This analysis of Bona Film Group (BONA) was provided to TradingIPOs subscribers in advance of its Thursday, Dec. 9, IPO. The company announced that its initial public offering of 11,740,000 American depositary shares was priced at $8.50 per ADS, within the $7-9 expected range.
Bona Film Group plans on offering 13.5 ADS (assuming over-allotments) at a range of $7-$9. Bank of America, Merrill Lynch and JP Morgan are leading the deal, and CICC, Piper Jaffray and Cowen co-managing. Post-IPO BONA will have 59.2 million ADS equivalent shares outstanding for a market cap of $474 million on a pricing of $8. IPO proceeds will be used to acquire theaters, film distribution rights and general corporate purposes.
Chairman of the Board and CEO Dong Yu will own 35% of BONA post-IPO. Sequoia Capital will own 10%.
From the prospectus:
'We are the largest privately owned film distributor in China.'
Since the beginning of 2007, BONA's distributed films have had a whopping 42% of the box office for the 20 highest grossing domestic Chinese films. This number is a tad misleading, as BONA's distributed films had a 17% total market share.
BONA's revenues rely annually on a few movies. BONA's top five films in 2007-2009 accounted for 60% of their revenues.
Since 11/03, BONA has distributed 139 films, including 29 which have been released internationally. 16-20 films a year is the norm.
In addition to distributing films, BONA also invests in film production and owns 6 movie theaters. Note that BONA purchased the theaters from its own CEO for shares equaling $93 million on a pricing of $9. BONA also runs a talent agency.
Chinese film industry - 32% average annual growth from 2005 to 2009. $926 million in total 2009 box office with average ticket prices of $4.60. 200 million admissions in 2009 with an estimated 258 million admissions in 2010. 1,687 urban movie theaters.
State owned film distributors account for approximately 50% of film revenues in China. Note that state owned distributors own the exclusive right to show foreign movies, mainly US hit movies.
Production - BONA has stepped up its production of films which kicked off in 2007. Film production can be much riskier than straight distribution as it requires a larger up front cash outlay with no guarantee of a return. In 2008, BONA spent $4 million in film production costs, $19.5 million in 2008 and $47.5 million through the first 9 months of 2010. In comparison, BONA has spent just $1.2 million in distribution rights in the first nine months of 2010.
Looking at expenses, it is obvious that BONA is shifting its business model from purchasing/distributing films to producing and distributing its own self-produced films.
Obvious risk here is for BONA to spend heavily on producing a few films that end up flopping -- similar risks to US film production studios.
$1.00 per ADS in net cash post-IPO. BONA does keep short term debt on the books to assist in production and distribution financing.
Taxes - BONA should continue to benefit from a low tax rate through 2013. Distribution revenues earned by film distributors are exempted from business tax until 12/31/13. BONA derives the bulk of its revenues from distribution.
BONA has been GAAP operationally profitable since at least 2007.
Cash flows - As BONA has gone deeper into film production, its cash flows have not surprisingly grown more negative. Film production eats up cash on the front end, with revenues coming on the back end then often used to fund future productions etc...This makes for a very risky business model, as all it takes is a year or two of disappointing returns to dry up cash coming in. BONA has increased its borrowing in 2009 and 2010 to cover film production costs. The IPO proceeds should slow the company's need to borrow. Do not expect positive annual operating cash flows here going forward-- just the way film production tends to work.
2010 - GAAP revenues should be $65 million, a 71% increase from 2009. Gross margins of 50%. Operating margins of 21%. Negligible taxes, net margins of 20%. EPS of $0.22. On a pricing of $8, BONA would trade 36 Xs 2010 earnings. Again, keep in mind that BONA is able to amortize production expenses, which allows for positive GAAP earnings with negative cash flows.
2011 - With this type of business model, forecasting is really just a guess. 80%+ of revenues are derived from film distribution, nearly all of which have not been released for 2011 as of yet.
This is the first Chinese film company to list in the US. Valuation looks a little dear here, due to the nearly 60 million shares outstanding. At 1/2 the market cap, this would be quite attractive, a $474 million market cap for a negative cash flow film operating generating $65 million in revenues seems pricey.
A number of these recent China IPOs seems to have quite a few shares outstanding. So while the actual pricing number appears reasonable there are so many shares in the market cap that any upside valued them quite dearly. We continue to see deal after deal across many sectors attempt (and succeed) to price at a very high price to revenues multiple. BONA is another of these. Not a bad looking IPO as 17% of the entire Chinese film distribution segment is impressive. However, valuation on any appreciation above range will look awfully aggressive for this high risk sector.