News over the weekend reported China's largest film company, China Film Group, will be soon hitting the public market after years of being state owned. However, the company will only be available for Chinese investors, leaving huge growth in the country unavailable to American investors. However, there is another option for investors, as Bona Film Group (NASDAQ:BONA), trades in the United States and offers entry into Chinese film distribution and a growing count of movie theaters and screens in China.
Bona Film Group was a company I profiled back in May of 2012. The reason for my article was the company's partnership with News Corporation (NASDAQ:NWS). Bona's deal with News Corporation gave a 19.9% equity stake. This equity came from CEO Dong Yu, who was left with a 27% stake after the News Corporation deal. The deal was seen as a huge boost to the company, as it would give the two companies films to distribute in their respective countries.
Bona Films is one of the largest entertainment companies in China. The company releases 16 to 20 films a year in China. Along with being a film distributor, the company also owns a talent agency and operates as a movie theater operator. In fiscal 2013, film distribution revenue was $76.6 million, while movie theater revenue came in at $61.5 million.
Here is a look at the company's upcoming film slate:
· June: "12 Years a Slave"
· July: "Non-Stop"
· July: "My Geeky Nerdy Buddies"
· July: "Duckweed"
· August: "The White-Haired Witch"
· August: "Pompeii"
· September: "The Grandmaster 3D"
· September: "The Dead End"
· October: "Midnight Fantasy"
· December: "The Taking of Tiger Mountain"
· February: "Bride Wars"
· February: "The Man From Macau 2"
· March: "Insanity"
· April: "Secret Treasure"
· May: "I am Somebody"
· July: "The Sword Master"
"Duckweed" was highlighted in the first quarter earnings calls. The movie is the directorial debut of celebrity writer Han Han. He has 40 million fans on Weibo, the Chinese microblogging network. "Bride Wars" is a Chinese take on the 2009 American comedy. This movie is part of News Corporation's partnership with Fox (NASDAQ:FOX).
Along with its strong film distribution business, Bona Film Group is a great play on the overall Chinese box office with its strong portfolio of movie theaters. At the end of the first quarter, Bona Film Group had 22 movie theaters in China. The company plans to open 6 to 10 more theaters by the end of 2014. By the end of 2014, Bona Film Group wants close to 40 movie theaters in China. This will prove to be a strong catalyst, as theater margins are above 50%, while the distribution arm sees margins around 23%.
In the first quarter, Bona Film saw revenue grow 30.7% to $56.6 million. This was around $15 million ahead of analyst's projections. Reported earnings per share were $0.04, which was $0.02 ahead of most analyst projections. Gross margins rose to 40.8%, from 34.1% in the prior year.
The IPO of China Film Group could prove to be a positive or negative catalyst for Bona Film Group. China Film Group is planning a $740 million IPO in Shanghai in a sale of 25% of the company. The current state owned company released 158 movies in China in 2012, which was more than the next four (including Bona) combined. The company has a near monopoly of the market and also holds the rights to import all foreign films.
China Film Group doesn't directly own movie theaters like Bona Film Group, but does have small stakes in six cinema exhibitors. The company's movies represent around 40% market share of the Chinese box office. The company is also investing in American cinema with deals on upcoming movies like "Marco Polo," "Warcraft," and "Seventh Son."
Bona Film Group may play second fiddle and look like a weak link in China, but is a great investment for Americans. The company provides strong exposure to both film distribution and movie theaters in China, who recently became the second highest movie market in the world. China Film Group has a majority market share, but that doesn't mean Bona is a weak link.
Bona Film Group continues to look strong with its play on both film distribution and the overall Chinese box office via movie theaters. Others are starting to take note. The Fox deal really set things in motion for investment in Bona Film Group. Bona Film also saw an investment by Fosun Group, who now owns 6.4% of the company. This stake was bought from the CEO's personal holdings, similar to the Fox deal in an attempt not to dilute current shareholders.
Bona Film Group also launched the Bona Film Investment Fund, a $165 million project with investments from Bona, Sequoia Capital, and Noah Holdings. Bona holds a 30% equity stake in the investment fund. The project will help fund movies like "Tracks in the Snowy Forest," "The Third Master's Sword," and "Moscow Mission." All three of these movies are part of the deal with Fox International.
Yahoo Finance lists estimated earnings per share as $0.19 for the current fiscal 2014. In fiscal 2015, earnings per share are expected to hit $0.28. Revenue is seen rising 38.4% in fiscal 2014. In fiscal 2015, revenue is expected to rise 22.5% to $253.2 million.
Shares of Bona Film Group trade just over $6, close to the mid-range of their 52-week trading range ($3.58 to $8.92). In 2014, shares are up only 4%. Since their IPO, shares have fallen over 12%. The company has a current market capitalization of $371 million.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in BONA over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.