Six Flags Final

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  • Team Square Alpha Research Industry Sector, Entertainment Facilities

    Date: 11/12/2016 New York Stock Exchange (NYSE)

    This report is published for Global Markets Investments Club Annual IBS Stock

    Pitch Challenge purposes.

    Ticker: SIX NYSE Current Price: 53.90 USD Target Price: 60.19 USD Recommendation: BUY (11.70% Upside)

    SIX: Riding Higher

    We issue a BUY recommendation on Six Flags Entertainment Corporation (SIX) with a one-year

    target price of $60.19, which offers a 11.70% upside from its closing price of $53.90 as of

    10/26/2016. SIX has a stable historical performance and enjoys robust growth potential driven by

    consumer confidence level and healthy consumer base. However, market concerns about quarterly

    earnings led to over 20% drop of its 52-week high of $62.7 in 3Q2015, though recovering to $53.90

    in late October. We believe SIXs season pass (introduced in 2010) and membership (introduced in

    2013) strategy will continue to generate stable revenue each year, with in-sight revenue from global

    expansion starting 2019.

    Strong Support by Prospect Industry Performance

    Amusement park industry has been growing steadily in the past few years due to stronger consumer

    confidence and spending after 2008 financial crisis. Over 400 enterprises operate in the industry and

    five major players take over more than 98% of market share. Over the next five years, the industry

    is expected to grow at a CAGR of 2.4% from $16 billion in 2016 to $17.9 billion in 2020E.

    Robust Growth Potential from Season Pass and Membership

    SIXs season pass and membership have been one of consumers favorites due to deep discounts

    and affordability (up to 72% savings compared to single-ticket). Thanks to this strategy, each pass

    holder spends 2x compared to single-ticket holder. And we expect its penetration rate (season pass

    & membership attendance to total attendance) to grow from 56.80% in 2016E to 60.00% in 2020E,

    implying a five-year CAGR of 4.51% in attendance numbers. Besides, given slow growth of U.S.

    population, SIX shows strong, unaffected and growing demand for season pass and membership.

    Marginal-Cost Revenue Contributed by Global Expansion

    SIX started its global expansion in early 2014 and has entered licensing partnership with companies

    from emerging markets, such as China, Vietnam and Dubai. Its licensing strategy requires no capital

    expenditure from SIX and generates revenue from both licensing fees and earnings allocation. We

    expect three parks to open in 2019 (two in China and one in Dubai) and another two parks (in

    Vietnam) open in 2020, contributing to premium of 4.8% and 5.8% of domestic revenue in 2019E

    and 2020E respectively.

    Attractive Profitability and Reliable Liquidity Sources

    Due to increasing operating efficiency, SIX enjoys higher EBITDA margin of 36.75% in 2016E,

    compared to industry average of 25.69% TTM, with consistently positive cash flows from operating

    activities (CFO) from $501 million to $582 million during 2016E-2020E. Besides solid CFO, SIX

    has the option of $250 million revolving loan to satisfy any anticipated liquidity needs, such as

    working capital, capital expenditure, stock dividends and discretionary common stock repurchases.

    Six Flag's Key Financial Ratios

    Key Ratios 2015 2016E 2017E 2018E 2019E 2020E

    EBITDA margin 35.35% 36.75% 36.83% 37.09% 37.16% 37.22%

    Net profit margin 15.26% 16.58% 16.89% 17.33% 17.61% 17.93% ROA 7.77% 9.26% 9.98% 10.79% 11.54% 12.36%

    Current ratio 0.84 0.97 1.04 1.16 1.27 1.40

    Quick ratio 0.72 0.71 0.72 0.74 0.75 0.75

    Cash conversion cycle 14 4.54 5.33 4.42 3.55 2.64

    Cash turnover 13 12.80 12.61 11.16 10.59 9.78

    CFO/EBIT 1.40 1.29 1.28 1.23 1.20 1.17 CFO/CapEX 4.15 4.11 4.11 3.96 3.91 3.84

    Long-term debt to assets 0.62 0.61 0.61 0.61 0.60 0.60

    Interest coverage 4.45 5.11 5.42 5.79 6.14 6.53 EPS (in $) 1.65 2.00 2.18 2.39 2.60 2.83

    Dividends (in $) 2.14 2.29 2.44 2.59 2.74 2.89 Source: Company report, Team estimates

    Market Profile

    Closing Price $53.90

    52-Week Price Range $45.2-$62.7

    Average Daily Volume 654,284

    Shares Outstanding 92.1M

    Market Cap 4986.7M

    Dividend Yield (TTM) 4.3%

    P/E (TTM) 41.6

    EV/EBITDA (TTM) 16.8

    Source: Bloomberg

    Valuation Breakdown

    DCF $63.17

    Weight 50.00%

    Multiple $57.22

    Weight 50.00%

    Target Price $60.19

    Source: Bloomberg, Team estimates

    Six Flags Entertainment Corporation





    Stock Price Movement

    SIX US Equity SPX Index

    FUN US Equity

    Source: Bloomberg

    1.65 2.00 2.18

    2.39 2.60 2.83










    2015 2016E 2017E 2018E 2019E 2020E

    SIX's EPS and Revenue Forecast

    EPS (in $) Revenue - RHS (in mn $)

    Source: Company report, Team estimates

  • Business Description

    Six Flags Entertainment Corporation is the largest roller coaster theme park in the world per number

    of parks it operates and achieved $688 million revenue in 2015, with a) 57.1% from theme park

    admissions; b) 41.5% from theme park food, merchandise and other; c) 1.4% from accommodations

    and d) 4.68% from sponsorship, licensing and other fees. (Table 1)

    There are 16 theme parks in United States, and two parks in Mexico and Canada (Exhibit 1). Given

    effective coverage radius of 50 miles and 100 miles, each domestic park generally serves 100 million

    people and 175 million people respectively. Besides, all parks are featured with unique roller coaster

    rides combination and placed within regions with high population density, such as Vallejo, Los

    Angeles, Atlanta, New Jersey, Chicago, Washington DC and New England.

    Different from regular amusement parks, SIX attracts consumers by offering thrilling and exciting

    roller coaster rides while maintaining some regular rides for non-roller-coaster riders. Thus,

    continuous introduction of new rides facilitates its consumer base, with ages ranging from 15-year-

    old to 40-year old. Besides regular-themed roller coaster rides, SIX also holds exclusive long-term

    licenses of characters from Warner Bros. and DC Comics, such as Batman, Suicide Squad and

    Superman, which are currently used for marketing purpose.

    Company Strategy

    Global Expansion: Compared to domestic amusement park peers (excluding Walt Disney and Universal Studios), SIX has taken a lead in global expansion using no-CapEx licensing strategy,

    which provides revenue premium but requires no further investments apart from operation

    assistance and brand licenses.

    Active Pass Base: Leveraging on season pass and membership strategy, SIX provides affordable pass tickets and thus can attract and retain a larger consumer base. Meanwhile, SIX is planning to

    introduce other passes to attract more customers. And thanks to big-data driven marketing

    strategies, SIX can better target potential consumers. (Table 2)

    Cutting-Edge Innovation: SIX has been leading the roller coaster industry with featured thrilling rides and recently introduced new Virtual Reality (VR) technology to enhance multi-dimensional

    and interactive riding experience, such as Superman and Batman rides. With VR headsets, riders

    can choose different specially-designed storylines and even use weapons by moving headsets.

    Industry Overview and Competitive Positioning

    Amusement park industry, featuring with high entry barriers, has been growing steadily in the past

    few years due to stronger consumer confidence and spending after 2008 financial crisis. The industry

    revenue heavily relies on leisure time and disposable income of consumers. Over 400 enterprises

    operate in the industry and five major players take over more than 98% of market share. Over the

    next five years, the industry is expected to grow at a CAGR of 2.4% from $16 billion in 2016E to

    $17.9 billion in 2020E.

    Consumer Base Overview

    Slow Population Growth & Large Young Population: Per U.S. Census Bureau, population

    between 0 and 44 years old is expected to grow by 2.5% from 2016E to 2020E while total population

    by 5%, showing a mild and slow growth (Exhibit 2). Regarding amusement park industrys

    consumer base, it is majorly teenagers and younger (under 18), occupying 22% of total attendances,

    while adults (18-44 years old) accompanying kids, taking up 36%, in 2016.

    Geographic Competition Overview

    Fierce Competition in Populated Areas: Five major players in the market are Walt Disney,

    Universal Studios, Six Flags, Cedar Fair, and Sea World (Appendix 7), with the first two taking up

    75% of total industry earnings utilizing only two locations of Orlando and Los Angeles. Sea World

    is mainly targeting at five locations while Six Flags and Cedar Fair are operating parks located in

    many populated areas across U.S., showing diversity in geographic strategies and stronger

    competition between each other.

    China and Dubai Potential Outlook

    Attractive Asian and Middle-East tourism & entertainment market: Operators in U.S. are

    expanding into international markets, especially Asia and Middle East, due to high growth pote