20160615-大和证券-IMAX_CHINA-01970.HK-Initiation__a_box-office_hit_35页_2mb_2mb

IMAX China Holding (1970 HK) Summary

Core Content and Investment View

• Target Price: HKD50.00
• Current Share Price (15 Jun): HKD39.55 (+26.4% upside)
• Investment Call: Buy (Initiation)
• Key Investment Thesis: IMAX China is a leading beneficiary of the rapid growth in China's cinema market, which is expected to overtake the US as the world's largest by 2017. The company's premium brand and asset-light business model position it well for long-term growth.

Main Points

• Market Growth: China's movie attendance and box-office revenue are growing rapidly, driven by rising disposable incomes and urbanization.
• Penetration Rate: Despite a significant increase in the number of screens, China's cinema penetration rate remains low compared to the US, Korea, and the UK.
• Revenue Model: IMAX China is transitioning from sales-type agreements to revenue-sharing agreements, which improve earnings quality and recurring revenue.
• Recurring Revenue: Expected to account for 71% of total revenue by 2017, up from 56% in 2015.
• Growth Forecasts:
  • Projected CAGR for total revenue: 22% (2016–2018)
  • Projected CAGR for theatre network: 27% (2015–2018)
• Profitability: Adjusted net margin is expected to rise from 37% in 2015 to 46% by 2018, driven by improved operating leverage.
• Valuation:
  • Target PER of 34x on average of 2016–2017E EPS
  • DCF-derived valuation: HKD48.8, slightly below the target price
  • Valuation justified by superior business model, exclusive positioning, and higher margins and ROE

Financial Summary (USDm)

Growth Outlook

• Theatre Backlog: Equivalent to 90% of existing network, indicating strong revenue visibility.
• Screen Growth: China's screen count grew by 40% CAGR from 2011–2015; expected to continue with a 20% CAGR through 2018.
• Market Potential: China is expected to surpass the US in box-office revenue by 2017, with continued growth in urban areas.

Valuation and Risks

• Valuation:
  • Target price: HKD50.00
  • Based on 34x PER, which is in line with historical averages since its IPO.
  • DCF valuation: HKD48.8, slightly below target.
• Risks:
  • Increasing competition from other premium cinema technologies in China may erode brand power and revenue-sharing rates.
  • Regulatory changes and economic slowdown could impact growth.

FAQs and Key Assumptions

• How many theatres can IMAX ultimately open in China?
  • Feasible to reach 1,000 screens by 2022, given the current growth rate.
• What's different about IMAX?
  • IMAX offers a premium experience through its unconventional, large-format screens.
  • It has a strong brand presence in China's fast-growing cinema market.
• Will cinemas still be relevant in 5 years with home-theatre advances?
  • Despite home-theatre growth, movie-going remains a popular and accessible form of entertainment for Chinese millennials.
• How does China's film quota affect IMAX China?
  • The film quota is expected to be a minor constraint, but the overall growth of the cinema industry is expected to outpace any restrictions.

Market and Consumer Trends

• Movie-going as Leisure Activity: Ranked second among Chinese millennials, behind internet use.
• China's Cinema Boom: Expected to continue over the next few years due to underpenetration of infrastructure.
• Urbanization and Growth: As China urbanizes, the demand for movie-going is expected to increase significantly.
• Consumption Rates: China's movie attendance per urban capita was 1.4x in 2015, compared to 4.8x in the US and 2.7x in the UK.
• Future Growth: If China reaches a 2.0x attendance rate, it would represent a 40% market growth.

Business Model and Strategic Position

• Asset-light Model: Reduces capital intensity and increases scalability.
• Revenue Streams:
  • Revenue-sharing agreements (increasing share of revenue)
  • Sales-type agreements (reducing upfront revenue)
• Premium Screens: IMAX screens represent only 1–2% of total screens globally, indicating room for expansion.
• Market Position: IMAX is the most recognized premium cinema brand in China, giving it a competitive edge.

Financial Health

• Cash Flow:
  • Free cash flow yield is expected to rise from 4.7% in 2016 to 5.3% in 2018.
  • Strong cash flow from operations, with a projected CAGR of 15%.
• Balance Sheet:
  • Cash and short-term investments are expected to increase significantly.
  • Net debt is projected to remain low due to strong cash flow generation.

Conclusion

IMAX China is well-positioned to benefit from the rapid growth of China's cinema market. With a strong brand, a growing number of revenue-sharing agreements, and a high theatre backlog, the company is expected to deliver strong top-line and improving earnings quality. Despite potential risks from competition and regulatory changes, its valuation is justified by its superior business model, exclusive positioning, and higher margins and ROE. The stock currently appears undervalued, and the investment case is strong for investors looking to capitalize on the growth of the Chinese cinema market.