mm2 Asia

[sillyivan]

This company once a media darling has been falling the past 2-3 years. Looks like market is punishing it for its debt-ridden acquisition of Cathay. Anyone have perspective of this company? PE ratio seems sensible currently and market price seems to be around what StarHub has shelled out for its stake.

[karlmarx]

mm2 has two listed subsidiaries, but mainly it is a film production company. And film production companies are like venture capital fund managers; they raise money from investors based on a film idea, manage the production of the film, and sell it when it is done. The film investors hope for good ticket sales, which means a higher probability that they can expect returns that are more than their investment capital. The production companies take a 'management fee' for producing the film, and 'performance fee' when it sells well. Usually, production companies have a partial stake in the films they produce. Production companies also hope for good ticket sales as that would mean better scriptwriters will want to have their ideas produced by them, and more investors will want to invest in their productions.

So the question for mm2 is, can it produce films with good ticket sales?


1) A box office hit is usually a combination of big stars, famous directors, a good script, and/or big intellectual property franchises. mm2 does not appear to have any of these. And mainly because it cannot afford their fees. In terms of intellectual property, Disney has its classic cartoon characters, Marvel and Star Wars, Paramount has Mission Impossible and Transformers, and mm2 has...a bunch of Ah Boys.

Since an mm2 film is likely to have low production value, the distributors (cinema operators) will be hesitant to screen it. The distributors will be thinking whether there will be any demand for the film. Even if the film comes on consignment-like terms, the distributor is still exposed to the opportunity cost of showing another film that can sell more tickets. This is probably why mm2 was so aggressive in purchasing its own distribution channel; so that it may strongly promote/market its own productions, and hopefully, help to increase its ticket sales. So far, the acquisition has not demonstrated to be a value-adding move.


2) Apart from not having big name stars/directors/scriptwriters/franchises, mm2 is also challenged by operating in small markets. The highest grossing film in Singapore thus far is Avengers (2015), at S$13.8m. So this means mm2 cannot produce a film that cost more than S$13.8m, because this is likely to be the highest amount of ticket sales that can be achieved for any single film. If the production budget (or 'AUM')is limited due to the market size, this means mm2 is limited by the production fees (or 'management fees') it can expect to extract from the film investors. Singapore's top grossing local film is Ah Boys to Men 4, which cost about S$3.6m and sold about S$6m worth of tickets. Small AUM = small management fee. 

mm2's response to this is to grow into the regional markets, such as Malaysia and Indonesia, and increase its number of 'small production' films. Its strategy in these countries is also similar; acquiring/partnering cinema operators to better sell its production. But these markets are still small, and mm2's success has been limited. The largest market that it is targeting is China. But of course, there are many players and restrictions. 

The with this regional strategy is that all these countries are culturally different. A Singapore film that sells well locally is unlikely to perform likewise in Indonesia or Malaysia. And Vice Versa. So unlike Disney and Paramount, where a single production can be sold to an international audience, there is very little economies of scale in mm2's model. 


3) In recent years, cinema attendance has stagnated or fallen, along with an increasing number of productions distributed online, such as Netflix. Although it is highly likely that people will still go to the big screens to watch blockbusters like Captain Marvel, what about the 'small production' films? The ones that mm2 are making? If there is a greater probability that you will watch any content created and distributed by Netflix, rather than say, Killer Not Stupid, then what are the chances that mm2 will succeed, in the long-term? 


mm2 is not in a good situation. Its domestic markets only allow for small production films. And it has yet to achieve the capital/ability/reputation required to produce films for the international market. Meanwhile, online platforms continue to expand onto its turf of low production films. Unless mm2 can score a big hit -- which may then lead to other large productions -- it is unlikely to prosper in the longer-term.

[sillyivan]

mm2 has two listed subsidiaries, but mainly it is a film production company. And film production companies are like venture capital fund managers; they raise money from investors based on a film idea, manage the production of the film, and sell it when it is done. The film investors hope for good ticket sales, which means a higher probability that they can expect returns that are more than their investment capital. The production companies take a 'management fee' for producing the film, and 'performance fee' when it sells well. Usually, production companies have a partial stake in the films they produce. Production companies also hope for good ticket sales as that would mean better scriptwriters will want to have their ideas produced by them, and more investors will want to invest in their productions.

So the question for mm2 is, can it produce films with good ticket sales?


1) A box office hit is usually a combination of big stars, famous directors, a good script, and/or big intellectual property franchises. mm2 does not appear to have any of these. And mainly because it cannot afford their fees. In terms of intellectual property, Disney has its classic cartoon characters, Marvel and Star Wars, Paramount has Mission Impossible and Transformers, and mm2 has...a bunch of Ah Boys.

Since an mm2 film is likely to have low production value, the distributors (cinema operators) will be hesitant to screen it. The distributors will be thinking whether there will be any demand for the film. Even if the film comes on consignment-like terms, the distributor is still exposed to the opportunity cost of showing another film that can sell more tickets. This is probably why mm2 was so aggressive in purchasing its own distribution channel; so that it may strongly promote/market its own productions, and hopefully, help to increase its ticket sales. So far, the acquisition has not demonstrated to be a value-adding move.


2) Apart from not having big name stars/directors/scriptwriters/franchises, mm2 is also challenged by operating in small markets. The highest grossing film in Singapore thus far is Avengers (2015), at S$13.8m. So this means mm2 cannot produce a film that cost more than S$13.8m, because this is likely to be the highest amount of ticket sales that can be achieved for any single film. If the production budget (or 'AUM')is limited due to the market size, this means mm2 is limited by the production fees (or 'management fees') it can expect to extract from the film investors. Singapore's top grossing local film is Ah Boys to Men 4, which cost about S$3.6m and sold about S$6m worth of tickets. Small AUM = small management fee. 

mm2's response to this is to grow into the regional markets, such as Malaysia and Indonesia, and increase its number of 'small production' films. Its strategy in these countries is also similar; acquiring/partnering cinema operators to better sell its production. But these markets are still small, and mm2's success has been limited. The largest market that it is targeting is China. But of course, there are many players and restrictions. 

The with this regional strategy is that all these countries are culturally different. A Singapore film that sells well locally is unlikely to perform likewise in Indonesia or Malaysia. And Vice Versa. So unlike Disney and Paramount, where a single production can be sold to an international audience, there is very little economies of scale in mm2's model. 


3) In recent years, cinema attendance has stagnated or fallen, along with an increasing number of productions distributed online, such as Netflix. Although it is highly likely that people will still go to the big screens to watch blockbusters like Captain Marvel, what about the 'small production' films? The ones that mm2 are making? If there is a greater probability that you will watch any content created and distributed by Netflix, rather than say, Killer Not Stupid, then what are the chances that mm2 will succeed, in the long-term? 


mm2 is not in a good situation. Its domestic markets only allow for small production films. And it has yet to achieve the capital/ability/reputation required to produce films for the international market. Meanwhile, online platforms continue to expand onto its turf of low production films. Unless mm2 can score a big hit -- which may then lead to other large productions -- it is unlikely to prosper in the longer-term.

Nice write-up, greatly appreciative of your in-depth perspective. Although constrained by operating in small markets, I'm impressed as they managed to increase their revenue by doubit digit % for their main production business yoy. The increase in their organic revenue/net profits have managed to offset the interest costs of the Cathay acquisition. Having said that, as per your point, they have limited economies of scale due to culturally different audiences so the success of 1 film is limited to the individual country. This then brings about the question if they are able to continue their production growth by having separate success in emerging markets and China.

Another question I have in my mind is that recently they managed to secure contract with Netflix for producing some films, and that is 1 way i feel personally they can pursue growth from. If they are able to get Netflix's interest in the content they're producing I think it speaks volumes about the reputation they are building for themselves. I believe that over the top (OTT) platforms are the next big thing that can propel companies forward and they should put more focus in that. China has 3 big OTT players while Netflix is the biggest internationally. If mm2 can secure a good relationship with them I think there will be good growth. However, I'm unsure if theres a big difference in revenue/income from OTT platforms vs conventional films.

It seems that although the general consensus is that cinema industry is a sunset industry and its something that is hard to argue about, cinema operators are still continually expanding and adding new premises. Also by acquiring the cinema business other than it being a good distribution point for their movies, i think it is to better balance out their lumpy revenue model.

I'm not vested currently but keeping a keen interest. Please continue to give me pointers to think about! 

[karlmarx]

1) The point about growing revenue and profit is interesting, because accompanying that is growth in turnover time for payables, and very high turnover time for receivables. I do not have intimate knowledge of the film production business, so while the numbers may actually make sense to someone (in the industry), they do not to me. Nevertheless, there is quite a fair bit of credit risk in the revenue and profit numbers, so I wouldn't count on it. At least not until there is some dividend paid out from it.

Receivables / Payables (Turnover in months)
FY12: 4.38 / 5.27
FY13: 10.14 / 12.98
FY14: 8.46 / 12.38
FY15: 10.17 / 12.00
FY16: 7.64 / 14.32
FY17: 5.80 / 11.09
FY18: 7.20 / 31.78


2) Netflix has been very generous with dishing out production projects as they continue to increase their budget for 'Netflix Originals.' Their large capital expenditure and negative cash flow is a question to ponder whether their big budget ways are sustainable in the longer-term. Nevertheless, even if Netflix does give business to mm2, mm2 is still constrained by the size of its market; it does not make financial sense for Netflix to shell out $20m to produce a series for a market that is perhaps worth only $10m in total. If they do, it is probably a marketing strategy to attract more sign-ups, but in the long-term, it will be unsustainable to do so. In the Malaysian, Indonesian, and Chinese market, there is also the question of whether Netflix will dish out its projects to other (local) houses with better expertise and knowledge of local taste. So I wouldn't count on mm2 growing alongside Netflix.

https://www.fool.com/investing/2018/03/1...-tv-s.aspx

https://www.forbes.com/sites/olliebarder...94385a3aad


3) While the acquisition of Cathay does 'balance out their lumpy revenue model,' mm2 did not pay a low price for this asset. Information on price paid can be found in earlier posts in this thread. Furthermore, cinema attendance in Singapore is no longer increasing. It does not seem that the Cathay acquisition on its own was a good use of money, unless the acquisition is able to create synergies, as previously mentioned. Since much of the acquisition cost was financed with loans, this makes the ROA of the cinema business even worse. If mm2 fails to create synergies with Cathay, this acquisition will weigh mm2's down for many years.

[sillyivan]

1) The point about growing revenue and profit is interesting, because accompanying that is growth in turnover time for payables, and very high turnover time for receivables. I do not have intimate knowledge of the film production business, so while the numbers may actually make sense to someone (in the industry), they do not to me. Nevertheless, there is quite a fair bit of credit risk in the revenue and profit numbers, so I wouldn't count on it. At least not until there is some dividend paid out from it.

         Receivables    /      Payables         (Turnover in months)
FY12:      4.38       /          5.27
FY13:      10.14         /        12.98
FY14:      8.46       /         12.38
FY15:      10.17         /        12.00
FY16:      7.64           /       14.32
FY17:      5.80        /      11.09
FY18:      7.20           /     31.78


2) Netflix has been very generous with dishing out production projects as they continue to increase their budget for 'Netflix Originals.' Their large capital expenditure and negative cash flow is a question to ponder whether their big budget ways are sustainable in the longer-term. Nevertheless, even if Netflix does give business to mm2, mm2 is still constrained by the size of its market; it does not make financial sense for Netflix to shell out $20m to produce a series for a market that is perhaps worth only $10m in total. If they do, it is probably a marketing strategy to attract more sign-ups, but in the long-term, it will be unsustainable to do so. In the Malaysian, Indonesian, and Chinese market, there is also the question of whether Netflix will dish out its projects to other (local) houses with better expertise and knowledge of local taste. So I wouldn't count on mm2 growing alongside Netflix.

https://www.fool.com/investing/2018/03/1...-tv-s.aspx

https://www.forbes.com/sites/olliebarder...94385a3aad


3) While the acquisition of Cathay does 'balance out their lumpy revenue model,' mm2 did not pay a low price for this asset. Information on price paid can be found in earlier posts in this thread. Furthermore, cinema attendance in Singapore is no longer increasing. It does not seem that the Cathay acquisition on its own was a good use of money, unless the acquisition is able to create synergies, as previously mentioned. Since much of the acquisition cost was financed with loans, this makes the ROA of the cinema business even worse. If mm2 fails to create synergies with Cathay, this acquisition will weigh mm2's down for many years.

All valid pointers. Regarding the Cathay acquisition, it seems like a really big move for mm2 to pull off since it required them to undertake such a sizeable amount of debt. Many even referred the acquisition to  “a small fish trying to swallow a big fish leading to indigestion”. Really curious as to what pushed the management to undertake such a big risk with high interest expense other than vaguely referring to “creating synergies” as per every news outlet. 

I also feel that after the spin off listings of Unusual and Vividthree, there wouldn’t be sizable growth coming from them that can materially impact mm2’s share price. As such I feel hard pressed to point out a single factor that can push price higher.

[karlmarx]

It seems that high receivables and debt/payables is not an uncommon feature of media production/distribution companies:

https://www.jknglobal.com/th

[karlmarx]

Looking at its latest 9M results, it seems like the aggressive growth path of mm2 may soon reach an inflexion point.

http://infopub.sgx.com/FileOpen/MM2_Resu...eID=543258

On the one hand it has huge receivables which it has yet to collect. On the other it has huge loans which is secured against Melvin Ang's shares of the holdco, and shares of the subsidiaries.

https://links.sgx.com/FileOpen/MM2_Refin...eID=548129

Operating cash flow remains weak as it is constantly reinvested into new production. Investment cash flow remains negative as it has been spending to acquire companies and for expansion.

Will mm2 finally slow/halt its growth and secure its footing? Shareholders should keep a close eye on the above-metioned metrics.

[sillyivan]

Also food for thought is that their operating cash flow the past years have always been outflow.

[specuvestor]

Company raised $50m in Jun 2017 for the Cathay stake and now another rights issue for similar amount

It's actually quite interesting that stock went up 9X from IPO price, which it raised a paltry $9m, to raise $50m in Jun 2017 almost at high; then now raising $52m rights issue BELOW IPO price (Splits adjusted)

Like I said, no tickets needed to be observers.

They sure know how to keep things interesting for shareholders!

http://infopub.sgx.com/FileOpen/mm2%20-%...eID=466726

Now that the GV cinema acquisition deal fell through, they have plenty of cash...

[Corgitator]

Says a lot when the largest shareholder's 63% post-IPO stake is now 38%. Either he didn't fully subscribe to previous fund-raising issuance, or he was exiting gradually. Regardless, I don't view such behavior positively, especially when the underlying business hasn't been doing that well.