October 7, 2015 / 5:29 PM / in 2 years

No China fears here: U.S. funds bet big on IMAX's giant screens

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, 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, 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.

The upcoming installment of the Star Wars franchise, the first since Walt Disney Co purchased Lucasfilm, is expected to bring in $700 million from the U.S. box office, according to JBL Advisors. Lions Gate Entertainment Corp’s final chapter of the “Hunger Games” series is expected to top $350 million, and Sony Corp’s “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, 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.

Reporting by David Randall, additional reporting by Elzio T. Barreto Jr.; Editing by Linda Stern and Nick Zieminski

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