Major Cineplex Group

Major Cineplex Group Plc (MAJOR) 

 

MAJOR is a favorite for both long and short-term. After passing the year’s bottom in 3Q15, it is looking at profit growth of 10-20% in 4Q15. For the longer horizon, we like MAJOR as a growth stock driven by aggressive expansion both in and outside Thailand. Expansion into CLMV will underwrite above-average growth in both revenue and profit. We expect earnings to hit ~Bt1.7bn in 2020. This implies MAJOR trades on only 12.8x 2020 EPS vs. 25x on 2015 EPS. Buy. 

 

Aggressive expansion. MAJOR’s five-year expansion plan involves doubling its screens to 1K in 2020 from 517 at the start of 2015. This implies 100 new screens per year for the next five years (from 50-60 annually for the past five years). Capex is estimated at Bt5bn for the five years. Of the new screens, 30% are planned for CLMV countries, which would bring total screens there to 100 or 10% of its total screens in 2020. Currently, MAJOR has 12 screens in CLMV: seven in Cambodia and five in Laos, and it plans many more in both countries. In Myanmar, MAJOR will join again with Aeon Mall (its partner in Cambodia), now negotiating for land. It has no solid plans for Vietnam.     

 

CLMV the new growth engine. We like the move to CLMV countries, giving it not only diversification from reliance on Thailand’s economy but also a new growth engine.  

 

1) We see CLMV as very similar to Thailand in 2005, with few screens and aging theaters. Rising GDP/capita will change lifestyles and trigger outings to watch movies, which will boost traffic – in turn allowing a rise in ticket prices, now at US$5/seat, ~10% less than Thailand. 

 

2) Margin expansion is another upside. As Thai movies provide better margin than Hollywood films – Hollywood producers demand a share of ~49% of box office take vs. 40% for Thai – using Thai movies in CLMV adds to gross margin.    

 

3) A good example is its JV in Cambodia. It achieved payback within 1.5 years of operation – half the target of three years. It dominates the market with a share of 70% in terms of revenue and revenue growth of 40% YoY. We expect revenue growth from CLMV to outpace Thailand and by 2020 revenue from CLMV is expected to provide 20% of MAJOR’s total revenue (up from 3% now). 

 

Solid earnings outlook. In 4Q15 we expect earnings to get back on track after the 3Q15 low point. Recent information from management confirms recovery, with 40% YoY revenue growth in October and 20% in November. We expect Bt270-300mn profit in 4Q15, up 10-20% QoQ. For the long-term, earnings will turn up with a 5-year CAGR of 14% in 2015-2020 to a new base of Bt2bn, double from 2015. Key to growth is higher revenue from screen expansion both in Thailand and overseas and a fatter margin from operational leverage, as fixed costs are high.        

Price performance and valuation. Share price has been at ~Bt31 for some time without a short-term catalyst to drive price up. But MAJOR in our view is a good long-term buy. At current price, it trades at 12.8x 2020 EPS, a 50% discount to current level.