AMC is a meme stock, but emerging market cinema companies are worth watching
- AMC has risen 3,000% ytd as its becomes the latest darling of meme investors
- AMC has gone from a company on the brink of bankruptcy to a well-capitalised giant in a few months
- We identify EM cinema stocks in Malaysia, China, Thailand and Indonesia that may be due a resurgence
Trading Places was a 1980s movie starring Eddie Murphy. It features a homeless man, who is suddenly catapulted to the top of a massive corporation.
AMC, the world's largest cinema operator, has had a similarly dramatic change of fortune. Even Hollywood would be hard-pressed to imagine its rags to riches story.
Entertainment activities such as cinemas have suffered in the pandemic, and had to grapple with low operating cash flow as well as surging debt. On 31 December, AMC was staring at the abyss. Its market capitalisation was US$308mn, while its net debt was 37 times larger at US$11.5bn, and its bonds were priced for insolvency.
Three consecutive quarters of Covid-19 closures had drained it of cash. It was bleeding at a rate of US$120mn a month and was unlikely to last another quarter without a bailout. Despite operating 12,000 screens it could not even pay the popcorn suppliers.
Since then, AMC has skyrocketed. The stock is up nearly 3000% ytd, as investors pile in due to a meme campaign. It rose 95% on 2 June alone! Its market cap is now US$26.4bn which is three times its net debt.
Meme stocks are companies targeted by retail investors in online discussion groups on platforms such as Reddit. There is a massive uptick in derivative trading in these names. AMC is now trading like a cryptocurrency, but with a movie theater attached.
But leaving aside the Reddit-driven boom, AMC is a symbol of the post-pandemic resurgence.
AMC's balance sheet has been buttressed and it has raised US$4bn since its dark days at the turn of the year. And as cinemas reopen in many countries people are now returning to the big screen experience. People are lining up to watch King Kong vs Godzilla – this year’s summer blockbuster.
There are cinema stocks in Emerging Markets that could see a similar bounceback, albeit not on the stratospheric scale of AMC.
Cinema groups such as Cathay (owned by MM2 Entertainment) were sitting ducks in the pandemic. They have high operating leverage, with high fixed costs such as rent, electricity and salaries.
However, despite the popularity during the pandemic of online OTT content platforms such as Netflix, the death of the cinema is highly exaggerated. It is a licensed business, with success being a function of the location and convenience of the cinema, alongside a pipeline of blockbuster content.
There is no collection risk in the business as moviegoers pay before they watch, and in good times the business can be a cash cow.
The cinemas are also proxy property investments, with many cinema operators collecting property opportunistically.
The following is a select list of Emerging Market cinema stocks:
MM2, a Malaysian cinema operator, has US$88mn in Property, Plant and Equipment (PPE) a figure that has tripled in the past three years. Most of the PPE is in its cinemas. MM2 has lost 72% of its value since the start of the pandemic.
Major Cineplex Group (MAJOR TB) operates cinemas in major locations in Bangkok. It is trading at just 8x FY19 EV/EBITDA. Its EBITDA dropped 90% in FY20.
Village Roadshow (VRL AU) has operated cinemas and theme parks in Australia and East Asia. It was taken private recently, which is perhaps an indication of the opportunity now being spied in the sector.
Meme stocks tend to soar before crashing back to earth, as influential early adopters cash out and the news of selling spreads like wildfire online, causes a chain reaction. But while the AMC meme-stock blockbuster may not have a happy ending, there may be a better and more realistic sequel in Emerging Markets.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...