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Bona Film Group Ltd. (NASDAQ:BONA)

Q3 2013 Earnings Call

November 15, 2013 8:00 PM ET

Executives

Brandi Piacente – IR

Jeffrey Chan – COO

Amy Xu – CFO

Yu Dong – Founder, Chairman and CEO

Analysts

Doug Creutz – Cowen and Company

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you this conference is being recorded today, November 15, 2013.

I would now like to hand the conference over to your first speaker today, Ms. Brandi Piacente. Thank you. Please go ahead.

Brandi Piacente

Hello everyone, and welcome to Bona Film Group Limited’s 2013 third quarter earnings conference call.

The company distributed its earnings press release earlier today, and you could find a copy on Bona’s website at ir.bonafilm.cn. On our call today are Bona’s Founder, Chairman and CEO, Yu Dong; COO, Jeffrey Chan; and CFO, Amy Xu. After the company’s prepared remarks, management will be available to answer your questions.

Before we begin, please note that the discussions today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties are included in the company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2012 and in our other documents filed with the U.S. Securities and Exchange Commission. Bona does not assume any obligation to update any forward-looking statements except as required under applicable laws.

As a reminder, this conference call is being recorded. In addition, an audio webcast of this conference will be available on Bona’s website.

For now, I am going to start with the remarks for Bona’s Founder, Chairman and CEO, Mr. Yu Dong.

In the third quarter, we generated revenue of US$35 million, a 42.1% increase over the same period last year and recorded non-GAAP net income of US$3.7 million or $0.06 per diluted ADS, which represents a 54.5% growth year-on-year. These results were driven by continued strengthen in our theater segment and increased revenues from our film distribution business.

In addition, Bona secured a US$20.8 million investment from Fosun Group which now owns a 6.4% stake in Bona, and successfully launched RMB 1 billion, Film Production Fund. We have a couple of good films lined up for the fourth quarter and a strong fleet heading into the first half of 2014. As such, we are confident about the further growth potential for Bona in 2014.

Bona’s theater business remained strong in the third quarter, generating revenues of US$15.2 million, up 40.5% year-on-year, in line with our expectations. As of the third quarter Bona had a total of eight new theater locations in its pipeline currently undergoing or about to enter the construction stage including; including Sanya, Liuzhou, Zibo, Taiyuan, Ningbo, Shenzhen Huangting, Shenzhen Xinghe and Wuhan, with the Zibo theater on track to officially start operations by the end of this year.

With this opening, Bona will own a total of 21 theaters and 173 screens by year-end and we expect to add another five new theaters in the first half of 2014. I remain highly confident about our movie theater business and therefore maintain my previously discussed target of US$70 million in segment revenues for the full-year 2013.

Likewise, I believe the theater business will continue to be a major and stable revenue contributor for our company going forward.

In our TV production segment, Bona is working with Beijing Yiwu Zhejiang [ph] Productions on a TV Series, Flying Swords of Dragon Gate, which recently started production. This series is based on the Bona blockbuster film of the same name which was a top box office performer in 2011, generating nearly RMB 600 million box office receipts, directed by Tae Ji Sung [ph] and produced by Feng Pan [ph], the TV series uses the successful film as foundation and as new elements in story lines to make the content richer and bring a new approach to the story. We have already received about RMB 35 million from the sale of this project.

We distributed three strong films during the third quarter; the award-winning action drama, Unbeatable; the romantic comedy, My Lucky Star; and the first 3D Chinese language disaster film, Out of Inferno 3D.

To-date, Unbeatable has generated over RMB 117 million in domestic ticket sales and taken in Hong Kong, HKD 44.6 million making it the highest grossing Chinese language film in Hong Kong this year. My Lucky Star produced by Zhang Ziyi and featuring Leehom Wang as her co-star also achieved excellent domestic box office performance generating RMB 136.5 million in box office receipts thus far.

Out of Inferno 3D debuted on the last day of September and has had a respectable showing generating RMB 132.1 million in domestic ticket sales since opening.

In the fourth quarter, we plan to distribute two films. The first is the Hollywood action comedy, Red 2, starring a first rate cast including Bruce Willis, Anthony Hopkins and Catherine Zeta-Jones. It is scheduled to release in China today, on November 15. The second film is a gripping crime drama, The White Storm, directed by Benny Chan and starting Louis Koo, Sean Lau and Nick Cheung. The film is set for release in China on November 29, kick-starting the holiday season.

The White Storm opens the Hong Kong Asian Film Festival in October and has since received overwhelmingly positive reviews from filmmakers, film reviewers and media editors from more than 20 countries throughout Asia, North America and Europe. The film was also shown last month at the National Theater Circuit’s Film Review Conference in Sanya, where it received praise from theater managers across China. We believe the support of these theater managers will provide a solid foundation for the film distribution later this month giving us confidence that it will perform well at the box office.

Moving onto our film production business. Several Bona invested films are now in the post-production phase, setting a stage for us to have successful and strong year in 2014. These projects include; Overheard 3, the insider story of China’s real estate market which is produced by Derek Yee, co-directed by Alan Mak and Felix Chong and starring Sean Lau, Louis Koo, Daniel Wu and Zhou Xun; the 3D martial art epic, The White-Haired Witch produced by Jianxin Huang, directed by Jacob Cheung and starring Bingbing Fan and Xiaoming Huang; the crime action comedy, From Vegas to Macau, which is produced by Andrew Lau, directed by Wong Jing, and starring Chow Yun-Fat, Nicholas Tse and Chapman To and Tian Jing; the psychological thriller, Insanity, produced by Derek Yee, and directed by Guangyao Li and starring Sean Lau and Xiaoming Huang; and the drama, SunSpot directed by mainland Chinese director Baoping Cao, and starring upcoming Chinese actors, Chao Deng, Luodan Wang and Yihong Duan.

Additionally, director Derek Yee’s next film, I Am Somebody, depicting the three leading actress [ph] in Hengdian, a large film and TV production site in China. It’s currently in production.

During the third quarter, Bona also took important steps to improve its ownership structure. On September 30, we received an investment of US$20.8 million from Fosun Group, representing a purchase of two million ordinary shares at $10.40 which is equivalent to four million ADS at $5.20 per ADS.

Following the transaction, Fosun now has a 6.4% equity stake in Bona. This deal marks the second important strategic investment in Bona following the investment by News Corp last year in May. Fosun has had a strong investment track record and extensive experience in a wide range of industries. We believe Fosun’s investment in Bona is going to provide meaningful support to our movie theater business in the future.

On August 30, Bona together with Noah Holdings and Sequoia China Fund successfully launched the Bona Noah Film Investment Fund, the first fund of its kind dedicated to film investment in China. The fund, almost RMB 1 billion in size to which Bona is committed to contribute RMB 300 million with remaining RMB 700 million to come from outside investors.

We plan to use this money to fund our film and TV productions in the next two years. We are determining the first round of investment projects which our COO Jeffrey, will explain in greater detail shortly.

The successful launch of this investment fund provides us with a financial support to continue to produce quality films with wide ranging appeal that will further strengthen Bona’s leadership position in the Chinese film industry.

We have made strategic advancement in 2013, expanding our theater business, releasing a number of strong films in a wide variety of genres through our production and distribution business and successfully realigning Bona’s ownership structure. I am pleased with our performance to-date and have great confidence looking out to 2014.

And with that, I would now like to turn the call over to COO, Jeffrey Chan, who will discuss our operational highlights in more detail. Jeffrey?

Jeffrey Chan

Thank you and hello to everyone on the call. During the third quarter, we distributed three new films domestically. The award winning Unbeatable; the romantic comedy, My Lovely Star; and the first 3D Chinese language disaster film, Out of Inferno 3D as mentioned earlier.

Looking ahead for the films for the fourth quarter and into the first half of next year, we have several exciting films in the pipeline that we expect to perform well because of their ability to influence our broad audience. As we mentioned, we have two films slated for release in the fourth quarter; Red 2, a sequel to 2010 film Red, is an action-comedy that tells the story of a retired CIA agent reuniting with his unlikely team of elite operatives for a global quest to track down a missing portable nuclear device. The film has the best rate Hollywood star cast including Bruce Willis, Anthony Hopkins, John Malkovich and Catherine Zeta-Jones, all of whom are popular with movie viewers in China.

We acquired a Chinese distribution right to this film early on at a very attractive price and given the strong performance of other film highlighted this year, as well as across to our providers in China, we are confident Red 2 will perform well at the box office. The film is scheduled to open in mainland China on November 15.

We also will be distributing The Cartel War, The White Storm, which shows story of three police officers battling against a notorious cartel in Thailand. Directed by Benny Chan and starring Sean Lau, Louis Koo and Nick Cheung, as well as the transgender model, Poy. This critically film opened the Hong Kong Asian Film Festival on October 25 and was praised by the media as the most entertaining Hong Kong Film of the Year and a powerhouse of acting experience.

The White Storm has also received an invitation to screen at the closing film at the Rome festival. It’s scheduled for release in China on November 29. Having discussed these exciting releases, I would also like to share with you some recent accomplishments that Bona Film has achieved in the third quarter. Bona’s Unbeatable, which won major awards at the Shanghai International Film Festival in June, continues to receive accolades. For upcoming Taipei Golden Horse Film Festival, one of the most respective film festivals from Chinese films from an artistic value perspective, Unbeatable has received a total of six nominations including best actor, best supporting actor and best supporting actress.

Additionally, Bona’s Christmas Rose received the best actress nomination for Gwei Lun-mei’s performance. And the Grandmaster delivered 11 nominations on its belt. It’s also likely to be a major contender at [indiscernible]. Looking at our pipeline for the next 12 months, the successful launch of the Bona Film Production Fund is on track to support the production of a number of exciting new projects. Director Shoya Xun’s [ph] long anticipated 3D action-epic [indiscernible] is on target to officially start for public release next month.

Bona has achieved tremendous successes in its recent 3D action films and demonstrated this unprecedented mastery of state-of-the-art 3D technology among Chinese actors, directors. We have high expectation for this film and firmly believe that we will continue to neutralize the Chinese audience with shows and fantastic story telling improvingly will make company’s net profit into a gain [indiscernible] blockbuster.

Our other publicly announced projects include From Vegas to Macau, Overheard 3, Sunspot and The White-Haired Witch, all of which are in the post-productive stage. Additionally, we recently finished shooting Insanity, and just entered post-production work on it. We also have two films in the production stage, director Derek Yee’s drama, I am Somebody, and female mainland Chinese director [indiscernible].

Films that we have scheduled to start production next year include Director Gong Zhong’s adventure film Secret Treasure, starring Louis Koo and Michael Cheung [ph]. Mainland Chinese director [indiscernible] and Derek Yee directed and [indiscernible] 3D produced martial arts epic Sword Master [ph]. We are very pleased with the progress of Bona production arm has made to-date and are enthusiastic about the opportunities presented by the financial resources of our new film investments fund.

With two film releases remaining this year and a number of film titles planned for the Chinese New Year holiday season and the rest of 2014. I am confident that Bona’s production and distribution business is sector to scale new heights in the coming year.

With that, I would now like to hand the call over to our CFO, Amy Xu. Amy?

Amy Xu

Thank you, Jeffrey, and hello to everyone on the call. I would now like to provide a brief overview of our financial results for the third quarter of 2013. Please note that all numbers I will discuss today are in U.S. dollars unless otherwise noted.

Net revenues for the third quarter of 2013 were US$35 million, up 42.1% from the third quarter last year. The increase in revenue was primarily attributable to increase in revenues from the company’s movie theater and film distribution segment. We distributed and invested in three films in the third quarter of this year, compared with two films in the third quarter of last year.

On a segment basis, total net revenues from the distribution, investment and production, and the movie theater segments were US$18.8 million, US$13.6 million, and US$15.2 million respectively in the third quarter of 2013. This compares to US$10.6 million, US$10.2 million, and US$10.8 million respectively in the third quarter of last year.

Gross profit for the third quarter of 2013 was US$19.8 million, an increase of 45.2% year-over-year. This increase in gross profit was primarily attributable to the strong performance in our film distribution segment and the increased number of movie theaters.

Gross margin for the third quarter of 2013 was 56.6% compared with 55.4% in the third quarter of 2012. Total operating expenses which included participation expenses, general and administrative expenses, and selling and marketing expenses were US$16.6 million for the third quarter of 2013, an increase of 29.2% year-over-year. This year-over-year increase in operating expense was primarily due to the increase in sales and marketing expenses associated with the promotion and advertising activities for our distributed films, including; Unbeatable, My Lucky Star and Out of Inferno. We also saw an increase in general and administrative expenses due to our expansion in the movie theater segment.

Operating income for the third quarter of 2013 was US$3.4 million, compared to US$1.1 million in the same quarter last year. Operating margin for the third quarter of 2013 was 9.6% compared to 4.3% in the third quarter of 2012. The improvement in operating margin in the third quarter of 2013 was mainly the result of strong box office performance from Unbeatable and My Lucky Star, as well as the maturity of the movie theaters we constructed last year.

Net income attributed to Bona for the third quarter of 2013 was US$2.8 million, compared with US$1.3 million in the year-ago period. Net income attributed to Bona Film Group Limited per ADS for the third quarter of 2013 was US$0.05 compared to US$0.02 for the same quarter of 2012.

Excluding share-based compensation, our non-GAAP net income for the third quarter 2013 was US$3.7 million. Non-GAAP net income attributable to Bona Film Group Limited per ADS for the third quarter of 2013 was US$0.06. Excluding interest, tax, depreciation and amortization, our EBITDA was US$6.2 million for the third quarter of 2013, compared with EBITDA of US$3.7 million for the same period last year.

Cash and cash equivalents, term deposits and restricted cash as of September 30, 2013 totaled US$41.7 million. Net cash outflow from operating for the third quarter of 2013 was approximately US$24 million, related to our increased investment in the film scheduled for release in the fourth quarter of 2013 and in early 2014.

Now turning to our guidance, based on current market and operating conditions, we expect that non-GAAP net income for the fourth quarter of 2013 to be between US$2 million to US$2.5 million.

Operator, we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Doug Creutz from Cowen and Company. Please ask your question.

Doug Creutz – Cowen and Company

Hi, thanks. I think earlier in the year, you had talked about this year as potential a being record or close to record at the box office for the company. Based on the guidance you’ve given for Q4, it doesn’t appear like that’s going to be the case. And it seems like maybe you might have had some slippages in films out of Q4 into next year. So first of all, am I interpreting that correctly and can you maybe give a little more color on what happened? Thank you.

Brandi Piacente

Please hold on for the translation to Mr. Yu. [Foreign Language – Chinese]

Doug, good evening, this is Amy. I am translating for Mr. Yu. Yes, you are correct. We have moved three films into next year. One is the Overheard 3. The other one is

The White-Haired Witch and the third one the City of Bones-Mortal Instruments, even though they’ll be the last day of this year, but majority of the box office will be generated in 2014. Those three films have been postponed to next year. Having said that with these three films moving to next year, our total box office generation for this year is still over RMB 1.3 billion total, for Bona [ph] on box office generations.

Doug Creutz – Cowen and Company

Could you talk about were the films delay was a – particularly with The White-Haired Witch, was an issue of the film needing more time or was it windowing issue I guess some of the films in the marketplace? Thanks.

Jeffrey Chan

Hi, this is Jeffrey Chan. Currently the production has been slightly delayed because actually the [indiscernible] when we were shooting, there was an accident with the main lead, Huang Xiaoming, so that will lead to take time – extend and lengthen the production period to wait his recovery. And secondly, also we will take into consider operation of the competitive scenario, that we would try to slot the film in a better slot for it to perform better box offices, so there are two reason for it. So the film is still in post-production stage at this moment.

Doug Creutz – Cowen and Company

Okay, thank you.

Operator

(Operator Instructions).

Brandi Piacente

Okay, operator. I think we’re ready to close the call if there is no further question. I’d just like to thank everybody for joining us tonight and we appreciate your time and please feel free to follow-up with the internal IR manager, Lingzi, or Piacente Group. Thank you.

Amy Xu

Thank you.

Jeffrey Chan

Thank you.

Yu Dong

Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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