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The Outrageous Story of mm2 Asia

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Bullionstar

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mm2 Asia is one of the most exciting prospects to grace Singapore stock market in many years. Within two years of listing in the Catalist, the entertainment outfit has witnessed such explosive growth that it ascended to the SGX mainboard on 7 August 2017. Along the way, it has also attracted investment from StarHub.

In 2014, when the company, through its IR agency, requested me to help them promote free tickets for their Jack Neo’s movie, “Ah Boys to Men”, I didn’t really take notice of this company. Fast forward three years later, the shares had been on a red hot bullish run since IPO.

On 19 May 2017, mm2 Asia announced that the company is in discussions with Village Cinemas Australia Pty Ltd (“Village Cinemas”) for the purchase by the Group of Village Cinemas’ entire stake in Dartina Development Limited, a company incorporated in Hong Kong which holds the Golden Village Cinema business in Singapore.

mm2 Asia

However, the transaction did not materialize. According to mm2 Asia, “Village Cinemas Australia was unable to procure fulfilment of certain conditions under the Shareholders Agreement entered into between Village Cinemas Australia and their existing coshareholder of Dartina Development Limited, and the deal could not be completed”.

On hindsight, the failed transaction could be a blessing in disguise. After all, operating a cinema could be risky as the business is susceptible to technology disruption. Just ask yourself how often you visit the cinema nowadays. Very often, the latest movies or shows could be viewed online at a fraction of movie ticket. Furthermore, during economic downturn, people are less likely to visit cinemas.

However, mm2 Asia’s current business as a content producer is different. No technology can ever replace a content maker. Furthermore, its content products can be distributed at a lower price through online. Thus, during bad times, retailers may not visit cinemas, but opt to watch its contents through online.

The latest move came fast and furious after the listing of its subsidiary, Unusual Limited on the Catalist Board of the Singapore Exchange, raising an aggregate of $19.4 million, anchored by cornerstone investor SPH AsiaOne Ltd, a subsidiary of Singapore Press Holdings Limited (“SPH”).

Share price of mm2 Asia had been surging in recent years. Since IPO, mm2 Asia share price has risen from listing price of $0.25 to the current $0.47 level. There was a stock split exercise of 1-into-2 exercise in early 2016. But that didn’t stop its meteoric rise. In late 2016, the company announced yet another stock split exercise of 1-into-2 exercise.

Based on my memory, I could not recall any SGX stocks that underwent twice stock split in a year and still continued to rise like mm2 Asia shares. If shareholders held on to the shares since IPO in 2014, they would have made a killing! This is because stock split is unlike rights issuance, which requires shareholders to cough up money. In stock split, shareholders do not need to make any payment. Do I regret missing the boat for this multi-bagger? Of course I did! The paper gains would have been 8 times considering the fact that this counter has been split twice in a year.

One of the reasons why I chose not to invest in mm2 Asia’s IPO back in 2014 was because of my lack of knowledge in the film-making and entertainment industry. Unless you work in this industry, most outsiders would lack understanding on the growth and prospect in this industry. Furthermore, my policy is not to invest in IPO because of their lack of track records. However, in SGX, mm2 Asia occupied a very niche area and based on its last two years’ financial results, the growth story has been compelling.

Full year net profit for FY2017 rose 146% to $22 million while revenue grew 149% to $95 million. The growth came about after a significant number of acquisitions, including the recent proposed acquisition of the Lotus cinemas in 13 locations in Malaysia, as well as the listing of one of Unusual Limited, on the SGX. As at 31 March 2017 (FY2017), cash and cash equivalents amounted to S$25.3 million as compared to cash and cash equivalents of S$4.1 million as at 31 March 2016 (FY2016).

The Group continues to harness its capability to provide services over the entire production and distribution process for movies and TV/Online content to address the demand for locally produced content in Singapore and Malaysia. But what I like about mm2 Asia is that its growth strategy is not just focused in Singapore or the South-East Asia market. It’s North Asia productions have contributed 55.9% of the Group’s production revenue in FY2017, up from 35.7% in FY2016.

Being a young listed company, mm2 Asia is wasting no time in building its investment moats within the entertainment industry with a series of partnerships and joint ventures announced in the past year.

On 29 July 2016, the Group has entered into a non-binding memorandum of understanding with Mr. Richard Lee Peng Boon (Dick Lee) to establish a company (Dick Lee Asia Pte. Ltd.) in Singapore which will engage in music, artistes, creative direction, consultancy or related industries by Dick Lee, and any other future artistes and business with Dick Lee. The Group and Dick Lee each hold 51% and 49% equity interest respectively in Dick Lee Asia Pte. Ltd.

On 20 October 2016, the Group has entered into a format license agreement with Talpa Global B.V. (‘Talpa Global”) to acquire the exclusive license rights to produce and broadcast The Voice, Talpa’s flagship talent format, for the Singapore/Malaysia version.

On 8 November 2016, the Group has entered into a binding term sheet with Lotus Fivestar Cinemas (M) Sdn Bhd for the acquisition of the business of cinema management and operations of thirteen (13) cinema locations. It currently operates a chain of 23 cinemas in Malaysia and comprise of 90 screens with a total of 15,818 seats.

On 28 February 2017, the Group has entered into a Share Subscription and Shareholders’ Agreement with RINGS.TV Pte Ltd (“RINGS.TV”) and its holding company, Mozat Pte Ltd, to acquire up to 20% stake in RINGS.TV over 12 months after the shareholders’ agreement. RINGS.TV is Singapore’s first interactive broadcasting technology platform to stream and broadcast live concerts, performances, conferences and other events. Under the agreement, mm2 Asia will make an initial investment of S$2.25 million to acquire 15% of RINGS.TV, with an option to increase its stake by an additional 5% for another S$0.75 million.

On 3 May 2017, the Group has entered into a binding MOU with Cinema Pro Limited and Kbro Media Co. Limited to acquire 19.68% of the enlarged share capital in Cinema Pro Limited. Cinema Pro Limited (CP) provides an ALL-IN-ONE cinema management service and is formed by a group of experts in the cinema industry covering Hong Kong and Mainland China including UA Cinema Circuit (UA 院線), Orange Sky Golden Harvest, Jinyi Cinemas and Dadi Cinemas.

The return on equity (ROE) was 231% in FY2013 and has been tapering to 31.5% in FY2016. This is typical of a young and growing stock. The revenue is expected to grow explosively for the next two years and is expected to be at least double digits due to the slew of acquisitions and partnerships in the pipeline. The acquisitions of cinemas in Malaysia and Singapore is a strategic move because it provides a source of recurring income for mm2 Asia. Furthermore, cinema operation is a profitable business.

This counter has not issued dividend yet because the management has chosen to re-invest cash into new acquisitions. At P/E ratio of 35, it is not considered under-valued too. Recently, in spite of announcing a good set of 1QFY2018 results, its share price suffered from a loss of form, presumably due to the failed acquisition of Golden Village. However, I feel that this counter may have been oversold. I have set an entry price of $0.35. On the basis of its bearish trend, I think my target price may be realistic.

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