China Media Sector:Warcraft’s first-week box office revenue surpasses Rmb1bn,second in China’s movie

Film Warcraft’s first-week box office revenue at Rmb1.027bn.

    According to Entgroup’s data, the film Warcraft, which premiered on 8 June in China,grossed Rmb1.027bn at the box office in its first week of release, second only to TheMermaid, which was released in this year’s CNY holiday (Rmb1.82bn first-week boxoffice revenue and Rmb3.39bn total box office revenue).

    We expect this to drive box office revenue growth in June.

    Chinese mainland posted box revenue of Rmb3.112bn in May 2016, a slight decline of2% from the Rmb3.18bn in May 2015. We attribute this to a bottleneck in movieproduction, which led to a shortage of blockbusters and weak box office revenuegrowth in the periods apart from the New Year’s Day/CNY holiday/summerholiday/National Day holiday. In 2014/15, 4/2 months saw box revenue growth lessthan 10%. In comparison, the US has 7-8 box office peak periods in a year thanks tostrong upstream production capability. We expect Chinese mainland box office revenueto pick up significantly in June 2016 due to a low base (Rmb3.35bn box office revenue)in June 2015 and the hot box office sales of Warcraft.

    New hot spots in content production: Movie/game interaction & fantasy genre.

    We believe the success of the film Warcraft will create new hot spots in China’s movieand TV product development: (1) Warcraft IP gave birth to various types of 1-tier gamessuch as RTS, MMORPG, BFS legend (card) and DOTA (MOBA), which had a wide fanbase. The latest adaptation into a movie is likely to provide a top case of movie andgame interaction; and (2) in H216, Chinese companies will start making fantasy moviesand TV series, a genre they have rarely touched before, including Jiuzhou, TheAdventures of Three Tomb Raiders, The Secret of Grave Robber and Ice Fantasy. This islikely to create an incremental market and lead to import substitution.

    Maintain Buy rating on Huace and SNC, and Neutral rating on Enlight Media.

    We expect the fantasy genre’s rise to offer new opportunities for China’s 1-tier movieand TV companies and increase industry concentration. Huace and SNS, which are setto launch this genre of products (SIPs such as the Ten Mile Peach Blossom of Three Lifeby Huace and Xuan Yuan Sword by SNC) in 2016-17, are likely to benefit. We reiterateour Buy rating on Huace and SNC. The potential box office revenue pickup in Juneshould boost market confidence. We maintain our Neutral rating on Enlight Media asMaoyan, in which Enlight bought a stake, is still in restructuring.