MM2 Asia Ltd (MM2) is a media, entertainment and content company with presence in Singapore, Malaysia, Hong Kong, Taiwan, China and the United States. It is the producer behind the wildly popular Ah Boys to Men movie series.

In mid-Sept, MM2 announced that it has appointed Haitong International Securities (Singapore) as financial adviser to conduct a strategic review of the group’s business with the aim of enhancing its corporate profile, branding and market awareness in the North Asia market and to explore possibility of a foreign listing of some of the group’s key assets.

While management has stated that there is no certainty that any corporate action will take place, could there be hidden fundamentals about the company that prompted a strategic review?

Let’s take a closer look in this article.

Business

MM2’s operations are segmented into 4 areas.

Firstly, its Core Business segment includes production, distribution and sponsorship of film, TV and online content. Revenue is mainly derived from producer and consultancy fees, distribution fees of content, and offering advertisers content and platform solutions.

Under the Event Production and Concert Promotion segment, MM2 is a major player in the live entertainment arena where its subsidiary, UnUsUal Limited frequently produces and markets large-scale event and concerts by internationally-renowned artists.

Under Cinema Operation segment, the group owns mmCineplexes with 133 screens present in 18 locations in Malaysia, and Cathay Cineplexes with 8 cinemas with 64 screens in Singapore.

MM2 also offers post-production services through its subsidiary, Vividthree Productions Pte Ltd, that specialises in 3D animation, computer-generated imagery (CGI) and visual effects.

In Financial Year (FY) 2018, Core Business was the largest segment with about 48.7% of the total revenue. This is followed by Concerts and Events at 24.1%, Cinema Operation at 23.4%, and Post Production segment at 3.3%.

MM2 FY 2018 Revenue Breakdown. Source: Company 2018 Annual Report

5 Year Financial Highlights

MM2 has been growing at an astonishingly-fast pace in the past 5 years. As shown below, its revenue has grown from $16.1 million to $192 million from FY 2014 to 2018. That is an 85.8% compounded annual growth rate (CAGR) over 5 years.

Similarly, its Net Profit Attributable to Shareholders increased from $2.7 million to $26.5 million over the same period, a 77% CAGR.

MM2 Revenue and Profit Attributable to Shareholders past 5 FY. Source: Company 2018 Annual Report

Latest Quarterly Earnings

MM2 showed similarly healthy growth in its latest quarterly earnings. Extracted from its 1Q FY19 earnings announcement, revenue grew 99% year-on-year (yoy) to $48.98 million, while its Profit before Income Tax and Net Profit increased at a much smaller rate of 21.5% and 17% respectively to $11.63 million and $9.12 million.

However, it is worth noting that MM2’s borrowings under its Current Liabilities increased by a whopping 2490% to S$129.5 million. This is due to additional loans and a drawdown of credit facilities for the payment of debts incurred in the acquisition of Cathay Cineplexes Pte Ltd.

Strength/Opportunities

Horizontally Integrated Across Content and Entertainment Value Chain

MM2’s business spans across the entire value chain of content creation, distribution and marketing, with complementary content distribution platforms across related industries. While it started out as a movie production house, it has since acquired cinema operators, post-production company, event production and concert promotion firm. These synergistic units facilitate greater efficiency and cost savings in creating more visually-engaging media,  cross-promotion of content, and securing movies screen time.

Healthy Production Pipeline

MM2 has its work cut out in FY2019. According to its Q1 FY2019 results announcement, the group has secured deals with Chinese partners to invest a total of US$25 million to co-produce 5 films and multiple online films in three years. Its subsidiary, UnUsUal Limited is morphing into Intellectual Property owner with the production of APOLLO, a show that celebrates man’s landing on the moon. Vividthree, its post-production arm, is creating a Virtual Reality tour show based on the popular 2016 Korean movie ‘Train to Busan’.

Weaknesses/Threats

High Debt

As a company on a fast growth track, MM2 has incurred a large amount of debts. In its Q1 FY2019 Balance Sheet, total debts were around $227 million (Q1 FY2018 was around $65.9 million), giving it a Debt to Assets ratio of 39.8%. Should we include the total liability, its gearing would be even higher. As mentioned earlier, this is due to the acquisition of Cathay Cineplexes hence investors would need to track the performance of Cinema Operations segment carefully.

Execution Risk

While MM2 has clearly laid-out growth plans with concrete actions taken to expand its business, the devil lies in its execution. Movies and content production is a high risk, high return industry where a big-budget movie can go on to sell well or fail terribly in face of the fickle nature of consumer taste. Furthermore, North Asia, its key growth market, is extremely competitive where MM2 is going against the local big boys such as Huayi Brothers Media and Alibaba Pictures that already have established market position. Furthermore, MM2 is also dealing with potential regulatory risk arising from unfavourable government regulations against foreign players.

Valuation

At a price of $0.345, MM2 is trading at a Price Earning ratio of 14.7 based on its trailing twelve months earnings. It does not pay a dividend at the moment.

Conclusion

While the future seems bright for MM2, we have to be mindful of its high debt due to its steadfast acquisition of companies in related industries. There are also inherent risks in the highly competitive movie and entertainment industry.

Fortunately, its PE valuation of 14.7 times is not demanding at the moment. This indicates that the market is not overly exuberant at its growth prospect.

Ultimately, investors need to monitor its future earnings closely. Should performance match up to what is described by the management presently, MM2 can be a fruitful investment for its shareholders.

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