By David Randall
NEW YORK, Oct 7 (Reuters) - U.S. fund managers, hoping that
a bit of Hollywood magic goes a long way in China, have been
rushing to invest in IMAX Corp IMAX.N , best known for enormous
movie screens.
Prospects for growth in China, alongside upcoming releases
of expected blockbusters that include new "Star Wars" films this
year and next, prompted 62 funds, including Lord Abbett,
Marsico, and Wells Fargo (NYSE:WFC), to add shares of the company to their
portfolios in their most recent quarter, according to
Morningstar data.
Each firm declined to comment. Overall, there was an
88-percent jump in funds initiating a position in the stock from
the quarter before.
With Chinese box office expected to overtake the U.S. market
as the world's largest by 2017, IMAX is spinning off its Chinese
division, which contributes approximately a quarter of its
revenues. Shares of IMAX China will begin trading Thursday in
Hong Kong, and IMAX will continue to own 70 percent of the
public float of the Chinese division 1970.HK .
The upcoming installment of the Star Wars franchise, the
first since Walt Disney Co DIS.N purchased Lucasfilm, is
expected to bring in $700 million from the U.S. box office,
according to JBL Advisors. Lions Gate Entertainment Corp's
LGF.N final chapter of the "Hunger Games" series is expected
to top $350 million, and Sony Corp's 6758.T "Spectre," the
newest James Bond film, is expected to garner $285 million in
U.S. receipts.
Each of those films will be screened in IMAX in both the
United States and in the Chinese market, which restricts imports
to 34 foreign films per year. Of those, 14 must be in 3D, IMAX,
or other enhanced formats.
The "robust" film pipeline is spurring Chinese theater
owners to accelerate installation plans for IMAX screens, which
should further boost revenues, said Benjamin Mogil, an analyst
at Stifel.
IMAX has 389 screens in the United States, where per-screen
revenues were up 40 percent last quarter from a year ago. IMAX
China had 251 theaters at the end of June, with commitments to
build another 217, its IPO prospectus showed.
Other companies with large China revenues are facing
pressure from activists and shareholders to spin off their
Chinese businesses. Third Point Investors, for instance, has
said Yum! Brands (NYSE:YUM), parent of Pizza Hut and KFC, needs a different
"ownership structure."
GROWTH PROSPECTS OVERBLOWN?
Yet for fund managers' bets to pay off, IMAX must prove that
it can shake off a list of concerns that could make even a
superhero pause. Shares have fallen 20 percent from a June high
as Chinese stocks suffered.
"The stock has been beaten badly this summer," said Jim
Oberweis, president of Oberweis Asset Management. Yet Oberweis,
who owns IMAX shares in several funds, expects the company's
revenues to be buoyed by the "strongest slate in years" for the
U.S. market.
Worries about slowing economic growth in China left shares
in the company's Chinese IPO priced near the bottom of the
indicative range on September 30. The IMAX China IPO had tepid
demand from retail investors, who bought only 70 percent of the
shares on offer for that portion of the deal, the company said
in a filing with the Hong Kong stock exchange.
Furthermore, some analysts say IMAX may already be hitting
limits on Chinese growth as it still trades at a pricey 51.2
times earnings.
"The overall business is great but the Chinese opportunity
isn't what they make it out to be," said Michael Pachter, an
analyst at Wedbush Securities who has a neutral rating on the
shares.
While IMAX Chinese box office grew 45 percent year-over-year
to $112 million this summer, Pachter said that the company is
already well-served in the affluent markets that have the means
to pay for a higher-priced IMAX ticket.
The expected blockbusters are already priced into the
shares, said Kevin Dusseldorp, an analyst at Veritas Investment
Research.
Dusseldorp, who has the only sell rating on the company
among the 14 analysts tracked by Reuters who follow the stock,
has a price target of $20, or less than half of its $34.66 price
on Wednesday. On average, analysts tracked by Reuters estimate
the company is worth $41.25 per share.
"Once we revert to a more typical film slate, the economics
of the industry are going to start to come through," he said.
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IMAX China $248 mln IPO saw lukewarm reception from retail
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