GHY Culture & Media - DBS Research 2021-08-13: Expect Stronger 2H On Robust Pipeline

GHY CULTURE&MEDIA HLDG CO LTD (SGX:XJB)

GHY Culture & Media - Expect Stronger 2H On Robust Pipeline

GHY Culture & Media reported weak 1H21 results, hit by COVID; expect a stronger 2H21 on robust pipeline.
Margins affected by the relocation of production to China due to the lockdown in Malaysia.
Identified potential concert productions in China in 2H21; other regions in 2022.
Cut FY21F/22F earnings by 32%/21%, maintain BUY with lower target price of S$0.87.

GHY Culture & Media (SGX:XJB)'s 1H21 results below expectations, hit by COVID. Revenue for 1H21 was up 18% y-o-y to S$43.8m, mainly due to recognition from :
1. One completed drama (“Horror Stories of Dynasty Tang”);
2. ongoing drama production for “Sisterhood”;
3. ongoing production of online short-form video series “Whimsical World” and
4. two films from the series “I Come From Beijing”.
In 1H20, revenue was recognized for one ongoing production, three films and S$14.8m from a concert production.
Excluding the concert segment, GHY Culture & Media's 1H21 revenue almost doubled y-o-y, and accounts for 24% of our FY21F revenue forecast. 1H is generally a much weaker half, as compared to 2H. For 1H20, revenue formed 29% of the total revenue for FY20. Excluding the concert in 1H20, revenue in 1H20 only accounted for 20% of the full year number.

Gross profit margin decreased to 28.2% in 1H21, from 52.6% in 1H20. This was mainly attributable to the relocation of production for “Sisterhood” from Malaysia to China, as certain set-up costs had to be incurred again in China, resulting in duplication of costs. Nonetheless, the affected drama remains profitable as the group’s end-to-end capabilities across the production value chain enables it to have full oversight of production and cost controls.
Overall, GHY Culture & Media's net profit for 1H21 of S$3.5m was below expectations. This was down 73% y-o-y, due to lower margins and the absence of profit contribution from the concert segment.

The group expects to commence production for at least another five dramas in the second half of 2021. These dramas are planned to be produced in China given the current COVID-19 situation in Malaysia. Our current projection is for eight dramas in FY21F and nine in FY22F.
GHY Culture & Media has a robust pipeline of dramas and films. This is demonstrated by the 64% increase in other receivables to S$17m as at end June 2021, from end December 2020, mainly due to prepayments made for upcoming drama productions. Contract assets, which represent the group’s right to consideration for drama and film productions in progress but unbilled, also grew by 36.5% to approximately S$72.6m in 1H21.

GHY Culture & Media has already identified potential concert productions in China for 2H21. In China, the live music scene has been gradually recovering with limited capacity events held. But other geographies are only expected to resume in 2022. The group currently maintains a small team in preparation for the resumption of concert production and is ready to ramp up production once concert dates are confirmed.

Over the last few months, GHY Culture & Media has put in place plans to expanding its portfolio of entertainment and products. These include :-
1. Setting up a JV for online short videos. The group has recently set up a JV for production of online short form videos, among other types of production. The JV Company has entered into an online short form video series collaboration agreement with Kuaishou (快手), a Chinese video-sharing mobile application, listed on the Stock Exchange of Hong Kong. The JV Company will produce, within a year, a collection of short form video series, with each series to comprise at least 25 episodes of at least 120 seconds each, which will be uploaded and released on Kuaishou’s video-sharing mobile application. We estimate the group can produce about two to three videos within a year, and revenue contribution per video is estimated to be slightly below S$0.5m.
2. Diversifying into multi-level entertainment offerings GHY Culture & Media has entered into a joint investment with a subsidiary of iQIYI to co-produce a stage musical in China.
3. Strategic investment in home-grown Clover Films
The group has signed an agreement to acquire a 51% interest in Clover Films Group, which distributes movies in Singapore, Malaysia and Southeast Asia.

The extended Movement Control Order (MCO) and the subsequent lockdown in Malaysia has disrupted GHY Culture & Media's filming and production activities in Malaysia. This has resulted in delays to the group’s production pipeline for 2021. We have reduced our projected number of drama productions to 7/8 for FY21F/FY22F vs 8/9 previously.
Gross margin assumption is cut to 32%/35% for FY21F/FY22F, from 40% for both years. The reduction in earnings is partly offset by the increase in contribution from the online short video segment.
Overall, we have cut GHY Culture & Media's FY21F/22F net earnings forecast by 32%/21%. Our target price for GHY Culture & Media is reduced to S$0.87, from S$1.00 previously.
Key catalyst would be the resumption of concert production.
Maintain BUY.
See

Lee Keng LING DBS Group Research | Wei Le CHUNG DBS Research | https://www.dbsvickers.com/ 2021-08-13

SGX Stock Analyst Report BUY MAINTAIN BUY 0.87 DOWN 1.000