Time Warner’s Efforts In China Are of Little Value To Shareholders

August 26th, 2015 by Trefis Team
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Time Warner

Time Warner’s (NYSE:TWX) studio, Warner Bros., is reportedly eyeing a partnership with a Chinese studio to produce films for the local market. This comes in as no surprise given the demand for movies in China and the success of various Hollywood films in international markets. Other media houses such as Fox (NASDAQ:FOX) and Disney (NYSE:DIS) have already set up joint ventures in international markets, including Europe and India. While China offers a great opportunity for Warner, it will have a limited impact on the company’s stock price due to low value contribution of the box-office business. Having said that, Warner will see steady growth in box-office revenues in the coming years, irrespective of the China deal. This growth will be led by sequels and movies around DC characters and Warner’s other popular franchises. It must be noted that we currently do not price any such acquisition in our price estimate.

Warner Bros. is in talks with China Media Capital to set up a joint venture that will produce local language films for the Chinese market, according to The Wall Street Journal. [1] So far, the quantum of investment and the number of movies to be produced in this possible joint venture is not known. There is massive demand for movies in China, evident from the region’s box-office grossing, which grew from a little under $1 billion in 2009 to around $5 billion in 2014. Domestic Chinese films accounted for 55% of this total grossing in 2014, reflecting high demand for regional cinema, which Warner is eyeing. [2] Furthermore, China shares only 25% of the box-office sales with U.S. media companies and this joint venture may be another way around to grab a bigger piece of this fast growing movie market. Another factor behind Warner’s move could be the limited exposure of international movies to China market, which currently allows only 34 foreign films to be released in a year.

If we assume a 10% market share for the combined studio in next five years and the overall market grows in high-single-digits, it will translate into revenues of less than $500 million, which will be split between the partners. Here, we assume similar market share of regional movies (55%). With very less revenues to look upon and lower EBITDA margins associated with the segment, due to high distribution costs for the movies, the acquisition will not have any meaningful impact on Time Warner’s stock price. However, the studio itself will see steady growth in the coming years, irrespective of this China deal.

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Warner’s share in the U.S. box-office has been in the range of 15% to 17% in the past few years. So far, in 2015, the studio has maintained close to 17% market share led by the success of American Sniper, San Andreas, Mad Max: Fury Road and Get Hard. [3] However, it postponed the release of its much-hyped Batman v Superman movie to 2016. Warner’s global box-office revenues have been hovering around $2 billion for the past few years amid a few hits and misses at the box-office. Going forward, we expect a slight uptick in revenues led by the company’s solid slate of DC movies that will boost its share in the global box-office market. However, we don’t expect any significant growth in the medium term, as the studio will be competing against Disney’s Star Wars and Fox’s Avatar sequels in the coming years.

We currently estimate $1.93 billion in box-office revenues and EBITDA of over $300 million for 2015. It must be noted that Warner Bros. earns most of its revenues from production and licensing of TV shows and box-office accounts for less than 3% of Time Warner’s stock valuation. Accordingly, any changes to our forecast will not have a meaningful impact on the company’s stock price (see – HBO And Warner Bros. Will Drive Time Warner’s Future Growth).

See our complete analysis for Time Warner

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Notes:
  1. Warner Bros. in Talks to Make Movies in China, The Wall Street Journal, Aug 25, 2015 [↩]
  2. China’s box office revenues surge 36% in 2014, Los Angles Times, Jan 5, 2015 [↩]
  3. Studio Market Share, Box Office Mojo [↩]