Investment highlights
First coverageHengdian Film and Television (603103)The target price for outperforming the industry is 26.98 yuan, corresponding to the 2021 EV/EBITDA multiplier of 20.0 times. The reasons are as follows:
The industry's leading private cinema and film investment companies are deeply involved in the declining channels of third- and fourth-tier cities.
The size of the company's cinemas and the number of screens have steadily expanded. At the end of 2019, it had 451 cinemas and 2,780 screens. According to Art, the growth in the country's total box office and number of movie viewers was clearly driven by the decline in channels. In 2019, the box office contribution of the third, fourth and fifth tier cities was 41.6%. The box office contribution of the third, fourth and fifth tier cities was more prominent, and the year-on-year growth rate was higher than that of Tier 1 and 2 cities; in 2019, the company ranked 8th and 3rd in the box office revenue of the country's theaters and film investment companies, respectively, with market shares of 4.2% and 4.3%, respectively. In particular, the third, fourth and fifth tier cities ranked higher in box office revenue.
The growth rate of movie box office has slowed, a period of accelerated industry integration has begun, and cinemas in low-tier cities may be cleared faster after the pandemic. The total box office CAGR for 2015-2019 is only 9.7%. We believe that future box office growth will mainly depend on an increase in the overall quality of movie content supply, driving an increase in the number of movie viewers per capita and attendance rate. Among them, the number of movie views per capita in third- and fourth-tier cities in 2019 was lower than 1.23 times in the country. Taking into account population density and consumption levels, it may become the main contributor to future box office growth. Judging from the number of cinemas, the supply of theaters in the medium to long term is relatively saturated. We judge that after the 2020 pandemic, the efficiency of cinema operations may accelerate fragmentation. The current state of cinema operations in low-tier cities may be more serious, and leading cinema companies are facing integration opportunities.
Preemptively deploy low-tier cities with high operating efficiency, benefit from scale effects on non-ticket businesses or contribute to long-term development momentum. In terms of operating efficiency measured by single-screen output, the company's cinemas performed above the industry level. In particular, the average annual single-screen output of companies in Tier 3, 4, and 5 cities from 2012 to 2019 was 1.36, 1.75, and 1.76 times that of the industry.
As the epidemic gradually eases, the demand elasticity faced by theaters in low-tier cities after resuming business may be lower than in Tier 1 and 2 cities. We judge that the company's cinemas in Tier 3, 4, and 5 cities are more efficient. Facing an abundance of cinemas in the middle and lower tier markets, the company may benefit more from the accelerated integration of cinemas in lower-tier cities, thus further expanding its market share. The company's non-ticket business accounted for 16.0% of revenue in 2019, which is a distance from 25%-35% of mature markets in Europe and the US. We believe that the company will continue to benefit from scale effects, diversified operations strengthen profitability, and the non-ticket business will become a growth point.
What is our biggest difference from the market? Based on detailed and comprehensive data analysis, we are optimistic that the company is deeply involved in sinking channels and has a relative competitive advantage supported by long-term expansion experience.
Potential catalysts: movie supply drives box-office growth; integrated implementation of cinema clearance, profit forecasting and valuation
We expect the company's 2020 and 2021 EPS to be -0.67 yuan and 0.55 yuan respectively; the current stock price corresponds to 16.7 times the 2021 EV/EBITDA. For the first time, we covered the “outperform the industry” rating and gave the company a target price of 26.98 yuan, corresponding to 20 times the 2021 EV/EBITDA, with a potential rise of 20.1%.
risks
Under the influence of the pandemic, the recovery of cinemas fell short of expectations; box office growth fell short of expectations; the risk of increased market competition; and the expansion of the number of cinemas and screens fell short of expectations.