CityNeon Holdings - UOB Kay Hian 2016-05-25: What Happens In Vegas Stays In Vegas

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CITYNEON HOLDINGS LIMITED 5HJ.SI 

Cityneon Holdings (CITN SP) - What Happens In Vegas Stays In Vegas

• We met up with Cityneon’s management ahead of the opening of the Las Vegas Avengers S.T.A.T.I.O.N. on Memorial Day (30 May). 
• We have changed our valuation methodology from PE-based to SOTP to better reflect the cash-generative nature of the Victory Hill Exhibition business. 
• Maintain BUY with a higher target price of S$0.85.

WHAT’S NEW

• We met up with management. This note highlights our key takeaways.
• Las Vegas. Avengers S.T.A.T.I.O.N. on Treasure Island will open on Memorial Day on 30-May. We expect the Transformers Experience in Las Vegas to open in 4Q16.
• Higher liquidity and more funds for growth. Cityneon placed out 40m shares comprising 20m new shares and 20m vendor shares at S$0.55 each with the aim of increasing the liquidity of the stock and bringing in strategic partners, which include CMC Holdings.

STOCK IMPACT

• Licensing fees. 

• In our previous forecast, we underestimated the impact of licensing fees paid to Cityneon from its partners for exhibits outside of Vegas. Management indicated that the licensing model it adopts is similar to how Disney structures its licensing deals. 
• Our channel checks indicate that licensing fees for Disney depend mainly on the length of the contract. We estimate the licensing fee for the current Avengers S.T.A.T.I.O.N. attraction in Paris which is slated to run for five months at about S$0.7m upfront. According to IFRS 18, this should be recorded immediately as no further obligations exist. 
• Given the length of the deal (two years) with Starclouds in China, we expect the licensing fee at S$5m, which should be booked in FY16.

• Cost structure. 

• Given the imminent opening of Avengers S.T.A.T.I.O.N. in Las Vegas, we have more clarity on the cost structure for the Vegas operations. The cost structure is expected to remain fairly stable as the property lease is for a period of more than 10 years and manpower needs are fairly static.

• Las Vegas demographics. 

• According to The Las Vegas Visitors And Convention Authority, there were 42m visitors to Las Vegas in 2015, of which 16% were first-time visitors and 65% were aged 40 years or older. The Marvel brand particularly resonates with this age group as a large number of them grew up reading comics books written by Stan Lee. The study also found that 47% of visitors indicated that vacation was the primary purpose of visiting Las Vegas vs only 10% who were there primarily for gambling (which has been the trend) as Las Vegas experiences an economic shift towards non- gaming sectors such as conventions and live-entertainment. 
• We expect each exhibit in Vegas to draw an attendance of about 300,000 visitors per year with 60% adults and 40% kids, implying an average ticket price of US$30. We have imputed a US$5 ticket service charge on top of the average ticket price.

• Dividends. 

• We have removed our dividend payout for 2016 as the group has just done an equity placement and raised about S$11m. However, given the largest shareholder Star Media Bhd’s history of paying generous dividends, we expect Cityneon to follow suit and pay out 20% of earnings from 2017 onwards.

• Orderbook for 2017 secured. 

• Management indicated to us that barring unforeseen circumstances, its orderbook for 2017 is already planned and it is working on partnerships for 2018. We have adjusted our exhibit roll-out down by one for 2017 and one for 2018 as we believe that each intellectual property (IP) should comfortably sustain four exhibits.

• About CMC Holdings. 

• CMC Holdings is a fund that counts Tencent Holdings and Alibaba Group as investors. CMC has been involved in bringing in Legoland to Shanghai, has tied up with Warner Bros Entertainment to produce and develop Chinese-language films and with DreamWorks Animation to produce Chinese-themed animated and live action films. Warner Bros Entertainment owns the rights to DC Comics which we have identified as a potential candidate for the third IP rights.

• Profit guarantees in place. 

• As part of the VHE acquisition, a contingent consideration arrangement or VHE profit guarantee was put in place for 2016-18 at S$2.8m, S$4.5m and S$5.5m respectively. Any profit above the guarantee will be shared with the seller. We understand the accounting treatment of the profit share will not be an income statement item but reflected on the balance sheet instead.

EARNINGS REVISION/RISK

• We lift our net profit estimates for 2016-18 by 12-28% to account for the inclusion of higher-than-expected licensing fees, a leaner cost structure and parking the profit guarantee liabilities on the balance sheet. 
• On our latest estimates, Cityneon is projected to deliver an explosive 3-year EPS CAGR of 180% (2015-18).

VALUATION/RECOMMENDATION

• Maintain BUY with a higher SOTP-based target price of S$0.85. Our target price has an implied 13.1x 2017F PE, which is a 24.8% premium to what peers are trading at (10.5x). 
• We believe the premium is justified given Cityneon’s: 
  1. low risk profile, 
  2. strong growth profile, 
  3. higher entry barriers, 
  4. low payables risk as licensing fees and minimum guarantees are collected upfront, and 
  5. high ROE vs peers’.

SHARE PRICE CATALYST

• Additional IP rights. If Cityneon is able to secure additional IP rights for other franchises such as DC Comics or Star Wars, we see further upside to our valuation. 
• Our 2% terminal growth assumption will likely be exceeded if additional IP rights are secured.

Nicholas Leow UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-25

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.85 Up 0.72