• We expect North Asia to contribute about 60% of production revenue from FY19F, up from 36% in FY16, 56% in FY17 and 57% in FY18.
• Upside to earnings would come from more projects, especially in China, where the market is bigger and budgets are much larger.

Results Highlight

• mm2's Net profit hit by higher interest costs, including one-off charge in relation to Cathay cinema purchase. 2Q19 revenue rose 106.8% to S$64.9m, boosted by the cinema business, including the Cathay cinema chain where the acquisition was completed in 3Q18, partly dragged down by the core production segment. Gross profit increased 90% y-o-y to S$27.6m, with gross margin of 42.5%, slightly lower than the 46.2% recorded in 2Q18.
• 2Q19 net profit of S$4.6m was down 18.7% y-o-y, mainly hit by higher finance expenses of S$5.3m. This was due to additional borrowings and the issuance of medium term note and convertible bonds mainly to finance the acquisition of the Cathay cinema chain. In addition, the Group has also recognised an unwinding of interes on the deferred purchase consideration of S$1.6m for the acquisitions of Cathay cinema and Lotus cinema in Malaysia.
• Overall, 1H19 revenue of S$113.9m (+103.3% y-o-y) accounted for 40% of our forecast while the net profit of S$14.6m formed 34%, below expectations.

Regional expansion, North Asia in particular; exploring foreign listing of some key assets

• mm2 continues to explore North Asia, which contributed 34% of Group revenue and 57% of production revenue. The Group has also appointed a financial adviser to review the businesses of the Group.
• mm2 aims to further enhance its corporate profile, branding and market awareness in the North Asia markets where it currently operates, and to explore the possibility of seeking a foreign listing of some of the Group’s key assets and businesses, which may include the cinema operations.

Outlook and plans for the different segments

• For the core production business, beyond the Chinese market, the Group is also seeking opportunities in regional film co-productions.
• For the cinema arm, the Group has seen some positive results from the new initiatives put in place with regards to asset utilisation and operating efficiencies since assuming the management of Cathay cinemas in June 2018.
• UnUsUaL (SGX:1D1), with the intellectual property (IP) rights to develop and produce APOLLO, has moved up the supply chain to become an IP owner, adding an additional revenue stream to the Group.
• Vividthree (SGX:DMK), listed on the SGX Catalist Board, has signed a Letter of Intent (LOI) for the territorial rights to open Train to Busan Virtual Reality (VR) Tour set in Taiwan, Hong Kong and Macau. Estimated delivery of the tour set is by 31st March 2019.

• We have reduced earnings for FY19F by 26% and 22% for FY20F. The cut in earnings is mainly from the core production and cinema segment. We have imputed slower growth ahead for the core production segment on the back of the delay in the release of key titles, while it would take time to reap the full synergistic benefits of the Cathay cinema chain acquisition across the entire value chain. We have also imputed higher interest costs.
• On the back of the cut in earnings and pegging the core production and cinema segment to a lower PE of 16x (vs 18x previously), in line with the de-rating of its peers, our sum-of-parts Target Price is reduced to S$0.50 (previous S$0.62).
• Though growth going forward is slower, we are still projecting FY18- 21F revenue and gross profit CAGR of 23%, and a lower 14% for net profit. Maintain BUY.