2020 was a tough year for TV/movie producer, mm2. Not so much for the films that they produced, but the acquisition of Cathay Cineplexes more than 2 years before Covid-19 struck dealt a heavy blow to the business.
Cinemas were not allowed to open for months and were only permitted to operate at 50% capacity during Phase 3 in Singapore. To make matters worse, cinemas are often the anchor tenants of expensive real estate in popular malls – rents have to be paid regardless of the ticket sales or a lack thereof.
The half-yearly results was telling. As of 30 Sep 2020, revenue fell by 83% and net loss ballooned to $26m from a profit of $13m in the same period of the previous year. This was mainly impacted by the cinema segment which brought in revenue of $87.9m during FY2020 and a mere $3.6m in the first half of FY2021. (about -96% drop!)
Operating cash flow was negative and it still has $240m borrowings in its balance sheet (which I believe was largely incurred by the cinema acquisition).
This isn’t sustainable.
Why did mm2 acquired a cinema, in an era where Netflix is ousting Hollywood?
Why would a TV/movie producer acquire a cinema chain in the first place? In business schools, such a move would be known as a “vertical integration” – cinemas are key movie distribution nodes and they have a say over which films to carry on their screens. Asian films have to compete with Hollywood blockbusters and having control of a cinema chain means mm2 produced films can be given some slots for airing. Also, most of the movie revenue is kept by the cinemas and mm2 will be able to boost its revenue further.
But all these advantages are meaningless if mm2 cash flow is impacted by the cinema.
mm2 appeared to be pursuing two options. In Dec 2020, talks of merging Cathay Cineplexes and Golden Village cinemas began to appear in the news. And it was also mentioned that should the merger fail, a spin off of Cathay Cineplexes to a separate listing would be considered.
Although these developments have not been cast in stone, it is very likely that mm2 is going to lighten the balance sheet by reducing the stake in Cathay Cineplexes one way or another – mm2 has a track record of spin offs: (1) events and concerts business to UnUsUaL and (2) visual effect and animation studio – vividthree.
This leaves mm2 with the core and more profitable TV/movie producing business.
mm2’s core business remain profitable
I learned that mm2’s production cost funding is secured before filming begins. The funding usually comes from investors, advertising fees from sponsorships, grants and subsidies from the government. The investors get their return and the producer gets a bonus when the box office does well. It is risk-free for mm2.
The core TV/movie production business is definitely worthy. I enjoyed Jack Neo’s movies as they are very relatable to Singaporeans. Besides that, mm2 has very successful portfolio of movies in Taiwan too. For example, More Than Blue is the highest grossing Taiwanese film of all time. It cost US$3m to produce while the box office revenue was US$150m.
Cinemas may go out of date but content production can never go away. mm2 is keeping up with the times as streaming becomes more dominant. It is targeting to generate 40% of the content revenue from streaming channels by FY2022. Subscribers of popular channels such as Netflix and Disney+ may be able to enjoy mm2 films in the future.
Details of the rights issue
But in the meantime, mm2 is seeking to raise $54.65m from the rights issue, pricing each right at $0.047. The proceeds would be used to pare down the debt. The gearing would decrease from 1x to 0.7x after the rights issue. This would buy mm2 more time before a permanent solution of reducing the stake in the cinema business materialise later.
There will be one rights share for every existing share so the number of shares will simply double after the exercise.
mm2 will trade ex-rights on 18 Mar 2021. If you hold mm2 shares until this date, you would be entitled the rights. If you buy on 18 Mar 2021, you will not get the rights.
Also, this is a renounceable rights and that means you will be able to sell the rights if you do not wish to convert. But whether you can find buyers for the rights at the price you want to sell is dependent on how the market sentiment during the rights trading period. The rights (mm2 Asia R) will trade between 24 Mar 2021 to 1 Apr 2021 with the ticker MIPR. This means that you can buy and sell the rights like any other stocks on SGX.
Lastly, you must make payment for the rights if you wish to convert them to shares by 8 Apr 2021.
In summary:
- 18 Mar 2021: mm2 trading ex-rights (XR)
- 23 Mar 2021: provisional rights entitlement credited to eligible shareholders
- 24 Mar to 1 Apr 2021: Nil-paid rights trading on SGX
- 8 Apr 2021: last day for acceptance and payment for rights issue
The major shareholder, Melvin Ang, has indicated his intention to subscribe all the rights he is entitled with. At least there is skin in the game.
So do you know when will the 4.7 cents stocks be credited for those who subscribe?