IMAX China stands to gain as China’s consumer force awakens, yet the company’s fast and furious surge may have overrun fundamentals.
The cinematic-technology provider premiered on the Hong Kong stock exchange only two months ago, but its share price has already gone up more than 70%. Investors snapped up the stock, knowing Chinese go to the theaters in droves—box office income for the first 11 months of 2015 was up 48% from a year earlier, according to Nomura—and many are willing to spend a little more for a premium experience. IMAX China, 68% owned by IMAX Corp., provides giant movie screens to theaters in China using technology from its parent.
But while IMAX China has won a front-row seat in China’s burgeoning movie market, its valuation leaves little room for error. It trades at 66 times this year’s expected earnings, adjusted for one-off items, according to FactSet. Indeed, it trades at 26 times forecast 2018 earnings, and that’s a forecast that calls for earnings to nearly triple. That means the current share price has already brewed in several years of optimism.
And IMAX China may face serious domestic competitors.
The company doesn't run its own cinemas, instead relying on Chinese partners to adopt its technology. However, two of its biggest customers— Wanda Cinema and CJ CGV, which account for more than half of IMAX theaters in China—have developed their own giant-screen technology. IMAX China brushes off these clones, arguing that they’re going up in locations where the exhibitor can’t have one of its screens because there’s already an IMAX theater there with exclusive rights. But it seems to be competition, all the same.
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In more-developed markets, the trend of exhibitors installing their own giant screens instead of using branded technology like IMAX is well established. The number of exhibitor-developed large-format screens has already overtaken the number of IMAX screens in North America and Europe, according to market-research firm IHS.
IMAX China also faces competition from the government, which may prefer to see an indigenous player succeed. The company’s biggest rival in China is China Film Giant Screen, owned by the state-owned China Film Group—which is also one of two importers of Hollywood films into the country.
Although IMAX China is still the overwhelming leader in the field, the cheaper alternatives, some coming from its own customers, have the potential to tilt the market. With expectations so high, IMAX China investors should remember that for big-budget movies to succeed, they also need big audiences.
Posted By: Nick Masi
Tuesday, December 8th 2015 at 6:52PM
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