Major Cineplex Group

Major Cineplex Group Plc (MAJOR)

Investment thesis
Following the preview conference call, we believe that 1Q14 core earnings will be the nadir, followed by a QoQ recovery in 2Q14 (due to a better film line-up and easing political tension) and a YoY rise in 2H14 (led by an MPIC turnaround and cost-cutting at MAJOR). Our BUY rating stands, premised on a 2H14 core earnings recovery and a cheap valuation—an FY14 PER of 16x (a long-term mean of 19.3x).
Lower box office takings for 1Q14
We estimate Bt729m in 1Q14 top-10 box office takings, down by 9% YoY and 21% QoQ. The assumed fall is attributable to the closing of prime theater locations at 5pm near political rallying sites during Jan-Feb and the domestic consumption slowdown. Only one movie grossed near Bt100m in 1Q14—Kid Theung Wittaya (Bt100m in total; Bt72m in 1Q14)—against two movies in 1Q13—Pee Mak Prakhanong (Bt570m in total; Bt102m in 1Q13) and G.I. Joe 2 (Bt115m in total; Bt62m in 1Q13). Three films grossed a 70-90m each in box takings in 1Q14—47 Ronin, Robocop (2014) and 300: Rise of an Empire. 
Insights into 1Q14—a modest YoY rise in core profit
We estimate a Bt184m net profit for 1Q14, down 39% YoY but up 68% QoQ. Stripping out extra items in 1Q13 and 4Q13, core profit should post a rise of 5% YoY and 21% QoQ, led by better OPEX control and a significantly shallower MPIC net loss, which we believe would have outweighed the effect of top-line slippage.
MPIC’s business model shift from a home entertainment distributor to a content provider and cost-cutting should have reduced its net loss from Bt61m in 4Q13 to Bt5m in 1Q14. Moreover, lower film-hire and staff costs in tandem with the launch of more e-ticketing boxes would have reduced MAJOR’s OPEX. Ticket sales slipped 3% YoY in 1Q14. But concession, bowling, space rentals and onscreen advertising revenues should have risen by 2-4% YoY. DVD/VCD distribution revenue will post a 59% YoY dive. 
QoQ recovery in 2Q14 a better film line-up & political easing
Due to the high 2Q13 profit base comparison (record box office takings for Pee Mak Prakhanong), we expect 2Q14 core profit to drop 23% YoY but rise 63% QoQ. The QoQ jump will be led by an improved movie line-up and increased movie-going with the easing of political tension. Note that Captain America 2 was the first film to premiere this year to gross above Bt100m (Bt152m up to April 20). We expect eight more blockbusters in 2Q-4Q14—The Amazing Spider-Man 2, Godzilla (2014), X-Men Days of the Future Past, King Naresuan 5 (2Q14), Transformers 4, Dawn of the Planet of the Apes (3Q14), The Hunger Games 3 (Part 1) and the Hobbit 3 (4Q14).