Migme — Update 2 March 2016

Migme — Update 2 March 2016

Migme

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migme

Path to profitability

Full year results

Software & comp services

3 March 2016

Price

A$0.58

Market cap

A$166m

Net cash (A$m) at 31 December 2015

5.1

Shares in issue

285.7m

Free float

76%

Code

MIG/117AB

Primary exchange

ASX

Secondary exchange

Frankfurt

Share price performance

%

1m

3m

12m

Abs

(29.7)

(40.2)

(15.9)

Rel (local)

(30.2)

(37.6)

(2.0)

52-week high/low

A$1.30

A$0.41

Business description

migme is a social entertainment platform targeting the world’s next wave of internet users, the 3.5bn people in emerging markets. The service offers free chat, content and blogging services to acquire users. Users buy virtual goods and engage in gaming. E-commerce is planned to start in H216.

Next events

AGM

April 2016

Analysts

Moira Daw

+61 2 9258 1161

Bridie Barrett

+44 (0)20 3077 5700

migme is a research client of Edison Investment Research Limited

migme (MIG) is a global digital media company focused on the emerging markets of Indonesia, the Philippines and India. At 31 December 2015 monthly active users (MAUs) totalled 32 million (December 2014: 10 million). MIG has announced its social e-commerce strategy, which it plans to launch in H216. MIG is still seen by the market as an early-stage company and we therefore expect that until the path to profitability becomes more certain, there will be a significant gap between share price and value. We have included the A$6.99m share placement to Meitu, but have excluded from our forecasts what we think will be a positive impact on both MAU and monetisation from the Meitu MoU pending the proposed company briefing.

Year end

Revenue
(A$m)

PBT*
(A$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/15

12.3

(21.0)

(7.9)

0.0

N/A

N/A

12/16e

46.0

(16.5)

(4.0)

0.0

N/A

N/A

12/17e

103.9

9.7

2.3

0.0

25.2

N/A

12/18e

171.7

37.5

8.8

0.0

6.6

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Runs on the board from journey to date

MIG has demonstrated that its product offering has been able to attract ~13% of its chosen marketplaces’ social network users of 246 million (social e-commerce users are expected to grow to 442 million by FY18, source: Statista.com) within an 18-month period. It has been able to monetise its offering using a freemium model, its social communities and its relationships with artists to entice users to purchase virtual gifts and premium offerings. Over the last year, MIG has grown its MAU base (220% y-o-y) at a similar rate to other large social media platforms.

Maximising monetisation opportunities

MIG plans to commence e-commerce in H216 using both a Consumer to consumer (C2C) model and a business to consumer (B2C) model. MIG believes in its success because social network online communities typically develop in an atmosphere of trust that can be carried over to the e-commerce space.

Valuation: Profitable by FY17

Our base case DCF valuation is A$1.93 per share (increased from A$1.75 due to the inclusion of social e-commerce and changes to our core business forecasts, which reflect higher revenue and reduced margins and the issue of shares to Meitu). Our reverse DCF shows that at the current share price the market is pricing in 84 million MAUs by FY18, which assumes that 4.3 million MAUs are added each quarter (in Q415 MIG added eight million users). Our sensitivity analysis results in a range of DCF valuations from nil to A$5.53, based on different market growth, monetisation and e-commerce assumptions. Our base case forecasts assume that MIG turns profitable in FY17.

The MIG journey

Business model

MIG’s social media platform is targeting the rapidly growing mobile internet markets of South-East Asia, and in particular in Indonesia, the Philippines and India, where there are expected to be ~4421 million social media users by 2018. The platform allows users to participate as themselves or, because of cultural or other issues, a user can create a fictional identity and use this to interact on the migme platform. Users are able to interact with like-minded people, to form communities and to engage in dialogue with artists and celebrities. MIG uses a freemium model and converts members to paying users by selling virtual gifts and premium game features. MIG is now conducting a launch campaign for social commerce, which will allow C2C, B2C2C and B2C social e-commerce. By creating a social network, MIG has developed communities that through interaction trust each other and are therefore prepared to engage in commercial transactions.

Statista.com.

By taking a different approach to the more established Facebook, and by being a first mover in its chosen markets, MIG has established a user base of over 32 million monthly active users (MAU) and has a track record of increasing monetisation rates.

The journey so far shows ‘runs on the board’

MIG listed on ASX via a shell company (Latin Gold [ASX: LAT]) in June 2014 following the relaunch of MIG’s platform (formerly a closed platform) as an open mass-market social entertainment platform offering chat, mini-blog, virtual gifts and games. The listing was accompanied by an A$8m capital raise (40m shares at A$0.20 per share). The Disclosure Document states that the existing core of members (MAU) was 3.2 million with very little revenue.

Since the listing MIG has attracted an additional 29 million users (total MAU was 32 million at 31 December 2015) and raised A$26.7m after capital raising costs and increased monetisation levels 2.2x faster than the growth in MAU. At the same time, operating costs have been contained. Cash receipts have grown 2.9x as fast as the growth in costs. The quarterly cash statement for FY15 shows an operating cash flow deficit for the year of A$17.1m.

In our view, significant progress has been made:2

MIG Appendix 4C Quarterly cash flow report December 2015.

22 million users have been added in 12 months, an annual growth rate of 220%, which is comparable to other successful network effect social media platforms.

The rate at which users are being added to the platform continues to accelerate and as more products and revenue earning opportunities such as games are added, we expect increased MAU and increased monetisation rates.

Cash receipts are now more than A$5m per quarter (A$5.4m in Q415).

During FY15 operating costs increased from A$4.4m per quarter to A$10.6m per quarter as the company embarked on its strategy of developing new territories, in particular in India.

Capital raises done throughout FY15 have been sold at significantly more than the A$0.20 per share IPO price. The A$10m capital raise in Q315 was priced at A$1.00 per share and the placement to Meitu on 3 March 2016 has been made at A$0.60 per share.

These numbers do not include the social e-commerce opportunity nor the impact of the Meitu joint venture, which should have a positive impact on the FY16 numbers.

Exhibit 1: Cash flows Q414 to Q415

Q414

Q115

Q215

Q315

Q415

Total

Monthly active users (MAU) (millions)

10

14

19

24

32

5 quarters

Growth in users (per quarter) (millions)

4

5

5

8

Cash receipts (A$000)

565

1,125

2,201

3,717

5,393

13,001

Cash operating costs (A$000)

(4,288)

(4,365)

(6,409)

(8,117)

(10,603)

(33,782)

Net operating cash flows (A$000)

(3,723)

(3,240)

(4,208)

(4,400)

(5,210)

(20,781)

Net investing cash flows (A$000)

(275)

326

(67)

(17)

(167)

(200)

Net financing cash flow (A$000)

10

13

6,564

9,660

3,410

19,657

Net increase (decrease) in cash (A$000)

(3,988)

(2,901)

2,289

5,243

(1,967)

(1,324)

Cash at beginning (A$000)

9,681

5,926

3,172

5,389

10,766

Exchange difference (A$000)

233

14

(72)

134

(141)

Cash at end of quarter (A$000)

5,926

3,172

5,389

10,766

8,658

Growth in MAU (q-o-q)

40.0%

35.7%

26.3%

33.3%

Growth in cash receipts (q-o-q)

99.1%

95.6%

68.9%

45.1%

Growth in operating costs (q-o-q)

-13.0%

29.9%

4.6%

18.4%

Compound quarterly growth rate:

Users

33.8%

Cash receipts

75.8%

Cash payments

25.4%

Source: MIG data (Appendix 4C quarterly lodged with ASX and management comments lodged with 4C), Edison Investment Research calculations

Our forecasts previously underestimated both revenue and costs. The industry revenue share model for artist and games providers is a 50/50 share. However, during FY15 MIG’s focus has been to establish its artist stable and to work with record companies to ensure that artists see the benefits of being part of the MIG community. Costs included promotion of artists’ products and an augmented revenue share (ie above 50%, which is MIG’s long-term benchmark for revenue share). These actions resulted in negative gross profit in FY15 as MIG worked to develop its platform and to build its MAU and its monetising users. We understand that it is MIG’s intention to wind back these costs and to increase the gross profit margin over time.

Over time we expect that MIG will be able to reduce the revenue share with artists and games developers because of the number of users and the revenue earning opportunities available to artists and games providers. Our forecasts (discussed below) show a gross profit margin from the core social media business (excluding e-commerce) of 45.2% by FY18.

Exhibit 2: FY15 actual vs estimates

(A$000)

Actual

Edison estimate

Variance

Revenue

12,299

8,995

3,304

Cost of goods sold

(13,043)

(4,497)

(8,546)

Gross profit

(744)

4,497

(5,241)

EBITDA

(21,021)

(12,108)

(8,913)

EBIT

(20,930)

(12,145)

(8,785)

Net interest

(20)

115

(135)

Profit before tax

(20,950)

(12,030)

(8,920)

Tax

(3)

3,609

(3,612)

NPAT

(21,043)

(8,421)

(12,622)

Source: MIG data, Edison Investment Research. Note: Actual revenue includes other income of A$114,700.

Forecast changes

Forecasting the rate at which users are added, the number of users who will monetise and the amount spent per user is a difficult exercise because it requires a judgement call on the acceptance of the social media platform by users in three developing countries. After MIG’s operational experience of between 12 and 18 months there is not sufficient data available to increase our confidence levels in our forecasting ability. This means that it is very probable that actual results will be materially different from our forecasts. Such forecasting error should be taken into account in assessing the risks inherent in the business model. Assessing tastes and preferences in a rapidly evolving marketplace where there is no history of similar business models being employed adds to the degree of difficulty.

We have amended our forecasts to reflect a reduced gross profit margin, higher operating costs and the inclusion of the e-commerce business. Details of our forecast changes are set out below.

Exhibit 3: Forecast changes

(A$’000)

2016e

2016e

2016e

2017e

2017e

2017e

2018e

2018e

2018e

Old

New

Variance

Old

New

Variance

Old

New

Variance

Total Revenue

33,176

45,962

39%

66,022

103,925

57%

110,776

171,734

55%

Cost of goods sold

(16,588)

(40,398)

144%

(33,011)

(71,001)

115%

(55,388)

(110,730)

100%

Gross Profit

16,588

5,564

(66%)

33,011

32,924

(0%)

55,388

61,004

10%

EBITDA

(1,540)

(16,320)

NM

13,779

9,940

(28%)

34,964

37,173

6%

EBIT

(1,575)

(16,363)

NM

13,747

9,900

(28%)

34,955

37,135

6%

Net interest

184

(87)

NM

265

(201)

(176%)

598

336

(44%)

Profit before tax

(1,391)

(16,450)

NM

14,012

9,699

(31%)

35,552

37,471

5%

Tax

417

(16,450)

NM

(4,204)

(2,910)

(31%)

(10,666)

(11,241)

5%

NPAT

(974)

4,935

NM

9,808

6,789

(31%)

24,887

26,230

5%

EPS (cents per share)

0

(4)

NM

4

2

(36%)

9

9

(4%)

Source: Edison Investment Research

The table below provides details of revenue and EBITDA per segment.

Exhibit 4: Forecast segments

A$m

2015

2016e

2017e

2018e

Core social media

Revenue

12.2

37.8

73.1

115.4

Other revenue

0.0

0.0

0.0

0.0

Total Revenue

12.2

37.8

73.1

115.4

COGS – Fixed

(3.3)

(3.9)

(4.0)

(4.2)

COGS – Variable

(9.8)

(29.6)

(41.0)

(59.0)

Gross Profit

(0.9)

4.3

28.1

52.2

Marketing costs

(1.9)

(2.2)

(2.3)

(2.4)

Labour costs

(10.4)

(11.9)

(12.5)

(13.0)

Operating costs

(4.6)

(5.9)

(6.2)

(6.4)

Total costs – exc e-commerce

(17.0)

(19.9)

(21.0)

(21.8)

EBITDA – SM

(17.8)

(15.6)

7.1

30.4

Gross Profit %

-7.0%

11.3%

38.4%

45.2%

EBITDA %

-146.2%

-41.3%

9.7%

26.3%

E-commerce

Revenue

C2C

0.0

0.1

0.3

0.4

B2C

0.0

8.1

30.6

55.9

Total revenue

0.0

8.2

30.9

56.4

COGS

0.0

(6.9)

(26.0)

(47.6)

Commission C2C

0.0

0.1

0.3

0.4

Margin – B2C

0.0

1.2

4.6

8.4

Total e-commerce EBITDA

0.0

1.3

4.9

8.8

Total EBITDA

Social Media

(17.8)

(15.6)

7.1

30.4

E-commerce

0.0

1.3

4.9

8.8

EBITDA before share-based payments

(17.8)

(14.3)

11.9

39.2

Share-based payments

(3.0)

(2.0)

(2.0)

(2.0)

EBITDA after share-based payments

(20.8)

(16.3)

9.9

37.2

EBITDA after share-based payments (%)

-170.7%

-35.5%

9.6%

21.6%

EBITDA – core social media (%)

-146.2%

-41.3%

9.7%

26.3%

EBITDA – e-commerce (%)

N/A

15.8%

15.8%

15.6%

% EBITDA – Social Media

100%

109%

59%

78%

% EBITDA – e-commerce

0%

-9%

41%

22%

Source: Edison Investment Research

MAU growth in perspective

The chart below puts MIG’s early growth rate in MAU in perspective. In our view, MIG’s growth needs to continue at similar rates to other social media sites such as Facebook, Twitter and TenCent’s WeChat.

Exhibit 5: MAU growth peer group and MIG

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Facebook

260%

69%

39%

25%

22%

5%

18%

Twitter

117%

58%

30%

20%

6%

WeChat

168%

125%

41%

30%

Qzone (TenCent SNS)

31%

8%

9%

4%

5%

migme

220%

116%

58%

35%

24%

Source: Statista and Tech Asia (for WeChat), TenCent for Qzone, migme actual for year one and Edison Investment Research forecasts for years two to five 

The chart below provides an indication of the ‘inflection point’ (the point at which there is a sharp increase in the number of MAU) for social media/e-commerce sites by tracking monthly MAU. The inflection point is somewhere between 21 and 24 months. MIG will enter its 24th month in July 2016. Our forecasts show profitable operations from FY17, however, we caution that the amount of profit will depend on the number of monetising users, the amount spent per monetising user and the gross profit margins from the core social network business as well as the success or otherwise of the social e-commerce venture.

Benchmarking the point at which the ‘network effect’ (the inflection point at which growth feeds growth in users) on social media platforms kicks in is relatively subjective. However, looking at the early years (from the point at which they reached 20m MAUs) for larger peers in Exhibit 6, MIG’s MAU growth is tracking well. In the first two years of scaling beyond 20m MAUs, Facebook, Twitter and LinkedIn for instance all added c 10m MAUs a quarter, and there were signs that the network effect kicked in approximately two years later at approximately 100m MAUs. Over the last four quarters, MIG has added 22m subscribers, an encouraging trend. Hence, we are forecasting a user growth trajectory only lagging behind Facebook but superior to Twitter, LinkedIn and eBay.

Exhibit 6: Social media platforms’ growth in MAU (on monthly basis)

Source: Company data. Note: X-axis is number of months. In each case zero is taken as the point at which there were c 15 million users.

MIG’s early success

From the outset the MIG vision has been:

to build a platform that would strike a chord with users in Asia and therefore would attract and retain users who would form trusted communities.

Key features included the ability to interact with local popular artists, the ability for users to become the person they want to be via the use of an avatar and linkages with likeminded people to form communities in which users interact and build a network of trust.

To focus on SE Asia, firstly Indonesia, then the Philippines and India.

To provide artists with a way to monetise their products by sharing revenue generated by the MIG platform with the artists; this has the effect of attracting more artists to the MIG platform.

To ensure that users are able to pay either by using pre-paid options or via a payments processing system.

To take advantage of the explosion in low-cost mobile phones.

To enter into pre-install arrangements with mobile phone manufacturers (like FIH, a subsidiary of Hoi Han Group).

MIG took its lead from successful sites in China such as TenCent (HK: 700) that combine chat, games and e-commerce. TenCent has more than 650 million MAU.

Where to now?

In our view, MIG has proved its business model. It has proved that it can build a social network community of some scale in three separate countries in South-East Asia and build the organisation to a 200-person strong team operating across the three territories. MIG has been able to do this because it has been successful in signing content and distribution agreements that build the membership base and engaging with artists and games providers. It has been successful in developing virtual gifts and upgrades that entice users to monetise.

We see the relationship with FIH Mobile, a subsidiary of Hoi Han Group, one of the world’s leading smartphone handset manufacturers as of strategic importance because it provides MIG with a cornerstone shareholder (it owns 19.9% of MIG) and a valuable contact in Asia that is able to bring MIG additional contacts and relationships as well as provide pre-installation opportunities for the migme app. The announcement on 3 March 2016 of a Memorandum of Understanding (MoU) with Meitu (>900m MAU of whom >100m are outside China)3 is an example of the power of relationships. FIH has a joint venture with Meitu (announced in May 2015) and it is likely that the Meitu doors were opened to MIG by FIH.

MIG announcement 3 March 2016 and crunchbase.com

We also think that MIG has demonstrated that the freemium model can lead to significant revenues (the revenue run rate is currently A$21.6m) just from the sale of virtual gifts and premium activities. In our initiation note (Social media for the next 3.5 billion, 18 December 2014) we noted that the keys to success were “driven by MIG’s ability to scale its user base and increase average revenue per paying user (ARPPU) while keeping costs in check”. ARPPU was initially disclosed by MIG but has not been provided for the last three quarters. The rate of increase in cash costs (a compound quarterly growth rate of 25.4%) has been significantly lower than the increase in cash receipts (growth of 75.8%).

MIG’s strategy now is to:

Continue to build the number of MAUs – By 2018 MIG’s management plans to have a significant market share of the 442m social media users in its target markets. Our base case forecasts assume that MIG will have captured ~33.3% market share.

Continue to add content through agreements with artists and key opinion influencers (KOI).

Continue to incentivise artists via a model whereby MIG and the artist share revenue generated on the platform; MIG expects to wind the revenue share back to 50% over time (we estimate that the current revenue share for artists and games providers at close to 90%).

Ensure that the payments network is in place to provide a framework that is able to facilitate commercial activities.

Launch social e-commerce by bringing an online shopfront to the user community.

E-commerce strategy

MIG’s e-commerce strategy is designed to take advantage of its MAU and their interests. The core social media business earns revenue from selling virtual gifts and premium features on games and the like. It should be noted that successful games hold the key to any ‘hockey-stick’ style increase in monetisation levels in the core business. Management expects the games platform to be launched in its final form in Q216.

MIG has established communities linked by common interests, joined by their interactions with each other and with the artists that have signed onto the MIG platform. These common activities provide a platform for MIG to launch an e-commerce business. MIG’s e-commerce platform will provide an opportunity for MAUs to transact business with each other (consumer to consumer [C2C], like eBay, where MIG will earn a commission) and to buy goods (such as merchandise from artists, DVDs or concert tickets) from third parties that join the migme platform (business to consumer, where MIG expects to earn a margin of 15%).

We have included the revenue and costs reflecting the social e-commerce strategy set out in the company’s release to the ASX on 23 February 2016. We have made the following assumptions:

2% of MAUs engage in e-commerce from H216. This proportion of MAUs remains unchanged for the forecast period.

The gross spend per business to consumer (B2C) user starts in H216 at A$40 pa and increases by 3% every six-month period. E-Marketer (Exhibit 7 below) forecasts that, in South-East Asia, e-commerce shoppers spend on average US$0.5-1.2k a year in 2016 (note this includes Asia Pacific and hence Australia). Our starting point of A$40 implies a 4-6% share of an online shopper’s annual gross digital spend in India and Indonesia.

Exhibit 7: E-commerce spend

US$ per digital shopper (B2C)

2014

2015e

2016e

North America

2,542

2,695

2,937

Western Europe

1,998

2,120

2,222

Asia-Pacific

1,057

1,123

1,179

India

691

708

724

Indonesia

437

480

516

MIG per capita spend (US$0.71/A$ for A$40)

28

% of annual digital shoppers in India

3.9%

% of annual digital shoppers in Indonesia

5.5%

Source: E-Marketer

The gross spend per C2C user starts at A$20 pa4 (although we expect the EBITDA contribution from this channel to be small, see Exhibit 8 below) and increases by 3% every six-month period thereafter.

The assumptions made in the forecast of the C2C and B2C business for revenue per user come from industry research carried out by Edison and are supported by data presented in the E-Marketer sourced table of E-Commerce spend

A 2% commission earned on C2C business; we understand that the possible commissions range from 1% to 5%.5

The assumptions made concerning commission rates were provided by MIG. The rate used in Edison Investment Research is at the conservative end of the company’s guidance range.

A 15%6 margin on B2C business with costs borne by the business (third party).

The assumption concerning the B2B margin is based on Edison Investment Research of like businesses and from discussions with MIG.

No additional costs are incurred in operating the e-commerce business

We will revisit our revenue and cost assumptions after e-commerce initiative is launched in H216 and more information becomes available.

Exhibit 8: MIG’s e-commerce revenue and EBITDA

A$m

2016e

2017e

2018e

C2C commission

0.1

0.3

0.4

B2C revenue

8.1

30.6

55.9

Total revenue

8.2

30.9

56.4

C2C commission

0.1

0.3

0.4

B2C margin

1.2

4.6

8.4

Total EBITDA contribution

1.3

4.9

8.8

Total EBITDA contribution

(16.3)

9.9

37.2

E-commerce % of total EBITDA

NM

48.9%

23.7%

Source: Edison Investment Research

Why the strategy should work

The early signs are encouraging both in terms of MAU growth and monetisation. MIG has long claimed that it understands the Asian market, which operates quite differently from social media markets in western countries. We note that in China Facebook, Twitter and other western social network sites do not have a presence, whereas in MIG’s chosen markets of India, the Philippines and Indonesia social networks are dominated by the ‘big names’ such as Facebook.

MIG has already demonstrated its ability to establish new markets, build the number of MAUs and increase monetisation rates. In our view this bodes well for further increases in user numbers and monetisation rates, which are likely to be driven by:

The critical mass of users on the platform – now 32 million compared with 10 million a year ago.

The addition of social e-commerce both for C2C and for B2C.

Forecast growth in smart phone usage in MIG’s target markets, in particular in India.

The expected growth in the number of social network users in MIG’s target markets. MIG expects the number of social media uses to grow from 246 million in 2015 to 442 million by 2018. This expectation is based on forecasts made by Statista.com.

Path to profitability

Our forecasts (last published in our research note Growth in users and monetisation continues, dated 23 October 2015) showed profitability being reached in FY17 with EBITDA of A$13.8m generated from 82 million users.

Our amended forecasts (see Exhibit 3) assume that FY17 will result in EBITDA of A$9.9m generated from 109 million MAU, including A$4.9m from e-commerce and A$7.1m from core social network business before share based payments. We have assumed share-based payments of A$2m The core business is now forecast to earn a lower EBITDA margin (9.7%). In our previous forecasts we had assumed that the artist incentive programme would have been complete by the end of FY16 (EBITDA margin of 20.9%). In our new forecasts, by FY18, our EBITDA margin increases to 21.6% for the core business and e-commerce. The business split in FY18 is expected to be 78% from core social media and 22% from social e-commerce.

We understand that operating costs will peak in H116 and then are likely to remain largely fixed. Payment gateway fees, revenue sharing with artists and gaming licence costs will remain variable and we expect that these costs will reduce over time (measured as a percentage of sales).

Exhibit 9: MIG – path to profitability (in $)

2015

2016e

2017e

2018e

MAU (m)

32

69

109

147

Revenue (A$m)

12.3

46.0

103.9

171.7

EBITDA (A$m) (norm)

(21.0)

(16.3)

9.9

37.2

NPAT (A$m) (norm)

(20.7)

(11.5)

6.8

26.2

Growth rates

Revenue

274%

126%

65%

EBITDA

NM

NM

274%

NPAT

NM

NM

286%

Source: MIG data, Edison Investment Research

Exhibit 10: MIG – path to profitability (description)

Establishment

Build user base

Prove the ‘freemium’ model

Convert users into monetising users

Sign artists using incentive packages

Set up payment gateways

Develop content

Acquire content

Launch in two additional territories

Complete product offering (games and e-commerce)

Proof and inflection point

Accelerate user growth

Reach inflection point for growth in MAU

Increase monetisation via games

Add e-commerce (C2C and B2C)

Reduce incentives paid to artists

Reduce artist/games developer commissions

Turn EBITDA to positive

Create shareholder value

Profitable operations

EPS ~A$0.09 cents per share
(P/E of 6.4x*)

Evidence of network effect appears

June 2014 to December 2015

January 2016 to December 2017

January 2018 onwards

Source: Edison Investment Research. Note: *Based on share price of A$0.58.

In our view this path to profitability is feasible because in the last 18 months MIG has:

Grown its user base from 3.2 million (as per June 2014 Prospectus) to over 32 million by 31 December 2015, a tenfold increase. This gives us confidence in MIG’s ability to grow MAU to 147m by FY18.

Signed over 650 artists to the platform, which means other artists are now likely to want to join the platform because they have seen the success that the migme platform can bring to artists. We expect that over time MIG will be able to reduce the revenue share with artists to ~50% (we assume 55% in our forecasts), which is MIG’s long-term goal.

Signed distribution deals with major record labels in Indonesia and India.

Developed a games business that will be launched in Q216 and is expected to be a major driver of growth in monetisation rates and MAUs.

Launched an e-commerce strategy that is expected to make a positive contribution to EBITDA from H216.

Put in place arrangements to make it possible for users in its chosen countries to pay using pre-paid cards and other card processing options.

Shown strong growth in monetisation through selling virtual gilts and premium features. We expect that monetisation rates will rise significantly with the launch of the games platform in Q216.

Our analysis shows that it has taken icons such as Facebook and Twitter between 21 to 24 months to reach an inflection point where there is a sharp acceleration in growth rates. MIG should be able to reach this point late in FY16 particularly as a successful games platform should drive explosive growth rates.

Social commerce in China

MIG has looked at an example of a social commerce company in China. We acknowledge that the geographies are different but the social media characteristics of the market are similar and therefore relevant.

The example of social commerce in China is the privately owned Mogujie, which acquired Meilishuo in January 2016. Together these businesses are valued at US$2.5bn and in 2015 generated combined revenue of almost US$3bn. Mogujie featured in the 2015 Fortune Unicorn List of 100 privately held companies worth more than US$1bn.7

“Chinese Social-Shopping Start up Mogujie to Acquire Competitor” Wall Street Journal, 16 January 2016.

Mogujie was founded as a social shopping services business in China in 2011 and since evolved into a social marketplace with revenues in 2015 of US$1.7bn and a MAU base of 47m.8 The key reasons for Mogujie’s success include:

MIG presentation 23 February 2016, released to ASX on 23 February 2016.

The ability for users to share views and opinions about goods.

Suggesting products to be purchased online that match the users’ personal parameters.

A focus on mobile first, which fosters higher visits, impulse buying and greater repeat purchases.

Using the social network and in particular the artists and celebrities (key online influencers) to drive chat and the sharing of views, ultimately leading to a sale.

Valuation

Exhibit 11: DCF

(A$m)

 

2016e

2017e

2018e

2019e

2020e

2021e

2022e

2023e

2024e

2025e

EBIT (total group incl. assoc)

-16.4

9.9

37.1

67.1

101.7

137.9

140.7

143.5

146.4

Tax

0.0

-3.0

-11.1

-20.1

-30.5

-41.4

-42.2

-43.1

-43.9

Depreciation

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Amortisation

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Maintenance capex

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Expansionary capex

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Incremental Working Capital

1.8

2.5

3.3

4.2

4.9

5.0

5.0

5.0

5.0

Free cash flow

-14.6

9.5

29.3

51.3

76.1

101.6

103.5

105.5

107.5

EBITA

-16.4

9.9

37.1

67.1

101.7

137.9

140.7

143.5

146.4

Free cash flow

-14.6

9.5

29.3

51.3

76.1

101.6

103.5

105.5

107.5

109.6

Discount

0.884

0.782

0.691

0.611

0.540

0.478

0.422

0.374

0.330

0.292

Discounted Value

-12.9

7.4

20.3

31.3

41.1

48.5

43.7

39.4

35.5

32.0

Sum of PV

254.4

Terminal value at FY22e

1007.6

Discount Factor

0.292

PV of terminal value

294.2

PV of enterprise

548.6

Debt/(cash)

(2.2)

Net value for shareholder

550.8

Number of shares in issue

 

285.7

NPV

 

$1.93

Source: Edison Investment Research

Our base case forecasts result in a DCF of A$1.93 compared with our previous DCF of A$1.75. The 10.3% increase in our DCF is attributable to the inclusion of the e-commerce business, our revised assumptions on growth in MAU and monetisation rates and in costs, reduction in the positive contribution from changes in working capital and the issue of 11.75m shares to joint venture partner Meitu. The result is that our core social network EBIT is now lower than our previous forecasts because our revenue increases have been offset by cost increases. The cost increases are significant in the forecast period but reduce in the out years as MIG achieves revenue sharing agreements with artists that are closer to its goal of 50%. Our previous forecasts assumed a gross margin of 50%. Our current forecasts for the core social media business assume a gross margin of 11.3% in FY16, 38.4% and 45.2% in the years 2016 to 2018. For the total business the margins from FY16 to FY18 are 12.1%, 31.7% and 35.5%.

Exhibit 12: EBIT forecast changes in core social media business

(A$000s)

2016e

2016e

2017e

2017e

2018e

2018e

Old

New

Old

New

Old

New

Revenue

33,176

37,781

66,022

73,060

110,776

115,381

Costs

34,751

(53,396)

52,275

65,981

75,821

85,009

EBIT

(1,575)

(15,616)

13,747

7,079

34,955

30,372

Variance

(14,041)

(6,668)

(4,583)

Variance (%)

891.5%

-48.5%

-13.1%

Source: Edison Investment Research

We have also run a reverse DCF and undertaken sensitivity analysis. Our base case and reverse DCF and our sensitivities use a WACC of 13.1% and a terminal growth rate of 2%. The terminal value accounts for 53.6% of the base case DCF and assumes a 6.9x EBIT multiple.

Our reverse DCF suggests that the current share is pricing in MAU of 84 million by FY18 (this is the equivalent of adding 4.3m users a quarter, against growth of eight million actually achieved in Q415) compared with our DCF assumption of 147 million MAU by FY18.

We have undertaken sensitivity analysis to determine the impact on valuation from the changes in three key variables:

MAU growth – Scenario 1 assumes that the number of MAU increases to 43% of market share by FY18. This increases MAU from 147 million in our base case forecast to 189 million in our Sensitivity 1 analysis below. The result is a DCF of A$2.89, which is an additional A$0.96 to our base case DCF of A$1.93. By the same token, a decrease of 10% market share will decrease our DCF valuation by $0.96 to $0.97.

MAU spend – MIG does not provide data on the number of monetising users or the average revenue per paying user (ARPPU). See Exhibit 13 for our base assumptions. Sensitivity 2 assumes that MAUs increase their FY18 spend by A$0.30 to A$1.47. The result is an increase of A$3.60 to our base case DCF to a total DCF of A$5.53. Similarly, a decrease of 25% spend per user would result in negative valuation.

E-commerce users – We have assumed in our base case that 2% of MAU engage in social e-commerce. Our Sensitivity 3 assumes usage doubles to 4%, which adds A$0.39 to our base case DCF, resulting in a total DCF of A$2.32. If the usage halves, the DCF would decline by A$0.39 to A$1.54.

The sensitivities undertaken and the results are set out in the table below.

Exhibit 13: DCF – impact of sensitivity analysis (A$ per share)

Case

Case Description

Change in DCF

Upper end

of DCF

Lower end

of DCF

Base case

Base case DCF - A$1.93/share

Sensitivity 1

MAU increase/decrease by 10% of market share (189m/102m MAU)

0.96

2.89

0.97

Sensitivity 2

MAU increase/decrease in spend ±30c (or ±25%) in FY18

3.60

5.53

N/M

Sensitivity 3

E-commerce doubles/halves market share (4% or 1% market share)

0.39

2.32

1.54

Source: Edison Investment Research

We have also calculated the EV/EBITDA multiples implied in the share price using the base case assumptions and the assumptions used (upside cases only).

Exhibit 14: DCF sensitivities

DCF

2017e

2018e

Base Case

EV/EBITDA multiple - share price

[x/[A$]

$1.93

16.7

4.6

EV/EBITDA multiple - DCF

[x]

55.4

15.4

MAU

[m]

69

109

MAU market share

[%]

23%

30%

Spend per MAU

[A$]

0.64

0.92

Sensitivity 1

EV/EBITDA multiple - share price

[x/[A$

$2.89

10.5

3.2

EV/EBITDA multiple - DCF

[x]

52.2

15.8

MAU

[m]

71

131

MAU market share

[%]

24%

36%

Spend per MAU

[A$]

0.64

1.00

Sensitivity 2

0.64

1.00

EV/EBITDA multiple - share price

[x/[A$]

$5.53

12.9

3.3

EV/EBITDA multiple - DCF

[x]

123.0

31.5

MAU

[m]

69

109

MAU market share

[%]

23%

30%

Spend per MAU

[A$]

0.65

1.01

Sensitivity 3

EV/EBITDA multiple - share price

[x/[A$]

$2.32

11.2

3.7

EV/EBITDA multiple - DCF

[x]

44.7

14.9

MAU

[m]

69

109

MAU market share

[%]

23%

30%

Spend per MAU

[A$]

0.64

0.92

Source: Edison Investment Research

Financials

Balance sheet

At 31 December 2015 MIG had net cash of A$5.1m. The placement to Meitu increased net cash by A$6.99m. Our forecasts assume that net operating cash flows will be negative (A$14.6m) in FY16 and that net debt will be A$2.2m.

We have not included the payment of dividends in our forecasts. We have included the conversion of all outstanding options at the exercise price, which in all cases is less than our DCF.

Joint venture announcement – Meitu

MIG has announced a Memorandum of Understanding with Meitu, a privately owned company based in Xiamen China. The MoU is to “explore joint marketing and product development opportunities”. MIG stated that it intends to work closely with Meitu to implement content sharing across both platforms and to undertake joint marketing activities. CEO of MIG, Stephen Goh believes that the combination of the Meitu product and the migme platform could provide users with an experience similar to Instagram and Snapchat. The company expects that the MoU with Meitu will help in growing MAU’s and in increasing monetisation.9

MIG announcement 3 March 2016.

In May 2015 Meitu Inc entered into a joint venture with Foxconn Technology Group (who through FIH own 19.9% of MIG) as a way of expanding its business in South East Asia and in India. Meitu produces mobile photo software that helps users to edit and share ‘selfies’. According to the company, Meitu has more than 900m uses with more than 100m users outside China. The Foxconn/Meitu joint venture plans to tailor devices to the local market and produce and ship 5m smartphones in 2016.10

“Foxconn teams with Meitu for selfie phone expansion’ Bloomberg 6 May 2015.

Our forecasts do not include the impact of the Meitu joint venture relationship and we will revisit our forecasts when more information is available.

Exhibit 15: Financial summary

A$000s

2014

2015

2016e

2017e

2018e

31 Dec

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,953

12,300

45,962

103,925

171,734

Cost of Sales

(605)

(13,043)

(40,398)

(71,001)

(110,730)

Gross Profit

1,347

(744)

5,564

32,924

61,004

EBITDA

 

 

(28,597)

(21,021)

(16,320)

9,940

37,173

Operating Profit (before amort. and except.)

(16,017)

(20,930)

(16,363)

9,900

37,135

Intangible Amortisation

0

0

0

0

0

Exceptionals

0

0

0

0

0

Other

0

0

0

0

0

Operating Profit

(16,017)

(20,930)

(16,363)

9,900

37,135

Net Interest

0

(20)

(87)

(201)

336

Profit Before Tax (norm)

 

 

(16,017)

(20,950)

(16,450)

9,699

37,471

Profit Before Tax (FRS 3)

 

 

(28,597)

(21,313)

(16,450)

9,699

37,471

Tax

(32)

(3)

4,935

(2,910)

(11,241)

Profit After Tax (norm)

(16,048)

(20,680)

(11,515)

6,789

26,230

Profit After Tax (FRS 3)

(28,629)

(21,043)

(11,515)

6,789

26,230

Average Number of Shares Outstanding (m)

251.6

262.7

285.7

296.3

299.9

EPS - normalised (c)

 

 

(6.38)

(7.87)

(4.03)

2.29

8.75

EPS - normalised and fully diluted (c)

 

(5.95)

(7.33)

(3.77)

2.20

8.51

EPS - (IFRS) (c)

 

 

(11.38)

(8.01)

(4.03)

2.29

8.75

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

69.0

-6.0

12.1

31.7

35.5

EBITDA Margin (%)

-1464.3

-170.9

-35.5

9.6

21.6

Operating Margin (before GW and except.) (%)

-820.2

-170.2

-35.6

9.5

21.6

BALANCE SHEET

Fixed Assets

 

 

646

1,077

5,971

5,933

5,898

Intangible Assets

0

326

326

326

326

Tangible Assets

502

583

542

504

469

Investments

145

168

5,103

5,103

5,103

Current Assets

 

 

6,539

9,419

1,655

11,489

43,505

Stocks

0

100

0

0

0

Debtors

0

0

0

0

0

Cash

5,926

8,658

994

10,829

42,844

Other

613

661

661

661

661

Current Liabilities

 

 

(1,593)

(2,931)

(4,586)

(6,093)

(9,386)

Creditors

(1,352)

(1,694)

(3,348)

(5,884)

(9,177)

Short term borrowings

0

0

0

0

0

Other current liabilities

(241)

(1,238)

(1,238)

(209)

(209)

Long Term Liabilities

 

 

0

(3,178)

(3,178)

0

0

Long term borrowings

0

(3,178)

(3,178)

0

0

Other long term liabilities

0

0

0

0

0

Net Assets

 

 

5,593

4,387

(138)

11,329

40,017

CASH FLOW

Operating Cash Flow

 

 

(11,074)

(17,065)

(14,565)

11,448

40,465

Net Interest

0

0

(87)

(201)

336

Tax

(143)

(10)

0

(2,910)

(11,241)

Capex inc R&D

(506)

(328)

(2)

(2)

(2)

Acquisitions/disposals

9,344

411

0

0

0

Financing

11

16,146

6,990

1,500

2,458

Dividends

0

0

0

0

0

Net Cash Flow

(2,368)

(846)

(7,665)

9,835

32,015

Opening net debt/(cash)

 

 

(2,182)

(5,926)

(5,080)

2,184

(10,829)

HP finance leases initiated

0

0

0

0

0

Other/Conv note converted to equity

(1,376)

400

3,178

0

Closing net debt/(cash)

 

 

(5,926)

(5,080)

2,184

(10,829)

(42,844)

Source: Edison Investment Research. Note: COGS does not include marketing costs and Revenue includes ‘other income’.

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