As Chinese Cinema Spotlight Fades, Investors See Value In Imax China As Privatization Play

Key Takeaways:

• Imax China reported its profit fell 9% to $12.65 million in the first half of this year
• Some observers expect a potential new privatization bid for the Chinese cinema company by its Canadian parent, after a previous bid failed

By Lau Chi Hang

It once wowed investors with a story of riches from the potent combination of its big-screen technology and a booming Chinese box office with potential to become the world’s largest. But these days Imax China Holding Inc. (1970.HK) looks far less promising, as its technology that once looked so hot has failed to catch on and growth at China’s box office also slows.

The China unit of Canada’s Imax Corp. IMAX has also been far from a crowd pleaser among investors, with its shares now trading 72% below what they fetched when the company made a Hong Kong IPO in 2015. 

The disappointment continued this year, as Imax China reported its revenue fell 3.2% in the first half of 2024 to $43.9 million, while its profit also sagged nearly 9% to $12.65 million. The company’s gross margin also fell 6.1 percentage points to 57.2% from 63.3% a year earlier.

Imax is known for its film production and projection systems with higher resolution, sharpness, greater contrast and more complete color than traditional movie technology. Imax China gets its revenue from two sources, namely, “content solutions” that convert movies and other content into the Imax format; and other technology products and services that include rentals, sales and maintenance for Imax systems used by third-party cinema operators.

Content solutions is the smaller of that pair, taking a beating as its revenue tumbled 34% in the first half to $9.35 million. It blamed the decline on weak Imax movie ticket sales, which fell to $108 million during the six months from $165 million a year earlier. Its technology products and services fare better, with revenue up 10% to $34.1 million year-on-year.

Unsuitable Films

One of Imax’s strongest selling points is the high-resolution and 3D qualities it brings to films. But the format isn’t necessary for all movies, and is generally best suited to genres like science fiction, fantasy or movies with very visually distinct scenes. Other genres, such as art-house, romance, comedy or daily life-themed movies, benefit little from the format.

Accordingly, years with more visually attractive films tend to bring a strong box office for Imax China. Last year was a case in point with the release in China of a series of sci-fi, fantasy and other visually notable blockbusters, including “Avatar: The Way of Water,” “Oppenheimer,” and “The Wandering Earth 2.” Audiences often preferred to watch such films in Imax theaters and willingly paid a premium for the more expensive tickets, generating a revenue bonanza for the company. But this year so far has failed to produce a similar string of suitable big hits for Imax’s big-screen format, pressuring the company’s ticket sales. 

Waning Box Office Boom

Another factor hitting the company is the fading of a movie-going boom after China lifted its strict pandemic restrictions at the start of last year. People flocked to theaters at first in their eagerness to get out and about again, fueling a surge in ticket sales. 

But that boom has subsided lately as China’s slowing economy causes consumers to rein in their spending. China’s box office took in 1.53 billion yuan ($214 million) during this year’s five-day Labor Day holiday at the beginning of May, similar to the previous year. If the remaining two months of the summer holidays are similar to July’s box office of 7.5 billion yuan, the summer box office is likely to total less than 20 billion yuan this year, also flat from last year’s 20.6 billion yuan. 

Such a slowdown doesn’t bode well for Imax China’s prospects, at least not in the near-term. When it went public in 2015, investors were mesmerized with a Chinese box office that grew 30.7% in the period from 2010 to 2014. At that time, a growing preference for premium viewing experiences by China’s growing middle class also convinced investors that demand for Imax movies would continue to grow. 。

But the fast growth slammed to a halt during the pandemic, and has failed to return since then, with demand for Imax movies falling far short of expectation. While things picked up after the end of pandemic restrictions last year, the new normal characterized by an economic slowdown and consumer caution is hurting demand for more premium products like Imax films.

Privatization Story

Imax China’s stock fell nearly 7% after the interim results were announced, and the stock is now down 86% from the HK$60 it reached not long after its listing.

Last July, its Canadian parent attempted to take the company private and offered to purchase the shares for HK$10 apiece, representing a 40% premium to the price before the offer. But the Canadian fund Letko rejected the offer as too low, and also opposed the privatization as the Chinese box office seemed to be coming back to life. Its opposition and a subsequent shareholder revolt ultimately caused the privatization bid to fail.

To get its way, Imax threatened that its China offspring might stop paying dividends if minority shareholders didn’t approve the privatization. That left a bad taste in the mouth of many investors, surprised at how far the company was willing to go to complete the delisting. 

The privatization bid’s collapse sent Imax China’s stock into a tailspin, though it has started to recover since May. That’s fueling speculation that some investors may be returning to the stock in anticipation of a new privatization bid with a similar premium to the first one. 

Imax China’s price-to-earnings (P/E) ratio currently stands at 13 times, which looks relatively strong considering that many rivals like AMC AMC and Orange Sky Golden Harvest Entertainment (1132.HK) are still losing money. But it could have room to grow further if a new privatization offer may be coming. That said, the stock really doesn’t seem to offer much for investors right now purely based on the company’s fundamentals, given the slowdown in China’s movie market and growing consumer caution that may dampen demand for its pricier Imax movie tickets. 

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.