Is it curtains for the cinema business?

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From Sept 27, screenings can cater to up to 1,000 people if all are fully vaccinated, and up to 50 people if unvaccinated. Food and beverages can also be served at screenings to groups of up to two fully vaccinated people.

Already battered by piracy and streaming services that are touting increasingly polished releases, cinemas are now buffeted by onagain, off-again Covid-19 restrictions, amid a dull year for Hollywood blockbusters.

According to the Singapore Film Commission, cinema attendance fell nearly 75% last year, from 18.5 million in 2019 to just 4.7 million last year, the lowest year on record. Approximate box office takings also fell from $175.4 million to $49.6 million over the same period.

Close to two years into the pandemic, can movie theatres catch a break? With wary Singaporeans still thinking twice about heading to the movies, is it too little too late?

mm2 Asia’s worst fear comes true

An outbreak of a communicable disease like Covid-19 has been the “biggest fear” of mm2 Asia, the Mainboard-listed entertainment company that also owns cinemas in Singapore and Malaysia.

“When we acquired Cathay Cineplexes, analysts told us we went from an asset-light business to an asset-heavy business,” founder and executive chairman Melvin Ang told The Edge Singapore in February.

There are eight Cathay cinemas in Singapore and 12 in Malaysia, housing 64 and 94 screens respectively. Nine screens in Malaysia are held by a JV.

“Our government’s control and management of the Covid-19 opening up plans are encouraging. We are seeing signs of good recovery that will benefit all our business segments,” mm2 Asia tells The Edge Singapore.

“Of course, if another lockdown happens, all sectors will be affected and we will have to innovate and overcome these challenges,” it adds.

See also: Ron Sim signals growing interest in media business with mm2 Asia and GHY stakes

As for Malaysia, mm2 Asia thinks the country will open up in 1Q2022. The company has seen better days; mm2 Asia has produced, co-produced and distributed more than 20 movies, including Ah Boys to Men, the highest-grossing Singaporean production in 2012.

The group built up its cinema assets via a series of acquisitions, including some $230 million it paid for Cathay Cineplexes here in Singapore back in November 2017.

An employee disinfects the seats inside a theatre at a Golden Screen Cinemas multiplex cinema ahead of reopening in Kuala Lumpur, Malaysia, last month (Photo: Bloomberg)

This year alone, mm2 Asia has seen one corporate action after another in its efforts to counter widening losses and a falling share price.

In FY2021 ended March 31, mm2 Asia posted a net loss of $92.7 million. Revenue from the cinema segment fell 81.9% y-o-y to $15.9 million due to reduced admissions and deferred releases.

Over the past four years, mm2 Asia’s share price has fallen to a tenth of what it was before, closing at 5.3 cents on Oct 5 and valuing the company at $118.61 million.

mm2 Asia’s Ang: When we acquired Cathay Cineplexes, analysts told us we went from an asset-light business to an asset-heavy business (Photo: Albert Chua/The Edge Singapore)

The company has mulled several options for its worst-hit business segment since last December. These have ranged from a spinoff IPO of the cinema business, held via an entity called mm Connect, to a merger with competitor Golden Village, which is owned by the Hong Kong-listed Orange Sky Golden Harvest Entertainment (Holdings) (OSGH).

The latest option involves an offer from local financial investment firm Kingsmead Properties, whose sole shareholder is Jasmine Foo Mei Ling, a Singaporean who had reportedly worked at JP Morgan and UBS before running her own investment business.

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See: mm2 Asia confirms sale of controlling stake of cinema business at a loss of $84.7 mil

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See also: Patience needed before silver screen shines again, says Melvin Ang of mm2 Asia

On Aug 30, mm2 Asia said it will sell 80% of the cinemas to Foo for $67.3 million. The transaction, pending shareholders’ approval, values the cinemas at $84.8 million — less than half the $230 million mm2 Asia paid in 2017 for just the Singapore assets.

Cathay Theatre, Singapore, 1941-1945 (Photo: Unsplash/Museums Victoria)

Meanwhile, mm Connect is moving ahead with its Catalist listing. Foo, via Kingsmead, may choose to convert the initial $3 million deposit, along with an additional $3 million deposit paid seven business days after the sale, into new ordinary shares at a 20% discount to its IPO price.

Should the sale fall through, Foo may also exchange the deposit into newly issued shares at 8 cents per new share.

“The cinema business has been a strategic part of the group’s content creation and distribution business, but it has been affected by Covid-19,” said Ang in a press release. “With this proposed sale, it will stabilise the group’s financial situation and allow mm2 to continue to focus on the development and strengthening of core production content growing opportunities,” he adds.

As Singapore learns to live with Covid-19, mm2 Asia believes the crowds will return next year, in time to catch local director Jack Neo’s new film, Ah Girls Go Army, when it hits theatres on Feb 1, 2022.

The fifth instalment in Neo’s series is co-produced by mm2 Entertainment and Neo’s J Team Productions.

mm2 Asia points out three income sources when producing and distributing films. They are the production income and producer bonus, distribution income and box office takings.

Before producing a film, mm2 Asia looks for investors who will fund a slate of upcoming films, forming the films’ budget.

The budget of the film includes the expenses needed to create the film, along with mm2 Asia’s production income. Hence, mm2 Asia will make a profit regardless of the film’s performance.

If the film does well and box office receipts exceed a pre-agreed hurdle rate, mm2 Asia will also receive a producer bonus.

After the film is produced, mm2 Asia distributes it to various channels, including cinemas and airlines. Here, mm2 Asia receives a distribution commission.

Finally, through its stake in cinemas, mm2 Asia will take a portion of box office ticket sales.

“Based on historical records, Jack Neo’s films tend to generate higher viewership as compared to other productions,” says DBS Group Research analyst Ling Lee Keng. “This should help contribute to mm2’s bottom line.”

Production affected too, just ask GHY

But the pandemic is not only affecting the tail end of a movie’s life cycle. Intra- and inter-country lockdowns have also thrown filming schedules into chaos, as regional film producer GHY Culture and Media tells The Edge Singapore.

“Due to the movement control order (MCO) in Malaysia, we have suspended filming and production activities temporarily… We were able to progressively relocate certain filming and production activities to China, which has seen most businesses return to normalcy,” says Mainboard-listed GHY.

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See: 'Content is king' with stronger 2H21 expected for GHY Culture and Media: DBS

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See also: GHY Culture & Media sets its sights on 'Nanyang'

As a result, GHY expects its financial performance for FY2021 ending Dec 31 to be impacted. That will follow 6MFY2021 earnings of $3.5 million, which dropped by 73% y-o-y. In a Singapore Exchange (SGX) announcement on July 13, the production company lamented the “continuous extension of the MCO since March 2020”, which it stressed is “beyond the group’s operational control”.

GHY Culture & Media’s group CEO Guo Jingyu, seen here in a pre-IPO interview last December. Film production company GHY Culture & Media approaches the first anniversary of its listing with a 10.6% fall in market cap as of Oct 5 (Photo: Albert Chua/The Edge Singapore)

GHY is understandably concerned. The company went public only last December, raising some $121.7 million in proceeds from its 9.6 times subscribed initial public offering (IPO). At its offer price of 66 cents per share, the group was estimated to have a market value of $708.7 million.

While the company’s shares traded at a high of 86 cents in January, they have lately been hovering around 60 cents, giving the stock a market cap of $633.5 million as of Oct 5.

Despite the weak 1HFY2021 results, GHY has a strong production pipeline that will strengthen its second-half results, says DBS Group Research analyst Ling Lee Keng in an Aug 13 note.

“Though the situation is still fluid, we expect a much stronger 2HFY2021,” writes Ling. “This is mainly due to the robust pipeline of projects and its strong network of business relationships with key industry players such as TV networks and video streaming platforms such as CCTV, iQiyi and Youku,” adds Ling.

Speaking to The Edge Singapore, Ling projects a total of eight to nine drama productions for FY2021/22, compared to just six drama productions in FY2020.

Ling also thinks GHY will produce four to six films in both FY2021 and FY2022, and another 15 to 20 short videos annually. “The project pipeline of $80.7 million offers earnings visibility up to FY2022.”

Under the charge of Chinese director Guo Jingyu, who also serves as GHY’s executive chairman and group CEO, the company has been busy building partnerships this year.

On Jan 19, Tianjin Changxin Film & Media Co, GHY’s indirect associated company in China, incorporated a JV to produce and develop scripts. The company generates the bulk of its revenue from TV and video production, followed by concert production, with a tiny sliver coming from its costumes, props and talent management business.

In March, GHY made a big move to grow its smallest business segment. At one of the first physical press conferences since Covid-19 hit, GHY signed a non-binding memorandum of understanding (MOU) with a subsidiary of China’s second-largest video streaming player and Nasdaq-listed iQiyi, to set up a Singapore-based talent management firm.

GHY and iQiyi have set up a Singapore-based talent management firm (Photo: GHY Culture & Media)

Singaporean artiste Tay Ping Hui was in attendance as one of the first to be managed by the JV named UNI-ICON Entertainment. The venture was confirmed on June 14, with GHY and iQiyi holding 70-30 stakes in the company respectively.

This is a significant undertaking for GHY, whose costume, props, make-up and talent management services made up just a tiny 3% of its total revenue for FY2020. It also signalled the company’s push for other revenue streams amid an extended pandemic fight.

Six months later, UNI-ICON’s artistes are now undergoing initial training, says GHY, and preparations for variety shows are ongoing. “We will make the necessary announcement at an appropriate time when there are further developments. Nurturing an idol takes time but we believe the future beholds pleasant surprises.”

In July, GHY announced a stage musical trilogy, slated to be performed in China for a year from August. Through its indirect wholly-owned subsidiary, Tianjin Xinhe Culture & Broadcast, GHY has entered into a joint investment agreement with Beijing iQiyi Science & Technology to collaborate in the co-production.

“The musicals will be launched in the combination of online streaming platforms and offline physical performances on stage. This will mark a brand-new model that wholly integrates film, drama and musical productions, online and offline,” says GHY.

Just months later, GHY signed another MOU, this time for a 51% stake in Clover Films’ three subsidiaries. The June 16 announcement did not state the potential deal value. Founded in 2009, Clover Films distributes films in Singapore and Malaysia and has handled films like Train To Busan and the Academy Award-winning Parasite.

“The strategic investment in Clover Films is to increase the group’s production and distribution capacity in Southeast Asia to leading streaming platforms in Southeast Asia,” says GHY.

As GHY packs on the pounds with Clover Films, however, another big player in the media production space is looking to shed some excess weight.

Spackman un-Zips

Another listed media company offloading its cinema assets is Spackman Entertainment Group. On Sept 14, the Catalist-listed company announced the sale of its entire Zip Cinema business to Kakao Entertainment, a subsidiary of South Korea-listed Internet company Kakao Corp, for $19.8 million in cash.

Also known as Zip Korea, the production house was incorporated in South Korea in December 2005. The deal, which dwarfs Spackman’s own market cap of $7.8 million as of Oct 5, will provide the group with capital to expand into Hollywood, says Spackman in an SGX filing.

The group has a pipeline of four potential US Hollywood projects. This is not the group’s first foray into the US. Spackman co-produced the 2013 Hollywood sci-fi film Snowpiercer, directed by Bong Joonho, who also helmed Parasite.

In response to SGX queries, Spackman says Zip Korea’s revenue is derived mainly from box office sales. “As consumers grow more accustomed to online viewing and social distancing, the film and drama sector will likely evolve towards distributing on over-the-top (OTT) platforms to cater to the demands of consumers,” says Spackman on Sept 17. “It has become increasingly popular to watch films and dramas on OTT platforms in the comfort of home as compared to going to the cinema. This change in market trend has led to a decline of the theatrical film business.”

How the box office revenue model works, according to Spackman (Photo: Spackman Entertainment)

Spackman, which launched its IPO here back in 2014 with a bang, is now mired in the red. For its 1HFY2021 ended June 30, it reported a revenue of US$9.6 million ($13 million), up 73% y-o-y as it booked more revenue from film production.

However, the company remained stuck in the red to the tune of US$2.6 million for the same 1HFY2021, though it was an improvement from a loss of US$4.1 million incurred in 1HFY2020.

In its earnings commentary, the company warns that if the pandemic drags on, “investors may be less keen to invest into the movie business” and that in the near term, “producing and financing film projects will continue to be challenging”. Therefore, the pivot to the US market is seen as a viable way out.

Meanwhile, the company remains under the scrutiny of SGX RegCo, which directed Spackman to conduct an independent review last September. This came about after the company bought close to 6.5 million shares in a business entity from certain existing shareholders at US$3 per share, through a series of transactions between March 2017 and August 2018.

On Aug 18, 2020, the company announced the sale of the same business at $2.30 to its controlling shareholder, an entity called Spackman Equities Group Inc, listed on the TSX Venture Exchange in Canada.

On Oct 4, Spackman said the draft of the review, done by Deloitte & Touche Financial Advisory Services, will be ready by the end of the month.

Curtains for cinema?

So, production work may be hampered for now and local players are working to smoothen the bumps on the road ahead before cinemas reopen. But for all their efforts, will there be an audience to return to when the pandemic ends?

With the ease of streaming today, do theatres still appeal to the next generation? Young moviegoers The Edge Singapore spoke to describe a coming-of-age theatre experience hampered by precautionary measures.

Tony Chen, 17, admits he was never a huge fan of visiting the theatre, though for one, small personal reason. “I do not like the smell of popcorn.”

That said, the social aspect of going to the movies is unique, he adds. “If you are streaming a movie at home, you are generally watching it by yourself on a computer. In a movie theatre, you are most likely with your friends.”

But even then, the safe distancing measures in theatres over the past months “killed the communal vibe” of being there in the first place. “We are only allowed to sit in twos and in every row, there are probably only six people. It really kills the vibe of watching the movie with your friends [and] trying to enjoy it together,” says Chen. “I just don’t think watching a movie in the cinema has the same feeling as [it did] before the pandemic,” he adds.

As Covid-19 spread across the world, Hollywood executives hesitated, postponing the release of blockbusters like the latest James Bond film, No Time To Die, and Marvel’s Black Widow.

The growing popularity of streaming has even caused big studios to turn their own wellhoned distribution model upside down. Black Widow, for one, was set to be released last May. It was instead released this July, both in cinemas and via streaming on Disney+, without the typical 90-day window.

Scarlett Johansson, whose pay for playing the titular role was pegged to a percentage of the box office takings (but not streaming revenue), promptly sued Disney, which owns Warner Studios, for alleged breach of contract. While the two parties settled the lawsuit in late-September, the terms of the deal were not disclosed.

Scarlett Johansson sued Disney for breach of contract after Marvel’s Black Widow was released both in cinemas and via streaming on Disney+ (Photo: Bloomberg)

Hotly anticipated titles like Top Gun: Maverick have been postponed yet again because of the pandemic. Others, like Greyhound, were postponed multiple times before simply bypassing theatres, with Apple acquiring the distribution rights for its own streaming service.

Frequent moviegoers like Hu Zhaoji, 18, have noticed the unusually quiet summer. “Throughout the pandemic, I feel like the movies released have not been that good compared to those before the pandemic.”

Even the usual student discounts, offered in hopes to attract casual viewers, may not be enough to woo the next generation. “I’ve received offers as a student sometimes but I don’t think it has affected my frequency of going to theatres,” says Hu. “It’s one or two dollars at most, which is really nothing.”

In contrast, he has nothing but praise for streaming service Netflix, which charges a monthly fee similar to the cost of a single movie ticket. “Of course, there is a reason why Netflix is the biggest streaming platform in the world. It has a lot of content in different languages, from different regions; you know, they have everything,” says Hu. “It’s really not that bad.”

Can streaming ever be a perfect substitute for the cinema? The assumption behind that idea is based on a narrow premise, says Nikki Draper, senior lecturer at Nanyang Technological University’s Wee Kim Wee School of Communication and Information.

“There are times when other considerations go into our choice of where we watch. A big one for me is: What kind of experience do I want with certain types of content? If I watch a horror film, I watch it at home where I can control aspects of the viewing experience that make me tense. But there are also times where I want the big screen and sound experience I can’t get at home,” she adds.

If we only think about movie watching as service delivery, then streaming seems like a “no-brainer”, says Draper, who is also faculty coordinator for the annual Perspectives Film Festival. “But consumption choices aren’t driven by service alone — theatrical viewing is part of an experience economy which people seem to want as well.”

Back at mm2 Asia, the film producer targets 40% of content production revenue to come from streaming channels by FY2022. The insatiable demand for content, especially with streaming services, will benefit the company, says Paul Chew, head of research at Phillip Securities Research.

“Their pipeline of content projects appears to be even higher than pre-pandemic levels,” says Chew to The Edge Singapore.

mm2 Asia says it sees “encouraging” opportunities with streaming platforms, noting that many more new players in the Chinese and international markets are looking to gain a foothold in the growing sector.

“We believe that the group’s track record in quality production will see its core production business sought by streaming channels,” say UOB Kay Hian research analysts Lucas Teng and John Cheong in a June 7 note.

Meanwhile, GHY is positioning itself in such a way that its content has the flexibility to be distributed via both traditional and new platforms. For one, its series The Ferryman — Legends of Nanyang available on iQiyi international since August.

Set in Singapore, the remake of iQiyi’s 2014 supernatural drama stars local artists Qi Yuwu and Jeanette Aw. The series is also GHY’s attempt at giving cinemas a run for their money, setting a record as Southeast Asia’s first online drama series with 4K video and Dolby Atmos audio specifications.

Despite the bells and whistles, however, streaming is unlikely to eclipse the theatre, says Draper, “I’m not even sure that is the streaming services’ goal. They appear to be thinking about how they can be complementary to each other.”

“In the US, I’ve seen actors participate in live-tweeting their weekly shows. Netflix has a great Twitter account called ‘Strong Black Lead’, which targets African-American audiences and organises simultaneous viewings,” she says. “This is just an example of how streaming is attempting to replicate live audience experiences, which nicely amplifies my point about why theatres still matter, too!”

For the sake of companies like GHY, mm2 Asia and Spackman, one hopes Draper is right on the money, as the magic of the movie theatre, captured in the likes of Cinema Paradiso, continues to live on. — With additional reporting by Kayden Whang

Header photo: Bloomberg