Major Cineplex: Thailand's Dominant Movie Theater Operator With Multiple Growth Drivers

| About: Major Cineplex (MCPDF)

Summary

Major Cineplex is the largest movie theater operator in Thailand and also one of the most profitable among its global peers.

The company has a long growth runway ahead, as Thailand's movie theater penetration and ticket prices are low compared with other markets globally.

My target price implies a 43% upside over a three-year holding period, based on a 26 times forward P/E multiple applied to my FY2019 EPS estimate.

Elevator Pitch

Major Cineplex Group Public Co., Ltd. (OTC:MCPDF) (OTC:MCGRF) (OTC:MCGPF) [MAJOR:TB] is the undisputed market leader of the Thailand movie theater industry with a market share in excess of 70%. It has one of the best profitability track record among its peers, thanks to its scale-driven cost advantages and a high proportion of ancillary revenues. Major Cineplex benefits from several growth drivers such as growing ancillary revenues, cinema expansion in the provincial areas of Thailand, and the secular growth in movie theater penetration and movie ticket prices in the mid-to-long term. My target price of Bt48.10 for Major Cineplex implies a 43% upside to the share price of Bt33.50 as of May 24, 2017.

Company Description

Major Cineplex is a Thailand-listed movie theater operator that also trades on an OTC basis in the U.S. It derived approximately 55%, 17%, 16%, 5%, 4% and 3% of its revenue from cinema admission sales, cinema concession sales, advertising, rental & service, bowling & karaoke and movie content business segments respectively in 1QFY2017. The cinema business comprises both ticket sales and concession sales (e.g. popcorn). Major Cineplex's advertising business provides a full suite of advertising solutions to advertisers and media agencies, including screen advertising, video-on-demand walls, tri-vision, plasma screens, menu board, outdoor media like billboards and cut-outs among others. The rental & service business rents out retail space at its standalone cineplexes while the bowling & karaoke segment operates bowling locations, karaoke rooms and ice skating rinks at its standalone cineplexes. The movie content business produces movies, VCDs/DVDs and distributes movie rights for cinema services.

Thailand Duopoly And Relative Scale In Bangkok Make A Big Difference To Profitability

Major Cineplex is one of the most profitable listed movie theater operators globally, as per the peer comparison table below. I explore the factors contributing to its leading profitability in this section.

Symbol Stock Gross Margin-trailing 12 month Net Profit Margin-trailing 12 month Asset turnover-trailing 12 month Return on average assets-trailing 12 month Return on average equity-trailing 12 month
BAK:MAJOR Major Cineplex Group Public Co Ltd 35.9% 13.8% 61.5% 8.5% 18.0%
SHE:002739 Wanda Film Holding Co Ltd 29.0% 12.0% 65.2% 7.8% 13.3%
CNK Cinemark Holdings, Inc. 49.7% 9.3% 70.3% 6.5% 22.3%
AMC AMC Entertainment Holdings, Inc. 62.3% 2.4% 50.5% 1.2% 4.4%
SEO:079160 CJ CGV Co., Ltd (OTC:CJCGF) 50.7% -0.4% 82.7% -0.3% -1.4%

Major Cineplex boasts over 70% market share of the Thai cinema industry, the only other key player with more than 10% market share is a private movie theater operator, SF Corporation Plc (approximately half the screens of Major Cineplex). The duopoly structure (unlike many other countries and markets) of the Thai movie theater industry and Major Cineplex's absolute size (70% market share) gives the company significant bargaining power over landlords, movie companies and concession distributors. This results in lower rental payments, a better slate of movies with movie companies and more favorable terms with concession distributors.

Relative scale matters more than absolute size when it comes to cost advantages driven by economies of scale. Major Cineplex is not simply big in Thailand, it is very dominant in the capital city, Bangkok. As of end-2016, 343 or more than half of its 678 screens are located in Bangkok (Thailand's capital and most populous city) and its vicinity. As marketing and other overhead costs (management on a local or regional basis) are largely localized in nature, having more cinemas concentrated in a single city or region, allows the company to spread its fixed costs over a larger revenue base (more movie theaters in Bangkok which share fixed marketing and overhead costs) which drives margin expansion via operating leverage.

Ancillary Businesses Contribute High-Margin Revenue Streams

Major Cineplex generates significant ancillary revenues from cinema concession sales and advertising services which account for 33% of sales compared with ticketing revenues which makes up 55% of the company's 1QFY2017 top line. These ancillary businesses are another significant driver of Major Cineplex's superior profitability relative to peers. In FY2010, cinema concession sales and advertising contributed only 22% of revenue, which validates the significant headway that the company has made in growing ancillary revenues in the past few years.

Furthermore, it is important to note that these ancillary revenue streams generate significantly higher profit margins than the core cinema tickets sale business. The segmental operating margins for the advertising business are approximately the same at around 70% compared with 9% for the core cinema ticketing business. In other words, cinema concession sales and advertising services are high-margin add-on revenues leveraging the strong competitive position and value of its core cinema business and assets.

There is still room to grow ancillary revenues, as the company's concessions as a percentage of total theater revenue was 31.4% in FY2016 compared with the 32-34% range that peers Wanda Film, AMC Entertainment and Cinemark Holdings are in. As Major Cineplex grows the number of cinemas it operates and the number of screens increase, cinema concession sales and advertising services will grow in tandem, but contribute a disproportionate amount of the overall earnings growth. As an illustration, Major Cineplex increased its revenue by 10% YoY in 1QFY2017, but its earnings grew by a much larger 16%, thanks to higher YoY revenue growth rates of 12% and 15% for cinema concession sales and advertising services (compared with a 12% growth in admissions sales).

Moving Upcountry With Differentiated Operating Model

Being already very dominant in Bangkok, Major Cineplex has set its sights on growing its presence outside Bangkok, what people refer to as upcountry or the provincial areas of Thailand. While Major Cineplex will benefit less from the scale economies it enjoys in Bangkok, this is more than made up for by other factors that I will discuss below.

Like many other developing countries in Asia, Thailand is witnessing a rising middle income and increased urbanization. The country's urbanization rate rose from 38.8% in 2006 to 50.4% in 2015. While Thai people staying outside of Bangkok earn on average about half that of their Bangkok peers, the people living upcountry or the provincial areas of Thailand actually spend a greater proportion of their income at 80% (versus 75% for those in Bangkok). Euromonitor expects consumer expenditure on leisure and recreation in Thailand to grow by a 5.1% CAGR over the next five years. The upcountry holds significant potential for Major Cineplex in terms on capitalizing on the increase in leisure spending by the rising middle income population.

Major Cineplex is expanding into the provincial areas of Thailand primarily by collaborating with hypermarket operators, which is a departure of its stand-alone or mall-based operating model in Bangkok. Hypermarkets in the provincial areas of Thailand are analogous to shopping malls in Bangkok, as they act as a favorite weekend destination for families to do their regular shopping. Under this operating model, Major Cineplex serves as an anchor tenant in hypermarkets and runs movie theaters (and bowling alleys as well) to complement the shopping activities done in the hypermarkets. Major Cineplex's key hypermarket partners are Big C Supercenter (OTCPK:BGCUY) and Tesco Lotus, where approximately 60 and 69 of its cinema screens are located at their hypermarkets respectively as of end-2016.

Another critical component of Major Cineplex's expansion in upcountry Thailand is its strategy of putting a greater emphasis on local movies as opposed to Hollywood movies which have gained more acceptance in Bangkok. Interestingly, the market share of Thai movies is 40% in Cambodia, but only 30% in Thailand (there are sources putting the local market share of Thai movies at a even lower 12%), its home market. Another useful comparison is that local movies have a 50-60% domestic market share in Korea and China. In a February 2017 interview with Thailand Tatler, Major Cineplex President and CEO Vicha Poolvaraluk expressed his intention for the company to screen more Thai movies, and even co-producing them with Korean entertainment companies. Major Cineplex co-financed eight Thai movies in 2016, which included the box-office hit "Luang Phee Jazz 4G" which did Bt400 million in ticket sales. In March 2016, Major Cineplex formed a 49:51 joint venture with Korean entertainment company CJ E&M which will co-produce 15-20 Thai movies over the next five years.

Major Cineplex tripled its number of movie theaters in provincial Thailand from 94 in 2010 to 316 in 2016 and plans to add another additional 50 screens (16 cinemas outside Bangkok versus one in Bangkok) this year. The company's mid-term target is 1,000 screens by 2020, with most of the growth coming from upcountry. Notably, the company has only a presence in 33 of 77 provinces in Thailand.

Long Growth Runway For Thailand Movie Theater Industry

Major Cineplex is a key beneficiary of the long growth runway for the Thailand movie theater industry as the undisputed market leader.

In terms of movie theater penetration, Thailand's movie theater screens per million people is approximately 17 compared with 23 in China, 38 in Malaysia and 40 in South Korea, and 125 in the U.S. Also, the average movie ticket price in Thailand is low at about $5 compared with $8 in Hong Kong & the U.S. and $12 in Japan. According to research by the Motion Picture Association of America and Macquarie, Thailand has one of the lowest annual admission per screen globally at 29,000 in 2016 compared with 32,000 in the U.S., 33,000 in China, 48,000 in Japan and 98,000 in Korea. Combining these statistics with the low market share of Thai movies, the growth in leisure & recreation spending and growing urbanization, the prospects for the Thailand movie theater industry and Major Cineplex are extremely bright.

Valuation

I arrive at a target price of Bt48.10 for Major Cineplex by applying a 26 times to my FY2019 EPS estimate of Bt1.85.

I forecast that Major Cineplex will increase its top line by a three-year CAGR of 12% from Bt8,745 million in FY2016 to Bt12,286 million in FY2019, based on assumptions of a 9% CAGR in the number of screens (878 screens by FY2019 compared with 678 in FY2016) and an annualized growth of 5% for box office revenues in line with the 5.1% yearly growth in consumer expenditure on leisure and recreation forecasted by Euromonitor. I expect Major Cineplex's net profit margin to be maintained at 13.5% in FY2019 (same as FY2016), as margin improvement from operating leverage and a higher proportion of ancillary revenues are offset by higher depreciation and administrative costs (recall that scale economies play a less significant outside Bangkok where the cinemas are dispersed in different provinces) from expansion in the number of cinemas, particularly in the upcountry. This results in a FY2019 EPS of Bt1.85.

Notwithstanding the fact that Major Cineplex boasts the highest profit margin, ROE and ROA of its peers (as highlighted above), it offers the highest dividend yield and has the second lowest P/E. While Cinemark has a lower forward P/E than Major Cineplex, I think the latter deserves a higher P/E valuation, taking into account the growth potential of Thailand implied by the low movie theater penetration and low movie ticket prices of the country compared with other markets. My forward P/E valuation multiple of 26 times is reasonable, considering the above-mentioned factors.

Symbol Stock Forward P/E Dividend Yield
BAK:MAJOR Major Cineplex Group Public Co Ltd 24.2 3.5%
CNK Cinemark Holdings, Inc. 17.1 2.7%
SHE:002739 Wanda Film Holding Co Ltd 33.4 0.4%
AMC AMC Entertainment Holdings Inc 31.4 3.2%
SEO:079160 CJ CGV Co Ltd 44.3 0.4%

My target price implies a 43% upside to Major Cineplex's share price of Bt33.50 as of May 24, 2017.

Variant View

The key risk factors for Major Cineplex are weaker-than-expected box office performance, changes in consumer preferences leading them to watch movies at home and overexpansion in a value destructive manner.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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