星美控股(00198.HK)：Facing two dilemmas

机构：麦格理

目标价：3港币

Conclusion 

We are downgrading SMI Holdings to Underperform from Neutral, as the cinema company is facing two dilemmas: 1) undergo further rapid expansion, which would pressure PSA (per screen average revenue), or put itself at risk of losing market share, and 2) raise further funds to finance theatre expansion, albeit with EPS dilution, or risk losing market share. SMI has announced a deal with Success Electronics for an A-share back-door listing of its core theatre asset, Chengdu Runyun, as a potential fund-raising for further expansion, but this could result in earnings dilution of up to 39% for the listing company, on our estimates. Relative to the other cinema companies that have strong financial backing from parentcos, SMI will continue to face the pressure of financing its network expansion. We reduce 2017-19E EPS 15-30% and trim TP to HK$3.00 from HK$3.50. We transfer coverage to Marcus Yang.

Impact 

Dilemma 1: rapid expansion (but higher PSA pressure) or lose market share. This is the dilemma that most cinema companies now face following considerable expansion in the sector. SMI continues to roll out aggressive expansion plans – we expect another 100 theatres a year to 2019 – which, if executed, would put pressure on its PSA and, we estimate, would reduce gross margins to 32.8% in 2019 from 36.6% in 2017. This is despite the company’s fast-growing and higher-margin retail business. Slower expansion, however, could reduce market share, which we believe in the worst case would put the company at risk of being marginalised in the long run. 

Dilemma 2: Further fundraising (but with EPS dilution) or lose market share. Unlike other major cinema companies, such as Wanda Film, SMI lacks group backing. It will continue to face the pressure of raising funds for its aggressive expansion plan lest it risk losing market share. Its gearing ratio reached 97% as of end-2016, hence SMI has turned to capital markets since 2017. Chengdu Runyun is seeking an A-share back-door listing. It completed A Round fundraising in Mar-17, which diluted SMI’s stake to 84.37% (from 100%), which we estimate will be further diluted to as low as 50% upon the completion of the A-share backdoor listing. In turn, we estimate this will dilute earnings by 39% given this business contributes 90% of SMI’s earnings, all else remaining same. The deal is still in the works and subject to regulatory approvals. 

Earnings and target price revision 

We are reducing 2018/19E EPS 15%/30% based on lower PSA and lower margin assumptions. We are lowering our target price to HK$3.0, based on an 11x 2018E PER (from HK$3.50, based on a 7x 2017E EV/EBITDA). 

Price catalyst 

12-month price target: HK$3.00 based on a PER methodology.  Catalyst: 4Q17 results, box office performance. Action and recommendation 

Downgrade to Underperform. Despite the already cheaper (than peers) valuation of 14x FY18E PER, we see limited visibility for the company to address the abovementioned dilemmas. 

Macquarie Governance and Risk Score (MGRS) 

On our proprietary Governance and Risk Score SMI Holdings Group scores in the fourth quartile of our current universe coverage.