Cityneon Holdings (CITN SP) - UOB Kay Hian 2016-10-14: Looking Forward To A Blockbuster Year Ahead

CITYNEON HOLDINGS LIMITED 5HJ.SI

Cityneon Holdings (CITN SP) - Looking Forward To A Blockbuster Year Ahead

Cityneon acquired Victory Hill Exhibitions (VHE), an exhibition production and distribution company, and propelled itself to the forefront of immersive attractions.
As Cityneon is poised to ride the wave of the Avengers and Transformers blockbuster movies, and given VHE’s relationships with big-name partners (eg Hasbro Inc, Marvel Entertainment and The Walt Disney Company), Cityneon is well positioned to grow as it embarks on entertaining a generation of superhero fans.

Management intends to focus on expanding the VHE segment in the near future. Avengers S.T.A.T.I.O.N. is expected to soft launch in Singapore on 28 Oct 16 and will be in Singapore until Mar 17. So far, we understand the ticketing pre-sales for the Singapore event have been very strong.

We see several avenues for the group to drive earnings. These include more exhibition sets, new intellectual property (IP) rights and penetration of new markets, including countries such as China.
In terms of exhibition sets, Cityneon plans to raise the number from four in 2016 to six in 2017 and eight in 2018.

Cityneon indicated it is adding to the creative team headcount in the US. In our view, this could suggest the potential for more IP rights. In any event, the creative team is one of the key factors to Cityneon’s success and we think a larger team is a solid indicator of its growth plans.
Other than potentially more IPs from Disney, we believe there are other IPs that Cityneon could consider, including DC Comics and Star Wars.

Management is looking to expand in Las Vegas as merchandising is a key part of the business. We do not rule out the possibility of a larger retail space if Cityneon can source suitable locations.
In addition, given that Cirque Du Soleil currently has about eight shows on the Las Vegas strip and Cityneon has only one exhibit at the moment, there is potential to bring the exhibit to different destinations along the strip, such as The Mirage or the Ballagio.

No change to our earnings estimates as we forecast an explosive 3-year 2015-18 EPS CAGR of 207%.

Cityneon is a production company which relies heavily on the strength of its in-house creative team. Some of the investors’ concerns centred on the retention of key creative personnel.
Cityneon is looking into implementing a profit sharing bonus plan to entice and retain employees critical to its operations.
Key personnel also have a non-compete clause embedded in their contracts.

Maintain BUY and SOTP-based target price of S$1.15, which implies 15.7x 2017F PE, or a 45% premium to peers’ average of 10.8x.
We think the premium is justifiable on:
1. strong growth prospects,
2. lower risk profile,
3. high entry barriers due to the IP rights,
4. orderbook secured for 2017 and partially for 2018, and
5. superior-than-peers’ ROE.

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/ 2016-10-14

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.15 UP 1.020