A strong China open for ‘Avatar’ lays the ground for a film stock rally, Morgan Stanley says
Chinese audiences appear eager to see Disney’s “Avatar: The Way of Water,” according to initial ticket sales ahead of the film’s Dec. 16 opening. “Avatar 2 is one of the key catalysts, alongside the upcoming holidays, that could support further near-term share outperformance for film stocks,” said Rebecca Xu, an analyst at Morgan Stanley, in a research note Thursday. Her preferred stock pick is ticketing platform and distributor Maoyan Entertainment. Xu has an overweight rating on the stock, with a HK$9.4 price target. Why China matters While Xu doesn’t cover Disney, and didn’t comment on its stock, the company has a lot riding on “Avatar” winning over China’s moviegoers. Director James Cameron has said that in order to break even, the film must become one of the top four movies of all time. Plus, Disney has big plans for the franchise in the coming years, with four more releases planned over the next decade. Prior to the Covid pandemic, China’s appetite for U.S. films was making it a force to be reckoned with in Hollywood. In 2009, China accounted for only $910 million in ticket sales, but 10 years later its box office receipts swelled to $8 billion. PwC predicted in 2019 that China would become the world’s largest movie market , but the health crisis derailed that forecast. Since China allowed theaters to reopen, venues have been subject to periodic closures. Morgan Stanley said only about half of the nation’s theaters are currently open due to efforts to contain Covid. “Avatar’s” debut is significant as the government has not cleared many Western films to be shown in the country in recent months. Notably, it will appear on screens in China on the same day as its domestic debut . Disney used this strategy when “Avengers: Endgame” was released and it’s hoping to see a repeat of that success. The original “Avatar,” released in 2009, held the title of the highest grossing film of all time until “Avengers: Endgame” snatched it away. Its rerelease in early 2021 allowed the sci-fi epic to reclaim the mantle. It owes the bulk of its popularity to international audiences, including those in China, and their desire to see the film in slick formats like Imax. Early ticket demand Xu is looking at “The Way of Water” to gauge the appetite for going back to the theater. So far, the signs are good. Not only is the buzz from critics positive, but sales kicked off to a strong start in China. Tickets went on sale Wednesday and as of noon Thursday, presale reached more than Rmb30 million, according to Maoyan Pro. Day 2’s presale grew 40% from the first day, which is unusual. That puts the pace of ticket sales for this latest Avatar film ahead of “The Battle at Lake Changjin 2,” a film released during this year’s Chinese New Year holiday, but behind “Detective Chinatown 3,” which debuted during the 2021 Chinese New Year, and “Endgame.” Notably, Avatar did this with only about half of the nation’s screens open. Stage set for box office recovery Morgan Stanley’s Xu expects China’s box office to rebound 50% in 2023, to Rmb51 billion, with the assumption that China’s reopening gains momentum in the spring. “We have seen positive signs that consumers are willing to go back to theatres,” Xu wrote, citing strong ticket sales during the 2021 Chinese New Year holiday period as evidence. She’s also drawing lessons from the U.S. box office reopening. Xu said the U.S. box office bounced back to about 70% of its 2019 levels in the second and third quarter of 2022, but the supply of new films stunted its recovery. In China, there is a “rich slate of blockbuster films” ready to come to theaters, Xu said. In addition, movie stocks have tended to rally during holiday periods, and even more so when the buzz around films is better than expected, she said. With this in mind, Xu raised her price targets for IMAX China, Ali Pictures, Wanda Film , Enlight and China Film. As for top pick Maoyan, Xu expects it will benefit from its dominant distribution position and the promising array of films coming to theaters, plus the fact it’s increasing its market share in production. Morgan Stanley said it favors Hong Kong-listed stocks over China A-shares, citing valuation. —CNBC’s Sarah Whitten and Michael Bloom contributed to this report.
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