.


Scalable business model with low execution risk. 

  • Cityneon’s earnings are directly correlated with its number of exhibits. So far, it has two permanent sets in Las Vegas and another two travelling sets; we expect it will have a total of six sets by end- 2017 and eight sets by 2018. The group operates on a relatively low execution risk model as outside the US, it will find partners in the target region, which will assume the operating risks.

Potential for third IP, and to tap on other Walt Disney franchises.

  • There is a huge pool of franchises to be tapped under the Disney umbrella, aside from the Marvel franchise. Some attractive options include Star Wars, Jurassic Park, Batman and Spider. We expect the VHE team to leverage their credentials in developing the Avengers and Transformers exhibits to leapfrog to the next IP.


Expect earnings to improve from FY16F. 

  • Earnings for FY16 should see a jump with the incorporation of VHE, due to contribution from the Avengers set in Paris and Las Vegas, as well as an upfront licence fee to be partially recognised in FY16 for the 2-year agreement in China. Thereafter, a ramp-up in operational sets will drive earnings growth. We have not factored in the potential of a third IP.


Initiate with BUY; TP S$1.03, based on peer average of 15.2x FY17F earnings. 

  • At a low PE to growth of < 0.1x, stock is attractive to investors seeking growth and unique ideas in the entertainment industry. 
  • An expanding project pipeline, plans to add a third IP right, and potential tie ups with CMC are catalysts for the stock.



SWOT Analysis


Strengths

  • Secured two IP rights. VHE has secured two IP rights since incorporation in 2012. VHE sealed a multi-year deal with Marvel Entertainment for the rights to use Avengers S.T.A.T.I.O.N. till 2024. In November 2015, VHE signed a deal with HASBRO Studios for Transformers franchise till year 2023.
  • Strong pipeline of Avengers/Transformers movies should bode well for attracting visitorship. Marvel has a strong movie pipeline stretching to 2020. For Transformers, four more films are coming in the next ten years, with Transformers 5 slated to launch in June 2017.
  • Helmed by industry veteran. Mr Ron Tan, CEO, was the producer of the popular Hi-5 series. Earlier in his career, he served in various management positions, including Media Corp. He is supported by established creative officers and producers in US.
  • Projects pipeline till 2017. VHE targets to launch Transformers in Las Vegas and China by end-2016. For next year, VHE intends to venture into Middle East, rest of Asia and others parts of China.

Weakness

  • Limited track record for VHE. VHE was formed in 2012 and its first exhibition was in New York in 2014, followed by Korea in 2015 and Paris this year.
  • Earnings dependent on number of visitors. Though Cityneon will usually get upfront payment fees from operators to use its exhibits, a higher visitorship would enable the group to generate higher royalties in excess of the minimum guarantees on royalties. Furthermore, ancillaries sales like merchandise, photo, food & beverage are also dependent on the number of visitors.
  • Low free float, key stakeholders control more than half of the company. Shares in Cityneon remain tightly held, with a free float of about 30%. Star Media still holds about 52.6% after the placement while CEO Ron Tan holds another 16.4%.

Opportunities


  • Potential for third IP. There is a huge pool of franchises to be tapped under the Disney umbrella, aside from the Marvel franchise. Some attractive options include Star Wars, Jurassic Park, Batman and Spider. We expect the VHE team to leverage their credentials in developing the Avengers and Transformers exhibits to leapfrog to the next IP.
  • Placement to strategic investors, paving way for growth. The recent placement to a strategic investor like CMC, a media and entertainment investment with operating platform in China, enhances collaboration opportunities between the two entities.
  • IP rights have no limits on location. VHE can venture into any part of the world with the two existing IP rights. Though it makes more business sense to target the larger cities first, VHE has vast opportunities as there are > 30 cities globally with population of > 10m.

Threats

  • Ability to find suitable partners in host country. VHE will tie up with a partner in the host country for its travelling sets. Failure to get a reliable and credible partner could affect VHE’s image.
  • Outbreak of contagious disease. An outbreak of disease, especially contagious ones, could affect the visitorship of VHE’s exhibition.
  • Sustainability of interest in interactive exhibition. With the advancement of today’s technology, the emergence of fresh ideas in the interactive exhibition space and other entertainment areas should not be ruled out.




LING Lee Keng DBS Vickers | http://www.dbsvickers.com/ 2016-05-30
DBS Vickers SGX Stock Analyst Report BUY Initiate BUY 1.03 Same 1.03


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