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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
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
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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
screens (out of 307)
Has its own brand “星幕 STARMAX”Operates just a few IMAX
screens (out of 307)
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
Source: Entgroup, OP Research
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
Source: Entgroup, OP Research
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
Source: Entgroup, OP Research
Lower tier cities (e.g. Tier 3 to 5)
now contributing about 56% of
total box office in 3Q15
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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
Source: China Film Press, OP Research
Exhibit 18: Box office growth by city tiers, 2014
Source: China Film Press, OP Research
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
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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
Source: Entgroup, OP Research
We prefer cinema operators
because of their revenue sharing
nature and a more diversified
income stream
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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%
Source: Entgroup, OP Research
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%
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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
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SMI Holdings (198 HK)
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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
Source: Bloomberg, OP Research
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.
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SMI Holdings (198 HK)
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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
Source: Company, OP Research
We expect SMI to have 290
cinemas by 2016E, and 455 by
2018E, about 90% of new cinema
will be in lower tier cities
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SMI Holdings (198 HK)
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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
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SMI Holdings (198 HK)
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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)
Source: Company, OP Research
Exhibit 29: SMI’s business & revenue model
Source: Company, OP Research
Other leverage from Baidu could
be the technology support, and
data base sharing
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SMI Holdings (198 HK)
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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
Source: Company, OP Research
Exhibit 31: SMI’s revenue breakdown for FY11-18E
Source: Company, OP Research
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
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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
Source: Company, OP Research
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
Source: Company, OP Research
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
Source: Company, OP Research
We expect SMI to achieve a
earnings CAGR of 39.6%, from
HK$360mn in FY15 to HK$980mn
in FY18E
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Exhibit 34: Key assumptions – SMI Holdings (198 HK)
2012 2013 2014 2015 2016E 2017E 2018E
Sales growth by segment (%)
Cinema operation
65.0% 21.4% 75.1% 42.8% 25.7% 21.0%
Retail stores
8.0% 289.2% 94.0% 50.0% 35.0% 25.0%
Others
99.9% -99.1% 0.8% 2.0% 2.0% 2.0%
Total
65.4% 16.4% 77.2% 43.7% 26.9% 21.5%
Number of cinemas by tier city
Tier 1 14 17 22 37 45 52 58
Tier 2-3 38 51 68 163 245 323 397
Total 52 68 90 200 290 375 455
Number of screens by tier city
Tier 1 106 137 177 360 450 520 600
Tier 2-3 257 353 523 1,040 1,580 2,105 2,540
Total 363 490 700 1,400 2,030 2,625 3,140
Box offices (HK$ 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%
Source: Company, OP Research
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
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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
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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.
Source: Company, OP Research
Exhibit 36: Shareholding structure and industry chain
Source: Company, OP Research
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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)
Year to Dec FY14A FY15A FY16E FY17E FY18E
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
Year to Dec FY14A FY15A FY16E FY17E FY18E
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
Source: Company, OP Research
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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
Source: Bloomberg, OP Research
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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
Close price: HK$38.10
Target Price: HK$33.00 (-13%)
Key Data
HKEx code 1970
12 Months High (HK$) 60.00
12 Month Low (HK$) 32.30
3M Avg Dail Vol. (mn) 1.01
Issue Share (mn) 355.36
Market Cap (HK$mn) 13,539.17
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$) 0.103 0.122 0.128 0.166 0.205
Adjusted diluted EPS growth (%) 12.2 18.0 5.3 29.5 23.0
Change to previous EPS (%)
0.0 0.0 0.0
Consensus EPS (HK$)
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
Source: Bloomberg, OP Research
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Nov/15 Feb/16 May/16
HK$1970 HK MSCI CHINA
0
50
100
150
200
250
300
Nov/15 Jan/16 Mar/16 May/16
Forward P/E Ratio
+1std.
avg.
-1std.
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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
Source: Company, OP Research
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
Source: Company, OP Research
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
Source: Company, OP Research
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
Source: Company, OP Research
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
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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
Source: Company, OP Research
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
Source: Company, OP Research
We expect IMAX’s blended gross
margin to increase from 61% in
FY16 to 64% in FY18E
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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
Source: Company, OP Research
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
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$70bn by 2020E
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6 8 913
200.7
2
11
16
50
6.710
20
29
70
0
10
20
30
40
50
60
70
80
2016E 2017E 2018E 2019E 2020E
VR Hardware VR Software
(US$ 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
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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
Source: Company, OP Research
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
Source: Company, OP Research
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$1.34mn
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1.22 1.22 1.22
1.34
1.22 1.24
1.27
1.16
1.20
1.24
1.28
1.32
1.36
2012 2013 2014 2015 2016E 2017E 2018E
(US$ 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
Source: Company, OP Research
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
Source: Company, OP Research
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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$1.34mn in 2015.
Exhibit 52: IMAX China’s GPM by segment, 2012 – 2018E
Source: Company, OP Research
Exhibit 53: Box office of top 5 Hollywood movies, 1H15 - 1H16E
Chinese Name English Name Total Box office IMAX Box office (OP est.) Date
1H16
1 魔兽 Warcraft 1,430 130 Jun-16
2 美国队长 3:英雄内战 Captain America3 : Civil War 1,246 120 May-16
3 星球大战:原力觉醒 Star Wars: The Force Awakens 825 120 Jan-16
4 X 战警:天启 X-Men: Apocalypse 795 40 Jun-16
5 蝙蝠侠大战超人:正义黎明 Batman v Superman: Dawn of Justice 619 30 Mar-16
Total 4,915 430
2H15
1 碟中谍 5:神秘国度 Mission Impossible – Rogue Nation 870 60 Sep-15
2 终结者:创世纪 Terminator Genisys 725 50 Aug-15
3 蚁人 Ant-Man 672 70 Oct-15
4 火星救援 The Martian 587 70 Nov-15
5 007:幽灵党 007 : Spectre 542 50 Nov-15
Total 3,395 300
1H15
1 速度与激情 7 Fast and Furious 7 2,426 200 Apr-15
2 复仇者联盟 2:奥创纪元 Avengers2 : Age of Ultron 1,466 150 May-15
3 侏罗纪世界 Jurassic World 1,420 150 Jun-15
4 霍比特人:五军之战 The Hobbit: The Battle of the Five Armies 766 70 Jan-15
5 末日崩塌 San Andreas(2015) 630 40 Jun-15
Total 6,708 610
Source: Company, OP Research
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150.7
183.8
55.9
78.2
110.6
132.3
164.2
50
70
90
110
130
150
170
190
2013 2014 2015 2016E 2017E
Consensus OP est.
(US$ 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)
Rating and valuation
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%
Source: Company, OP Research
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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%
Exhibit 57: Management profiles
Name Age Position Role and responsibilities Experience
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
business operations of the Group
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
business operations of the Group
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.
Source: Company, OP Research
Exhibit 58: Shareholding structure
Source: Company, OP Research
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Financial Summary – IMAX China (1970 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E
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
Total debt/equity (%) 133.3 8.1 5.2 4.2 3.4
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
Other income 0 0 0 0 0
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
Year to Dec FY14A FY15A FY16E FY17E FY18E
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%
Other non-current assets 4 4 4 4 4
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$) 0.091 (0.621) 0.116 0.159 0.197
Prepayments & deposits 1 1 1 1 2 YoY% 4 (785) (119) 37 24
Other current assets 5 6 6 6 6
DPS (HK$) 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
Bank loans & leases 0 0 0 0 0
Operating cash 35 12 59 76 95
CB & othe debts 8 13 13 13 13 Interest received 0 0 1 1 1
Other current liabilities 0 0 0 0 0
Tax (7) (12) (12) (16) (20)
Current liabilities 63 35 46 54 62
Net cash from operations 28 (0) 48 61 76
Bank loans & leases 23 29 29 29 29
Capex (11) (14) (17) (21) (25)
CB & othe debts 27 0 0 0 0 Investments 0 0 0 0 0
Deferred tax & others 13 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
Source: Company, OP Research
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Exhibit 59: 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
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)
Adjusted sector avg* 48.0 28.6 20.5 44.9 39.9 (21.3) 1.1 0.7 0.6 4.3 4.7 29.7 14.0 40.2 46.0 4.7 9.9 12.5 (7.6) (9.1)
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)
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 13,256 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 1,818 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)
Adjusted sector avg* 37.2 28.6 26.7 19.8 25.9 22.1 1.5 0.6 0.7 4.3 4.6 6.4 42.9 9.9 13.0 16.0 (4.5) (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 13,493 115.7 155.8 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 4,009 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 5,069 37.4 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 5,637 112.3 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 1,547 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
Source: Bloomberg, OP Research
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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
Close price: HK$0.43
Target Price: HK$0.38 (-12%)
Key Data
HKEx code 1132
12 Months High (HK$) 0.87
12 Month Low (HK$) 0.35
3M Avg Dail Vol. (mn) 3.52
Issue Share (mn) 2,742.52
Market Cap (HK$mn) 1,179.28
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$) 0.005 (0.066) (0.005) 0.015 0.036
EPS growth (%) (89.0) (1,494.6) (92.7) (419.0) 132.5
Change to previous EPS (%)
0.0 0.0 0.0
Consensus EPS (HK$)
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
Source: Bloomberg, OP Research
0.0
0.2
0.4
0.6
0.8
1.0
Jun/15 Sep/15 Dec/15 Mar/16
HK$1132 HK MSCI CHINA
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.
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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
Hong Kong Mainland China Taiwan Singapore
(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
Source: Company, OP Research
Exhibit 62: OSGH’s No. of screens for 2012-2018E
Source: Company, OP Research
China operation was growing at a
slower than industry rate and was
losses making for the past 4 years
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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
Hong Kong Mainland China Taiwan Singapore
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
Source: Company, OP Research
Exhibit 64: Segment EBIT margin for FY12-18E
Source: Company, OP Research
OSGH’s overseas business has
stable margins but slow in sales
growth
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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%
Source: Company, OP Research
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
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Rating and valuation
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%
Source: Company, OP Research
We initiate HOLD on OSGH, with
TP of HK$0.38, downside of 12%
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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.
We analyze the potential
investment risks are 1) faster/
slower than expected turn around,
2) potential further cooperation
with Tencent and Wanda, 3)
Restructuring of the company
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PublicWu Kebo & Asso
(Chairman)
Orange Sky
(1132 HK)
21.91%10.94%67.15%
CCBI
Exhibit 67: Management profiles
Name Age Position Role and responsibilities Experience
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
Source: Company, OP Research
Exhibit 68: Shareholding structure
Source: Company, OP Research
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Financial Summary – Orange Sky Golden Harvest (1132 HK) Year to Dec FY14A FY15A FY16E FY17E FY18E
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)
Total debt/equity (%) 51.9 60.9 88.7 85.5 85.9
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
Other income 65 3 17 20 23
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)
Year to Dec FY14A FY15A FY16E FY17E FY18E
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
Other non-current assets 83 83 83 83 83
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$) 0.005 (0.066) (0.005) 0.015 0.036
Prepayments & deposits 237 287 341 398 464 YoY% (89) (1,495) (93) (419) 133
Other current assets 99 118 118 118 118
DPS (HK$) 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
Bank loans & leases 265 449 479 268 168
Operating cash 146 (63) 44 98 167
CB & othe debts 169 147 447 447 447 Interest received (26) (38) 6 6 5
Other current liabilities 0 0 0 0 0
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
Bank loans & leases 490 374 474 674 874
Capex (162) (129) (167) (195) (227)
CB & othe debts 0 0 0 0 0 Investments 117 49 (95) (106) (104)
Deferred tax & others 11 12 12 12 12
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
Source: Company, OP Research
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Wed, 29 Jun 2016
Orange Sky G H (1132 HK)
Page 54 of 65
Exhibit 69: 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
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)
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 1,814 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)
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 13,482 115.6 155.8 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
Source: Bloomberg, OP Research
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Wed, 29 Jun 2016
Nan Hai Corp (680 HK)
Page 55 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
Close price: HK$0.207
Key Data
HKEx code 680
12 Months High (HK$) 0.23
12 Month Low (HK$) 0.08
3M Avg Dail Vol. (mn) 41.29
Issue Share (mn) 68,645.54
Market Cap (HK$mn) 14,209.63
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
Jun/15 Sep/15 Dec/15 Mar/16
HK$680 HK MSCI CHINA
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Wed, 29 Jun 2016
Nan Hai Corp (680 HK)
Page 56 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
Source: Entgroup, OP Research
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
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Wed, 29 Jun 2016
Nan Hai Corp (680 HK)
Page 57 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
Source: Company, OP Research
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
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Wed, 29 Jun 2016
Nan Hai Corp (680 HK)
Page 58 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
Source: Company, OP Research
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
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Wed, 29 Jun 2016
Nan Hai Corp (680 HK)
Page 59 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
Source: Company, OP Research
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
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Wed, 29 Jun 2016
Nan Hai Corp (680 HK)
Page 60 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
We analyze the potential
investment risks are 1) Execution
risk of future expansions, 2)
Unexpected slowdown in
domestic movie box office, 3)
Housing market crash
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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
Exhibit 75: Management profiles
Name Age Position Role and responsibilities Experience
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)
Source: Company, OP Research
Exhibit 76: Shareholding structure
Source: Company, OP Research
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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
Source: Company, OP Research
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Exhibit 78: 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
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)
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)
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)
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)
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
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)
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
Source: Bloomberg, OP Research
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