China Film (600977 CH): Initiating coverage: SOE and market leader China Film likely to sustain steady development for the long term

The gist: BUY

·??????China Film Group subsidiary and cultural SOE covers entire film value chain

·??????We expect the film market to bottom out and China Film would benefit fully

·??????Distribution is key income driver while Cinity turbocharges its tech business

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China Film Group subsidiary and cultural SOE covers entire film value chain

China Film was established in December 2010 and listed on the Shanghai Stock Exchange in August 2016. Its business spans the film industry value chain, encompassing film creation, publicity and distribution, theater management and technological R&D. The six major divisions are: (1) film creation; (2) distribution; (3) screening; (4) technology; (5) services and (6) innovations. Its largest income earner is the distribution of both Chinese and imported films, which contributed more than 30% of revenue in 2021. Its Cinity premium-format and film equipment business benefits from the steady expansion of the technology division, whose fast revenue growth leapfrogged the screening division to become the second-largest income stream in 2021. Backed by controlling shareholder China Film Group, China Film’s steady growth trajectory demonstrates its SOE strength.

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We see a visible industry recovery trend as future prospects brighten

The film market is clearly on a recovery trend in 2023E, in our view. Demand wise, we believe pandemic management policy optimization and normalizing offline activities will lead to a pick-up in cinema-going consumption. Supply wise, content film prospects are looking good, based on the scheduled film release pipeline. In view of the new project and content backlog from the past few years, the current content pipeline is rich with theme films, while imported film releases are returning to normal. We thus expect the company to rebuilt box-office growth.

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Entire value chain coverage: industry recovery beneficiary; we expect bottom-out

Screening: the box-office recovery and normalizing cinema operations would directly drive a recovery in screening revenue. Film screenings slowed down when the company’s cinema holdings expanded, so it paid more attention to single-screen premium offerings. The company maintained its competitive edge in 2022: China’s top 10 theater chains in terms of box-office takings included Zhongshu (2nd), China Film South (5th) and China Film Stellar (9th).

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Distribution: imported film launches contribute to medium and long-term performance elasticity. China Film has a policy advantage when it comes to imported film releases and imported films form the bulk of its distribution income.

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Film creation: its key films are progressing smoothly in terms of production. China Film’s production business has shown a stellar performance in recent years. Its blockbuster productions include The Wandering Earth 2 (2023), My Country, My Parents (2021) and The Sacrifice (2020), which performed well at the box office, a testament to its success formula based on theme films.

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Technology: the company develops and promotes premium-tech format film systems that are at the cutting edge of the global film industry. China Film completed the acquisition of Cinity shares in 2021, a related business that promotes premium-format screenings, which optimize cost and efficiency.

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Valuation and risks

We forecast revenue of RMB3.66bn/6.46bn/8.00bn in 2022/23/24E, changing -37.1/ +76.6/+23.9% yoy; with net profit at RMB-220m/+957m/+1.13bn. As a cultural SOE, China Film holds considerable advantages across the film value chain. We expect it will fully benefit from China’s box-office recovery and improving industry growth. On top of that, Cinity’s advanced technological positioning ensures a healthy expansion momentum. We initiate coverage of China Film with a BUY rating.

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Risks include: a worse-than-expected film market recovery; less-than-expected normalization of the imported film market; film content driving lower-than-expected box-office takings; policy regulatory risks; and third-party data accuracy risks.

Disclosure

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