• Vividthree is transforming from a post-production provider to a digital content producer, with the new segment contributing 60% of FY18 net profit. It should benefit from the rising penetration of VR, having recently secured the rights to develop a VR thematic tour show for a popular film.
• If executed well, the VR tour will be highly profitable and transform Vividthree’s business model to a highly scalable one where it could grow with more recurring royalty income and IPs. For each VR set, Vividthree expects S$1.0m-1.5m net profit (37-56% of FY18 net profit).

Business Overview

• Vividthree has two key business segments:
  1. Post Production (40% of FY18 revenue). Specialising in visual effects, computer- generated imagery services and other post production services such as video editing and colour grading.
  2. Content Production (60% of FY18 revenue). Develops digital IP assets or acquiring them from third parties to produce movies/series or VR products such as thematic tour shows.
• Similar to most VFX companies, Vividthree started as a “contractor” to provide post-production services for customers like film producers, corporates and advertising agencies. As it builds up its technical competence and leverages the extensive network of mm2 Asia (SGX:1B0), Vividthree has successfully expanded its production beyond Singapore into Greater China and with a greater focus towards the more profitable content creation model.

History and Milestones

• In 2003, after graduating with diplomas in multimedia, founders Charles Yeo, Sky Li and Jay Hong, incorporated Vividthree Pte Ltd. Shortly after, they were introduced to production companies in the movie and film industry and started working with a production company to produce animated films. During this time, they were involved in both the production and post-production processes, with the latter including video editing, editing of soundtracks and colour grading, and built up their visual effects, post-production capabilities and technical skills. With the experience gained, the founders incorporated Vividthree Singapore in 2006 to focus on the core business of offering production and post-production services. Vividthree Pte Ltd was eventually struck off in May 09.
• In 2006, Vividthree took on its first project to produce a 3D stereoscopic video, ‘Tiger Beer Live from Grain to Gold’. As the group continued to build up its capabilities, they also invested in acquiring additional software and hardware such as computers and expanded the scope of our visual effects services to include 3D animation.
• The group’s first 3D animation project was the film ‘Men in White’, which was produced by Boku Films Pte Ltd and released in 2007. Thereafter, the group worked on the visual effects in two US films - Robotropolis which was released in 2011, and Battle of the Damned which was released in 2013.
• As Vividthree’s founders continued to build up their experience in the industry, in 2012, they worked together with J Team Productions on the visual effects and computer-generated imagery in ‘Ah Boys to Men’ which became the highest grossing local production in Singapore in 2012, earning S$6.21m in box office receipts.
• In 2015, mm2 Asia (SGX:1B0) acquired 51% of Vividthree. Following the acquisition, Vividthree has access to a wider range of opportunities in the movie and film industry, including working alongside mm2 Asia, to provide visual effects, computer-generated imagery and other production and postproduction services for movies and films which mm2 Asia produces.
• Vividthree ventured into conceptualising and developing animated characters and designs, character outlines and synopses in 2016, and subsequently sold the IP rights in these contents to a third party. With the experience acquired, it went on to conceptualise and develop other new animated characters and designs, character outlines and synopses and intend to exploit these to produce VR thematic theme shows as well as animated movies and series. In Mar 18, Vividthree entered into a binding term sheet to develop a VR thematic tour show based on the film Train to Busan in respect of all countries apart from South Korea.

Investment Highlights

Transiting to a more profitable business model that focuses on content production

• Net profit from content production made a maiden contribution in FY18 and became a key contributor, forming 60% of full-year net profit. Vividthree aims to grow profit contribution from content production aggressively in the next two years as it evolves from a post-production company to a content powerhouse.
• Earlier in 2018, Vividthree secured the intellectual property (IP) rights to develop a VR tour for a popular Korean film, Train To Busan, for all countries except South Korea. Vividthree will develop the master VR content including the storyline and VR experience.
• On the other hand, post production will continue to provide the base profit.

Attractive industry prospects and investment proposition.

• As shopping mall operators increasingly seek theme-based experience to drive traffic, VR tour could stand to benefit. Vividthree’s tour set is also highly modular, potentially attracting venue owners of different sizes, including theme parks and VR gaming providers.
• With a relatively low initial capital outlay of S$2m-3m for a VR set, management expects the investment payback period at only around one year, making it an attractive investment. Vividthree will sell the VR tour sets consisting mostly of software to stakeholders on a build-to-order basis and earn a fixed production income. It will continue to enjoy the success through royalties. Should promoters request for exclusive operation of the VR tour in a region, Vividthree may earn additional territorial rights fee.

Extracting synergies from the parent.

• Leveraging the extensive network of its parent company, mm2 Asia (SGX:1B0), Vividthree has gained new business opportunities, particularly in North Asia where sales have increased to 32% of FY18 total revenue from 0% in FY16.
• More importantly, Vividthree gained access to the IP rights of the Train To Busan VR tour through the cinema network of mm2, which we believe it may continue to pave the way for Vividthree to secure more blockbuster IPs for immersive experiences via strategic al film studios or other IP owners like Apollo Space Travel, Walking With Dinosaurs and Disney etc.

VALUATION

• Based on peers’ 18.7-18.9x FY20F PE, the valuation range for Vividthree is S$0.44-0.45.
• If Vividthree meets its VR sales target, it expects net profit to grow 64-74% for FY19-20, driven by the sale of Train to Busan (TTB) virtual reality (VR) tour set, slated to launch in 2HFY19. For every VR tour set sold, Vividthree targets to earn a production income of S$1.0m-1.5m (37-56% of FY18 net profit) and some royalty fees.
• Vividthree has secured the clients for two VR tour sets in 2019 and aims to sell three in 2020.

Source: UOB Kay Hian Research - 04 Oct 2018