[Research Report Summary]

Increased value of fixed advantages. We have revised the company's profit forecast for 2020. It is estimated that the company's EPS for 2020-2022 will be 0.01/0.52/0.59 respectively, corresponding to the company's closing price of 22.60 yuan on August 28. The 2021-2022 market shutdown for half a year caused loss of performance, and “hard work on internal skills” during the closure period. 1) Affected by the epidemic, the movie market has been shut down for nearly half a year since January 24. Compared with the box office for the same period in '19, the total market box office decreased by 28.9 billion, and the number of movie viewers decreased by nearly 750 million, which had an important impact on the company's performance. 2) During the reporting period, on the one hand, the company saved unnecessary expenses on the cost side. Operating costs, sales and management expenses decreased by 59.04%, 74.72% and 31.88% year-on-year. The balance of the company's monetary capital and wealth management products at the end of the period was 942 million yuan, with sufficient cash flow. On the other hand, hard work on internal skills includes using the period of closure to carry out technological transformation and investment in efficient old cinemas to enhance the movie-watching experience after resuming business; optimizing cinema projects, promptly shutting down cinemas with low operating efficiency, and sorting out contracted projects twice to ensure quality. 20H1 has opened 9 new direct-run cinemas and has 459 cinemas open by the end of the period, including 376 asset-linked cinemas and 2,365 screens. Asset-linked cinemas can not only increase the company's bargaining power, but at the same time, the impact of scale can enhance the company's profitability and brand influence.

The market is recovering at an accelerated pace, helping cinemas return to normal operations. 1) Since cinemas resumed operations on July 20, the movie market has picked up at an accelerated pace. Cat's eye data shows that as of August 27, the national cinema resumption rate reached 82.34%, the cumulative box office was 2,947 billion yuan, the number of screenings was 6.75 million, and the cumulative number of movie viewers was 85.32 million. Furthermore, based on the current epidemic prevention situation, the cinema attendance limit was relaxed from 30% to 50% after August 14. 2) After the resumption of business, the company's box office performance was good. Among them, the Hengdian cinema line ranked third among film projection companies, with an annual box office of 173 million yuan, 5.9 million viewers, and a box office share of 3.33%, an increase of 0.02% over 2019; the cinema ranked seventh, with an annual box office of 206 million, a total of 6.98 million viewers, and a box office share of 3.97%, up 0.07% from '19.

3) After “Babai” was released, a number of blockbuster movies were scheduled for the National Day, including “Jiang Ziya” (cat's eye+ticket scavenging users want to watch 2.83 million) and “Win the Championship” (2.31 million), which was originally expected to be screened during the Spring Festival, and another National Day celebration film “My Hometown” and “I'll Be Home at a Little Time” after “Me and My Motherland”, etc., the attendance rate of “Babai” and “I'll Wait for You at the End of Time” on the day of the Tanabata Festival has reached around 40%. Factors such as the enthusiasm for watching movies that are being released and the impetus of important holiday schedules are expected to accelerate the return of cinemas to normal With formalized operations, performance and cash flow are expected to continue to improve.

The impact of the epidemic has accelerated the reshuffle of the industry, and leading theaters are expected to usher in opportunities for integration. According to the data, in the first half of 2020, 133 film tube and film investment companies and 8 cinema companies nationwide were cancelled or suspended. The epidemic has particularly increased the operating pressure on small and medium-sized film, television and cinema companies with insufficient cash flow. On April 29, the National Film Administration meeting proposed to explore effective ways to expand and strengthen theaters, encourage mergers and restructuring across regions, and benefit leading film investment and cinema companies. It is expected that capital and platform advantages will be used to accelerate integration and further increase the company's market share.

Investment suggestions: The company has a clear leading advantage in the layout of low-tier cities and the operation of film investment companies, and is expected to continue to benefit from the recovery of the market in the future; the medium- to long-term industry accelerates clearance and integration, leading cinema companies are expected to consolidate their annual PE to 43/38, maintaining the “increase in holdings” rating.

There is a risk that the impact of the subsequent epidemic is uncertain, cross-regional operations are uncertain, and single-screen output has declined.