Just over a year ago, I said that Asian cinema stocks could be a good bet:"If we get in early enough, we will have a strong foothold in a fast-growing industry that shows no signs of slowing in the immediate future".
It turns out I was being too cautious. The three recommended stocks have been blockbusters.
In Korea, CJ CGV Co. Ltd (079160 KS) is up 167%.
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In Thailand, Major Cineplex Group PCL (MAJOR TB) is up 87%.
In China, Bona Film Group Ltd (BONA US) is up 117%.
They have returned an average of 10% per month.
So let's look at what's causing this growth.
Everyone needs escapism
Most of the crowd were millennials', something I've experienced in other cinemas in the region. A lot of them are studying at colleges/universities or work in the lower rungs of companies. They endure less efficient public infrastructure system, traffic jams and uncertainty about property prices.
Millennial angst can be self-medicated with escapism. Going to the cinema offers a relatively safe, value-for-money experience; it's also politically accepted.
The last point is vital. Revenues from Macau gambling, another popular form of escapism, have been slumping for 12 consecutive months, down 37% in May. The Chinese leaders' corruption clampdown, increased scrutiny of UnionPay debit cards and smoking restrictions have all played a role in scaring away the high rollers and making Macau gambling a less attractive form of escapism.
Cinema has only grown as a form of entertainment and escapism. So what are Chinese millennials watching this year?
According to Box Office Mojo, the top three grossing movies in China are Furious 7 ($391m), Avengers: Age of Ultron ($240m) and The Man from Macau II ($154m).
Hollywood is trying to court China
Behind the big numbers lies a fast-growing industry.
The number of cinema screens grew by 38% in 2009-14, well above 15% in 2005-09. This has been met with an even faster demand, where cinema attendance increased at a 38% in 2009-14. So far this year, cinema attendance growth has accelerated to 57%.
The outlook is bright, and some analysts believe the Chinese cinema market, in value terms, will exceed the US by as early as 2018.
The Chinese market has driven the share price performance of CJ CGV. To recap, CJ CGV develops and operates multi-screen movie theatres in South Korea. The company's theatre complex also hosts stores and restaurants in theatres and sells advertising space on screen.
CJ CGV has been involved in China for a few years with the target to have 125 cinemas there by 2017 and a market share of 6.5%. It is also planning an IPO in China.
While not involved in China, Major Cineplex is rolling out new cinemas in the periphery. It opened a new cinema with seven screens in Cambodia last year, and aims to open another one with five or six screens in Laos. The target is to have 100 screens in the region.
These strong numbers are drawing huge interest.
I predict big things for this sector
Wanda Cinema Line
Meanwhile, Bona Film has just received an offer from its founder and major shareholders to go private. Founder and CEO Mr Yu Dong, Sequoia Capital, and Fosun International have proposed to acquire all the shares they don't own at $13.70 per share, equivalent to a 7% premium. At that price, it would trade at 40.3 times 2015 earnings. The group needs to receive two-thirds quorum, which is likely to be accepted as it already own 60%. Mr Yu justified the proposal by saying that he wanted to "come back home" to China and implied he wanted to focus on creating content for China's internet giants, Alibaba, Baidu and Tencent.
The current frenzy is unsustainable. Based on Bloomberg, our three cinema stocks are trading on steep valuations for 2016: CJ CGV (35.9 times earnings), Major (18.9 times earnings) and Bona (27.5 times earnings).
Regardless of the short-term direction, I think the sector's future is closely linked to three broad themes.
Three broad themes to play
1. The narrowing gap between China and Hollywood
2. The Chinese internet giants are searching for fresh content
3. Identify the winners of escapism
This is not so far-fetched as you may think. In the 12th five-year plan (2011-16) culture was identified as a new pillar industry', which is defined as contributing more than 5% of GDP.
I envisage investors will be handsomely rewarded by companies which can capture part of this theme.
Lars is our resident emerging markets expert, with 17 years of 'on the ground' experience hunting down profit opportunities in Asia.
Lars spent ten years living in Malaysia and Thailand, seeking out strategic opportunities, before moving to London to manage the Oracle Asia Absolute Fund.
In short, Lars has real knowledge of where the opportunities in Asia are. Sign up to his free newsletter, The New World, here.
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