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China - Film Industry

China - Film Industry

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Published by: Simon Kai T. Wong on Jun 21, 2011
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Asia Pacific Equity Research
18 January 2011
Bona Film Group Ltd.
Initiation
Overweight
BONA, BONA US
A 'blockbuster' distributor
Price: $6.14
Price Target: $8.50
ChinaChina InternetDick Wei
AC
(852) 2800-8535dick.x.wei@jpmorgan.comJ.P. Morgan Securities (Asia Pacific) Limited
Ritesh Gupta
(91-22) 6157 3307ritesh.z.gupta@jpmorgan.comJ.P. Morgan India Private Limited
Imran Khan
(1-212) 622-6693imran.t.khan@jpmorgan.comJ.P. Morgan Securities LLC
5811$
Jan-10Apr-10Jul-10Oct-10Jan-11
 
Price Performance
BONA share price ($)NASDAQ Composite (rebased)
YTD1m3m12mAbs 6.2%-12.3%-27.8%-27.8%Rel 2.3%-17.2%-40.9%-46.7%
 
See page 36 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
 
Initiating coverage with an Overweight rating and Dec-11 PT of US$8.5.
Bona Film Group is the leading film distribution company inChina. The company has also expanded into film investment andproduction, theatres, film-related advertising, and talent agency businesses.China’s box office per capita is currently one-sixteenth of the US. We seeBona Film as a high growth potential stock backed by a solid Chinaentertainment consumption story.
 
A beneficiary of the China entertainment consumption growth:
Weexpect the company to be a key beneficiary of rising disposable income,rapid growth in the number of screens and theatres, increase in the numberof good quality domestically-made movies, and lifestyle upgrade in China.According to EntGroup’s forecasts, the Chinese film industry’s revenue isexpected to record 2009-2012 CAGR of 38%, to become a US$4.3 billionmarket by 2012.
 
Distribution-centric vertically integrated business model:
Building on itssolid base in movie distribution, Bona Film has expanded vertically intoother parts of the movie value chain—from production to theatrical. Thecompany’s expertise and presence throughout the film industry chainprovides it a competitive advantage in identifying and gaining access topromising films. In future, Bona Film should benefit from bettermonetization of non-theatrical channels, international distribution, and film-related advertising, in our view.
 
Strong management team:
Bona Film’s management team has a strongtrack record in the film business. The founder Dong Yu has over 15 years of experience in film distribution. Nansun Shi is a Hong Kong film producerand presenter with over 30 years of experience in the film industry. Since2003, Bona Film has distributed 139 films (including 29 internationally).
 
Our Dec-11 PT of US$8.5 implies 25x 2011E and 21x 2012E non-GAAP
 
earnings.
We expect the company to register 2010E-2012E EPS CAGR of 38%. Key risks to our price target are increasing reliance on in-houseproduction, revenue concentration from top films, change in the regulatorylandscape, and departure of key management.
Reuters: BONA.US, Bloomberg: BONA US
US$MM, Y/E Dec FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E
Sales 38.4 50.3 159.7 209.6ROE (%) 31.1-5.610.9 11.8 52-week range US$6.14-8.50Operating profit 5.6 9.6 25.5 33.7ROIC (%) 26.7-3.69.5 10.3 Shares outstg 58.9MMEBITDA 6.5 10.8 27.1 35.7GAAP dil. EPS (US$)
1Q2Q3Q 4Q
Avg daily volume 0.2MnPre tax profit 5.6 -3.9 24.9 32.1
EPS FY09
0.000.000.05 0.12 Avg daily value 1.1MnReported net profit 4.2 -5.8 21.0 25.5
EPS FY10E
0.03-0.010.14 0.05 Index (NASDAQ) 2,755Reported EPS (US$) 0.13 -0.15 0.34 0.41
EPS FY11E
0.08-0.020.09 0.20 Free float 30%P/E (x) 49.0 nm 18.0 15.0
1M3M12M
Dividend yld 0
 Adjusted EPS (US$) 0.16 0.22 0.34 0.41
Absolute perf. (%) -12.3-27.8-27.8 Market cap US$0.4B
Diluted P/E (x) 37.4 28.5 17.8 14.9
Relative perf. (%) -17.2-40.9-46.7 Price target US$8.5EV/EBITDA 59.2 35.4 14.1 10.7Cash (US$MM) 7124 170 204 Date of price Jan 14, 2010P/B (x) 481.8 2.0 1.8 1.7Equity (US$MM) 20184 205 231Y/E BPS (US$) 0.0 3.0 3.3 3.7
Source: Company, Bloomberg, J.P. Morgan estimates. * Note: Adj. EPS excludes share-based compensation expenses.
 
 2
Asia Pacific Equity Research
18 January 2011Dick Wei(852) 2800-8535dick.x.wei@jpmorgan.com
Company description P&L sensitivity metrics
EBITDA EPSFY11E impact (%) impact (%)
Growth in RevenuesImpact of each 1% increase 0.7% 0.9%Growth in COGSImpact of each 1% increase -1.3% -1.7%Growth in Sales and Marketing expensesImpact of each 1% increase -0.5% -0.6%Growth in General and Administrative expensesImpact of each 1% increase -0.6% -0.7%
Source: J.P. Morgan estimates.
Price target and valuation analysis
Bona Film Group Ltd is the largest and most successfuldistributor of domestic films among all privately-owned film distributors in China in terms of number of films distributed and total box office receipts in 2009.The company was founded in November 2003 by DongYu.
Revenue growth (Rmb MM)
Our Dec-11 PT of US$8.5 is based on 20.4x 2012E non-GAAPearnings, in line with China consumer discretionary comparables, andimplies 25x 2011E and 21x 2012E non-GAAP earnings.
Risk-free rate: 4.0%Market-risk premium: 6.0%Beta: 1.3WACC: 12.1%Terminal “g”: 0%
J.P. Morgan estimates.
38.450.3159.7209.60.050.0100.0150.0200.0250.020092010E2011E2012E
Source: Company reports, J.P. Morgan estimates.
 
EPS estimates: J.P. Morgan vs consensus (Rmb)
US$ J. P. Morgan Consensus
4Q10E 0.05 NAFY11E 0.34 NAFY12E 0.41 NA
Source: Bloomberg, J.P. Morgan estimates.
 
Risks to our price target
Key risks to our price target are increasing reliance on in-houseproduction, revenue concentration from top films, change in regulatorylandscape, and departure of key management.
 
 3
Asia Pacific Equity Research
18 January 2011Dick Wei(852) 2800-8535dick.x.wei@jpmorgan.com
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