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Brian Dunne

CNK AT A GLANCE

P/E ► -43.0   EV/EBITDA ► 14.4 AVG ROA ► 2.2% AVG ROE ► -3.4% AVG Debt to Equity ► 2.67 AVG Current Ratio ► 1.93 AVG Interest Coverage Ratio ► 0.971 AVG

 

 

 

 

 

 

Cinemark Holdings operates the 3rd largest movie theater chain in the U.S., managing 287 theaters with 3,654 screens.^[1] In 2007, revenues increased $462.2 million (37.9%) from fiscal 2006.^[2] A key driver of this growth was Cinemark's performance in Central and South America, where Cinemark operates 121 theaters with 1,011 screens.^[3] Latin American revenues totaled $333.6 million in fiscal 2007, representing 19.8% of Cinemark's total.^[4]

Another important revenue driver is the box office success of films that Cinemark's theaters show – quality movies mean higher attendance and ticket sales, while a poor movie season will lead to empty theaters. Fiscal 2007's blockbuster hits, such as Spiderman 3, Pirates of the Caribbean: At World's End, and Shrek the Third helped to boost Cinemark's revenues to $1.6B.^[5] Anticipated blockbusters in 2008 include The Dark Knight, The Incredible Hulk 2, and Indiana Jones and the Kingdom of the Crystal Skull ^[6], and if these movies meet box office expectations the company will continue its revenue growth.

Cinemark must compete with other theater chains, as well as other forms of entertainment like in-home theater services, television programming, sporting events and concerts. To combat this competition, Cinemark and other large theater chain owners such as Regal Entertainment Group and AMC Entertainment have moved to a megaplex theater format - CNK has an average screen-to-theater ratio of 11.4, much higher than the industry average of 6.5.^[7] By providing a centralized location for multiple screens, Cinemark capitalizes on economies of scale, minimizing labor and concession costs. The ability to control costs within its theaters is essential for Cinemark because it has so little leverage with the film distribution industry that provides the content for its movie screens. Cinemark has little pricing power in its contracts with film distributors since the theater industry is highly fragmented, and a deterioration in Cinemark's relationship with distributors would squeeze profit margins.

Business Overview

Financials

Cinemark's primary revenue sources come from admissions and concessions, which accounted for 64.6% and 30.69% of total 2007 revenues, respectively. Total revenues increased by 37.8% in 2007, and they have risen by 76.98% since the end of 2003. Admission revenues have outpaced even that figure, rising by 82% over the same time period.^[8] The increase in revenues has been fueled by the box office success of films, strong movie attendance and by rising movie ticket prices. Cinemark's yearly attendance has grown 22.8% and average ticket prices have risen by 14.1% over the last 5 years.^[9]

Other revenue streams come from theater access fees paid by the advertising firm National CineMedia, Inc. and from arcade games set up in the lobby of some theaters. Unlike Regal Entertainment Group and AMC Entertainment, Cinemark does not share in the revenues of National CineMedia despite being a partial owner.^[10]

Analysis

Operating income declined considerably in 2004 and 2005 due to declining movie attendance. Fewer patrons led to decreased ticket and concessions revenues. Between fiscal 2004 and 2005, attendance decreased by 7.6%. Costs also increased over 2004 and 2005 with higher film rental costs. ^[11] Rising operating income in 2006 and 2007 is attributable to rising attendance. Attendance rose 19.3% between fiscal 2006 and 2007, leading to an increase of $165 million in revenues.^[12]

Geographic Breakdown

Cinemark operates in 38 US states, Canada, and 12 countries in Central and South America.^[13] 78% of Cinemark's movie screens and 70% of its theaters are located within the United States. Theater location is paramount for Cinemark, as the company ranked 1st or 2nd in box office revenues in 22 of the 25 top US markets.^[14] Cinemark targets metropolitan and suburban centers for both acquisition and organic growth. Cinemark acquired Century Theaters, Inc. in 2006, which added 77 theaters and 1,017 screens in 12 states.^[15] Organic expansion consisted of opening 12 theaters and 257 screens in fiscal 2007.^[16]

Trends and Forces

Cinemark's Revenues Rely on the Popularity of Films

A movie theater company's success is tied closely to the quality of the films that it shows. Box office successes boosted Regal Entertainment's revenues in fiscal 2007. For example, Cinemark's 19.3% increase in 2007 attendance led to a 43% increase in admissions revenues.^[17] Franchise films were helpful to the box office, as 4 of the 5 highest grossing films were sequels. (Spiderman 3, Pirates of the Caribbean: At World's End, Shrek the Third, and Harry Potter and the Order of the Phoenix).^[18] Fiscal 2005 provides further proof of Cinemark's reliance on admissions. A 7.6% decrease in attendance from fiscal 2004 to 2005 led to a 0.4% drop in revenues - a figure that would have been larger had ticket prices not increased 7.8% that year.^[19]

Sequels of high-grossing franchise films are often even more successful than their predecessors. 2008 also has a large number of sequels scheduled for release:

• The Dark Knight (July 2008) ^[21]
• The Incredible Hulk 2 (June 2008) ^[22]
• The Chronicles of Narnia: Prince Caspian (May 2008) ^[23]
• The Mummy: The Tomb of the Dragon Emperor (August 2008) ^[24]
• The Sisterhood of the Traveling Pants 2 (August 2008) ^[25]
• Saw 5 (October 2008) ^[26]
• High School Musical 3 (October 2008) ^[27]
• Harry Potter and the Half-Blood Prince (November 2008) ^[28]
• Indiana Jones and the Kingdom of the Crystal Skull (May 2008) ^[29]

Growing Profitability of Theaters in Central and South America will Increase Cinemark's Revenues

Cinemark has the largest presence of any theater company throughout Central and South America. Cinemark considers these to be emerging markets for the film industry as a result of multiplex theater construction, attractive demographics with a significant teenage population, and a growing acceptance of movie-going as a form of entertainment.^[30] The MPAA (Motion Picture Association of America) reports that international box office receipts have increased at a compound annual growth rate of 11.9% from 2003 to 2007.^[31] Cinemark's international revenues increased 16.7% over fiscal 2007 to $333.6 million.^[32] This continued international growth, and especially growth in Latin America, boosts Cinemark's revenues.

Cinemark Faces Competition from Non-Theater Industry Players

Cinemark's attendance directly affects its revenues. Though Cinemark's attendance and revenue attendance have grown overall in the past few years, increased competition from non-movie theater industries has caused growing concern about declining attendance throughout the industry. A decline in overall box office receipts would adversely affect Cinemark and the rest of the movie theater industry; however, US box office receipts have grown by 3.5% (2006) and 5.4% (2007) in the last two years as a result of high-grossing film releases.^[33] Cinemark and other theater companies compete with non-theater entertainment companies, as well, such as in-home theater services, television movie providers and other forms of entertainment such as sporting events and music concerts. Special concern stems from non-theater film providers, such as television movie stations, in-home video and DVDs, and the Internet. Traditionally, film distributors have provided a period known as the theatrical release window in which films are licensed only to theater companies. In recent years, though, the release window has shortened, heightening competition from these alternative film providers.^[34] A shortening release window will lead to revenue losses for theater companies as a result of such non-theater competition.

Cinemark's Relationship with Film Distributors is Key to Sustaining Profit Margins

The film distribution industry is dominated by 6 film distributors. The top six companies account for about 80% of US box office revenues and provided 42 of the 50 highest grossing films of 2007.^[35] The industry is highly concentrated due to high barriers to entry involving fixed costs and specific, skilled labor.

^[36]

Theater companies lack pricing power because there are so many film-exhibition companies. Film distributors can easily substitute their contracts from one theater company to another without losing revenues. Distributors can also change licensing contracts with film companies outside of the theater industry. This is evident in the shortening theatrical release window, meaning that distributors are turning to non-theater movie providers earlier in a given film's revenue-generating lifetime.^[37]

Because of this high market concentration, the motion picture distribution industry is heavily regulated. These regulations mandate that negotiations between distributors and exhibitors to be on a theater-by-theater and film-by-film basis. As a result, theater companies' costs can vary significantly from movie to movie. In 2007, Cinemarks' film rental and advertising costs were $589.7 million (about 35% of 2007 revenues). That ratio has remained relatively stable over the past 3 years, though total film rental and advertising costs jumped 45% in fiscal 2007.^[38] If this cost-revenue ratio were to increase, Cinemark would incur lower profit margins. This could happen as a result of a rise in motion picture production costs, changes in regulation on film distribution companies, or a deterioration in Cinemark's relationship with its suppliers.

Digitization of Theaters Improves the Movie-Going Experience

In February 2007, Cinemark, AMC Entertainment, and Regal Entertainment Group created Digital Cinema Implementation Partners LLC, a company that will facilitate the implementation of digital movie screens in the companies' theaters. DCIP is still in the process of finalizing finance plans. Cinemark and the other companies are hoping to corner a greater market share by upgrading to digital projection theaters, which will provide enhanced screen quality and better compatibility with IMAX and 3-D format movies. Digital cinematography is the process of capturing a movie on a digital-storing memory device instead of on film. Capturing a movie in this way prevents the common "jitter" of a film-captured motion picture and also saves film distributors the cost of making film prints for each theater, which can cost up to $2,000 each. Unlike Regal Entertainment Group and AMC Entertainment, Cinemark has not begun a roll-out plan of digital projection theaters due to high costs of digital technology.^[39] Deterrents to installing digital technology include large capital investment and the breakdown in talks between DCIP and IMAX, 3-D movie providers. For instance, a deal between DCIP and Dreamworks Animation SKG was supposed to be finalized by 4Q 2007, but negotiations have deteriorated.^[40] Since both AMC Entertainment and Regal Entertainment Group are also upgrading theaters, installing digital screens will not provide additional value from an enhanced product, but it will keep Cinemark competitive, thus protecting against a deterioration of market value.

Competition

Overview

Cinemark faces competition from within the movie theater industry and from non-theater markets such as in-home movie services, television movie providers and from other forms of entertainment. Theater companies also face cost difficulties because the film distribution industry, theaters' main supplier, is dominated by a few large companies. In 2007, only six film distributors accounted for 78% of US box office revenues and supplied 42 of the 50 highest grossing films.^[41] Because the movie theater industry is so competitive, film distributors can substitute between theater companies without losing revenues. Cinemark, along with other theater exhibitors, is prohibited from entering into long-term contracts with these suppliers. Negotiating on a theater-by-theater and film-by-film basis only increases the level of competition for the rights to show films.

Competing Firms

The movie theater industry is top-heavy: the largest 5 companies (Regal Entertainment Group, AMC Entertainment, Cinemark USA, Carmike Cinemas, and National Amusements) control 45% of the market share while the next 5 only control 8%.^[42] National Amusements is a private company, and therefore no financial data is available. Revenue information for AMC Entertainment is not yet available for FY 2007. ^[43]

^[44]

How is Cinemark Different?

Cinemark has a substantial presence in Central and South America. The film industry's ability to grow in these markets will affect Cinemark's revenues and international market share. International box office revenues have increased rapidly since 2003, at a CAGR of 11.9%.^[45] Cinemark's international revenues already account for 16.7% of total 2007 revenues.^[46] Continued growth of the Latin American movie industry will benefit to Cinemark's revenues and international market share.

How is Cinemark Similar to Other Theater Companies?

The movie theater industry is fragmented and highly competitive. All theater companies face intra-industry competition as well as competition from non-theater industries. Few barriers to entry exist and, according to Regal Entertainment Group's 2007 10-K, moviegoers base their theater decision on proximity, film quality, and amenities.^[47] Cinemark and other theater chains lack negotiating power with film suppliers, making it difficult to cut costs.

References

1. ↑ CNK 2007 10k, Item 1: Business, pg. 2
2. ↑ CNK 2007 10k, Item 6: Selected Financial Data, pg. 27
3. ↑ CNK 2007 10k, Item 1: Business, pg. 2
4. ↑ CNK 2007 10k, Item 1: Business, pg. 5
5. ↑ CNK 2007 10k, Item 6: Selected Financial Data, pg. 20
6. ↑ The Internet Movie Database 2008
7. ↑ RGC 2007 10k, Item 1: Business, pg. 4
8. ↑ CNK 2007 10k, Item 6: Selected Financial Data, pg. 20
9. ↑ National Association of Theater Owners, "Average US Ticket Prices," 2008
10. ↑ CNK 2007 10k, Item 1: Business, pg. 9
11. ↑ CNK 2005 10k, Item 7: Management's Discussion and Analysis of Financial Condition and Results
12. ↑ CNK 2007 10k, Item 7: Management's Discussion and Analysis of Financial Condition and Results, pg. 27
13. ↑ CNK 2007 10k, Item 1: Business, pg. 6-7
14. ↑ CNK 2007 10k, Item 1: Business, pg. 4
15. ↑ CNK 2007 10k, Item 1: Business, pg. 2
16. ↑ CNK 2007 10k, Item 6: Selected Financial Data, pg. 21
17. ↑ CNK 2007 10k, Item 6: Selected Financial Data, pg. 27
18. ↑ Pajiba.com, "The Ten Highest Grossing Films of 2007," 1/9/08
19. ↑ CNK 2005 10k, Item 7: Management's Discussion and Analysis of Financial Condition and Results
20. ↑ National Association of Theater Owners, "Total U.S. & Canada Box Office Grosses," 2008
21. ↑ The Internet Movie Database, "The Dark Knight," 2008
22. ↑ The Internet Movie Database, "The Incredible Hulk 2," 2008
23. ↑ The Internet Movie Database, "The Chronicles of Narnia: Prince Caspian," 2008
24. ↑ The Internet Movie Database, "The Mummy: The Tomb of the Dragon Emperor," 2008
25. ↑ The Internet Movie Database, "The Sisterhood of the Traveling Pants 2," 2008
26. ↑ The Internet Movie Database, "Saw V," 2008
27. ↑ The Internet Movie Database, "High School Musical 3," 2008
28. ↑ The Internet Movie Database, "Harry Potter and the Half-Blood Prince," 2008
29. ↑ The Internet Movie Database, "Indiana Jones and the Kingdom of the Crystal Skull," 2008
30. ↑ http://sec.gov/Archives/edgar/data/1385280/000095013408005619/d55075e10vk.htm CNK 2007 10k, Item 1: Business, pg. 3]
31. ↑ CNK 2007 10k, Item 1: Business, pg. 3
32. ↑ CNK 2007 10k, Item 7:Management’s Discussion and Analysis of Financial Condition and Results of Operations, pg. 27
33. ↑ Motion Picture Association of America, "Theatrical Market Statistics," 2007
34. ↑ RGC 2007 10k, Item 1: Business, pg. 7
35. ↑ CNK 2007 10k, Item 1: Business, pg. 12
36. ↑ Thefreelibrary.com "Motion picture distributors: ranked by 2007 domestic box office revenue," 2008
37. ↑ RGC 2007 10k, Item 1: Business, pg. 7
38. ↑ CNK 2007 10k, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, pg. 26
39. ↑ CNK 2007 10k, Item 1: Business, pg. 14
40. ↑ IT Blogspot and Digital Cinema, "DreamWorks' Katzenberg Disappointed with 3D Talks," 2008
41. ↑ CNK 2007 10k, Item 1: Business, pg.12
42. ↑ Morningstar, "Regal Entertainment Group, Inc.," 8/31/07
43. ↑ RGC 2007 10k, Item 6: Selected Financial Data, pg. 25;AC 2006 10k, Item 7: Discussion and Analysis of Financial Condition and Results of Operations, pg. 45; CNK 2007 10k, Item 6: Selected Financial Data, pg. 25; CKEC 2007 10k, Item 6: Selected Financial Data, pg. 22
44. ↑ RGC 2007 10k, Item 6: Selected Financial Data, pg. 25;AC 2006 10k, Item 7: Discussion and Analysis of Financial Condition and Results of Operations, pg. 45; CNK 2007 10k, Item 6: Selected Financial Data, pg. 25; CKEC 2007 10k, Item 6: Selected Financial Data, pg. 22
45. ↑ CNK 2007 10k, Item 1: Business, pg. 3
46. ↑ CNK 2007 10k, Item 7:Management’s Discussion and Analysis of Financial Condition and Results of Operations, pg. 27
47. ↑ RGC 2007 10k, Item 1: Business, pg. 1