20160629-东英亚洲证券-China_Cinema_Industry__Riding_on_the_middle_class_to_double_the_box_office_65页_1mb

China Cinema Industry Summary

Core Content

The China cinema industry is entering a golden age driven by the rising middle class, increasing entertainment expenditure, and a virtuous cycle between box office growth and movie supply. The report forecasts significant growth in both box office revenue and movie admissions per capita, with the box office expected to grow at a 19.3% 5-year CAGR from RMB44bn in 2015 to RMB106bn by 2020E. This growth is supported by an estimated 9.2% CAGR in entertainment expense per capita, rising from RMB942 in 2015 to RMB1,462 in 2020E. Movie admission per capita is expected to increase from 0.9 times per annum in 2015 to 2.2 times by 2020E, with average ticket prices remaining stable at RMB34.2.

The growth is further fueled by the increasing popularity of 3D and IMAX formats, which provide a superior cinematic experience compared to home theaters. Domestic movies have also gained significant traction, contributing the majority of the box office, with 12 out of the top 20 movies in 5M16 being domestic or joint development films. This trend supports the virtuous cycle between box office and movie production, where higher box office revenue encourages more investment in film-making, which in turn drives further box office growth.

Main Views

• Middle Class Growth: The rising middle class in China is a key driver of entertainment spending, which is expected to grow at a 9.2% CAGR from 2015 to 2020E.
• Box Office Growth: China's box office is projected to grow at 19.3% 5-year CAGR to reach RMB106bn by 2020E, with a 24.1% 3-year CAGR to RMB84bn by 2018E.
• Movie Admissions: Movie admissions per capita are expected to double from 0.9 times per year in 2015 to 1.8 times by 2018E, with the majority of growth coming from lower tier cities.
• Affordability: Despite a slight decline in average ticket prices, movies remain an affordable form of entertainment, especially with the rise of 3D and IMAX formats, which offer premium experiences at prices that are more accessible than home theaters.
• Cinema Operators: These are preferred over movie producers due to their revenue sharing model and more stable income streams. They share 50-52% of gross box office revenue, regardless of individual film profitability, and benefit from non-box office revenue such as advertising and F&B sales.

Key Information

• Rising Middle Class: Expected to increase entertainment spending, leading to higher movie admissions and box office growth.
• Ticket Price Stability: Average ticket price remains stable at RMB34-35, with premium formats like 3D and IMAX driving higher revenue per seat.
• Virtuous Cycle: Box office growth stimulates investment in film production, which in turn increases movie supply and further boosts admissions.
• Cinema Operators: Benefit from revenue sharing, M&A activities, and organic growth, leading to faster-than-industry expansion and earnings growth.
• Non-Box Office Revenue: Expected to improve margins due to higher gross margins (90%+ for advertising, 70%+ for F&B) compared to box office revenue (20% GPM).

Investment Recommendations

• BUY SMI (198 HK): Offers the best risk/reward ratio with the fastest EPS growth (35% CAGR) and lowest valuation (16x FY16E PE). Target price is HK$1.00, implying a 49% upside.
• HOLD IMAX China (1970 HK): Strong technology capabilities but faces short-term challenges with weak 1H16 box office and potential exit of pre-IPO investors. Target price is HK$33.00, implying a -13% upside.
• HOLD Orange Sky Golden Harvest (1132 HK): Business remains loss-making in FY16E with limited growth potential. Target price is HK$0.38, implying a -12% upside.
• NR Nan Hai Corp (680 HK): Owner of the second-largest cinema operator in China, Dadi Cinema, which has shown strong growth. Expected to benefit from synergies and cost reductions.

Financial Highlights

Market Structure

• Cinema Operators: Less concentrated than distributors and circuits, with top 10 players accounting for 41.6% of market share in 2015.
• Top Operators: Wanda Cinema, Dadi Cinema, and Jinyi Cinema are the leading operators, with SMI showing the highest YoY box office growth in FY15.
• M&A Trends: Expected to become more active from 2016 onwards as a strategy to gain market share.

Revenue Sharing and Profitability

• Revenue Sharing: Cinema operators typically share 50-52% of gross box office revenue, with 52% for imported movies.
• Non-Box Office Revenue: Advertising and F&B sales contribute to margin expansion, with SMI expected to achieve 2.7ppt/2.1ppt blended margin growth from FY14 to FY18E.

Investment Risks

• Short-Term Challenges: IMAX China faces a weak 1H16 box office and potential investor exits.
• Market Volatility: Despite the growth outlook, the sector is subject to fluctuations in movie demand and competition.

Conclusion

The China cinema industry is poised for significant growth, driven by the rising middle class and the increasing demand for localized, high-quality entertainment. Cinema operators are positioned to benefit the most from this growth due to their stable revenue model and diversified income streams. SMI is highlighted as the top pick due to its strong growth prospects and favorable valuation, while IMAX China and Orange Sky Golden Harvest are recommended with caution.