IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

Arun has over 15 years’ experience covering the Technology sector. During this time, he has worked with technology start-ups and as an equity analyst in investment banks and independent research firms. He was formerly a Technology Analyst for Canaccord Genuity, Altium Securities, Espirito Santo Investment Bank, Noble Group and Clear Capital. He has a dual Master’s degree in Financial Engineering and Industrial and Operations Engineering from the University of Michigan. He obtained his Bachelor’s degree in Mechanical Engineering from the Indian Institute of Technology, Bombay. He is also a CFA charterholder.

IPOs and Catalysts/Events

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Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

Maoyan Entertainment / Equity Capital Markets

As <a href="https://www.smartkarma.com/entities/26970" target="_blank" data-smartkarma-citation="entities:26970:1">Meituan Dianping (3690 HK)</a>’s shares begin trading on Thursday, we look at Maoyan, which was founded and subsequently divested by Meituan. <a href="https://www.smartkarma.com/entities/27451" target="_blank" data-smartkarma-citation="entities:27451:1">Entertainment Plus (EPLUS HK)</a> operates Maoyan which is the largest online movie ticketing service provider in China. According to press reports, Maoyan aims to raise between $500 million and $1 billion. Maoyan is backed by <a href="https://www.smartkarma.com/entities/1424" target="_blank" data-smartkarma-citation="entities:1424:1">Beijing Enlight Media (300251 CH)</a> (20.0% shareholder), <a href="https://www.smartkarma.com/entities/26" target="_blank" data-smartkarma-citation="entities:26:1">Tencent Holdings (700 HK)</a>  (16.3% shareholder) and Meituan (8.6% shareholder).Maoyan's financial performance is mixed as revenue has grown at a rapid pace (primarily due to the Weying acquisition) but it has moved to negative EBITDA and FCF flow in 1H18. Online entertainment ticketing is Maoyan's core business and accounts for 61% of 1H18 revenue. Unfortunately, Maoyan’s core business is running out of growth drivers which also affects its profitability:<ol>
<li>Online movie ticketing accounts for around 98% of Maoyan’s online entertainment ticketing GMV. A key growth driver over the last few years has been the rapid consumer adoption of purchasing movie tickets online. The online penetration rate of movie ticketing has rapidly increased from a low 18% in 2012 to 82% in 2017. In other words, market growth driven by rising online penetration rates has largely played out.</li>
<li>Maoyan’s high market share of 61% is misleading as Maoyan has barely grown its organic market share since 2015. China’s online movie ticketing market has rapidly consolidated from four major players in 2015 to just two in 2017 (Maoyan, Tao Piao Piao). Maoyan has largely been responsible for the consolidation as it acquired Weying in September 2017 and Weying acquired Gewara in late 2015. On a pro-forma basis, on the assumption that Weying was part of Maoyan since 2015, Maoyan’s market share has remained relatively stagnant at around 60% since 2015.</li>
<li>In contrast, we believe that <a href="https://www.smartkarma.com/entities/20724" target="_blank" data-smartkarma-citation="entities:20724:1">Alibaba Pictures (1060 HK)</a>'s Tao Piao Piao has taken market share from the small sub-scale players. Alibaba Pictures notes that Tao Piao Piao achieved “market share expansion” in 1Q18. Due to duopoly market structure and Alibaba Pictures’ full commitment to Tao Piao Piao, we believe Maoyan’s ability to maintain its market share will be fully tested.</li>
<li>Monetisation rate has little headroom to grow due to the industry structure. Except for an industry price hike in 2016, Maoyan’s monetisation rate has remained relatively flat since 2016. Notably, while Meituan’s food delivery also faces an aggressive competitor in <a href="https://www.smartkarma.com/entities/787" target="_blank" data-smartkarma-citation="entities:787:1">Alibaba Group Holding (BABA US)</a>'s Ele.me, it has managed to increase its monetisation rate since 2016.</li>
<li>Improving profitability is a challenge due to the ongoing pressure to spend on user incentives. Maoyan’s S&amp;M expenses as a percentage of revenue increased from 56% in 2017 to 60% in 1H18 due to the aggressive spend by Tao Piao Piao on user incentives. On 13 April 2018, Alibaba Pictures announced a profit warning as it “accelerated its promotional effort to increase the market share of Tao Piao Piao.” We believe that if Alibaba continues to view online ticketing as strategically important, Maoyan will struggle to rein in its S&amp;M expenses and materially improve profitability.</li>
</ol><div class="content-highlight">Like Meituan, Maoyan is yet another proxy in the battle between Tencent and Alibaba. However, unlike Meituan, Maoyan’s core business seems to be running out of organic growth drivers. Profitability also is under pressure due to an aggressive Alibaba-backed competitor. Overall, we believe Maoyan faces challenging prospects. We will provide an updated view on the release of further information.</div>

As Meituan Dianping (3690 HK)’s shares begin trading on Thursday, we look at Maoyan, which was founded and subsequently divested by Meituan. Entertainment Plus (EPLUS HK) operates Maoyan which is the largest online movie ticketing service provider in China. According to press reports, Maoyan aims to raise between $500 million and $1 billion. Maoyan is backed by Beijing Enlight Media (300251 CH) (20.0% shareholder), Tencent Holdings (700 HK)  (16.3% shareholder) and Meituan (8.6% shareholder).Maoyan's financial performance is mixed as revenue has grown at a rapid pace (primarily due to the Weying acquisition) but it has moved to negative EBITDA and FCF flow in 1H18. Online entertainment ticketing is Maoyan's core business and accounts for 61% of 1H18 revenue. Unfortunately, Maoyan’s core business is running out of growth drivers which also affects its profitability:
Online movie ticketing accounts for around 98% of Maoyan’s online entertainment ticketing GMV. A key growth driver over the last few years has been the rapid consumer adoption of purchasing movie tickets online. The online penetration rate of movie ticketing has rapidly increased from a low 18% in 2012 to 82% in 2017. In other words, market growth driven by rising online penetration rates has largely played out.
Maoyan’s high market share of 61% is misleading as Maoyan has barely grown its organic market share since 2015. China’s online movie ticketing market has rapidly consolidated from four major players in 2015 to just two in 2017 (Maoyan, Tao Piao Piao). Maoyan has largely been responsible for the consolidation as it acquired Weying in September 2017 and Weying acquired Gewara in late 2015. On a pro-forma basis, on the assumption that Weying was part of Maoyan since 2015, Maoyan’s market share has remained relatively stagnant at around 60% since 2015.
In contrast, we believe that Alibaba Pictures (1060 HK)'s Tao Piao Piao has taken market share from the small sub-scale players. Alibaba Pictures notes that Tao Piao Piao achieved “market share expansion” in 1Q18. Due to duopoly market structure and Alibaba Pictures’ full commitment to Tao Piao Piao, we believe Maoyan’s ability to maintain its market share will be fully tested.
Monetisation rate has little headroom to grow due to the industry structure. Except for an industry price hike in 2016, Maoyan’s monetisation rate has remained relatively flat since 2016. Notably, while Meituan’s food delivery also faces an aggressive competitor in Alibaba Group Holding (BABA US)'s Ele.me, it has managed to increase its monetisation rate since 2016.
Improving profitability is a challenge due to the ongoing pressure to spend on user incentives. Maoyan’s S&amp;M expenses as a percentage of revenue increased from 56% in 2017 to 60% in 1H18 due to the aggressive spend by Tao Piao Piao on user incentives. On 13 April 2018, Alibaba Pictures announced a profit warning as it “accelerated its promotional effort to increase the market share of Tao Piao Piao.” We believe that if Alibaba continues to view online ticketing as strategically important, Maoyan will struggle to rein in its S&amp;M expenses and materially improve profitability.
Like Meituan, Maoyan is yet another proxy in the battle between Tencent and Alibaba. However, unlike Meituan, Maoyan’s core business seems to be running out of organic growth drivers. Profitability also is under pressure due to an aggressive Alibaba-backed competitor. Overall, we believe Maoyan faces challenging prospects. We will provide an updated view on the release of further information.

Maoyan IPO Preview: Running Out of Growth Drivers