Market Insight

Change of winds in Wanda’s film business

August 14, 2017

Pablo Carrera Pablo Carrera Principal Research Analyst, Cinema
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Dalian Wanda Group, a property developer with interests in film (as well as in insurance, technology, tourism and sports) will sell a stake in its flagship film project, the studio Qingdao Movie Metropolis. Additionally, Wanda’s subsidiary AMC, the largest film exhibitor in the world controlling over 11,000 screens in 15 territories (excluding Chinese screens controlled by Wanda), has reported losses for Q2 2017 due to worse than expected box office results.

Wanda decided to sell some of its assets in response to a push by the Chinese government last month to restrict its access to capital from state-owned banks and to reduce its debt. Alongside theme parks it will sell a stake in Wanda Studios, part of the Qingdao Movie Metropolis complex which is under construction. It will be acquired by Sunac China Holdings Ltd., with Wanda retaining a 9% stake and a management role.

Separately, Wanda’s US film exhibition subsidiary AMC, which recently acquired Carmike, Odeon and Nordic Film Group, has reported a net loss of $176 million in Q2 2017, including a $203 million impairment charge for its National CineMedia investment. This compares to net earnings of $24 million in Q2 2016 before the acquisitions. The net loss is attributed to a slowdown in domestic box office and has triggered a cost reduction in its US operations from July through to the end of the year.

Our analysis 

These two recent events are not directly related. In fact, when it was reported that Wanda would suffer capital restrictions, AMC issued a statement confirming it did not affect its access to funds or its operations and backed this up in the Q2 earnings call.

The reading seems to be that the first event affects Wanda’s long term film strategy domestically (in China) and in particular its involvement in the production sector, whilst the second is a financial and operational issue in a subsidiary that requires short term responses without much impact across the whole business.

In China, Wanda has been caught up in a Government’s determination to reduce indebtedness of the largest groups and to limit the Chinese capital used in foreign acquisitions. Although these policies don’t target Wanda’s film activities directly (there are other companies involved and Wanda is also selling part of its theme parks), these are underpinned by debt and foreign acquisitions and so growth is limited within and outside China. In fact, it is inevitable to read this restriction in connection with Wanda’s ambitions of acquiring a Hollywood studio and other media assets, which are seemingly being shelved for the time being.

The Qingdao Movie Metropolis is meant to be the largest film studio in the world. With 30 sound stages but also hotels, post-production houses, indoor theme parks and residential areas it is a large property development with film as its anchor. It was Wanda’s flagship project in the production sector designed to attract large Hollywood productions and boost filmmaking skills in China. With this sale, Wanda has reduced its foothold to a 9% stake and a management role, shifting the balance from production to exhibition within the group.

In its turn, AMC’s second quarter loss is not a surprise. US box office was down 4.4% compared to the same quarter last year, and whilst legacy AMC theatres performed better, legacy Carmike sites still underperformed with a 11.3% decline compared to Q2 2016. It is taking time for AMC to make its strategy work for Carmike’s cinemas and pressure will probably mount in the next quarters to prove it can turn the tide.

Across the Atlantic, Odeon’s revenues were up by 11.9% year-over-year in constant currency and Nordic Cinema Group up by 20.9%. However, they only represent around 20% of AMC’s total revenues so could not fully overcome the domestic loss. Quick to react, it has already put in motion a cost saving initiative to reduce expenses only in the US by $30m. This is similar to IMAX, which also partly as a result of the poor box office results has laid off 10% of the staff.

Looking forward, in the short term eyes will be on Q4’s strong slate to boost the year. AMC confirmed that acquisitions will be put on hold for the time being. It will focus on turning the tide in legacy Carmike’s theatres and in renewing theatres and installing recliner seats.

On that front, it released new data about AMC theatres with recliner seats, which showed attendance was up 5% compared to an 8.3% decline in those without. It also announced tests with recliner seats in IMAX venues that haven’t thrown up any results yet. It would make sense that IMAX installs recliner seats in some sites in order to maintain the premium differentiation vis-à-vis smaller screens with recliner seats.

Finally, AMC’s CEO confirmed that views on PVOD window are still too different between studios and so nothing will change in 2017.

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