万达电影(002739)

Key points

2Q earnings missed on weak box office and accordingly PSA and margins

We trim 18/19E adj. earnings by 9%/5% with a lower TP of Rmb49.5

The stock remains suspended on an acquisition deal, which could be EPSaccretive

Event

Wanda Film’s 2Q18 adj. earnings dropped by 40% YoY to Rmb334m, 57%below MQ (no quarterly WIND estimate). The miss reflects the weak Chinabox office in 2Q, and accordingly the weaker-than-expected marginperformance on PSA (per screen average revenue) pressure. We cut 18-20Eadj. earnings by 5-9%. Maintain Neutral. The stock trading remains suspendedgiven the ongoing acquisition deal.

Impact

2Q18 missed across the board. 2Q18 revenue dropped by 5% YoY (down27% QoQ) to Rmb3.1bn, 14% below MQ. The miss was primarily driven by thesoft China BO performance in 2Q (-5% YoY) on weaker Hollywood filmperformance this year, given the stable 14% market share for Wanda Filmdomestically. That put its theatre PSA and then GM continuingly underpressure (down 1.5ppts YoY to 14.5% in 1H), and largely offset the marginaccretion from ads and merchandise businesses. Along with the still highopex%, EBIT (-31% YoY) missed MQ by 51%.

Box office recovering in 3Q. Thanks to local films Dying To Survive 我不是药神and Hello Mr. Billionaire 西虹市首富, China BO QTD resumed growth of 9%YoY even with hard comps built by Wolf Warrior 2 (launched on 27 July 2017).We still expect 3Q China BO to grow by 14% YoY. That echoes Wanda Film’s3Q earnings guidance of Rmb364-617m, with the midpoint +31% YoY. Weexpect 2H18 adj. earnings to grow by 28% YoY based on 15% sales growth,modest GM expansion and better opex control.

Proposed acquisition potentially EPS accretive. Wanda Film proposed toacquire 96.83% of Wanda Media, the content provider of films, TV shows andonline games on 26 June. In the reorganization proposal, the net profit ofWanda Media is promised to be no less than Rmb888m, Rmb1,069m,Rmb1,271m fin 2018, 2019 and 2020, respectively, which could be 30-32%EPS accretive for 19-20E. The deal is still under process and thus the stockremains under suspension.

Earnings and target price revision

We reduce 18-19E adj. earnings by 9%/5% and lower our TP to Rmb49.5(from 53.3 prior) based on a 32x target PER (18-19 average).

Price catalyst

12-month price target: Rmb49.50 based on a PER methodology.

Catalyst: Box office performance, deal announcement, 3Q18 results

Action and recommendation

Retain Neutral. We prefer midstream player China Film (A-Share) (600977CH, Rmb13.36, Outperform, TP: Rmb17.80) over downstream player WandaFilm given cinema oversupply issues.