mm2 Asia's bet on cinemas may be a long shot

MAINBOARD-LISTED mm2 Asia is still reeling from the S$230 million acquisition of Cathay Organisation's eight cinemas three years ago.

The deal was meant to provide an additional source of recurring income for the company. Instead, the cinema business is weighing on its bottom line, its balance sheet and its shares.

The cinema operations posted a margin on earnings before interest, taxes, depreciation and amortisation (Ebitda) of 12.3 per cent for FY2018 ended March 31. The group's overall Ebitda margin that year was 33.4 per cent. It fared slightly better the subsequent year, posting an Ebitda margin of 17.4 per cent compared with the group's Ebitda margin of 29.5 per cent.

Last year, as the Covid-19 pandemic shuttered cinemas worldwide, revenue from mm2's cinemas for the six months to September shrank to just S$3.6 million - from S$49.5 million in the same period of the year before. The segment also clocked a pre-tax loss of S$16.5 million.

Meanwhile, mm2's debt load stood at S$264 million at end-September. That gives it a net gearing of 1.1 times.

Since listing in 2014 at 25 Singapore cents a share, the counter has gone as high as 63.5 cents in June 2017. But it has lost 85.3 per cent of its value since announcing the Cathay acquisition in November that year. Shares of mm2 closed flat at 8.3 cents on Tuesday, giving it a market capitalisation of S$96.5 million.

Ticket, stubbed

Now, mm2 is looking to pare down its debt by spinning off the cinema business in a separate Catalist listing - a move that had been on the cards since 2018. The company said a spin-off would enable the cinema business to be "financially independent" and raise the funds required for "new growth opportunities" without relying on mm2.

It is, however, unclear what growth opportunities are present in the market. In fact, cinemas are facing an increasingly grim post-pandemic reality as streaming services continue to strengthen their reign over the entertainment industry.

Even before the pandemic, Singapore's box-office takings have made little headway while consumer spend on subscription video-on-demand (SVOD) has been recording exponential growth.

According to data from PwC, Singapore's SVOD revenue grew from S$90 million in 2015 to S$411 million in 2020 with a projected compound annual growth rate (CAGR) of 15.4 per cent between 2019 and 2024. Box-office revenue, on the other hand, dipped from S$260 million in 2015 to S$106 million by 2020 with a projected CAGR of -0.5 per cent from 2019 to 2024.

Covid-19 has struck mm2 another blow, as its cinemas have to halve their usual capacity amid safe-distancing measures while still having to fulfil the usual operating lease commitments. DBS analyst Ling Lee Keng said in a report that losses for mm2's cinema business are expected to last till at least the second half of FY2022.

To make matters worse, Singapore actually has a higher cinema penetration rate than many other markets in the region (measured by number of cinemas per resident).

It will take a strong backer with deep pockets, appetite for risk and a long-term investment horizon for mm2 to pull off a successful cinema listing.

The company had announced in February that it is in talks with a potential investor, who has expressed interest in taking a minority stake in "one of the group's core businesses".

Out of focus

There are, of course, some synergies to owning both film studios and cinemas. And with its control of both production and distribution in the supply chain, mm2 has an opportunity to remake the movie business in its favour.

But in hindsight, mm2 would have been better off focusing on its core business, which includes the distribution and production of motion picture, video and television programmes. Net profits for this segment rose from S$5.1 million in FY2015 to S$22.3 million in FY2019.

Of notable success is the 2018 Taiwanese romance film More Than Blue produced by mm2's subsidiary, mm2 Entertainment. It was distributed across the region and racked up impressive box-office sales.

More resources could also have been put into co-production in China, which has since surpassed the United States as the world's biggest movie market.

Co-produced content could potentially give mm2 greater access to the fast-growing market in China through better distribution and revenue sharing models.

Also, in the entertainment industry, content owners wield significant power over distribution venues.

Studios have increasingly opted to bypass theatres to release films online directly, giving consumers fewer reasons to head to the cinemas.

Flash forward

Director Christopher Nolan wrote in a Washington Post op-ed: "Movie theatres have gone dark, and will stay that way for a time.

"But movies, unlike unsold produce or unearned interest, don't cease to be of value. Much of this short-term loss is recoverable. When this crisis passes, the need for collective human engagement, the need to live and love and laugh and cry together, will be more powerful than ever."

Just as video did not kill the radio star, the rise of streaming will not bring moviegoing to a complete halt. But mm2 will need some fresh ideas to convince investors there is still growth in the cinema business.

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