DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 25 January 2018 Asia Pacific/Hong Kong Equity Research Media China Media Sector Research Analysts Ivy Ji 852 2101 7951 ivy.jicredit-suisse Kenneth Fong 852 2101 6395 kenneth.kc.fongcredit-suisse INITIATION Growing pains Figure 1: China box office to grow at a 15% CAGR in 2018-20E Source: Company data, Credit Suisse estimates We initiate coverage on the China Media Sector with three companies Beijing Enlight Media, Zhejiang Huace Film & TV, and IMAX China. Industry in transition. We believe the film industry in China has transitioned from a supply-side and quantity-driven expansion to a new age growth underpinned by content and quality. We forecast a 15% CAGR in box office growth in 2018-20E, driven by admission increase (+14% CAGR), especially in lower-tier cities, and the stabilisation of average ticket price. Meanwhile, the TV drama industry has been transformed with the rise of online video websites as the primary distribution channel. The industry grew at five-year CAGR of 37% through 2017, driven by content spending of video websites. However, intensified competition, and the Matthew effect of accumulated advantage of the internet age have pushed up demand for big dramas with top celebrities in the cast and led to hikes in production costs. Quality content producers to win. We believe moderating box office growth is likely to prompt consolidation across the film value chain. High- quality upstream players (studios) with strong content track record and integrated distribution capabilities are likely to stand out. Meanwhile, the surge in TV drama production cost has led to margin erosion, cash flow pressure and elevated project risk for studios. As downstream online video websites consolidate and the bargaining power of top celebrities remain strong as ever, we are cautious on the outlook of TV studios. Stock selection. We initiate coverage on Enlight with an OUTPERFORM rating and a TP of Rmb15 based on 35x 2018E P/E. We like Enlight for its strong content track record, and unique offline and online distribution network. We initiate on Zhejiang Huace Film & TV (one of the largest TV drama producers in China) with a NEUTRAL rating and TP of Rmb11, based on 28x 2018E P/E. Lastly, we initiate IMAX China with an UNDERPERFORM rating and a TP of HK$19, implying 21x 2018E P/E, as it is likely to continue trailing behind industry growth in 2018/19E. Key risks: Box office growth lower than expected; unexpected policy changes. 1 3 . 11 7 . 12 1 . 82 9 . 64 3 . 9 4 5 . 75 2 . 46 0 . 56 9 . 17 9 . 630% 30%28%36%48%4%15% 16% 14% 15%0%1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %0 . 01 0 . 02 0 . 03 0 . 04 0 . 05 0 . 06 0 . 07 0 . 08 0 . 09 0 . 02 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 E 2 0 1 9 E 2 0 2 0 EC h in a b o x o f f ic e Y o Y % c h g - R H SR m b bn Yo Y % c hg 25 January 2018 China Media Sector 2 Focus charts and table Figure 2: Forecast 15% three-year CAGR in China box office through 2018 Figure 3: Admission growth in lower-tier cities would be the main driver Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 4: Internet has become the primary distribution channel for TV dramas Figure 5: Appetite for big drama has significantly pushed up production cost Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 6: Valuation comparison table Source: IBES, Credit Suisse estimates; priced as of 24 Jan 2018 2 1 . 82 9 . 64 3 . 94 5 . 75 2 . 46 0 . 86 9 . 87 9 . 828%36%48%4%15%16%15% 14%0%1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %0 . 01 0 . 02 0 . 03 0 . 04 0 . 05 0 . 06 0 . 07 0 . 08 0 . 09 0 . 02 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 E 2 0 1 9 E 2 0 2 0 EC h in a b o x o f f ic e Y o Y % c h g - R H SR m b bn Yo Y % c hg3 . 3 3 . 7 3 . 7 3 . 8 3 . 8 2 . 3 2 . 6 2 . 7 2 . 8 2 . 9 0 . 5 0 . 7 0 . 8 1 . 0 1 . 2 -0 . 51 . 01 . 52 . 02 . 53 . 03 . 54 . 04 . 52 0 1 6 2 0 1 7 2 0 1 8 E 2 0 1 9 E 2 0 2 0 ET i e r 1 T i e r 2 T i e r 3 a n d b e lo wPe r c ap i ta a dm i s s i on ( pe r s on - ti m e)7% 10%32%49% 51%68%93% 90%68%51% 49%32%0%1 0 %2 0 %3 0 %4 0 %5 0 %6 0 %7 0 %8 0 %9 0 %1 0 0 %2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 1 H 1 7% o f d r a m a s d is t r i b u t e d v ia in t e r n e t % o f d r a m a s d is t r u b u t e d o n T V% of to ta l d r am as dis tr i bu te d500 - 600> 2 , 0 0 0800 - 9005 , 0 0 0 01 , 0 0 02 , 0 0 03 , 0 0 04 , 0 0 05 , 0 0 06 , 0 0 02 0 1 1 2 0 1 5A v e r a g e d r a m a P r e m iu m d r a m aP r o d u c t i o n c o s t ( R mb '0 0 0 )CSM a rke t6M P/ERati ng Curr e nt Ta rge t cap A DT (% ) (x )(% ) (USD m ) (USD m ) YTD 12m 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019EChin a Con te nt Produ c e rsEn l i g h t M e d i a 3 0 0 2 5 1 .SZ O 1 2 .7 1 5 .0 18 5 ,8 2 2 36 21 25 4 3 .2 3 0 .6 2 5 .6 4 .8 4 .2 3 .7 1 1 .1 1 3 .8 1 4 .5 1 6 .2 4 1 .2 1 9 .4Hua c e F i l m & T V 3 0 0 1 3 3 .SZ N 1 1 .3 1 1 .0 (3 ) 3 ,1 3 8 35 5 8 3 2 .8 3 0 .0 2 5 .7 2 .9 2 .6 2 .4 8 .7 8 .8 9 .4 2 5 .2 9 .4 1 6 .6Hua y i Bro th e rs 3 0 0 0 2 7 .SZ NR 1 0 .4 N.A. N.A. 4 ,5 0 3 46 19 2 3 4 .8 2 8 .8 2 6 .5 3 .0 2 .7 2 .4 8 .5 9 .4 9 .1 2 .0 2 0 .5 9 .2Sh a n g h a i F i l m 6 0 1 5 9 5 .SS NR 2 1 .4 N.A. N.A. 1 ,2 4 9 7 5 (3 7 ) 3 4 .0 2 8 .6 2 6 .4 3 .8 3 .4 3 .0 1 1 .5 1 2 .1 1 1 .7 1 .2 1 8 .0 1 1 .2Chi n a F i l m 6 0 0 9 7 7 .SS NR 1 6 .2 N.A. N.A. 4 ,7 2 8 19 5 (2 3 ) 2 7 .5 2 3 .4 1 9 .5 2 .8 2 .5 2 .2 1 0 .5 1 1 .0 1 1 .6 2 2 .6 1 6 .7 2 0 .3Al p h a Grou p 0 0 2 2 9 2 .SZ NR 1 3 .6 N.A. N.A. 2 ,8 9 3 27 (5 ) (3 5 ) 4 2 .4 3 0 .7 2 6 .1 3 .4 3 .0 2 .7 8 .6 1 0 .0 1 0 .3 (1 7 .5 ) 4 1 .5 1 7 .9Se c tor a v e rag e 1 3 ,4 6 4 15 11 3 6 .9 2 9 .8 2 5 .9 3 .5 3 .2 2 .9 9 .4 1 0 .7 1 1 .0 1 4 .5 2 3 .7 1 5 .0Chin a Cin e m a Cha in sIM AX Ch i n a 1 9 7 0 .HK U 2 3 .7 1 9 .0 (2 0 ) 1 ,0 8 3 3 1 (3 3 ) 2 8 .9 2 7 .0 2 4 .0 4 .8 4 .2 3 .6 1 6 .6 1 5 .3 1 4 .9 1 .5 8 .1 1 3 .4W a n d a F i l m 0 0 2 7 3 9 .SZ NC 5 2 .0 N.A. N.A. 9 ,5 6 5 0 0 (7 ) 3 3 .6 2 6 .0 2 1 .1 5 .1 4 .3 3 .7 1 2 .9 1 8 .6 1 9 .0 2 9 .3 2 9 .3 2 5 .6SM I Hld g Grp 0 1 9 8 .HK NR 4 .0 N.A. N.A. 1 ,3 9 5 1 (2 ) 10 1 3 .9 1 2 .0 9 .5 1 .3 1 .1 1 .0 1 1 .2 1 0 .0 1 0 .9 9 9 .0 2 5 .0 2 8 .9J i n y i M e d i a 0 0 2 9 0 5 .SZ NC 3 8 .0 N.A. N.A. 999 20 6 12 3 0 .0 2 5 .7 2 3 .7 N.A. N.A. N.A. 1 1 .3 1 1 .6 1 1 .2 n m f 1 6 .9 8 .5Se c tor a v e rag e 1 3 ,0 4 2 1 5 2 5 .8 2 1 .3 1 8 .1 3 .2 2 .7 2 .3 1 1 .8 1 3 .4 1 3 .7 6 4 .1 2 3 .7 2 1 .0(x ) (% )Pric e P/BV RO EA bs ol ute Pe rforma nc eCom pa ny Na m eUps id e EPS g row thTi c k e r 25 January 2018 China Media Sector 3 Growing pains Film: Content is king In our view, the film industry in China has transitioned from a supply-side and quantity- driven growth in earlier years into a more mature and sustainable phase of development. We believe the content and the overall quality of films released will be the key factors to drive future growth. We forecast box office to grow at a three-year CAGR of 15% in 2018-20E to Rmb87 bn in 2020E, mainly driven by continued admission growth (+14% CAGR; 2012-17: 28%) and the stabilisation of average ticket price (+1% CAGR). Our analysis shows that residents in Tier 1 and Tier 2 Chinese cities are 5.7x and 4.0x more likely to watch a film than their lower-tier cities peers in 2017 despite of the income gap of only 3.0x and 1.7x, respectively. We, therefore, see room for further penetration to catch up in lower-tier cities supported by: (1) consumption upgrade; (2) improvement in the domestic film quality; and (3) further expansion in cinema penetration. Meanwhile, we expect ticket pricing to gradually improve, thanks to the cool-down in price war among online ticketing platforms and a slower pace of new screen addition. As box office growth moderates, we expect consolidation across the value chain. Weakness in per screen average box office (PSA) is likely to push small downstream players (i.e., circuits and cinemas) out of the market. Meanwhile, quality upstream players (i.e., studios) with strong track record and integrated distribution capabilities are likely to benefit from the new age of growth underpinned by content and quality, in our view. TV drama: Brave new world The TV drama industry in China has been transformed over the last few years with the rise of online video platforms taking the place of traditional TV stations and becoming the primary distribution channel, as TV advertising revenue dwindled. Thanks to the deep pockets of video websites to pay for content, the overall market size has nearly tripled over the last five years to Rmb42 bn in 2016, according to our estimates. However, TV studios have been severely squeezed, despite the rapid growth of the industry. Intensified competition and the Matthew effect of accumulated advantage of the internet age have pushed up demand for big TV dramas with top celebrities in the cast. This has led to: (1) significantly higher production cost, especially salary of the cast, which erodes margins of TV studios; and (2) elevated capital requirement per drama creates pressure on cash flow and also increases project risks for studios. As downstream online video websites consolidate and bargaining power of top celebrities remain strong as ever, we are cautious on the outlook of TV studios, and expect their margin and cash flow to remain under pressure over the medium term. Initiate coverage on Enlight, Huace and IMAX China We initiate coverage on Beijing Enlight Media with an OUTPERFORM rating and TP of Rmb15 based on 35x/29x 2018/19E P/E. As a leading film studio and distributor with a strong content track record, we believe Enlight is well positioned to benefit from the film industrys transformation into quality driven growth. We initiate on Huace Zhejiang Film & TV (one of the largest TV drama producers in China) with a NEUTRAL rating and TP of Rmb11, imply 29x 2018E P/E. We like Huace for its industry leading position and a decent drama pipeline. However, due to industry headwinds, margin and cash flow are unlikely to recover meaningfully. Lastly, we initiate IMAX China (provider of IMAX system and the platform for the release IMAX films) with an UNDERPERFORM rating and TP of HK$19, implying 21x 2018E P/E as, in our view, it is likely to continue trailing industry growth in 2018/19E. Key risks: Significant deviation of box office growth from forecast; unexpected policy changes in imported film quota. We forecast a 15% CAGR in box office growth in 2018-20E, driven by admission increase (+14% CAGR), especially in lower-tier cities, and the stabilisation of average ticket price The TV drama industry grew tremendously, thanks to video website content spending. TV drama studios, however, have been squeezed as production costs surged Initiate Enlight Media with OUTPERFORM, Huace with NEUTRAL and IMAX China as UNDERPERFORM 25 January 2018 China Media Sector 4 Table of contents Focus charts and table 2 Growing pains 3 Film: Content is king . 3 TV drama: Brave new world . 3 Initiate coverage on Enlight, Huace and IMAX China . 3 Film: Content is king 6 Competitive landscape: Industry consolidation amid moderating box office growth 6 Admission growth: Lower-tier cities remain the driver. 10 Ticket price: Stabilising with mild recovery . 12 Expect 15% CAGR box office in 2018-2020E . 13 TV drama: Brave new world 14 From offline to online . 14 Appetite for big dramas pushed up production cost . 16 Regulation catching up . 17 Initiate coverage on Enlight, Huace and IMAX China 18 Prefer leading cinema chains and quality producers . 18 Cautious on TV studios outlook . 19 Initiate coverage on Enlight, Huace and IMAX China . 20 Investment risks. 22 Focus charts 25 Future in light 27 Proven track record in content and distribution . 27 Strong pipeline to support growth in 2018/19E . 28 Monetisation upside from Maoyan-Weiying . 29 Robust earnings outlook and a strong balance sheet . 31 Initiate coverage with an Outperform rating . 32 Management profile and shareholding structure . 33 Investment risks. 34 Beijing Enlight Media in HOLT (300251.SZ) 35 Focus charts 38 Patience needed 40 Growth likely continues to underperform industry . 40 Return may further trend down . 43 25 January 2018 China Media Sector 5 Initiate coverage with an Underperform rating . 45 Management profile . 47 Investment risks. 47 IMAX China Holding in HOLT (1970.HK) 48 Focus charts 51 Company background . 53 Valuation . 53 Investment risks.