2017 preliminary earnings miss consensus; maintain Buy on revenue mixchange and 2018E box office growth

Wanda Film’s 2017 top/bottom-line missed consensus by 8%/15%, based on itspreliminary results. We believe the miss on profit is due to the lower marginresult from its aggressive new cinema openings (1,000 new movie screens addedin 2017). Therefore, we roll over and cut our 2018/2019 earnings forecasts by13% /13% to reflect this. Given that 1) its continued revenue mix change and2) our 2018E China box office growth forecast of 14-16%, we maintain Buy onWanda Film with a new TP of RMB74.

Revenue mix change may continue in 2018E

Revenue from non-box office was RMB5.1bn in 2017, yoy growth of 31%.Wanda’s non-box office revenue as percentage has increased to 39% from 32%in 2016. This is mainly due to increasing 1) commodity sales including restaurantsand movie derivative products and 2) movie advertising and promotion business.Such businesses enjoy higher margins (c.50% of gross margin) compared to thetraditional movie screen business (c. 20% of gross margin). We believe Wandahas become less reliant on the box office and tried to leverage its sizable traffic forrepeated consumption. Since the company is still undergoing cinema expansion,we also believe that the revenue mix change may continue in 2018E.

Solid 2M18 results; we are expecting a 14-16% 2018E box office growth

Total Box office collection in China in Feb 2018 was a record-breakingRMB10.1bn, increased by 64% yoy (vs. RMB6.2bn in Feb 2017). Three Chinesemovies (Detective Chinatown Vol 2 with RMB2.9bn, Operation Red Sea withRMB2.5bn and Monster Hunt 2 with RMB2.1bn) contributed c. 75% of total boxoffice in Feb 2018. Total box office of RMB15bn in 2M18 got off to a good start,implying an increase of 36% (vs. RMB11bn in 2M18). Given such solid results atthe start of 2018, we are confident on our full year box office growth forecast of14-16%.

Valuation and risks

We derive our target price from a DCF valuation (beta 1.1, 8.7% WACC, and 4% TGgiven the structural long-term growth in China's film industry, all unchanged). Thestock (suspended since July 2017) last closing price implies 23.5x PE on our 2018earnings forecast. Key downside risks include competition from online media andinsufficient high-quality movies.

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