Upcoming Alipictures AGM: 23 June. This is the story behind $AliPictures HKD(S91.SI) ¥979.2 million loss

Upcoming Alipictures AGM: 23 June. This is the story behind $AliPictures HKD(S91.SI) ¥979.2 million loss

This column is written by @fayewang
-Faye is both a fundamental analyst and economist by nature. She is a global thinker who’s open-minded and enjoys learning from the market.

The AGM of Alipictures is arranged on 23rd of June. Here is a quick overview on Alipictures’ business and financial position.

Brief Introduction:
Alibaba Pictures Group Limited is a subsidiary of Alibaba Group, and it is an investment holding company principally engaged in the entertainment related business. During the year ended December 31, 2016, the Group’s operating and reportable segments for continuing operations are as follows:
a. Internet-based promotion and distribution: the operation of an integrated O2O platform for the promotion and distribution of entertainment content, and the provision of online movie ticketing service to consumers and ticket issuance system to cinemas.
b. Content production: the investment and production of entertainment content such as film and drama series both domestically and internationally.
c. Integrated development: centered around copyrights, the development of professional services ranging from financing, business placement, promotion and distribution to merchandising.
d. Other operations.

Financial highlights:

According to the chart, Alipictures has achieved significant revenue growth in the FY16, yet at the cost of ¥979.2 million (equals to $200 million) loss. Due to the loss, Alipictures suffered from negative ROA and ROE. Alipictures’ superior profit performance in 2015 is the result of ¥882 million finance income, which is independent from the company’s core operation. The company claimed that the ¥979.2 million loss in FY16 is because of its marketing and promoting expenditures on its Tao Piaopiao business, in which Alipictures has invested ¥10 billions over past few years.

Upsides & Downsides
+ Increasing demand for movies consumption
+ Brand awareness, Sufficient funds and cash and mature operating team
+ Supported by theatres acquired by the group, the Alipay payment system and Ali group’s advanced data system
+ Increasing market share
– Competitors as a content producer: Wanda Cinema Line Corp (万达影视集团) and H.brothers (华谊兄弟)
– Competitors as a ticket service provider: Maoyan movies (猫眼电影) , Weipiao movies (微票儿)
– Chinese strict industrial regulations
– Prolonged heavy investment, thus deteriorate financial performance and higher business risk

Tao Piaopiao (淘票票) business:
In this part, I want to talk about reasons of Alipictures’ huge investment in its ‘Tao Piaopiao’ business, and what the movement may deliver to the company in the future.

Alipictures produced various films, TV drama series as well as games in recent years. However, in lieu of content producer, the core goal embedded in the whole operation is to become an integrated O2O platform, through which Alipictures can keep distribute their content, provide tickets services and most importantly, get direct access to group of young consumers. Young group is the main consumers of movies and other entertainment activities, thus strategy aimed at this group is crucial for Alipictures to compete with Maoyan movies. As over 80% Chinese customers purchase movie tickets via online platforms, Tao Piaopiao targeted itself a consolidated platform that offer online movie ticketing service to consumers and ticket issuance system to cinemas. At the same time, Alipictures also purchase physical theatres in tier 1 and 2 cities of China. This action reflects Alipictures’ ambition in integrating online services provider, cultural contents and offline theatres & customers.

It is market share that Alipictures tend to acquire even at a cost of ¥979.2 million. When Tao Piaopiao initially launched its platform in 2015, it only took 5% of the market pie by the end of that year. According to a survey result of CBNData in July of 2016, Maoyan movies ranked as the top online tickets sales platform with 33% market share, followed by Tao Piaopiao with 21% market share and Weipiao with 18% market share. However, an announcement issued by Alipictures during the spring festival of 2017 pointed out that though the rank remained unchanged, the market share of Tao Piaopiao has increased to 30%. Monopolistic competition is an inevitable trend in the field of online movie tickets sale, and it is the reason of Alipictures’ lavish investment.

Alipictures also focus on the derivative products within the entertainment industry, for example, the company has collaborated with renewed firms like Paramount Pictures Corporation., Bandai Namco Entertainment Inc. on development and sales regarding derivative products of movies, drama series, comics and animations.

Against the backdrop of Alibaba’s existing e-commerce and aggregated data system, Tao Piaopiao gains advantages in studying customer’s preference and further acquiring market share. Supported by ¥6.22 billion free cash, Alipictures confirmed that the company will adhere to its strategy and pour greater amount of capital in developing Tao Piaopiao. Aimed at integrated O2O platform, Alibaba considers Alipictures an integral segment of its business empire. Once Alipictures possess enough market share and become a monopolistic player, the company will own a complete business chain that cover content production, content distribution and merchandising, and derivative products sales.

Key takeaways
It seems likely to be a common phenomenon that Singaporean investors try to avoid S-chips, and apparently Alipictures is an extreme illiquid counter in SGX. Alipictures experienced a loss of ¥979.2 million in FY16 due to heavy expenditures on its Tao Piaopiao business. The company anticipated monopolistic competition applies to the industry and considered acquiring market share as one of the top priorities, thus Alipictures does not really care about temporary loss. Alipictures is an essential step in completing Aligroup’s industrial value chain, its potential monopolistic position may bring the group considerable return (within 3 years estimated by the firm) and engagement in the cultural industry.

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