If hedge fund managers wrote motion picture scripts, they might pen a story like this recent market tale.
Tremblant Capital Group is a New York–based hedge fund firm whose filings with the Securities and Exchange Commission reveal a thematic interest in the growth of consumer spending in China. More specifically, Tremblant’s investment team is banking on growing box office receipts for movies in China — not just dubbed retreads imported from Hollywood, but homegrown blockbusters made possible by increased access of Chinese film companies to global capital markets.
Tremblant is a major shareholder in the Bona Film Group, the largest private distributor of motion pictures in China. Filings show that Tremblant owns an 8 percent stake in the Beijing-based company, which went public in late 2010. Mind you, the holding has yet to prove a blockbuster for Tremblant; shares have been trading in a tight range for some time. On February 21, the Nasdaq-traded stock closed at $4.56. (Filings show Tremblant owns 4.7 million of shares of the ADRs, which puts the value of its stake at just below $21.5 million.)
Some analysts think Bona has been overlooked because revenues took a dip, post IPO. Still, profits are up, and there are other reasons to be optimistic long-term. There is room for upside with shares trading at only about 11 times earnings. That said, Bona’s hits are names you likely have never come across — such as the animated Pleasant Goat and Big Big Wolf and a current hit, the 3-D martial arts movie Flying Swords of Dragon Gate, starring Jet Li.
In recent weeks, the latter has managed one of the best-grossing openers in Chinese box office history, thanks to its release in native 3-D IMAX format, the first such Chinese-language movie shot to take advantage of that format. Though the movie’s opening gross of $2.5 million might be laughable by Hollywood standards, Tremblant likely sees the growth potential.
Still, betting on motion pictures and even distributors can be a risky proposition due to cyclical swings in box office sales. It’s here that Tremblant’s investment team perhaps deserves kudos for its foresight. In addition to betting on the “software” side of the equation with distribution in China via Bona, the hedge fund has also taken a stake on the “hardware” side through a major investment in IMAX itself.
Filings with the SEC show that Tremblant owns roughly 3.1 million shares in IMAX. That makes the hedge fund one of IMAX’s largest shareholders with a 5.1 percent stake. The stock has been a solid performer of late, hitting a recent high of $24.93 and putting the value of Tremblant’s portfolio holding at roughly $77 million.
As a major stakeholder, Tremblant must have been aware that IMAX was not only planning to expand internationally but had teamed up with Bona to do so in the Chinese market. (This was precipitated by the motion picture company establishing local subsidiaries IMAX China and IMAX [Shanghai] Multimedia Technology Co.)
Again, Tremblant saw both the forest and the trees in this investment and wisely bet on both. The wider market was either oblivious to or skeptical of this China–silver screen synergy. In mid-February IMAX shares surged over the course of two days, gaining almost $2.50 per share when the company announced a big jump in box office sales during the quarter and the opening of new theaters in China. Since the start of 2012, the value of Tremblant’s IMAX stake has appreciated by $29 million. So why not lock in profits?
There are compelling reasons for Tremblant to hold IMAX as a global consumer play: The motion picture company plans to grow the number of theaters it has in China from about forty to eighty in 2012, making it IMAX’s No. 2 market after the U.S. What’s more, China is offering tax breaks to both cinema builders and domestic filmmakers in an effort to steal some of the cultural and financial thunder that emanates from LA.
Tremblant seems well positioned and must like that IMAX’s effort to globalize its franchise isn’t just a simple China play. IMAX has been looking wide and far for growth, and recently announced that its first Russian-language film, based on the siege of Stalingrad, is expected to be released in 2013.
One would hope that Tremblant uses its large-stake position to urge IMAX to continue this methodical expansion. After all, IMAX is unique in that it is both a maker of specialized motion picture equipment and an owner of theaters that use a proprietary projection technology that maximizes the strengths of large-screen cinema. In a competitive environment, there’s nothing like being your own vertical. Investments in both IMAX and Bona Film Group show Tremblant gets this lesson.
