mm2 Asia - CIMB Research 2016-05-09: The next big bang

MM2 ASIA LTD 43D.SI

mm2 Asia - The next big bang

mm2, a film/TV producer, is poised to ride on the rise of the film business in China.
Multiple acquisitions in cinema and events management complement growing core business in production, driving FY16-18 topline growth of 16-122%.
High-margin business that focuses on content production and distribution, with little movie financing to minimise risk of commercial success.

We initiate coverage with an Add recommendation and TP of S$0.70, based on a CY17 P/E of 22.0x. This is backed by a 3-year forecast EPS CAGR of 28.8%.

mm2 is a film/TV production company in Asia offering a spectrum of movie-making services, and first expanded into North Asia in 2013 via co-productions with local partners.
We believe mm2 is able to capitalise on its close ties with these established industry players (e.g. China’s Hesheng Media), to gain better traction in China.
Not only is China an attractive market due to booming end-consumer demand, but also because of bigger production budgets and wider audience reach.

We expect a growing production pipeline (from a total budget of S$11.5m in FY15 to FY16’s S$23m and FY17’s S$44m) to be the key revenue driver for mm2.
Meanwhile, its newly purchased cinemas in Malaysia will contribute to its FY16 earnings and its 51%- owned concert production business will start contributing earnings in FY17, in our view, with potential synergies for mm2 to unlock across these acquisitions.

Unlike most production and media companies, mm2 typically does not take an equity stake in its movie productions (or not more than 10% in cases where it is unable to secure financing from other investors). This makes it less dependent on the films’ commercial success. mm2 derives income from film budgets (in the form of producer fees, script rights), as well as movie distribution.
We also like its high-margin (gross ~40%, net ~20%) business model.

Most film authorities in countries where mm2 has a presence in are supportive of local content producers, be it in terms of grants and subsidies (of up to 40% of the qualifying expenditure), or protectionist measures on number of films (local vs. foreign).
More notably, China’s Five-Year Plan has the cultural sector as one of the pillars, meaning more government investment in entertainment.

We initiate coverage with an Add rating and target price of S$0.70, based on a CY17 P/E of 22x, pegged to peer average but with higher EPS growth.
Potential re-rating catalysts include a stronger-than-expected project pipeline and more earnings-accretive acquisitions.
Any unforeseen production delay or lack of funding could pose downside risks.

NGOH Yi Sin CIMB Securities | William TNG CFA CIMB Securities | http://research.itradecimb.com/ 2016-05-09

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