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1、Macquarie Research25 February 2019EQUITIESContentsKey charts2Investment summary3China Movie: Key watch points in 20195TV/online drama: turning more regulated and disciplined13Appendix19China Film (A-Share)22IMAX China Holdings30Zhejiang Hu ace Film & TV (A-Share)38Wanda Film (A-Share)46China media s
2、ector underperformed SH-A share index by 16%oooooooooo o5050505050599887766554二叩 LOoLoe 二叩OJLcoLoe 10叩二8oe 1 EoLoooe 1 ocosoooLoe L8CO0CO3CM 二叩 zocolocm I。叩 90COL0CM Lco1n98OCXJ oco4o,8o(XJ LcoooaJoe 8e&oa)oe 二叩ooooe3500 30002500 20001500 10005000China media sector indexSH-A share indexSource: Wind,
3、 Macquarie Research, February 2019China media stock picksChina Film 600977 CH OP28%20.00 22 18IMAX China 1970 HK OP24%25.50 18 17Huace300133 CH OH20%9.00 21 16Wanda Film 002739 CH N3%22.00 27 24Company Ticker MQ Upside TP PE(x) rating(LC) 19E 20E*Bloomberg data as of Feb 22, 2019.Source: Bloomberg,
4、Macquarie Research, February 2019AnalystsMacquarie Capital LimitedEllie Jiang +852 3922 4110 Wendy Huang, CFA +852 3922 3378John Wang +852 3922 3578 Frank Chen +852 3922 1433ChinaChina Internet & MediaMovies and TV: Content is kingKey pointsBlockbuster content and premium experience are primary grow
5、th drivers. Regulation leads to ST industry consolidation but raises LT sustainability. Reiterate OP on China Film; upgrade IMAX China to Outperform.We launch our second media series with a focus on Chinas movie and TV sector (see our music report here). The China media sector has underperformed the
6、 SH-A share index by 16% since the beginning of 2018, especially with soft box office growth and a regulatory overhang in 2H18. We revisited some key events, and identified potential drivers in the movie and TV industries in 2019.Quality over quantity to be the main driverChinas media sector has tur
7、ned more disciplined, with content the most powerful growth driver for downstream and upstream players alike. While Chinese audience seem open to trying different genres, they have been selective in picking quality over IP/cast, leading to a close correlation between reviews and final turnout of med
8、ia content. We expect the top 10 films in China to contribute over 40% of total BO in 2019, vs a corresponding 62% share in the US in 2018.Movie: premiumization is the key watch pointThe movie sector has entered a period of steady growth, with the box office set for 10% CAGR on the number of total s
9、creens rising to 78k in the next two years, per our estimate. Yet, we expect a gradual easing in per-screen-average revenue (PSA)一a 4% yoy decline in 2019E after an 8% decline in 2018, driven by increasing ticket price and rising demand for premium movie-going. With increased blockbuster films embed
10、ded with special effects and action sequences, as well as rising quality from domestic films, we remain optimistic in premium players such as IMAX and Giant Screen (China Film) and expect them to be the first to recover from the PSA decline as premium large-format (PLF) tickets are 2-i v Drama: leaa
11、ing coniem proviaers io gain snareRegulation has heavily impacted the TV drama sector and will continue to this year, especially on licensing costs and online content. We see a mixed impact from regulations to content providers: better margin with lower production costs, but topline pressure from po
12、tentially lower licensing prices, a roughly 20% decline on our estimate. The licensing price for top content, however, should remain high, given more premium production quality. We believe industry consolidation will benefit top players like Huace in gaining bargaining power with quality content sup
13、ply and accumulating more market share, especially with a lack of quality pipeline for distribution channels resulting from low production volume in 2H18.Stock picks: Top pick China Film; upgrade IMAX China to OPWe believe ifs a good time to revisit the media sector as we believe audience in China a
14、re increasingly selective in content quality, and we prefer IP-centric upstream over asset-heavy downstream. We also like premium over mass, as we are optimistic on the prospects of premium movie-going demand. We upgrade IMAX China from Neutral to Outperform on its faster box-office growth outlook i
15、n 2019 (14% vs 11% industry growth). Reiterate Outperform on China Film as we think it is the most resilient player among all with its authorized distribution business, prudent theatre expansion, and least PSA dilution impact.Please refer to page 54 for important disclosures and analyst certificatio
16、n, or on our website .Fig 21 Avg. ticket price increased 12% yoy during 2019 CNYAvg. ticket priceyoy%Fig 22 Top content leads to better turnout overallThe Wandering EarthCrazy AlienPegasusThe New King of ComedyBonnie Bears: Blast into the PastSource: Dengta, Macquarie Research, February 2019Source:
17、Maoyan, Macquarie Research, February 20197.0%Fig 23 BO contribution by city-tier during major release periods (2018)100.0%90.0% -80.0%70.0% -60.0% -50.0% -40.0%30.0% -20.0%10.0% -0.0% -CNYSummerNational HolidayNew YearTier 1 aTier 2 Tier 3Tier 4 Tier 5Source: EntGroup, Macquarie Research, January 20
18、19Regulations on movie sectorAccelerate screen expansion and government subsidy on PLFsOn Dec 11,2018, the China Film Administration released the uOpinions on accelerating theatre construction and promoting prosperity of film market55 or “关于加快电影院建设,促进电影市场繁荣开展的意 见”.The Opinion sets out the target tha
19、t total screens in China should exceed 80k by 2020, which beats the previous street expectations for total movie screens to reach 70k by 2020. The government is encouraging more reasonable demographic distribution among new theatres and expects advanced technology to improve the overall movie viewin
20、g experience. Provide funding for theatre construction in county-level cities. The Opinion emphasizes the importance to match theatres with population demographics, further strengthening guidance for theatre site selection. Meanwhile, the China Film Administration will provide special funding to cou
21、nty-level cities, especially in the mid-Western areas for the purpose of new theatre construction or existing theatre expansion. The government will provide no more than Rmb300k to support new construction, and Rmb200k for existing theatre expansion. For those located in contiguous areas of difficul
22、tyn, the government will provide Rmb100k-150k funding per theatre to support operational development. Promote high technology and PLF screens. The government encourages theatres to upgrade the existing environment and equipment and enhance the overall projection quality. Through the special fund for
23、 China national film development, the equipment upgrades will focus primarily on technology such as premium large format (PLF) screens and laser projectors. According to the Opinion, funding amounts will not exceed 20% of the total procurement price for the projection equipment, and maximum funding
24、subject to each theatre should not exceed Rmb500k. Encourage theatre circuits and theatre investment companies with more standardized management. The government authority promotes development of theatre circuits with a unified brand, film arrangement, operations and management. Per Opinion, the thea
25、tre circuits need to make sure: 1) total theatre numbers should be no fewer than 50 or total screen numbers should be no fewer than 300, and 2) the overall box office revenue should not be less than Rmb500m. The government encourages movie theatres to merge and reconstruct in accordance with relevan
26、t laws and regulations, supporting cross-region and cross-ownership integration to promote scale expansion for China theatres. Develop theme-based theatres. The Opinion encourages developing more theme-based theatres, such as campus theatres that could play an important role in reaching a specific a
27、udience. The government also gives support to mainstream films and art films for enhanced cultivation.Fig 24 China movie screen forecast (2014-2020)China screen numberYoY%Source: SARFT, Macquarie Research, February 2019Movie ticketing subsidies banThe China Film Administration was reportedly to ban
28、the online ticketing subsidies in China as soon as October 2018. Though no formal document has been released so far, we expect official rules to kick in this year. According to media, the new rules will impact mostly third party ticketing platforms such as Maoyan and Taopiaopiao, while movie theatre
29、s are still allowed to offer discounts and coupons on tickets.Currently, the lowest movie ticket price is Rmb19.9 across multiple online ticketing platforms, compared to Rmb9.9 or even lower previously.We expect the subsidy ban will lead to a reshuffle of bargaining power across the movie industrys
30、food chain. China ticketing apps have gained clout after becoming the mainstream channel for ticket purchases. The new rules will give clout back to the cinemas (which get back pricing power) and producers (quality producers should resurface amid fairer competition). We also expect the rising movie
31、ticket prices could help ease some pressure from PSA dilution.Fig 25 Online ticketing penetration rises over timeFig 26 Market share among major online ticketing platformsSource: Proresearch, Macquarie Research, February 2019*Data as of 1H18.Source: Analysys, Macquarie Research, February 2019TV/onli
32、ne drama: turning more regulated and disciplinedDriven by the blockbuster strategy in the China media and entertainment sector, the Matthew effect continues as top-rated content has accumulated much higher exposure over time. We see that the audience become more rational in selecting content, furthe
33、r polarising the performance of drama titles based on content quality. Although the number of dramas that filed for SAPRT broadcasting approval declined slightly in 2018 from the previous year, with total episodes declining 2% yoy, top-ranked content continues to gain market share.The total number o
34、f dramas with over 10bn views increased from only 1 title in 2017 to 7 titles in 2018. Among the top titles, Story of Yanxi Palace （延禧攻 略），an original costume play, received the most viewership at 18.2bn, followed by Ruyis Royal Love in the Palace （如懿传）and Mr. Right （恋爱先生）with 16.3bn and 16bn, respe
35、ctively.Fig 27 Number of dramas filed for broadcasting approval declined slightly on an annual basisFig 28 Filings declined sharply in 2H18 due to regulatory overhangSource: SARFT, Macquarie Research, February 2019Source: SARFT, Macquarie Research, February 20191H2H 2017 b2018Source: SARFT, Macquari
36、e Research, February 2019Fig 29 Viewership of Chinas top online dramas each yearSource: EntGroup, Macquarie Research, January 2019Rising production costs, but shifting towards quality enhancementCoupled with rising content quality expectations, production costs in China are surging, especially for t
37、op-viewed dramas. In 2018, production costs for Ruyis Royal Love in the Palace 如懿彳专 exceeded Rmb15m per episode, 5 times more than the costs for Empresses Pa/ace 里后姨传 in 2012. Notably, more than half of the production cost went into the main casts for Chinese dramas. In comparison, the product cost
38、for the final season of Game of Thrones reached $15m per episode, according HBO. The huge price tag was dedicated primarily to large-scale set pieces and computer graphics with an inordinate amount of epic battle scenes. This cost mismatch in China has restricted resources for production, and ultima
39、tely driven down the quality of films. In August 2018, China5s leading TV producers and streaming platforms agreed to cap actors5 salaries and crack down on tax evasion events. According to the joint agreement, the lump sum package for actors cannot exceed 40% of the total production cost, and the l
40、ump-sum package for major talents is capped at 70% of total talents package for each series. Since then, the package for actors has declined approximately 60%, whereas compensation for directors and film writers has decreased 20-30%. This has also led to a major slowdown in TV drama5s production pip
41、eline in 2H18. As regulations will continue to bring pressure in the near term, however, we believe that this will set a higher standard for Chinas TV/online drama quality. We expect production costs for top-tiered content to continue rising, but to shift towards production and post-editorial.Fig 30
42、 Production costs surging across the US and ChinaFig 31 Actors, compensation accounts for half of production cost in China (2017)Fig 31 Actors, compensation accounts for half of production cost in China (2017)Fig 32 .whereas 80% of production costs were spent on production and post-editorial in the
43、US (2017)Source: iResearch, Macquarie Research, February 2019Source: iResearch, Macquarie Research, February 2019Source: iResearch, Macquarie Research, February 2019License prices hitting the ceiling As downstream players face fierce competition in pursuing top-quality content, the license prices ha
44、ve surged for premium dramas. In 2018, the license cost for Ruyis Royal Love in the Palace reached Rmb6m per episode for satellite TV, more than triple that of Empresses in the Palace in 2012. Driven by massive investments and a channel shift in mainstream media consumption, competition among major
45、online video platforms to bid for top content has become more fierce. The license price for online platforms surpassed satellite TV stations in 2016 for the first time. According to iResearch, the license price for Ruyis Royal Love in the Palace reached Rmb9m per episode, increasing 20% from Rmb7.5m
46、 per episode for The Legend of Mi Yue in 2017. The SARFT reportedly w川 introduce new regulation to cap the license price for online platforms. According to local media, the maximum license price for online platforms to purchase ancient costume plays should not exceed Rmb8m per episode, while the lic
47、ense price for contemporary dramas should not exceed Rmb6m per episode. Although no official announcement has been made, we expect more regulatory guidance to come this year, and expect the average license cost for TV/online dramas to decline 20%, with the price for top-tier content to remain high d
48、riven by production costs.Fig 33 License cost per episode for premium dramas in China2012201320142015201620172018Premium dramaEmpresses in theLongmenThe Empress ofThe Journey ofIce FantasyThe Legend ofRuyis Royal LovePalaceExpressChinaFlower幻城Mi Yuein the Palace甄嫔傅龙门镖局武媚娘傅奇花千骨芈月传如懿传Online (Rmb m)0.30.91.01.34.07.59.0Satellite TV (Rmb m)1.9na2.51.62.34.06.0Source: iResearch, Macquarie Research, February 201