Equity Research Report Media
March 2019 By: Gary Guo (S1700517120002) and Jing Han (S1705518080001) www.research.hsbc.com
China Cinema Initiate coverage: Back in the spotlight
China’s big cinema chains are poised for a period of sustained growth. We forecast that box office revenue will rise at a CAGR of 11.8% over 2019-21e
The market leaders that are increasing their reach across the value chain should benefit most
Initiate coverage of three cinema chains – Wanda Film (Buy), Hengdian Entertainment (Buy) and Shanghai Film (Hold) – and upgrade China Film to Buy from Hold
Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Equities ● Media March 2019
Why read this report
China’s film industry is on the rise again, which is good news for the country’s big cinema chains; we forecast box office revenue will rise at a CAGR of 11.8% over 2019-21e
Smaller cinemas are losing money, so industry consolidation is inevitable; the industry leaders are also increasing their reach across the value chain
Initiate coverage of three cinema chains – Wanda Film (Buy), Hengdian Entertainment (Buy) and Shanghai Film (Hold) – and upgrade China Film to Buy from Hold; prefer Wanda Film
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Contents
A good screenplay 3
Industry outlook 13
Company Section 21 Wanda Film (002739 CH) 22 Hengdian Entertainment (603103 CH) 34 China Film (600977 CH) 44 Shanghai Film (601595 CH) 51
Disclosure appendix 60
Disclaimer 64
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A good screenplay
High-calibre films, a quality viewing experience, favourable policy initiatives and a growing audience away from the big cities…we believe the outlook for China’s big cinema chains is bright. The leaders will increase their market share as competition squeezes out smaller chains in this fragmented sector; they are also expanding into other parts of the film industry. We forecast box office takings will rise at a CAGR of 11.8% over 2019-21e. In this report, we initiate coverage of three cinema chains – Wanda Film (Buy), Hengdian Entertainment (Buy) and Shanghai Film (Hold) – and upgrade China Film to Buy (from Hold).
Back in the spotlight
It’s nearly a year since we published our thematic report on China’s film makers. We highlighted China’s film industry is on the rise again that box office takings had stalled in 2016 for the first time after an influx of hot money pushed up the quantity of films, but not the quality (China Media – A Hollywood moment for China’s film- makers, 18 May 2018). Audiences were not impressed. But since that brief blip, China’s film industry is on the rise again. There’s a wider range of quality big-budget domestic movies, which can now compete on level terms with the latest imported Hollywood blockbusters.
This time, we focus on the big cinema chains. Box office takings rose 15.4% in 2017 and a further 8.0% in 2018, not bad in a year when growth in the domestic economy was slowing. We forecast a CAGR of 11.8% over 2019-21e and think the leading companies in the cinema industry are poised for a sustained period of growth. This should be driven by the rise in the number of cinemas and bigger audiences in smaller cities, as well as the ability to diversify into other parts of the film business and an accelerating pace of industry consolidation. In this report, we:
Look at the new government policies that will help industry leaders gain market share.
Explain why audiences in smaller cities will drive growth in box office takings. The percentage of box office revenue in third and fourth-tier cities grew from 36.16% in H1 2016 to 41.16% in H1 2018.
Show why diversifying business across the film industry is so important.
Assess the other market forces driving industry consolidation. For example, a lot of smaller cinemas are loss-making and about 300 cinemas closed in first 10 months of 2018.
Discuss competition from streaming services and explain why we think the risks are being overstated.
Initiate on three big cinema companies – Wanda Film (Buy), Hengdian Entertainment (Buy) and Shanghai Film (Hold). We explain why we prefer Wanda Film.
Upgrade China Film to Buy from Hold and raise our target price to RMB19.90 from RMB16.50 on higher net profit forecasts.
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The industry outlook
China is world number one in many industries, but it will have to wait a little longer until it is crowned king of the world’s box office. There were signs that revenue from ticket sales would overtake North America in 2018 but a bumper year in the US cinema industry and the slowdown in growth of China’s domestic economy meant that it was not to be. But we believe it’s really only a matter of time.
China’s box office revenue rose 8.0% in 2018 to RMB56.6bn (about USD8.41bn). Domestic There are now around 60,000 cinemas across the country films accounted for 62% of the total, up from 54% in 2017, reflecting higher production standards. One of the main factors driving this growth is the rapid increase in the number of cinemas. There are now around 60,000 screens across the country, with 9,000 being added in 2017. Between 2015 and 2018, the number of film screens in China has risen at a CAGR of 22.7%.
All this means that competition is now at a whole new level and we believe that industry consolidation is inevitable in this fragmented market for the following reasons
We believe China cinema industry will enter a period of consolidation. Intense competition would force small and medium-sized cinemas to phase out of the market and enhance the market share of top players. Our view is based on the following reasons:
Increasing saturation: The rise in the number of cinema screens has resulted in a sharp decrease in revenue per screen, from RMB1.39m in 2015 to RMB1.01m in 2018.
The squeeze is on: According to Top Thinktank, 84% of the cinemas in China pulled in box office revenue of less than RMB10m and 63% less than RMB5m. This means a lot of smaller cinemas are loss-making and, according to a report by 36Kr, about 300 cinemas closed in first 10 months of 2018.
Out with the old: New cinemas, normally run by the big chains, have advanced facilities and can provide a better consumer experience. We believe old cinemas can’t compete.
Policy incentives: In December 2018, the State Film Administration stated that to build a cinema chain a company should have “no less than 50 cinemas with a controlling stake or no less than 300 screens” and “box office of no less than RMB500m from its cinemas with controlling stake”. Out of the 48 cinema chains in China, only about 20 can fully meet these requirements, in our view.
International comps: The top five cinema chains in China accounted for 46.1% of box office takings in 2018. It’s a different story in developed markets. For example, in the US, AMC, Regal and Cinemark control 59% of the market in terms of the number of screens.
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Exhibit 1. Number of screens in China Exhibit 2. Per screen box office revenue (RMBm)
70000 40% 1.60 60079 1.39 60000 1.40 1.26 50776 1.18 1.20 50000 30% 1.10 41179 1.20 1.01 40000 32487 1.00 20% 30000 24304 0.80 18398 20000 10% 0.60 10000 0.40 0 0% 0.20 2013 2014 2015 2016 2017 2018 0.00 Screen YoY 2013 2014 2015 2016 2017 2018
Source: EntGroup, HSBC Qianhai Securities Source: EntGroup, HSBC Qianhai Securities
Number of screens: lower-tier cities are the main growth engines
We use the number of cinema screens per 100,000 population to measure screen density in different countries. In developed markets like the US, France and Australia, screen density is between 9.2 and 12.5. In China, the average is 7.2 but it varies by city tier. Using a weighted average, it is 10.6 in first-tier cities (Beijing, Shanghai, Shenzhen and Guangzhou), 9.6 in second-tier cities, and 6.4 in other lower-tier cities. First and second-tier cities in China have almost reached the level of developed countries, while lower-tier cities are still catching up.
According to guidelines released by the State Film Administration in December 2018, “the We estimate 10,000 new screens will be installed number of screens in urban cinemas is set to total over 80,000 by 2020”. Based on this target, annually in 2019-20 we estimate 10,000 new screens will be installed annually in 2019-20, a CAGR of c15%. The main drivers are rising urban populations in some second-tier cities due to migrant inflows and urbanization, and increasing “screen density” in lower-tier cities.
China’s urbanisation rate was 59.58% in 2018. According to National Plan on Population Development 2016-2030 published by the State Council, China’s population is expected to reach 1.42bn by 2020, with 60% of the population classified as urban. We have done a sensitivity analysis based on an urbanization rate of between 59% and 62% in 2020. If the number of screens rises to 80,000 in 2020, the number of cinema screens would be in the range of 9.5-9.1 per 100,000 population, on par with the current level in developed countries.
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Exhibit 3. Number of cinema screens per 100,000 population by country and region
15 12.5 10.6 9.7 9.6 10 9.2 7.2 6.4 4.3 5
0
Source: EntGroup, National Bureau of Statistics of China, HSBC Qianhai Securities（data of China in 2018, data for other countries in 2017）
Exhibit 4. Sensitivity analysis – impact of urbanisation rate on “screen density” 2020 Urbanisation rate 59% 60% 61% 62% Number of cinema screens per 100,000 9.5 9.4 9.2 9.1 population Source: HSBC Qianhai Securities estimates
Ticket prices set to rise
China’s average film ticket price remained stable during 2015-18. We think this will start to change this year. During the 2019 Lunar New Year holiday, ticket prices hit a new high, averaging RMB44.5, up 11.8% y-o-y. Although prices tend to be higher during the holiday period, this year is different. The regulator has prohibited film producers and distributors from offering ticket subsidies to attract higher audiences. We think this will help push up prices throughout 2019.
Exhibit 5. Average ticket price vs. ticket price during Lunar New Year holiday (RMB)
50 44.5 39.5 37.7 39.8 40 36.3 35.0 33.1 34.4 35.3 30
20
10
0 2015 2016 2017 2018 2019
Ticket price(Whole year) Ticket price(Spring Festival)
Source: EntGroup, HSBC Qianhai Securities
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The price increases will probably be limited though. Cinema tickets are already quite expensive in China compared to other countries on a relative basis. The ratio of the average film ticket price to per capita disposable income is 0.13%, compared to just 0.05% in the US and Australia.
We expect China’s average ticket price to grow by c2% annually over the next three years. If we use the US as a reference point, the average ticket price grew at a CAGR of 2.2% over 2009-18 and reached cUSD9.1 (cRMB61) in 2018.
Exhibit 6. US cinema ticket price (USD) Exhibit 7. Ticket price as % of disposable income per capita
10 6% 0.14% 0.125% 8 5% 0.12% 4% 6 0.10% 3% 0.08% 4 2% 0.055% 0.06% 0.046% 2 1% 0.04% 0 0% 0.02%
0.00% Ticket price YoY China US Australia
Source: Box office mojo, HSBC Qianhai Securities Source: Box office mojo, screenaustralia, HSBC Qianhai Securities
The growth of the market: 2019-21e box office CAGR of 11.8%
We estimate the growth rate of China’s film market from three perspectives – urban population, per capita attendance, and average ticket price.
The urban population is rising steadily. It totalled 831m in 2018, with an urbanisation rate of 59.57%. Based on the growth rate of the last three years, we estimate this will rise to 63% in 2021e.
We estimate the average ticket price will rise from RMB35.3 in 2018 to RMB37.5 in 2021e, a CAGR of 2.0%.
In 2018, people went to the cinema an average of 2.1 times a year, well below the average of 3.4-3.8 in North America. We expect per capita attendance in China to reach 2.6 by 2021e, a CAGR of 7.4% for 2018-21e, driven by audiences in lower-tier cities.
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Exhibit 8. Per capita attendance in China and North America 3.8 3.7 3.7 4 3.6 3.5 3.6
3 2.0 2.1 2 1.6 1.7 1.1 1 0.8
0 2013 2014 2015 2016 2017 2018
US China
Source: MPAA, World Bank, NBS, EntGroup, HSBC Qianhai Securities Note: We calculate per capita attendance in China and the US by urban population and total population, respectively
In our base-case scenario, between 2018 and 2021 we expect the urban population to grow 6.1%, the average ticket price 6.2%, and per capita attendance 23.8%. We estimate that in 2021e, China’s box office will hit RMB86bn, up from RMB60.7bn in 2018, a CAGR of 11.8%. We believe the increase in per capita attendance is the key driver for future box office growth.
Exhibit 9. China’s box office growth forecast (target year: 2021) Scenario Base-case Bull-case Bear-case Total population in China (bn) 1.4 1.4 1.4 Urbanisation rate 63% 65% 61% Annual per capita attendance 2.6 2.8 2.4 Average ticket price (RMB) 37.5 39 36 Box office (RMBbn) 86 99.4 73.8 CAGR 11.8% 17.3% 6.2% Source: NBS, EntGroup, HSBC Qianhai Securities estimates
Global cinema market: majority of growth driven by Asia The global box office has grown from USD28bn in 2008 to USD41bn in 2017, a CAGR of 4.4%. The majority of this growth was driven by Asia Pacific countries, whose share of global revenues grew from 27% in 2014 to 31% in 2017. According to PWC, the global box office should grow by 4.4% over the next five years.
Exhibit 10. Global box office trend
100% 5% 6% 6% 8% 8% 9% 80% 25% 24% 27% 28% 30% 31% 60% 35% 34% 33% 33% 31% 30% 40%
20% 35% 36% 34% 31% 31% 30% 0% 2012 2013 2014 2015 2016 2017
US/Canada EMEA APAC LATAM
Source: MPAA, HSBC Qianhai Securities
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Exhibit 11. Global attendance per capita (2017)
5.0 4.3 3.8 4.0 3.7 3.3 3.0 2.6 2.0 2.0 1.5 1.5 1.4
1.0
0.0 S Korea Australia North France UK China India Germany Japan America
Source: Cineworld, HSBC Qianhai Securities
Initiate coverage
China’s film market wobbled in 2016, which led to stocks in the sector being de-rated. We think the industry is bottoming out, as is the country’s broader media and entertainment sector. The large cinema chains with quality management capable of diversifying their businesses across the value chain should benefit from box office growth and industry consolidation. We initiate coverage of Wanda Film, Hengdian Entertainment and Shanghai Film, and upgrade China Film from Hold to Buy.
Wanda Film (002739 CH, Buy; TP RMB28.5): China’s largest cinema chain. Its merchandise, advertising and other non-box-office revenue are all contributing to steady margin growth. The company is acquiring Wanda Media to access the whole industry value chain. We expect Wanda Film’s 2018/2019/2020e net profit to be RMB1,289m/RMB1,564m/RMB1,841m, implying y-o-y growth of -15.0%/21.4%/17.7%.
Hengdian Entertainment (603103 CH, Buy, TP RMB28.0): This cinema chain focuses on third and fourth-tier cities, which are the growth drivers of box office revenue at the industry level. We forecast that net profit in 2019/2020/2021e will rise to RMB344m/RMB393m/RMB453m, implying y-o-y growth of 7.2%/14.4%/15.1%.
Shanghai Film (‘SFC’, 601595 CH, Hold, TP RMB15.0): By integrating downstream and upstream businesses, the company covers the entire film distribution and screening value chain from distributor to integrated cinema chain and operator. We forecast that 2018/2019/2020e net profit will be RMB243m/RMB280m/RMB317m, implying y-o-y growth of -5.5%/15.3%/13.1%.
China Film (600977 CH, Buy, TP RMB19.9): Company is involved in the whole industry value chain, from film production, distribution and cinemas, to film and TV services. China Film is one of only two Chinese companies licensed to distribute imported films and works with film companies from all over the world. It has produced blockbusters such as Warcraft, Kung Fu Panda 3, and The Great Wall in co-operation with leading foreign producers. We raise our 2018/2019/2020e net profit estimates by 0.5%/6.9%/11.6% to RMB1.101bn/RMB1.325bn/ RMB1.554bn and upgrade the rating to Buy from Hold.
Our order of stock preference is Wanda Film, followed by China Film, Hengdian Entertainment Wanda Film is China's No.1 cinema chain in terms of and Shanghai Film. Wanda Film is China's No.1 cinema chain in terms of market share and the market share company is traversing the whole value chain by expanding into film-making, distribution, and screening.
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Share price catalysts We think the film industry is bottoming out and entering a period of prosperity. We expect the quality and sophistication of the film industry to further improve over the next 2-3 years, and cinema chains should benefit.
Online ticketing platforms started out as a portal linking the audience to cinemas. They are now much more than that. Using the vast quantity of data acquired, they have expanded across the whole value chain into services related to screening, film production and distribution.
The fragmented market will consolidate. We believe smaller cinema chains will be squeezed out and the industry leader will gain market share.
The banning of ticket subsidies should help accelerate the consolidation process because: 1) previously, small cinema chains often attracted larger audiences by offering lower ticket prices. They can’t do this anymore; and 2) without subsidies, online ticket platforms may lose customers, giving large cinema chains an opportunity to build their membership programmes and enhance customer stickiness.
Key industry risks: Fluctuation in the quality of films: If the quality of films does not meet audience expectations, cinema chain revenues could be lower than expected.
Rising cinema rents: The rising cost of commercial buildings and intensifying competition in cinema investment could lead to higher cinema rents, dragging down profit margins.
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Where we are different from the market
Broadly speaking, our revenue and net profit forecasts are below consensus. The biggest difference is for Wanda Film’s net profit, where we are 15.2% below the Street for 2019e and 12.3% below for 2020e. We think this is because our estimates of its box office revenue are more conservative.
Exhibit 12. HSBC Qianhai Securities estimates vs consensus (RMBm) Ticker Company RMBm _ HSBC Qianhai Securities estimates ______Wind consensus ______HSBC Qianhai vs Wind consensus 2018e 2019e 2020e 2018e 2019e 2020e 2018e 2019e 2020e 002739 CH Wanda Film Revenue 14,104 16,052 18,189 14,101 16,412 18,423 0.0% -2.2% -1.3% Net profit 1,289 1,564 1,841 1,293 1,862 2,124 -0.3% -16.0% -13.3% 600977 CH China Film Revenue 10,048 11,882 13,767 10,127 12,168 13,894 -0.8% -2.3% -0.9% Net profit 1,101 1,325 1,554 1,447 1,366 1,564 -23.9% -3.0% -0.6% 601595 CH Shanghai Film Revenue 1,225 1,363 1,503 1,173 1,441 1,698 4.5% -5.4% -11.5% Net profit 243 280 317 242 291 364 0.3% -3.8% -13.0% 2019e 2020e 2021e 2019e 2020e 2021e 2019e 2020e 2021e Hengdian 3,140 3,578 4,041 3,170 3,620 3,789 -0.9% -1.1% 6.7% 603103 CH Revenue Entertainment Net profit 344 393 453 380 440 465 -9.5% -10.8% -2.5% Source: Wind, HSBC Qianhai Securities estimates
Exhibit 13. Cinema comparable table Target Closing EPS ROE EBITDA Dividend Company Ticker Rating Upside Mkt cap ADTV _____ PE ______PB ______EV/EBITDA price price CAGR (%) Growth yield (%) RMB RMB USDm USDm 2018e 2019e 2020e 2018-20e 2018e 2019e 2020e 2019e 2018e 2019e 2019e 2019e Domestic Wanda Film 002739 CH Buy 28.50 21.42 33% 5,532 45 29.3 24.1 20.5 19.4% 3.0 2.7 2.5 11.8 15.3 12.3 21.1% 1.0 Hengdian 603103 CH Buy 28.00 25.15 11% 1,671 29 35.4 33.1 28.9 10.7% 5.0 4.3 3.8 14.9 15.5 14.2 21.4% 0.9 Entertainment China Film 600977 CH Buy 19.90 17.06 17% 4,670 27 28.9 24.0 20.6 18.6% 2.4 2.2 2.0 11.8 10.0 7.9 20.8% 1.4 Shanghai 601595 CH Hold 15.00 14.93 0.5% 818 12 23.0 19.9 17.6 14.4% 2.8 2.6 2.4 12.0 12.7 10.6 18.4% 1.9 Film Average 28 29.2 25.3 21.9 15.8% 3.3 3.0 2.7 12.6 13.4 11.3 20.4% 1.3
Overseas Cinemark CNK US 4,719 40.1 17.0 16.5 15.4 15.0% 2.9 2.6 2.2 17.8 7.9 7.7 2.8% 3.4 Cineplex CGX CN 1,171 10.1 19.5 17.0 17.1 9.0% 2.4 2.5 2.5 12.1 7.9 7.2 5.5% 7.1 Cineworld CINE LN 5,425 4.7 11.5 11.1 10.4 14.5% 1.3 1.2 1.3 6.8 8.2 7.8 25.0% 4.8 PVR PVRL IN 1,106 0.5 44.1 33.7 27.3 29.8% 6.1 4.9 4.1 14.3 15.9 12.7 24.8% 0.1 INOX INOL IN 470 0.3 30.7 25.0 20.1 36.9% 3.5 3.0 2.6 12.0 13.0 10.9 24.2% 0.0 Average 11.1 24.5 20.7 18.1 21.1% 3.2 2.8 2.5 12.6 10.6 9.3 16.5% 3.1 Source: Wind, HSBC Qianhai Securities estimates for our four covered stocks. Pricing date as of 26 March
Valuation methodology
For Wanda Film and Hengdian Entertainment, their main business is cinema. Their A&D expenses are at high levels due to their cinema expansion. Therefore, we use EV/EBITDA methodology to value Hengdian Entertainment and the cinema business of Wanda Film.
For China Film and Shanghai Film, they have diversified into other parts of the film business besides screening. Their A&D expenses are relatively lower compared to Wanda and Hengdian. Therefore, we use PE valuation methodology for China Film and Shanghai Film.
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Valuation and risks
Valuation Risks
Closing price: We use a SOTP valuation method. For the cinema business, we assign a Key downside risks: Stronger competition Wanda Film RMB21.42 2019e EV/EBITDA of 12x, implying a market cap of RMB36.9bn. The average and risk of industry chain integration. 002739 CH Target price: of 2019e EV/EBITDA for A-share cinema stocks is 11.3x. We estimate 2019e
RMB28.50 EBITDA growth of the cinema business will be 21%, slightly higher than the average growth rate of A-share cinema stocks (20.4%). As such, our target Buy Upside: 2019e EV/EBITDA multiple of 12x for its cinema business is justified, in our 33% view. For film & TV business to be injected, Wanda Media has pledged to achieve net profit of RMB888m in 2019e. Taking the comparable valuation of the film & TV industry as a reference, we assign a 2019e PE of 15x for the film & TV
business, implying a market cap of RMB13.3bn. Therefore, we derive a total market cap of RMB50.2bn, implying a target price of RMB28.50. Our target price implies an upside of 33%. We initiate coverage with a Buy rating. Yi Guo | [email protected] | +86 755 88983137
Hengdian Closing price: We use an EV/EBITDA valuation method. The stock is trading at 14x 2019e Key downside risks: Management risk Entertainment RMB25.15 EV/EBITDA, 1.5SD below the historical average (20x) since it was listed in incurred by business expansion, profitability October 2017. In our view, the stock traded at very rich multiples after it listed, impacted by higher depreciation expense, and 603103 CH Target price:
RMB28.00 so we use the valuation after July 2018 as the benchmark. stronger competition. EBITDA grew 4% in 2018 and its EV/EBITDA ranged between 13x and 15x. We
Upside: Buy estimate 2019e EBITDA growth rate to be 6.1%, higher than 2018. Therefore, 11% we assign a valuation of 16x 2019e EV/EBITDA. Based on that multiple, we derive a market cap of RMB12.7bn, implying a target price of RMB28.00. Our target price implies an upside of 11%. Consider that the company focuses on
third and lower-tier cities, which should drive revenue growth, we initiate coverage with a Buy rating.
Yi Guo | [email protected] | +86 755 88983137
Closing price: We use PE to value Shanghai Film. Our valuation is based on a 20x 2019e PE. Key downside risks: Insufficient supply of Shanghai Film RMB14.93 We expect net profit to grow at a CAGR of 14.4% over 2018-20e, lower than the quality films, rising cinema rents, and cinema 601595 CH Target price: average of comparable companies (15.8%). Given that the industry average expansion pushing up depreciation expense.
RMB15.00 2019e PE is 25.3x, we believe it is reasonable to use a 20x 2019e PE for our valuation. We derive a target price of RMB15.0, implying 0.5% upside. Initiate Key upside risks: Higher-than-expected revenue
Hold Upside: coverage with a Hold rating. from the film distribution and faster-than- 0.5% expected growth of China’s film market. Yi Guo | [email protected] | +86 755 88983137
Closing price: We raise China Film’s 2018/19/20e net profit estimates by 0.5%/6.9%/11.6% to Key downside risks: Film products below China Film RMB17.06 RMB1,101/1,325/1,554m. expectations, regulatory risks, and competition 600977 CH Target price: Our valuation is based on a 28x 2019e target PE (previously 25x 2019e PE). from new media.
RMB19.90 We estimate 2019e net profit growth to be 20.4%, higher than the net profit
growth rate in 2018 (14.1%). Therefore, we believe it is reasonable to assign a Buy Upside: 28x 2019e PE for the stock, which is higher than the average PE in 2018 (26x). 17% Based on this valuation multiple, we raise our TP to RMB19.90 from RMB16.50,
implying 17% upside. Considering that the company is able to cover the whole value chain, we upgrade the stock to Buy from Hold. Yi Guo | [email protected] | +86 755 88983137
Priced at close of 26 March 2019 Source: HSBC Qianhai Securities estimates
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Industry outlook
Streaming services cater to different consumer needs; they can complement traditional cinema chains
Cinema chains will focus on value chain integration and diversifying their businesses
We expect the cinema market to consolidate, favouring the market leaders
Why streaming services would not steal much cinema audience
Streaming services, led by Netflix in the US and iQIYI in China, have mushroomed around the The market is concerned about whether streaming will world, disrupting the traditional media industry in the process. The market is concerned about be a threat to cinema chains whether this will be a threat to cinema chains by grabbing their audience and pushing films to be released online. We think these fears are largely unwarranted.
Despite competition in some areas, this is not in a zero-sum game. We believe that streaming services and cinema chains are very different forms of entertainment. Streaming offers a convenient viewing experience at home or on the move, while cinemas are entertainment venues. People go for the experience. A survey by Entgroup found that cinemas offer better sound and visual effects, more comfortable facilities, and the right atmosphere to focus on the film content. There’s also a social networking element in the form of family and friends.
Exhibit 14. Why audience choose to watch films in cinemas
Social Hang out with friends 26.30% Focus on film 30.40%
Experience Comfortable facilities 33.50%
Atmosphere 63.80%
Sound 72.50%
Equipment Visual 74.00%
0% 20% 40% 60% 80%
Source: EntGroup, HSBC Qianhai Securities
As we stated in our thematic report Global Cinemas: Showtime (October 2018), audience behaviour patterns show that streaming is not the threat to cinemas the market thinks it is; as its adoption matures, we expect streaming to complement the cinema industry. According to a survey by EY and MPAA conducted in North America, frequent movie-goers are also frequent
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streamers. Meanwhile, 48% of those who do not visit cinemas also do not view content on streaming services. This shows that streaming is not necessarily the reason why audiences don’t go to cinemas.
Exhibit 15. The frequency of cinema visits is positively correlated to streaming hours
40% 36% 34% 35% 32% 31% 30% 28% 27% 28% 26% 25% Streaming hours 25% 22% per week 20% 20% 21% 21% 1-3hrs 20% 16% 4-7hrs 15% 13% 8-14hrs 10% 15hrs and above 5%
0% 1-2times 3-5times 6-8times 9 and above
2017 frequency of cinema visits
Source: EY, MPAA, HSBC Qianhai Securities
Exhibit 16. Non-moviegoers are also less likely to stream any online content
15 or more hours 14%
8 to 14 hours 11%
4 to 7 hours 13%
1 to 3 hours 13%
Do not stream 48%
0% 10% 20% 30% 40% 50% 60%
Source: EY, MPAA, HSBC Qianhai Securities. % = % of non-movie goers
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Exhibit 17. Number of films and TV Exhibit 18. Online video views in the US programmes in Netflix libraries (bn)
8000 200 6755 160.3 160 6000 110.3 4010 120 4000 79.3 80 67.1 57.1 2000 1569 530 40 5.7 7.1 8.5 8.1 7.2 0 0 2010 2018 2013 2014 2015 2016 2017
Movies TV Programmers Online movie Online TV
Source: Flixable, HSBC Qianhai Securities Source: MPAA, HSBC Qianhai Securities
Another point to consider is that films are not the main content viewed on streaming platforms. For example, films received 7.2bn views in the US in 2017, just 4.5% of the viewing numbers for TV programmes as a whole (source: MPAA Theme Report 2017). A Netflix executive has stated that films only constitute a third of its streaming hours and the company has actually been cutting the number of films it shows and beefing up its library of TV programmes (source: Businessinsider, 5 Dec 2016). Between 2010 and 2018, the number of TV programmes rose 196% from 530 to 1,569, while the number of films fell 41%, from 6,755 to 4,010.
Streaming has had a bigger impact on the TV industry than the film industry in the US. Family spending on digital entertainment has increased by 110.5% over 2013-17, while spending on physical entertainment has decreased by 41.3% (see table below). US cinemas, meanwhile, saw an increase of 1.8% over the same period.
Exhibit 19. US family entertainment spending (USDbn)
40
30 11.37 11.12 10.92 10.36 11.14 20 6.49 7.65 8.96 11.43 13.66 10 11.64 10.26 9.08 8.04 6.83 0 2013 2014 2015 2016 2017
Physical Home Entertainment Digital Home Entertainment Theatrical
Source: MPAA, HSBC Qianhai Securities
Using the US market for reference, we believe the impact of streaming media on China’s film industry will also be limited. Online videos in China are dominated by TV series and variety shows. They account for 80-90% of views on Chinese streaming websites, and films less than 10%. Similar to the US, the TV industry in China is more exposed to the rise of streaming media than the cinema market.
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Exhibit 20. Views breakdown by genre on China’s streaming platforms (2017)
100% 6% 6% 3% 10% 5% 10% 5% 9% 11% 80% 19% 13% 23% 16% 52% 60%
40% 10% 70% 76% 58% 63% 20% 35%
0% iQiyi Tencent Video Youku Letv Mango TV
TV Carton Show Movie
Source: GroupM, HSBC Qianhai Securities
Online ticketing websites now cover the whole film industry
China’s online ticketing market has developed at a rapid pace. iResearch estimates that it expanded at a CAGR of 59.9% during 2012-18, hitting RMB51.9bn last year and accounting for 85.5% of the total box office.
This huge market has also consolidated. There were five competitors, but two giants now dominate. In the first nine months of 2018, Maoyan (1896 HK, held by Enlight Media and Tencent) and Taopiaopiao (1060 HK, owned by Alibaba Pictures) had market shares of 61.3% and 34.3%, respectively.
Maoyan now covers the industry value chain after expanding into film marketing, distribution and production. Taopiaopiao’s strength is that it has access to the pool of resources offered by Alibaba Group.
Exhibit 21. Total trading volume of China’s Exhibit 22. Competitive landscape of online ticketing market (RMBbn) China’s online ticketing market (9M 2018)
60 100% 51.9 46 50 80% 40 34.4 29 60% 5% 30 Maoyan 40% 20 13.6 Taopiaopiao 34% 20% Others 61% 10 3.1 4.9 0 0% 2012 2013 2014 2015 2016 2017 2018e
Total trading volume % of total box office
Source: iResearch, HSBC Qianhai Securities. Estimates from iResearch Source: iResearch, HSBC Qianhai Securities
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Data-powered expansion of coverage across the value chain Online ticketing platforms started out as a portal linking the audience to cinemas. They are now much more than that. Using the vast quantity of data acquired, they have expanded across the whole value chain. They are now involved in:
Online ticketing: They provide ticketing and settlement services online;
Screening: Cinemas can schedule screenings based on data and projections provided by online ticketing platforms, improving cinema management;
Distribution: Online ticketing platforms carry out targeted marketing aimed at a specific consumer group. Maoyan has amassed user information based on gender, age, location, profession, and film preference. It also offers 158bn film ratings and 70.6m film reviews;
Production: Data analysis helps online ticketing platforms advise on script and cast selection for film projects, improving the chances of having a box office hit.
Maoyan is now involved in a wide range of film projects, including distribution, marketing, production and investment. Last year it distributed seven films, co-distributed eight, presented seven and co-presented another seven. Monster Hunt 2, a film distributed by the platform in 2018, took RMB6.78bn at the box office, the third highest in China last year. Apart from marketing and distribution, Maoyan is also testing the waters by making small investments in films. The platform has been involved in projects such as Dying to Survive, an award-winning comedy-drama.
Exhibit 23. Number of film projects that Maoyan is involved in
14 13 12 11 10 8 8 8 8 7 7 7 7 7 7 6 4 3 2 2 1 0 2015 2016 2017 2018
Producer Co-Producer Distributor Co-Distributor
Source: Maoyan App Pro, HSBC Qianhai Securities
Ticket subsidies – a new policy
The subsidies routinely offered by distributors and online ticketing platforms to lower the price of movie tickets have been a cause of some controversy in China. In the past, film distributors have been accused of using subsidies and the purchase of tickets to increase the box office takings of their own films. In 2017 this led investors to question the validity of box office takings at the national level, which in turn has put pressure on share prices.
The regulator is taking action to prevent these types of abuses. In September 2018, the China Film Administration said that ticket subsidies would be banned and it also put a cap on service fees charged by online ticketing platforms, and a narrowing of settlement period (source: Xinhuanet, 14 September 2018).
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Exhibit 24. New policy on ticket subsidies
Policy Content Ticket subsidies ban A ban on all online ticket subsidies from third-party channels and own channels of cinema sites Service fee caps Third party ticketing service fee shall not exceed RMB2 (ticketing platform included), cinema chains/film investing companies shall not be able to share service fees Settlement period shortened Online ticketing platform’s settlement period with cinemas has been shortened to 8 days starting from 1 Oct 2018, and will be changed to immediate settlement from 1 Oct 2019 Source: Xinhuanet, HSBC Qianhai Securities
We believe the new policy will accelerate the pace of industry consolidation because: 1) previously, small cinema chains often attracted larger audiences by offering lower ticket prices. They can’t do this anymore, so audHi iences will likely choose leading cinema chains with better facilities; and 2) without subsidies, online ticket platforms may lose customers, giving large cinema chains an opportunity build their membership programmes and enhance customer stickiness.
For other parts of the industry, we believe the new policy will have the following impact:
Box office: In the short term, the banning of subsidies should push up ticket prices which may lower box office takings. In the long term, the new policy creates a level playing field and removes the market distortion caused by the subsidies.
Online ticketing platforms: With the cap on service charges, online ticketing platforms will be stripped of the advantages they enjoyed in terms of grabbing market share through offering ticket subsidies. We believe they will step up efforts to expand into upstream businesses such as film production, investment, promotion and distribution.
Promotion and distribution: The new policy may shake up the current online promotion and distribution model that is reliant on ticket subsidies and move promotion and distribution back to offline channels.
Non-box office revenue: strong upside potential
Advertisements and snacks are very much part of the movie experience. They also generate a Advertisements and snacks are very much part of the lot of revenue for cinemas and have the added benefit of having very high margins. For movie experience example, in 2017 advertising accounted for 38% of Wanda Film’s profits, and merchandising 26%, both exceeding the contribution from screening (24%).
We believe non-box office revenue can be a key growth driver in the future. Merchandising accounts for 8-15% of the revenue of major domestic cinema chains, but for overseas chains such as AMC, Cineworld and Cinemark, this rises to 20-35%. We sees strong upside potential for Chinese cinemas in this area of business.
The drivers include: 1) offering more diversified merchandise such as a wider range of food and beverage, toys and related products; 2) improvements in operational efficiency, with more entertainment facilities such as massage chairs and mini karaoke booths; and 3) building proprietary membership systems to boost consumption by customers.
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Exhibit 25. Merchandising revenue Exhibit 26. Merchandising revenue contribution of domestic cinema chains contribution of overseas cinema chains
15% 40%
30% 10%
20%
5% 10%
0% 0% 2014 2015 2016 2017 2014 2015 2016 2017
Wanda Hengdian Jinyi Cineworld AMC Cinemark
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
Market concentration to increase
The top five cinema chains in China accounted for 46.1% of box office takings in 2018, and this rose to 68.7% for the top 10. Wanda Film is the market leader with 13.6%. But despite the huge growth in the number of cinemas, little has changed in the last few years. In 2014, the market share of the top 10 was 66.9%. It’s a different story in developed markets. For example, in the US, AMC, Regal and Cinemark control 59% of the market in terms of the number of screens.
We believe the market in China will consolidate. The rise in the number of screens is putting pressure on smaller cinema chains and we think the industry is entering a phase of vertical integration. In our view, there’s still plenty of room for the industry leaders to grab more market share.
Exhibit 27. Market share of China’s cinema Exhibit 28. CR10 of China’s cinema chain chains (2018) industry
Wanda 69% 68.73% Dadi Shanghai United China Film South 68% 67.63% 67.47% China Film Digital China Film Stellar 66.93% 66.68% Jinyi 67% Hengdian Others 66%
65% 2014 2015 2016 2017 2018
Source: EntGroup, HSBC Qianhai Securities Source: EntGroup, HSBC Qianhai Securities
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Exhibit 29. Market share of the US cinema chains in 2017 by the number of screens
29% AMC 41% Regal Cinemark Others 18% 12%
Source: National Association of Cinema Owners, HSBC Qianhai Securities
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Company Section
21 Equities ● Media March 2019
Wanda Film (002739 CH)
A cinema chain with global ambitions and No.1 market share in China
Eyeing full value chain coverage – the consolidation with Wanda Media is supporting non-box office revenue
Initiate at Buy with a target price of RMB28.50
Vertical integration makes Wanda an industry leader
Established in 2005, Wanda Film is China's No.1 cinema chain in terms of market share. With its leading market position, operational efficiency and solid capital reserves, the company has been expanding its business presence and ramping up revenue and profit over the past few years. Wanda Film is a subsidiary of the Dalian WanRresda conglomerate.
In 2017, the company recorded revenue of RMB13.229bn and net profit attributable to the parent of RMB1.516bn. In 2014-17, its revenue grew at a CAGR of 35.3%, and the recurring net profit attributable to the parent grew at a CAGR of 20.5%. According to the company’s revised results forecast for 2018, its net profit attributable to the shareholders of the listed company will be in the range of RMB1.288bn to RMB1.379bn, down between 9% and 15% y-o-y, mainly due to lower-than-expected box office revenue in Q4 2018.
Exhibit 30. Revenue and growth of Wanda Exhibit 31. Wanda Film’s recurring net Film (RMBbn/%) profit attributable to the parent and its growth rate (RMBbn/%)
20 18.19 80% 2.00 1.84 80% 18 16.05 1.56 16 14.10 1.50 14 13.23 1.24 1.29 11.21 1.10 1.16 12 10 40% 1.00 40% 8.00 0.71 8 5.34 6 0.50 4 2 0 0% 0.00 0% 2014 2015 2016 2017 2018e 2019e 2020e 2014 2015 2016 2017 2018e 2019e 2020e
Revenue YoY Recurring net profit YoY
Source: Company data, HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities estimates
The company’s revenue is derived from box office sales, advertising and merchandising. In H1 2018, the revenue contribution of these three segments was 65.65%, 17.04% and 13.54%, respectively. The gross margin of the film screening business has dropped in recent years – from 25% in 2015, to 17.4% in 2016 and 12.1% in 2017; it was 14.46% in H1 2018. The gross margins of the advertising and merchandising businesses are much higher – 68.3% and 60.8%
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in H1 2018. Their contribution to the gross profit has been gradually climbing but we think this trend will flatten out in 2019 and 2020.
Exhibit 32. Revenue breakdown
100% 11.5% 11.8% 13.7% 14.0% 14.7% 15.4% 80% 11.8% 5.8% 15.1% 18.1% 17.9% 17.1% 16.6% 0.0% 60%
40%
20% 76.9% 79.8% 67.1% 63.0% 64.8% 65.2% 65.3% 0% 2014 2015 2016 2017 2018e 2019e 2020e
Film screening Advertising Merchandising Others
Source: Company data, HSBC Qianhai Securities estimates
Exhibit 33. Gross profit breakdown
100%
80% 23.0% 22.0% 25.5% 28.3% 29.6% 30.8% 60% 13.4% 23.8% 30.7% 40% 38.1% 40.1% 38.0% 36.7% 57.8% 20% 44.1% 35.6% 23.7% 22.9% 24.8% 25.9% 0% 2014 2015 2016 2017 2018e 2019e 2020e
Film screening Advertising Merchandising Others
Source: Company data, HSBC Qianhai Securities estimates
Exhibit 34. Gross margin trend
100%
80%
60%
40%
20%
0% 2014 2015 2016 2017 2018e 2019e 2020e
Film screening Advertising Merchandising
Source: Company data, HSBC Qianhai Securities estimates
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Exhibit 35. Net cash flow from operating Exhibit 36. Capital expenditure (RMBbn) activities (RMBbn)
3.50 3.05 2.00 1.75 3.00 2.59 1.50 2.50 1.50 2.09 2.12 1.20 1.93 1.99 1.10 1.10 1.10 2.00 1.00 1.50 1.26 0.67 1.00 0.50 0.50 0.00 0.00 2014 2015 2016 2017 2018e 2019e 2020e 2014 2015 2016 2017 2018e 2019e 2020e
Source: Company data, HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities estimates
According to the company’s Q3 2018 results, Beijing Wanda Investment, as the company’s controller, holds a 50.7% stake in the company, Hangzhou Zhengxi Investment Management holds 7.66% and Beijing Wanda Cultural Industry Group holds 2.51%. Beijing Wanda Cultural Industry Group is the controlling shareholder of Beijing Wanda Investment. Wang Jianlin is the actual controller of both companies. Other shareholders are neither associated parties, nor persons acting in concert.
Screening business: from quantity to quality – per screen output expected to pick up
Cinema chains have been expanding rapidly in China. As the industry leader, Wanda Film scaled up the number of screens from 1,613 in 2014 to 5,278 in 2018, a CAGR of 34.5%.
However, as growth in the number of screens outran box office takings, per screen output declined, prompting a slump in the gross margin. Wanda Film's per screen output fell from RMB2.61m in 2014 to RMB1.81m in 2018, but the pace of the decline in y-o-y growth started to ease from 2016. As the company’s focus has switched from scale expansion to operational efficiency, we expect Wanda Film’s per screen output to improve.
As part of the industry’s consolidation process, we expect small-and-medium sized cinema chains to be phased out due to increased pressure on earnings. This provides an opportunity for the industry leaders to gain market share. We believe Wanda Film has two core advantages: 1) the use of data analysis that significantly enhances the accuracy of screening scheduling; and 2) superior locations in commercial complexes thanks to close collaboration with Dalian Wanda Commercial Properties.
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Exhibit 37. Total box office of Wanda Film Exhibit 38. Number of screens of Wanda (RMBbn) Film
12 60% 6000 5278 70% 9.6 4571 60% 10 8.6 50% 5000 7.6 50% 8 40% 4000 3564 6.3 40% 6 30% 3000 2557 4.2 30% 4 20% 2000 1616 20% 2 10% 1000 10% 0 0% 0 0% 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Box office YoY Screen number YoY
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
Exhibit 39. Attendance of Wanda Film (m) Exhibit 40. Per screen output of Wanda Film (RMBm)
250 230 60% 3.0 0% 209 2.6 2.5 200 184 50% 2.5 2.1 -4% 1.9 151 40% 2.0 1.8 150 -8% 102 30% 1.5 100 -12% 20% 1.0
50 10% 0.5 -16%
0 0% 0.0 -20% 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Attendance YoY Per screen output YoY
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
Non-box office revenue on the rise
The revenue contribution from merchandising and advertising has been on the rise. In H1 2018, advertising revenue reached RMB1.256bn, up 15.61% y-o-y; merchandising revenue reached RMB998m, up 16.46% y-o-y.
The company’s per customer merchandising revenue as a percentage of ticket price also beat the industry average. Per customer merchandising revenue was RMB8.7 in 2017, accounting for 21.1% of the average ticket price, higher than for other domestic cinema chains.
Its advertising business also has a higher level of operational efficiency than its peers. Per cinema advertising revenue was RMB4.651m in 2017, with per screen advertising revenue of RMB0.525m, both above the levels of its domestic peers.
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Exhibit 41. Advertising revenue from Exhibit 42. Merchandising revenue of Wanda Film (RMBbn) Wanda Film (RMBbn)
3.0 300% 2 1.81 50% 2.40 2.5 250% 40% 1.5 1.33 2.0 1.69 200% 30% 0.92 1.5 150% 1 0.63 20% 1.0 100% 0.46 0.5 0.5 50% 10%
0.0 0% 0 0% 2015 2016 2017 2014 2015 2016 2017
Advertising YoY Merchandising YoY
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
Exhibit 43. Wanda Film’s per customer Exhibit 44. Per customer merchandising merchandising revenue exceeds industry revenue as a percentage of ticket price average also exceeds industry average
10 8.7 25% 21.1% 8 7.2 6.2 6.1 20% 17.5% 6 15.0% 14.6% 15% 4 10% 2 5% 0 2014 2015 2016 2017 0% 2014 2015 2016 2017
Wanda Hengdian Jinyi Omnijoi Wanda Hengdian
Jinyi Omnijoi
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
Exhibit 45. Per cinema advertising revenue Exhibit 46. Per screen advertising revenue of Wanda Film (RMBm) of Wanda Film (RMBm)
5 4.7 0.6 4.2 0.525 0.475 4 0.5 0.4 3 0.3 2 1.5 1.6 0.181 0.2 0.164
1 0.1
0 0.0 2014 2015 2016 2017 2014 2015 2016 2017
Wanda Hengdian Jinyi Wanda Hengdian Jinyi
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
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Value chain integration
The company announced its asset restructuring plan to acquire Wanda Media in 2018. According to a report released by the company in February 2019, Wanda Film will acquire a stake of 95.7683% in Wanda Media from 20 shareholders, including Wanda Investment, for a consideration of RMB10.5bn. Wanda Film will directly hold 95.7683% of Wanda Media’s shares upon the completion of the deal.
Founded in 2009, Wanda Media’s businesses includes film and television investment, production and distribution as well as web game distribution and operations. From January to July 2018 Wanda Media recorded revenue of RMB1.41bn and net profit of RMB0.56bn. In 2017, it achieved revenue of RMB2.02bn and net profit of RMB0.596bn, up 103% and 63.7% y-o-y, respectively. Wanda Media’s revenue and profit mainly come from film and game businesses. Driven by a recovery in box office revenue, Wanda Media’s film & TV businesses have seen a rise in their gross margins from January to July 2018, up to 62.2% and 58%, respectively.
According to the company, Wanda Investment, Shenxian Rongzhi (莘县融智) and Ms. Lin Ning jointly pledged that Wanda Media’s net profit would be no less than RMB763m/ RMB888m/ RMB1.069bn/ RMB1.274bn in 2018/ 2019/ 2020/ 2021e.
Exhibit 47. Revenue and net profit Exhibit 48. Wanda Media’s 2017 revenue attributable to the parent of Wanda Media breakdown (RMBm)
2,500 2020 2,000
1,500 995 Film 1,000 40% 42% 596 TV 500 364 Game 18% 0 2016 2017
Revenue Net profit
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
As one of the top filmmakers in China, Wanda Media is developing and absorbing a number of IPs of film and television production that should underpin its future production. It is also exploring a new IP-based operating model. Wanda Media is also seeking genre diversification with productions such as romance, comedy, police, fantasy, art films and drama to cater to different audience groups.
Hit films include Battle of Memories, Mojin - The Lost Legend, Detective Chinatown, Go Away Mr. Tumour, Beijing Love Story, The Great Hypnotist, Police Story 2013, and Chongqing Hot Pot. The total box office of films invested by Wanda Media reached RMB15.844bn in 2017, accounting for c28.34% of China’s total box office.
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Exhibit 49. Films invested by Wanda Media Title Release time Box office (RMB100m) % of investment Lead in or joint and share of profit investment Detective Chinatown 2 2018 33.98 54.5% Lead in investment Mojin - The Lost Legend 2015 16.83 50% Lead in investment Detective Chinatown 2015 8.24 50% Lead in investment Wonder Woman 2017 USD820m 7.5% Joint investment with (global box office) Warner Bros. The Foreigner 2017 5.37 30% Joint investment with Yaolai Film Police Story 2013 2013 5.34 62.5% Lead in investment Go Away Mr. Tumour 2015 5.12 51% Lead in investment City of Rock 2017 4.57 15% Joint investment Source: Company data, HSBC Qianhai Securities
Exhibit 50. Project pipeline of Wanda Film Title Expected release time Cast % of investment Lead in or joint investment Boonie Bears: Autumn Q1 2019 Animation 10% Joint investment Awesomeness Bodies at Rest Q2 2019 Nick Cheung, Yang Zi 30% Lead in investment The King's Avatar Q3 2019 Animation 30% Lead in investment Jade Dynasty Q3 2019 Meng Meiqi 25% Joint investment Candle In The Tomb (2019) Q4 2019 Zhang Hanyu, Jiang Wu 40% Lead in investment Source: Company data, HSBC Qianhai Securities
Initiate at Buy with a target price of RMB28.50
For the screening business, box office revenue comes from both China and overseas. We estimate China’s attendances and ticket prices will increase 11%/14%/13% and 0%/2.5%/2%, respectively in 2018/19/20e, while overseas attendance and ticket price will increase 2%/3%/4% and -1%/0%/0%. As for costs, we expect box office sharing and rent as a percentage of revenue to remain stable and fixed costs like remuneration and depreciation to increase in line with the growing screen numbers. We estimate screen numbers will grow 15.5%/12.1%/12.0% in 2018/19/20e. We estimate gross margin of the screening business to be 10.6%/11.5%/12.1% in 2018/19/20e.
For the merchandising business, we expect revenue as a percentage of box office revenue to reach 21%/22%/23%, with gross margin steady at 61% over 2018/19/20e.
For cinema advertising, we estimate revenue will grow 5.0%/9.0%/10.0%, with gross margin stable at 67.5% over 2018/19/20e.
Selling expenses include advertising and relevant personnel expenses. Given the growth in company, we expect selling expenses as a percentage of total sales to slightly decrease in 2019-20. We estimate selling expenses as a percentage of total sales to be 7.2%/7.0%/7.0% over 2018-20e. Administrative expenses consist mainly of employee compensation. As a percentage of total sales, we expect them to remain steady at 8.0% over 2018-20e. We estimate finance costs as a percentage of total sales to be 1.2%/0.9%/0.6% over 2018-20e.
We expect net profit of Wanda Film to grow -15.0%/21.4%/17.7% y-o-y to RMB1.289bn, RMB1.564bn, and RMB1.841bn in 2018/2019/20e.
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Exhibit 51. Wanda Film: Revenue forecasts Revenue (RMBm) 2017 2018e 2019e 2020e Film screening 8,334 9,140 10,467 11,886 Advertising 2,400 2,520 2,747 3,021 Merchandising 1,808 1,969 2,363 2,807 Others 687 474 474 474 Total revenue 13,229 14,104 16,052 18,189 Source: Company data, HSBC Qianhai Securities estimates
Exhibit 52. Operational estimates for cinemas and cinema chains
2017 2018e 2019e 2020e China Attendance in China (m) 187.0 207.6 236.6 267.4 y-o-y 14.0% 11.0% 14.0% 13.0% Ticket price in China (RMB) 37.8 37.8 38.7 39.5 y-o-y -0.1% 0.0% 2.5% 2.0% Screen number in China 4,134 4,833 5,461 6,171 Overseas Attendance overseas (m) 21.1 21.5 22.2 23.1 y-o-y 4.6% 2.0% 3.0% 4.0% Ticket price overseas (RMB) 72.2 71.4 71.4 71.4 y-o-y 4.1% -1.0% 0.0% 0.0% Screen number overseas 437 446 455 455
Merchandising revenue as % of box 21.1% 21.0% 22.0% 23.0% office revenue Advertising revenue growth rate 5.0% 9.0% 10.0% Source: Company data, HSBC Qianhai Securities estimates
Exhibit 53. Operating cost estimates (RMBm) 2017 2018e 2019e 2020e Film screening costs in China Variable costs: Box office sharing 2,739 3,041 3,553 4,095 As % in revenue 40% 40% 40% 40% Rental cost 753 836 977 1,126 As % in revenue 11% 11% 11% 11% Fixed costs: Remuneration 893 1,027 1,150 1,288 Depreciation & amortisation 937 1,077 1,207 1,352 Others 1,336 1,510 1,676 1,860
Total film screening costs in China 7,329 8,168 9,260 10,446
Gross margin Overseas screening 56.0% 56.0% 56.0% 56.0% Advertising 67.5% 67.5% 67.5% 67.5% Merchandising 60.0% 61.0% 61.0% 61.0%
Operating costs 8,983 9,859 11,179 12,627 Overall gross margin 32.1% 30.1% 30.4% 30.6% Source: Company data, HSBC Qianhai Securities estimates
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Exhibit 54. Wanda Film: Expense-to-sales ratios and earnings forecasts
2017 2018e 2019e 2020e Selling expense-to-sales ratio (%) 7.2% 7.2% 7.0% 7.0% Administrative expense-to-sales ratio (%) 8.0% 8.0% 8.0% 8.0% Financial expense-to-sales ratio (%) 1.7% 1.2% 0.9% 0.6%
Net profit attributable to shareholders of 1,516 1,289 1,564 1,841 parent company (RMBm) Source: Company data, HSBC Qianhai Securities estimates
We take the growth rates of the company’s 2019e attendance in China and depreciation and amortization to conduct a sensitivity analysis on 2019e net profit. The results are below:
Exhibit 55. Wanda Film: 2019e net profit sensitivity analysis ______2019e view growth in China ______10.0% 12.0% 14.0% 16.0% 18.0% 2019e 8.0% -4.2% -1.0% 2.2% 5.4% 8.6% depreciation & 10.0% -5.3% -2.1% 1.1% 4.3% 7.5% amortisation 12.0% -6.4% -3.2% 0.0% 3.2% 6.4% growth rate 14.0% -7.5% -4.3% -1.1% 2.1% 5.3% 16.0% -8.6% -5.4% -2.2% 1.0% 4.2% Source: HSBC Qianhai Securities estimates
Balance sheet and cash flow analysis According to the 3Q18 quarterly report, the company’s debt asset ratio was 43.42%. Building new cinemas has resulted in a higher debt ratio. Short-term and long-term borrowings amounted to RMB2.3bn and RMB1.9bn, respectively.
Capex was mainly for building cinemas. As we expect the number of the company’s newly-built screens to decline over the next three years, capex should decrease. We estimate capex will be RMB1.2bn, RMB1.1bn, and RMB1.1bn over 2018-20e. We expect equity free cash flow to pick up and reach RMB882m, RMB1.484bn, and RMB1.990bn in 2018-20e.
Exhibit 56. Balance sheet and cash flow (RMBm) Balance sheet 2017 2018e 2019e 2020e Cash 2,851 3,040 3,459 3,920 Debt 4,280 3,896 3,206 2,119 Net debt (cash) 1,429 856 -253 -1,801 Shareholders’ equity 11,670 12,650 13,838 15,237
Cash flow statement Cash flow from operating 1,988 2,118 2,593 3,054 activities Capex -1,747 -1,200 -1,100 -1,100 FCFE 105 882 1,484 1,990 Source: Company data, HSBC Qianhai Securities estimates
Valuation and risks
The stock was suspended in July 2017 due to asset restructuring and resumed trading in November 2018. The A-share market retreated during the suspension, resulting in a significant fall in the stock price after trading resumed. Currently, the stock is trading at c12.3x 2019e EV/EBITDA, 2SD below historical average.
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We use a SOTP valuation method. For the cinema business, we assign a 2019e EV/EBITDA of 12x, implying a market cap of RMB36.9bn. The average of 2019e EV/EBITDA for A-share cinema stocks is 11.3x. We estimate 2019e EBITDA growth of the cinema business to be 21%, slightly higher than the average growth rate of A-share cinema stocks (20.4%). As such, our target 2019e EV/EBITDA multiple of 12x for its cinema business is justified, in our view.
For film & TV business to be injected, Wanda Media has pledged to achieve net profit of RMB888m in 2019e. Taking the comparable valuation of the film & TV industry as a reference, we assign a 2019e PE of 15x for the film & TV business, implying a market cap of RMB13.3bn.
Therefore, we derive a total market cap of RMB50.2bn, implying a target price of RMB28.50. Our target price implies an upside of 33%. We initiate coverage with a Buy rating.
Share price catalysts: Increase in market share and greater operational efficiency due to industry chain consolidation.
Exhibit 57. SOTP valuation Cinema business Film & TV production business EV/EBITDA 12 PE 15 2019e EBITDA(RMBbn) 3.057 2019e net profit (RMBbn) 0.888 2019e EV (RMBbn) 36.7 Corresponding market cap (RMBbn) 36.9 Corresponding market cap (RMBbn) 13.3 Total target market cap (RMBbn) 50.2 Target price (RMB) 28.50 Source: HSBC Qianhai Securities estimates
Exhibit 58. EV/EBITDA 35
30
25 -2SD -1SD 20 Average +1SD 15 +2SD
10
Source: Wind, HSBC Qianhai Securities
Key downside risks: Competition. The number of cinemas has been rapidly growing in China and the industry has become increasingly competitive. The company’s market share could be affected if its peers expand their business, posing a risk to the company’s earnings growth.
Film quality. The cinema chain industry is subject to the impact of upstream film production and distribution. The quality and quantity of films affect box office of the company. Operating results could be affected if there is a shortage of quality films.
Integration. The company plans to acquire movie, TV series and gaming businesses to expand into content production. However, there are big differences between its main cinema chain business and those businesses. There are risks about whether effective integration and synergies can be achieved.
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The stock was included in the Shenzhen-Hong Kong Stock Connect scheme in March 2017. In March 2019, the shareholding under the scheme accounted for c0.24% of the total outstanding A-shares of the company.
Exhibit 59. Shareholding under the Shenzhen-Hong Kong Stock Connect as a percentage of outstanding A-shares of Wanda Film (%)
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0 2017/3/17 2017/6/17 2017/9/17 2017/12/17 2018/3/17 2018/6/17 2018/9/17 2018/12/17
Source: Wind, HSBC Qianhai Securities
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Financials & valuation: Wanda Film Buy
Financial statements Valuation data Year to 12/2017a 12/2018e 12/2019e 12/2020e Year to 12/2017a 12/2018e 12/2019e 12/2020e Profit & loss summary (CNYm) EV/sales 3.0 2.7 2.3 2.0 Revenue 13,229 14,104 16,052 18,189 EV/EBITDA 12.8 15.3 12.3 10.0 EBITDA 3,065 2,524 3,057 3,574 EV/IC 3.1 3.0 2.9 2.8 Depreciation & amortisation -959 -756 -976 -1,196 PE* 24.9 29.3 24.1 20.5 Operating profit/EBIT 2,106 1,768 2,081 2,378 PB 3.2 3.0 2.7 2.5 Net interest -229 -176 -149 -104 FCF yield (%) 0.3 2.3 3.9 5.3 PBT 1,877 1,592 1,932 2,273 Dividend yield (%) 0.9 0.8 1.0 1.2 HSBC Qianhai PBT 1,877 1,592 1,932 2,273 * Based on HSBC Qianhai EPS (diluted) Taxation -361 -303 -367 -432 Net profit 1,516 1,289 1,564 1,841 HSBC Qianhai net profit 1,516 1,289 1,564 1,841 ESG metrics Cash flow summary (CNYm) Environmental Indicators Governance Indicators 12/2018a Cash flow from operations 1,988 2,118 2,593 3,054 GHG emission intensity* No. of board members 6 Capex -1,747 -1,200 -1,100 -1,100 Energy intensity* Average board tenure (years) 3.8 Cash flow from investment -774 -1,620 -1,798 -2,152 Dividends -352 -309 -375 -442 CO2 reduction policy No Female board members (%) 0 Change in net debt 590 -573 -1,109 -1,548 Social Indicators Board members independence (%) 33.3 FCF equity 105 882 1,484 1,990 Employee costs as % of revenues Balance sheet summary (CNYm) Employee turnover (%) Intangible fixed assets 14,718 14,718 14,718 14,718 Diversity policy No Tangible fixed assets 2,695 3,138 3,262 3,166 Source: Company data, HSBC Qianhai Securities Current assets 5,023 5,344 6,039 6,797 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Cash & others 2,851 3,040 3,459 3,920 Total assets 23,142 23,907 24,726 25,388 Operating liabilities 7,147 7,316 7,634 7,984 Issuer information Gross debt 4,280 3,896 3,206 2,119 Share price (CNY) 21.42 Free float 100% Net debt 1,429 856 -253 -1,801 Shareholders' funds 11,670 12,650 13,838 15,237 Target price (CNY) 28.50 Sector Media Invested capital 12,438 12,845 12,926 12,778 RIC (Equity) 002739.SZ Country China Bloomberg (Equity) 002739 CH Analyst Gary Guo Market cap (USDm) 6,259 Contact +86 755 8898 3137 Ratio, growth and per share analysis Year to 12/2017a 12/2018e 12/2019e 12/2020e Y-o-y % change Price relative Revenue 18.0 6.6 13.8 13.3 EBITDA 12.0 -17.6 21.1 16.9 70 70 Operating profit 5.5 -16.0 17.7 14.3 60 60 PBT 4.0 -15.2 21.3 17.7 50 HSBC Qianhai EPS 10.9 -15.0 21.4 17.7 50 40 Ratios (%) 40 30 30 Revenue/IC (x) 1.1 1.1 1.2 1.4 20 ROIC 14.7 11.3 13.1 15.0 20 10 ROE 13.7 10.6 11.8 12.7 10 0 ROA 8.1 6.1 6.9 7.7 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 EBITDA margin 23.2 17.9 19.0 19.7 Wanda Film Rel to CSI 300 Index Operating profit margin 15.9 12.5 13.0 13.1 EBITDA/net interest (x) 13.4 14.4 20.5 34.2 Net debt/equity 12.2 6.7 -1.8 -11.8 Source: HSBC Qianhai Securities Net debt/EBITDA (x) 0.5 0.3 -0.1 -0.5 Note: Priced at close of 26 Mar 2019 CF from operations/net debt 139.1 247.4 Per share data (CNY) EPS Rep (diluted) 0.86 0.73 0.89 1.04 HSBC Qianhai EPS (diluted) 0.86 0.73 0.89 1.04 DPS 0.20 0.18 0.21 0.25 Book value 6.63 7.18 7.86 8.65
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Hengdian Entertainment (603103 CH)
Focuses on third and fourth-tier cities, the growth drivers of box office revenue at the industry level
Over 50% of its box office comes from smaller cities, the highest in the industry
Initiate at Buy with a target price of RMB28.00
A cinema chain tapping into the brand influence of Hengdian
Established in 2008, Hengdian Entertainment focuses on franchise cinemas, film screening and other related businesses. It is the market leader in third, fourth and fifth-tier cities in China. Hengdian has two types of cinemas – those that it owns and franchised cinemas, which use its brand name. The company takes about 2% of the box office as the franchise fee.
In 2018, revenue rose 8.2% y-o-y to RMB2.724bn, and net profit attributable to the parent dropped 3.0% y-o-y to RMB321m. Net profit has slipped slightly in both 2017 and 2018, mainly due to rising labour and leasing costs in larger cities, but we expect to see a steady recovery in the next 2-3 years as operational efficiency improves.
Exhibit 60. Revenue and growth (RMBm/%) Exhibit 61. Net profit and growth (RMBm/%)
5,000 120% 500 453 200% 4041 393 400 356 150% 4,000 3578 344 331 321 344 3140 80% 2724 300 100% 3,000 2518 2280 2110 200 50% 2,000 119 40% 1180 100 0% 1,000 0 -50% 0 0% 2014 2015 2016 2017 2018 2019e 2020e 2021e
Revenue YoY Net profit YoY
Source: Company data, HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities estimates
The major revenue sources are film screening, merchandising and advertising. In 2018, the merchandising and advertising businesses contributed 7.3% and 9.1% of the total revenue and the numbers are still growing. We believe that the strategy of building cinema complexes will help generate non-box-office revenue and diversify its business operations, creating a hedge against industry fluctuations.
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Exhibit 62. Revenue breakdown
100% 4.2% 2.8% 4.9% 6.2% 11.7% 9.1% 9.5% 13.6% 10.4% 9.8% 9.6% 9.8% 80% 7.3% 7.9% 8.1% 8.4%
60%
40%
20% 78.4% 81.8% 78.3% 76.7% 74.7% 73.3% 72.9% 72.4% 0% 2014 2015 2016 2017 2018 2019e 2020e 2021e
Film screening Advertising Merchandising Cinema chain distribution Others
Source: Company data, HSBC Qianhai Securities estimates
Exhibit 63. Gross profit breakdown
100% 14.1% 11.8% 22.6% 28.4% 80% 9.9% 18.4% 38.6% 39.9% 39.7% 39.2% 18.5% 60% 29.3% 26.0% 41.5% 40% 28.8% 33.3% 34.1% 34.0% 33.8% 30.7% 20% 48.2% 24.9% 29.3% 34.6% 37.1% 37.9% 38.1% 14.9% 0% -7.5% 2014 2015 2016 2017 2018 -12.32019e% -12.72020e% -12.22021e% -20%
Film screening Advertising Merchandising Cinema chain distribution Others
Source: Company data, HSBC Qianhai Securities estimates
Exhibit 64. Gross margin trend
120%
100%
80%
60%
40%
20%
0% 2014 2015 2016 2017 2018 2019e 2020e 2021e -20%
Film screening Advertising Merchandising Cinema chain distribution
Source: Company data, HSBC Qianhai Securities estimates
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Exhibit 65. Net cash flow from operating Exhibit 66. Capital expenditure (RMBm) activities (RMBm)
1200 500 448 996 424 424 1000 400 400 400 816 837 400 354 740 308 800 667 580 612 300 600 200 400 223 100 200 0 0
Source: Company data, HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities estimates
According to a company announcement in 2018, the controlling shareholder is Hengdian Group Holdings Limited, with an 80.35% stake; Jinhua Hengying Investment Partnership (Limited Partnership) holds 7.95% shares. Hengdian Group Holdings Limited is a general partner of Jinhua Hengying Investment Partnership (Limited Partnership); the two companies are persons acting in concert.
The focus is on third and lower-tier cities
The rapid growth in cinema screens in first-tier cities slowed growth in urban box office revenue. While cinema construction in third and fourth-tier cities has also boomed, changes in consumption habits and increased purchasing power have stimulated the demand for entertainment in these smaller cities.
Smaller is of course a relative term in China. For example, Guilin, a tourist hotspot in Guangxi Province in the southwest of the country which is classified as a third-tier city, has a population of about 5m people.
According to EntGroup, a leading entertainment website, the percentage of box office revenue in China’s third and fourth-tier cities grew from 36.16% in H1 2016 to 41.16% in H1 2018. That of first and second-tier cities fell from 61.71% to 58.36% over the same period. Third and fourth- tier cities are now the major driver force behind growth in box office revenue.
At the company level, third, fourth and fifth-tier cities are even more important. As of 2017, they accounted for 57.1% of Hengdian Entertainment’s box office revenue, the highest percentage in the industry. As a result, we expect the company’s box office results to exceed the industry average.
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Exhibit 67. Hengdian Entertainment’s box Exhibit 68. Box office contribution from office breakdown (2017) third, fourth and fifth-tier cities (2017)
57.1% 60% 50% 45.6% 42.9%
7% 40% 31.7% 27.1% First tier 30%
Second tier 36% 20% 57% Lower tier 10%
0%
SMI
Jinyi
Wanda Hengdian
Investment
China Film Cinema Film China Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
As of the end of 2018, the company had 402 cinemas and a total of 2,470 screens. Of these, it owns 316 cinemas and 1,996 screens. There rest are franchises. The company’s per screen output and attendance rates are above the industry average most of the time, demonstrating its relatively high level of operational efficiency. We are bullish about the prospects of the company’s film business in smaller cities, especially given the recent earnings slide due to increased labour and leasing costs in first and second-tier cities.
Exhibit 69. Number of cinemas and Exhibit 70. Proportion of cinemas it owns screens: Hengdian Entertainment
3000 30% 100% 2470 82.4% 81.8% 81.8% 2500 25% 80.6% 80.8% 2089 80% 2000 20% 78.6% 1404 1727 77.1% 76.9% 77.2% 78.2% 60% 1500 1098 15% 1000 10% 40% 340 402 500 179 229 285 5% 0 0% 20% 2014 2015 2016 2017 2018 0% Cinema Screen 2014 2015 2016 2017 2018 YoY-Cinema YoY-Screen % of Cinemas % of Screens
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
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Exhibit 71. Per screen output of own Exhibit 72. Attendance rate of own cinemas cinemas (RMBm) 1.50 1.39 25% 1.26 1.31 1.20 1.19 19.1% 1.20 1.06 1.10 1.06 20% 1.01 15.2% 15.2% 13.3% 0.90 15% 11.6% 16.0% 17.0% 0.60 10% 14.0% 13.0% 12.0% 0.30 5%
0.00 0% 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Hengdian Industry average Hengdian Industry average
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
Initiate at Buy with a target price of RMB28.00
For the screening business, we estimate revenue to grow 13.2%/13.2%/12.2% in 2019/20/21e, driven by the increase in attendance and ticket prices. For operating costs, we expect the company’s share of box office takings to remain stable in 2019-21e, representing 40.7% of the costs. Considering the rise in remuneration, rents, depreciation and amortization due to the increase in screens, we expect the gross margin of the screening business to be -3.6%/-3.7%/-3.7% for 2019/20/21e.
For the franchise business, the company’s revenue comes from the box office share of franchise cinemas, and we expect the company’s share of the box office to remain at around 1.8%. We estimate revenue to grow 51.5%/17.3%/16.3% in 2019/20/21e, driven by the increase in attendance and ticket prices.
For the merchandising business, we expect revenue as a percentage of box office revenue to reach 12.5%/12.7%/13.0%, with gross margin steady at 76.0% in 2019/20/21e.
For the cinema advertising business, we estimate revenue will grow 24.0%/18.0%/16.0%, with a gross margin of 99.98% in 2019/20/21e.
Selling expenses include advertising and sales personnel expenses. We expect the selling expense-to-sales ratio to remain stable at 2.4% in 2019-21e. Administrative expenses consist mainly of staff remuneration. We expect the administrative expense-to-sales ratio to remain steady at 2.3% over 2019-21e. We estimate the financial expense-to-sales ratio to be -0.1%/-0.1%/-0.2% over 2019-21e.
We expect Hengdian Entertainment’s net profit to grow 7.2%/14.4%/15.1% y-o-y to RMB344m/393m/453m in 2019-21e.
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Exhibit 73. Revenue estimates of Hengdian Entertainment
Revenue (RMBm) 2017 2018 2019e 2020e 2021e Film screening 1,930 2,034 2,302 2,607 2,925 Advertising 157 199 247 291 338 Merchandising 247 249 299 343 394 Cinema chain distribution 5 5 7 9 10 Others 179 238 285 328 374 Total revenue 2,518 2,724 3,140 3,578 4,041 Source: Company data, HSBC Qianhai Securities estimates
Exhibit 74. Operational data estimates of cinemas and cinema chains
2017 2018 2019e 2020e 2021e Self-owned cinemas Box office (RMBm) 2,001 2,110 2,388 2,704 3,034 Attendance (m) 66.5 67.4 74.8 83.1 91.4 y-o-y 9.0% 1.4% 11.0% 11.0% 10.0% Ticket price (RMB) 30.1 31.3 31.9 32.5 33.2 y-o-y -0.7% 3.9% 2.0% 2.0% 2.0% Screen number 1,684 1,996 2,335 2,639 2,929 y-o-y 19.3% 18.5% 17.0% 13.0% 11.0%
Franchised cinemas Box office sharing 270 352 416 488 567 Attendance (m) 9.3 11.7 13.6 15.7 17.9 y-o-y 23.5% 26.8% 16.0% 15.0% 14.0% Ticket price 29.2 29.9 30.5 31.1 31.8 y-o-y -1.0% 2.6% 2.0% 2.0% 2.0% Cinema chain revenue sharing % 1.8% 1.4% 1.8% 1.8% 1.8%
Merchandising revenue as % of box office 12.3% 11.8% 12.5% 12.7% 13.0% revenue Advertising revenue growth 38.9% 26.8% 24.0% 18.0% 16.0% Other businesses’ growth 28.6% 33.0% 20.0% 15.0% 14.0% Source: Company data, HSBC Qianhai Securities estimates
Exhibit 75. Operating cost estimates (RMBm) 2017 2018 2019e 2020e 2021e Costs of film screening Box office sharing cost 785.5 827.8 937.1 1,061.0 1,190.4 Sharing % 40.7% 40.7% 40.7% 40.7% 40.7%
Remuneration 343.2 418.7 489.9 568.3 653.5 Rents 257.3 295.9 337.3 377.7 415.5 Depreciation & amortisation 239.0 277.2 318.8 357.1 392.8 Others 215.1 257.3 301.0 340.2 381.0 Total film screening costs 1,840.1 2,076.9 2,384.1 2,704.2 3,033.2 Gross margin Film screening 4.66% -2.11% -3.55% -3.74% -3.71% Advertising 99.98% 99.88% 99.98% 99.98% 99.98% Merchandising 75.24% 76.80% 76.00% 76.00% 76.00% Cinema chain distribution 100.00% 100.00% 100.00% 100.00% 100.00% Others 92.98% 93.34% 93.00% 93.00% 93.00% Operating costs Advertising 0.0 0.2 0.0 0.1 0.1 Merchandising 61.2 57.8 71.7 82.4 94.7 Cinema chain distribution 0.0 0.0 0.0 0.0 0.0 Others 12.5 15.8 20.0 22.9 26.2
Total operating costs 1,913.8 2,150.7 2,475.7 2,809.6 3,154.1 Overall gross margin 23.98% 21.06% 21.16% 21.47% 21.95% Source: Company data, HSBC Qianhai Securities estimates
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Exhibit 76. Expense-to-sales ratios and net profit estimates of Hengdian Entertainment
2017 2018 2019e 2020e 2021e Selling expenses-to-sales ratio (%) 2.7% 2.4% 2.4% 2.4% 2.4% Administrative expense-to-sales ratio (%) 2.2% 2.3% 2.3% 2.3% 2.3% Financial expense-to-sales ratio (%) 0.3% 0.1% -0.1% -0.1% -0.2%
Net profit attributable to shareholders 331 321 344 393 453 the parent (RMBm) Source: Company data, HSBC Qianhai Securities estimates
We take the estimated growth in attendance at the cinemas the company owns in 2019e and depreciation and amortization to conduct a sensitivity analysis on 2019e net profit. The results are tabulated below:
Exhibit 77. Hengdian Entertainment: 2019e net profit sensitivity analysis ______2019e view growth rate of asset-linked cinemas ______7.0% 9.0% 11.0% 13.0% 15.0% 2019e 11.0% -8.4% -2.9% 2.5% 7.9% 13.3% depreciation & 13.0% -9.6% -4.2% 1.2% 6.6% 12.1% amortisation 15.0% -10.8% -5.4% 0.0% 5.4% 10.8% growth rate 17.0% -12.1% -6.6% -1.2% 4.2% 9.6% 19.0% -13.3% -7.9% -2.5% 2.9% 8.4% Source: HSBC Qianhai Securities estimates
Balance sheet and cash flow analysis According to the 2018 annual report, the debt-asset ratio was 32.13% (falling to 20.76% after advances from customers) and net cash was RMB221m. Capex was mainly for building cinemas. As we estimate 2019-21e capex to be RMB400m each year, we estimate equity free cash flow to be RMB383m, RMB482m and RMB645m over this period.
Exhibit 78. Balance sheet and cash flow (RMBm) Balance sheet 2017 2018 2019e 2020e 2021e Cash 324 225 505 870 1,379 Debt 29 4 4 4 4 Net debt (cash) -295 -221 -501 -865 -1,375 Shareholders’ equity 1,974 2,190 2,431 2,706 3,023
Cash flow statement Cash flow from operating 612 667 740 837 996 activities Capex -424 -424 -400 -400 -400 FCFE 198 292 383 482 645 Source: Company data, HSBC Qianhai Securities estimates
40 Equities ● Media March 2019
Valuation and risks
We use an EV/EBITDA valuation method. The stock is trading at 14x 2019eEV/EBITDA, 1.5 SD below the historical average (20x) since it was listed in October 2017. In our view, the stock traded at very rich multiples after it listed, so we use the valuation after July 2018 as the benchmark.
EBITDA grew 4% in 2018 and its EV/EBITDA ranged between 13x and 15x. We estimate 2019e EBITDA growth rate to be 6.1%, higher than 2018. Therefore, we assign a valuation of 16x 2019e EV/EBITDA. Based on that multiple, we derive a market cap of RMB12.7bn, implying a target price of RMB28.00. Our target price implies an upside of 11%. Considering that the company focuses on third and lower-tier cities, which should drive revenue growth, we initiate coverage with a Buy rating.
Share price catalysts: Box office growth in lower-tier cities boosting rapid earnings growth.
Exhibit 79. Hengdian Entertainment’s EV/EBITDA
30
25 -2SD 20 -1SD Average 15 +1SD +2SD 10
Source: Wind, HSBC Qianhai Securities
Key downside risks: Business expansion. The company expects to further increase the number of cinemas it owns. The expansion would put pressure on its operations, management and risk control. If the company fails to enhance management and operational efficiency, business expansion might have a negative impact on the company’s development.
Depreciation expense. The RMB770m proceeds from the IPO in 2017 were for building cinemas. We expect the cinema projects will involve large-scale depreciation expense for the company every year. If the industry environment changes, resulting in lower-than-expected returns from the new cinemas, depreciation of fixed assets would impact profitability.
Competition. China’s film market is growing rapidly and the government is encouraging investment in and construction of cinemas. As a result, competition is intensifying. If the company fails to respond, operating results and the development outlook might be affected.
The stock was included in the Shanghai-Hong Kong Stock Connect scheme in June 2018. The shareholding ratio under the scheme increased from 0.15% in June 2018 to 0.22% in March 2019 (as a percentage of total outstanding A-shares).
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Exhibit 80. Hengdian Entertainment: Shareholding under the Shanghai-Hong Kong Stock Connect as a percentage of outstanding A-shares
1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0
Source: Wind, HSBC Qianhai Securities
42 Equities ● Media March 2019
Financials & valuation: Hengdian Entertainment Buy
Financial statements Valuation data Year to 12/2018a 12/2019e 12/2020e 12/2021e Year to 12/2018a 12/2019e 12/2020e 12/2021e Profit & loss summary (CNYm) EV/sales 4.1 3.5 2.9 2.5 Revenue 2,724 3,140 3,578 4,041 EV/EBITDA 15.5 14.2 11.3 9.1 EBITDA 718 761 924 1,099 EV/IC 5.8 5.8 5.9 6.2 Depreciation & amortisation -292 -313 -413 -513 PE* 35.5 33.1 29.0 25.2 Operating profit/EBIT 425 448 511 586 PB 5.2 4.7 4.2 3.8 Net interest -2 3 5 9 FCF yield (%) 2.6 3.4 4.3 5.7 PBT 423 451 516 595 Dividend yield (%) 1.0 0.9 1.0 1.2 HSBC Qianhai PBT 423 451 516 595 * Based on HSBC Qianhai EPS (diluted) Taxation -102 -107 -123 -142 Net profit 321 344 393 453 HSBC Qianhai net profit 321 344 393 453 ESG metrics Cash flow summary (CNYm) Environmental Indicators Governance Indicators 12/2018a Cash flow from operations 667 740 837 996 GHG emission intensity* No. of board members 7 Capex -424 -400 -400 -400 Energy intensity* Average board tenure (years) 3.4 Cash flow from investment -652 -357 -355 -351 Dividends -112 -103 -118 -136 CO2 reduction policy No Female board members (%) 0 Change in net debt 74 -280 -364 -509 Social Indicators Board members independence (%) 42.9 FCF equity 292 383 482 645 Employee costs as % of revenues Balance sheet summary (CNYm) Employee turnover (%) Intangible fixed assets 758 758 758 758 Diversity policy No Tangible fixed assets 897 984 971 858 Source: Company data, HSBC Qianhai Securities Current assets 1,523 1,786 2,188 2,736 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Cash & others 225 505 870 1,379 Total assets 3,227 3,577 3,965 4,401 Operating liabilities 1,032 1,142 1,255 1,374 Issuer information Gross debt 4 4 4 4 Share price (CNY) 25.15 Free float 12% Net debt -221 -501 -865 -1,375 Shareholders' funds 2,190 2,431 2,706 3,023 Target price (CNY) 28.00 Sector Media Invested capital 1,920 1,880 1,791 1,599 RIC (Equity) 603103.SS Country China Bloomberg (Equity) 603103 CH Analyst Gary Guo Market cap (USDm) 1,697 Contact +86 755 8898 3137 Ratio, growth and per share analysis Year to 12/2018a 12/2019e 12/2020e 12/2021e Y-o-y % change Price relative Revenue 8.2 15.3 13.9 12.9 EBITDA 4.1 6.1 21.4 19.0 45.00 45.00 Operating profit -3.2 5.3 14.1 14.7 PBT -2.2 6.6 14.6 15.3 40.00 40.00 HSBC Qianhai EPS -3.0 7.2 14.4 15.1 35.00 35.00 Ratios (%) 30.00 30.00 Revenue/IC (x) 1.5 1.7 1.9 2.4 25.00 25.00 ROIC 18.2 18.0 21.2 26.3 ROE 15.4 14.9 15.3 15.8 20.00 20.00 ROA 10.3 10.0 10.3 10.7 15.00 15.00 EBITDA margin 26.3 24.2 25.8 27.2 2017 2018 2019 Operating profit margin 15.6 14.3 14.3 14.5 Hengdian Entertainment Rel to CSI 300 Index EBITDA/net interest (x) 292.1 Net debt/equity -10.1 -20.6 -32.0 -45.5 Source: HSBC Qianhai Securities Net debt/EBITDA (x) -0.3 -0.7 -0.9 -1.3 Note: Priced at close of 26 Mar 2019 CF from operations/net debt Per share data (CNY) EPS Rep (diluted) 0.71 0.76 0.87 1.00 HSBC Qianhai EPS (diluted) 0.71 0.76 0.87 1.00 DPS 0.25 0.23 0.26 0.30 Book value 4.83 5.37 5.97 6.67
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China Film (600977 CH)
A pioneer in China’s film industry covering the whole value chain, from production and distribution to screening
The company is a leading importer of foreign films
Upgrade to Buy from Hold; raise TP to RMB19.90 from RMB16.50
A pioneer in China’s film industry covering the whole value chain
China Film was established in December 2010 and listed on the A-share market in August 2016. The company is involved in the whole industry value chain, from film production, distribution and cinemas, to film and TV services.
China Film is one of only two Chinese companies licensed to distribute imported films and works with film companies from all over the world. It has produced blockbusters such as Warcraft, Kung Fu Panda 3, and The Great Wall in co-operation with leading foreign producers. The “China Film” brand is becoming increasingly influential in overseas markets.
In 1H18, the company’s revenue grew 1.48% y-o-y to RMB4.619bn; net profit attributable to the parent grew 10.97% y-o-y to RMB667m; screening business revenue grew 10.33% y-o-y to RMB973m. According to its positive profit alert before the 2018 results, the company estimates net profit attributable to the parent will increase by 45-60%, or RMB434-579m. The company estimates recurring net profit attributable to parent to increase by 0-15%, or RMB0-124m.
Exhibit 81. Revenue (RMBm) and growth Exhibit 82. Net profit attributable to parent (%) company (RMBm) and growth (%)
16,000 25% 2,000 80%
20% 12,000 1,500 60% 15% 8,000 1,000 40% 10% 4,000 500 20% 5%
- 0% - 0%
Revenue YoY Net profit YoY
Source: Company data, HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities estimates
In 1H18, the cinema chain it controls and has investments in generated box office revenue of RMB8,831m, up 15.89% y-o-y, in line with the growth of China’s box office growth (17.83%) in the same period. The company has adopted a steady expansion strategy in this business and maintains a stable profit margin. In 1H18, screen numbers grew 18%, lower than the national
44 Equities ● Media March 2019
average of 26%. However, average output per screen in China dropped 6.54% y-o-y, while the company’s declined only 2.32%. The operating margin of the screening business in 1H18 fell 0.3ppt y-o-y to 15.8%.
According to the company’s 2018 interim report, film distribution accounted for 58% of revenue, screening 21%, film and TV services 12%, and film and TV production 9%.
Exhibit 83. China Film: Gross margin Exhibit 84. Gross margins of different segments of China Film
25% 23.50% 40% 21.50% 20.54% 20.71% 21.28% 30% 20% 21.25% 21.40% 20% 15% 10%
10% 0% 2014 2015 2016 2017 2018e 2019e 2020e -10% 5% -20%
0% Film distribution Film screening 2014 2015 2016 2017 2018e 2019e 2020e
Flim/TV services Film/TV production
Source: Company announcement, HSBC Qianhai Securities estimates Source: company data, HSBC Qianhai Securities estimates
According to the 3Q18 quarterly report, the controlling shareholder was China Film Group, with a stake of 67.36%.
Screening: The largest cinema market share
The film screening business is China Film’s second largest source of revenue. It includes cinema chains and cinema investment and management. The company controls or has interests in cinemas with 15,945 screens in China, a market share of 28.67%, down 0.56ppt from the end of 2017.
The company has four cinema chains in which it has a controlling stake and is invested in three others. Last year, 153 new cinemas and 1,105 screens were added. Overall attendance amounted to 253m people, generating box office revenue of RMB8.831bn. Among the top 10 box office cinema chains, China Film Group Digital Cinema Line, China Film South Cinema Circuit and China Film Stellar Theater Chain were ranked No 4, 5 and 6.
China Film invests in and manages cinemas through China Film Cinema Investment Company. As of 1H18, China Film had 128 controlled cinemas with 930 screens generating box office of RMB824m. The attendance amounted to 25m, with an average attendance of 17.26%, leading the industry in China.
In 1H18, revenue from film screening increased 10.33% y-o-y to RMB973m, and the gross margin was 21.27%. As cinema rents are fixed expenses, the gross margin of film screening is highly correlated with box office revenue. We expect China Film to maintain a steady box office revenue growth, supporting an increase in gross margin.
45 Equities ● Media March 2019
Exhibit 85. Revenue and growth rate of Exhibit 86. Gross margin of film screening film screening of China Film (RMBm/%) of China Film
2500 60% 30% 1920 50% 2000 1792 1798 28.02% 40% 25% 23.37% 23.88% 1500 1226 30% 21.29% 21.27% 1015 973 20% 1000 20% 10% 15% 500 0% 10% 0 -10% 5%
0% 2014 2015 2016 2017 2018H1 Revenue YoY
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities
Channel expansion and increasing screen market share are the main development strategies. China Film aims to increase the market share of its screens through M&A and organic growth by leveraging its strengths in brand power, finances and management.
Upgrade to Buy (from Hold) and raise TP to RMB19.90 (from RMB16.50)
The company will continue to introduce overseas blockbusters and expand its distribution business, so we raise 2018/19/20e film distribution revenue by 2.9%/5.5%/5.5%. Given the slowing growth of the film market, we lower 2018/19/20e screening revenue by 3.5%/1.8%/0.9%. As film & TV services are expanding after China Film acquired the stake in CFG-Barco (中影巴克), a technology leader in the digital cinema industry, we raise 2018/19/20e revenue of film & TV services by 0%/2.4%/6.7%.
Given the higher gross margin of the distribution business, we raise the 2018/19/20e gross margin by 0/0.6/1.2ppt. As revenue growth leads to a lower expense ratio, we lower the 2018/19/20e selling expense-to-sales ratio by 0/0.1/0.1ppt and administrative expense-to-sales ratio by 0/0.1/0.1ppt.
We raise China Film’s 2018/19/20e net profit estimates by 0.5%/6.9%/11.6% to RMB1.101bn, RMB1.325bn and RMB1.554bn.
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Exhibit 87. Revenue and earnings estimates revision by segment ______2018e ______2019e ______2020e ______Original Updated Change Original Updated Change Original Updated Change Revenue (RMBm) Film distribution 5,664 5,826 2.9% 6,513 6,874 5.5% 7,490 7,905 5.5% Film screening 2,050 1,978 -3.5% 2,316 2,274 -1.8% 2,594 2,570 -0.9% Film services 1,400 1,400 0.0% 1,750 1,792 2.4% 2,100 2,240 6.7% Film making and 717 717 0.0% 789 789 0.0% 868 868 0.0% production Others 127 127 0.0% 153 153 0.0% 183 183 0.0% Total revenue 9,958 10,048 0.9% 11,521 11,882 3.1% 13,236 13,767 4.0% Net profit 1,095 1,101 0.5% 1,239 1,325 6.9% 1,392 1,554 11.6% Change (ppt) Change (ppt) Change (ppt) Ratios Gross margin 21.3% 21.3% 0.0% 21.5% 22.1% 0.6% 21.6% 22.8% 1.2% Selling expenses 1.4% 1.4% 0.0% 1.4% 1.3% -0.1% 1.4% 1.3% -0.1% (% Sales) Administrative expenses 5.6% 5.6% 0.0% 5.6% 5.5% -0.1% 5.6% 5.5% -0.1% (% Sales) Source: Company data, HSBC Qianhai Securities estimates
We take the company’s 2019e screening revenue growth and gross margin of the screening business to conduct a sensitivity analysis on 2019e net profit. The results are tabulated below:
Exhibit 88. China Film: 2019e net profit sensitivity analysis ______2019e film screening revenue growth rate ______11.0% 13.0% 15.0% 17.0% 19.0% 18.0% -4.6% -4.5% -4.3% -4.1% -3.9% 2019e gross 20.0% -2.6% -2.4% -2.1% -1.9% -1.7% margin of film 22.0% -0.5% -0.3% 0.0% 0.3% 0.5% screening 24.0% 1.6% 1.9% 2.1% 2.4% 2.7% 26.0% 3.6% 4.0% 4.3% 4.6% 4.9% Source: HSBC Qianhai Securities estimates
Balance sheet and cash flow analysis According to the 3Q18 quarterly report, the debt-asset ratio was 33.38% and the debt asset ratio after advances from customers was 27.66% after excluding advances. The company has a low debt ratio and good solvency, demonstrating its ability to make interest payments and settle debts.
We estimate 2018/19/20e cash flow from operating activities to be RMB2,096/1,747/2,540m; we expect capex to maintain steady growth at RMB697m, RMB702m and RMB710m in 2018/19/20e, respectively.
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Exhibit 89. Balance sheet and cash flow (RMBm) Balance sheet 2017 2018e 2019e 2020e Cash 15,304 17,038 18,375 20,382 Debt 0 0 0 0 Net debt (cash) -7,873 -8,710 -9,432 -10,748 Shareholders’ equity 10,336 10,828 11,703 12,607
Cash flow statement Cash flow from operation 1,473 2,096 1,747 2,540 Capital expenditure -595 -697 -702 -710 Free Cash flow 954 1,631 1,293 2,090 Source: Company data, HSBC Qianhai Securities estimates
Valuation and risks
Our valuation is based on a 28x 2019e target PE (previously 25x 2019e PE). We estimate 2019e net profit growth to be 20.4%, higher than the net profit growth rate in 2018 (14.1%). Therefore, we believe it is reasonable to assign a 28x 2019e PE for the stock, which is higher than the average PE in 2018 (26x).
Based on this valuation multiple, we raise our TP to RMB19.90 from RMB16.50, implying 17% upside. Considering that the company is able to cover the whole value chain, we upgrade it to Buy from Hold.
Share price catalysts: Introduction of overseas blockbusters leading to rapid growth of distribution revenue; higher market share from cinema expansion.
Exhibit 90. China Film’s PE vs EPS growth
60 25
50 20 ）
% （
40 15 PE 30 10
20 5 EPSgrowth
10 0
PE EPS growth(%)
Source: Wind, HSBC Qianhai Securities estimates
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Exhibit 91. China Film’s PE band
60
50 Max 61x +1 SD 44x 40 Mean 33x
30 -1 SD 23x Min 16x 20
10
0 2016-11-18 2017-03-18 2017-07-18 2017-11-18 2018-03-18 2018-07-18 2018-11-18
Source: Wind, HSBC Qianhai Securities
Key downside risks: Film products below expectations. The company will release many films in 2019 and 2020. However, box office revenue is hard to predict, so earnings may fluctuate.
Regulatory risks. Regulation is becoming tighter and film content review is getting stricter. If the company’s products or films that are distributed cannot be released as per schedule due to regulatory reasons, its results could be affected.
Competition from new media. Short video, web series and other new media are growing swiftly in China, competing with traditional film and the TV industry. This may result in loss of audience and, in turn, lower revenue.
The stock was included in the Shanghai-Hong Kong Stock Connect scheme in June 2017. The shareholding ratio under the scheme increased from c0.02% in June 2017 to c2.1% in March 2019 (as a percentage of outstanding A-shares).
Exhibit 92. China Film: Shareholding under the Shanghai-Hong Kong Stock Connect as a percentage of outstanding A-shares
3.0 2.5 2.0 1.5 1.0 0.5
0.0
2017/7/1 2017/8/1 2017/9/1 2018/1/1 2018/2/1 2018/3/1 2018/4/1 2018/5/1 2018/6/1 2018/7/1 2018/8/1 2018/9/1 2019/1/1 2019/2/1 2019/3/1
2017/10/1 2017/11/1 2017/12/1 2018/10/1 2018/11/1 2018/12/1
Source: Wind, HSBC Qianhai Securities
49 Equities ● Media March 2019
Financials & valuation: China Film Co Ltd Buy
Financial statements Valuation data Year to 12/2017a 12/2018e 12/2019e 12/2020e Year to 12/2017a 12/2018e 12/2019e 12/2020e Profit & loss summary (CNYm) EV/sales 2.6 2.2 1.8 1.5 Revenue 8,988 10,048 11,882 13,767 EV/EBITDA 11.2 10.0 7.9 6.3 EBITDA 2,081 2,252 2,720 3,201 EV/IC 10.6 11.7 9.7 9.9 Depreciation & amortisation -649 -598 -712 -826 PE* 33.0 28.9 24.0 20.5 Operating profit/EBIT 1,432 1,653 2,007 2,375 PB 3.1 2.9 2.7 2.5 Net interest 99 124 136 151 FCF yield (%) 3.0 5.2 4.2 6.8 PBT 1,531 1,778 2,143 2,526 Dividend yield (%) 1.9 1.9 1.4 2.0 HSBC Qianhai PBT 1,531 1,778 2,143 2,526 * Based on HSBC Qianhai EPS (diluted) Taxation -395 -435 -528 -631 Net profit 965 1,101 1,325 1,554 HSBC Qianhai net profit 965 1,101 1,325 1,554 ESG metrics Cash flow summary (CNYm) Environmental Indicators 12/2017a Governance Indicators 12/2018a Cash flow from operations 1,473 2,096 1,747 2,540 GHG emission intensity* No. of board members 11 Capex -595 -697 -702 -710 Cash flow from investment -542 -650 -576 -573 Energy intensity* Average board tenure (years) 5.7 Dividends -609 -609 -450 -650 CO2 reduction policy No Female board members (%) 27.3 Change in net debt -416 -837 -721 -1,317 Social Indicators 12/2017a Board members independence (%) 36.4 FCF equity 954 1,631 1,293 2,090 Employee costs as % of revenues Balance sheet summary (CNYm) Employee turnover (%) Intangible fixed assets 526 579 632 686 Diversity policy No Tangible fixed assets 2,726 2,771 2,707 2,537 Source: Company data, HSBC Qianhai Securities Current assets 11,123 12,571 13,794 15,789 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD Cash & others 7,873 8,710 9,432 10,748 ‘000s Total assets 15,304 17,038 18,375 20,382 Operating liabilities 4,292 5,292 5,464 6,226 Gross debt 0 0 0 0 Issuer information Net debt -7,873 -8,710 -9,432 -10,748 Share price (CNY) 17.06 Free float 30% Shareholders' funds 10,336 10,828 11,703 12,607 Target price (CNY) 19.90 Sector Media Invested capital 2,209 1,919 2,238 2,037 RIC (Equity) 600977.SS Country China Bloomberg (Equity) 600977 CH Analyst Gary Guo Ratio, growth and per share analysis Market cap (USDm) 4,743 Contact +86 755 8898 3137 Year to 12/2017a 12/2018e 12/2019e 12/2020e
Y-o-y % change Price relative Revenue 14.6 11.8 18.3 15.9 EBITDA 5.8 8.2 20.8 17.7 Operating profit 8.8 15.4 21.4 18.3 PBT 10.0 16.1 20.6 17.9 23.70 23.70 HSBC Qianhai EPS 5.2 14.1 20.4 17.3 Ratios (%) 18.70 18.70 Revenue/IC (x) 4.1 4.9 5.7 6.4 ROIC 48.7 60.5 72.8 83.3 ROE 9.6 10.4 11.8 12.8 13.70 13.70 ROA 7.2 7.7 8.5 9.2 EBITDA margin 23.2 22.4 22.9 23.3 8.70 8.70 Operating profit margin 15.9 16.5 16.9 17.3 2017 2018 2019 EBITDA/net interest (x) China Film Co Ltd Rel to CSI 300 Index
Net debt/equity -71.5 -74.2 -73.1 -75.9 Source: HSBC Qianhai Securities Net debt/EBITDA (x) -3.8 -3.9 -3.5 -3.4 CF from operations/net debt Note: Priced at close of 26 Mar 2019 Per share data (CNY) EPS Rep (diluted) 0.52 0.59 0.71 0.83 HSBC Qianhai EPS (diluted) 0.52 0.59 0.71 0.83 DPS 0.33 0.33 0.24 0.35 Book value 5.54 5.80 6.27 6.75
50 Equities ● Media March 2019
Shanghai Film (601595 CH)
Ranked No 3 in cinema market share – expanding via direct sales and franchising
Branching out into non-box office businesses, notably cinema advertising
Initiate at Hold with a target price of RMB15.0
Regional distribution and screening leader
Established in 1994, the state-owned company completed the reform of its ownership structure in 2012 and went public in 2016. The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) of the Shanghai municipal government is the actual controller and Shanghai Film Group.
The company is engaged in film distribution and screening businesses, which include film distribution and copyright sales, cinema chain operation as well as cinema investment, development and operations. By integrating the downstream and upstream businesses, it covers the entire film distribution and screening value chain, from distributor and integrated cinema chain to cinema operator.
In the first three quarters of 2018, revenue rose 0.34% y-o-y to RMB824m, but net profit attributable to the parent dropped 34.6% y-o-y to RMB101m. In H1 2018, revenue rose 1.21% y-o-y to RMB534m, and net profit attributable to the parent fell 45.04% y-o-y to RMB59m.
We believe the decline in its net profit attributable to the parent was attributed to: 1) the slowdown in China’s box office growth as a whole and an increasingly competitive industry landscape; and 2) the company’s flagship cinema Yonghua Cinema City is closed for renovation, its distribution team is restructuring and exploring a new business model, and fiscal subsidies and investment returns were not recognised during the reporting period.
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Exhibit 93. Shanghai Film revenue and Exhibit 94. Shanghai Film net profit and growth (RMBm/%) growth (RMBm/%)
2,000 30% 400 40% 1503 317 1363 280 1,500 1225 300 257 10461122 20% 236 243 900 1,000 193 703 200 161 0% 10% 500 100 0 0% 0 -40% 2014 2015 2016 2017 2018e2019e2020e
Revenue YoY Net rofit YoY
Source: Company data, HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities estimates
Revenue comes from film screening, film distribution, advertising, food and beverage sales, online ticketing and equipment sales. Shanghai Film’s advertising business has been growing since 2017. Its ad rates have remained at a high level despite tough competition thanks to its regional leadership position in Shanghai. In November 2018, the company signed a cinema advertising deal with Youmu Advertisement (优幕广告) with a contract price of RMB715m over 2019-23. We believe Youmu’s expertise will help drive robust growth in advertising revenue.
Exhibit 95. Revenue breakdown
100% 7.3% 7.2% 7.1% 7.3% 17.0% 12.1% 18.8% 80% 5.9% 5.7% 5.9% 6.2% 6.3% 6.4% 10.9% 13.3% 5.2% 11.6% 12.2% 12.4% 12.6% 60% 12.0% 9.8% 9.7% 9.3% 9.0%
40% 66.0% 64.3% 58.5% 58.6% 56.9% 56.8% 56.6% 20%
0% 2014 2015 2016 2017 2018e 2019e 2020e
Film screening Film distribution Advertising Merchandising Online ticketing Equipment sales Others
Source: Company data, HSBC Qianhai Securities estimates
Over the past few years, the market has become increasingly saturated as investment in cinemas has been growing faster than box office and cinema attendance. Fierce competition has put earnings and revenue of both existing and newly-built cinemas under pressure, while rising lease payments are also weighing on profitability. Since 2014, the gross profit and gross profit margin of the film screening business have both been trending down.
In addition to distribution and screening businesses, Shanghai Film is also expanding in other areas. Its existing advantage in terms of cinema resources, coupled with its efforts in online distribution and screening, has enabled the company to diversify its operations (for example, the rapid expansion in online sales and franchising).
We think that consolidation of the distribution and screening market will gather pace, so industry leaders with diversified operations should stand out.
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Exhibit 96. Shanghai Film’s gross profit breakdown
100% 24.6% 19.2% 18.9% 19.1% 34.6% 80% 44.3% 23.4% 5.1% 11.1% 11.2% 11.2% 12.2% 60% 11.2% 11.6% 12.7% 12.6% 12.5% 14.4% 25.4% 10.6% 40% 20.8% 32.2% 32.0% 31.7% 11.7% 36.0% 20% 24.5% 33.4% 32.2% 17.3% 24.1% 19.6% 18.4% 0% 8.0% 3.5% 5.2% 6.7% -11.8% 2014 2015 2016 2017 2018e 2019e 2020e -20%
Film screening Film distribution Advertising Merchandising Online ticketing Equipment sales Others
Source: Company data, HSBC Qianhai Securities estimates
Exhibit 97. Gross margins by segment
120% 100% 80% 60% 40% 20% 0% 2014 2015 2016 2017 2018e 2019e 2020e -20%
Film screening Film distribution Advertising Merchandising Online ticketing Equipment sales
Source: Company data, HSBC Qianhai Securities estimates
Exhibit 98. Shanghai Film: net cash flow Exhibit 99. Shanghai Film: capital from operating activities (RMBm) expenditure (RMBm)
400 349 250 350 202 309 299 200 200 200 200 300 169 247 243 157 250 218 150 191 200 100 150 61 100 50 50 0 0 2014 2015 2016 2017 2018e 2019e 2020e 2014 2015 2016 2017 2018e 2019e 2020e
Source: Company data, HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities estimates
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According to the Q3 2018 results, the controlling shareholder is Shanghai Film Group, with a shareholding of 69.22%, followed by Shanghai Jingwen Investment. Shanghai Film Group, as the controlling shareholder, is neither a connected party nor a person acting in concert with the rest of the top 10 shareholders.
Exhibit 100. Shanghai Film’s shareholding structure (Q3 2018 results)
Shanghai Film Group Co.,Ltd 25% Shanghai Jingwen Investment Co., Ltd 3% National Council for Social Security Fund 3% 69% Others
Source: Company data, HSBC Qianhai Securities
Expansion of cinemas to enhance distribution advantage
According to the 2018 interim results, the company owned more than 90 cinemas as of H1 2018. This includes 54 directly-managed SFC branded cinemas with 378 screens, which reported a total box office of RMB370m (excluding service fee income), up 11% y-o-y, and attendance of 9.8m, up 14% y-o-y.
The revenue of Shanghai United Circuit LLC (SUC), also owned by the company, grew 10.6% y-o-y to RMB2.307bn (excluding service fee income), and attendance rose 11.48% y-o-y to 66.14m. The number of SUC’s franchised cinemas grew 23.2% y-o-y to 547. Including SFC, the company has a market share of 7.65%, ranking it third in the industry.
Exhibit 101. SUC box office and growth Exhibit102. SUC attendance and growth (RMBm) (million person / %)
5000 20% 150 30% 4244 124 18% 4000 3610 24% 3145 15% 99 100 85 20% 3000 230711% 17% 10% 66 2000 50 11%10% 1000
0 0% 0 0% 2015 2016 2017 2018H1 2015 2016 2017 2018H1
Box office YoY Attendance YoY
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities estimates
54 Equities ● Media March 2019
Initiate at Hold with a target price of RMB15.0
Film screening: As cinema attendance is on the rise, we expect the company’s screening revenue to increase 6%/11%/10% in 2018-20e. Driven by growing revenue, we estimate the gross margin of this business will increase to 2%/3%/4% in 2018-20e.
Film distribution (by cinema chains and agents): As more and more cinemas are joining SUC’s franchise, we expect the revenue from film distribution to increase 8%/7%/6% and the gross margin to remain stable at 65% in 2018-20e.
Advertising: We expect advertising revenue to increase 15%/13%/12% and gross margin to remain stable at 85% in 2018-20e.
Food and beverage: As the company plans to boost the sales of food and beverage, we expect revenue in this segment to increase 15%/13%/12% and gross margin to remain stable at 66% in 2018-20e.
Online ticketing: We expect online ticketing revenue to increase 25%/15%/13% and gross margin to drop slightly to 70% in 2018-20e.
Selling expenses include advertising and marketing expenses. In 2018-20e, we expect the selling expense-to-sales ratio to reach 2.4%/2.4%/2.4%. Administrative expenses include staff remuneration. In 2018-20e, we expect the administrative expense-to-sales ratio to be stable at 9.1%, and the financial expense-to-sales ratio to be -0.7%/-0.7%/-0.6%, respectively.
We expect the company’s net profit to grow -5.5%/15.3%/13.1% y-o-y to RMB243m/RMB280m/RMB317m in 2018-20e.
Exhibit 103. Shanghai Film: Revenue and earnings estimates (RMBm) 2016 2017 2018e 2019e 2020e Revenue Film screening 611 658 697 774 852 Film distribution 125 110 119 127 135 Advertising 130 150 169 189 Merchandising 54 66 76 86 96 Online ticketing 36 50 63 72 81 Equipment sales 22 28 34 38 41 Copyright revenue 10 24 31 41 53 Others 188 56 56 56 56 Total revenue 1,046 1,122 1,225 1,363 1,503
Gross margins Film screening 4.3% -5.5% 2.0% 3.0% 4.0% Film distribution 63.9% 66.6% 65.0% 65.0% 65.0% Advertising 84.2% 85.0% 85.0% 85.0% Food and beverage 70.3% 66.3% 66.0% 66.0% 66.0% Online ticketing 95.8% 74.4% 70.0% 70.0% 70.0% Equipment sales 13.9% 18.5% 19.0% 19.0% 19.0% Copyright revenue 97.5% 98.1% 98.0% 98.0% 98.0% Others 72.1% 84.2% 80.0% 80.0% 80.0% Overall gross margin 31.2% 27.1% 32.2% 32.9% 33.8%
Selling expense-to-sales ratio (%) 1.9% 2.4% 2.4% 2.4% 2.4% Administrative expense-to-sales ratio 8.3% 9.1% 9.1% 9.1% 9.1% (%) Financial expense-to-sales ratio (%) -0.4% -0.5% -0.7% -0.7% -0.6%
Net profit attributable to the parent 236 257 243 280 317 Source: Company data, HSBC Qianhai Securities estimates
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We have conducted a sensitivity analysis on the revenue growth rate and gross margin of the film screening business to the company’s 2019e net profit. The details are tabulated below.
Exhibit 104. 2019e net profit sensitivity analysis ______2019e revenue growth of the film screening business ______7.0% 9.0% 11.0% 13.0% 15.0% -1.0% -8.1% -8.7% -9.4% -10.0% -10.7% 2019e GPM of 1.0% -3.6% -4.1% -4.7% -5.2% -5.8% the film screening 3.0% 1.0% 0.5% 0.0% -0.5% -1.0% business 5.0% 5.5% 5.1% 4.7% 4.3% 3.9% 7.0% 10.0% 9.7% 9.4% 9.1% 8.8% Source: HSBC Qianhai Securities estimates
Balance sheet and cash flow analysis According to the Q3 2018 results, the company had a debt-to-asset ratio of 24.93%, a current ratio of 2.77 and a quick ratio of 2.75. The company has a low debt ratio and sound solvency, demonstrating its ability to make interest payments and settle debts.
Given the robust revenue growth of the main businesses, we expect the cash flow from operating activities to reach RMB243m/RMB299m/RMB349m in 2018-20e, respectively. We expect the company to build more cinemas, so its capex should remain high at RMB200m/RMB200m/RMB200m in 2018-20e. We also forecast its free cash flow to equity (FCFE) to reach RMB86m/RMB146m/RMB197m in 2018-20e.
Exhibit 105. Balance sheet and cash flow statement (RMBm) Balance sheet 2017 2018e 2019e 2020e Cash 1,405 1,368 1,410 1,489 Debt 78 42 42 42 Net debt (cash) -1,328 -1,327 -1,368 -1,447 Shareholders’ equity 2,099 2,249 2,423 2,619
Cash flow statement Cash flow from operating 218 243 299 349 activities Capex -202 -200 -200 -200 FCFE 148 86 146 197 Source: Company data, HSBC Qianhai Securities estimates
Valuation and risks
We use PE to value Shanghai Film. Our valuation is based on a 20x 2019e PE. We expect net profit to grow at a CAGR of 14.4% over 2018-20e, lower than the average of comparable companies (15.8%). Given that the industry average 2019e PE is 25.3x, we believe it is reasonable to use a 20x 2019e PE for our valuation. We derive a target price of RMB15.0, implying 0.5% upside. Initiate coverage with a Hold rating.
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Exhibit 106. Shanghai Film PE vs EPS growth
60 20 ）
50 %
10 （
PE 40
0 growth
30 EPS
20 -10
PE EPS growth(%)
Source: Wind, HSBC Qianhai Securities
Exhibit 107. Shanghai Film PE band
32
28 Max 42x 24 +1 SD 37x 20 Mean 30x
16 -1 SD 23x Min 20x 12
8
4
0
Source: Wind, HSBC Qianhai Securities
Key downside risks: Film quality. Revenue from the screening business depends on the supply of quality films. A lack of quality films means revenue could be lower than expected.
Cinema rents. Rents of cinemas constitute most of the operating cost. Rising costs of future commercial buildings and intensifying competition in cinema investment could lead to high rents, weighing on the profit margin.
Depreciation expense. The company’s investment plan shows that it will continue to build new cinemas. These projects will bring about large-scale depreciation expense of fixed assets. If the new projects underperform expectations while depreciation expense of fixed assets increases, the company's profitability would suffer.
Key upside risks: Higher-than-expected revenue from the film distribution. The company’s distribution business generates revenue through marketing and promotion and dealing with cinemas. Distribution revenue could beat our expectations if the films it helps to distribute become box office hits.
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Faster-than-expected growth of China’s film market. Revenue from distribution and screening is linked to growth in China’s film market. Faster-than-expected box office revenue growth would lead to better-than-expected revenue growth.
The stock was included in the Shanghai-Hong Kong Stock Connect scheme in July 2017. The shareholding ratio under the scheme increased from 0% in July 2017 to c0.3% in March 2019 (as a percentage of total outstanding A-shares).
Exhibit 108. Shanghai Film: Shareholding under the Shanghai-Hong Kong Stock Connect as a percentage of outstanding A-shares
0.6 0.5 0.4 0.3 0.2 0.1 0.0
Source: Wind, HSBC Qianhai Securities
58 Equities ● Media March 2019
Financials & valuation: Shanghai Film Hold
Financial statements Valuation data Year to 12/2017a 12/2018e 12/2019e 12/2020e Year to 12/2017a 12/2018e 12/2019e 12/2020e Profit & loss summary (CNYm) EV/sales 3.7 3.4 3.0 2.7 Revenue 1,122 1,225 1,363 1,503 EV/EBITDA 10.3 12.7 10.6 9.0 EBITDA 403 329 389 451 EV/IC 8.5 6.5 5.3 4.5 Depreciation & amortisation -98 -48 -68 -88 PE* 21.7 23.0 19.9 17.6 Operating profit/EBIT 305 281 321 364 PB 2.7 2.5 2.3 2.1 Net interest 5 8 9 9 FCF yield (%) 2.7 1.6 2.7 3.6 PBT 311 289 330 373 Dividend yield (%) 1.7 1.7 1.9 2.2 HSBC Qianhai PBT 311 289 330 373 * Based on HSBC Qianhai EPS (diluted) Taxation -56 -43 -50 -56 Net profit 257 243 280 317 HSBC Qianhai net profit 257 243 280 317 ESG metrics Cash flow summary (CNYm) Environmental Indicators 12/2017a Governance Indicators 12/2018a Cash flow from operations 218 243 299 349 GHG emission intensity* No. of board members 9 Capex -202 -200 -200 -200 Energy intensity* Average board tenure (years) 2.0 Cash flow from investment 202 -188 -151 -151 Dividends -97 -92 -106 -120 CO2 reduction policy No Female board members (%) 44.4 Change in net debt -315 1 -42 -79 Social Indicators 12/2017a Board members independence (%) 33.3 FCF equity 148 86 146 197 Employee costs as % of revenues Balance sheet summary (CNYm) Employee turnover (%) Intangible fixed assets 398 398 398 398 Diversity policy No Tangible fixed assets 288 440 573 685 Source: Company data, HSBC Qianhai Securities Current assets 1,974 1,956 2,048 2,182 * GHG intensity and energy intensity are measured in kg and kWh respectively against revenue in USD ‘000s Cash & others 1,405 1,368 1,410 1,489 Total assets 2,988 3,122 3,346 3,593 Operating liabilities 764 781 831 881 Issuer information Gross debt 78 42 42 42 Share price (CNY) 14.93 Free float 28% Net debt -1,328 -1,327 -1,368 -1,447 Target price (CNY) 15.00 Sector Media Shareholders' funds 2,099 2,249 2,423 2,619 Invested capital 491 645 778 896 RIC (Equity) 601595.SS Country China Bloomberg (Equity) 601595 CH Analyst Gary Guo Market cap (USDm) 830 Contact +86 755 8898 3137 Ratio, growth and per share analysis Year to 12/2017a 12/2018e 12/2019e 12/2020e Y-o-y % change Price relative Revenue 7.3 9.2 11.2 10.3 EBITDA 13.8 -18.5 18.4 16.0 42.30 42.30 Operating profit 10.0 -8.0 14.4 13.1 37.30 37.30 PBT 10.4 -6.9 14.3 12.9 32.30 32.30 HSBC Qianhai EPS 8.8 -5.5 15.3 13.1 Ratios (%) 27.30 27.30 Revenue/IC (x) 2.0 2.2 1.9 1.8 22.30 22.30 ROIC 44.5 42.1 38.4 36.9 17.30 17.30 ROE 12.8 11.2 12.0 12.6 12.30 12.30 ROA 8.7 7.8 8.4 8.9 7.30 7.30 EBITDA margin 35.9 26.8 28.6 30.0 2017 2018 2019 Operating profit margin 27.2 22.9 23.6 24.2 Shanghai Film Rel to CSI 300 Index EBITDA/net interest (x) Net debt/equity -62.1 -57.9 -55.5 -54.3 Source: HSBC Qianhai Securities Net debt/EBITDA (x) -3.3 -4.0 -3.5 -3.2 Note: Priced at close of 26 Mar 2019 CF from operations/net debt Per share data (CNY) EPS Rep (diluted) 0.69 0.65 0.75 0.85 HSBC Qianhai EPS (diluted) 0.69 0.65 0.75 0.85 DPS 0.26 0.25 0.28 0.32 Book value 5.62 6.02 6.49 7.01
59 Equities ● Media March 2019
Disclosure appendix
Analyst Certification The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Gary Guo and Jing Han
Important disclosures Equities: Stock ratings and basis for financial analysis HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis: The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
60 Equities ● Media March 2019
Rating distribution for long-term investment opportunities As of 29 March 2019, the distribution of all independent ratings published by HSBC is as follows: Buy 54% ( 29% of these provided with Investment Banking Services ) Hold 37% ( 28% of these provided with Investment Banking Services ) Sell 9% ( 20% of these provided with Investment Banking Services )
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.
For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.
Share price and rating changes for long-term investment opportunities China Film Co Ltd (600977.SS) share price performance Rating & target price history CNY Vs HSBC rating history From To Date Analyst N/A Hold 18 May 2018 Gary Guo Target price Value Date Analyst 35 Price 1 17.50 18 May 2018 Gary Guo Price 2 14.70 12 Sep 2018 Gary Guo 30 Price 3 16.50 20 Feb 2019 Gary Guo Source: HSBC 25
20
15
10
Mar-16 Mar-15 Mar-17 Mar-18 Mar-19 Mar-14 Source: HSBC
Wanda Film (002739.SZ) share price performance CNY Rating & target price history Vs HSBC rating history From To Date Analyst Buy N/A 30 Aug 2017 Target price Value Date Analyst 116 Price 1 85.00 27 Oct 2016 John Liu Price 2 77.00 31 Mar 2017 John Liu 96 Price 3 N/A 30 Aug 2017 Source: HSBC 76
56
36
16
Mar-17 Mar-15 Mar-16 Mar-18 Mar-19 Mar-14 Source: HSBC
To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please use the following links to access the disclosure page:
Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures
Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures
61 Equities ● Media March 2019
HSBC & Analyst disclosures Disclosure checklist
Company Ticker Recent price Price date Disclosure HENGDIAN ENTERTAINMENT 603103.SS 24.37 28 Mar 2019 7 Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 28 February 2019, HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 31 January 2019, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 31 January 2019, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 31 January 2019, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company 12 As of 23 Mar 2019, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share capital, calculated according to the SSR methodology. 13 As of 23 Mar 2019, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share capital, calculated according to the SSR methodology. HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or liquidity provider in the securities/instruments mentioned in this report.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
Non-U.S. analysts may not be associated persons of HSBC Securities (USA) Inc, and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with the subject company, public appearances and trading securities held by the analysts.
Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities. This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as such, this report should not be construed as an inducement to transact in any sanctioned securities.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. HSBC Private Banking clients should contact their Relationship Manager for queries regarding other research reports. In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst.
62 Equities ● Media March 2019
Additional disclosures 1 This report is dated as at 29 March 2019. 2 All market data included in this report are dated as at close 26 March 2019, unless a different date and/or a specific time of day is indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. 4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument. 5 This report may be a translation of a report authored in another language. If so, and if there is any discrepancy between versions, the original-language version shall prevail. 6 At the time of publication of this report, HSBC Qianhai Securities Limited does not hold 1% or more of a class of common equity securities of this company. Production & distribution disclosures 1. This report was produced and signed off by the author on 29 Mar 2019 03:38 GMT.
2. In order to see when this report was first disseminated please see the disclosure page available at https://research.hsbcqh.com.cn/R/34/6gbmmrb
63 Equities ● Media March 2019
Disclaimer
*Legal entities as at 30 November 2017 Issuer of report ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; HSBC Qianhai Securities Limited ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Inc.; HSBC Bank, Paris Branch; HSBC Block 27 A&B, Qianhai Enterprise Dream Park, 63 France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Qianwan Yi Road, Shenzhen-Hong Kong Cooperation Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Zone, Shenzhen, China Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Phone number: +86 755 8898 3288 Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Website: www.hsbcqh.com.cn Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch; PT Bank HSBC Indonesia; HSBC Qianhai Securities Limited In the People’s Republic of China (“PRC”) (Excluding special administrative regions of Hong Kong and Macao), this document is issued and approved by HSBC Qianhai Securities Limited for the information of its clients only; it is not intended for and should not be distributed to retail customers in the PRC. 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HSBC Qianhai Research Team
Head of Research, HSBC Qianhai Securities Industrials and Environmental Services Transportation and Logistics Steven Sun +86 755 8898 3158 [email protected] Analyst, Head of A-share Industrials and Analyst, Head of A-share Transportation & Environmental Research Logistics Research Deputy Head of Research, Head of Bonan Li +86 755 8898 3139 David Wu +86 755 8898 3436 Research Product, HSBC Qianhai [email protected] [email protected] Securities John Chung Infrastructure Analyst, Head of A-share Infrastructure China Equity Strategy Research Analyst, Head of China Equity Strategy Corey Chan +86 755 8898 3404 Research [email protected] Steven Sun +86 755 8898 3158 [email protected] Petrochemical & New Materials
Associate Analyst, Head of A-share Petrochemical Elaine Du and New Materials Eric Shen +86 755 8898 3403 Associate [email protected] Kate Zhang Telecoms, Media & Technology Consumer Analyst, Head of A-share Technology Analyst, Head of A-share Food & Beverage Hardware Research and Pulp & Paper Research Frank He +86 755 8898 3136 Katharine Song +86 755 8898 3142 [email protected] [email protected] Analyst, Head of A-share Media & Internet Analyst, A-share Food & Beverage and Research Pulp & Paper Research Yi Guo +86 755 8898 3137 Darron Xue +86 755 8898 3407 [email protected] [email protected] Analyst, A-share Media & Internet Associate Jing Han +86 755 8898 3147 Joseph Zhou [email protected]
Associate Analyst, Head of A-share IT Software Li Quan Research Sijie Ma +86 755 8898 3140 [email protected] Healthcare Analyst, Head of Greater China Healthcare Associate Research Kevin Xing Zhijie Zhao +86 755 8898 3144 [email protected] Associate Chase Ding Associate Jialei Fan
Issuer of report: HSBC Qianhai Securities Limited Block 27 A&B, Qianhai Enterprise Dream Park 63 Qianwan Yi Road, Shenzhen-Hong Kong Cooperation Zone, Shenzhen, China Telephone: +86 755 8898 3288
Main contributors
Gary Guo* (S1700517120002) Gary Guo joined HSBC Qianhai Securities Limited in 2017 as Head of A-share Media & Internet Head of A-share Media & Internet Research Research. Previously, he worked as an equities analyst for a top Chinese securities firm where he HSBC Qianhai Securities Limited also focused on the media and Internet sector. He has an MSc in computer science from Tsinghua [email protected] University. +86 755 8898 3137
Jing Han* (S1705518080001) Jing Han joined HSBC Qianhai Securities Limited in 2017 and covers China media and Internet Analyst, A-share Media & Internet stocks. Previously he worked at a prominent Chinese securities firm. He holds a BA in engineering HSBC Qianhai Securities Limited and an MSc in finance from Tsinghua University. [email protected] +86 755 8898 3147
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered / qualified pursuant to FINRA regulations
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