I was spoilt for entertainment on a recent Qantas flight. Instead of working, I wasted time on a few Hollywood blockbusters and noticed how they are increasingly targeting Asian markets. Movie studios see Asia as an incredible source of entertainment demand.
So they should. China is expected to be the world’s largest box-office revenue earner by 2017. The latest James Bond movie, Spectre, (two hours of my life I will never get back) broke records last year on its opening weekend in China and in one weekend earned only slightly less than the previous instalment, Skyfall, made in its entire run in China.
Chinese moviegoers were less hooked on the new Star Wars: the Force Awakens. It is expected to take only US$120 million, according to newspaper reports. But even that is big business in a market showing voracious appetite for Western entertainment.
I have written about the coming boom in middle-class Asian consumption on many occasions for The Bull and identified sectors such as tourism, agriculture and education that are key beneficiaries. Entertainment will be another huge winner as 2 billion Asians join the middle class by 2030, on OECD forecasts, and spend more income on leisure.
US entertainment stocks such as The Walt Disney Company are superbly leveraged to the Asian entertainment trend. Marvel Entertainment is another: notice how many comic-book heroes are being turned into action-movie characters, partly for an Asian market that cannot get enough of films such as The Avengers and the upcoming Batman Versus Superman saga.
Sadly, there are few entertainment stocks on ASX. Village Roadshow is among the purest ways to play the trend. It owns theme parks, film distribution, cinema exhibition through almost 700 cinemas in Australia, Singapore and the US, film production and digital operations.
After peaking at $7.68 last year, Village has fallen to $5.38. Its recent half-year result was below market expectations and only its cinema-exhibition division performed as expected. Earnings guidance was also weaker than the market expected.
Village, arguably, should be performing better given the tailwinds from inbound Chinese tourism for its Gold Coast theme parks. The half-year performance of its Sydney Wet’n’Wild theme park disappointed. Village still has excellent film and leisure assets and good medium-term prospects, but more work is needed to regain the market’s confidence in the short term.
Micro-cap entertainment company Beyond International has been a consistent performer. Its five-year total shareholder return (including dividends) is an annualised 16 per cent. Beyond produces TV programs, distributes film and TV, and has home-entertainment and digital-marketing divisions. It is well run, but low stock liquidity is an issue for investors and its earnings are mostly in Australia and New Zealand.
Another micro-cap, Vista Group International, looks the pick of small-cap entertainment stocks. Vista provides cinema-management software, film-distribution software and customer-analytics software in companies in the global film industry. It has twin attractions: a business model based on software and recurring revenue, and growing exposure to Chinese cinema.
The market is well aware of Vista’s strengths. The New Zealand-based company, dual-listed on ASX, raised $83 million in an IPO and listed in August at $2.15 a share. It has rallied to $5.20 and has barely missed a beat in the past 18 months.
Chart 1: Vista International Group
Vista delivered 39 per cent growth in revenue to $65.4 million for FY15 and grew underlying earnings (EBITDA) by 60 per cent to $15.1 million. Both results exceeded prospectus forecasts.
Vista said the start to 2016 had been strong and expected to maintain revenue growth at 20-30 per cent. How many other ASX-listed companies are growing sales at such rates?
Vista software is now installed in 4,527 sites worldwide and this number is growing rapidly. Another 461 sites were installed in 2015, the majority for new customers. For a small-cap company, it has a large, growing global footprint as its cinema software is rolled out to more countries.
Chinese growth is a priority. Vista this month announced the sale of its Chinese subsidiary into a new venture owned by Vista and Weying Technology. Weying’s online ticking App is integrated into WeChat, the giant Chinese App that more than 600 million people use. About three quarters of movie tickets in China are sold online through Apps, and Weying is thought to have a 15 per cent share in this market.
The deal should give Vista a stronger position in the booming Chinese cinema market. Through the new venture, it effectively has a smaller share of what could become a much larger business thanks to Weying’s market position in China.
The key question, of course, is valuation. Vista trades on a forward PE of about 25 times Fy16 earnings on some broker forecasts. That’s high for a small-cap stock with less than two years’ history as a listed company, but not excessive for a high-growth technology company with a rapidly expanding global business and strong, recurring annuity income.
Vista, due for a pause after stellar recent share-price gains, remains a small-cap to watch. Any sustained share-price weakness would be a buying opportunity for a company that is ideally placed to organise millions of tickets as Asian demand for Western movies rises.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at March 11, 2016.