• We believe mm2 Asia (SGX:1B0)’s earnings will experience an upward trend in FY23, driven by all three business segments:
  1. cinema attendance is expected to rise as Singapore’s and Malaysia’s cinemas operate at full capacities,
  2. resumption of in-person concerts, and
  3. ramping up of film production.
• Maintain BUY recommendation on mm2 Asia with a lower SOTP-based target price of S$0.098 (S$0.115 previously).

What's New for Mm2 Asia's Business

Cinemas: Steady rise in cinema attendance.

• Cinema audience numbers are expected to rebound to close to pre-pandemic levels given the removal of capacity restrictions for cinemas during the year. As of 10 Oct 22, Singapore’s authorities have lifted all COVID-19 vaccination-differentiated safe management measures (VDS), stimulating the economic viability of the entertainment industry.
• In accordance to the last phase of Malaysia’s National Recovery Plan, cinemas are now open to fully-vaccinated individuals, which make up 85% of Malaysia’s population.
• With the expected return of movie-goers and increased consumer spending on food and beverage in cinemas, FY23 revenue and operating profit from mm2 Asia's cinemas operations is likely to increase.

Concerts: Resumption of live concerts.

• With the relaxation of COVID-19 restrictions in Apr 22, live concerts have since resumed in 1HFY23. To date, UnUsUaL (SGX:1D1) has co-produced four concerts in Singapore for renowned singers A-Lin, 831 and Eric Chou, and is set to co-produce six concerts in both Singapore and Malaysia for notable acts such as JJ Lin and Westlife in 2HFY23.
• Tickets for Westlife’s concert on 16 Feb 23 were sold out almost immediately, leading to a recent announcement for an additional show on 17 Feb 23. This indicates pent-up demand for live concerts, and we therefore expect FY23 EBITDA from this segment to return to profitability.

Core production business: Gaining momentum on production.

• mm2 Asia is slated to increase production for release over the coming year with multiple projects in the pipeline. This is partly due to the relaxation of most travel restrictions, allowing for more cross-border collaborations. Five films with international content have since been shot during the year and are scheduled for release in 2023. Titles include Happy Ghost, a Taiwanese remake of Korean film Hello Ghost.
• Given mm2 Asia’s Taiwanese version of More Than Blue grossing S$220m in international box office, we anticipate wide reception to the upcoming films as well.
• Additionally, we believe that the group’s track record in quality production will see its core production business sought by streaming channels, with the release of its highly anticipated More Than Blue: The Series well-received on Netflix. We expect FY23 revenue and EBITDA from the core business to grow by 44.1% y-o-y and 20.0% y-o-y respectively.

Ticket Sales to Climb Amid Reopening

• A greater demand for tickets is forecast in the second half of the year. Doctor Strange in the Multiverse of Madness, which was released in May 22, brought in S$7m across its 22 weeks of release in Singapore. Its average weekly box office grossed 32% higher than that of 2021’s highest grossing film – Spider-Man: No Way Home – indicating a boost in cinema audience numbers. Several other blockbusters such as Black Panther: Wakanda Forever and Ant-Man and the Wasp: Quantumania are highly anticipated in 2HFY23, given that production companies are bouncing back from COVID-19 disruptions.
• According to The Numbers, the number of films released thus far in 2022 is 110% that of film releases in 2021. Additionally, as only fully-vaccinated individuals were permitted to enter cinemas then, we can expect higher ticket sales in 2HFY23 with the lifting of VDS from Oct 22.

Poised for Recovery as Market Trends Upward

• As peers are seeing positive growth in revenue, we expect mm2 Asia’s FY23 financial results to follow suit. An upward trend is observed in IMAX Corporation’s earnings, which they have mainly attributed to blockbuster releases.
• As for the domestic market, Orange Sky Golden Harvest Entertainment, the sole owner of Golden Village cinemas in Singapore, has also seen an 84% increase in net box office receipts from S$16m in 1H21 to S$30m in 1H22 alone.
• Based on its peers’ improvement in total revenue and EBITDA over the year, mm2 Asia is likely to see a similar pattern in its financials.

Mm2 Asia - Earnings Forecast Revision and Recommendation

• We maintain our earnings forecast of mm2 Asia. Maintain BUY recommendation on mm2 Asia with a lower SOTP-based target price of S$0.098 (S$0.115 previously).

• Our target price is based on a SOTP-based valuation, with:
  • core production business at 9.1x (11.4x previously) FY23F EV/EBITDA, in line with larger peers;
  • cinema business at 8.0x FY23F EV/EBITDA, in line with larger peers; and
  • UnUsUaL (SGX:1D1) and Vividthree (SGX:OMK) at market value.
• Catalysts: Privatisation offer, better-than-expected demand for concerts.

Source: UOB Kay Hian Research - 13 Oct 2022