Imax goes big in China with IPO
Imax Corp., the big-screen cinema company, is taking a great leap forward in China.
The Toronto company, which has a large operation in Los Angeles, will take an historic step Thursday when its subsidiary goes public on the Hong Kong Stock Exchange. The stock offering will enable Imax to raise some $248 million to help finance its expansion in China, which now accounts for nearly one-third of Imax revenue.
But the IPO is more broadly significant because Imax is the first Hollywood company — and among the first North American businesses — to list shares of a subsidiary in Hong Kong.
The stock offering highlights the rising value of China’s film market to American movie studios, even as the country’s economy slows. Chinese audiences have shown a growing appetite for the kind of big action movies that favor the Imax format, such as “Furious 7” and “Transformers: Age of Extinction.”
“We have a great business in China,” Imax Chief Executive Rich Gelfond said in an interview. “It’s about unlocking value and showcasing the growth in the entertainment industry there.”
The timing of the IPO is surprising given the recent market turmoil in China. Other Chinese companies have scrapped planned stock offerings as financial markets were roiled this summer amid economic worries.
Yet Hollywood’s interest in China has not abated. Warner Bros., for example, recently signed a joint venture agreement with China Media Capital, a state-backed investment fund that also is an investor in Imax China.
Like others in the film industry, Imax views China as a crucial growth market, especially as the movie business slows in North America. China’s box office is expected to grow 35% this year to $6.5 billion, according to Artisan Gateway, a cinema consulting firm. By comparison, North American ticket sales are expected to top $11 billion this year.
Boosted by a rising middle class, strong support from the government and a multiplex building surge, China’s film market is poised to surpass that of the U.S. by 2017. China will have an estimated 30,000 movie screens by the end of the year, up about 25% from last year.
Imax has been a direct beneficiary of the growth. By installing a local management team and carefully cultivating ties with local Chinese partners and the government, Imax has positioned itself as an influential player in China’s growing cinema business.
Imax currently has 251 theater screens in China with 217 more planned to be built. Imax this week reached a deal with state-owned company Omnijoi Cinemas to open 15 more theaters in the country.
The company’s box-office revenue in China reached $183 million last year and has grown at annual rate of 50% a year since 2012.
Imax said it raised $248 million from its Hong Kong offering. Imax China Holding Inc. and its four major shareholders offered a combined 62 million shares at $4 a share, which represents about 17% of Imax China’s outstanding shares.
The company, which trades under the ticker symbol “1970,” is valued at about $1.43 billion. On the first day of trading, the shares gained 10% on the Hong Kong Exchange, closing at $4.42.
Wall Street’s reaction to the IPO had been mixed.
Investors were enthusiastic when Imax Corp. announced its stock offering in June. But Imax shares on the New York Stock Exchange tumbled in August amid concerns that a slowdown in China’s overall economy could hurt its business. Imax’s stock price has since rebounded, climbing 11% in the last month to close at $35.05 on Wednesday, down 10 cents.
“The Chinese economy is slowing, there’s no doubt about that,” said Eric Handler, a media and entertainment industry analyst for MKM Partners. “While there are big macro issues in China, we’re not seeing any evidence of a slowdown in the exhibition industry.”
Imax set the stage for its IPO last year when it sold a 20% stake in its China subsidiary to two local investors, FountainVest Partners and CMC Capital Partners.
“To be successful in the long term in China, you have to have Chinese owners,” said Gelfond, who has visited China 50 times.
Beyond unlocking the value of its China business, the IPO also could have other benefits.
“It’s really going to build their relationships in China,” said Eric Wold, an analyst with B. Riley & Co. “Maybe they will get more preferential treatment for their movies over there.”
For Imax, the stock offering culminates a long-term strategy to grow its business in the world’s most populous country.
“We played a role in helping to grow the Chinese exhibition business,” said Gelfond, who spent the last three years preparing for the stock offering. “It’s not like we put a shingle up and said, ‘This is Imax’s business office.’“
The company’s foray into China began in 2001 when it opened an Imax theater at the Shanghai Science and Technology Museum. Then China’s film market was in its nascent stages, and Imax was better known for releasing documentaries about nature and space.
The apolitical nature of its films, in fact, turned out to be an advantage that enabled Imax to slowly build its brand for high-quality cinema viewing without offending Chinese government censors.
Imax opened its first commercial theater in People’s Square in Shanghai, where it mostly played nature documentaries but also some commercial movies.
Key to its success in China was forming alliances with powerful local companies, especially Dalian Wanda Group, Asia’s largest cinema chain and owner of AMC Theatres.
Wanda Cinema Line was one of Imax’s first exhibition partners in China, opening an Imax theater in Dongguan in 2007. Following the enormous popularity of James Cameron’s 2009 movie “Avatar,” the companies signed a 75-theater joint venture agreement in 2011, the same year that Imax also established its own subsidiary based in Shanghai. Wanda further expanded its relationship with Imax in June 2013, agreeing to open 120 additional Imax theaters in China.
Imax also has worked to build goodwill in China by supporting locally produced films, not just Hollywood blockbusters. That paid off this summer when Imax screened “Monster Hunt,” which was the most successful Chinese movie ever, generating $385 million in ticket sales, including $27 million for Imax.
The company has faced some hurdles in China, including a legal dispute with a former employee who allegedly used Imax technology to launch a rival company in China. The case was settled.
Also key to Imax’s success has been cultivating close ties with the Chinese government, which controls what films are shown in China through a quota system. Those ties paid off in 2012, when the Chinese government agreed to allow 14 more movies into the country annually, stipulating that they had to be shown in Imax, 3-D or another specialty format.
“They have a great relationship with the government, which you need to have given that they’re the gatekeeper,” Wold said.
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