Deutsche Bank Markets Research Rating Company Date 8 March 2016 Buy Wanda Cinema Company Update Asia China Reuters Bloomberg Exchange Ticker Price at 7 Mar 2016 (CNY) 80.30 Consumer 002739.SZ 002739 CH SHZ 002739 Price target - 12mth (CNY) 115.00 Hotels / Leisure / 52-week range (CNY) 244.89 - 72.59 Gaming HANG SENG INDEX 20,160 Suspended for major acquisition; we Tallan Zhou Karen Tang foresee an emerging movie kingdom Research Analyst Research Analyst (+852 ) 2203 6464 (+852 ) 2203 6141 Reason for suspension is to buy movie/TV assets from Dalian Wanda Group [email protected] [email protected] The Wanda Cinema suspension continues, but today it released an announcement saying that the company will acquire movie/TV-related assets from Dalian Wanda Group. Price/price relative 280 What are Dalian Wanda Group’s film/TV assets? 240 The three film/TV-related assets below are under the control of Wanda Group, 200 according to public news sources. 160 120 1. Wanda Pictures 80 40 2. Legendary Pictures (which Wanda Group acquired for USD3.5bn) 0 1/15 7/15 1/16 3. Wuzhou Film Distribution (五洲电影发行) (a 44.5% share, the largest Wanda Cinema shareholder) HANG SENG INDEX (Rebased) We cannot help linking this announcement to the news of Wanda Film’s IPO Performance (%) 1m 3m 12m The WSJ said recently that Wanda Group is seeking USD1.5bn from domestic Absolute -5.0 -28.1 -11.8 Chinese investors for Wanda Pictures, on a USD5.3bn valuation. The potential HANG SENG INDEX 4.5 -9.2 -16.6 IPO asset is also likely to include Legendary Pictures and Wuzhou Film Source: Deutsche Bank Distribution. Two possible scenarios, in our view We believe that there are two possible ways of restructuring Wanda’s movie segment. 1. Wanda Cinema would purchase shares from Wanda Pictures before it undergoes an IPO. Although the two companies are listed separately, the interests of the two companies would be aligned by such an arrangement. 2. Wanda Pictures would choose not to undergo an IPO at this stage. All the upstream assets would be injected into Wanda Cinema. Valuation and risks We derive our target price of RMB115 on a DCF-based valuation (an 8.3% WACC and a 4% terminal growth rate). Key downside risks include competition from online media and a lack of high-quality movies. Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 4,022.6 5,339.0 7,577.6 14,369.2 20,145.8 EBITDA (CNYm) 961.7 1,310.2 1,839.5 3,496.4 4,779.5 Reported NPAT (CNYm) 602.5 801.0 1,173.2 2,069.1 2,848.7 DB EPS FD(CNY) 0.60 0.80 1.05 1.81 2.49 PER (x) – – 76.7 44.4 32.3 EV/EBITDA (x) – – 47.4 26.4 19.2 DPS (net) (CNY) 0.00 0.80 0.59 0.95 1.32 Yield (net) (%) – – 0.7 1.2 1.6 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. 8 March 2016 Hotels / Leisure / Gaming Wanda Cinema Model updated:02 December 2015 Fiscal year end 31-Dec 2012 2013 2014 2015E 2016E 2017E Running the numbers Financial Summary Asia DB EPS (CNY) 0.39 0.60 0.80 1.05 1.81 2.49 Reported EPS (CNY) 0.39 0.60 0.80 1.05 1.81 2.49 China DPS (CNY) 0.00 0.00 0.80 0.59 0.95 1.32 BVPS (CNY) 1.6 2.2 3.0 4.3 7.0 8.6 Hotels / Leisure / Gaming Weighted average shares (m) 1,000 1,000 1,000 1,120 1,145 1,145 Wanda Cinema Average market cap (CNYm) na na na 89,936 89,936 89,936 Enterprise value (CNYm) na na na 87,237 92,138 91,988 Reuters: 002739.SZ Bloomberg: 002739 CH Valuation Metrics P/E (DB) (x) na na na 76.7 44.4 32.3 Buy P/E (Reported) (x) na na na 76.7 44.4 32.3 Price (7 Mar 16) CNY 80.30 P/BV (x) 0.00 0.00 0.00 18.79 11.44 9.36 Target Price CNY 115.00 FCF Yield (%) na na na 1.0 1.6 2.3 Dividend Yield (%) na na na 0.7 1.2 1.6 52 Week range CNY 72.59 - 244.89 EV/Sales (x) nm nm nm 11.5 6.4 4.6 Market Cap (m) CNYm 89,936 EV/EBITDA (x) nm nm nm 47.4 26.4 19.2 EV/EBIT (x) nm nm nm 64.6 34.8 25.5 USDm 13,805 Income Statement (CNYm) Company Profile Sales revenue 3,031 4,023 5,339 7,578 14,369 20,146 Wanda Cinema was founded in January 2005 and has Gross profit 1,031 1,399 1,830 2,563 4,608 6,415 been ranked as the No.1 theatre circuit in China in terms EBITDA 745 962 1,310 1,840 3,496 4,780 of box office since 2009. As of July 2015, the company Depreciation 276 154 183 266 569 824 operates 195 theatres with over 1,700 screens across Amortisation 0 124 178 223 278 351 China. EBIT 469 684 949 1,350 2,650 3,605 Net interest income(expense) -3 5 15 26 -173 -220 Associates/affiliates 0 0 0 0 0 0 Exceptionals/extraordinaries -2 -6 -27 -6 0 0 Other pre-tax income/(expense) 62 106 120 179 267 392 Profit before tax 526 789 1,057 1,549 2,744 3,778 Price Performance Income tax expense 135 184 255 373 671 924 Minorities 2 2 2 2 4 5 280 Other post-tax income/(expense) 0 0 0 0 0 0 240 Net profit 388 603 801 1,173 2,069 2,849 200 160 DB adjustments (including dilution) 0 0 0 0 0 0 120 DB Net profit 388 603 801 1,173 2,069 2,849 80 40 Cash Flow (CNYm) 0 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Cash flow from operations 884 1,300 1,652 1,795 3,305 4,609 Net Capex -553 -537 -672 -874 -1,836 -2,456 Wanda Cinema Free cash flow 330 762 980 920 1,469 2,153 HANG SENG INDEX (Rebased) Equity raised/(bought back) 0 0 0 1,240 1,840 0 Margin Trends Dividends paid 0 0 0 -448 -656 -1,069 Net inc/(dec) in borrowings 0 0 0 0 0 0 26 Other investing/financing cash flows 27 -283 -409 -753 -5,161 -934 24 Net cash flow 357 480 571 959 -2,508 151 22 Change in working capital 350 208 253 132 520 737 20 18 Balance Sheet (CNYm) 16 Cash and other liquid assets 695 1,175 1,746 2,705 197 348 14 Tangible fixed assets 989 1,089 1,268 1,906 7,623 9,433 12 13 14 15E 16E 17E Goodwill/intangible assets 7 27 62 64 2,611 2,610 EBITDA Margin EBIT Margin Associates/investments 0 0 0 0 0 0 Other assets 907 1,162 1,498 1,922 2,492 3,274 Growth & Profitability Total assets 2,598 3,452 4,574 6,597 12,923 15,663 Interest bearing debt 0 0 0 0 2,394 2,394 100 34 Other liabilities 998 1,249 1,570 1,805 2,485 3,445 80 32 Total liabilities 998 1,249 1,570 1,805 4,879 5,839 60 30 Shareholders' equity 1,595 2,197 2,998 4,786 8,039 9,819 Minorities 5 6 5 6 6 6 40 28 Total shareholders' equity 1,600 2,203 3,003 4,792 8,045 9,825 20 26 Net debt -695 -1,175 -1,746 -2,705 2,196 2,046 0 24 12 13 14 15E 16E 17E Key Company Metrics Sales growth (%) 37.2 32.7 32.7 41.9 89.6 40.2 Sales growth (LHS) ROE (RHS) DB EPS growth (%) -36.4 55.2 32.9 30.8 72.5 37.7 Solvency EBITDA Margin (%) 24.6 23.9 24.5 24.3 24.3 23.7 EBIT Margin (%) 15.5 17.0 17.8 17.8 18.4 17.9 40 150 Payout ratio (%) 0.0 0.0 99.9 55.9 52.8 53.0 20 ROE (%) 27.7 31.8 30.8 30.1 32.3 31.9 0 100 Capex/sales (%) 18.3 13.4 12.6 11.5 12.8 12.2 -20 Capex/depreciation (x) 2.0 1.9 1.9 1.8 2.2 2.1 -40 50 Net debt/equity (%) -43.5 -53.3 -58.1 -56.5 27.3 20.8 -60 Net interest cover (x) 137.1 nm nm nm 15.3 16.4 -80 0 Source: Company data, Deutsche Bank estimates 12 13 14 15E 16E 17E Net debt/equity (LHS) Net interest cover (RHS) Tallan Zhou +852 2203 6464 [email protected] Page 2 Deutsche Bank AG/Hong Kong 8 March 2016 Hotels / Leisure / Gaming Wanda Cinema Wanda Pictures in 2015 Box office performance Figure 1: Box office revenue, 2015 Figure 2: Box office market share, 2015 Box office (RMBbn) 8.00 7.00 Wanda Pictures, 6.00 Others, 24.8% 5.00 35.6% 4.00 Enlight 3.00 Media, 2.00 13.3% 1.00 LeTV, Bona, 11.6% - Huayi 8.5% Wanda Enlight Media Bona LeTV Huayi Brothers Brothers, Pictures 6.2% Source: Company data Source: Company data List of movies productions Figure 3: Wanda Pictures’ movie productions in 2015 Investment % Movies Box office (RMBm) NA 警察故事 2013 Police Story 2013 534.38 NA 北京爱情故事 Beijing Love Story 405.53 NA 催眠大师 The Great Hypnotist 273.87 NA 一生一世 But Always 228.52 NA 魁拔 3 Kuiba 3 24.30 NA 归来 Coming Home 291.46 25% 十万个冷笑话 One Hundred Thousand Bad Jokes 119.81 10% 奔跑吧兄弟 Hurry Up, Brother 434.28 10% 咱们结婚吧 Let's Get Married 284.46 10% 煎饼侠 Jian Bing Man/ A Hero Or Not 1,160.14 51% 滚蛋吧！肿瘤君 Go Away Mr.