Cityneon Holdings - DBS Research 2018-08-14: Transformation On Track 

Cityneon Holdings - DBS Group Research 2018-08-14: Transformation On Track  CITYNEON HOLDINGS LIMITED SGX:5HJ

Cityneon Holdings - Transformation On Track 

  • Cityneon’s 1H18 net profit more than doubled y-o-y, partly boosted by higher contribution from IP segment and tax credits.
  • More travel routes in the pipeline for the exhibition sets; semi-permanent HG1 to open in 4Q18.
  • Not stopping at four IPs; fifth in the next few months.
  • Legacy business in transformation.



On path of transformation.

  • In a short span of three years, Cityneon has transformed from a legacy business struggling with low profit and margins to an Intellectual Property (IP) player with four to its name - 
    • Avengers S.T.A.T.I.O.N., 
    • Transformers Autobot Alliance, 
    • Jurassic World - The Exhibition and 
    • The Hunger Games. 
  • We continue to expect Cityneon to deliver explosive FY17-19F EPS CAGR growth of 131% based on the current four IPs, and its legacy Traditional business. 
  • Strong performance of IP segment in 1H18; revenue exceeded the Legacy Traditional Business for the first time and accounted for 52.5% of total revenue. Net profit more than doubled y-o-y, partly boosted by higher contribution from IP segment and tax credits.


Where we differ:


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  • Assuming more travelling sets. We assume eight exhibition sets in total for FY18F (four for Avengers, two for Transformers, one each for Jurassic World and The Hunger Games) and nine for FY19F (four for Avengers, two each for Transformers and Jurassic World and one for The Hunger Games), vs consensus of seven to eight sets for FY18F and FY19F.


Potential catalysts:

  • M&A, acquiring more IPs, expanding project pipeline, focus on higher-margin projects for the traditional business. 


Key Risks to Our View: 


VHE’s limited track record. 

  • Victory Hill Exhibitions (VHE) was formed in 2012 and its first exhibition was held in New York in 2014.
  • Earnings dependent on number of visitors, especially for the permanent set in Las Vegas. 


WHAT’S NEW

  • Cityneon’s 1H18 net profit more than doubled y-o-y, partly boosted by higher contribution from IP segment and tax credits


RESULTS HIGHLIGHT


1H18 revenue for IP business exceeded the Legacy Traditional Business:

  • Cityneon recorded 14.4%y-o-y increase in revenue to S$55.4m in 1H18. The Intellectual Property (IP) business segment accounted for 52.5% (vs 31.3% in 1H17) of the total revenue, the first time it exceeded the Legacy Traditional Business segment. 
  • The opening of Avengers S.T.A.T.I.O.N. (AVG2) in Melbourne, Australia, AVG3 in Moscow, Russia, AVG4 in Sweden, Transformers Autobot Alliance Set 1 (TF1) in Chong Qing, China, and Jurassic World - The Exhibition (JW1) in Paris, France contributed to the half year revenue increases.
  • There were only two Avengers S.T.A.T.I.O.N. sets (AVG1 and AVG2) in operation during 1H17. Revenue from IP business segment increased by 91.6% against 1H17.

Net profit more than doubled y-o-y, partly boosted by tax credits.

  • Cityneon’s gross profit increased by 55.6% y-o-y to S$34.2m in 1H18, due to the higher revenue contribution from IPE business segments. Gross profit margin improved to 61.7% in 1H18 from 45.4% in 1H17. 
  • Net profit of S$13m for 1H18 more than doubled that of 1H17, as a result of the reduced corporate tax rate of 21% (w.e.f. 1 Jan 2018) in the USA. The one-off write back resulted in a positive S$3.5m tax credit for the Group in 1H18.
  • Overall, Group revenue, pretax profit and net profit account for 44%/34%/55% of our FY18F forecasts, roughly in line as we are expecting a stronger 2H with the scheduled travel routes for its exhibition sets.


OUTLOOK


More travel routes in the pipeline for the exhibition sets; semi-permanent HG1 to open in 4Q18.

  • In 2H18, AVG2 is scheduled to be in Shanghai, China, AVG4 in London, United Kingdom, TF in Jeju, Korea and JW1 in Madrid, Spain.
  • Cityneon has planned its tour schedules for all its Avengers S.T.A.T.I.O.N. and Transformers Autobots Alliance exhibition sets for the rest of 2019, and is in the process of concluding a long-term touring deal for its JW1 exhibition set in North Asia, after Madrid, Spain. 
  • In addition, it is expecting to open the HG1 exhibition set in MGM Las Vegas in 4Q2018 – making this the second semi-permanent installation for the Group in Las Vegas, USA. The opening of HG1 will leverage on the current Group’s stronger performances of its AVG1 set at Treasure Island, Las Vegas, USA since June of 2016. Further improvements in economies of scale in Las Vegas is expected.
  • Cityneon has also announced the design and construction of JW2 – and has plans to open the exhibition set (JW2) in Las Vegas, USA, in time for Jurassic World 3 movie in 2021.

Not stopping at four IPs; 5th in the next few months.

  • Cityneon has already secured four IPs in five years - The Avengers from Marvel in 2013, Transformers from HASBRO in 2015, Jurassic World in 2017 and The Hunger Games in 2018. We expect the Group to leverage on its credentials and experience and continues to explore other IPs. The Group is currently in discussion for the 5th IP and is expecting to conclude its negotiations in the next few months.

Legacy business in transformation.

  • The Group is still in the process of transforming its business from that of the Legacy’s to one of Intellectual Property and Creative and Design led business. As of 1H18, the revenue contribution from the Legacy Business has gone below 50% for the first time in history for the Group’s first-half financial period, and this trend is expected to continue.


EARNINGS & RECOMMENDATION


Maintain forecasts and BUY call with Target Price of S$1.57.

  • No change in earnings forecasts, which is based on a total of eight sets – (four for Avengers, two for Transformers, one each for Jurassic World and The Hunger Games) for FY18F, and a total of nine sets (four for Avengers, two each for Transformers and Jurassic World and one for The Hunger Games) for FY19F.
  • Our target price of S$1.57 is based on PE valuation peg of 14.4x, which is at a 20% discount to peers’ average PE of 18x on blended FY18F and FY19F earnings. 
  • Maintain BUY.





Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2018-08-14
SGX Stock Analyst Report BUY Maintain BUY 1.570 Same 1.570



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