Thailand Total Access CommunicationThailand RE-INITIATE COVERAGE Major Cineplex Group (MAJOR.BK/MAJOR TB)* Positive factors are in the price Neutral Re-initiate Event Price as of 28 Mar 2017 33.75 We re-initiate coverage on MAJOR with a 2017 target price of Bt37.00 and a rating of Neutral. 12M target price (Bt/shr) 37.00 Unchanged / Revised up (down) (%) N.A. lmpact Upside/downside (%) 9.6 A major cinema operator in Thailand MAJOR is a major player in Thailand’s cinema industry in both market share and number of Key messages branches and screens. In 2016, the company had revenue market share of more than 70%, We expect MAJOR’s 2017-2018 earnings to surge followed by SF Corporation Plc. which provides cinema services under the brands SF World, with CAGR of 25% on the back of i) revenue SFX and SF Cinema. At the end of 2016, MAJOR had 113 branches with 678 screens while SF growth in cinema business (core business), ii) blooming advertising revenue along with branch had around 50 branches with 300 - 350 screens. expansion, and iii) margin improvement. Core business has rosy outlook However, our 2017 target price of Bt37.00 offers The company’s cinema business (core business), which contributes around 72% of revenues, only 9.6% upside from the current market price. has a solid outlook from 2017 onward. Ticket sales are expected to increase by 10% in 2017- Thus, we re-initiate coverage on MAJOR with a rating of Neutral. 2018 to Bt5.3bn and Bt5.8bn, respectively, on the back of i) larger number of guests along with screen expansion in the vicinity of 50-70 screens/year coupled with a strong movie line up Trading data from Hollywood, and ii) increased average ticket price from Bt166 to Bt171 (+3% YoY). Mkt cap (Btbn/US$mn) 30.1/755 Core earnings to increase at 25% CAGR during 2017–2018 Outstanding shares (mn) 894.5 MAJOR’s 2017 core earnings are expected to surge 35% YoY to Bt1.09bn, driven by i) 10% YoY Foreign ownership (mn) 435.2 growth in cinema business, ii) blooming advertising revenue (+15% YoY) along with the 3M avg. daily trading (mn) 2 recovery in the advertising industry and the company’s increased number of screens making it 52-week trading range (Bt) 27.25 – 35.50 more attractive to media agencies and business owners, and iii) margin improving from 36.2% Performance (%) 3M 6M 12M in 2016 to 39.8% on increased revenue and the end of segments that contributed losses, such Absolute 0.7 11.6 17.4 as some bowling branches and VCD, DVD distribution. Core profit is expected to grow a Relative -2.7 5.2 3.8 further 16% YoY in 2018 to Bt1.27bn. Quarterly EPS Valuation and action Bt 1Q 2Q 3Q 4Q Our target price for 2017, which is based on the DCF method (WACC 6.8%), is Bt37.00, offering 2014 0.16 0.50 0.33 0.23 an upside of only 9.6% from the current market price. Meanwhile, we expect a dividend yield 2015 0.22 0.55 0.38 0.16 of 3.7% for 2017. We rate MAJOR, Neutral due to the limited upside to our target. However, 2016 0.25 0.61 0.37 0.10 there is short term catalyst from seasonality, as historical data indicates MAJOR’s earnings usually hit the peak in 2Q. Share price chart 38 30 Risks 36 Weaker than expected revenue from movie line up in 2017. 20 34 32 10 Key financials and valuations 30 0 28 Dec-14A Dec-15A Dec-16A Dec-17F Dec-18F (10) 26 Revenue (Bt mn) 8,623 8,580 8,745 9,622 10,535 24 (20) Mar-16 Jun- 16 Aug-16 Nov-16 Jan- 17 Mar-17 Gross Profit (Btmn) 3,148 3,028 3,165 3,827 4,286 Sh ar e Pr i ce Price performance relative to SET EBIT (Btmn) 1,084 1,015 753 1,200 1,410 Source: SET Net Profit (Btmn) 1,086 1,171 1,188 1,313 1,490 Normalized Profit (Btmn) 952 890 808 1,093 1,270 EPS ( Bt ) 1.22 1.31 1.328 1.450 1.645 DPS ( Bt ) 1.05 1.15 1.20 1.25 1.35 EPS growth (%) 3.0 7.5 1.2 9.2 13.4 P/ E ( x) 22.7 26.9 24.7 23.3 20.5 P/ B ( x) 3.87 4.73 4.36 4.36 4.16 EV/ EBITDA ( x) 10.8 14.0 14.9 12.9 11.3 Net debt/Equity (x) 0.6 0.7 0.7 0.6 0.5 PiyathidaSonthisombat Dividend yield (%) 3.8 3.3 3.7 3.7 4.0 66.2658.8888 Ext.8852 Return on Average Equity (%) 17.4 18.0 17.8 19.1 20.7 [email protected] Source: KGI Research Key investment themes *The Company may be issuer of Derivative Warrants on these securities. 1 March 29, 2017 http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer Thailand Major Cineplex Group A leader in Thailand’s cinema industry: MAJOR is considered a leader in the industry, as it has the largest revenue market share, at more than 70%, with the greatest number of screens in Thailand (678 screens at the end of 2016). Having the largest number of screens would enhance MAJOR’s capacity to accommodate moviegoer traffic when blockbuster movies are released. Moreover, having the largest market share in the industry is likely to enhance the company’s bargaining power with movie owners and attract agencies and business owners to advertise on the company’s screens. Cinema revenue to be boosted by strong movie line up in 2017: There are more blockbuster movies from Hollywood (expected to bring high box office revenue) lined up in 2017 than in 2016. We believe that MAJOR’s 2017 revenue from cinema business is likely to show impressive growth boosted by ticket sales and concession sales. Core earnings growth expected at 25% CAGR 2017-2018: We anticipate MAJOR’s core profit to increase to Bt1.3bn in 2017 (+35% YoY) thanks to revenue growth from its cinema business, core business (+10% YoY) and advertising business (+15% YoY). Growth for its cinema business is expected to come from a larger number of guests resulting from a strong movie line up and the company’s branch expansion plan. Meanwhile, its advertising business is expected to bloom with the recovery in the advertising industry, including advertising in cinema. Outstanding among peers: We believe that the positive factors have been priced in MAJOR’s share price. Currently, MAJOR is trading at PER of 23x implying close to +1 SD, which is lower than regional peers that are traded at PER of almost 33x while the company’s 2017 core profit is expected to grow 35.3%, or above the average regional growth of 30.5% for 2017. Seasonality is a short-term catalyst to robust profit growth in 2Q17: Based on historical data, MAJOR’s share price usually rises along with the company’s earnings that always peak in 2Q. Figure 1: Regional peer comparison Ticker Country Mkt Cap. Norm EPS growt h PER PBV Div. yield USDmn 2017F 2018F 2017F 2018F 2017F 2018F 2017F M A JOR TB Thailand 877 35.3 16.2 23.3 20.5 4.4 4.2 3.7 002739 CH China 9,680 38.3 31.3 32.8 25.0 5.3 4.5 0.7 601595 CH China 2,010 25.4 23.2 46.5 37.7 5.5 4.7 - 300528 CH China 1,360 31.8 33.5 51.1 38.2 2.9 2.8 - 3636 HK China 590 21.4 23.1 13.0 10.5 NA NA - Average 2,903 30.5 25.5 33.3 26.4 4.5 4.0 0.9 Source: KGI Research , Bloomberg A leader in cinema in Thailand *The Company may be issuer of Derivative Warrants on these securities. 2 March 29, 2017 http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer Thailand Major Cineplex Group MAJOR was established in 1995 as a cinema complex provider. The company has expanded into other businesses that enhance its cinema business. Currently, its businesses can be categorized into five groups; i) Cinema business: To provide more movies at the same time, MAJOR’s cinema business decided to provide multiplex cinemas with more than three screens per branch. By the end of 2016, MAJOR had 12 brands for its cinema business providing 678 screens. It is considered the leader in Thailand’s cinema industry with the greatest number of screens. ii) Advertising business: Operated by Major Cine Ad Co., Ltd, the company’s subsidiary provides advertising media in MAJOR’s cinemas, such as screen ads and VDO walls. iii) Bowling business: MAJOR provides bowling and karaoke at its bowling branches. In 2016, the company had 15 bowling branches (14 branches are in Thailand and 1 branch is in Cambodia) with 290 lanes and 174 karaoke rooms. Moreover, MAJOR has launched ice skating at five of its branches. iv) Rental space business: MAJOR manages some of the spaces at its cinema branches to rent. At the end of 2016, MAJOR had a total of 50.6K sqm to rent with an occupancy rate of 90%. Its key customers are KFC, MK, McDonald’s, Black Canyon and B2S. v) Movie content business: The business imports movies, produces Thai movies to display on cinema screens and also sells the rights on those movies to home entertainment providers.