Company trends
Management aims to release business value in China
Market capitalization: $234 million; free circulation: 35%; three-month average daily turnover: $1.3 million background: orange Sky Golden Harvest Entertainment (Group) Co., Ltd. (Orange Sky Golden Harvest) through its subsidiaries, distribute films and film and television products related to films and television programs. The company also shows films and produces screenings in Hong Kong, Singapore, Taiwan and Chinese mainland. The company is a leading cinema operator with operations in Hong Kong, Taiwan, Singapore and China.
Business coverage is more diversified. Unlike Hong Kong and A-share listed peers, Orange Sky Golden Harvest has a leading position in Hong Kong, Taiwan and Singapore. Orange Sky Golden Harvest, which has six cinemas and 24 screens, has a 10 per cent market share in Hong Kong. The company holds a 35.71% stake in Weixiu Cinema, Taiwan's largest chain of cinemas, operating 11 cinemas and 109 screens, with a market share of 38%. The company also owns 50 per cent of the Golden Village Cinema, which dominates the Singapore film market, operating 11 cinemas and 92 screens, with a market share of 50 per cent. The company has achieved strong growth in its cinema operations by expanding its network. Between 2009 and 2014, the number of cinemas operated by the company increased from 2 to 59, and the number of screens increased from 21 to 420 over the same period. China's market is fragmented, with the top three cinema operators having a market share of 32 per cent in 2014 (in terms of box office revenue), while the top company is Wanda Cinema [002739.CH], with a market share of 14.2 per cent in 2014. Orange Sky Golden Harvest also has a leading position in China, ranking ninth among cinema operators, with a market share of 2.1% in 2014. Orange Sky Golden Harvest aims to increase the number of screens to 1,000 within two years (up from 447 at the end of June 2015), which will lift the company to the top five in the industry. The company signed an agreement with the owner to develop 100 new screens and signed a memorandum of understanding to acquire more than 300 screens in China. The total capital expenditure on these screens is 1 billion yuan. However, the company's rapid expansion in China requires huge upfront capital investment, which has dragged down the company's overall performance over the past few years. In EBITDA terms, it takes two years for each of the company's new cinemas to break even. The company is investing cash flow from markets outside China into the development of the Chinese market. In order to reduce the impact of the new cinema at the development stage, the company will pay more attention to acquisitions with guaranteed profits. At present, about 2% of the cinemas operated by the company are in a loss or break-even state. For new cinemas, the company generally offers free membership and promotions to increase attendance. For those profitable cinemas, The company's goal is to increase ticket prices and non-box office receipts.
The size of the market is growing. Between 2009 and 2015, China's box office revenue grew at an average annual compound rate of 38.7%. China is now one of the largest film markets in the world. Historical trends and recent strong data show that China's film industry is in a period of prosperity and growth. In China, the average person goes to the cinema 0.6 times a year, compared with 3.6 times in North America. China's film production industry is growing rapidly. China could become the world's largest box office market as soon as 2018. Entertainment-related activities are the growth area of the consumer industry. In film production, there will be more M & An activity, especially in the cinema market in China, mainly because the industry is being consolidated and leading companies are expanding their business coverage. According to the guidance of the company's management, the growth momentum of the number of screens is slowing, mainly due to a decline in the number of new commercial properties, which is positive for leading companies. Cinemas in China are more profitable than those in Hong Kong, mainly because leases in China are generally 15-20 years, while those in Hong Kong are 6 years. Compared with other countries, Orange Sky Golden Harvest's business in China should make a better contribution in the next few years.
Orange Sky Golden Harvest's active expansion of its business in China still has a dilution effect on its operating results in the second half of 2015. Compared with the industry, the company's 2015 annual results are expected to be mediocre. However, the company's operating performance will improve significantly in 2016 and beyond, as the company's cinemas in China will turn a profit and the company will make more selective acquisitions and expansion. Due to the strong box office receipts of cinemas, the market's interest in the film production sector has increased, resulting in the stock prices of related companies performing well. It is generally believed that cinema operators are the beneficiaries of the rapid growth of China's film industry. Orange Sky Golden Harvest has lagged behind in the recent revaluation of the sector, mainly due to the company's lack of investor relations and fund-raising activities over the past few years. Wanda Cinema made two acquisitions (Shimao Cinema and Hoyt) in 2015, which is equivalent to 8.8 million yuan per screen in China and 5.3 million yuan abroad. At present, the industry is using this price as the benchmark. The company's management is keen to unleash the value of its Chinese business. Given the weak market atmosphere, the company's share price is likely to continue to fluctuate, which may lead to an opportunity to refocus on the shares.
Catalyst: working with Internet giants, strong box office receipts, news about mergers and acquisitions and industry consolidation.