Blockbusters and virtual reality could help IMAX China turn its fortunes around, say analysts
IMAX China’s profits expected to improve from an estimated 4pc growth this year to 42pc next year, says Nomura
Fan-favourite blockbusters and virtual reality cinema experiences could paint a more positive picture for 3D movie operator IMAX China next year, says Nomura.
Profits for China’s film sector – the second biggest movie market in the world after the United States – have slowed this year due to a shortage of big movies and a trend towards watching movies at home, with ticket sales slipping 16 per cent in the third quarter after enormous growth in the past few years.
But in a recent research note, Nomura analysts Richard Huang and Stella Xing tipped 2017 to be the year of box office recovery and upgraded IMAX China to a buy rating.
IMAX China, which only has 4.5 per cent of the mainland cinema market share, closed at HK$39.70 on Monday after slipping 22 per cent slip from August to mid-November, but that’s predicted to rebound to HK$45 next year.
IMAX China’s profits are expected to improve from an estimated 4 per cent growth this year, to 42 per cent next year, back in line with the 46 per cent compound annual growth rate between 2013-2015. That will be thanks to big movies due to hit the screens in 2017, like the latest in the Transformers series and Fast 8, which follows Fast and Furious 7’s 2.43 billion yuan box office take for IMAX in 2015.
“Good movies are necessary to drive industry growth,” Huang said. “We like the long-term growth story of the China movie industry,” he said, although he noted that some stocks – like IMAX China and Huace – were tipped to do better than others.
Huang believes IMAX China will also be buoyed by the introduction of virtual reality (VR) experiences.
IMAX has VR centres in Los Angeles and London that are set to open at the end of this year or the beginning of 2017, and at least two pilot sites are planned for China, IMAX chief business development officer Robert Lister told the Post in an email.
The VR “pods”, which can accommodate about six people, will show short, interactive experiences.
“Chinese consumers appear to have a very significant appetite for virtual reality experiences and we expect China to be a crucial market for our VR centres,” Lister said, noting that VR wouldn’t replace traditional cinema.
“With China being IMAX’s fastest growing cinema markets [approximately 700 theatres open or set to be open in the market] we think it can be a very significant part of our global VR strategy,” he said.
Rawen Huang, founder of greater China-focussed hedge fund Petrel Capital, agreed that popular films are important for box office growth, but was still “relatively conservative” on the 3D cinema operator’s fortunes next year despite Nomura’s upgrade and wasn’t rushing to buy the stock.
“It’s the first upgrade of IMAX recently because people have been pretty disappointed,” he said, noting that investors had expected big things following its 2015 Hong Kong initial public offering.
“After a very successful 2015, 2016 kind of pales in comparison.”
Huang noted that none of the top IMAX movies this year had cracked the 2 billion yuan mark, while both Fast and Furious 7 and animated local offering Monster Hunt had managed to rake in over 2.4 billion yuan each in 2015.
“Blockbusters matter,” he said. “It’s the lack of hot Chinese movies.”
Huang said IMAX’s fortunes next year depended on whether good Chinese movies were released.
“IMAX movies in general are like an arms race – you need the wow, the graphics, the technology. I think that’s why the Chinese movie hasn’t really been challenging US movies.”
As for the trend of Chinese consumers moving towards watching movies on mobile devices, Huang believes that would disrupt the growth of traditional cinema operators but not 3D providers like IMAX.
The growth of virtual reality “definitely had the potential to disrupt” IMAX’s experience, but the market wasn’t worried about that right now, Huang said. “The market for cinema I think is actually bigger [than VR technology].
“People still like to go to movies because it’s still a pretty affordable form of entertainment. Longer term will it be disrupted by mobile entertainment? Absolutely, if it hasn’t already been. But I still think shorter term it’s a lot better than people think.”