Cinemark Holdings: The Advantages and Disadvantages

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Includes: CNK, RGC
by: Gaurav

I had purchased Cinemark (NYSE:CNK) at $8.90 at the end of April when Swine flu broke out in Mexico. 20% of CNK's EBITDA comes from LatAm (mainly Brazil and Mexico), so the fears were justified at that time.
1H09 has been spectacular for US theater exhibitors with box office gross up approx 13% yoy. In 2H09 though, the company will face difficult comps from The Dark Knight, which was released in July 2008. And come 1H10, it will face difficult comps from a great 1H09. So the question is what should one do? Here is a list of the positives and negatives:

Advantages:

  • Dividend yield of 6.5%, FCF yield of 12% are good. This is not a declining biz. Volume (attendance) is up high-single digits this year. That might fluctuate yoy and might be -ve next year, but it doesn't look like this industry is in secular decline.
  • 3-D might really happen. If Avatar is a big success, it might just change the dynamics of the entire industry. Dreamworks is quite bullish on 3D. 2010 might not be a down year if 3D takes off in a big way.
  • There was a lot of concern over the past few years that DVDs will destroy the theatre industry. Investors were afraid that if the studios are able to collapse the time gap between theatrical release and DVD release of a movie, consumers will prefer to buy a $20 DVD than spend $40 for a family trip to the movie theatre. After this year, theatres might have more negotiating power against the studios.
  • Cinemark seems a better operator than Regal (NYSE:RGC) or AMC - its attendance growth / screen is constantly higher than Regal and AMC.
  • 2Q earnings might be above consensus because of higher attendance growth translating into better margins. Real and MXN strengthening would help offset by the biz lost in these markets because of the flu.
  • Hey, it is an emerging market play...
Disadvantages
  • Difficult comps.
  • Company levered at 3x Net Debt/EBITDA. If 2010 is a down year, and investors extrapolate that down year into the future, then the company might be forced to do something on its capital structure - like cut dividend or raise equity. Regal has cut its dividend.
  • Studios might turn up the pressure on theatres to shorten the DVD release window now that they are in real trouble because of falling DVD sales
  • Studios are cutting on their movie slate. It is possible to have a higher box office gross with fewer releases (like 2Q09) - but one never knows.
  • Maybe consumers get bored of 3D by 2010. So it turns out to be all capex with no returns. Though after watching Monsters vs Aliens in 3D, I don't mind paying a bit extra for the 3-D experience.
I think I am going to hold on till earnings.
Disclosure: Long Cinemark