万达电影(002739)

Conclusion

We downgrade Wanda Film to Neutral from Outperform as we don’t think thestrong movie-going demand can fully digest the excess theatre supply thatwas built over the past five years. We expect Wanda Film’s per-screenaverage revenue (PSA) to decline to RMB1.71m in 2019 from RMB1.88m in2017, the steepest decline among major cinema players, given its aggressiveplan to add 100-150 theatres a year. While we still consider Wanda Film asthe ultimate consolidator in the market, we estimate its earnings CAGR in2017-19E to decelerate to 15% from 31% in 2013-16, which looks lacklustrein view of its 32x 18E PER, vs the average of 41x since IPO in Jan 2015.

Impact

Wanda Film PSA to decline sharper amid sector glut. Despite the solidmovie-going demand, we expect China movie industry’s PSA to fall to anunhealthy level of RMB1.01m (USD156k), in 2019 after the rapid addition ofscreens. Within this, we expect the domestic PSA of Wanda Film to decline toRMB1.71m in 2019 from RMB1.88m in 2017 based on its plan to add 100-150theatres a year. That implies an annual 5% PSA decrease, compared to theprojected 0.4% decrease for the sector, largely due to Wanda Film’s moreaggressive expansion. We thus expect the gross margin of its theatrebusiness to drop to 14.5% in 2019E from 17.4%/16.0% in 2016/2017E.

Looking into details of CNY box office data. Box office in the first five daysof 2018 CNY holidays reached RMB4.9bn, or 72% higher than 2017. Whilethis is buoyant, we see Wanda Film’s market share slightly declined to 13.0%despite its more aggressive expansion, as this demand was primarily drivenby people who had returned home to third- or fourth-tier cities. Its nationwidemarket share has decreased in the past five years, to 13.2% from 14.5%.

Long-term consolidator but near-term issues linger. We remain positiveon Wanda Film’s long-term position amid market consolidation thanks to itsunrivalled scale and group resources. Alibaba’s investment, announcedearlier this month, will further enhance its competitiveness. However, webelieve the excessive supply in the sector will drag Wanda Film’s earningsCAGR to 15% in 2017-19E from 31% in 2013-16.

Earnings and target price revision

Trim 18-19E EPS by 1-2% with TP falling to RMB53.40. We change ourvaluation methodology to PER-based from EV/EBITDA. Our new TP is basedon 33x 2018E PER.

Price catalyst

12-month price target: Rmb53.40 based on a PER methodology.

Catalyst: 4Q17 results on 26 April, box office performance

Action and recommendation

Downgrade to Neutral. Wanda Film trades at 32x 18E PER, compared to 28xfor its local media downstream peers.