Not everyone will pay a premium for quality; reiterating Sell

Deutsche Bank Markets Research Rating Sell Asia Hong Kong Consumer Hotels / Leisure / Gaming Company IMAX China Date 21 November 2016 Forecast Change Not everyone will pay a premium for quality; reiterating Sell Reuters Bloomberg Exchange Ticker 1970.HK 1970 HK HSI 1970 Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (USDm) 78.2 110.6 124.1 140.2 148.3 Reported NPAT (USDm) 22.8 -181.9 43.1 48.1 51.4 DB EPS FD(USD) 0.10 0.15 0.12 0.14 0.14 DB EPS growth (%) 13.6 43.2 -18.1 11.7 6.7 PER (x) – 42.3 40.2 36.0 33.7 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close We cut our 2016 and 2017 earnings forecasts by 15% and 20%, respectively ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 18 Nov 2016 (HKD) 37.85 Price target - 12mth (HKD) 26.00 52-week range (HKD) 59.70 - 34.80 HANG SENG INDEX 22,344 Tallan Zhou Research Analyst (+852 ) 2203 6464 tallan.zhou@db.com Karen Tang Research Analyst (+852 ) 2203 6141 karen.tang@db.com Key changes Price target 31.00 to 26.00 ↓ -16.1% Sales (FYE) 136 to 124 ↓ -8.7% Op prof margin (FYE) 46.9 to 43.8 ↓ -6.7% Net profit (FYE) 50.5 to 43.1 ↓ -14.6% Source: Deutsche Bank Price/price relative 20304050607010/154/1610/16IMAX ChinaHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -0.8 -14.0 -17.6 HANG SENG INDEX -4.5 -2.9 0.7 Source: Deutsche Bank 3Q results confirmed our view that demand for IMAX's premium products is not driven by supply but rather growth in IMAX’s box office takings is driven by the popularity of individual Hollywood movies, irrespective of format quality. Audience response this year has been poor, with demand highly skewed to screens in tier 1 & 2 cities. As the company expands its footprint to lower tier locations, we believe returns on each new screen will fall further because of lower occupancy levels and the need to sell tickets at lower prices. There is also a clear trend of increased competition affecting demand. We cut 2016/2017E EPS 15%/20% and our valuation to HKD26: Sell. The greater the penetration, the lower the return for IMAX’s revenue share model We have consistently argued that IMAX’s strategy to penetrate lower tier cites in China will weaken margins. The current business mix is very concentrated in tier 1 & 2 cities, and expansion into lower tier cities is inefficient as lower occupancy rates and ticket prices will lead to lower yields per screen and margins. On our return sensitivity analysis the per screen sales (PSA) and revenue share rate drop we expect within the next 10 years would significantly lower the return of the revenue share model by almost 36% External competition to intensify Externally, we see more giant screen operators aiming for China’s market share. Operators such as DMAX (China Film Group), X-land and Dolby cinemas have aggressive expansion plans for the next few years. Although IMAX still enjoys brand power as its competitive advantage, Chinese audiences (especially those in lower tier cities) are very sensitive to price and may shift to other giant screen operators, which are typically 25% cheaper (c.RMB45 vs. IMAX RMB60). Valuation and risks We cut our price target to HKD26 from HKD31, based on DCF (9.5% WACC and 3% TGR). The share currently trades at 40x/36x 2016/17E earnings, which we believe is overvalued given we project just 12% EPS growth in 2017 and 7% in 2018. Risks include a better-than-expected box office for Hollywood blockbuster movies in China, increasing upfront payment, higher percentage of revenue sharing, and lower production cost. Distributed on: 21/11/2016 11:03:36 GMT 21 November 2016 Hotels / Leisure / Gaming IMAX China Page 2 Deutsche Bank AG/Hong Kong Model updated:12 November 2016 Running the numbers Asia Hong Kong Hotels / Leisure / Gaming IMAX China Reuters: 1970.HK Bloomberg: 1970 HK Sell Price (18 Nov 16) HKD 37.85 Target Price HKD 26.00 52 Week range HKD 34.80 - 59.70 Market Cap (m) HKDm 13,449 USDm 1,734 Company Profile IMAX China is a leading cinematic technology provider. The compan