Imax China, the supplier of giant screen cinema facilities and services in Greater China, is one of the purest plays on the mainland Chinese movie exhibition market available to investors. The stock, traded in Hong Kong, has rocked and rolled over the past 15 months between HK$10 and HK$25 per share, in response China’s closure of cinemas for six months from January last year, substantial derestriction of capacity controls from October and a spectacular recovery at Lunar New Year 2021.

The company’s financial results for calendar and financial year 2020 show revenues plunged by 58% compared with 2019, to $52.3 million. Net profits of $42.9 million in 2019 were replaced by losses of $26.7 million, a swing of $69.5 million.

Chairman Richard Gelfond’s nearly three-page letter to shareholders published with the results is extraordinary for barely mentioning coronavirus, events of 2020 or how the business reacted to the strictures imposed by disease, government regulations and financially-distressed theater chain customers. The loss of Hollywood releases, and market share gain by Chinese titles, also dented company performance in 2020.

Instead, Gelfond largely focuses on 2021, recovery, and how the company is geared up to outperform in an expanding box office market.

The explanation of how Imax China is also geared to underperform when China’s box office is in a downturn can only be found in section 4 of the “notes to the consolidated accounts.”

These showed that the company was last year hit by delayed installation of theater equipment and services (new sales), delays in customer payments, waiving of other fees, and a downward rebasing and extension of others (lost or delayed recurring income). After having assessed the likelihood of recovering lost income, the group also “recorded an allowance for expected credit losses of $10.9 million in 2020.”

“The repercussions of the COVID-19 global pandemic resulted in a significant decrease in the group’s revenues, profits and operating cash flows during the year ended 31 December 2020 as gross box office results declined significantly, the installation of numerous theater systems were delayed, and maintenance services were generally suspended for theatres that were closed,” the note explained.

“In addition, the group has experienced, and is likely to continue to experience, delays in collecting payments due under existing theatre sale or lease arrangements and digital remastering services agreements from certain of its local studio and exhibitor partners who are facing financial difficulties as a result of the theater closures. In response, the group has provided temporary relief to exhibitor partners by waiving maintenance fees during periods when theatres were closed and, in certain situations, by providing extended payment terms on annual minimum payment obligations in exchange for a corresponding extension of the term of the underlying sale or lease arrangement. For relief on annual minimum payments, the transaction price was re-assessed and adjusted with the extended payment terms, resulting in an adjustment of $1.0 million to revenue for the year ended 31 December 2020; for relief on maintenance, no maintenance revenue was recognized during the relief period as no performance obligation of maintenance service was delivered during that period,” it continued.

Gelfond’s chairman’s statement is unflaggingly bullish. He points to average box office market share of 2.7% on local (Chinese) titles, up 70 basis points compared with 2019; Imax China’s growth in indexing with local language blockbusters to levels approaching that of Hollywood tentpoles, including “The Eight Hundred,” “Legend of Deification” and “Shockwave 2”; record breaking Chinese New Year opening weekend box office up approximately 45% from 2019; and further network expansion to 745 screens across over 200 cities, representing 1.2% (nationwide) penetration, up 20 basis points year-over-year.”

Gelfond also suggests that Imax can further grow its share of revenue on Chinese titles, towards the 7% it earns on Hollywood movies. “IMAX has played an instrumental role in the development of Hollywood blockbuster franchises. We see the same opportunity in China as local filmmakers are starting to build their brands in the same way as their western counterparts,” he says.

“Our competitive position built upon our brand, technology and network scale has further strengthened post-pandemic. As theatrical entertainment becomes more and more blockbuster-driven and the content pipeline increasingly caters towards IMAX DNA, we feel well-positioned to capitalize on China’s premiumization trend and deliver continued market share gain,” Gelfond concluded.

He is so confident of an upswing that the company proposes to increase its dividend payout ratio from 33% of net income during 2017 to 2019 to 50% from 2021.

Following the publication of the results, Imax China shares were up 6.3% at HK15.66 by Friday’s lunchtime trading break. At that price the group is valued at HK$5.4 billion ($692 million).

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