Cine Top Culture Seeks $18 Million U.S. IPO (Pending:CJOY)

A Quick Take On Cine Top Culture Holdings

Cine Top Culture Holdings Limited (CJOY) has filed to raise $18.4 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm operates premium quality cinema locations in Guangzhou, China.

Given the small size of the company, its operational risks due to COVID-19-related lockdowns and increasing operating losses, I’m on Hold for the CJOY IPO as an investment.

The nominal IPO price of $4.00 per share means that day traders may create intense volatility for the stock in the minutes and hours after trading starts, so prospective investors should be aware of the potential for extreme price movements in the stock.

Cine Top Overview

Guangzhou City, China-based Cine Top was founded to acquire and develop high quality movie theaters in Guangzhou and other provinces in China.

Management is headed by founder, Chairman and CEO Yihong Pan, who has been with the firm since inception and was previously executive director and manager of Guangzhou Chunghei Culture Co and executive director of Guangzhou Yanxi Western Food Co.

The firm currently has 3 new multiplex cinemas under construction, although construction has currently been delayed due to COVID-19 lockdowns.

Cine Top has booked fair market value investment of $5.15 million as of December 31, 2021 from investors including senior executives and various holding companies.

Cine Top – Customer Acquisition

The company has located most of its cinemas in central business and residential districts in Guangzhou and elsewhere. These areas provide easy access via pedestrian traffic.

The firm generates revenue through ticket sales, concession sales of food and drinks and movie-themed merchandise.

Selling & Marketing expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate:

Selling & Marketing	Expenses vs. Revenue
Period	Percentage
2021	3.8%
2020	7.0%

(Source – SEC)

The Selling & Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling & Marketing spend, was 14.5x in the most recent reporting period. (Source – SEC)

Cine Top’s Market & Competition

According to a 2021 market research report by ResearchAndMarkets, the Chinese market for cinema entertainment was an estimated $3.4 billion in 2020 and is forecast to reach $16.5 billion by 2026.

This represents a forecast CAGR of 30.12% from 2020 to 2026.

The main drivers for this expected growth are a growth in 3D screens, increasing foreign film representation, rising disposable income by consumers and the implementation of the cinema circuit system.

Also, however, the ongoing COVID-19 pandemic with its rolling lockdowns and uncertain future variants, is a potential cloud over the industry’s growth prospects.

Major competitive or other industry participants include:

• Dalian Wanda Group

• China Film Group

• Guangdong Dadi Cinema Circuit Co.

• Shanghai Film Group Corporation

• Hengdian Group Holdings Limited

Cine Top Culture Holdings Limited Financial Performance

The company’s recent financial results can be summarized as follows:

• Growing topline revenue from a small base

• Increasing operating losses

• A swing to positive cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
2021	$ 3,195,956	122.5%
2020	$ 1,436,297
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
2021	$ (2,509,031)	-78.5%
2020	$ (2,424,600)	-168.8%
Net Income (Loss)
Period	Net Income (Loss)	Net Margin
2021	$ (2,378,294)	-74.4%
2020	$ (2,415,052)	-75.6%
Cash Flow From Operations
Period	Cash Flow From Operations
2021	$ 1,184,415
2020	$ (1,831,683)
(Glossary Of Terms)

(Source – SEC)

As of December 31, 2021, Cine Top had $16.4 million in cash and $1.7 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2021 was $1.2 million.

Cine Top Culture Holdings Limited IPO Details

Cine Top intends to raise $18.4 million in gross proceeds from an IPO of its ordinary shares, offering 4.6 million shares at a proposed price of $4.00 per share.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $58.8 million, excluding the effects of underwriter over-allotment options.

The float to outstanding shares ratio (excluding underwriter over-allotments) will be approximately 25%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Management says it will use the net proceeds from the IPO as follows:

Approximately $5,000,000 to complete the construction of new cinemas;

Approximately $3,000,000 to acquire other cinemas; and

Approximately $1,400,000 to upgrade and renovate our existing cinemas; and

The remaining balance for general corporate purposes, which may include working capital requirements.

(Source – SEC)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management said that any legal proceedings would not have a material adverse impact on the company’s financial position or operational results.

The sole listed bookrunner of the IPO is Univest Securities.

Valuation Metrics For Cine Top

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Market Capitalization at IPO	$73,584,212
Enterprise Value	$58,826,159
Price / Sales	23.02
EV / Revenue	18.41
EV / EBITDA	-23.45
Earnings Per Share	-$0.12
Operating Margin	-78.51%
Net Margin	-74.42%
Float To Outstanding Shares Ratio	25.01%
Proposed IPO Midpoint Price per Share	$4.00
Net Free Cash Flow	$1,182,934
Free Cash Flow Yield Per Share	1.61%
Debt / EBITDA Multiple	-0.67
CapEx Ratio	799.74
Revenue Growth Rate	122.51%
(Glossary Of Terms)

(Source – SEC)

As a reference, a potential public comparable to Cine Top would be Cinemark Holdings (CNK); below is a comparison of their primary valuation metrics:

Metric	Cinemark Holdings	Cine Top Culture	Variance
Price / Sales	1.00	23.02	2202.4%
EV / Revenue	2.80	18.41	557.4%
EV / EBITDA	32.59	-23.45	-171.9%
Earnings Per Share	-$2.42	-$0.12	-94.9%
Revenue Growth Rate	622.1%	122.5%	-80.3%
(Glossary Of Terms)

(Source – SEC and Seeking Alpha)

Commentary About Cine Top’s IPO

CJOY is seeking U.S. public capital market investment to fund completion of construction of 3 cinemas and the acquisition of additional facilities.

The company’s financials have generated increasing topline revenue from a small base, growing operating losses but a swing to positive cash flow from operations.

Free cash flow for the twelve months ended December 31, 2021, was $1.2 million.

Selling & Marketing expenses as a percentage of total revenue dropped as revenue has increased; its Selling & Marketing efficiency multiple was 14.5x in the most recent calendar year.

The firm currently plans to pay no dividends and to keep future earnings to reinvest back into the business. The company may be subject to various restrictions on dividends from Cayman Islands law and current PRC regulations.

The market opportunity for theater entertainment in China is ostensibly large and the demand for long-form movie products is expected to grow substantially over the longer term.

However, the industry continues to grapple with lockdown orders from authorities in regions subject to COVID-19 virus outbreaks, increasing the firm’s growth and operational risks.

Like other firms with Chinese operations seeking to tap U.S. markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. U.S. investors would only have an interest in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. Additionally, restrictions on the transfer of funds between subsidiaries within China may exist.

The recent Chinese government crackdown on IPO company candidates combined with added reporting and disclosure requirements from the U.S. has put a serious damper on Chinese or related IPOs resulting in generally poor post-IPO performance.

Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable Chinese regulatory rulings that may affect such companies and U.S. stock listings.

Univest Securities is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 255.1% since their IPO. This is a top-tier performance for all major underwriters during the period.

As for valuation, compared to much larger U.S.-based Cinemark, the CJOY IPO is priced at an extremely high EV/Revenue multiple.

Given the small size of the company, its operational risks due to COVID-19-related lockdowns and increasing operating losses, I’m on Hold for the CJOY IPO.

The nominal IPO price of $4.00 per share means that day traders may create intense volatility for the stock in the minutes and hours after trading starts, so prospective investors should be aware of the potential for extreme price changes in the stock.