Could peaking box office revenues dent Cinemark Holdings' future?

Cinemark Holdings Inc (NYSE:CNK), operator of flagship US cinema chains such as Cinemark, Century Theatres, Tinseltown USA, CinéArts, and Rave Cinemas, is facing serious headwinds in a challenging environment to gain viewers’ attention, according to a new report.

In its latest examination of the company’s financials and forward projections, US-based research and analysis firm Vision Research (VR) opined that after 2018 box office revenues for Cinemark were boosted by its frequent user MoviePass plan, an unusually strong movie line up in 2019 could mark the industry’s peak with revenue falling thereafter.

Cinemark is the third-largest movie theatre operator in the US behind AMC and Regal Entertainment (now owned by Cineworld), with sizeable operations in Canada. Cinemark breaks down revenue into admissions (~55%ofrevenues), concessions (~35% of revenues), and other (10% of revenues).

Other revenues consist mostly of advertising revenue from ads played on their screens and special events. In just under two years of its launch, MoviePass has bagged 600,000 members, but VR noted that while encouraging, it would not be enough to maintain revenue growth in 2020.  

The research firm attributed this to changing consumer tastes and intense competition. “Disney's purchase of Fox gives the company dominant market share and the ability to further pressure movie rental costs. Pressure from Netflix and Disney could cause the viewing window for movies to be negotiated lower," VR added. 

The North American cinema industry, formally an oligopoly, has seen one competitor [AMC] push aggressively into the subscription business offering big discounts on both tickets and concessions pushing Cinemark into a spot of bother.

Furthermore, cinema operators’ demand of the 90-day exclusivity window from producing studios is fast becoming a thing of the past, with the emergence of Netflix and Amazon Prime, who often choose not to accept such preconditions and give rights to independent cinemas. 

Cinemark has stated Netflix would need to honour the 90-day window in order to show their movies in its theaters. "This seems unlikely until the viewing window is compressed. Any hit movies from Netflix or Amazon would be captured by small independents who do not worry about the movie window schedule as much," VR said. 

Disney and other movie producers will also start to push upcoming titles to their OTT [‘Over The Top’] streaming products (e.g. Disney+) in order to gain long term subscription revenue” and put cinema operators at a disadvantage.

More holistically speaking, ticket price growth in US and Canada, Cinemark’s mainstay markets, has weakened as luxury seats have become more saturated. "The company’s long-term EBIT margins appear under pressure," VR observed.

Hence, the research firm's verdict is that a combination of factors and a possible peaking of revenue make Cinemark Holdings a ‘bear’ case.

For more, download and read Vision Research's full report on the fundamental investment case for Cinemark Holdings Inc, via ReachX’s research marketplace.