Cityneon Holdings (CITN SP) - Maybank Kim Eng 2017-02-07: A Marvel-lous Move

Cityneon Holdings (CITN SP) - Maybank Kim Eng 2017-02-07: A Marvel-lous Move CITYNEON HOLDINGS LIMITED 5HJ.SI

Cityneon Holdings (CITN SP) - A Marvel-lous Move

Stellar performance due to VHE unit 

  • Cityneon (CITN) nearly doubled returns for shareholders in 2016 (vs STI: -0.1%, FTSE ST Small Cap: -6.2%). 
  • Despite headwinds in CITN’s core Meetings, Incentives, Conferences and Exhibitions (MICE) business, it was CITN’s foray into the Intellectual Property (IP) exhibition space that is now underpinning its growth proposition and investor interest. 
  • CITN acquired Victory Hill Exhibitions (VHE) in 2015, which owns long duration licence agreements with Marvel Characters BV and Hasbro to provide exhibits for the Avengers & Transformer franchises.

What’s driving growth? 

The Marvel & Transformers Franchises 

  • VHE holds exclusive global rights to the Avengers S.T.A.T.I.O.N (Marvel) and Transformers Experience (Hasbro) franchises for the installation of interactive and immersive exhibitions. These long duration rights were signed in Jun 2015 and Oct 2015 and are valid through 2024 and 2023 respectively.
  • The Avengers is a Marvel Comics movie franchise that has grossed over USD10.9b in the global box office, making it the highest-grossing movie franchise of alltime.
    • The Transformers franchise has grossed USD 3.78b in global box office receipts, and is ranked 10th by Box Office Mojo.
    • CITN’s financial performance in 1H16 was predominantly lifted by VHE’s contributions. With the acquisition in 2015, VHE now contributes more than 22% of CITN’s overall topline of SGD46.3m. 
  • VHE’s gross margin of > 87% also helped to shore up CITN’s overall gross margin to 38.8% from 23.5% in 1H15 – translating into a +15ppts improvement. While at the operating level, VHE’s contributions helped to push CITN back into profitability with 1H16 operating profit of SGD6.5m (1H15: SGD-0.4m).
  • Despite this stellar performance, the IP exhibition business is not without its risks as it is highly dependent on location sites where the exhibitions are held. VHE’s maiden exhibition project with the Avengers S.T.A.T.I.O.N was deemed a failure when it first showcased in New York on May 2014. The exhibition showcase earned only three out of five stars on Yelp, with several scathing 1-2 stars reviews on Yelp.
  • The main reason for the poor performance was due to the venue, poor maintenance of props and attractions and high ticket price of USD25-35. The project gestation period was also a long 18 months from initial contract signing with Marvel to the premier launch of the first set in New York.
  • VHE has two main platforms to stage exhibition sets: 
    1. permanent sets where the exhibition event is built on a permanent site and 
    2. traveling sets where the exhibits are mobile.
  • VHE’s permanent sets are built at a specific location with the company taking on the responsibility of installation as well as daily operations and their associated costs. For traveling sets, VHE is spared the execution risk as it works with venue operators to stage the exhibition. Currently, VHE runs one permanent and two traveling Avengers S.T.A.T.I.O.N sets – one of these traveling sets is currently idle as it is undergoing maintenance work in the Netherlands.
  • On our site visit to the Singapore Science Centre, we were impressed by the quality of the exhibits as well as the rich experience provided for by its dedicated app. Our positive impression was further cemented by Former Chairman of Marvel Comics, Stan Lee’s comments to the press that the New York exhibit exceeded his “wildest expectations”.

What’s next? 

More Exhibits: Charting a path for sustained growth Avengers S.T.A.T.I.O.N 

  • In addition to the current three exhibition sets (one permanent, two traveling), management shared that it has already sunk in resources to build two additional exhibit sets. The 3rd set will be ready for deployment within Asia in 2017.
  • Delivery timeline for the 4th set has not been confirmed but deployment will be for the Middle East / European markets.

Transformers Experience 

  • We note that the premier launch of the first Transformers Experience permanent exhibition set in Las Vegas, which was initially planned for 4Q16, has been delayed till at least 1Q17. 
  • Management highlighted that delays were mainly due to continued discussions over the contract terms. 
  • Notwithstanding these delays, CITN has commenced work and has set in motion plans to build two traveling sets. One will be deployed in China while a second has been slated for Middle East deployment.

What could go wrong? 

Decline in franchise popularity 

  • Neither CITN nor VHE has any control over content in the franchises that it holds licenses to. While a single movie’s failure might not destroy a franchise overnight, consumers can quickly shift their preferences to other franchises which offer more compelling content.
  • In the super-hero segment, we note that DC Comics are an up and coming rival to Marvel. DC’s execution however, has not been stellar with its most recent Batman v Super (Dawn of Justice) movie attaining only US$873.3m in global box office receipts vs the first instalment of the Avengers movie which reaped US$1.52b. Rife competition in the super-hero movie franchise industry could ultimately lead to lower demand for Marvel’s exhibits.

Location-related risks 

  • Venue-related issues could adversely affect exhibition attendance. While attendance is not a primary revenue driver for traveling sets, it does bode ill for VHE if venue operators fail to maintain the overall exhibition customer experience at a high bar.
  • To mitigate such issues, management highlighted that lessons learnt in New York for the maiden Avengers exhibit as well as other venues, have allowed CITN to evolve its project execution competencies and protocols to include: 
    1. financial stability of the venue partner, 
    2. marketing skills and expertise, 
    3. track record, 
    4. synergistic complements with VHE’s operations. 
  • Venue operators whom VHE partner to display the exhibits are also required to insure the traveling sets at USD10m.

Weak attendance 

  • Footfall traffic risk is higher for VHE’s exhibit sets in Las Vegas. As these are permanent fixtures, attendance traffic is heavily dependent on exhibit management and promotions & marketing.

Star Media & CITN’s strategic alignment 

  • CITN’s board composition may be a risk factor. VHE’s strategy execution hinges on the ability of CITN’s board to support capex and expansion budgets.
  • MKE’s Malaysian research team highlights that CITN’s majority shareholder, Star Media (Hold, TP: MYR2.35) is currently facing operational headwinds from declining print adex (3Q16: -17% YoY) and rising print cost. 
  • While Star Media is in a strong net cash position, MKE analyst Jade Tam expects weaker cash flows this year and higher investment outlays for Star Media’s Dimsum Over-The-Top streaming service.
  • On these considerations, CITN’s Board support on VHE’s capex needs to fund new IP acquisitions may be affected or re-prioritised. CITN has not paid any dividends since FY14.

Latest Interim Results (1H16 ended 30 Jun) 

  • CITN’s 1H16 revenue growth of 13.8% YoY to SGD46.3m was mainly underpinned by maiden contributions of SGD10.2m from VHE.
  • On its legacy business, CITN saw substantial growth in its exhibition services business unit to SGD16.6m (+33.3% YoY) due to the delivery of major shows such as Food and Hotel Asia 2016, CommunicAsia 2016 and Bahrain International Air Show. This was, however, partially offset by weakness across its experiential environment (-24.7% YoY to SGD11.4m), event management (-66% YoY to SGD2.3m) and interior architecture (-8% YoY to SGD5.7m) business units.
  • 1H16 operating profit jumped to SGD6.5m (1H15: -SGD0.4m, 2H15: +242% from SGD1.9m) on operating margin of 14% (1H15: NA, 2H15: 3.4%). Margin was boosted by VHE’s strong margin as well as higher margin projects from the exhibition services unit.

Balance sheet 

  • CITN reported a net cash position of SGD9m as at 1H16 vs SGD12.3m (2H15) and SGD4.9m (1H15). The marginal drop in cash reserves was due to cash outlays for the construction & development of traveling sets. 
  • Almost all (99.8%) of its SGD22.9m debt burden is short term (with an average interest rate of 3.5%). 85% of short term loans are secured.

Cash flow 

  • Operating cash flows are improving, turning positive to SGD3.3m (1H15: SGD4m outflow). 
  • CITN also took on more debt in 1H16 to finance the construction of new interactive exhibition assets and renovation costs for its Las Vegas permanent exhibition set. 
  • Capex will likely remain elevated as VHE invests in more traveling sets and the new permanent Transformers Experience set in Las Vegas.

Target Price: N/A

Simeon Ang Maybank Kim Eng | 2017-02-07
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