GSC eyes rest of Indochina

This article first appeared in The Edge Financial Daily, on May 11, 2017.

Koh: GSC keeps investing in new technologies. People are always looking for new things and experiences when they go to the cinemas. Photo by Sam Fong

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KUALA LUMPUR: “Sugar King” Robert Kuok’s cinema business under Golden Screen Cinemas Sdn Bhd (GSC), which made headlines late last year as the tycoon was said to be seeking buyers for it in a deal that could reportedly fetch up to US$500 million (RM2.17 billion), is on the prowl for more expansion opportunities in Indochina.

Set to open six new cinemas in Vietnam this year and one in Cambodia by year end or early next year, GSC is now in talks to go into other countries where the group is distributing films via GSC Movies Sdn Bhd.

“Yes, we’re looking to grow as a regional player. Though nothing specific has been firmed up, we are definitely looking for opportunities to expand into Myanmar [and] Laos — all the other Indochina countries we’re already distributing films to,” GSC chief executive officer Koh Mei Lee told The Edge Financial Daily in an interview last week.

Koh’s statement comes two months after Kuok’s PPB Group Bhd, in which GSC is parked, quashed speculation it was going to sell off the cinema business, and stressed it was planning to expand it instead.

GSC, which turned 30 years old in March, has come a long way since 1987, when it was first established as Golden Communications (M) Sdn Bhd after PPB took over the cinema operations of Shaw Brothers Malaysia. Three years later, PPB expanded the business when it bought over Borneo Filem Organisation (M) Sdn Bhd, which owned the Cathay chain of cinemas.

However, in the mid-1990s, some had questioned if the move was a wise one, as cinema operators came up against a hitherto unknown threat: the introduction and proliferation of cheap, pirated VCDs (video compact discs), followed by the more advanced cousin, DVDs (digital video discs). “Those were very trying times,” Koh admitted.

But cinema operators fought back by upping the quality and experience of their offerings.

Today, GSC is the largest cinema operator in Malaysia, while its cinema and film distribution business represents the second biggest earnings contributor to PPB Group. Ironically, as GSC stands strong, unfazed in the era of streaming shows, videos on demand, and entertainment-on-the-go, the pirated DVD vendors are in turn “suffering”, as Koh put it.

“We’re very confident cinemas are here to stay. [Going to the movies] is a lifestyle now. People are social animals. We want to do things with family and friends, and the experience you get from going to the cinemas is entirely different from what you would get from streaming a show from your tablet, laptop or computer.

“Cinematic technology has evolved tremendously and [watching a movie in the cinema] is now a completely immersive experience. You also have bigger blockbusters now. Your Transformers are getting bigger, your Fast & Furious are getting faster and more furious. And all the new cinematic technology — like the motion chairs, the 3D surround sounds — really enhances your experience. You won’t get that feeling when you watch it anywhere else.

“That’s why GSC keeps investing in new technologies. People are always looking for new things and experiences when they go to the cinemas, [that’s why] we have the THX halls; we have the large screen formats, the [Dolby] Atmos [audio surround technology],” said Koh.

The investment isn’t confined to just new cinematic technologies, but also upgrading the whole movie-going experience, from interior designs to ticketing — where GSC has gone into online booking, app booking, and now piloting its kiosk ticketing at Tropicana City Mall (the second one is set to open at 1Utama soon). At the same time, it has been increasing the choice and quality of its food concession offerings.

GSC’s successful business model of partnering shopping malls for growth has also shown that cinemas are no longer feasible as stand-alone, single destinations, like the Rex and Pavilion of old.

The model works because Malaysians, said Koh, love to spend time at the malls. More often than not, they turn it into a whole-day affair as they enjoy the shopping, the food, and then a movie or two, she said.


Return to Johor

To date, GSC has 305 digital screens in 33 locations across Malaysia, out of an industry tally of 1,041, and commands over 40% of domestic box office collections. The sum exceeded RM1 billion last year.

“People ask us how come the industry grew so much. In 2006, we only had 282 screens, so 700 plus screens were added in 10 years. Actually, we grew in tandem with shopping malls. That was the key: the mushrooming of malls. And cinemas are considered anchor tenants,” said Koh.

“In fact, come May 24, GSC is opening a new cinema in MyTown, which has 13 screens, followed by a 10-screen one in Melawati Mall in Wangsa Maju, in June. We’re also adding three more screens to our cinema in Summit (USJ, Subang Jaya) this year,” said Koh.

GSC is also returning to Johor this year with its first flagship outside the Klang Valley, a 16-screen cinema in Paradigm Mall, Johor Baru (JB), which will open in November. That’s altogether 39 more screens in Malaysia.

Though Koh admitted that some parts of the country are getting saturated — she said the Damansara area alone have seven to 10 cinemas within a 5km radius — she still sees room for growth overall as admissions per capita in Malaysia were only at 2.5, compared with four to five seen in matured markets such as Singapore and Australia.

“Having said that, there is saturation in the Klang Valley, which caters to about 55% to 60% of the total domestic box office. So we’re more selective where we go into. We will only go into strategic locations, with malls of reputable developers. We’re also choosing underserved markets like Johor and Penang. So outside the Klang Valley, if there’s a mall and it’s underserved, we’d like to be there,” said Koh.


JV model works best

Growth opportunities are also aplenty outside the country, said Koh. In Vietnam, she said the maths alone — where the population is over 90 million, with just some 700 over screens, as opposed to Malaysia’s 30 million with 1,041 screens — makes a compelling argument for aggressive expansion.

Which is why the group is planning six new cinemas there this year under the Galaxy brand of cinemas operated by Galaxy Studio Joint Stock Company. PPB, via GSC Vietnam Ltd, has a 40% stake in Galaxy Studio.

“Vietnam is a really big growth market for us. This year alone, we’re adding 37 screens there. Next year, we are looking at another six locations, with 30 screens. Currently, we have seven locations there with 43 screens,” said Koh.

The group first ventured into Vietnam in 2013, when it started with only three cinemas in Ho Chi Minh City.

“Since then, we’ve gone to Hanoi, the Mekong Delta, and tier two to four cities. We’re in Danang as well. By 2018, we would be in close to 19 locations, compared to seven now. That’s about 2.7 times growth,” she said.

In Cambodia, it is entering the market via a 60:40 joint venture (JV) with a mall operator, with GSC owning the majority. “We’re targeting [the opening for] 4Q (fourth quarter) this year, or before the next Chinese New Year. It all depends on how soon we get the premises handed over to us,” said Koh.

The group intends to use a similar JV model with mall operators in other Indochina countries it is targeting.

“Normally, when we go into a new territory, we will want a local partner. We have the cinema running expertise, while the local [partner] will have the relationship with the local government body. It works well for us,” said Koh.

For the financial year ended Dec 31, 2016 (FY16), GSC’s profit slid 10% to RM59.06 million from RM65.61 million a year ago, due to a foreign exchange translation loss suffered on US dollar denominated loans. Revenue, however, grew 8% year-on-year to RM468.49 million from RM435.57 million, mainly due to to the full-year contribution from five new cinemas opened in 2015, improved cinema collections from strong movie titles and higher concession sales.

This year, the group is expecting a single-digit growth in terms of earnings.

“I think the growth would come from the new cinemas we open. I think JB (Johor Baru) will do very well as we’re not only tapping the JB market, but also Singapore’s market as well, especially with our international screens there, which will appeal to Singaporeans.

“As for our existing cinemas, I’ll be very happy if they can keep their admission levels. It also depends on the performance of the movies, as our business is very product-driven. The first quarter was not great but we have stronger titles in the 2Q. So we expect to do well this year,” she added.



Excerpts from the interview with GSC’s Koh Mei Lee:

The Edge Financial Daily (TEFD): We understand the PPB Group Bhd has allocated RM215 million as capital expenditure for the cinema business this year.

Koh: That’s for the nine new cinemas we have in the pipeline and upgrading of existing ones, and not just for this year alone. Three are opening this year, with another six to be opened in 2018 to 2020.


Do your food and beverage concessions make up a good portion of your cinema earnings?

I don’t want to go into the ratios, but it is a big contributor. We actually make very small margins from cinema tickets because we are very highly taxed. Entertainment tax is 25%. On top of that, we have the 6% GST (goods and services tax). So, we have to complement [our earnings] from the concessions.


You have gone into eletronic ticketing. How many of your bookings now come from there?

Online booking makes up about 30% of our ticket sales now. We hope to reach 40% to 50%.


How big actually is your film distribution business?

It’s about 10% of GSC [group] profit. It’s not big, but it’s part and parcel of an integrated business. We need to have our own distribution to supply movies to ourselves, so we are not reliant on just Hollywood movies.


It seems there’s a trend of mergers and acquisitions in the industry. Is GSC going to go in that direction too?

(South Korean-based CJ Group bought Turkish cinema operator Mars Entertainment Group; China’s Dalian Wanda Group, via AMC Entertainment Holdings Inc, bought UK-based Odeon & UCI Cinemas to become the world’s largest exhibitor. AMC is also buying US exhibitor Carmike Cinemas.)

Yes, there’s been a lot of interests in the entertainment business in recent years. If you hear rumours, we can’t help it if people are interested in us. But it doesn’t mean we want to sell. It all depends on [PPB Group’s] strategy, whether we are happy with our growth. For now, it’s still one of our core businesses — the second largest in the [PPB] Group.


How about listing GSC as a separate entity?

No, we don’t have any plans now to list it. But I can tell you there’s still a lot of value to be created in GSC. Not only in Malaysia, but overseas too.


GSC is also into co-production of films, one of which was Ola Bola, which did very well at the box office last year. Will we see more of that?

We have the allocation, but it depends on the script, director and storyline. If there’s a movie worth making, we would definitely invest. So far, we have nothing in the pipeline.


Many businesses are facing rising costs. Being an anchor tenant, do you get cheaper rental rates?

We get anchor tenant rates from the malls. But to face challenging times, we negotiate most of our rentals with our landlords, to [get] ones with a base rental and revenue sharing. This means when we have higher admissions, higher box office, they would get a higher rental. If admissions are lower, the landlords have that base to keep their cost down. It’s win-win for both. When we do well, we don’t mind sharing some of our takings. But when times are hard, we are at least sustainable and can negate seasonal factors.


Some cinema operators have gone into alternative contents, like screening football matches. Is that workable for GSC?

Yes, it’s something we are looking into. I think there is an opportunity there. But all these have to do with licensing rights. For the EPL (English Premier League), for example, we may need to work with Astro. So far, we have done live-streaming of e-sports, in Mid Valley [Megamall] last year. We have also done live concerts like Japanese anime [idol] concerts. We did it twice and it was [a] full house. A lot of fans were excited [that] they could watch it here, instead of having to go to Japan. We even had customers from Singapore and China.