Brett_Hondow
Elevator Pitch
I continue to rate IMAX Corporation’s (NYSE:IMAX) shares as a Buy.
I discussed about IMAX Corporation’s capital allocation activities relating to M&As (Mergers & Acquisitions) and share repurchases in my prior write-up for IMAX published on October 4, 2022.
With this latest update, I touch on why China’s reopening is a key tailwind for the company. The recent Chinese New Year box office numbers were pretty good, and various research firms expect China’s box office sales to recover in a meaningful way this year. I am of the view that IMAX Corporation’s shares have room to rise further, as the stock’s P/E valuation is below its historical average. As such, I maintain my Buy rating for IMAX.
IMAX’s China Exposure
China is a very important market for IMAX Corporation as per the metrics presented below.
In 2019, prior to the full COVID-19 outbreak, the Greater China market accounted for 31% of IMAX’s topline. Notably, Greater China was IMAX Corporation’s largest geographical market segment in terms of revenue contribution in 2019.
Another way to determine IMAX Corporation’s exposure to the Chinese market is to look at the company’s China subsidiary, IMAX China Holding, Inc. (OTCPK:IMXCF) (1970:HK). According to its most recent 3Q 2022 10-Q filing, IMAX Corporation had a 71% stake in IMAX China. Based on the latest share price data sourced from S&P Capital IQ, the value of IMAX Corporation’s equity interest in IMAX China was equivalent to 37% of its market capitalization.
In the section, I highlight how China’s reopening has benefited the country’s movie industry by reviewing recent box office data.
Chinese New Year Box Office Data
China’s Chinese New Year box office sales amounted to RMB6.76 billion for the period between January 22, 2023 and January 27, 2023, as indicated in Chinese state media CGTN’s January 29, 2023 news article. This represented a reasonably good +12% increase as compared to the RMB6.03 billion Chinese New Year box office sales for 2022. Also, China achieved its second-highest Chinese New Year box office sales on record this year.
The numbers highlighted above are consistent with the metrics shared by IMAX Corporation. Earlier, IMAX Corporation issued a media release on January 23, 2023, revealing that its subsidiary IMAX China’s $7 million box office on January 22, 2023 was “its second-best opening day ever for the Chinese New Year holiday.”
At the company’s most recent Q3 2022 results briefing in end-October last year, IMAX Corporation specifically mentioned that the movie titled “Wandering Earth 2” which is “the sequel to our highest grossing local language film of all time” is part of the company’s Chinese New Year movie slate. Wandering Earth 2 did live up to expectations, as it contributed roughly $6 million of the $7 million Chinese New Year opening day box office revenue for IMAX.
In a nutshell, Chinese moviegoers are returning to movie theaters, as China makes a pivot away from its COVID-zero stance and relaxes pandemic restrictions. The box office data suggests that both the Chinese movie industry and IMAX Corporation are benefiting from China’s reopening.
Full-Year 2023 Outlook
China’s movie industry is expected to see a very strong recovery in 2023, and IMAX Corporation is well-positioned to grab a larger slice of the Chinese movie market this year.
Research firm Gower Street predicts that box office sales in China will expand by approximately +27% from $4.4 billion in 2022 to $5.6 billion for 2023 in USD terms. Morgan Stanley (MS) is even more bullish on the Chinese film industry’s recovery prospects as compared to Gower Street. In a research report (not publicly available) titled “China Film – How To Position After The Rally” published on January 15, 2023, MS estimates that China’s box office sales will grow by +64% to RMB49 billion ($7.2 billion) in the current year.
The encouraging Chinese New Year box office data, which I referred to earlier in this article, supports Gower Street’s and Morgan Stanley’s expectations of significantly higher box office revenue for China’s film market in 2023.
Separately, IMAX Corporation has been growing its market share in China’s film industry in the past couple of years. Based on IMAX China’s latest investor presentation slides, IMAX’s market share for the Hollywood movies screened in China in terms of box office sales increased from 5.7% in 2017 to 8.6% for 2021. Over the same period, the company’s share of domestic films’ box office in the Chinese market also went up from 1.7% to 2.5%.
In the company’s January 23, 2023 press release announcing its Chinese New Year opening day box office data, IMAX Corporation also noted that Wandering Earth 2 screened in IMAX theaters accounted for “8.5% of the film’s first day gross (box office) on only 1% of screens” in China. This serves as an indication that IMAX continues to gain market share with domestic movies in China. As the quality of domestic films in the Chinese market becomes better with time, it is very likely that an increasing number of moviegoers in China will choose to watch local movies in IMAX theaters.
As per S&P Capital IQ’s financial data, the analysts see IMAX China (IMAX Corporation’s Chinese subsidiary) growing its topline and normalized net income by +25.4% and +67.8%, respectively, in 2023. This is pretty realistic, taking into account the expected recovery in Chinese film box office sales and IMAX China’s market share gain potential.
Closing Thoughts
IMAX Corporation’s shares are worthy of a Buy rating. IMAX currently trades at 22.3 times consensus forward next twelve months’ normalized P/E, which is below its 10-year (2010-2019 period before COVID-19) average P/E multiple of 26.0 times. In other words, IMAX Corporation’s current stock price and valuations have yet to fully reflect the positives relating to China’s reopening.
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