cinema sector/ china china cinema...

Wed, 29 Jun 2016

Equi ty Research China Cinema Industry Cinema Sector / China

Riding on the middle class to double the box office

Rising middle class to drive 19.3% 5 years CAGR in China box office from RMB44bn in 2015 to RMB106bn by 2020E, thanks to the virtuous cycle between box office and movie supply

We prefer cinema operators given its revenue sharing nature and faster-than-industry growth, driven by both M&As and organic growth

BUY SMI for 0.5x PEG and HOLD IMAX China by short term challenge

Rising middle class to drive 19.3% 5 years CAGR box office growth in China to

RMB106bn in 2020E, fueled by virtuous cycle between box office and movie supply.

With the rise of the middle class in China, we estimate Chinese entertainment expense per

capita to grow at 9.2% CAGR from RMB942 in 2015 to RMB1,462 in 2020E. Movie as one

of the most affordable forms of entertainment directly benefits from this trend, we estimate

movie admission per capita in China to increase from 0.9x p.a. in 2015 to 2.2x p.a in

2020E, (compared to 3.6x and 4.2x in US and Korea) and average ticket price to remain

stable at RMB34.2 during the period, which together will drive 19.3% CAGR in China box

office from RMB44bn in 2015 to RMB106bn in 2020E. We see strong growth of box office

to stimulate and retain investments in the film-making industry especially for domestic and

jointly produced movies to capture more shares by leveraging on familiarity in language

and growing appeal of local actors-actresses. This has, as a result, supported the virtuous

cycle between box office growth and supply of local movies.

We prefer cinema operators given its revenue sharing nature and faster-than

-industry growth, driven by both M&As and organic growth. With more localized

movie content and supply to drive up movie admission per capita in China, we see cinema

operators becoming more ready to build more screens in tier 3 to 5 cities. With higher

penetration into lower tier cities, we see improving movie admissions per capita in tier 3

and below cities to drive up the box office growth, kicking off the virtuous cycle between

box office growth and cinema operators’ expansion and earnings growth. We like cinema

operators in the movie industry as they are less risky and generate more stable income

streams than movie-makers by sharing 50-52%/52% of gross box office for

domestic/imported movies regardless of their profitability. They also benefit from better

control over revenue by efficient movie scheduling, diversification into the non-box office

segment, as well as the faster-than-industry growth driven by M&As and organic growth.

BUY SMI for 0.5x PEG and HOLD IMAX China for soft IMAX box office in 1H16. Our

top pick is SMI, since it offers the best risk/ reward metrics, with the fastest EPS growth

(35% CAGR) but the lowest PE (16x PE) in the sector, we initiate BUY rating on SMI with

TP HK$1.00 based on 25x FY16E PE, implying 15% discount to its peers and 0.7x PEG,

given 35% EPS CAGR in FY15-18E. Even though we like IMAX China for its industry

leading capabilities on filming and screening technology, we do see a weak 1H16 IMAX

box office as a short term challenge, hence we initiate HOLD on IMAX China with TP

HK$33.00 based on 33x FY16E PE, 10% premium to its peers, given 18.8% adjusted net

profit CAGR in FY15-18E. We initiate HOLD on Orange Sky GH, with TP HK$0.38 based

on 25x FY17E PE, at par to historical industry average given struggle outlook and loss

making in FY16E. We see Nan Hai Corp (680.HK, NR) as an under-valued gem in the

cinema sector since it owns the No.2 cinema operator, Dadi Cinema, in China.

Walter Woo

Analyst

+852 2135 0248

[email protected]

Sector Report

Exhibi t 1: Recommendat ions summar y

Company Stock code Rating Target Price

Target

Valuation Closed Price

Current

Valuation

Potential

Upside

SMI Holdings 198 HK BUY HK$1.00 25x FY16E P/E HK$0.67 16x FY16E P/E 49%

IMAX China 1970 HK HOLD HK$33.00 33x FY16E P/E HK$38.10 38x FY16E P/E -13%

Orange Sky G H 1132 HK HOLD HK$0.38 25x FY17E P/E HK$0.43 27x FY17E P/E -12%

Nan Hai Corp 680 HK NR HK$0.207

Source: Bloomberg, OP Research

Wed, 29 Jun 2016

China Cinema Industry

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Table of Contents

Table of Contents ......................................................................................................................................... 2

Investment Summary ................................................................................................................................... 3

Rise of middle class kicks off the virtuous cycle between box office growth and movie supply ..................... 5

We prefer cinema operators given its revenue sharing nature and faster-than-industry growth ...................12

SMI Holdings (198 HK) – Offering the best risk reward metrics ...................................................................18

Financial Summary – SMI Holdings (198 HK) .............................................................................................28

IMAX China (1970 HK) – HOLD on, wait for 4Q16 ......................................................................................30

Financial Summary – IMAX China (1970 HK) .............................................................................................44

Orange Sky Golden Harvest (1132 HK) – lacking profits and growth ...........................................................46

Financial Summary – Orange Sky Golden Harvest (1132 HK) ....................................................................53

Nan Hai Corp (680 HK) – Owner of the No.2 cinema operator in China ......................................................55

Investment Risks .........................................................................................................................................60

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Investment Summary Rising middle class and growing appetite for entertainment, more better

quality and localized contents are all pointing to a golden age for

China’s box office

China movie box office grew by 34% 5 years CAGR to RMB44bn in 2015, and

we forecast a 24.1% 3 years CAGR to RMB84bn in 2018, and a 19.3% 5

years CAGR to RMB106bn in 2020E, driven by admission per capita up from

0.9x in 2015 to 2.2x in 2020E (still below US and Korea’s 3.6x and 4.2x in

2014), as a result of rise of middle class, greater appetite for entertainments,

and movie ticket price being stable at RMB35. We believe more new and

retained investments in the sector will enable more and better local movies,

and higher penetration into lower tier cities which will kick off the virtuous

cycle between the supply of better, localized content, cinemas and box office.

Cinema operators provide a stable and less risky way to share the box

office growth, with additional growth thanks to M&As, and margin

expansion from more non-box office sales

We regard cinema operators as the best proxy to invest in the sector, as they

will deliver a faster-than-industry growth, with additional growth from M&As,

enjoy a less volatile income stream due to their sharing of 50%-52% of gross

box office, plus margins expansion from more advertising income, higher F&B

sales and the scaling up of the cinema network.

Top pick is SMI Holdings (198 HK, TP HK$1.00, BUY), SMI is our top pick

given the fastest growth (35% EPS CAGR) and the lowest valuation (16x

FY16E PE, implying a 0.5x PEG) in the sector, considering that : 1) it aims to

double the cinemas/ screens from 200/1400 in FY15 to 455/3140 in FY18E, 2)

it can leverage on its strategic alliance with Baidu, and 3) margin expansions

from greater economies of scale.

We are cautious on IMAX China (1970 HK, TP HK$33.00, HOLD) in short

the term because of 1) margin hurts by weaker-than-expected 1H16 IMAX

box office and 2) potential exit of pre-IPO investors holding 5.8% shares.

None the less, we still believe its long term structural growth, will remain intact,

given its rising popularity among audiences, cinemas and directors, as well as

its parent IMAX Corp’s Virtual Reality (VR) initiatives.

Orange Sky Golden Harvest (1132 HK, TP HK$0.38, HOLD), we expect

OSGH business to remain loss making in FY16E, and have lackluster growth

in overseas markets. However, the recent sell off of 13.79% shares of its

subsidiary, OSGH (China), to investors including Wanda and Tencent, has

revealed that its plan for A-share listing within the next 4 years.

We see Nan Hai Corp (680 HK, NR) as a strong player for potential

re-rating because 1) it owns the No.2 Cinema operator, Dadi Cinema, which

expanded at a faster-than-industry 41.5% 5 years CAGR to 286 cinemas in

FY15, 2) it will benefit from greater synergies after the sales of CB

investments to Ali Picture (1060 HK) with 4.76% enlarged shares, 3) it will be

aided by stronger cash flow from real estate contract sales as well as cheaper

financing (e.g. CB), which could lead to considerable finance costs reduction

in FY16E and FY17E, 4) realization of its, currently high discount, about 80%,

in NAV, Shenzhen and Guangzhou’s properties

China box office is expected to

experience a 24.1% 3 years CAGR

to RMB84bn in 2018E, driven by

increases in admission per capita,

from 0.9x in 2015 to 2.2x in 2020E

We prefer cinema operators as

their will share 50%-52% of gross

box office regardless of the

profitability of any individual

movie, be able to grow from

M&As

We initiate BUY on SMI, HOLD on

IMAX China, HOLD on Orange Sky

Golden Harvest, and NR on Nai

Hai Corp.

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Cinema:

Cinemas: 7,205 +24.5% yoy

Screens: 31,626 +30.1% yoy

3D screens: 25,200 80% of total screens

IMAX screens: 307 0.97% of total screens

Admission: 1.26bn +51.8% yoy

Avg. ticket price: RMB35

Attendance (Seat occupancy): 17.5%

Movie:

Box office: RMB44.1bn +48.6% yoy, 16% of global

Contribution of top 20 movies:

Top 1 movie: RMB2.4bn 6% of total BO

(Fast and Furious 7)

Top 20 movies: RMB22.5bn 51% of total BO

Domestic vs. Imported:

Domestic Imported

Box office: RMB27.1bn vs. RMB16.9bn

As % of total: 61% vs. 39%

Box office growth: 70% yoy vs. 24% yoy

No. of movies shown: 334 (686 produced) vs. 34 (due to import quotas)

Movies group by box office:

% of box office %of no. of movies

<RMB100mn 11% 87%

RMB100mn-500mn 33% 9%

>RMB500mn 56% 4%

Peak Seasons:

Month: July (RMB5.5bn, 12.4% of total)

Period: Spring festival week (RMB1.98bn, 4.5% of total)

National day golden week (RMB1.85bn, 4.2% of total)

Day: 18 July 2015 (RMB425mn, 0.96% of total)

(Monster Hunt, Jian Bing Man, Monkey King)

China:

Population: 1.36bn

GDP per capita: RMB7,989

Channel:

Ticketing:

Online ticketing: 57% of total

Box office by city tiers:

Tier 1-2 cities: 44.4%

Tier 3-5 cities: 55.6%

Online ticketing

platforms

Cinema operators

Non-conventional

theatre equipment

Wanda + Tencent

owns 5.16% shares

in OSGH (China) (a

sub. of 1132 HK)

1.59% shares of

SMI (198 HK)

Ali picture owns

4.76% shares (CB) in

Dadi cinema (a sub.

of 680 HK)

Operates over 150 IMAX

screens (out of 307)

Operates over 10 IMAX


Has its own brand “星幕 STARMAX”Operates just a few IMAX


Exhibit 2: Relationship between WBAT, cinemas, IMAX, and online ticketing platforms

Source: OP Research

Exhibit 3: China movie sector overview, 2015

Source: Entgroup, China Film Press, OP Research

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559652

762 752838

942 1,036

1,129 1,231

1,317 1,462

4.2%4.3%

4.6% 4.6%4.8%

5.0%5.1%

5.3%5.5% 5.5%

5.6%

2.2%

2.7%

3.2%

3.7%

4.2%

4.7%

5.2%

5.7%

6.2%

0

200

400

600

800

1,000

1,200

1,400

1,600

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Entertainment expense per capita As % of total expense

(RMB) (%)

Rise of middle class kicks off the virtuous cycle between box office growth and movie supply

Rise of middle class in China continuously driving entertainment

expense per capita in China in the coming 5 years

With higher disposable income and greater appetite for leisure in China, Chinese

entertainment expense per capita grew by 11.0% CAGR to RMB942 from 2010 to

2015 with entertainment expenses per capita as % of total expenses improved by

0.8ppt from 4.2% to 5.0%, which is still low compared to US entertainment

expense per capita ratio of 6.5%. We estimate Chinese entertainment expense

per capita to grow at a 9.2% CAGR to RMB1,462 from 2015 to 2020E with

entertainment expenses per capita ratio further improved by 0.6ppt to 5.6%.

Exhibit 4: Trend of entertainments expense per capita in China, 2010-2020E

Source: NBS, OP Research

We expect Chinese to spend more

on entertainment as % of total

expenditure, and forecast a 9.2%

CAGR in entertainment expense

per capita from 2015 to 2020E

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30

35

40

60

80

100

120

140

150

200

300

400

500

1,000

- 200 400 600 800 1,000 1,200

McDonald's Combo meal

Movie

Starbucks coffee

Karaoke

Chinese Super League ticket

Drinks in CoCo Park

Body massage

Haichang Ocean World

Drama/ Musicals

Happy Valley Amusement Park

Night club

Pop-star concert

Disney Shanghai ticket

On-shore air ticket

(RMB per purchase)

Movie as a form of entertainment becoming more affordable in China, as it is the

direct beneficiary from the increasing demand for entertainment needs given

disposable income was up by 63% in the past 5 years while movie ticket pricing

was down by 3.8% to RMB34.9 during the same period.

Exhibit 5: Cost comparison of other popular forms of entertainment

Source: OP Research

Increasing disposal income is going to double both movie admission per

capita and box office per capita in China

China ranked No. 2 box office country globally in 2015 as compared to No. 5 in

2010 and is likely to surpass US to be No. 1 in 2018E, the box office per capita

and the box office per capita as percentage of disposable income in China

remained low at US$5.0 and 0.10% in 2015, respectively, as compared to US’s

US$32.5 and 0.25%. Thanks to the growing middle class in China, we estimate

China’s box office per capita and box office per capita as percentage of

disposable income to continue to improve from US$5.0/0.10% in 2015 to

US$9.3/0.17% by 2018E.

Watching movies now become

more affordable as the ticket price

stayed at RMB34-35 for the past 5

years while disposable income

was up by 63%

Box office per capita as % of

disposable income in China was

0.10% in 2015, comparing to

0.25% in US, and we expect it to

grow to 0.17% by 2020E

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1.1 1.4 2.0 2.6 3.5 5.0

6.3 7.8

9.3 10.6 11.6

34.0 32.3

34.1 34.0 31.9

34.0 34.3 35.0 36.4 36.0 36.7

0.04% 0.04%0.05%

0.06%0.08%

0.10%0.12%

0.15%0.17%

0.18% 0.19%

0.30%0.28% 0.28%

0.29%

0.25% 0.25% 0.24% 0.24% 0.25% 0.24% 0.24%

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Box office per capita in China Box office per capita in US

As % of disposible income (China) As % of disposible income (US)

(US$)(US$) (%)

0.2 0.3 0.30.5

0.6

0.9

1.2 1.2

1.5

1.82.0

2.2

3.6

4.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2010 2011 2012 2013 2014 2015 2016 Japan(2014)

2017 2018 2019 2020E US(2014)

Korea(2014)

(times p.a.)

Exhibit 6: Box office per capita in China vs. US, 2010-2020E

Source: Entgroup, NBS, U.S. Bureau of Economic Analysis (BEA), OP Research

As a result, we estimate movie admission per capita in China to double from 0.9

times per annum in 2015 to 1.8 times per annum in 2018E thanks to 1) 9.3%

CAGR in Chinese entertainment expense during the same period and 2)

watching movie as a form of entertainment becomes more affordable given

increasing disposable income.

Exhibit 7: Movie admissions per capita in China, 2010-2020E, compared to

Japan, US and Korea, 2014

Source: Entgroup, NBS, MPAA, OP Research

We expect movie admission per

capita will grow from 0.9x in 2015

to 1.8x in 2018E

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49.0% 50.6%

62.4%

49.2% 47.7%39.8% 37.0%

20.6%

38.8%21.2%

27.5%

16.6%

21.3%

43.6%

30.5%

10.6%16.4%

23.3%

35.6% 38.9%

19.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014 2015 5M16

Imported movies Joint development movies Domestic movies

美人鱼, 3391, 20%

疯狂动物城, 1530,

9%

美国队长3: 英雄内战,

1225, 7%

西游记之孙悟空三打

白骨精, 1201, 7%

澳门风云3, 1118, 7%功夫熊猫3, 1002, 6%

奇幻森林, 979, 6%

星球大战：原力觉醒,

825, 5%

北京遇上西雅图之不

二情书, 776, 5%

叶问3, 770, 5%

唐人街探案, 682, 4%

蝙蝠侠大战超人：正

义黎明, 619, 4%

老炮儿, 434, 3%

荒野猎人, 377, 2%

火锅英雄, 371, 2%

愤怒的小鸟,

355, 2% 伦敦陷落, 340,

2%

我的特工爷爷, 324,

2%寻龙诀, 309, 2% 熊出没之熊心归来,

288, 2%

Virtuous cycle between box office and movie production – Increasing

proportion of domestic movie to support doubling movie admission per

capita by 2018E

In 2015, the number of blockbusters with box office exceeding RMB100mn was

81, surging from only 17 in 2010 and resulting in a robust 34% CAGR in China

box office during the period. For 5M16, 12 out of top 20 movies are domestic and

joint development movies, with ‘The Mermaid/美人鱼’ at No.1.

Exhibit 8: Proportion of top 20 box offices by types of movies, 2010-5M16

Source: Entgroup, OP Research

Exhibit 9: Top 20 movie’s box office, First 5 months in 2016, RMBmn


Domestic movies have achieved

greater success in recent years,

and now contribute the majority

of box office, e.g. 12 out of top 20

movies for 5M16 are domestic

and joint development movies

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74 74 80 88 91154

231 273 308 334

300

402 406456

526558

745

638 618

686

24.7%

18.4% 19.7%

19.3%17.3%

27.6%

31.0%

42.8%

49.8% 48.7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

100

200

300

400

500

600

700

800

900

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Domestic movies shown Domestic movies produced

Domestic movies shown (%)

(No. of movies) (%)

Chinese higher spending in

entertainment and movie

Growth in

box office

Retain and attract new investments in movie contents

More localized and better quality domestic movies

More interestingly, 49% or 334 movie out of 686 domestic movies produced were

shown in cinemas in 2015 as compared to only 27% or 154 out of 558 in 2010.

With increasing spending on entertainment and movies driving robust growth in

China box office is likely retain and attract new investments in movie production

which encourages film-makers to invest more, especially domestic and joint

development movies. As more localized movies are being shown that meet

Chinese demands on entertainment being shown, movie admission per capita is

likely to continue growing.

Exhibit 10: Quantity and quality of domestic movies, 2006-2015

Source: Dadi market research, OP Research

Exhibit 11: Virtuous growth cycle for movie makers

Source: OP Research

Quality of domestic movies has

improved as now more of them

are being shown on cinema, 49%

was shown in 2015 compared to

27% in 2010

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36.936.7

35.335.7

34.9

34.634.4

34.2 34.2 34.2

32.0

33.0

34.0

35.0

36.0

37.0

38.0

2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

(RMB)(RMB)

All pointing to a golden age of box office, we estimate China box office

to double in the coming three years to RMB84bn

Despite average movie ticket price being slightly down by 5% to RMB35 in the

past 5 years due to 1) rapid opening of new cinemas especially in tier 2 or below

cities with lower movie ticket price, 2) discounted ticket sales due to subsidies by

online ticketing platform such as Maoyan (猫眼), Baidu Nuomi (百度糯米),

Weipiao (微票儿). However, we see average ticket price still to be stable at

RMB34 to RMB35 level in the coming 5 years offset by increased attractiveness

of higher pricing 3D/ IMAX format movie in China, e.g. IMAX ticket prices for

‘Warcraft/魔兽’ range from RMB60 to RMB160, depending on city tier level.

Exhibit 12: The average movie ticket price in China, 2011-2020E

Source: China Film Press, OP Research

We expect ticket price to remain

at RMB34-35 in the coming 5

years

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4 610 13

1722

30

44

57

70

84

97

106

29%

30.0%

10.0%

-1.0% 0.0%

0

20

40

60

80

100

120

-5%

5%

15%

25%

35%

45%

55%

65%

2008 2009 2010 2011 2012 2013 2014 2015 2016E2017E2018E2019E2020E

China Box office (RHS) China box office yoy% (LHS)Movie admissions yoy% (LHS) Average movie ticket price yoy% (LHS)No. of screens yoy (%) (LHS)

(RMB bn)(%)

With doubling movie admission per capita in China by 2018E and stable average

movie ticket price, we estimate China’s box office to grow by 24.1% CAGR in the

coming three years from RMB44bn in 2015 to RMB84bn in 2018E

Exhibit 13: China box office, admission, screens growth for 2008 - 2020E

Source: Entgroup, NBS, OP Research

Hence, we estimate cinema operators to record an almost double box office in the

coming three years given stable average ticket price and stable 50-52%

percentage sharing of box office by doubling the admission per capita in China.

Leading Cinema operators like SMI and IMAX who would share operators’ box

office will experience a faster-than-industry growth rate due to gains in market

shares. We estimate SMI (198 HK, BUY) box office revenue to grow by 30%

CAGR from RMB2.6bn in FY15 to RMB5.6bn in FY18E, and IMAX China’s (1970

HK, BUY) box office related revenue to grow by 25% CAGR from US$63mn in

FY15 to US$123mn to FY18E.

We expect 24.1% CAGR for

China’s box office from 2015 to

2018E

SMI (198 HK) and IMAX China

(1970 HK) will record a

faster-than- industry growth of

30% and 25% CAGR for their box

office related sales from FY15 to

FY18E

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IMAX China (1970 HK)

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Higheradmission per

capita

Growth in box office

More screen being built

Higher penetration into

T3-5 cities

We prefer cinema operators given its revenue sharing nature and faster-than-industry growth

Virtuous cycle between box office and cinema operators’ revenue growth

With increasing movie admission per capita driven by the rise of middle class, we

see cinema operators benefit by 1) advanced technology like 3D & IMAX format

movie and 2) penetrating into lower tiers continues to drive total box office growth

which provide cash flow and incentive for cinema operators to build more screens

in lower tier cities in the coming 3 years which in return will support the movie

admission per capita increase from 0.9 times per annual in 2015 to 1.8 times per

annual in 2018E and hence kicking off the virtuous cycle for cinema industry in

the coming 3 years.

Exhibit 14: Virtuous cycle of cinema operators

Source: OP Research

Advanced technology like 3D and IMAX format movie bring superior

cinematic experience that a home theatre cannot provide

Setting up a 3D home theatre costs about RMB20k to RMB30k compared to a 3D

movie ticket of RMB30 to RM100 which is more affordable for the middle class in

China with average monthly disposal income ~RMB6k. For top 20 box offices

movie in 2015, 56.9% were contributed by 3D movies as compared 29.6% in

2010. We see this upward trend continues in 2016 onwards given 3D movie

contributed 82.5% of top 20 box office movie in 5M16.

There is a virtuous cycle between

admission per capita and better

movie experience (e.g. 3D/ IMAX)

and higher penetration into lower

tier cities, which will continue to

drive decent growth

Paying a 3D ticket for RMB30-100

is much more affordable than

setting up a home theatre which

costs around RMB20K-30K

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28.5% 25.7% 23.6% 22.6% 21.4%

27.0%25.7%

24.7% 24.0% 23.0%

20.0%20.2%

20.6% 20.2%20.0%

16.3%17.6% 18.5% 19.2% 20.1%

8.1% 10.8% 12.6% 14.0% 15.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 3Q15

1st tier 2nd tier 3rd tier 4th tier 5th tier

1,878 2,766

5,844 6,774

7,825

12,818 13,953

29.6%

39.8%

59.6%64.2%

53.2%56.9%

82.5%

15%

25%

35%

45%

55%

65%

75%

85%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2010 2011 2012 2013 2014 2015 5M2016

3D box office from top 20 movies in China As % of top 20 box office

(RMB mn) (%)

Exhibit 15: Contribution of 3D box office in top 20 movies, 2010-5M2016


Cinema operators are more willing to build up more screens in lower tier

cities driven by increasing demand and spending on entertainment

By offering more 3D and IMAX format movies with higher movie ticket price,

cinema operators are likely to partially offset the low movie ticket price in lower

tier cities. We see tier3 or below cities screen deployments are a key focus for

cinema operator as tiers1 - 2 cities contributing 55.5% China box office in 2011

which compared to 44.4% in 3Q15 with an increasing trend of higher

contributions from tier 3 and lower cities.

Exhibit 16: Box office distribution by city tiers


Lower tier cities (e.g. Tier 3 to 5)

now contributing about 56% of

total box office in 3Q15

Wed, 29 Jun 2016


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0.10

0.15

0.27

0.41

0.95

2.44

0.00 0.50 1.00 1.50 2.00 2.50 3.00

6th tier

5th tier

4th tier

3rd tier

2nd tier

1st tier

(times per year)

22.3%18.9%

31.0%28.8%24.7%

32.9%36.6%

32.5%34.3%

46.8%

35.8%

42.0%

80.6%

51.7% 52.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2012 2013 2014

1st tier 2nd tier 3rd tier 4th tier 5th tier

3-yr avg.38%

We see increasing demand on entertainment driven by rise of middle class as

likely to boost movie admission per capita in tier 3 and below cities in the coming

3 years to drive the movie admission per capita in China from 0.9 times per

annual to 1.8 times by 2018E.

Exhibit 17: Movie admission per capita by city tiers, 2014


Exhibit 18: Box office growth by city tiers, 2014


There is ample room for

improvement for admission per

capita to catch up, Chinese in tier

3 to 5 cities only watch 0.1-0.4x

movie per year, comparing to 2.4x

for those in tier 1 cities

Wed, 29 Jun 2016


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Th

e S

tate

Ad

min

istr

ati

on

of

Rad

io F

ilm

an

d T

ele

vis

ion

Movie production

Movie marketing

Movie distribution

Cinema operation

State-owned (national level) production company:

• China Film Group Corporation Shanghai Film Group, etc

• Changchun Film Group

State-owned (province level) production company:

• Beijing Film Studio Shanxi Film Studio, etc

• Guangxi Film Studio

Private production company:

• Huayi Brothers (300027 CH) Bona Cineplex (BONA US)

• Wanda Pictures (under Wanda Group)

• Leshi Pictures (under Leshi 300104 CH)

• Enlight Pictures (300251 CH) Huace Pictures (300133 CH)

• Beijing New Pictures Tangde Pictures (300426 CH)

• SMI Culture (2366 HK) Orange Sky (1132 HK)

• Ali Pictures (1060 HK) Huayi Tencent Entertainment (419 HK)

Movie marketing agency:

• China Film Group Film Distribution Huaxia Film Distribution

• Beijing poly-bona film publishing Huayi Brothers Film (300027 CH)

• Wanda Pictures (002739 CH) Leshi Pictures (300104 CH)

• Enlight Pictures (300251 CH) SMI Culture (2366 HK)

Movie distribution agency:

• Wanda cinema (002739 CH) China Film Stellar Cinema Chain

• Dadi Theatre Circuit (837015 OC) Shanghai United Circuit

• Guangzhou Jinyi Zhujiang China Film South Cinema Circuit

• Beijing New Film Association Hengdian cinema

Cinema operator:

• Wanda cinema (002739 CH) Dadi Theatre (under Nan Hai Corp 680 HK)

• Jinyi cinema SMI Holdings (198 HK)

• Hengdian cinema CJ CGV (079160 KS)

• UME Orange Sky (1132 HK)

Movie related

merchandising

Movie related merchandising company:

• Wanda World (under Wanda cinema 002739 CH)

• Huayi Brothers (300027 CH)

• Alpha Group (002292 CH)

• Xingmeihui (under SMI 198 HK)

Pre-production

Film shooting

Post-

production

Digital effects

and titles

Test

screenings

Pre-distribution

preparation

We prefer cinema operators as a direct investment proxy for the robust box

office growth in China as they share a fixed split in total box office

We like cinema operators in the movie industry because 1) they are much less

risky as they share split of total box office regardless of the profitability of the

movie shown and 2) they generate more stable income stream than movie

producers. Unlike movie producers betting on one-off enormous box office

income from successful blockbusters, cinema operators have more control over

their revenue by efficient screening scheduling and diversifying the revenue

stream to non-box office segments.

Exhibit 19: Industry value chain


We prefer cinema operators

because of their revenue sharing

nature and a more diversified

income stream

Wed, 29 Jun 2016


of 65

Cinema operators share ~50% of total box office, highest among the movie

value chain

Revenue of cinema business largely depends on the box office split. After

deducting the National Special Funds for the Development of Film, “NSF” ((5% of

gross box office) and VAT (3.3% of gross box office), the box office split for

cinema operator is 50-52%/ 52%/ 50-52% for domestic or joint development/

imported movies (without sharing)/ imported movies (with revenue sharing).

Exhibit 20: Revenue sharing structure in movie industry

NSF VAT Movie producer Distributor Cinema circuit Cinema operator

Domestic movies / Joint development movies 5% 3.3% 31-40% 4-6% 3-7% 50-52%

Imported movies (no revenue sharing) 5% 3.3% RMB0.5-1.5mn 43% 5% 52%

Imported movies (revenue sharing but with quotas) 5% 3.3% 13-20% 22-28% 5-7% 50-52%

Source: Entgroup, OP Research,

Cinema operators’ segment is less concentrated, leaving ample M&A

opportunities for leading player to gain market share

The cinema investment management companies own and operate cinemas. They

receive copies of movies from the cinema circuits and retain control over the

screening schedules. There are 243 cinema operators by end of Dec 2015, with

top 10 accounting for 41.6% market share in terms of box office, yet less

centralized than top 10 cinema circuits’ 66.5% and top 10 distributors’ 86.4%. The

top 3 cinema operators in China are Wanda Cinema, Dadi Cinema (680 HK, NR)

and Jinyi Cinema. Among the top 10 cinema operators, SMI (198 HK, BUY)

generated the highest yoy box office growth in FY15 thanks to market share gain

via M&As. We expect M&A activities to become more active from 2016 onwards

as a market share gain strategy for top 5 players.

Exhibit 21: Top 10 cinema investment management companies in China, 2015

Rank Cinema operators

Box office

(RMB mn) YoY growth

Market

share

Admission

(mn) Cinemas Screens Seat

Box office

per seat Utilization

1 Wanda Cinema

(002739 CH)

5,890.7 40.3% 13.4% 143.5 207 1,824 300,863 19,579 24.0%

2 Dadi Cinema (680 HK) 2,209.6 56.0% 5.0% 71.5 282 1,405 196,620 11,238 18.0%

3 Jinyi Cinema 1,927.5 17.5% 4.4% 51.8 125 822 130,821 14,734 18.0%

4 China Film 1,723.4 48.4% 3.9% 50.8 90 632 101,094 17,048 26.0%

5 SMI (198 HK) 1,637.3 105.3% 3.7% 47.1 177 1,099 157,630 10,387 17.0%

6 Hengdian Cinema 1,446.5 42.7% 3.3% 44.2 115 757 102,058 14,173 21.0%

7 CJ CGV (079160 KS) 1,031.6 83.6% 2.4% 27.3 53 417 73,326 14,069 19.0%

8 UME 810.7 13.0% 1.9% 18.8 24 284 34,080 23,788 25.0%

9 SFC 782.5 -1.3% 1.8% 18.0 39 252 39,093 20,017 24.0%

10 OSGH (1132 HK) 777.6 29.2% 1.8% 21.9 64 458 68,328 11,381 16.0%

Total 18,237.5 41.6%


Non box office revenue is likely to drive gradual improvement on margin

for cinema operators on top of the robust revenue growth.

Non-box office revenue such as advertising income and F&B retailing usually

enjoy 90%+ and 70%+ GPM, compared to ~20% GPM for box office revenue.

China’s non-box office income remained low at 13% of the total revenue as

Cinema operators usually have a

cut of 50% of the box office (net of

tax and national movie

development fund)

Cinema operators as an industry

is not concentrated, top 10

players accounted for only 42% of

market shares, less than circuit’s

67% and distributor’s 86% in 2015

Non-box office usually enjoys a

higher gross margin, 90%+ and

70%+ for advertising and F&B,

than box office’s 20%

Wed, 29 Jun 2016


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131.0 360.0

561.8 734.9

980.3

25.1%

29.2%30.4%

31.3% 31.9%

0%

5%

10%

15%

20%

25%

30%

35%

0

1,000

2,000

3,000

4,000

5,000

6,000

2014 2015 2016E 2017E 2018E

Cinema operation Retail stores Net profit att. GP margin

(HK$ mn) (%)

compared to 70% in North America. We see increasing traffic and improving

utilization rate of screen driven by increasing demand on movie to drive 48.9%

non box office revenue CAGR for SMI in FY14 to FY18E. Hence we estimate SMI

GPM to improve from 25.1% in FY14 to 31.9% in FY18E. Thanks to economies of

scale and operating leverage, we estimate SMI net profit to grow at 65.0% CAGR

from RMB131mn in FY14 to RMB980mn in FY18E.

Exhibit 22: SMI’s revenue segments, blended GPM and net profit, FY14-18E

Source: OP Research

Wed, 29 Jun 2016

SMI Holdings (198 HK)

of 65

SMI Holdings (198 HK) – Offering the best risk reward metrics Doubling the cinemas in FY15-18E, margins to improve as it scales up

Leverage on Baidu strategic alliance to drive 29.5 % box office revenue CAGR in the same period

Initiate BUY with TP HK$1.00 based on 25x FY16E PE, 15% discount to peers, given 35% EPS CAGR from FY15 to FY18E.

Target to double the number of cinemas and screens in three years to reap the robust box office growth in China. We estimate SMI to double its number of cinemas/screens from 200/1,400 in FY15 to 455/3,140 in FY18E through 40% self-built and 60% M&As, close to ~100 cinema new adds each year in the coming three years. We expect more, about 90% of new cinemas, to be opened in lower tier cities which enjoy faster-than-average box office growth.

Leverage on the Baidu strategic alliance to foster manifold growth. In Jun 2015, Baidu bought 1.59% SMI shares for HK$150mn. A strategic alliance was formed one month prior to the investment. We believe SMI box office would be boosted by the partnership and achieve a faster-than-industry 30% CAGR via such joint schemes as the “SMI Baidu Movie pre-paid card”, which enables prepaid purchase of SMI movie tickets and allows up to RMB200 per top up. The “Baidu SMI VIP pre-paid cards”, another joint scheme under the alliance which enables SMI members to make prepaid card purchase at all SMI cinemas but also all Xingmeihui (星美汇) stores, is aiming to attract 20mn users by 2018E. SMI is shown at the top of the cinema list on Baidu Nuomi (百度糯米)’s online ticketing APP, currently the No.2 online ticketing platform with about 28.8% market shares, just behind Maoyan (猫眼)’s 31.9% as at 1Q16. Collaboration between SMI and Baidu also extends to crowd-funding for movie productions, online marketing, technological support as well as data sharing, etc.

We expect 2.7ppt/2.1ppt blended gross/EBIT margin expansion due to the growth of high margins segments and economies of scale. Dilutive effects on the margins due to the addition of new cinemas of lower efficiency and margins during the aggressive expansion can be offset by the growth of the high margins advertising and retail sales segments (95% and 70% respectively vs 18-19% for box office sales). Blended margins improve also as a result of economies of scale and increasing bargaining power over suppliers. The overall blended margins would still continue its uptrend and we expect the gross/ EBIT margin to improve by 2.7ppt/2.1ppt from 29.2%/18.3% in FY15 to 31.9%/20.4% in FY18E.

Initiate a BUY rating on SMI on the best risk reward metrics. We initiate our BUY rating on SMI with TP HK$1.00 based on 25x FY16E PE, 15% discount to peers’ average, given 35.0% EPS CAGR during FY15-18E. SMI trades at 16.0x FY16E PE, 44% discount to its industry average of 28.6x. Near-term catalyst is promising positive 1H16 results.

Risks: 1) Execution risk on expansion; 2) Slower-than-expected ramp up of its retail store business; 3) Potential earnings dilution from fund raising

Initial Coverage

BUY

Close price: HK$0.67

Target Price: HK$1.00 (+49%)

Key Data

HKEx code 198

12 Months High (HK$) 1.14

12 Month Low (HK$) 0.46

3M Avg Dail Vol. (mn) 26.91

Issue Share (mn) 13,474.43

Market Cap (HK$mn) 9,027.87

Fiscal Year 12/2015

Major shareholder (s) Qin Hui 59.01%

Source: Company data, Bloomberg, OP Research Closing price are as of 28/06/2016

Price Chart

1mth 3mth 6mth

Absolute % -5.5 -12.8 -26.0

Rel. MSCI CHINA % -2.7 -8.2 -16.6

PE

Company Profi le SMI Holdings is a leading theater operator in

the PRC’s blooming movie industry with a

vertically integrated business model covering

movie investment, movie theater operation to

integrated retailing and marketing

Exhibit 23: Forecast and Valuation Year to Dec (HK$ mn) FY14A FY15A FY16E FY17E FY18E

Revenue 1,650.1 2,924.1 4,201.3 5,332.1 6,479.4

Growth (%) 16.4 77.2 43.7 26.9 21.5

Net Profit 131.0 360.0 561.8 734.9 980.3

Growth (%) 15.9 174.8 56.1 30.8 33.4

Diluted EPS (HK$) 0.013 0.030 0.042 0.055 0.073

EPS growth (%) (3.5) 122.2 41.0 30.8 33.4

Change to previous EPS (%)

0.0 0.0

Consensus EPS (HK$)

0.048 0.069

ROE (%) 7.7 8.4 9.6 10.5 12.0

P/E (x) 50.3 22.6 16.0 12.3 9.2

P/B (x) 1.9 1.5 1.3 1.2 1.0

Yield (%) 0.6 0.5 0.8 1.0 1.3

DPS (HK$) 0.004 0.004 0.005 0.007 0.009


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Jun/15 Sep/15 Dec/15 Mar/16

HK$198 HK MSCI CHINA

0

10

20

30

40

50

Dec/13 Jun/14 Dec/14 Jun/15 Dec/15

Forward P/E Ratio

+1std.

avg.

-1std.

Wed, 29 Jun 2016


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15 37 52 68 90200

290 375 455

105 259

363 490

700

1,400

2,030

2,625

3,140

47%

70%73%

75% 76%

82%84% 86% 87%

30%

40%

50%

60%

70%

80%

90%

100%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

No. of theatres No. of screens % of cinema s located in Tier 2-3 cities

(No. of theatres/screens)

Target to add 100 cinemas in 2016, expect capex/ investment payback in 5

years

We estimate SMI to increase number of cinemas/screens from 200/1,400 in FY15

to 290/2030 in FY16E and 455/3,140 in FY18E through 40% self-built and 60%

M&As. The company now has 200 target cinemas in backlog, which have already

fulfilled the acquisition requirement for adequate traffic, prime locations and

equipped with 3D/IMAX screens. The average capex/ investment breakeven

period that management aims to achieve is about 4 to 5 years. We expect more,

about 90% of new cinemas to be opened in lower tier cities which enjoy

faster-than-average box office growth

Exhibit 24: SMI’s number of screens and cinemas from FY10-18E

Source: Company, OP Research

Exhibit 25: SMI’s Cinema network by tier cities, FY15


We expect SMI to have 290

cinemas by 2016E, and 455 by

2018E, about 90% of new cinema

will be in lower tier cities

Wed, 29 Jun 2016


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Leverage on Baidu strategy alliance to drive growth in many ways

In May 2015, SMI formed a strategic alliance with Baidu. The company launched

“Baidu SMI VIP pre-paid cards”, aiming to establish a new business model of

“online top-up, offline shopping”, and attract 20mn members by FY18E. SMI

members can use this VIP pre-paid card in all SMI cinemas and Xingmeihui (星美

汇)stores, including purchase of movie ticket online. We have noticed that a

similar product “SMI Movie pre-paid card”, RMB200 per top up with certain

discounts, is shown at the top of the list when users click into Baidu Nuomi (百度

糯米)’s APP, this would direct more traffic and boost more sales, therefore we are

confident SMI to achieve a faster-than-industry CAGR of 30% in FY15-18E.

Noting that it is now the No.2 online ticketing platform with about 28.8% market

share, just behind Maoyan (猫眼)’s 31.9%, as at 1Q16, they aim to attract 20mn

users by 2018E. Cooperation also extends to crowd-funding for movie

productions, online marketing, technological support as well as data sharing, etc.

Exhibit 26: Baidu SMI living VIP card

Source: OP Research

Exhibit 27: SMI Movie pre-paid card at the top of the list in Baidu Nuomi (百

度糯米)’s app

Source: OP Research

We believe SMI to benefit from the

alliance with Baidu, e.g. greater

traffic and more purchase of SMI

Movie pre-paid card in Baidu

Nuomi (百度糯米)’s APP

Wed, 29 Jun 2016


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Xingmeihui online shop Xingmeihui offline stores

By leveraging on Baidu’s technology support and mass client base, we expect

SMI would improve operating efficiency in its integrated O2O business and

further drive the growth of both box office and non-box office sales.

Exhibit 28: SMI’s O2O platform Xingmeihui (星美汇)


Exhibit 29: SMI’s business & revenue model


Other leverage from Baidu could

be the technology support, and

data base sharing

Wed, 29 Jun 2016


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569 7301,204 1,461

2,559

3,654

4,594

5,557

145

48188

364

546

737

921

16783

165

2

2

2

2

2

0.1%

5.2%

3.4%

11.4%

12.4%13.0%

13.8%14.2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

1,000

2,000

3,000

4,000

5,000

6,000

2011 2012 2013 2014 2015 2016E 2017E 2018E

Cinema operation Retail stores Others Retail stores %

(HK$ mn) (%)

Non-box office revenue growth is faster than box office at 36% CAGR in

FY15-18E, and enjoy a higher gross margin

Referring to cinemas in those more developed countries, e.g. No.2 largest

cinema operator “Hoyts”, their advertising income and retail sales, each accounts

for 18% each of total revenue, which is way higher comparing to our estimate of

SMI’s 5%/ 13% of total sales . Given that the advertising/ retail sales segments

are having a higher gross margin, at about 90%+ / 70%+, compared to ~20% for

ordinary box office, margin will likely trend up as its contribution to sales

increases. We estimate its non box office revenue contribution to increase from

12.4% in FY15 to 14.2% in FY18E or with a faster-than-industry CAGR of 36%

from HK$364mn in FY15 to HK$921mn in FY18E.

Exhibit 30:SMI’s gross margin by segment, OP est. ,2015


Exhibit 31: SMI’s revenue breakdown for FY11-18E


We expect non-box office sales

growth is faster at 36% CAGR in

FY15-18E, and enjoy a higher GP

margin of 70%-90%+

18.4%

95.0%

70.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cinema operation Advertising Retail stores

Wed, 29 Jun 2016


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23.6%

21.6% 22.0% 22.5% 22.8%

-1.5%

8.1%9.0%

10.0%11.0%

13.9%

18.3%19.2%

19.9% 20.4%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2014 2015 2016E 2017E 2018E

Cinema operation Retail stores Blended EBIT margin

We expect 2.7ppt/2.1ppt blended gross/EBIT margin expansions from

greater economies of scales.

Even though the EBIT margin could be diluted by adding many new cinemas with

lower efficiency and margin during the SMI’s aggressive expansion of doubling

the cinemas to 500-600 by 2018E. We believe the benefit from economies of

scale will rise as SMI’s cinema network grow, thanks to the greater ordering sizes

to SMI’s supplier, we expect 5-10% savings in for the same SKUs, resulting in

better retail sales EBIT margin, this applies similarly to advertising income as well,

bargaining power towards clients like auto brands, soda brands. Also, SMI’s

brand Xingmeihui (星美汇), which has online stores on the internet, and physical

stores within SMI’s cinema, are selling movie merchandising items and F&B

products, following its greater sales growth, we estimate SMI’s blended EBIT

margin to improve by 2.1ppt from 18.3% in FY15 to 20.4% in FY18E, thanks to

non-box office revenue contribution and margin improved from 12.4% and 8.1%

in FY15 to 14.2% and 11% in FY18E, respectively.

Exhibit 32:SMI’s segment EBIT margins, FY14 - 18E


We expect economies of scale to

benefit margins as the size of

cinema reached over 300, and

forecast the EBIT margin to trend

up to 30.4% in FY18E from 18.3%

in FY15

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113.0 131.0

360.0

561.8

734.9

980.3

8.0% 7.9%

12.3%

13.4%13.8%

15.1%

5%

7%

9%

11%

13%

15%

17%

0

200

400

600

800

1,000

1,200

2013 2014 2015 2016E 2017E 2018E

Net profit Net margin

(HK$ mn) (%)

OSGH - 0%, -30.0x

SMI - 35%, 14.2x

SMI - OP Target (50% upside) -

35% , 23.5x

IMAX China -18.8%, 34.1x

Wanda - 43.6%, 38.5x CJ CGV - 28.6%,

27.6x

(35)

(25)

(15)

(5)

5

15

25

35

0 10 20 30 40 50

Avg

. P

/E f

or

FY

16-1

7

FY15-18E EPS CAGR

Rating and valuation

We estimate SMI to achieve a 39.6% earnings CAGR from HK$360mn in FY15 to

HK$980mn in FY18E, driven by 1) aggressive expansion strategy to reap

doubling box office in China during the same period and 2) margin improvement

from increasing contribution of high margin non-box office revenue and 3)

operating leverage from economies of scale.

Exhibit 33: SMI’s net profit for FY13-18E


SMI currently has the fastest growth (35% EPS CAGR), and the lowest valuation (16x FY16E PE, implying a 0.5x PEG) in the sector, we believe a potential re-rating and 50% upside in share price would be likely once the value of the company be fully realized.

Exhibit 33A: SMI’s Price to Growth metric shows re-rating opportunity


We expect SMI to achieve a

earnings CAGR of 39.6%, from

HK$360mn in FY15 to HK$980mn

in FY18E

Wed, 29 Jun 2016


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Exhibit 34: Key assumptions – SMI Holdings (198 HK)

2012 2013 2014 2015 2016E 2017E 2018E

Sales growth by segment (%)

Cinema operation

65.0% 21.4% 75.1% 42.8% 25.7% 21.0%

Retail stores

8.0% 289.2% 94.0% 50.0% 35.0% 25.0%

Others

99.9% -99.1% 0.8% 2.0% 2.0% 2.0%

Total

65.4% 16.4% 77.2% 43.7% 26.9% 21.5%

Number of cinemas by tier city

Tier 1 14 17 22 37 45 52 58

Tier 2-3 38 51 68 163 245 323 397

Total 52 68 90 200 290 375 455

Number of screens by tier city

Tier 1 106 137 177 360 450 520 600

Tier 2-3 257 353 523 1,040 1,580 2,105 2,540

Total 363 490 700 1,400 2,030 2,625 3,140

Box offices (HK$ mn)

Tier 1 286 411 496 1,044 1,305 1,534 1,800

Tier 2-3 444 793 965 1,515 2,349 3,060 3,757

Total 730 1,204 1,461 2,559 3,654 4,594 5,557

Box office (HK$ mn) per screens

Tier 1 2.7 3.0 2.8 2.9 2.9 3.0 3.0

Tier 2-3 1.7 2.2 1.8 1.5 1.5 1.5 1.5

Total 2.0 2.5 2.1 1.8 1.8 1.8 1.8

GP margins

25.1% 29.2% 30.4% 31.3% 31.9%

Selling & distribution costs / sales

-5.5% -3.6% -3.7% -3.7% -3.6%

Admin expenses / sales

-4.9% -4.6% -4.5% -4.3% -4.3%

Effective tax rate

-40.0% -17.6% -18.0% -18.0% -18.0%


Initiate BUY on the best risk reward metrics

We initiate our BUY on SMI with TP HK$1.00 based on 25x FY16E PE, implying

0.7x 3years EPS PEG, based on a 35.0% EPS CAGR as we expect SMI to have

a faster-than-market growth rate of 30.4% CAGR during FY15-18E by its

aggressive expansion strategy, it is trading at 16.0x FY16E PE currently, about

44% discount to its industry average of 28.6x.

We initiate BUY on SMI, with TP of

HK$1.00, 49% upside

Wed, 29 Jun 2016


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Investment Risks

Execution risk on expansions - SMI currently operates 250 cinemas by 1H16, it

has aimed to expand its number of cinemas to over 300 by the end of 2016, and

to reach 500-600 by 2018, 40% from self-built and 60% from M&As. We see

potential execution risks from missing the target due to 1) over-stretched

experienced staff for organic expansion and 2) lack of reasonably priced M&As

targets as there may be crowded investments in the cinema space chase up the

valuations and the selling prices.

Slower than expected ramp up of its retail store business – SMI’s retail

stores business Xingmeihui (星美汇) also aims to double its store number to over

400 by 2018E, compared to 200 in 2015, lower than expected reception from

audiences will result in slower ramp up in sales, and less profit.

Potential dilution in shares equity due to further fund raising - SMI is

undergoing a fast expansion period in the next few years, and it requires a huge

capex which may be funded merely by debts, therefore it may consider equity

fund raising.

Potential investment risks are 1)

execution risk, 2) slower than

expected ramp up of the retail

sales, 3) potential dilutions from

further fund raising

Wed, 29 Jun 2016


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Public

SMI Holdings

(198 HK)

36.22%59.01%

Qin Hui

(Founder)

Strategic Media

International Ltd

100%

Baidu (HK) LtdCCBI

InternationalVitel Group Ltd

1.59%1.59% 1.59%

SMI Culture

Group Holding

Limited

(2366 HK)

23.57%

Integrated

retailing and

marketing

Film production Film marketing Theater circuitTheater

operation

Exhibit 35: Management profiles

Name Age Position Role and responsibilities Experience

Dr. Allan Yap 60 Chairman, Independent

Non-Executive Directors

Overall corporate strategy Dr. Yap joined SMI in 2016.

Dr. Yap is also the Chairman and executive director of

Hanny Holdings (275 HK), Rosedale Hotel Holdings

(1189 HK), Meike International (953 HK), was an

alternative director of TVB (511 HK)

Dr. Yap has over 30 years of experience in finance.

Cheng Chi Chung 49 Chief Executive Officer Overall corporate strategy and

operations

Mr. Cheng joined SMI in 2011.

Mr. Cheng holds an EMBA degree from Tsinghua

University of Beijing and a bachelor degree from Taiwan

University.

Mr. Cheng has extensive management experience in

culture, media and retail areas.

Yang Rongbing 36 Executive Director Corporate strategy in operation,

finance, investment, human

resources and legal.

Mr. Yang joined SMI in 2010.

Mr. Yang holds a MBA from Central University of Finance

and Economics.

Mr. Yang has extensive experience in investment and

media industry.


Exhibit 36: Shareholding structure and industry chain


Wed, 29 Jun 2016


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Financial Summary – SMI Holdings (198 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E

Year to Dec FY14A FY15A FY16E FY17E FY18E

Income Statement (HK$ mn)

Ratios

Cinema operation 1,461 2,559 3,654 4,594 5,557

Gross margin (%) 25.1 29.2 30.4 31.3 31.9

Sales of goods in retail stores 188 364 546 737 921

Operating margin (%) 24.1 21.9 22.3 23.5 24.3

Others 2 2 2 2 2

Net margin (%) 7.9 12.3 13.4 13.8 15.1

Selling & dist'n exp/Sales (%) 5.5 3.6 3.6 3.6 3.5

Turnover 1,650 2,924 4,201 5,332 6,479

Admin exp/Sales (%) 4.9 4.6 4.6 4.4 4.4

YoY% 16 77 44 27 22

Payout ratio (%) 29.7 12.1 12.1 12.1 12.1

COGS (1,237) (2,070) (2,924) (3,663) (4,412)

Effective tax (%) 28.8 17.8 18.0 18.0 18.0

Gross profit 413 854 1,277 1,669 2,067

Total debt/equity (%) 23.1 25.4 41.7 42.8 41.2

Gross margin 25.1% 29.2% 30.4% 31.3% 31.9%

Net debt/equity (%) 18.4 3.8 18.6 30.3 33.8

Other income 156 26 3 9 18

Current ratio (x) 0.6 1.0 1.0 0.7 0.6

Selling & distribution (91) (106) (152) (194) (229)

Quick ratio (x) 0.5 0.9 0.9 0.7 0.5

Admin (81) (136) (192) (233) (283)

Inventory T/O (days) 26 17 17 17 17

R&D 0 0 0 0 0

AR T/O (days) 153 68 68 68 68

Other opex 0 0 0 0 0

AP T/O (days) 390 266 266 266 266

Total opex (172) (241) (345) (427) (512)

Cash conversion cycle (days) (212) (181) (181) (181) (181)

Operating profit (EBIT) 398 639 936 1,251 1,573

Asset turnover (x) 0.5 0.4 0.4 0.4 0.4

Operating margin 24.1% 21.9% 22.3% 23.5% 24.3%

Financial leverage (x) 1.8 1.8 1.9 2.0 2.0

Provisions 0 0 0 0 0

EBIT margin (%) 24.1 21.9 22.3 23.5 24.3

Interest Income 3 15 36 33 21

Interest burden (x) 0.5 0.7 0.7 0.7 0.8

Finance costs (110) (213) (273) (371) (376)

Tax burden (x) 0.6 0.8 0.8 0.8 0.8

Profit after financing costs 290 440 698 913 1,218

Return on equity (%) 7.7 8.4 9.6 10.5 12.0

Associated companies & JVs (81) 7 0 0 0

ROIC (%) 0.0 11.1 11.6 11.6 11.9

Pre-tax profit 209 447 698 913 1,218 Tax (84) (78) (126) (164) (219)


Minority interests 6 (8) (11) (14) (19)

Balance Sheet (HK$ mn)

Net profit 131 360 562 735 980

Fixed assets 1,758 2,266 2,690 3,118 3,541

YoY% 16 175 56 31 33

Intangible assets & goodwill 1,467 3,426 5,625 7,623 9,521

Net margin 7.9% 12.3% 13.4% 13.8% 15.1%

Associated companies & JVs 210 313 313 313 314

EBITDA 543 882 1,185 1,518 1,864

Long-term investments 1,566 1,334 1,334 1,334 1,334

EBITDA margin 32.9% 30.2% 28.2% 28.5% 28.8%

Other non-current assets 0 88 88 88 88

Diluted EPS (HK$) 0.013 0.030 0.042 0.055 0.073

Non-current assets 5,001 7,427 10,050 12,476 14,797

YoY% (4) 122 41 31 33 DPS (HK$) 0.004 0.004 0.005 0.007 0.009

Inventories 88 97 137 171 206

AR 692 545 783 993 1,207


Prepayments & deposits 3 3 4 6 7

Cash Flow (HK$ mn)

Other current assets 218 406 406 406 406

EBITDA 543 882 1,185 1,518 1,864

Cash 130 1,008 1,384 814 526

Chg in working cap 81 92 342 292 295

Current assets 1,130 2,058 2,714 2,391 2,353

Others 41 21 0 0 0 Operating cash 665 996 1,528 1,810 2,159

AP 1,323 1,507 2,128 2,666 3,211

Interest received (7) (7) 36 33 21

Tax 92 146 126 164 219

Tax (60) (19) (47) (39) (55)

Accruals & other payables 0 0 0 0 0

Net cash from operations 597 969 1,516 1,804 2,126

Bank loans & leases 80 223 223 223 223

CB & othe debts 43 58 58 58 58

Capex (304) (433) (672) (693) (713)

Other current liabilities 425 219 219 219 219

Investments (970) (2,157) (2,200) (2,000) (1,900)

Current liabilities 1,963 2,152 2,754 3,331 3,931

Dividends received 0 0 0 0 0 Sales of assets 3 2 2 0 0

Bank loans & leases 236 313 1,001 1,501 1,901

Interests paid 0 8 5 5 5

CB & othe debts 420 834 1,534 1,534 1,534

Others (76) (97) (120) (120) (120)

Deferred tax & others 147 959 959 959 959

Investing cash (1,345) (2,678) (2,985) (2,808) (2,728)

MI 0 0 11 25 44

FCF (748) (1,708) (1,469) (1,004) (602)

Non-current liabilities 803 2,106 3,505 4,019 4,438

Issue of shares 334 972 500 0 0 Buy-back 0 (32) 0 0 0

Total net assets 3,365 5,227 6,505 7,517 8,782

Minority interests 0 0 0 0 0 Dividends paid (37) (42) (42) (66) (86)

Shareholder's equity 3,365 5,227 6,505 7,517 8,782

Net change in bank loans 181 128 1,388 500 400

Share capital 1,018 1,351 1,609 1,952 2,322

Others 356 1,555 0 0 0

Reserves 2,348 3,877 4,896 5,565 6,460

Financing cash 833 2,581 1,846 434 314

BVPS (HK$) 0.36 0.44 0.50 0.58 0.67

Net change in cash 85 872 377 (570) (288) Exchange rate or other Adj 4 5 0 0 0

Total debts 776 1,328 2,715 3,215 3,615

Opening cash 41 130 1,008 1,384 814

Net cash/(debts) (621) (199) (1,210) (2,280) (2,968)

Closing cash 130 1,008 1,384 814 526

CFPS (HK$) 0.061 0.080 0.113 0.134 0.158


Wed, 29 Jun 2016

SMI Holdings(198 HK)

of 65

Exhibit 37: Peer Group Comparison

Company Ticker Price

Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x)

PER FY1

(x)

PER FY2

(x)

EPS FY1

YoY%

EPS FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div yld

Hist (%)

Div yld

FY1 (%)

P/B Hist

(x)

P/B FY1

(x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist (%)

Gross

margin

Hist (%)

Net

margin

Hist (%)

ROE Hist

(%)

ROE FY1

(%)

Sh px

1-mth %

Sh px

3-mth %

Cinema operators

Smi Holdings 198 HK 0.67 1,163 2.5 22.6 16.0 12.3 41.0 30.8 35.0 0.46 0.5 0.8 1.51 1.34 9.2 8.4 3.8 29.2 12.3 8.4 9.6 (6.9) (10.7)

HSI 20,172.46 10.0 11.1 10.1 (9.7) 10.2 3.1 3.56 4.1 3.9 1.04 1.01 10.4 9.1 (2.0) (0.9)

HSCEI 8,536.16 6.7 7.2 6.6 (7.6) 8.8 3.0 2.38 4.3 4.1 0.83 0.80 12.4 11.0 (0.7) (1.9)

CSI300 3,136.40 13.7 12.9 11.5 6.1 12.6 10.0 1.3 2.1 2.2 1.7 1.6 12.5 12.3 2.4 (1.1)

Adjusted sector avg* 56.7 32.3 23.7 38.9 35.8 (59.9) 1.1 0.3 0.4 6.2 6.8 34.2 17.1 74.6 53.2 2.9 10.3 17.2 (6.6) (10.5)

Imax China Holdi 1970 HK 38.10 1,745 5.4 N/A 28.7 22.5 N/A 27.5 (175.9) N/A N/A 0.5 11.06 7.62 29.3 19.3 0.0 65.4 (164.4) (197.6) 30.7 (2.2) (17.4)

Orange Sky Golde 1132 HK 0.43 152 0.2 N/A 21.5 15.4 N/A 40.0 (135.7) N/A N/A N/A 0.66 N/A (200.2) 9.4 39.4 57.1 (14.1) 0.2 3.5 (10.4) (21.8)

Nan Hai Corp Ltd 680 HK 0.21 1,831 1.1 59.1 N/A N/A N/A N/A N/A N/A N/A N/A 4.38 N/A 42.5 N/A 236.6 62.1 5.7 7.5 N/A (1.4) (4.2)

Wanda Cinema L-A 002739 CH 75.01 13,247 34.8 70.1 47.8 33.1 46.6 44.3 43.3 1.10 0.3 0.5 9.67 8.28 50.3 27.5 0.0 31.6 15.5 19.6 19.8 (6.6) (6.6)

Cj Cgv 079160 KS 100,500.00 1,816 15.5 40.9 31.2 23.7 31.2 31.6 28.6 1.09 0.3 0.3 4.99 4.38 14.8 12.1 97.3 50.2 4.4 13.8 14.9 (12.6) (2.4)

Movie makers

Smi Holdings 198 HK 0.67 1,163 2.5 22.6 16.0 12.3 41.0 30.8 35.0 0.46 0.5 0.8 1.51 1.34 9.2 8.4 3.8 29.2 12.3 8.4 9.6 (6.9) (10.7)

Adjusted sector avg* 37.2 28.6 26.7 19.8 25.9 22.1 1.5 0.4 0.7 4.3 4.6 6.4 42.9 9.9 13.0 16.0 (5.6) (5.6)

Ali Pictures 1060 HK 1.75 5,691 8.1 71.3 N/A N/A N/A N/A N/A N/A N/A N/A 2.28 N/A (70.7) N/A 0.0 (9.5) 176.7 4.2 N/A (1.1) 2.3

Wison Engineerin 2236 HK 0.82 430 0.1 13.9 N/A N/A N/A N/A N/A N/A N/A N/A 1.48 N/A 5.7 N/A 0.0 15.1 3.8 11.4 N/A (1.2) (20.4)

Leshi Internet-A 300104 CH 48.30 13,484 115.6 155.8 97.8 61.1 59.4 60.1 55.3 1.77 0.1 0.1 21.99 15.67 46.6 28.6 37.5 14.0 4.4 16.1 19.8 (17.9) (17.9)

Zhejiang Huace-A 300133 CH 15.25 4,006 45.4 50.8 40.1 30.9 26.7 30.0 27.6 1.45 0.2 0.3 4.34 4.22 50.7 32.5 0.0 36.8 18.0 10.5 10.5 0.8 (3.6)

Beijing Enligh-A 300251 CH 11.48 5,065 37.3 82.0 48.2 35.2 70.0 37.0 46.4 1.04 0.4 0.5 4.93 4.40 82.4 44.9 0.0 33.6 26.4 9.3 9.2 (9.9) 1.5

Huayi Brothers-A 300027 CH 13.45 5,633 112.2 35.4 32.1 27.3 10.2 17.7 17.8 1.80 0.4 0.6 3.85 3.70 39.3 28.0 0.0 50.0 25.4 12.7 10.0 (5.9) (1.5)

Zhejiang Talen-A 300426 CH 64.25 1,546 0.3 N/A 28.6 19.8 208.2 44.4 N/A N/A 0.2 N/A 11.84 9.52 68.5 N/A 0.0 35.8 21.0 18.5 27.2 (1.1) (1.1)

Imax Corp IMAX US 27.63 1,887 20.9 35.0 27.6 21.5 26.8 28.5 22.6 1.22 N/A N/A 3.16 3.05 13.1 11.9 0.0 58.7 14.9 13.1 8.7 (17.2) (9.1)

Reald Inc RLD US N/A N/A N/A N/A N/A 110.0 N/A N/A (174.7) N/A N/A N/A N/A N/A N/A N/A 0.0 49.4 (14.6) (14.4) N/A N/A N/A

Cinedigm Corp -A CIDM US 1.25 10 0.1 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 5.8 4.6 N/A 71.5 (29.7) N/A N/A (8.1) (47.5)

Walt Disney Co DIS US 94.38 153,126 749.3 19.1 16.3 15.3 17.3 6.2 11.4 1.43 1.5 1.5 3.64 3.47 11.2 9.8 26.9 45.9 16.0 20.2 21.2 (5.9) (3.8)

Twenty-First - B FOX US 26.26 49,863 83.5 6.7 15.8 12.4 (57.4) 26.9 (14.3) N/A 1.1 1.2 3.45 3.54 9.8 9.9 56.4 N/A 28.7 14.0 21.2 (10.3) (6.2)

Regal Entertai-A RGC US 20.78 3,258 24.8 21.0 19.9 17.1 5.7 16.4 10.0 1.99 4.2 4.2 N/A N/A 9.8 8.6 N/A 61.4 4.9 N/A (17.3) (2.2) (1.9)

* Outliners and "N/A" entries are in red and excl. from the calculation of averages


Wed, 29 Jun 2016


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IMAX China (1970 HK) – HOLD on, wait for 4Q16 IMAX’s unique technology differentiates itself from other competitors

Introduction of VR cinemas, IMAX could be a game changer

Weaker than expected 1H16 IMAX box office growth will hurt margins

Initiate HOLD with TP HK$33.00, implied 13% downside, based on 33x FY16E PE, 20% premium given unique positioning in the market

Unique 3D/ IMAX technology fends off competition and gets popular with audiences, cinemas and directors. IMAX format movies are more popular in China as audiences find themselves enjoying the larger screens, higher resolutions, greater screen brightness and more advanced sound systems, which easily surpass that offered at any home studio. We expect 1) the middle class in China to trade up for better movie experience and thereby drive up utilization rate of IMAX cinemas from 2H16 onwards, 2) more and more directors to shoot with IMAX 3D camera thanks to its unrivalled image quality, 3) more cinemas to equip themselves with IMAX screens, which generally attract doubled seat occupancy than normal screens. Further growth of IMAX cinemas is evident by the abundant orders backlog of 289 screens as at Jun 2016, and we expect 98 new systems to be delivered this year.

Game changer at VR play in the cinema industry. IMAX plans to open 6 VR cinemas worldwide by the end of 2016E. The VR content may be tied to existing movie franchises, costing US$7-US$10 per 10 minutes. IMAX plans to introduce VR cinemas to China in 2018E at a faster pace than in the US/Canada, riding on widespread cinema network like Wanda Cinemas. Meanwhile, IMAX also plans to develop a cinema-quality VR camera with Google for commercial use in 2H17. Introduction of VR cinemas by IMAX may bring dramatic changes to the movie industry, and be a mid-term re-rating catalyst for the company although we have not factored in any VR related contribution into our model.

2 short term challenges: Weaker than expected 1H16 IMAX box office to hurt margins and potential exit of pre-IPO investors as an overhang. We continue to believe that IMAX China is structurally well positioned given industry tailwinds and rising popularity of IMAX among audiences, directors and cinemas. However, we noticed two short term challenges: 1) potential offloading of shares by its Pre-IPO investors in 8Jul16, 2) margin decline due to weaker than industry IMAX box office growth in 1H16 (OP est. +4% vs 23% for overall China box office in 1H16) attributable to the lack of blockbusters (sum of top 5 Hollywood movies box office in 1H16 recorded a 27% decline vs 1H15).

Initiate with HOLD with TP at HK$33.00 and 25% lower than consensus net profit. We Initiate HOLD on IMAX China, with sales/ net profit forecast 13%/ 25% lower than consensus, to reflect 1) lower than expected IMAX box office growth per screen at US$1.22mn in 2016E, 9% drop from US$1.34mn in 2015 due to strong base in 1H15, and hence 2) GP/ OP margins decline from 65.4%/ 46.6% in 2015 to 61.3%/40.6% in 2016E. TP at HK$33.00, based on 33x FY16E PE.given its 19% adjusted net profit CAGR in FY15-18E, representing 13% downside.

Risks: 1) Concentration risk of imported Hollywood movies 2) Intensifying competition from other equipment providers, 3) Over penetration of IMAX cinemas, 4) Unfavorable policy imposed on imported movies.

Initial Coverage

HOLD


Target Price: HK$33.00 (-13%)

Key Data

HKEx code 1970




Issue Share (mn) 355.36


Fiscal Year 12/2015

Major shareholder (s) IMAX Corporation 68.46%

Source: Company data, Bloomberg, OP Research

Closing price are as of 28/06/2016

Price Chart

1mth 3mth 6mth

Absolute % -2.2 -18.3 -30.3

Rel. MSCI CHINA % 0.6 -13.8 -20.9

PE

Company Profi le IMAX China Holding, Inc. operates as a

holding company. The Company, through its

subsidiaries, broadcasts movies in theaters.

IMAX China Holding

Exhibit 38: Forecast and Valuation Year to Dec (US$ mn) FY14A FY15A FY16E FY17E FY18E

Revenue 78.2 110.6 132.3 164.2 196.6

Growth (%) 39.8 41.4 19.6 24.1 19.8

Net Profit 22.8 (181.9) 41.0 56.4 69.9

Growth (%) 30.5 (898.3) (122.6) 37.4 23.9

Adjusted Net profit 26.0 43.4 45.7 59.1 72.7

Growth (%) 41.0 66.9 5.3 29.5 23.0

Adjusted diluted EPS (US$) 0.103 0.122 0.128 0.166 0.205

Adjusted diluted EPS growth (%) 12.2 18.0 5.3 29.5 23.0


0.0 0.0 0.0

Consensus EPS (HK$)

1.323 1.689 2.105

ROE (%) 154.7 (197.6) 20.3 20.5 20.7

Adjusted P/E (x) 66.1 40.1 38.1 29.4 23.9

P/B (x) 56.5 11.0 7.1 5.7 4.7

Yield (%) 0.0 0.4 0.0 0.0 0.0

DPS (HK$) 0.000 0.134 0.000 0.000 0.000


0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Nov/15 Feb/16 May/16


0

50

100

150

200

250

300

Nov/15 Jan/16 Mar/16 May/16

Forward P/E Ratio

+1std.

avg.

-1std.

Wed, 29 Jun 2016


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Unique 3D/ IMAX technology fends off competition

IMAX format movies differ from other non-conventional cinematic formats by actual participation in the filming and digital recodification of movies. Thus, IMAX delivers not only an incomparably premium movie experience for high-end consumers to enjoy Hollywood and Chinese language blockbuster movies, but also a superior way of filming movies.

IMAX will continue to be the mainstream and more directors tend to use IMAX cameras to for film shooting

IMAX 3D camera is also becoming more popular among directors to produce movies given its better IMAX effects when presented on the IMAX screen, IMAX cinema will expand to fill the entire screen, allowing movie-goers to see up to 40% more of image with unprecedented crispness, clarity and colour saturation For example, director Michael Bay wound up shooting more of Transformers in IMAX than he’d originally intended. High loyalty towards IMAX screen and premium pricing

IMAX format movies not only enjoy a premium movie ticket price but also attract higher admission to cinemas with IMAX, hence benefiting the traffic for the rest of the screens in the same cinema. IMAX screens accounted for 1% of total screens in China, but generating about 4.6% of total box office, given the ticket price is 3x higher than a normal ticket, implying a 100% higher in seat occupancy per screen. As at Dec 2015, there were 278 IMAX cinemas in China, representing 65% of total non-conventional cinemas and over 80% of non-conventional box office. Given over 90% IMAX cinemas renewed the contract with existing cinema partners in FY14, we believe IMAX has satisfied most of the moviegoers and built high customer loyalty.

Exhibit 39: Comparison of IMAX and other technologyies

Operator Equipment/Technology Features Cinemas in 2015

IMAX IMAX China - DMR conversion technology to convert

live-action digital movies or 35mn movies to

large-format;

- IMAX digital xenon projection system;

- IMAX laser-based digital projection system;

- IMAX nXos2 system: 12 discrete channels

plus sub-bass, proportional point source loud

speakers, laser-aligned digital surround

sound, automated multi-point tuning process

- Larger screen: A typical IMAX screen is

16 metres high by 22 metres wide.

Higher resolution and fidelity, greater

brightness and clarity, wider colour gamut

- Able to distribute sound evenly

throughout the cinema, to deliver

10-times the dynamic range of a standard

sound system

278

China Film

Grian Screen

China Film Digital

Giant Screen

Dual digital movie projectors with single

camera with high output brightness,

multi-channel sound reproduction and digital

movie conversion

Larger screen with greater brightness and

clarity 73 (2014)

X-land Wanda Cinema 4K projection system, dual projectors, high

full-wall metal screen and advanced sound

system like the 11.1 multi-channel 3D

surround speaker matrix

Larger screen with greater brightness and

clarity 48

4DX Jointly operated by

CH CGV and UME

Cinema Group

Motion chair, vibration, fog/wind/bubbles

generator, water spray equipment, etc.

Special effects such as sear rotation, fog

and water spraying 28 (2014)

Dolby Cinema Dolby - Dolby Atmos (sound system): 64 speakers

powered independently and get its own

separate audio feed.

- Full range speakers, more subwoofers and

celling speakers.

- Dolby Vision (screen system): Dual 4K laser

projection that offers a million to one contrast

ratio, 31fl of light and an expanded HDR

colour gamut

- Higher resolution and fidelity, greater

brightness, extraordinary black level and

colour reproduction capabilities

- Enveloping listeners in a hemisphere of

sound

- Signed a deal of

100 cinemas in 5

years with

Wanda;

- To open a Dolby

Cinema in Jackie

Chan Cinema


IMAX can easily beat its competitors with unique 3D/IMAX technology which brings audience superior movie experience

More and more directors prefer to shoot with IMAX 3D cameras, IMAX will continue to be the mainstream

IMAX has high loyalty with 90% renewal rate, cinemas continue to like IMAX screen as it drive more traffic

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40 45 61 73 96 98 105 102 97

289

88128

173234

307403

501606

708

128173

234

307

403

501

606

708

805

0

100

200

300

400

500

600

700

800

900

2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Backlogin Jun16

New orders Existing cinemas

(No. of IMAX cinemas)

Riding on the fast expansion of the cinema operators, current order

backlog could support for next 2 years’ revenue growth

IMAX China had 215 orders backlog on hand at the end of 2015, covered by 57

sales arrangements, 95 hybrid revenue sharing, 63 full revenue sharing orders,

these are expected to be delivered in the next 2 years. The number has

increased to over 280 after contracts signed with Guangzhou Jinyi/ Sichuan

LuLumière Pavilions 40/10 new cinemas in Jun 2016. Thus we estimate the

number of IMAX cinemas to increase from 307 in FY15 to 606 in FY18E at 25.4%

CAGR during the period, given its abundant backlog of cinema orders.

Exhibit 40: No. of IMAX cinemas in China, 2012 – 2020E


More sales from revenue sharing arrangement to boost margin driven by

aggressive expansion plans of cinema operators

IMAX China provides cinema systems to the cinema partners through two types

of arrangements:1) sales arrangement, 2) full revenue sharing and 2) hybrid

revenue sharing. Sales arrangement comprises a significant upfront fee of

US$1.30mn and smaller ongoing fees plus annual maintenance fee, which has

minimal link to the box office of the IMAX format movies. By contrast, revenue

sharing arrangements can benefit from box office growth as it delivers the IMAX

cinema systems to cinema operators free of upfront charges but in return for a

portion share of box office generated from IMAX format movies (12% or 16%

depends on Hybrid or Full revenue sharing). Full revenue sharing do not require

any significant upfront investments and the costs of buying the equipment will be

capitalized, while Hybrid revenue sharing will require a US$550K cash to pay for

the machines, and the costs will be expensed during the year. We believe more

cinemas would adopt revenue sharing arrangement as it enables cinema

operators to expand IMAX cinema network more rapidly by saving upfront costs.

IMAX has an orders backlog of

over 280 installations, and

expects to deliver about 100

screens in 2016

Revenue sharing model will help

cinema operators to save up

upfront costs, and help IMAX to

increase its margins in the future

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30 28 37 48 60 68 747 1423

3440

5469

913

19

28

33

43

53

4756

78

111

132

164

197

35.6%

49.4%52.9%

56.9%54.8%

58.7%62.4%

0%

10%

20%

30%

40%

50%

60%

70%

0

50

100

150

200

250

2012 2013 2014 2015 2016E 2017E 2018E

Movie businessRevenue sharing arrangementsSales arrangements, maintenance and others% of box office related sales

(US$ mn)(%)

Exhibit 41: IMAX China's business model

Clients: Cinemas Upfront payment Revenue sharing % of box office Maintenance/royalty fee Contract length

Hollywood grade Chinese Languages

Sales arrangement Significant upfront fee,

about US$1.3 mn

minimum or a

small percentage

of box office

Ongoing maintenance and

royalty fee after installation.

Royalty fee equals to a fixed

minimum amount or a

percentage of box office,

whichever is greater

The system is sold to the

customer

Hybrid revenue

sharing

About 1/3 of the

upfront payment under

a Sales arrangement,

at US$550K

About 8 - 12% from

cinemas

About 8 - 12% from

cinemas

Ongoing maintenance fee, at

US$50K, per annum

Non-cancellable for 10 to 12

years, and renewable by the

exhibitor for one or more

additional terms of between

5 to 10 years

Full revenue sharing No, or a relatively small

upfront payment

About 16 - 18%

from cinemas

About 16 - 18% from

cinemas

Ongoing maintenance fee, at

US$50K, per annum

Non-cancellable for 10 to 12

years, and renewable by the

exhibitor for one or more

additional terms of between

5 to 10 years

Clients: Producers Upfront payment Revenue sharing % of box office Maintenance/royalty fee Contract length

Film Business No About 9.5% from

producers

About 12.5% from

producers

No just one off conversion fees

for each movie


As a result, we estimate IMAX China revenue to grow by 31.5% yoy from

US$111mn in FY15 to US$132mn in FY16E and 21.1% 3-year CAGR to

US$197mn in FY18E. With IMAX China shifting its focus from direct machine

selling to box office sharing, we estimate the sales contribution from box office

related sales, which includes revenue sharing arrangements and movie business

to increase from 57% in FY15 to 62% in FY18E.

Exhibit 42: IMAX China’s revenue breakdown, 2012 - 2018E


We expect IMAX’s revenue to

increase by 19% in FY16E, while

its sales contribution from

revenue sharing arrangements to

increase from 57% in FY15 to 62%

in FY18E

Wed, 29 Jun 2016


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52.2%

57.6%59.4%

65.4%

61.3%63.0%

64.1%

33.0%

37.4%39.8%

46.6%

40.6%

43.6%45.1%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

2012 2013 2014 2015 2016E 2017E 2018E

GP margins Adjusted OP margin

54.3%

38.2% 36.6% 33.5% 34.9% 31.0% 27.3%

15.6%

25.3% 29.1% 31.2% 30.1%32.8%

35.3%

9.3%10.8% 9.2% 8.5% 9.1% 9.2% 9.2%

0.8%1.6% 1.3% 1.1% 1.1%

1.1% 1.1%

20.0% 24.1% 23.8% 25.7% 24.8% 25.9% 27.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015 2016E 2017E 2018E

Sales arrangements Revenue sharing arrangements Cinema system maintenance OtherMovie Business

Exhibit 43: IMAX China’s revenue breakdown as percentage, 2012 - 2018E


We estimate IMAX China’s GPM/ Adjusted OP margin to gradually climb up to

64.1%/45.1% by FY18E from 61.3%/40.6% in FY16E, thanks to 1) increasing

contribution of box office related sales from 57% of sales in FY15 to 62% of sales

in FY18E and 2) rising margins in both revenue sharing arrangements and movie

business, increase by 6ppt/5ppt from 50%/67% in FY16 to 56%/72% in FY18E

respectively.

Exhibit 44: IMAX China’s GPM and Adjusted OP margin, 2012 - 2018E


We expect IMAX’s blended gross

margin to increase from 61% in

FY16 to 64% in FY18E

Wed, 29 Jun 2016


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Game changer for VR play in cinema industry, in partnership with Google

In mid May 2016, IMAX announced that it plans to open 6 virtual reality (VR)

cinemas around the world by the end of 2016, with the first destined for Los

Angeles. Additionally, the company wants to expand to China. The VR headsets

would be co-developed by Sweden-based games developer Starbreeze and

Taiwanese hardware manufacturer Acer, which boast a wide and immersive field

of vision. For example, 210 degrees vs. 110 degrees for the Oculus Rift and HTC

Vive. At the same time, IMAX is working with Google to create a cinema-quality

VR camera, which is expected to be put into commercial use in 2H17. The VR

content is estimated to cost US$7 - US$10 per 10 minutes shown.

Exhibit 45: People enjoy a wholy new premium movie experience in VR cinemas


VR content may hit IMAX’s cinema and kicking off monetizing as the

earliest in 2H17, the mid-term re-rating catalyst

We believe with IMAX research and technology capability and its rich partnership

with cinema operators across the world will enable IMAX to be the first batch of

tech companies that can profit from the upcoming VR needs in consumer sector

and reap the robust growth of VR market in the world.

According to IDC, the VR hardware sales are estimated to reach US$2.3bn in

2016E, mainly driven by gaming such as PS VR. TrendForce is more optimistic

about the VR market and estimates US$6.7bn market size in 2016E and forecast

the market to grow at 80% CAGR to US$70bn by 2020E with US$20bn for

hardware sales and US$50bn for software sales. TrendForce analysts point out

the share of VR headset device and free of charge application will improve the

popularity of VR application while VR analyst at Moor Insights & Strategy

disagreed that no player in any part of the market can turn VR into a US$70bn

mature and mainstream market in 4 years. We see IMAX may be a potential

player to turn and reap this U$70bn VR market by 2020E given IMAX position at

the top end of value chain of filming and movie industry in the world and IMAX

can leverage its success in IMAX camera and IMAX screens as well as its

existing channel network to promote the VR format movie trailer or more remote

the VR format movie in the coming 3 years. If 1% of China box office in 2020E is

VR format movie, this implies an RMB1bn market size while Digi Capital force the

VR market to reach US$30bn by 2020E and VR movie and VR theme park

accounts for close to 30% of market or US$9.0bn

IMAX announced its plan to open

VR cinemas and joint

development of VR camera with

Google

Various technology research

houses like TrendForce, IDC and

Digi Capital expect VR market,

both hardware and software to be

large, could be about US$30 bn to

US$70bn by 2020E

Wed, 29 Jun 2016


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6 8 913

200.7

2

11

16

50

6.710

20

29

70

0

10

20

30

40

50

60

70

80

2016E 2017E 2018E 2019E 2020E

VR Hardware VR Software

(US$ bn)

VR games, US$13bn, 43%

VR hardware, US$6bn, 20.0%

VR movies, US$4.5bn, 17%

VR theme park, US$4bn, 13%

VR niche markets, US$1.5bn, 7%

Total VR market revenue at US$30bn by 2020E

Exhibit 46: Global VR hardware and software market size, 2016E – 2020E

Source: TrendForce, OP Research

Exhibit 47: Global VR market revenue breakdown, 2020E

Source: Digi Capital, OP Research

We notice that the VR play in cinema and movie industry is still at early stage and

hence we have not taken into account any sales contribution from VR related

business for IMAX. However, we believe IMAX is a key player in this VR movie

industry in near-to-mid term that we will have to keep a close eye on it and we

believe it may be a mid-term re-rating catalyst when the business model becomes

more certain.

We did not factor in any

contribution from VR in our IMAX

model, but IMAX’s initiation on VR

could be a game changer, and will

promote a re-rating if those are

monetarized

Wed, 29 Jun 2016


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31%27%

36%

49%

29%

50% 47%

23%

33%

45%

38%

54%

21%

80%

32%

4%

40%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2012 2013 2014 2015 2016E 1H15 2H15 1H16 2H16E

China IMAX China - OP est.

0.0% 0.0%

29.4%

-7.2%

-23.5%

7.3%

45.2%

38.1% 39.1% 39.9%35.9%

33.1%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2013 2014 1H15 2H15 1H16 2H16E

Box office per screen growth - OP est. Network growth -OP est.

2 short term challenges: Weaker than expected 1H16 IMAX box office to

hurt margins and potential exit of pre-IPO investors remain an overhang.

Short term challenge #1: potential offloading of shares by its Pre-IPO investors. CMC (which owns CMCCP and CME) and FountainVest, both have 2.92 % shares of IMAX China, will have their lockup expire in 8Jul16. We expect them to exit in the future, following their last sell down of shares in Mar 2016.

Short term challenge # 2: GP margin will normalize to 61.3% in 2016, from 65.4% in 2015, following a weak 1H16 IMAX box office growth, at only 4% (OP est.) vs 23% for China in total. Historically speaking, IMAX box office growth in China are faster than the overall growth, by 8% on average, during 2012-2015, which is fuelled by increasing popularity of IMAX screens, as more cinemas use that to attract more traffic. We, however, stress that in 1H16, it will be slower than the industry, to only 4% vs 23% for china in total.

Exhibit 48: Box office growth by segments, 2012- 2016E, 1H15- 2H16E


We noticed that IMAX’s network (No. of screens) growth is stable at about 30%, while the major disappointing is box office per screen growth in 1H16, dropped by 24%.

Exhibit 49: IMAX box office growth break down, 2013 - 2014, 1H15 - 2H16


Potential 5.84% shares offloading by CMC and FountainVest in 8Jul 2016

We expect gross margins fall to 61.3% in 2016E from 65.4%, due to slower than industry IMAX box office growth in 1H16, driven by US$$1.22mn box office per screen, 9% below 2015’s US$1.34mn

Wed, 29 Jun 2016


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1.22 1.22 1.22

1.34

1.22 1.24

1.27

1.16

1.20

1.24

1.28

1.32

1.36

2012 2013 2014 2015 2016E 2017E 2018E

(US$ mn)

50%

16%

-27%

33%

44.9%

5.3%

-27.9%

45.0%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1H15 2H15 1H16 2H16E

Sum of top 5 Hollywood movies IMAX box office for sum of top 5

This is in-line with the trend of the sum of top 5 hollywood movie box office, which

felll by 27% in 1H16, this was the result of disappointing box office of potential hit

movies like Warcraft(RMB1.43bn), Captain America3:Civil War(RMB1.25bn), and

X-Men: Apocalypse(RMB795mn), etc, and comparing to the very robust comps

back in 1H15, e.g. Fast and Furious 7 (RMB2.43bn), Avengers2 : Age of

Ultron(RMB1.47bn), as well as Jurassic World(RMB1.42bn).

Exhibit 50: Box office growth for sum of top 5 Hollywood movies (both total

and IMAX), 2012- 2016E, 1H15- 2H16E


Therefore we expect IMAX’s box office per screen in 2016E to drop back to a

similar level as 2014, at US$1.22mn, from US$1.34mn per screen in 2015.

Exhibit 51: IMAX China box office per screen, 2012 – 2018E


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28.8%24.6%

46.8%

55.7%

50.0%

54.0%56.0%

40.2%

61.1%64.0%

76.3%

67.0%70.0%

72.0%

52.2%57.6%

59.4%

65.4%

61.3% 63.0% 64.1%

20%

30%

40%

50%

60%

70%

80%

2012 2013 2014 2015 2016E 2017E 2018E

Sales arrangements, maintenance and others Revenue sharing arrangements

Movie business Blended gross margin

Since IMAX’s costs for selling a screens by revenue sharing arrangement are

largely fixed, its margins would easily be leveraged up (down) as box office per

screen increases (decreases), hence we now foresee a blended gross margin fall

back to 61.3% in 2016E after shooting up to 65.4% in 2015, to reflect the box

office per screen retreat to US$1.22mn in 2016E, from US$1.34mn in 2015.

Exhibit 52: IMAX China’s GPM by segment, 2012 – 2018E


Exhibit 53: Box office of top 5 Hollywood movies, 1H15 - 1H16E

Chinese Name English Name Total Box office IMAX Box office (OP est.) Date

1H16

1 魔兽 Warcraft 1,430 130 Jun-16

2 美国队长 3：英雄内战 Captain America3 : Civil War 1,246 120 May-16

3 星球大战：原力觉醒 Star Wars: The Force Awakens 825 120 Jan-16

4 X 战警：天启 X-Men: Apocalypse 795 40 Jun-16

5 蝙蝠侠大战超人：正义黎明 Batman v Superman: Dawn of Justice 619 30 Mar-16

Total 4,915 430

2H15

1 碟中谍 5：神秘国度 Mission Impossible – Rogue Nation 870 60 Sep-15

2 终结者：创世纪 Terminator Genisys 725 50 Aug-15

3 蚁人 Ant-Man 672 70 Oct-15

4 火星救援 The Martian 587 70 Nov-15

5 007：幽灵党 007 : Spectre 542 50 Nov-15

Total 3,395 300

1H15

1 速度与激情 7 Fast and Furious 7 2,426 200 Apr-15

2 复仇者联盟 2：奥创纪元 Avengers2 : Age of Ultron 1,466 150 May-15

3 侏罗纪世界 Jurassic World 1,420 150 Jun-15

4 霍比特人：五军之战 The Hobbit: The Battle of the Five Armies 766 70 Jan-15

5 末日崩塌 San Andreas(2015) 630 40 Jun-15

Total 6,708 610


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150.7

183.8

55.9

78.2

110.6

132.3

164.2

50

70

90

110

130

150

170

190

2013 2014 2015 2016E 2017E

Consensus OP est.

(US$ mn)

60.6

Cons. adjusted net profit

77.3

18.4

26.0

43.4 45.7

OP est. adjusted net profit

57.9

15

25

35

45

55

65

75

85

2013 2014 2015 2016E 2017E

Consensus OP est.

(US$ mn)


Initiate with HOLD with TP at HK$33.00 and 25% lower than consensus net profit.

We Initiate HOLD on IMAX China, with TP at HK$33.00, based on 33x FY16E PE, 20% premium over its peers, given its 19% adjusted net profit CAGR in FY15-18E, representing a 13% downside. Our sales/ net profit forecast 13%/ 25% lower than consensus, to reflect 1) lower than expected IMAX box office per screen at US$1.22mn in 2016E, 9% drop from US$1.34mn in 2015 due to strong comps in 1H15, and hence 2) GP/ OP (adjusted) margins decline from 65.4%/ 46.6% in 2015 to 61.3%/40.6% in 2016E.

Exhibit 54: Forecast summary for IMAX, we expects box office and margin to normalize in 2016E, but continue

to climb in 2017E - 2018E

FY16E FY17E FY18E

(US$ mn) OP est. Cons. Var(%) OP est. Cons. Var(%) OP est. Cons. Var(%)

Revenue 132 146 (9.4) 164 174 (5.7) 197 209 (5.7)

Gross profit 81 98 (17.2) 103 119 (13.3) 126 145 (13.0)

Gross margin 61.3% 67.1% (5.8) 63.0% 68.6% (5.5) 64.1% 69.4% (5.3)

Opex (27) (26) 6.6 (32) (30) 6.6 (37) (35) 6.2

EBIT 54 72 (25.7) 72 89 (19.9) 89 110 (19.1)

Reported Net profit 41 55 (25.9) 56 70 (19.2) 70 86 (18.6)

Adjusted Net Profit 46 61 (25.6) 59 75 (20.9) 73 91 (20.3)

Diluted EPS (US$) 0.116 0.156 (25.9) 0.159 0.196 (19.2) 0.197 0.242 (18.6)

Adjusted diluted EPS (US$) 0.128 0.173 (25.6) 0.166 0.210 (20.9) 0.205 0.257 (20.3)

Source: OP Research

Exhibit 55: IMAX’s sales and adjusted net profit, OP est. vs BBG consensus

Source: OP Research

We initiate HOLD on IMAX with TP

of HK$33.00 and downside of 13%

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Exhibit 56: Key assumptions – IMAX China (1970 HK)

2012 2013 2014 2015 2016E 2017E 2018E

China Box office (RMB bn) 17.1 21.8 29.6 44.0 56.6 70.4 84.1

China IMAX Box office (US$ mn) 81 129 183 312 378 508 635

Per Screen average revenue (US$ mn) 1.22 1.22 1.22 1.34 1.22 1.24 1.27

Growth (%)

Sales growth by segment

Cinema Business

13.8% 40.4% 37.7% 21.2% 22.2% 17.9%

Sales arrangements

-15.6% 34.0% 29.2% 24.7% 10.1% 5.4%

Revenue sharing arrangements

94.1% 60.8% 51.6% 15.3% 35.5% 28.9%

Cinema system maintenance

39.1% 19.9% 29.6% 29.4% 24.3% 21.0%

Other

147.5% 10.5% 24.2% 20.0% 25.0% 20.0%

Movie Business

44.8% 37.8% 53.1% 15.0% 30.0% 25.0%

Total

20.0% 39.8% 41.4% 19.6% 24.1% 19.8%

Total installations by type

Sales arrangements 74 88 107 130 163 200 240

Full revenue sharing 51 75 102 131 179 219 259

Hybrid revenue sharing 3 10 25 46 61 82 107

Total 128 173 234 307 403 501 606

New installations by type

Sales arrangements 16 14 19 23 33 37 40

Full revenue sharing 21 24 27 29 48 40 40

Hybrid revenue sharing 3 7 15 21 15 21 25

Total 40 45 61 73 96 98 105

Sales per installation

Sales arrangements 1,584 1,528 1,433 1,425 1,400 1,375 1,340

Revenue sharing arrangements 135 166 179 195 166 179 190

Theatre system maintenance 34 35 31 30 30 30 30

GP margins 52.2% 57.6% 59.4% 65.4% 61.3% 63.0% 64.1%

Gross margins by segment

Cinema Business 55.2% 56.5% 58.0% 61.6% 59.4% 60.6% 61.1%

Sales arrangements 64.3% 65.8% 68.1% 69.0% 69.0% 69.0% 69.0%

Revenue sharing arrangements 28.8% 24.6% 46.8% 55.7% 50.0% 54.0% 56.0%

Cinema system maintenance 47.4% 98.4% 55.0% 57.3% 57.0% 59.0% 61.0%

Other 40.4% 58.6% 41.2% 33.8% 33.0% 34.0% 32.0%

Movie Business 40.2% 61.1% 64.0% 76.3% 67.0% 70.0% 72.0%

Total 52.2% 57.6% 59.4% 65.4% 61.3% 63.0% 64.1%

Selling & distribution costs / sales -17.0% -15.8% -14.4% -21.6% -15.3% -14.1% -13.9%

Admin expenses / sales -2.2% -4.4% -5.2% -5.5% -5.4% -5.3% -5.1%

Effective tax rate -16.4% -16.7% -21.6% 6.4% -22.0% -22.0% -22.0%


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Investment Risks

Concentration risk of imported Hollywood movies Due to the limited quotas

for imported Hollywood movies, failures to select hit movies could add up to one

large disappointment in total box office. E.g. risks that blockbusters sequel fail to

improve materially over its previous, like, Captain America 3(2016)’s RMB1.25bn

vs Avenger 2(2015)’s RMB1.47bn, X-Men: Apocalypse(2016)’s RMB783mn vs

X-Men: Days of Future(2014)’s RMB724mn

Competition from other non-conventional cinema equipment providers

intensify (e.g. price war) - IMAX has over 80% of market shares currently in the

space of non-conventional cinema equipment. Attracted by its high net profit

margins of over 10%, other players likes STAR MAX (by Dadi) may emerge and

price war may be launched by the current No.2, DMAX (by China Film Giant

Screen), and other foreign competitors like Dolby Cinema.

Over penetration in China, hence future demand slows down - The current

penetration of IMAX screen is high compared to other countries, at 1% in China

vs 0.7% in the world on average, failure to ramp up these current IMAX screens in

China may slow down future IMAX’s demand.

Unfavorable policy imposed on imported movies (e.g. no upward revision

of current quota of 34 imported movies) - China has limitation in imported

movies at the moment, and market expects the restriction to gradually loosen

going forward, therefore any negative changes in this policy will be vulnerable to

IMAX due to its heavy dependence on imported blockbuster IMAX format movies.

We analyze the potential

investment risks are 1)

Concentration risk of imported

Hollywood movies, 2) Intensify

competition, 3) Over penetration

in China, 3) Unfavorable policy

imposes on imported movies

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CMECMCCP IMAX Barbados

IMAX

Corporation

Public

IMAX China

(1970 HK)

1.50% 25.62%68.46%1.50%

100%

2.92%

FountainVest

Partners

100%

CMC

100%



Richard Lewis Gelfond 61 Chairman &

Non-executive Director

Provide strategic advice and

guidance on the business and

operations of the Group

Mr. Gelfond joined IMAX Corp since 1994.

Mr. Gelfond graduated from the State University of New

York with a Bachelor of Arts in May 1976 and from the

Northwestern University School of Law with a juris doctor

degree in June 1979.

Mr. Gelfond has 21 years’ experience at IMAX and media

industry

Jiande Chen 60 Chief Executive Officer &

Executive Director

Overall strategic direction and

business operations of the Group

Mr. Chen joined IMAX Corp since 2011.

Mr. Chen received a doctorate in Communications from

the University of Washington in 1991 and graduated from

Fudan University with major in English in 1982.

Mr. Chen has 15 years’ experience in media industry.

Jin Athanasopoulos 45 Chief Financial Officer

and Executive Director

Overall strategic direction and


Mr. Athanasopoulos joined IMAX Corp since 2000.

Mr. Athanasopoulos graduated from the University of

Toronto with a bachelor’s degree in Commerce in 1993.

Mr. Athanasopoulos has 15 years’ experience in media

industry.

Mei Hui Chou

(Jessie)

47 Executive Director Overall marketing direction and


Ms Chou joined IMAX Corp since 2006.

Ms. Chou was awarded an EMBA from the National

Taiwan University in 2006 and received a Diploma from

Les Roches Hotel Management School in 1994.She

obtained a bachelor’s degree in Foreign Language and

Literature from the National Tsing Hua University in 1991.

Ms. Chou has 18 years’ experience in media industry.


Exhibit 58: Shareholding structure


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Financial Summary – IMAX China (1970 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E


Income Statement (US$ mn)

Ratios

Cinema Business 60 82 100 122 143

Gross margin (%) 59.4 65.4 61.3 63.0 64.1

Sales arrangements 29 37 46 51 54

Operating margin (%) 39.8 38.3 40.6 43.6 45.1 Revenue sharing arrangements 23 34 40 54 69

Net margin (%) 29.1 (164.4) 31.0 34.4 35.6

Cinema system maintenance 7 9 12 15 18

Selling & dist'n exp/Sales (%) 14.4 21.6 15.3 14.1 13.9 Other 1 1 1 2 2

Admin exp/Sales (%) 0.0 0.0 0.0 0.0 0.0

Movie Business 19 28 33 43 53

Payout ratio (%) 0.0 (2.8) 0.0 0.0 0.0

Turnover 78 111 132 164 197

Effective tax (%) 21.6 (6.4) 22.0 22.0 22.0 YoY% 40 41 20 24 20


COGS (32) (38) (51) (61) (71)

Net debt/equity (%) Net cash Net cash Net cash Net cash Net cash

Gross profit 46 72 81 103 126

Current ratio (x) 1.3 3.9 5.0 5.2 5.5 Gross margin 59.4% 65.4% 61.3% 63.0% 64.1%

Quick ratio (x) 1.3 3.8 4.8 5.0 5.3


Inventory T/O (days) 39 61 61 61 61 Selling & distribution (11) (24) (20) (23) (27)

AR T/O (days) 118 118 118 118 118

Admin 0 0 0 0 0

AP T/O (days) 459 116 116 116 116

R&D 0 0 0 0 0

Cash conversion cycle (days) (301) 62 62 62 62 Other opex (4) (6) (7) (9) (10)

Asset turnover (x) 0.7 0.6 0.5 0.5 0.5

Total opex (15) (30) (27) (32) (37)

Financial leverage (x) 8.0 2.0 1.3 1.3 1.3 Operating profit (EBIT) 31 42 54 72 89

EBIT margin (%) 39.8 38.3 40.6 43.6 45.1

Operating margin 39.8% 38.3% 40.6% 43.6% 45.1%

Interest burden (x) 0.9 (4.0) 1.0 1.0 1.0 Provisions (2) (214) (2) 0 0

Tax burden (x) 0.8 1.1 0.8 0.8 0.8

Interest Income 0 0 1 1 1

Return on equity (%) 154.7 (197.6) 20.3 20.5 20.7 Finance costs (0) 0 0 0 0

ROIC (%) 0.0 67.7 49.8 57.0 59.7

Profit after financing costs 29 (171) 53 72 90 Associated companies & JVs 0 0 0 0 0


Pre-tax profit 29 (171) 53 72 90

Balance Sheet (US$ mn) Tax (6) (11) (12) (16) (20)

Fixed assets 43 52 63 76 90

Minority interests 0 0 0 0 0

Intangible assets & goodwill 0 0 0 0 0

Net profit 23 (182) 41 56 70

Financing receivables 20 25 25 25 25 YoY% 31 (898) (123) 37 24

Deferred income tax asset 1 1 1 1 1

Net margin 29.1% -164.4% 31.0% 34.4% 35.6%


Adjsuted net profit 26 43 46 59 73

Non-current assets 68 83 94 106 121 YoY%

66.9% 5.3% 29.5% 23.0%

EBITDA 35 47 60 80 99

Inventories 3 6 9 10 12 EBITDA margin 44.8% 42.6% 45.3% 48.4% 50.3%

AR 25 36 43 53 63

EPS (US$) 0.091 (0.621) 0.116 0.159 0.197

Prepayments & deposits 1 1 1 1 2 YoY% 4 (785) (119) 37 24


DPS (HK$) 0.000 0.134 0.000 0.000 0.000

Cash 48 91 170 210 260

Current assets 83 139 227 280 343

Year to Dec FY14A FY15A FY16E FY17E FY18E Cash Flow (US$ mn)

AP 40 12 16 19 22 EBITDA 35 47 60 80 99

Tax 9 6 12 16 20

Chg in working cap 1 (27) (4) (8) (8)

Accruals & other payables 5 4 5 6 7 Others (1) (8) 4 4 4


Operating cash 35 12 59 76 95

CB & othe debts 8 13 13 13 13 Interest received 0 0 1 1 1


Tax (7) (12) (12) (16) (20)

Current liabilities 63 35 46 54 62

Net cash from operations 28 (0) 48 61 76


Capex (11) (14) (17) (21) (25)

CB & othe debts 27 0 0 0 0 Investments 0 0 0 0 0


Dividends received 0 0 0 0 0

MI 0 0 0 0 0

Sales of assets 0 0 0 0 0

Non-current liabilities 62 29 29 29 29 Interests paid 0 0 0 0 0

Others (17) 0 0 0 0

Total net assets 26 158 246 303 373

Investing cash (28) (14) (17) (21) (25) FCF 1 (14) 31 40 51

Shareholder's equity 26 158 246 303 373 Issue of shares 37 104 0 0 0

Share capital 0 0 0 0 0

Buy-back 0 0 0 0 0

Reserves 26 158 246 303 373 Minority interests 0 0 0 0 0

Dividends paid 0 (48) 48 0 0

BVPS (HK$) 0.67 3.45 5.39 6.63 8.16 Net change in bank loans 0 0 0 0 0

Others 0 0 0 0 0

Total debts 35 13 13 13 13

Financing cash 37 57 48 0 0

Net cash/(debts) 13 78 157 197 248

Net change in cash 38 42 79 40 51

Exchange rate or other Adj (0) (0) 0 0 0

Opening cash 10 48 91 170 210

Closing cash 48 91 170 210 260 CFPS (HK$) 0.874 (0.004) 1.055 1.331 1.661


Wed, 29 Jun 2016


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Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x)

PER FY1

(x)

PER FY2

(x)

EPS FY1

YoY%

EPS FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div yld

Hist (%)

Div yld

FY1 (%)

P/B Hist

(x)

P/B FY1

(x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist (%)

Gross

margin

Hist (%)

Net

margin

Hist (%)

ROE Hist

(%)

ROE FY1

(%)

Sh px

1-mth %

Sh px

3-mth %

Cinema operators

Imax China Holdi 1970 38.10 1,745 5.4 40.1 38.1 29.4 5.3 29.5 18.8 2.03 0.4 0.0 11.03 7.13 285.6 225.6 Net cash 65.4 39.2 (197.6) 20.3 (2.2) (17.4)

HSI 20,172.46 10.0 11.1 10.1 (9.7) 10.2 3.1 3.56 4.1 3.9 1.04 1.01 10.4 9.1 (2.0) (0.9)

HSCEI 8,536.16 6.7 7.2 6.6 (7.6) 8.8 3.0 2.38 4.3 4.1 0.83 0.80 12.4 11.0 (0.7) (1.9)

CSI300 3,136.40 13.7 12.9 11.5 6.1 12.6 10.0 1.3 2.1 2.2 1.7 1.6 12.5 12.3 2.4 (1.1)


Smi Holdings 198 HK 0.67 1,163 2.5 21.9 14.0 9.7 56.9 43.8 N/A N/A 1.6 1.0 1.73 1.58 11.3 6.9 24.1 29.2 12.3 8.4 11.8 (6.9) (10.7)




Cj Cgv 079160 KS 100,500.00 1,818 15.5 40.9 31.2 23.7 31.2 31.6 28.6 1.09 0.3 0.3 4.99 4.38 14.8 12.1 97.3 50.2 4.4 13.8 14.9 (12.6) (2.4)

Movie makers

Imax China Holdi 1970 38.10 1,745 5.4 40.1 38.1 29.4 5.3 29.5 18.8 2.03 0.4 0.0 11.03 7.13 285.6 225.6 Net cash 65.4 39.2 (197.6) 20.3 (2.2) (17.4)

















Wed, 29 Jun 2016

Orange Sky G H (1132 HK)

of 65

Orange Sky Golden Harvest (1132 HK) – lacking profits and growth Lagging business in China due to low efficiency and weak cost control

Other markets like Hong Kong, Taiwan and Singapore lack growth

Initial HOLD with TP HK$0.38 based on 25x FY17E PE, at par to industry average.

OSGH’s China business remains fast growing, but still lags behind the industry and its profitability has been an issue. OSGH’s China business grew by 19.4% in FY15, slower than industry growth of 49%. A HK$120mn EBIT loss was made during the period, implying a -11.6% OP margin in China, way less than its relatively stable margins in HK, TW and SG. We attribute this to 1) inefficiency in operation and 2) loose control on costs, and we expect China OPM to remain negative until FY17E.

Business in Hong Kong, Taiwan and Singapore is more stable but lack growth. OSGH operates 6/13/11 cinemas in Hong Kong/Taiwan/Singapore, where Taiwan is an associate with 37.5% stake and Singapore is a 50% JV. These three markets combined only generated 2% sales CAGR and -2% EBIT CAGR during the past 3 years.

Recent sell down of its subsidiary, OSGH (China), reveals RMB2.9bn valuation that may trigger mid-term re-rating. Introducing Wanda and Tencent (via Beijing Weiying, 5.17% stake), Jiaxing Credit Prosperity Investment (6.9% stake) and Beijing Qing Zhong Tong Chuang Asset Management (1.72% stake) to become OSGH (China) shareholders by disposing 13.79% enlarged share capital of OSGH (China) at RMB400mn, which implies a RMB2.9bn valuation for 100% OSGH (China). The placing agreement also reveals a spin-off and listing plan of OSGH (China) within 4 years. This implies the valuation of OSGH (China) attributed to OSGH is HK$3.1bn, 1.63 times higher than its latest market cap.

Initial HOLD. We initiate our HOLD rating on OSGH with TP HK$0.38 based on 25x FY17E PE given 1) struggling business operating efficiency and loss making in FY16E, 2) potential turnaround for OSGH (China) in the coming 2 years as per listing requirements and 3) potential revaluation by spinning off OSGH (China) for A-share listing in the coming 4 years.

Risks: 1) Faster/slower than expected turnaround for its China business; 2) further cooperation with Wanda and Tencent, 3) sales, spinning off and restructuring of the company, which may help unlock its potential values.

Initial Coverage

HOLD


Target Price: HK$0.38 (-12%)

Key Data

HKEx code 1132






Fiscal Year 12/2015

Major shareholder (s) Wu Kebo & Asso 67.15%

Source: Company data, Bloomberg, OP Research

Closing price are as of 28/06/2016

Price Chart

1mth 3mth 6mth

Absolute % -10.4 -24.6 -31.7

Rel. MSCI CHINA % -7.6 -20.0 -22.3

PE

Company Profi le Orange Sky Golden Harvest Entertainment

(Holdings) Ltd., through its subsidiaries,

distributes movies and audio visual products

related to movies and television programs.

The Company also exhibits movies in Hong

Kong, Malaysia, Singapore, and China, and

produces motion pictures. In addition,

Golden Harvest processes movie and

produces music.

Exhibit 60: Forecast and Valuation Year to Dec (HK$ mn) FY14A FY15A FY16E FY17E FY18E

Revenue 1,082.8 1,277.1 1,515.0 1,771.9 2,062.4

Growth (%) 16.5 17.9 18.6 17.0 16.4

Net Profit 12.7 (180.5) (14.6) 46.6 108.5

Growth (%) (88.9) (1,517.6) (91.9) (419.0) 132.5

Diluted EPS (HK$) 0.005 (0.066) (0.005) 0.015 0.036

EPS growth (%) (89.0) (1,494.6) (92.7) (419.0) 132.5


0.0 0.0 0.0

Consensus EPS (HK$)

0.020 0.028

ROE (%) 0.7 (10.7) (0.9) 2.9 6.5

P/E (x) 91.1 (6.5) (87.4) 27.4 11.8

P/B (x) 0.7 0.7 0.7 0.7 0.7

Yield (%) 0.0 0.0 0.0 0.0 0.0

DPS (HK$) 0.000 0.000 0.000 0.000 0.000


0.0

0.2

0.4

0.6

0.8

1.0



0

20

40

60

80

100

120

140

160

Aug/15 Oct/15 Dec/15 Feb/16 Apr/16

Forward P/E Ratio

+1std.

avg.

-1std.

Wed, 29 Jun 2016


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26 24 24 24 24 24 24

306 354420 474

548 639

740 109109

109127

136

154

171

8787

9291

91

91

91

528574

645716

799

908

1,026

0

200

400

600

800

1,000

1,200

2012 2013 2014 2015 2016E 2017E 2018E

Hong Kong Mainland China Taiwan Singapore

(No. of screens)

6 6 6 6 6 6 6

42 4959

6779

94111

1111

1113

14

16

18

1111

11

11

11

11

11

7077

87

97

110

127

146

0

40

80

120

160

2012 2013 2014 2015 2016E 2017E 2018E


(No. of cinemas)

China remains its fastest growing market, but profitability is an issue

The China market is Orange Sky Golden Harvest (OSGH) fastest growing

segment in OSGH in terms of sales, cinemas and screens. We estimate the

number of cinemas/screens in China to increase by a 3-year CAGR of

18.3%/16.0% to 111/740 in FY18E, they are losing market shares as these are all

slower than the industry growth of 25.1%/34.1%, its profitability has been an

issue since we have noticed that it was loss making for the past 4 years with

HK$120mn EBIT losses in FY15.

Exhibit 61: OSGH’s No. of cinemas for 2012-2018E


Exhibit 62: OSGH’s No. of screens for 2012-2018E


China operation was growing at a

slower than industry rate and was

losses making for the past 4 years

Wed, 29 Jun 2016


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4.0%

19.0%

13.3%

2.0%

13.7%

-20%

-10%

0%

10%

20%

30%

40%

Hong Kong Mainland China Taiwan Singapore Total

2013 2014 2015 2016E 2017E 2018E

12.5%

19.7%

8.2%

10.5% 10.0% 10.5% 10.5%

0.7%0.5%

-1.8%

-11.6%

-3.0% -1.0%

0.3%

10.5%

7.3%4.5%

7.6% 8.0% 8.5% 8.5%

14.6%13.0% 12.8%

15.4% 16.0% 16.5% 16.5%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2012 2013 2014 2015 2016E 2017E 2018E


Businesses in Hong Kong, Taiwan and Singapore are more stable but lack

growth

OSGH also operates 6/13/11 cinemas in Hong Kong/Taiwan/Singapore where

Taiwan is an associate with 37.5% stake and Singapore is a 50%/50% JV. From

FY13 to FY15, these three markets combined generated only 2% sales CAGR

and -2% EBIT CAGR despite the box office in HK, TW and Singapore dropped by

1.3% /grew by 4.4%/1.7% CAGR during the same period.

Exhibit 63: Sales growth by regions


Exhibit 64: Segment EBIT margin for FY12-18E


OSGH’s overseas business has

stable margins but slow in sales

growth

Wed, 29 Jun 2016


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Recent sell down of OSGH (China) share reveal RMB2.9bn valuation that

may trigger mid-term revaluation by spinning off for A-share listing

In Mar 2016, OSGH (China) issued 13.79% enlarged shares at RMB400mn cash

consideration to three investors: 1) 6.90% stake to Credit Prosperity Fund

managed by CITIC Securities (6030 HK), 2) 5.17% stake to Beijing Weiying jointly

invested by Tencent (700 HK) and Wanda Group and 3) 1.72% stake to a private

domestic investment fund, Beijing Qing Zhong Tong Chuang Asset Management.

One of their potential exit plan for the three new investors would be through the

listing of OSGH (China) and hence we believe it could likely be on the A-share

market and OSGH (China) business may turnaround in the coming 2 years for the

qualified IPO.

We believe such investments would generate synergy for OSGH since Weipiao

(operated by Beijing Weiying with 16% market share in 4Q15) would help OSGH

(China) in the online ticketing business with certain subsidies and technology

support.

Valuation attributes to OSGH is RMB2.5bn (~HK$3.1bn), 163% higher than its

latest market cap of HK$1.15bn, which may bring re-rating and revaluation

opportunities if the spinoff and re-listing proved to be success.

Except the China business, OSGH’s overseas segment could also be a decent

target for players like Wanda who explicitly target to capture 20% of global market

shares in the cinema operator market

Exhibit 65: Details of prospose share sell down of OSGH (China)

Investor Background Investment (RMB mn) Equity interest

Credit Prosperity Fund Jointly funded by CITIC Securities (6030 HK) and strategic

investors

200 6.9%

Beijing Weiying Established in 2014 by a group of strategic investors, including

China Culture Industrial Investment Fund, as well as

investment vehicles established by Tencent (700 HK) and

Wanda Brand name conglomerates.

150 5.2%

Beijing Qing Zhong Tong Chuang

Asset Management

Managed PRC domestic private investment fund management

company

50 1.7%

Total 400 13.8%

OSGH (China)'s total valuation 2,901

86.21% stake of OSGH (China)

valuation attribute to OSGH

2,501

OSGH (1132.HK, HOLD) latest

market cap

HK$1,179.3mn

- Implying upside 163%


In Mar 2016, OSGH (China) issued

13.79% enlarged shares on its

China segment for RMB400mn to

three industry funds

We expect synergy from these

investments to improve OSGH

China’s online ticket sales

Valuation of RMB2.5bn makes

OSGH an attractive M&A target

OSGH’s overseas assets are the

possible stepping stones to go

overseas

Wed, 29 Jun 2016


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Initiate HOLD on struggle business outlook in FY16E

We initiate our HOLD rating on OSGH with TP HK$0.38 based on 25x FY17E PE given 1) struggle business operating efficiency and lose making in FY16E, 2) potential turnaround for OSGH (China) in the coming 2 years for listing requirement and 3) potential revaluation by spinning off OSGH (China) for A-share listing in the coming 4 years.

Exhibit 66: Major assumptions – OSGH (1132 HK)

2012 2013 2014 2015 2016E 2017E 2018E

Sales by region

Growth (%)

Hong Kong

-15.8% 6.1% 7.5% 6.0% 5.0% 4.0%

China

34.8% 21.7% 19.4% 22.1% 19.8% 19.0%

Inter-segment sales

19.2% 44.3% -9.5% 19.0% 17.0% 16.4%

Total

16.5% 16.5% 17.9% 18.6% 17.0% 16.4%

Box office growth (%)

Hong Kong

-27.9% 25.2% 21.9% 8.2% 7.1%

Mainland China

41.0% 34.5% 25.9% 24.6% 22.3%

Taiwan

6.6% -2.8% 9.5% 6.0% 15.5%

Singapore

8.5% -1.3% -4.5% 0.0% 2.0%

Total

10.0% 8.1% 11.9% 11.0% 14.9%

Box office (HK$ mils) per screen

Hong Kong 7.4 5.8 7.2 8.8 9.5 10.2 10.8

Mainland China 1.2 1.4 1.6 1.8 1.9 2.0 2.1

Taiwan 8.2 8.7 8.5 7.9 7.9 8.0 8.2

Singapore 6.0 6.5 6.0 5.8 5.8 5.9 6.1

Average 70 77 87 97 110 127 146

No of screens by region

Hong Kong 26 24 24 24 24 24 24

Mainland China 306 354 420 474 548 639 740

Taiwan 109 109 109 127 136 154 171

Singapore 87 87 92 91 91 91 91

Total 528 574 645 716 799 908 1026

GP margins 59.8% 60.8% 59.2% 57.1% 58.2% 59.1% 60.0%

Selling & distribution costs / sales -53.3% -54.0% -57.2% -60.7% -55.0% -53.0% -51.5%

Admin expenses / sales -11.9% -10.8% -9.6% -12.5% -9.5% -8.5% -7.5%

Effective tax rate 11.0% -1.1% -40.9% -2.7% -2.7% -10.0% -15.0%


We initiate HOLD on OSGH, with

TP of HK$0.38, downside of 12%

Wed, 29 Jun 2016


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Investment Risks

Faster / slower than expected turn around - OGSH has aimed to expand its

number of cinemas to over 1,000 by 2018, roughly 50% from self-built and 50%

from M&A. We see potential risk from missing the target due to lack of good

targets and rising selling prices due to crowded investments in the cinema space.

Potential further co-operation or investments with Tencent and Wanda -

Tencent and Wanda are now strategic investors with 5.17% shares, synergies

may arise from further co-operations with Tecent on the internet, says from

marketing, ticketing, to data sharing, or with Wanda in the physical shopping

malls, for instance, offering more favourable rent in other Wanda’s properties..

Restructuring of the company, which may help unlock its potential value

(e.g. separating China and other regions businesses, sales of the company

to others like BAT, or another cinema operator) - According to our estimation,

the current share price at HK$0.46 is way below its replacement costs of HK$1.27,

this may be realized if they are being bought out by others. Restructuring like

separating the losses making China and other very stable regions could also

unlock the hidden values. It is trading at 0.79x historical P/B.


investment risks are 1) faster/

slower than expected turn around,

2) potential further cooperation

with Tencent and Wanda, 3)

Restructuring of the company

Wed, 29 Jun 2016


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PublicWu Kebo & Asso

(Chairman)

Orange Sky

(1132 HK)

21.91%10.94%67.15%

CCBI



Wu Kebo 52 Chairman &

Executive Director

Overall strategy and operations Mr. Wu joined OSGH in 2008..

Mr. Wu graduated with a bachelor’s degree in business

administration from the SOKA University in 1992.

Mr. Wu is the brother of Ms. Wu Keyan

Mao Yimin 38 Chief Financial Officer

and Executive Director

Overall strategy and operations Mr. Mao joined OSGH in 2011.

Mr. Mao graduated from the University of New South

Wales with a master’s degree in commerce in 2003.

Mr. Mao has extensive investment advisory and

industry-related experience in manufacturing, retail,

media and real estate.

Li Pei Sen 68 Executive Director Overall strategy and operations Mr. Li joined OSGH in 2010.

Mr. Li has over 15 years’ experience in movie and

television industry.

Wu Keyan 45 Executive Director Overall strategy and operations Ms. Wu joined OSGH in 2007.

Ms Wu graduated with a bachelor’s degree in business

management from Takushyoki University in 1996.

Ms. Wu is the sister of Mr. Wu.

Chow Sau Fong 43 Executive Director Managing the exhibition business

of the group in all territories

Ms. Chow joined OSGH in 2007.

Ms. Chow holds an MBA in Finance and Entrepreneurial

Management from the Wharton Business School at the

University of Pennsylvania, and a Bachelor degree of

Business Administration from the Chinese University of

Hong Kong.

Ms. Chow has extensive experience in media industry




Wed, 29 Jun 2016


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Financial Summary – Orange Sky Golden Harvest (1132 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E


Income Statement (HK$ mn)

Ratios

~ Hong Kong 267 287 305 320 333

Gross margin (%) 59.2 57.1 58.2 59.1 60.0

~ Mainland China 871 1,040 1,270 1,522 1,811

Operating margin (%) (1.6) (20.1) (5.5) (1.6) 1.8 ~ Taiwan 463 502 532 615 696

Net margin (%) 1.2 (14.1) (1.0) 2.6 5.3

~ Singapore 408 397 397 405 413

Selling & dist'n exp/Sales (%) 57.2 60.7 53.4 51.4 49.5 Share of revenue from JV (872) (899) (929) (1,020) (1,109) Admin exp/Sales (%) 9.6 12.5 11.1 10.1 9.5 Elimination of Intra-segment revenue (4) (2) (2) (2) (2)

Payout ratio (%) 0.0 0.0 0.0 0.0 0.0

Others (52) (48) (58) (68) (80)

Effective tax (%) (18.0) 1.7 1.7 (18.0) (18.0)


Turnover 1,083 1,277 1,515 1,772 2,062

Net debt/equity (%) 27.7 44.4 55.4 62.3 64.6 YoY% 17 18 19 17 16

Current ratio (x) 1.3 0.8 0.9 0.9 1.0

COGS (442) (548) (633) (725) (825)

Quick ratio (x) 1.3 0.8 0.8 0.9 1.0

Gross profit 641 729 882 1,047 1,237

Inventory T/O (days) 5 4 4 4 4 Gross margin 59.2% 57.1% 58.2% 59.1% 60.0%

AR T/O (days) 31 36 36 36 36


AP T/O (days) 73 60 60 60 60

Selling & distribution (619) (775) (809) (911) (1,021)

Cash conversion cycle (days) (37) (19) (19) (19) (19) Admin (104) (160) (168) (178) (196)

Asset turnover (x) 0.4 0.4 0.5 0.5 0.6

R&D 0 0 0 0 0

Financial leverage (x) 1.7 1.7 2.0 2.1 2.1 Other opex (0) (52) (5) (5) (6)

EBIT margin (%) (1.6) (20.1) (5.5) (1.6) 1.8

Total opex (723) (988) (982) (1,095) (1,223)

Interest burden (x) (1.3) 0.7 0.2 (1.8) 3.4 Operating profit (EBIT) (17) (256) (83) (28) 37

Tax burden (x) 0.6 1.0 0.9 0.9 0.9

Operating margin -1.6% -20.1% -5.5% -1.6% 1.8%

Return on equity (%) 0.7 (10.7) (0.9) 2.9 6.5 Provisions 0 0 0 0 0

ROIC (%) 0.0 (11.0) (3.5) (0.9) 1.0

Interest Income 10 5 6 6 5 Finance costs (45) (40) (47) (53) (52)


Profit after financing costs (53) (291) (125) (75) (9)

Balance Sheet (HK$ mn) Associated companies & JVs 76 105 109 126 137

Fixed assets 1,402 1,395 1,407 1,446 1,509

Pre-tax profit 23 (186) (16) 51 127

Intangible assets & goodwill 200 200 199 198 198 Tax (9) 5 0 (5) (19)

Financing receivables 372 411 517 638 769

Minority interests (1) 1 0 0 0

Deferred income tax asset 32 44 44 44 44

Net profit 13 (180) (15) 47 108


YoY% (89) (1,518) (92) (419) 133

Non-current assets 2,089 2,133 2,249 2,409 2,603 Net margin 1.2% -14.1% -1.0% 2.6% 5.3%

EBITDA 120 (97) 73 129 202

Inventories 7 7 8 9 10 EBITDA margin 11.0% -7.6% 4.8% 7.3% 9.8%

AR 92 125 149 174 203

EPS (HK$) 0.005 (0.066) (0.005) 0.015 0.036

Prepayments & deposits 237 287 341 398 464 YoY% (89) (1,495) (93) (419) 133


DPS (HK$) 0.000 0.000 0.000 0.000 0.000

Cash 406 195 458 308 302

Current assets 842 732 1,073 1,008 1,096

Year to Dec FY14A FY15A FY16E FY17E FY18E Cash Flow (HK$ mn)

AP 89 90 103 118 135 EBITDA 120 (97) 73 129 202

Tax 13 7 (0) 5 19

Chg in working cap 43 (74) (28) (30) (35)

Accruals & other payables 114 193 228 267 311 Others (16) 107 0 0 0


Operating cash 146 (63) 44 98 167

CB & othe debts 169 147 447 447 447 Interest received (26) (38) 6 6 5


Tax (11) (13) (7) 0 (5)

Current liabilities 649 885 1,257 1,106 1,080

Net cash from operations 109 (113) 43 105 167


Capex (162) (129) (167) (195) (227)

CB & othe debts 0 0 0 0 0 Investments 117 49 (95) (106) (104)


Dividends received (1) 4 4 5 5

MI 0 0 (0) (1) (1)

Sales of assets 1 0 0 0 0

Non-current liabilities 501 387 486 686 886 Interests paid 0 0 47 53 52

Others (1) (66) 0 0 0

Total net assets 1,781 1,593 1,579 1,625 1,734

Investing cash (47) (142) (210) (243) (273) FCF 62 (256) (167) (138) (107)

Shareholder's equity 1,781 1,593 1,579 1,625 1,734 Issue of shares 0 0 0 0 0

Share capital 274 274 274 274 274

Buy-back 28 0 0 0 0

Reserves 1,506 1,319 1,304 1,351 1,459 Minority interests 0 0 0 0 0

Dividends paid 0 0 0 0 0

BVPS (HK$) 0.65 0.58 0.58 0.59 0.63 Net change in bank loans (205) 71 430 (11) 100

Others (9) (23) 0 0 0

Total debts 924 970 1,400 1,389 1,489

Financing cash (186) 48 430 (11) 100

Net cash/(debts) (493) (707) (875) (1,013) (1,120)

Net change in cash (124) (208) 263 (149) (7)

Exchange rate or other Adj (4) (3) 0 0 0

Opening cash 535 406 195 458 308

Closing cash 406 195 458 308 302

CFPS (HK$) 0.040 (0.041) 0.014 0.034 0.055


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Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x)

PER FY1

(x)

PER FY2

(x)

EPS FY1

YoY%

EPS FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div yld

Hist (%)

Div yld

FY1 (%)

P/B Hist

(x)

P/B FY1

(x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist (%)

Gross

margin

Hist (%)

Net

margin

Hist (%)

ROE Hist

(%)

ROE FY1

(%)

Sh px

1-mth %

Sh px

3-mth %

Cinema operators

Orange Sky Golde 1132 HK 0.43 152 0.2 (6.5) (89.5) 28.1 (92.7) (419.0) (181.5) 0.49 0.0 0.0 0.74 0.75 (19.5) 28.3 44.4 57.1 (14.1) (10.7) (0.9) (10.4) (21.8)

HSI 20,172.46 10.0 11.1 10.1 (9.7) 10.2 3.1 3.56 4.1 3.9 1.04 1.01 10.4 9.1 (2.0) (0.9)

HSCEI 8,536.16 6.7 7.2 6.6 (7.6) 8.8 3.0 2.38 4.3 4.1 0.83 0.80 12.4 11.0 (0.7) (1.9)

CSI300 3,136.40 13.7 12.9 11.5 6.1 12.6 10.0 1.3 2.1 2.2 1.7 1.6 12.5 12.3 2.4 (1.1)






Cj Cgv 079160 KS 100,500.00 1,814 15.5 40.9 31.2 23.7 31.2 31.6 28.6 1.09 0.3 0.3 4.99 4.38 14.8 12.1 97.3 50.2 4.4 13.8 14.9 (12.6) (2.4)

Movie makers

Orange Sky Golde 1132 HK 0.43 152 0.2 (6.5) (89.5) 28.1 (92.7) (419.0) (181.5) 0.49 0.0 0.0 0.74 0.75 (19.5) 28.3 44.4 57.1 (14.1) (10.7) (0.9) (10.4) (21.8)

















Wed, 29 Jun 2016

Nan Hai Corp (680 HK)

of 65

Nan Hai Corp (680 HK) – Owner of the No.2 cinema operator in China Dadi Cinema has been gaining market shares from early expansion

into lower tier cities

Further cooperation with Alibaba following Ali Picture’s 4.76% shares CB investment in Nan Hai’s subsidiary, Dadi Cinema

Historical PE is not meaningful as we see many positives ahead

Dadi Cinema has been gaining market shares in past 3 years due to its

greater-than-industry exposure to lower tier cities. Dadi’s box office continues

to grow at a 3-year CAGR of 41.5% to RMB2.21bn in FY15, 4.3ppt higher than

the industry’s 37.2%. Dadi Cinema gained market shares from 4.7% to 5.1% in

last 3 years. We attribute Dadi’s success to its early expansion to tier 4 – 5 cities

ahead of other competitors. Foreseeing urbanization to become a major force in

driving box office growth, going forward Dadi will continue to add 70-80 new

cinemas per year, the majority will likely be self-built. Margins for the FY16E

would improve as the company closed down about 20 non-preforming cinemas in

FY15.

Launch of “STAR MAX” cinemas with the aim to open 20 by the end of 2016.

Dadi launched the first self-developed brand “STAR MAX” on 2 Feb 2016 in

Hangzhou, which adopts giant screen, SONY 4K SXRD dual laser projectors,

Dolby Laboratories sound system and klipsch speakers. It provides advanced

movie experience to IMAX but at ~30% lower ticket price and ~30% investment

costs, making it more attractive to moviegoers as well as cinema operators.

Company plans to set up a total of 20 STAR MAX cinemas by the end of 2016

and target to reach 100 by 2018E. We see STAR MAX as an icon for Dadi ‘s

strength in R&D, differentiating them from their peers and also as a weapon for its

penetration into tier 1-2 cities where people are more willing to pay higher prices

for better movie experience.

Alibaba being Nan Hai’s strategic investors with 4.76% stakes in its

subsidiary, Dadi Cinema. On 9 May 2016, Ali Pictures (1060 HK) bought

RMB1.0bn convertible bonds of Dadi Cinema, representing 4.76% of the

enlarged share capital if executed. Later, Ali Pictures formed strategy cooperation

with Dadi Cinema in the areas of cinema management, movie ticketing operation

and movie distribution etc. Leveraging on Alibaba’s dominant e-commerce

platform operating experience and the wide-spread Alipay payment network, we

believe Dadi Cinema is likely to further improve its operating efficiency both online

and offline to drive its earnings growth in the coming 3 years.

Historical PE is not meaningful, we see re-rating potential. We value Nan Hai

by 1) Cinema related business at 30x FY16E PE and faster-than-industry net

profit growth of 40% in FY16E which translate into HK$10.6bn market cap and 2)

60% discount NAV on its properties related business which translate into

HK$23.6bn market cap. Together we believe the fair value of Nan Hai Corp to be

HK$0.497 per share, 140% higher than current share price of HK$0.207, based

on our conservative calculation.

Risks: 1) Execution risk of future expansions; 2) Unexpected slowdown in

domestic movie’s box office due to lack of hit movies 3) Housing market crash.

Company visit note

Non-Rated


Key Data

HKEx code 680






Fiscal Year 12/2015

Major shareholder (s) Yu Pun Hoi 52.89%

Source: Company data, Bloomberg, OP Research Closing price are as of 28/06/2016

Price Chart

1mth 3mth 6mth

Absolute % -1.4 -3.3 21.1

Rel. MSCI CHINA % 1.4 1.3 30.5

Company Profi le Nan Hai Corporation Limited, through its

subsidiaries, designs, manufactures, and

markets consumer electronic products. The

Company invests in and develops properties

and operate Dadi Cinema in China.

0.0

0.1

0.1

0.2

0.2

0.3



Wed, 29 Jun 2016


of 65

14.7%

14.9% 14.7% 14.3%13.6%

5.6% 5.8% 6.0%5.6%

4.5%

4.9%4.7% 4.8% 5.0%

5.1%

4.4% 4.4% 4.1% 4.0% 4.0%

2.8% 2.6% 2.6% 2.7%3.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2011 2012 2013 2014 3Q15

Wanda cinema China Film StellarDadiTheatre Circuit Shanghai United CircuitGuangzhou Jinyi Zhujiang

4th-tier cities, 7.1%

5th-tier cities, 6.2%

1st-tier cities, 4.1%

2nd-tier cities, 3.2%

3rd-tier cities, 2.8%

4.4% 2.9% 2.2%

8.9%11.4%3.7%

2.5%1.9%

8.1%

11.7%

0%

5%

10%

15%

20%

25%

1st-tiercities

2nd-tiercities

3rd-tiercities

4th-tiercities

5th-tiercities

Domestic movies Imported movies

Dadi's screens contribution Dadi's admission contribution

Dadi Cinema, the only one keep on gaining market shares in past 3

years

Dadi box office revenue grew at 41.5% CAGR to RMB2.21bn in FY15 from

RMB0.78bn in FY12, 4.3ppt higher than China’s box office growth during the

same period. Dadi Cinema continuously gained market shares in past 3 years

from 4.7% in 2012 to 5.1% in 2015 and become the second largest cinema

operators in 2015. We believe the faster-than-industry growth is attributed to its

seasoned management and early bird advantage in penetrating into tier 3-5 cities.

Going forward Dadi will continue to add 70-80 new cinemas per year, likely to be

all self-built, and margins for the FY16E would improve as company had closed

down about 20 non-preforming cinemas back in FY15

Exhibit 70: Market share by box office


Exhibit 71: Dadi’s screens and admission contribution by city tiers

Source: Company, Entgroup, OP Research

Dadi Cinema keeps gaining

market shares to become No.2

cinema operator in China with

box office revenue reached

RMB2.22bn in FY15

Wed, 29 Jun 2016


of 65

Launch of STAR MAX cinema, IMAX like Screen

Ranked No.2 in China, Dadi Cinema is the only one who does not own IMAX

cinemas among top 10, however Dadi has launched its first self-developed giant

screens brand “STAR MAX” on 2 Feb 2016 in Hangzhou. Equipped with giant

screen, SONY 4K SXRD dual laser projectors, Dolby Laboratories sound system

and klipsch speaker, “STAR MAX” can provide premium movie experience that

exceed international standard. The company plans to set up total 20 STAR MAX

cinemas by the end of FY16 and target to 100 by FY18E.

Exhibit 72: Dadi’s new Star Max cinema


STAR MAX offers a lower movie ticket price than IMAX at RMB 55-60 but

similar audience experience

Capex for each STAR MAX is RMB0.5-1mn per screen, around 2-3 times of the

normal screens depending on the size of showroom. The revenue per show from

STAR MAX increased to RMB2,053 from RMB630 within 4 months, which is

about 3x of normal screens on average. We expect STAR MAX to help improve

Dadi Cinema’s profitability given 1) audience is willing to pay a higher price of

RMB55-60 to watch STAR MAX format movie for superior experience and 2) the

utilization rate of STAR MAX screen is likely to improve as STAR MAX gaining

better brand recognition and audience satisfaction.

Company will open more STAR

MAX cinema, 20 by FY16, and 100

by FY18E

We expect STAR MAX to be more

profitable than normal screens by

its premium price and high

utilization rate after ramp up

Wed, 29 Jun 2016


of 65

630

1,685

1,299

2,053

1,679

568 561 500 575 545

0

500

1,000

1,500

2,000

2,500

Feb-2016 Mar-2016 Apr-2016 May-2016 Mar-Mayaverage

STAR MAX Normal screen

(RMB)

Exhibit 73: Dadi’s revenue per show from STAR MAX and normal screen


Alibaba becomes Dadi Cinema’s strategy investor

On 9 May 2016, Ali Pictures (1060 HK) subscribed RMB1.0bn convertible bond of

Dadi Cinema which can convert into 4.76% of the enlarged share capital of Dadi

Cinema. The maturity is 2 years and 1.95% coupon. Prior to this investment, Ali

Pictures have acquired Yueke Software, Taobao movie and Yulebao, and

participated in Bona Film Group privatization to build its movie industry value

chain in aspect of IP incubation, movie production, marketing and distribution. Ali

Pictures also formed strategy cooperation with Dadi Cinema in the area of movie

ticketing operation, membership management, cinema operation, movie

distribution and movie derivatives management. The use of proceeds from the

RM1.0bn CB issuance are used for 1) funding the continued operation of the

business of Guangdong Dadi , 2) acquisition and operation of cinemas, 3)

repayment of bank loans.

We see this strategic cooperation would create synergies for both company as 1)

Ali Pictures would complete the industry value chain investment by adding

cinema operators segments and 2) Dadi Cinema could further improve its

operating efficiency on both online platform and offline cinema management by

leveraging on Alibaba’s mature e-commerce operation experience and well

established Alipay network of Alibaba Group in China.

In May 2016, Alibaba become a

strategic investors of Dadi

Cinema with cooperation on

movie ticketing operation and

cinema management

We think Dadi Cinema could

improve operating efficiency by

such strategic investment

Wed, 29 Jun 2016


of 65

Real estate business in Shenzhen and Guangzhou could yield RMB19.5 bn

cash flow in FY16, this could improve Nan Hai ‘s financial status

Nan Hai Corp develops “The Peninsula” project in Shekou, Shenzhen with unique

landscape backed by Shekou Hill. The project has an area of over 300k sq.m.

and total floor area of over 1mn sq.m, which is to be developed in 5 phases,

providing almost 7,000 residential units. The 1st and 2

nd phase had been sold out

in 2006 and 2009 respectively. The Phase 3 just recorded RMB5bn in the

pre-sales period in Apr 2016, offering approximately 50K sq.m of top-class

residence, and is expected to record another RMB13.5bn in the following

pre-sales in 2H16. We think the sales of Phase 3 would positively contribute to

the group’s earning in the coming years as the cost was minimal given the land

was acquired in 90s. Another project Co-developed by Nanhai Corp is “Free Man

Garden”, it is located in Huadu District, Guangzhou. The project has total floor

area of 1300k sq.m. The 1st phase had nearly been sold out in FY15 and 2

nd

phase started pre-sale in Feb 2015, and 77.3% has been sold in FY15, and it is

expected to deliver in 2H16. Besides, Phase 3 of “Free Man Garden” is expected

to launch its pre-sale in 2016 and record proceeds of RMB0.8bn.

The pre-sale of the two projects are expected to contribute significant revenue of

RMB19.5bn (HK$23.0bn) and bring strong cash flow for the Group in the coming

years, and could improve the financial status by reducing the interest costs. The

details of these two projects are summarized below.

Exhibit 74: Residence project

Project GFA Reference ASP Pre-sale kickoff time Expected delivery time

The Peninsula – SZ Phase 3: 185,000 sq.m

Phase 4: 143,794 sq.m

RMB 120,000/sq.m Phase 3: Apr 2016

Phase 4: expected 2017

Phase 3: Dec 2018

Phase 4: not disclosed

Free Man Garden - GZ Phase 2: 141,666 sq.m

Phase 3: 276,500 sq.m

RMB12,000/sq.m Phase 2: Feb 2015

Phase 3: expected 2016

Phase 2: 2H16

Phase 3: not disclosed


Historical PE is not meaningful, we see re-rating potential. We value Nan Hai

by 1) Cinema related business at 30x FY16E PE and faster-than-industry net

profit growth of 40% in FY16E which translate to HK$10.6bn market cap and 2)

60% discount NAV on its properties related business which translates to

HK$23.6bn market cap. Together we believe, based on our conservative

calculation, fair valuation of Nan Hai Corp to be HK$0.497 per share,144% higher

than current share price of HK$0.204.

Pre-sales of residence will

contribute significant revenue

and bring strong cash flow for the

Company in the coming years

Historical PE is not meaningful as

we see significant improvement in

the coming years

Wed, 29 Jun 2016


of 65

Investment Risks

Execution risk of future expansions – Dadi has aimed to expand its number of

cinemas to over 400 by 2016, mainly by self-built. We see potential risk from

overstretching its experience staffs if the expansion pace is too fast, hence

decreasing the quality of future projects

Unexpected slowdown in domestic movie’s box office due to lack of hit

movies – Dadi cinema, being the second largest box office cinema operator in

china, has extensive footprint in the lower tier cities which has a greater appetite

in domestic movies, therefore, failure to have a series of hit blockbuster may

result in adverse effect in box office.

Housing market crash – Dadi has a concentrated real estate projects in

Shenzhen and Guangzhou, if there is any downturn in housing market and prices,

and their projects are not being able to sell at a reasonable price, this may result

in a gap in cash flow and the needs of significant debt borrowing, which, may

result in surge in borrowing costs


investment risks are 1) Execution

risk of future expansions, 2)

Unexpected slowdown in

domestic movie box office, 3)

Housing market crash

Wed, 29 Jun 2016


of 65

Yu Ben Hei

(Chairman’s son)

Yu Pun Hoi

(Chairman)Lim Siew Choon Lee Tat Man Public

Nan Hai Corp

(680 HK)

5.45% 17.15%11.66%12.85%52.89%

Ali Pictures (1060 HK) invested in CB as

4.76% shares of Dadi Cinema, subsidiary of

Nan Hai Corp, if converted



Yu Pun Hoi 57 Chairman & Executive

Directors

Overall strategy and operations Mr. Yu joined the Group in September 2000.

Mr. Yu holds a degree of Doctor of Philosophe conferred

by Peking University.

Mr. Yu is also the chairman of Sino-I (250 HK)

Chen Dan 47 Executive Directors Overall strategy and operations Ms. Chen joined the Group in October 2000.

Ms. Chen graduated from Beijing Finance & Trade

College with a Bachelor degree in Trade & Economics,

and obtained a degree of EMBA in China Europe

International Business School.

Ms. Chen is also an executive director of Sino-I (250 HK)

Liu Rong 44 Executive Directors Overall strategy and operations Ms. Liu joined the Group in 2002.

Ms. Liu graduated from the Law School of Anhui

University with a Bachelor degree in Laws, and got a

Master of Laws conferred by the Law Institute of Chinese

Academy of Social Science.

Ms. Liu is also an executive director of Sino-I (250 HK)




Wed, 29 Jun 2016


of 65

Exhibit 77: Financial summary – Nan Hai Corp (680 HK)

Year to Dec (HK$ mn) FY11A FY12A FY13A FY14A FY15A

Income Statement

Revenue 2,333 1,954 2,319 3,153 4,200

YoY% 20.7 (16.3) 18.7 36.0 33.2

Gross profit 1,451 1,215 1,514 2,075 2,607

Gross margin 62.2% 62.2% 65.3% 65.8% 62.1%

EBITDA 203 95 1,452 297 568

EBITDA margin 8.7% 4.9% 62.6% 9.4% 13.5%

Net Income (495) (346) 865 (702) 239

YoY% 29.7 (30.1) (350.0) (181.1) (134.0)

Net margin -21.2% -17.7% 37.3% -22.3% 5.7%

EPS (0.007) (0.005) 0.013 (0.010) 0.004

YoY% 28.6 (30.6) (352.0) (181.0) (134.3)

DPS 0.000 0.000 0.000 0.000 0.000

Balance Sheet

Inventories 8,039 8,612 5,863 5,932 7,188

Accounts receivables 42 52 71 138 332

Cash & cash equivalent 385 1,143 1,512 1,355 2,529

Other curr assets 1,074 1,069 819 1,103 2,241

Non-curr assets 2,279 2,823 4,397 4,134 5,179

Total assets 11,820 13,699 12,663 12,661 17,469

Accounts payables 465 497 206 272 571

Total debts 4,917 6,747 5,558 5,750 10,027

Other liabilities 2,990 3,318 2,920 3,482 3,629

Total liabilities 8,372 10,562 8,683 9,504 14,227

Shareholders' equity 3,448 3,137 3,979 3,157 3,242

ROE -13.8% -10.5% 24.3% -19.7% 7.5%

Net debt-to-equity 131.4% 178.7% 101.7% 139.2% 231.3%

Cash Flow Statement

Operating cash flow (324) (34) 342 338 (2,579)

Investing cash flow (929) (1,483) (231) (759) (1,422)

Free cash flow (1,252) (1,517) 111 (421) (4,001)

Financing cash flow 993 1,565 215 188 4,525

Net change in cash flow (259) 48 326 (233) 524


Wed, 29 Jun 2016


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Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x)

PER FY1

(x)

PER FY2

(x)

EPS FY1

YoY%

EPS FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div yld

Hist (%)

Div yld

FY1 (%)

P/B Hist

(x)

P/B FY1

(x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist (%)

Gross

margin

Hist (%)

Net

margin

Hist (%)

ROE Hist

(%)

ROE FY1

(%)

Sh px

1-mth %

Sh px

3-mth %

Cinema operators


HSI 20,172.46 10.0 11.1 10.1 (9.7) 10.2 3.1 3.56 4.1 3.9 1.04 1.01 10.4 9.1 (2.0) (0.9)

HSCEI 8,536.16 6.7 7.2 6.6 (7.6) 8.8 3.0 2.38 4.3 4.1 0.83 0.80 12.4 11.0 (0.7) (1.9)

CSI300 3,136.40 13.7 12.9 11.5 6.1 12.6 10.0 1.3 2.1 2.2 1.7 1.6 12.5 12.3 2.4 (1.1)

Adjusted sector avg* 44.6 29.1 21.4 39.6 34.8 (41.0) 0.9 0.4 0.5 5.6 5.4 (19.3) 15.3 28.1 46.7 (29.3) (31.1) 15.7 (7.7) (11.8)



Smi Holdings 198 HK 0.67 1,163 2.5 22.6 16.0 12.3 41.0 30.8 35.0 0.46 0.5 0.8 1.51 1.34 9.2 8.4 3.8 29.2 12.3 8.4 9.6 (6.9) (10.7)


Cj Cgv 079160 KS 100,500.00 1,816 15.5 40.9 31.2 23.7 31.2 31.6 28.6 1.09 0.3 0.3 4.99 4.38 14.8 12.1 97.3 50.2 4.4 13.8 14.9 (12.6) (2.4)

Movie makers


















Wed, 29 Jun 2016


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