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Is there a silver lining to the silver screen?

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam12/4/2020 07:00 AM GMT+08  • 4 min read
Is there a silver lining to the silver screen?
Deep fall in cinema operator stock prices could be a blockbuster opportunity, says our columnist Nirgunan Tiruchelvam.
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Harry Houdini was an American entertainer in the 1890s who was famous for defying death. Houdini performed all over America. Audiences were transfixed by his escape acts. He was short but powerfully built.

One stunt was popular. He was buried alive, but managed to claw back to the surface. Houdini’s strength came in handy.

This week saw a Houdini act in the cinema business. mm2 Asia, which owns the Cathay cinema chain in Singapore and mmCineplexes chain in Malaysia, is looking to spin off its cinema business. mm2 Asia, which listed on the Catalist back in 2014, upgraded to the Mainboard in 2017. It runs 64 screens in Singapore, with a total of 11,364 seats. It also runs 133 screens in Malaysia.

mm2 Asia wants the cinema business to raise money independently. The move is a vote of confidence for the threatened industry. Singapore is a cash cow for cinema operators. The average Singapore resident watches seven movies a year, which is the world’s highest viewership per capita.

Predicting the death of cinema has been common for about a hundred years. In the 1950s, television was a threat. In the 1980s, videos were feared. Since the 2010s, the wolf has been Netflix. The cinema business has still survived and thrived.

But the pandemic has done something that two world wars did not. It has closed cinemas in most countries. Cinemas were open during the Japanese occupation in Singapore (1942-1945). People used to throng to the Cathay Cinema on Orchard Road despite the hardship. But cinemas were closed during the “circuit breaker”.

Today, Cathay and Golden Village cinemas are operating at less than half capacity in Singapore. I watched Mulan with my twin boys and another kid recently. There was no queue for popcorn. The distance between us and the next family was three rows.

Cinemas like Cathay are sitting ducks in a pandemic. They have high operating leverage. This means the fixed costs like rent, electricity and salaries are high.

Regulatory protection

The success of cinemas in most countries is due to regulatory protection. The movie producers like Walt Disney provide cinemas with exclusivity. For instance, Mulan, one of the few blockbusters of 2020, could only be shown in cinemas for the first 70 days of its release. During this window, the movie cannot be streamed.

It is a licensed business. The success is a function of the location and convenience of the cinema. Many Singaporean cinemas are in malls that provide cushioned seats and sell salted popcorn. There is no collection risk in the business. Movie-goers pay before they watch the movie. The business can be a cash cow.

The cinemas have another attraction — property. Cinema operators collect property opportunistically. As at March 31, 2020, mm2 Asia has $113 million in property, plant and equipment (PPE) as well as right-of-use assets, which has tripled in the last three years. Most of the PPE is in its cinemas. Cinema operators are proxy property investments.

Cinemas have survived during hardship by moving swiftly. During the Great Depression in the 1930s, most urban Americans watched at least one movie a week. Tickets were priced at a quarter (25 cents), which was just 10% of the daily wage. Cinemas gave out freebies like dishes to lure traffic. You could get a free saucepan or a salad dish at the box office.

Today, the cinema business can reinvent with a similar move. Netflix and Amazon Prime are putting pressure on the 70-day exclusivity window of cinema operators. A model could evolve where you could watch a new release online on the same day as a cinema. The Netflix viewing could be at a premium, encouraging viewers to flock to the cinema. The cinema would have better audio and visual experience, as well as companionship.

Another scenario would be for the streamers like Netflix and Amazon to buy cinemas. Up to the 1950s, the Hollywood studios like MGM used to own cinemas.

The deep fall in cinema operator stock prices could be a blockbuster opportunity. mm2 Asia is 74% below its five-year high. AMC Entertainment, the world’s largest cinema owner, has lost 90% of its value since 2017. It has warned that it could run out of cash by end of 2020. At just 4% of its book value, investors may bail it out.

Houdini used to be handcuffed and placed in a box full of milk. He managed to escape. Cathay and AMC could do the same once the vaccine appears.

Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer (Exotix Capital)

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