The cinema business has weathered an unprecedented crisis brought by the pandemic. The massive plunge in patrons to the cinemas has drastically fallen off the cliff with all the measures by governments to contain Covid 19. However, things seem to be picking up with an about-turn to better days with the unwinding of earlier tough measures.
From Singapore’s scenario, there is now no safe distance requirement and capacity could go back to 100%. With the pent-up supply where movie companies have held back launches of their blockbusters, the return of the good old days of the cinema business could be on track.
In recent times, the screening of Top Gun (meant to be released in June 2020), Jurassic World Dominion, and the upcoming Minions- The Rise of Gru, would generate the buzz for moviegoers to revisit the cinemas and get things back to normalcy.
Given this backdrop, an investment in the cinema business would be a way to ride this recovery thesis of the sector. Moreover, we have spotted a well-known company that is trading at a deep value which provides a good margin of safety.
Deep Value Play
The stock that we are considering would be no other than Orange Sky Golden Harvest which is listed on the Hong Kong Stock Exchange. They are owners of the Golden Village chain of cinemas in Singapore (14 cinemas) and also have exposure to the Hong Kong (10 cinemas) and Taiwan (16 cinemas) cinema industry.
Golden Village is an iconic name in the Singapore Cinema scene with the first multiplex (Numerous cinemas) established in Singapore on 27th May 1992.
Currently, they are just trading at a Price to Book of 0.12 which is a very deep value and attractive proposition provided they are able to navigate their way out of their current predicament and start to regenerate earnings; still in a loss-making situation.
Financial Woes
Source: Orange Sky Annual Report 2021
They have been bleeding close to 300 million HKD annually for 2020 and 2021- these losses include non-recurring asset impairment and it would have been 216 million and 175 million for 2020 and 2021 without the impairments respectively.
Source: Orange Sky Annual Report 2021
They have 1.06 billion HKD in bank loans (Debt to Equity would be around 66 per cent) and due to the breach of bank covenants, they have all now come under current liabilities. Actions have been done to improve the working capital situation.
- Refinancing 573 million HKD worth of bank loans
- Sale of HQ Property for proceeds of 225 million HKD
- There is still 745 million HKD cash in the coffers.
Factoring in the repayment of the full 1.06 billion dollars HKD bank loans and coupled with the remedial actions, the company should have left with 483 million HKD cash at their disposal (745+225+573- 1060).
The company’s bank loans are at a floating rate and could be affected by the current interest rate environment. I would not be surprised if there is a cash call in the mode of a rights issue.
Though it seems like a good bargain from price to book angle, we have adjusted the ratio by eliminating all the goodwill and intangible assets which makes up almost 2/3 of their book value. At their current price of 6.5 cents HKD, it would still be at an attractive 0.36x to book value of 18 cents– could be a target price.
Positives Despite Precarious Financials
Given their financial situation, our estimates would be they will still have 3 years of buffer to turn things around. Unless there is a further exacerbation of the pandemic situation such as another long lockdown, we do have the view that the company would be able to survive this crisis and come out stronger.
The company was able to generate positive operating cash flow for 2021 despite greater losses from 2020. This is a positive sign that we hope will carry into 2022 results.
Also, the company is still investing and taking this crisis as an opportunity and converting their cinemas to be able to hold events and be multi-purpose, which could provide optionality in this current Netflix world. Just imagine instead of movies, you could be attending mini concerts, plays and etc, in the cinema which would drive average revenue per seat up.
The company is confident that cinemas will still be a key form of entertainment and they have increased their cinemas’ count in Hong Kong and Singapore despite the negative tone set by the pandemic.
Industry Figures
Source: Infocomm Media Development Authority Singapore
Source: Statista
An analysis of the data from Singapore’s cinema industry shows a recovery with 2020 as the drought and in 2021, the attendance has improved from 4.7 million to 7.63 million. It is still a far cry from their average of 19-20 million in normal times.
Orange Sky also has a controlling market share of 42% of the Singapore market based on seat capacity.
The worrying trend is the shift from cinemas to streaming alternatives such as Netflix and Disney Plus. We could see numbers started declining in 2016 when Netflix subscribers’ growth rate have gain traction. This has nothing to do with the pandemic.
Somehow, for this investment thesis to work, the movie experience in the cinemas must remain intact. It is more of an experience to dress up for a movie with the family or a date, rather than just watching it over the TV, for a blockbuster full of animation and sound effects.
If the movie experience at the cinema is going to be obsolete, then this investment would be a big value trap.
Summing Up
Trading at just 0.12x Book Value, Orange Sky Golden Harvest is indeed an opportunity that deserves greater attention. The Golden Village branding is iconic, an established and trusted name in the cinema industry. They started the first multiplex in Singapore on May 27th 1992 at Yishun 10.
Not all is green pasture as not surprisingly, they are having tough times over the past few years. Their financials are also under strain but we do see recovery on course. There could also be a possibility of a cash call in the mode of a rights issue to boost up their financials.
With positive operating cash flow seen in 2021 and further new investments, Orange Sky could be prime for a good ride to the recovery of the cinema business.
However, the trend of alternatives such as Netflix and Disney Plus would be a threat but Orange Sky is trying to innovate by overhauling their cinemas to be multi-purpose so as to provide optionality to the changing landscape.
We do feel the current price is an attractive proposition if recovery is on track for a slice in the cinema business. We just hope there are no more surprises on the pandemic front- another prolonged lockdown.
Disclaimer:
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
