Yong Tai hosted the grand opening of Encore Melaka on 7 July. The event was wellattended by over 2,000 highly-distinguished guests who were impressed by the state-of-the-art theatre. We also gather that ticket sales have been encouraging since the trial run to the grand opening while contribution from offtakers will commence in Aug 18. We cut our FY19 net profit forecast by 12% to factor in a gradual improvement in ticket sales. Maintain BUY with a lower target price of RM2.10 post earnings adjustment.

WHAT’S NEW

• Well-received by highly distinguished guests. We attended Yong Tai’s grand launch of Encore Melaka last Saturday. The event was well attended by over 2,000 distinguished guests.
• Encouraging ticket sales and contribution from offtakers will commence in Aug 18. During the trial run, ticket sales were encouraging with a few hundred fee-paying audiences for every show running up to the grand opening. Separately, tickets sold to tour agent consortiums will start in Aug 18.

STOCK IMPACT

• Officially launched critically-acclaimed Encore Melaka. Yong Tai has officially launched the Encore Melaka on 7 Jul 18, in conjunction with the 10-year anniversary of the recognition of Melaka as a UNESCO World Heritage City. We gathered that Yong Tai has hosted a trial performance for business partners and friends on 28 May and received strong positive reviews.
• Gradually increasing number of shows. Currently, Yong Tai has only one show per day during weekdays and two shows a day during the weekend. The number of shows will increase to two daily from next month. More shows might be added should demand be encouraging, especially for chartered shows which have started to receive interest from big corporations and institutions. We understand that the 2,014-seat theatre can run up to four shows daily with a duration of 70-90 minutes per show and at an average ticket price of RM120/person.
• Earnings expected to turn around significantly. We expect earnings to improve markedly from RM12m in FY18 to RM151m in FY19, largely underpinned by Encore Melaka. This assumes two shows daily, or 1.48m seats per year. Since Yong Tai has secured 1m forward ticket sales annually for the next three years, more shows could be added. Our sensitivity analysis indicates that for every additional daily show, it could add 732,000 seats, which translates into an additional RM88m in revenue and RM41m to bottom line, assuming 100% take-up.
• “Offtakers” ticket sales to commence in Aug 18. We understand that the tickets sold to tour agent consortium will start in Aug 18. To recap, of the 1.4m seats annual capacity, 1m tickets have been secured as Yong Tai has entered into offtake agreements with six local and foreign travel agents over the next three years. The 1m tickets represent a 70% occupancy rate of the theatre based on two shows daily. While ticket prices were not revealed, we understand they are above our assumption of RM120 each. The agents are Majestic Express Holidays (500,000 tickets targetting mainland Chinese), Apple Impression Holiday (200,000 tickets targetting Malaysians), Levingo Travel (100,000 tickets targetting Malaysians), Coachliner 707 Travel & Tour (50,000 tickets targetting Singaporeans), WTS Travel & Tours (50,000 tickets targetting Singaporeans) and Shanghai Ctrip International Travel Service Co (1,000,000 tickets targetting mainland Chinese).
• Upside from cruise liners. Yong Tai is still in negotiations with cruise liners that dock in Melaka. Currently, two cruise liners dock in Melaka every week, carrying about 3,000 passengers per ship. Assuming Yong Tai can entice half of the passengers to watch its show, it could add up 156,000 in audience attendence per year.
• Impression City to ride on spillover effects from Encore Melaka. The group has access to over 100 acres of land surrounding the theatre. The development will be an integrated mixed development that includes F&B clusters, a shopping mall, hotels, serviced apartments and offices. Other key projects include serviced apartments on Jalan U-Thant, Kuala Lumpur, and an integrated development in Bukit Bintang.

EARNINGS REVISION/RISK

We cut FY19 net profit forecast by 12% as we think the occupancy rate during the first two months of opening will be relatively lower. We expect the improvement in occupancy rate will be gradual with contribution from offtakers commencing in Aug 18.

VALUATION/RECOMMENDATION

Maintain BUY with a lower target price of RM2.10 post earnings adjustment. Our target price is based on a 30% discount to our SOTP valuation of RM3.30/share. Our target price implies 10.9x FY19F PE. We expect no dividend payout in the first two financial years, but there could be dividends as operating cash flow improves.

Source: UOB Kay Hian Research - 9 Jul 2018