mm2 Asia - CIMB Research 2016-11-15: Potentially the next box office hit

MM2 ASIA LTD. 1B0.SI

mm2 Asia - Potentially the next box office hit

Increasing TV/film productions and acquisitions led to 176% yoy growth in 1H17 revenue.
1H17 core EPS (+53% yoy due to dilution) was in line at 50% of our full-year numbers, despite higher expansion costs.
Management adopts a “good content, multi-platform” strategy to monetise and gain wider audience reach.

Maintain Add with unchanged target price of S$0.52 (still pegged to 22x CY18 P/E).

Mm2’s 1HFY3/17 topline expanded by 176% yoy to S$35m, driven by total production revenue of S$24m (including post-production from Vividthree), acquisition of cinemas (S$6m) and Unusual Entertainment (S$5m).
Reasons why we are not overly concerned about the topline miss include:
1. 2H is historically stronger with more film productions in the pipeline,
2. it was mitigated by stronger gross margins across all segments and
3. less than six months’ contribution from Mega Cineplexes and Unusual Entertainment.

As a result of revenue mix changes, 1H17 gross margin fell from 66% in 1H16 to 56%, which was ahead of our FY17F GPM of 42%.
We also saw some side effects of rapid expansion in the form of higher staff costs, more professional fees stemming from M&As and additional borrowings.
1H17 core net profit still grew by 94% yoy, making up 50% of our full-year forecasts.
Operating cash outflow narrowed from 1H16’s S$2.4m to 1H17’s S$1.1m, despite a significant rise in film products and films under production.

Stripping out contribution from acquisitions, we estimate almost 100% organic growth of mm2’s core business (1H17: S$22m, 1H16: S$11m) from a higher film budget. North Asia represented c.71% of 1H17 production revenue, with the remaining contribution from Singapore and Malaysia.
Deeper penetration into North Asia and broader product offerings (e.g. The Voice) should continue to drive production budget going forward.

Apart from strengthening its content-creating capabilities such as 3D animation effects and concert production, mm2 has also focused on extending its distribution channels via the acquisition of cinemas, Millinillion and more recently, a partnership with Rings.TV.
Management believes that a successful combination of good content and the right platform could lead to better monetisation and a wider audience reach.

We revise our FY17-19F assumptions to reflect higher gross margins across all segments, but offset by higher admin and finance expenses in FY17F. This led to a 2.3% FY17F EPS cut, but 0.1-1.4% increase in FY18-19F EPS estimates.

We keep our Add rating and target price of S$0.52 unchanged, still pegged to CY18 P/E of 22x (peers’ average).
Potential catalysts are stronger traction into North Asia TV/movie production, earnings-accretive M&As and the successful listing of Unusual Entertainment.
Downside risks to our Add call are unexpected production delay and budget overrun.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-15

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