Initial Thoughts - MM2 ASIA LTD.
MM2 Asia Ltd. is the latest addition to my watch-list. I noticed it when it first listed as it was when I started being more diligent in watching the financial news. At the time, I was more focused on stable, dividend investments, so did not consider them yet. I recently noticed that they had received some good press in market reports and a listing of their subsidiary, UnUsUaL, so have taken some time to try and understand their business.
Business
MM2 Asia is aiming to become an integrated content and platform provider, involved in both the creation of media content, and its distribution.
It currently has a core business in film/tv production, providing services that cover the entire filmmaking process: production, distribution, sponsorship (offering space to advertisers). It was involved in over 100 films across Asia since 2008.
Besides the core business, it has taken up investments in:
1. a post-production company, Vividthree, specialising in 3D animation
2. UnUsUaL, a concert and events company
3. Cinema business, with 43 screens in 5 cinemas in Malaysia
4. a JV with Dick Lee Asia, for artiste and consultancy services
5. a minority stake in Rings.TV, a broadcasting platforms provider.
MM2 also has partnerships across north asia (HK, TW, PRC), and incorporated a subsidiary in USA.
Expansion Plans
It currently sits on a large cash pool, having recently completed a S$157m convertible note, which gives it more cash to acquire other companies.
With this war chest, and the existing acquisitions, MM2 looks on track to become a media company with a wide range of capabilities and platforms. This would be a good bet if they can become some kind of Asian Netflix.
On the other hand, this stream of acquisitions is not easy to maintain. For example, just recently, their aim to gain a stake in GV had fallen through. Growing a company so quickly would make it harder and harder to unlock synergies, and take up more and more of management's time. Considering this, I think I must expect that the acquisition stream may slow down, or may not contribute as much growth as before. At some point they would have to slow down and focus on organic growth.
Content Pipeline
A key factor in MM2's growth is whether it has a healthy pipeline of good films to produce. Having good films is also crucial to long term assets as it gives them IP to exploit.
The financials also show a large amount of trade receivables from its production business, which I wonder whether has a level of credit risk if the films do not succeed. Production delays and cost overruns have also been noted as one of the key business risks.
It currently has 38 shows over the next 12-18 months. I don't see myself as an expert on film/tv content, especially when it comes to local shows. Sadly, I tend to have quite a low expectation of the standard of local films, but I do see strong interest in shows like Ah Boys to Men. They are also working on a version of The Voice for SG and MY, which has been successful in PRC, and among Singaporeans.
Without much experience in this industry, I find it hard to tell if there will be more good scripts coming to MM2. Perhaps with a growing local arts scene, and also partnerships with HK and PRC, which are also focusing on film content, good scripts will find their way here. However, this part would remain relatively speculative for me.
Having an alternative cinema business for recurring income, and also a concert production business, helps to mitigate these risks by proving other sources of income though.
Financials
The financials show very strong growth, with revenue having a CAGR of 76.3%, gross profit at 127.2%, and net profit at 120.2% since FY12. It would be impressive if they can maintain these growth numbers, but this growth is also partially caused by acquisitions and expansions, and not fully indicative of the company's organic growth (to be fair, the core business also has positive growth numbers).
Another strong point is that its business has large profit margins (FY16 core business margin = 44%)
The breakdown of revenue has also been diversifying away from the core business to include the other business segments, and also away from Singapore revenue.
On the balance sheet, I am concerned that a big portion of its assets (>10%) constitute goodwill from acquisitions, part of its assets are also intangible, being film rights and inventory. I thus do not give too much value to its net asset numbers.
While growth prospects appear strong, these are likely to be priced in by the market already, as the PE ratio is 39 (ttm), and NAV per share is 10c. This is a huge premium. Recent research reports still consider that the stock has potential and put up a buy call with a target price of 0.58-0.60.
Management
The management team, including founder Melvin Ang, well known in the local media scene, have a large combined pool of media experience. However, a large chunk of their experience comes from time in mediacorp, which I do not feel has been a shining star in the local media scene. Could this be their chance to restart something new and apply their experience, or would MM2 end up on a similar path and feel irrelevant compared to more mainstream western content.
On a side note, I notice their investor relations page does not have the latest financial results, and the results have some editorial mistakes. These are quite trivial issues, but it does give an impression that their corporate governance team is still young.
Conclusion
I think the media business is one which will have steady demand, just looking around at my own friends or people on the train, there is constant demand for content to consume. Even if the economy is bad, I think people still look to on-screen content, which is relatively cheap, for entertainment. They would instead give up branded goods, or expensive meals.
However, that does not mean MM2 is sure to do well, people want content, but I think they are fickle as to where that content is from. There are many sources of content out there: Youtube, Netflix, illegal downloads and streams etc, and also different types of content, K-Dramas, GOT, etc. It it these shows that have been going viral and not locally produced ones. While I would hope for some local content to become a worldwide sensation, I am not holding my breath for this to happen.
Conversely, if managed well, their huge war chest and expansion plans could let them become a ubiquitous name in the Asian media scene, and competing with the large Western platforms and content creators. The current results seem to show good progress towards such an aim, and would be a good reason to invest in this stock.
The Pros and Cons can be summed up as follows:
Pros
- Strong growth results
- Large profit margins
- Diverse media capabilities
- Aggressive expansion plan
- Large war chest for expansion
Cons
- Expansion plans may not materialise
- Not clear if strong organic growth possible
- Risk of slow pipeline of scripts
- Risk of cost overruns and production delays
- Competitive industry.
With limited funds now, I will observe this for awhile more, and if the price falls due to general market conditions, perhaps consider a small investment, which will be speculative in nature. I think mm2 has potential to be a good investment, but it may also be more prudent for me to increase my investment in the index instead.
The above represents my personal thoughts and does not constitute and is not intended to be relied on as advice or recommendations to any person.