STX Entertainment: A Hollywood star may be born in Hong Kong

[HONG KONG] Coming soon: STX Entertainment's financial thriller. The young studio behind films such as Jackie Chan's "The Foreigner" is getting ready for a stock market premiere in Hong Kong. Its co-stars, audience and original script should support a valuation of at least US$2.5 billion.

The initial public offering venue, far from home in Tinseltown, may be a shrewd move for STX. Among its backers are China's Tencent and Hong Kong-listed media company PCCW, which will carry more weight with Asian investors. STX also has teamed up with the likes of e-commerce giant Alibaba to produce movies.

Those local connections should help STX churn out movies that appeal in China. Such arrangements also sidestep foreign film quotas set by the People's Republic.

Even so, China's track record with Hollywood has been fraught with missteps. And most companies that depend on steady hits have been absorbed into media conglomerates. Lumpy profit and a couple of flops, in isolation, can scare investors more than "The Shining".

STX is also unprofitable, though the top line is growing quickly, increasing about 40 per cent in the final quarter of 2017, to US$93 million. The nature of film accounting suggests the bottom line should follow. Production and marketing costs are required upfront, while the bulk of the income flows through from streaming services and beyond for years after the initial theatrical release.

Cable tycoon John Malone invested US$15 million in STX last year at a US$1.6 billion valuation. A roughly 50 per cent uplift - a reasonable leap from a pre-IPO fundraising - would put STX at close to US$2.5 billion. Rival Lions Gate Entertainment, before it bought pay-TV company Starz in 2016, was fetching about 16 times expected Ebitda. If investors discount STX to a multiple of 12 times for its limited track record and a longer time horizon, it would imply an expectation of some US$200 million of Ebitda in a few years.

That would be rational enough. The Hong Kong market, though, is heavily skewed towards financial stocks and a studio might appeal for diversification purposes. Consolidation in its already small industry also means STX can tout scarcity value. If investors get caught up in that story, the IPO could turn into a blockbuster.

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STX Entertainment, the studio behind films such as "Bad Moms" and "Molly's Game", on April 26 filed a draft prospectus with the Hong Kong Stock Exchange for a planned initial public offering.

As part of the submission, the company disclosed it had lost US$409 million on US$203 million of revenue in the year ended Sept 30, 2017. STX also reported a 41 per cent increase in its top line for the quarter ended Dec 31 from a year earlier, and a wider loss of US$240 million in the same three-month span.

Goldman Sachs and JPMorgan are listed as joint sponsors.

Early STX backers include private equity firms TPG and Hony Capital. Chinese technology giant Tencent, Hong Kong-based media company PCCW and John Malone's cable group Liberty Global are among those that made later investments.

REUTERS