source from：WSJ
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Imax China to Cash In as Hollywood Comes to Town
Big screen cinema supplier could rally 25% as a slate of U.S. blockbusters revives China’s box office revenues.

By ISABELLA ZHONG
March 22, 2017 11:52 p.m. ET

Beaten down Imax China shares could be set to rally as Fast & Furious 8 leads a strong slate of films set to debut at the Chinese box office this year.

Imax China (1970.HK) is down almost 40% from its 2015 peak as box office growth has disappointed. Profits slumped 13.4% last year but a lineup of films likely to attract Chinese moviegoers could deliver a sharp rebound in earnings this year, while the pace of new screen installations is set accelerate. At around HKD38 a share, the stock now trades at 32 times forward earnings – below its historical average of 33 times.

Ticket sales have become a key driver of Imax China’s earnings. The proportion of Imax theaters in China where the company shares a slice of ticket sales, in exchange for a discounted installation price, has risen from 49% in 2013 to 63%. The shift towards revenue sharing is smart as the box office income will support revenues when new screen installations begin to slow. But it also means Imax China’s top line is more dependent on the success of new movies. A dearth of blockbusters in 2016 saw Imax China’s box office revenues fall roughly 5%. Total box office growth in China slowed to less than 4% in 2016 from 48% the previous year.

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The slate of movies set to show in the Imax mega screen format looks more promising this year. They’re the type of action movies that have proven to be box office hits in China. Besides Fast & Furious 8, Transformers 5 and Spider-Man: Homecoming are also set to hit screens. Fantasy films Beauty and the Beast and Guardians of the Galaxy 2 are also likely to be popular. Morgan Stanley analyst Gary Yu expects the lineup of films to drive a 43% increase in Imax China’s box office revenues this year. Growth will come from a higher number of screens and a rise in per screen average (PSA) sales. PSA is expected to rise 4% this year. Yu has an overweight rating on the stock with a HKD45 a share target price, which implies 18% upside. Analysts surveyed by FactSet expect Imax China to grow earnings per share by 38% this year and 23% in 2018.

The pace of new screen installations has been healthy. Imax China installed 119 new screens in 2016 compared to 73 in the previous year. The company expects to install 120 new screens this year to bring the total number of screens in China to 544. It had a backlog of 334 orders at the end of 2016. The strong demand for installations is testament to the healthy long-term growth trajectory of the Chinese box office. Imax China recently inked a 30 theater deal with Bona Film Group after having signed a 150 screen deal with Wanda Cinema Line (002739.CN) last August. Morgan Stanley’s Yu reckons the Bona deal underscores Imax’s strong branding in China. Demand for installations may be boosted by the strong slate of upcoming films. Macquarie analyst Wendy Huang notes Imax China claims to an acceleration in new installations as the cinema operators move to cash in on the strong lineup of films to be released over the next two years. Huang has an outperform rating on Imax China with an HKD42 a share target price.

Imax China’s margins should improve this year. While gross profit margins fell seven percentage points in 2016, the decline reflected one-off costs from the higher number of installations and weak box office revenues. While sales, general and administrative (SG&A) costs are expected to rise about 8% this year, UBS analyst Archibald Pei argues revenue growth should offset higher expenses. Pei expects Imax China’s net profit margin to improve to around 36% this year from roughly 30% in 2016. The analyst has a buy rating on the stock with a HKD44.5 a share target price.