SG Small Cap Stocks - CIMB Research 2018-03-14: Who Says Singapore Is Boring?

SmallCaps - CIMB Research 2018-03-14: Who Says Singapore Is Boring? Singapore Small Cap Stocks Picks Entertainment Sector UNUSUAL LIMITED 1D1.SI MM2 ASIA LTD. 1B0.SI CITYNEON HOLDINGS LIMITED 5HJ.SI KINGSMEN CREATIVES LTD 5MZ.SI

SmallCaps - Who Says Singapore Is Boring?

  • We list 6 reasons why Singapore is fun and identify 4 entertainment stocks to give investors the best bang for their buck – mm2, CityneonUnUsUaL, Kingsmen Creative.
  • mm2’s core production business is currently priced at 60% discount to peers’ average of 21x FY18F P/E. We also see earnings growth potential in all its other segments.
  • We like Cityneon for its strong IP portfolio, growth prospects and attractive valuation.
  • UnUsUaL is a proxy for increasing global demand for live events, in terms of product offering and geographical reach.
  • We keep Kingsmen Creatives (KMEN) on our radar for NERF delivery and foray into IP business.

Singapore is boring? 

  • We beg to differ Singapore Tourism Board’s (STB) recent video featuring some of Singapore’s most popular sights and activities was a tongue-in-cheek response to the Time Out survey that ranked the country second last on the list of “most exciting cities”. 
  • We give six reasons why we think Singapore is fun, and also highlight four listed names with the relevant exposure and potential to ride on the growing media/entertainment business regionally.
  • Our preferred picks for this sector are mm2 and Cityneon.

mm2 – poised for regional media boom 

  • Apart from increasing production budget and higher contribution from its cinema and concert segments, we believe its post-production segment is primed for the next growth phase, after securing the “Train to Busan” intellectual property (IP) right to develop into touring shows. 
  • At the current valuation, we think the growth prospects of mm2’s core production business and potential synergies across the different segments may have been overlooked. Key near-term catalyst is potential spin-off of Vividthree Productions.

Cityneon – transformation underway 

  • With a portfolio of three IP rights and an expanding creative team, we think Cityneon is on stronger footing now and remain positive on its travelling show pipeline. Its traditional business could gain from more theme park and event opportunities. 
  • We think its current 12x FY18F P/E valuation is attractive, given 3-year EPS CAGR of 20.4% (our estimates) vs. industry average of 17x and 20.6% (Bloomberg consensus). We think winning its fourth IP and stronger uptake of travelling sets could cause the stock to re-rate.

Unusual Limited – entertainment galore 

  • We expect the number of concerts/events by UnUsUaL (UNU SP, Not Rated) to more than double over 2018-19F, from historical average of 12-15 p.a., on the back of its penetration into North Asian cities and a new product line called “Disney on Ice”. 
  • By leveraging on its listing status, regional network and technical expertise, UnUsUaL could broaden its product offering and clientele reach, benefiting from the continuing global demand for live events.

Kingsmen Creatives – awaiting NERF ammunition 

  • Compared to its above-mentioned peers, Kingsmen Creatives (KMEN SP, Not Rated) is under-covered and has underperformed in recent years due to rising competition and soft retail spending. Management sees opportunities for order book expansion (S$84m at end-Jan 2018) and plans to diversify into location-based entertainment. 
  • Its partnership with Hasbro on NERF licensing may be the first of more IPs, with fees for content development, set construction and attraction management forming a new income stream.


#1 Singapore owns an exciting portfolio of blockbuster IPs 

  • Singapore was thrust into the limelight for blockbuster titles in 2015, when Cityneon (CITN SP, Rating: ADD, Target Price: S$1.58) bought Victory Hill Exhibitions (VHE), a US-based exhibition production and distribution company that owns exclusive licensing rights under Marvel’s Avengers S.T.A.T.I.O.N and Hasbro’s Transformers experience brand. Two years on, these attractions have travelled around the globe to Las Vegas (the only permanent set), Paris, Singapore, Taiwan and China, indirectly assuming the role as an extension of the marketing arm of these movie franchises.
  • Along with the acquisition of Jurassic World intellectual property (IP) rights in 2017, we expect Cityneon’s business to gain scale faster through more travelling sets and destinations in the pipeline, with local partners bearing the bulk of execution risk. We believe these three licensing rights could continue to enjoy success in tandem with more sequels in the pipeline and box office returns.
  • Meanwhile, the company is on the lookout for its fourth IP, which is likely to fit into the earlier criteria of
    1. family themed licences,
    2. generating global movie takings more than US$1bn, and
    3. having future sequels in the pipeline. 
  • We believe this could be a catalyst for Cityneon, if proven successful.
  • Kingsmen Creatives (KMEN SP, Not Rated), with its recent partnership with Hasbro International, has jumped onto the bandwagon of licensing rights.
  • In Feb 2018, KMEN announced that it has established a majority-owned, US-based subsidiary (Kingsmen Xperience) and will be rolling out multiple NERF family entertainment centre (FEC) attractions across Asia, with the first location expected to be opened in Singapore by 2019. The group intends to work with venue operators to identify suitable indoor entertainment locations, which will also feature activity zones, merchandising and F&B areas. 
  • Known for its toy guns and blasters, NERF was the second best-selling toy brand worldwide in 2017 (according to NPD Group), and such a concept attraction is likely to appeal to children and families. Management expects to earn fees from not only:
    1. content development, but also
    2. set construction, and
    3. attraction management (in the form of revenue sharing).
  • This differs from Cityneon’s operating model for its travelling sets. Cityneon recognises upfront licensing fees (amount depending on country and duration of touring agreement) and royalties. Cityneon also bears minimal execution risk but is responsible for the capex required for each set. 
  • Apart from FECs, KMEN also seeks to pursue more opportunities relating to IP rights and location-based entertainment, including travelling exhibits and larger theme park projects.

#2 Singapore even has popular K-movie theme shows Riding on the Train to Busan. 

  • Vividthree Productions, a 51%-owned subsidiary of mm2 Asia (mm2 SP, Rating: ADD, Target Price: S$0.74) that specialises in 3D animation and visual effects (VFX), has announced a collaboration with Next Entertainment World (NEW, 160550 KS, Not Rated) to develop a virtual reality tour show based on the “Train to Busan” film.
  • The “Train to Busan” was one of the top Korean movie hits in Singapore, Malaysia and Hong Kong with over US$140m ticket sales globally. The “Train to Busan” travelling sets will be designed by Vividthree Productions in exchange for development fees and some revenue-sharing on sale of tickets and merchandise, etc. 
  • UnUsUaL Limited (UNU SP, Not Rated), Vividthree’s sister company, could take on the role of set construction and promotion in various countries, similar to how a concert tour operates. We believe acquiring more licensing rights, as well as locations for the touring sets, would be Vividthree Productions’ key objectives.

#3 Singapore also caters to local tastes and preferences 

  • Apart from food, cinema-going is another favourite past-time for Singaporeans. We believe good content and venues that offer a high-quality experience would continue to retain mindshare and spending dollars of the population. 
  • mm2 started as a movie/content production and distribution company, with notable titles such as “Ah Boys to Men”, “The Journey” and “Take me to the Moon”. In recent years, it has diversified away from production in Singapore and Malaysia, into North Asia, which accounted for 76% of 9MFY3/18 production revenue. Net profit attributable to the production business has more than tripled to S$17m in FY17 since its listing in 2015.
  • In addition to its core production business, mm2 was also involved in a series of acquisitions to expand its earnings and extend its presence across the media/ entertainment value chain, particularly Vividthree Productions (Mar 2015) and UnUsUaL Limited (Feb 2016). The group now owns 26 cinema assets across Singapore and Malaysia, under the Cathay Cineplex, Mega Cineplex (now rebranded to mmCineplexes) and Lotus Fivestar cinema brands.

#4 Singapore develops concerts and hosts sporting events every year 

  • UnUsUaL Limited (UNU SP, Not Rated) is the concert production arm of mm2 Asia. It organises 12-15 concerts on average in Singapore every year, on top of other major events such as the Singapore F1 Grand Prix, Southeast Asia (SEA) games and Youth Olympics. Management expects this number to double in FY18F as it brings concerts to other ASEAN and North Asia cities, with secondto third-tier cities in China as its main targets.
  • UnUsUaL has also launched a new product line called “Disney on Ice” in collaboration with Feld Entertainment to jointly present 48 shows in South Korea and Taiwan over 2018-19F. We see potential for the group to add other locations for these shows and broaden to other brands owned by Feld Entertainment like “Sesame Street Live”, “Disney Live!” and “Monster Jam”.
  • The company is also a potential beneficiary of the growing market for live music worldwide. According to consultancy firm PricewaterhouseCoopers (PwC), live music revenue is forecasted to register 3% CAGR in 2017-2021. 
  • Other trends noted include rising industry consolidation led by players such as Live Nation (LYV US, Not Rated) and AEG Presents LLC (Unlisted), as well as an “increasingly international” concert business.

#5 Singapore builds some of the most thrilling rides 

  • Universal Studios’ first theme park in Southeast Asia is located in Singapore and was launched in early 2010. It was partly built by Cityneon and Kingsmen Creative. Both companies were involved in several other theme park projects in the region, including Legoland Malaysia, Disneyland Hong Kong (HK), and Disneyland Shanghai. 
  • We expect both companies to secure some contract wins as new theme park opportunities arise. 
    1. Universal Studios Beijing theme park has commenced construction with scheduled opening in 2020, while 
    2. HK Disneyland has expansion plans over 2018-2023 with an estimated HK$10bn budget.
    3. Lionsgate has also, according to new sources, announced its first outdoor theme park in Jeju, South Korea with a 2019 opening target.
  • These projects tend to generate lumpy revenue and at times, they run the risk of cost overruns. However, assuming contract wins of one-tenth the size of both HK Disneyland and Universal Studios Beijing projects, this could translate into additional revenues of at least S$168m and S$300m to Cityneon’s and KMEN’s order books, respectively.

#6 Singapore has the world’s 15th best bar 

  • Atlas Bar, located in Parkview Square, entered the World’s 50 Best Bars list for the first time in 2017, ranked 15th, seven rungs below Manhattan cocktail bar in the Regent Hotel Singapore. 
  • Atlas Bar is widely known in the local entertainment scene for its Art Deco interior and collection of over 1,000 types of gin. It is less widely known that Kingsmen Creative (KMEN) was the installation contractor for Atlas Bar, which was designed by Hassell.
  • Kingsmen Creative also offers design and production services in the segments of museums and retail & corporate interiors. Its past work includes exhibits for the National Museum of Singapore and interior architecture for Victoria’s Secret and The Hour Glass outlets in Singapore. 
  • Cityneon has similarly designed adaptation and installed interior fit-outs for SEA Aquarium and Resorts World Sentosa Singapore. Kingsmen Creative’s longstanding relationships with these customers, and consistent award wins are testament to its established name and track record, as well as its creative and design capabilities.


Ability to attract and retain creative talent 

  • In a highly competitive media/entertainment business, industry players often rely on novelty, well-known franchises and technical expertise to differentiate from one another, which is made possible by recruiting the right team of creative talent. 
  • We also think the availability of talent could pose limitation to the scalability of such business. For instance, KMEN has previously turned down smaller projects and faced capacity constraints due to the lack of sufficient creative talent. Cityneon is also keen to grow its creative and design team from the current 7% of total workforce to about 50%, possibly through acquisitions. The company hired Welby Altidor, the former director of creations at Cirque du Solei, as its group chief creative officer in Aug last year.

Unexpected production delays or cost overruns 

  • For the production business, producers are contractually required to finance the overruns themselves or may seek additional financing, in the event of a budget overrun. Substantial budget overruns could lead to delays in the completion and release of a film, which could cause box office underperformance and hurt the overall financial success of the film. 
  • Similarly, we understand that theme park projects (for e.g. Universal Studios Japan and Singapore) could incur losses due to tight deadlines or unexpected reworks.


mm2 and Cityneon are our best bets for entertainment 

  • We think mm2 (Rating: ADD, Target Price: S$0.74) is the best proxy for the growing media and entertainment business in the region, given its extensive presence across the entire value chain, with involvement in content production, movie exhibition, concerts/events promotion and development, 3D/animation effects (and now travelling sets). 
  • mm2’s current market valuation (excluding UnUsUaL and the S$230m price tag for Cathay cinemas) appears to be pricing its core production business at only 8x CY18F P/E, which is at a discount of almost 60% to its regional Movie/TV production peers.
  • We also like Cityneon (Rating: ADD, Target Price: S$1.58) for its:
    1. transformation into a creative and design-focused company;
    2. exciting portfolio of three IP rights – Marvel’s Avengers STATION, Hasbro’s Transformers and Jurassic World; and
    3. scalable business model with minimal execution risk. 
  • The stock currently trades at 12x FY18F P/E, cheaper than the 17x average of its regional meetings, incentives, conferences and events (MICE) peers. We think there is potential for upward revision to our FY18-20F earnings forecasts, should there be a stronger uptake of travelling sets.


NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2018-03-14
CIMB Research SGX Stock Analyst Report Maintain Same
ADD Maintain ADD 0.740 Same 0.740
ADD Maintain ADD 1.580 Same 1.580
NOT RATED Maintain NOT RATED 99998.000 Same 99998.000