mm2 Asia - CIMB Research 2017-07-24: Assuming ‘orange Sky’ Scenario

Mm2 Asia - CIMB Research 2017-07-24: Assuming ‘orange Sky’ Scenario MM2 ASIA LTD. 1B0.SI

mm2 Asia - Assuming ‘orange Sky’ Scenario

  • mm2’s proposed acquisition of a 50% stake in GV Singapore has been delayed.
  • The reason for the delay is that the seller could not obtain the approval of OSGH, the owner of the remaining 50% interest in GV Singapore by 21 Jul 2017.
  • While management confirmed that discussions are still underway, we expect stock overhang from the uncertainty. Its war chest of cash and cinema vision are intact.
  • Downgrade from Add to Hold following our 21-23% FY18-20F EPS cuts as we remove earnings contribution from GV Singapore.

Unexpected twist of events 

  • On 24 Jul 2017, mm2 announced (see mm2 Announcement dated 2017-07-24 07:24:03) that its proposed acquisition of 50% stake in Golden Village (GV) Singapore cinemas did not take place on 21 Jul 2017, the scheduled completion date for the conditional share sale and purchase agreement with seller Village Cinemas Australia. 
  • According to management, the seller failed to procure the approval of Golden Screen Limited, a wholly-owned subsidiary of Orange Sky Golden Harvest (1132 HK, Not rated), that owns the remaining 50% of GV Singapore.

Who is Orange Sky Golden Harvest? 

  • Orange Sky Golden Harvest (OSGH) is a film entertainment company with over 40 years of experience in film production, financing, distribution and exhibition. It currently operates 106 multiplexes, with a collective 772 screens across Mainland China, Hong Kong, Taiwan and Singapore. 
  • OSGH announced earlier this year that it intended to sell its cinema assets in mainland China, which have been consistently loss-making, to Dadi Digital Cinema, China’s second-largest exhibition group for Rmb3.3bn (S$662m).

OSGH to buy the 50% stake in GV Singapore that it does not own? 

  • While OSGH’s right of first refusal (ROFR) option for the other 50% stake in GV Singapore has lapsed, we think the company may revisit this opportunity, given the attractive Singapore assets, and Rmb3.2bn (S$640m) fresh funds from its pending divestment of movie theatres in China. According to its regulatory filings, c.HK$1.3bn (S$227m) of the net proceeds received would be deployed for expansion of existing business, including purchasing cinema operations in the Asia region (except China).
  • Village Roadshow still keen to sell mm2 confirmed that discussions on the stake sale are still ongoing as the seller has requested for extension. 
  • We believe Village Roadshow Australia remains keen to sell, in order to: 
    1. pare down its debt level (FY6/16: 111.3%), and 
    2. pursue other growth strategies, based on its ASX announcements. 
  • We note that its working relationship with OSGH started in 1992, when they built a GV multiplex in Singapore.

War chest intact; remains steadfast in cinema vision 

  • We think mm2 may be better off without the acquisition of the GV Singapore stake given the latest development, unless the interests and goals of both parties in the joint venture are aligned. 
  • Regardless of the outcome, mm2 is now equipped with a war chest of S$64m (from its recent new share placement) and up to S$93m from convertible debt securities, to support its future expansion plans and realise its cinema vision.

Downgrade to Hold; stock overhang expected 

  • We cut our FY18-20F EPS estimates by 21-23% as we remove any earnings contributions from GV Singapore, which leads to a lower SOP-based target price of S$0.58 (post new share dilution). 
  • Downgrade from Add to Hold as we think this episode could cast doubt on mm2’s M&A plans in the near-term and we await further clarity on this GV Singapore acquisition. 
  • Further earnings-accretive M&As could catalyse the stock, while production overruns/delays could pose downside risks to our call.

Background of Orange Sky Golden Harvest (OSGH) 

  • Apart from Village Roadshow Australia, GV Singapore is also jointly owned by Golden Screen Limited, a wholly-owned subsidiary of Orange Sky Golden Harvest (1132 HK, Not rated). 
  • Previously known as Golden Harvest, OSGH has over 40 years of operating experience in the film exhibition business, with presence across China, Hong Kong, Taiwan and Singapore. While penetration into China has been OSGH’s focus over the past few years, we note that its most profitable assets lie in Singapore and Taiwan, given their market leading positions of 44% and 42% respectively, according to its FY2016 annual report.
  • On 25 January 2017, OSGH announced its divestment of cinema assets in China to Dadi Digital Cinema for Rmb3.3bn (S$662m), which has yet to complete as of 20 July 2017. Based on its regulatory filings, an estimated HK$1.3bn (S$227m) of net proceeds would be utilised towards expansion of the existing business, including purchasing of cinema operations or businesses in Asia. 
  • Given the attractiveness of GV Singapore cinemas, we suspect the delay in approval from OSGH might be an indication that they are reconsidering this opportunity, even if the ROFR option has expired earlier.

Might be better off with other more synergistic investments 

  • Unless mm2 is bestowed with the blessings of its potential future JV partner (OSGH), the company might be better off with other M&As which could offer stronger synergies, in our view. It currently has a war chest of c.S$155m from the recent new share placement and issuance of convertible debt securities, and we think there could be other opportunities in the region, for example, Cathay cinemas in Singapore and MBO theatres in Malaysia (3rd largest).
  • While we remove GV Singapore’s earnings contribution from our FY18-20F numbers, we still expect mm2 to record double-digit EPS growth each year, largely driven by its core production business (bigger budget, especially from North Asia), and increasing contributions from the newly-listed Unusual Productions (as it brings more artiste tours into 2nd tier Chinese cities).

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | 2017-07-24
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 0.58 Down 0.720