China - Film Industry

Asia Pacific Equity Research 18 January 2011

Bona Film Group Ltd. Initiation

Overweight BONA, BONA US

A 'blockbuster' distributor

Price: $6.14

Price Target: $8.50

China China Internet

Dick WeiAC

(852) 2800-8535 [email protected]

J.P. Morgan Securities (Asia Pacific) Limited

Ritesh Gupta (91-22) 6157 3307 [email protected]

J.P. Morgan India Private Limited

Imran Khan (1-212) 622-6693 [email protected]

J.P. Morgan Securities LLC

5

8

11

$

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

Price Performance

BONA share price ($)NASDAQ Composite (rebased)

YTD 1m 3m 12mAbs 6.2% -12.3% -27.8% -27.8%Rel 2.3% -17.2% -40.9% -46.7%

See page 36 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

• Initiating coverage with an Overweight rating and Dec-11 PT of US$8.5. Bona Film Group is the leading film distribution company in China. The company has also expanded into film investment and production, theatres, film-related advertising, and talent agency businesses. China’s box office per capita is currently one-sixteenth of the US. We see Bona Film as a high growth potential stock backed by a solid China entertainment consumption story.

• A beneficiary of the China entertainment consumption growth: We expect the company to be a key beneficiary of rising disposable income, rapid growth in the number of screens and theatres, increase in the number of good quality domestically-made movies, and lifestyle upgrade in China. According to EntGroup’s forecasts, the Chinese film industry’s revenue is expected to record 2009-2012 CAGR of 38%, to become a US$4.3 billion market by 2012.

• Distribution-centric vertically integrated business model: Building on its solid base in movie distribution, Bona Film has expanded vertically into other parts of the movie value chain—from production to theatrical. The company’s expertise and presence throughout the film industry chain provides it a competitive advantage in identifying and gaining access to promising films. In future, Bona Film should benefit from better monetization of non-theatrical channels, international distribution, and film-related advertising, in our view.

• Strong management team: Bona Film’s management team has a strong track record in the film business. The founder Dong Yu has over 15 years of experience in film distribution. Nansun Shi is a Hong Kong film producer and presenter with over 30 years of experience in the film industry. Since 2003, Bona Film has distributed 139 films (including 29 internationally).

• Our Dec-11 PT of US$8.5 implies 25x 2011E and 21x 2012E non-GAAP earnings. We expect the company to register 2010E-2012E EPS CAGR of 38%. Key risks to our price target are increasing reliance on in-house production, revenue concentration from top films, change in the regulatory landscape, and departure of key management.

Reuters: BONA.US, Bloomberg: BONA US US$MM, Y/E Dec FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E Sales 38.4 50.3 159.7 209.6 ROE (%) 31.1 -5.6 10.9 11.8 52-week range US$6.14-8.50 Operating profit 5.6 9.6 25.5 33.7 ROIC (%) 26.7 -3.6 9.5 10.3 Shares outstg 58.9MM EBITDA 6.5 10.8 27.1 35.7 GAAP dil. EPS (US$) 1Q 2Q 3Q 4Q Avg daily volume 0.2Mn Pre tax profit 5.6 -3.9 24.9 32.1 EPS FY09 0.00 0.00 0.05 0.12 Avg daily value 1.1Mn Reported net profit 4.2 -5.8 21.0 25.5 EPS FY10E 0.03 -0.01 0.14 0.05 Index (NASDAQ) 2,755 Reported EPS (US$) 0.13 -0.15 0.34 0.41 EPS FY11E 0.08 -0.02 0.09 0.20 Free float 30%P/E (x) 49.0 nm 18.0 15.0 1M 3M 12M Dividend yld 0 Adjusted EPS (US$) 0.16 0.22 0.34 0.41 Absolute perf. (%) -12.3 -27.8 -27.8 Market cap US$0.4B Diluted P/E (x) 37.4 28.5 17.8 14.9 Relative perf. (%) -17.2 -40.9 -46.7 Price target US$8.5 EV/EBITDA 59.2 35.4 14.1 10.7 Cash (US$MM) 7 124 170 204 Date of price Jan 14, 2010 P/B (x) 481.8 2.0 1.8 1.7 Equity (US$MM) 20 184 205 231 Y/E BPS (US$) 0.0 3.0 3.3 3.7 Source: Company, Bloomberg, J.P. Morgan estimates. * Note: Adj. EPS excludes share-based compensation expenses.

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Dick Wei (852) 2800-8535 [email protected]

Company description P&L sensitivity metrics EBITDA EPS FY11E impact (%) impact (%)

Growth in Revenues Impact of each 1% increase 0.7% 0.9% Growth in COGS Impact of each 1% increase -1.3% -1.7% Growth in Sales and Marketing expenses Impact of each 1% increase -0.5% -0.6% Growth in General and Administrative expenses Impact of each 1% increase -0.6% -0.7% Source: J.P. Morgan estimates. Price target and valuation analysis

Bona Film Group Ltd is the largest and most successful distributor of domestic films among all privately-owned film distributors in China in terms of number of films distributed and total box office receipts in 2009. The company was founded in November 2003 by Dong Yu.

Revenue growth (Rmb MM)

Our Dec-11 PT of US$8.5 is based on 20.4x 2012E non-GAAP earnings, in line with China consumer discretionary comparables, and implies 25x 2011E and 21x 2012E non-GAAP earnings.

Risk-free rate: 4.0% Market-risk premium: 6.0% Beta: 1.3 WACC: 12.1% Terminal “g”: 0% J.P. Morgan estimates.

38.4 50.3

159.7

209.6

0.0

50.0

100.0

150.0

200.0

250.0

2009 2010E 2011E 2012E

Source: Company reports, J.P. Morgan estimates. EPS estimates: J.P. Morgan vs consensus (Rmb) US$ J. P. Morgan Consensus 4Q10E 0.05 NA FY11E 0.34 NA FY12E 0.41 NA Source: Bloomberg, J.P. Morgan estimates.

Risks to our price target Key risks to our price target are increasing reliance on in-house production, revenue concentration from top films, change in regulatory landscape, and departure of key management.

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Table of Contents Key positives ............................................................................4 Key risks ......................................................................................................................7 Company profile ..........................................................................................................8 Valuation and share price analysis.........................................9 Comparables’ valuation analysis .................................................................................9 Investment thesis ...................................................................12 China entertainment consumption to rise...................................................................12 Booming box office ...................................................................................................13 A vertically integrated business model ......................................................................15 A leading film distributor in China ............................................................................18 Strengths in distribution capabilities..........................................................................20 Production business synergetic to distribution business ............................................22 Film theatre and talent agency business.....................................................................23 Opportunities in non-theatrical distribution ...............................................................24 Quality and influential management ..........................................................................25 Solid growth ahead ....................................................................................................26 Cash flow ...................................................................................................................29 Bona Film Group Ltd.: Summary of financials.....................32 Film release schedule.................................................................................................33 Key accounting policies.............................................................................................34

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Key positives A leading film distributor in China Bona Film is the largest private film distributor in China, both in terms of the number of titles and revenue marketshare. The company distributed 14 movies in 2009 vs. seven by its nearest competitor, according to EntGroup. The company also has a good track record in identifying, investing in and distributing top movies.

The company’s market share in the distribution business is only behind China Film Group, a government-owned player.

Figure 1: Film distribution marketshare in China, 2009

CFG32%

Bona17%Huay i Brothers

13%

Others25%

SFG5%

Huax ia Film Distribution

8%

Source: EntGroup, 2009. Note: By domestic box office receipts. For jointly distributed films, gross box office receipts are split among joint distributors.

The company has maintained a steady share of above 40% in the top 20 films’ box office receipts in China for the past three years (FY07-FY09).

Figure 2: Consistent share of top 20 films box office receipts 44.1%

40.0%44.1%

0%

10%

20%

30%

40%

50%

2007 2008 2009

% of Box Office Receipts among Top 20 Highest Grossing Domestic Films

Source: EntGroup, 2009.

A key beneficiary of China’s entertainment consumption boom As more and more people become affluent and go beyond a minimum sustenance level, the percentage allocation for discretionary spending such as travel, going to

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movies, luxury goods, and gaming would increase. We believe the rising disposable income in China is likely to lead to increased entertainment spending in the country.

Increasing entertainment spending coupled with lifestyle upgrade is likely to lead to fast growth in movie-going in China. Other factors which could drive box office growth include: (1) increasing quality of domestically-produced movies; (2) increasing number of domestically-produced movies; and (3) rising number of movie theatres.

As per EntGroup forecasts, China’s box office will grow at 2008-2012 CAGR of 48.4%.

Figure 3: Box office in China to record a CAGR of 48.4% for 2008-2012

600900

1,500

2,200

3,100

0500

1,0001,5002,0002,5003,0003,500

2008 2009 2010E 2011E 2012E

Box office (US$M)

Source: EntGroup estimates.

Distribution-centric vertically integrated business model Bona Film has expanded from its core movie distribution business to other areas of film value chain such as film production and investments, movie theatres, and talent agency.

The company enhances its core film distribution business through film production and exhibition capabilities, and operations in complementary areas such as talent agency services and advertising.

We believe the vertically integrated model gives the company stronger bargaining power with other stakeholders in the film value chain, both in upstream and downstream. Additionally, the model helps Bona Film to gain a broader insight into the film business for effective decision-making on film investment and acquisition of distribution rights.

Bona’s strengths in film distribution Some of the features of the company’s distribution model are:

Influential film sourcing As the number of movies distributed is restricted by the number of weekends, Bona Film focuses on distributing highly promising movies to ensure success. The company focuses on obtaining distribution rights for high-quality names through management relationships and contacts, involvement in film production, and strengths in distribution capabilities.

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Low risk revenue model Given the inherent risks in the film distribution model, the company executes most of the distribution contracts after the post-production of films. This helps the company better evaluate the market potential of films beforehand. The company enters into distribution contracts before film pre-production only in the case of big budget movies or if high profile artists are involved.

Effective distribution channel The company maintains a healthy relationship with most of the theatre circuits in China. It has distributed 19, 16 and 14 domestic films (including Hong Kong films) in 2007, 2008 and 2009, respectively.

Track record in movie investment As Bona Film gains reputation in the movie industry and builds a solid track record, more independent production houses and movie directors are likely to turn to the company for investment and distribution.

In movie investment, we believe the company differentiates by: (1) conservative portfolio investment philosophy; (2) strong insight into the movie business through a vertically integrated model; and (3) ability to syndicate third-party investments in higher project valuation. From the portfolio of movies that the company lead-invested in 2009 and 2010, we estimate a return of investment of more than 30%.

The additional benefits of movie investment include: (1) securing movie distribution rights in China and overseas; and (2) building up a larger movie library.

Strong management team We believe Bona Film management is well-placed to source distribution rights and other film investment projects. The company’s strong management team includes leaders of modern Chinese film industry, including Mr. Dong Yu, Mr. Jeffrey Chan and Ms. Nansun Shi.

The company founder Dong Yu has over 15 years of experience in film distribution. He was rated as “The Most Influential Asian Film Producer” by Hollywood Reporter in November 2006 and ‘‘Outstanding Figure of the Year in Chinese Creative Enterprises’’ by Chinese Creative Enterprises in 2008. Mr. Yu is also on the managing committee of various film associations in China.

Nansun Shi, a director of the company, is a Hong Kong-based film producer, presenter and a former senior advisor for Media Asia Group with over 30 years of experience in the film industry. She has extensive knowledge and insights into key players in the international film industry.

Mr. Jeffrey Chan, director and chief operating officer of the company, has over 20 years of experience in the film distribution and entertainment industry. He has also been actively involved in the development of Hollywood adaptations of Chinese movies such as The Departed and Confession of Pain.

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Key risks Increasing reliance on in-house production adds to business volatility The company has increased its presence in film investment and production, which adds inherent risks to the business. However, Bona Film has a “portfolio” approach to film production, diversifying film investment across genres and reducing economic interest through “film participation”. The company diversifies its capital-at-risk in film investment by syndicating film investment to other investors while trying to keep its stake not more than 50% of the total investment amount.

Revenue concentration—Top 5 films comprised 67.9% of revenue in 2009 Top 5 films accounted for more than 67.9% of revenue from the 16 films distributed by the company in 2009. However, as the company continues to seek an overall higher-quality movie portfolio, we expect revenue concentration to be lowered.

Potential change in the supportive regulatory landscape Overall the government is supportive of the film industry development in China. Various government regulatory bodies have announced policies benefiting different players across the entire film entertainment value chain, including policies relating to private capital investments, participation of financial institutions in film financing and exports of films. Significant tax exemption and tax reduction policies have been adopted by the government to incentivize film producers and investors.

However, if the government reduces tax breaks or becomes more vigilant on film content, the profitability of the company could be affected.

Departure of key management likely to affect distribution and production Film distribution and production business are highly human-centric. The top management of the company significantly uses its influence and reputation to source distribution rights as well as source quality artists for the films it produces. The departure of key management may also affect the execution capabilities of the company, in our view.

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Company profile Bona Film Group Ltd is the largest and most successful distributor of domestic films among all privately-owned film distributors in China in terms of number of films distributed and total box office receipts in 2009. The company was founded in November 2003 by Dong Yu.

The company accounted for 44.1% of the total box office receipts for 20 highest grossing domestic films in China. It has total experience of distribution of 136 films (including 29 films internationally) since its inception. It generally distributes between 16 and 20 films theatrically each year.

Bona Film also invests in film production projects to augment the supply of desirable film projects that it distributes. The company has expanded into non-theatrical distribution channels, including home video products, digital distribution and television. The company currently owns and operates six movie theaters in commercial districts and residential areas in several major cities in China. It also leverages its films and movie theater operations to attract advertising customers.

The company generated a net revenue of US$22.4 million, US$23.4 million and US$38.4 million in 2007, 2008 and 2009, respectively, representing a CAGR of 30.9%.

Key competitors for the company are Huayi Brothers, and government-backed China Films Group.

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Valuation and share price analysis Comparables’ valuation analysis Bona Film is the leading private film distributor in China. The company also earns part of its revenue from film production and theatres. The company has created strong entry barriers in the film distribution business given its strong track record, and good working relationship with upstream and downstream of the film entertainment value chain in China.

A comparison with US film studios In terms of business model risks of movie distribution and production, Bona Film shares risks similar to US film studios such as Dreamworks Animation and Lions Gate Entertainment. While Lions Gate’s earnings are currently negative, Dreamworks Animation trades at 14x 2011E and 12x 2012E (Bloomberg consensus estimates) non-GAAP earnings.

However, we believe these companies do not capture the strong growth opportunities provided by the Chinese film entertainment market. Bona Film’s EPS is expected to grow at a CAGR of 38% in 2010-2012E period vs. Dreamworks is expected to grow at a CAGR of 15% in the same period, according to consensus estimates.

A comparison with diversified media companies US diversified media companies such as Time Warner, Disney, and Viacom are trading at a median price to earnings ratio of 13.6x for 2011E and 12.0x for 2012E (Bloomberg consensus estimates). All these companies are expected to have a 2010E-2012E consensus EPS CAGR of 13%-15%.

Again, we believe these companies do not capture the strong growth opportunity provided by the Chinese movie industry.

A comparison with traditional consumer discretionary We believe this set of comparables is most relevant for Bona Film’s business. We believe both traditional consumer discretionary and movie business enjoy a strong secular consumer spending growth story, life style upgrade and growing trend in “mall-going” behaviors.

While these companies don’t capture the inherent risks in the film business (such as unsuccessful movie projects), their consensus earnings growth estimate for 2012 (median growth of 22%) is lower than the estimate for Bona Film for the same period. In addition, we believe Bona Film’s good portfolio management approach would lower risks for the business. Traditional consumer discretionary companies are trading at a consensus median P/E of 23.7x 2011E and 19.7x 2012E earnings. We expect Bona Film to trade in line with this group.

A comparison with China new lifestyle leaders China new lifestyle leaders companies are market leaders among new China economy growth stocks. Given Bona Film’s leading position in private film distribution in China, we believe this group is also a relevant comparable for Bona Films. The group trades at 28.6x 2011E and 22.4x 2012E consensus non-GAAP earnings.

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We initiate with an Overweight rating and Dec-11 PT of US$8.5 Our price target of US$8.5 is based on 20.4x 2012E non-GAAP earnings, in line with China consumer discretionary comparables. Our price target also implies 25x 2011E non-GAAP earnings. We expect 2010E-2012E EPS CAGR of 38% for Bona Film, which is comparable with China new lifestyle leaders. This is at a slight discount to China new lifestyle leaders given the slightly more risky profile of the film entertainment business.

Key risks to our price target are potential unsuccessful movie production/distribution that could lead to lower earnings, larger-than-expected investment in movie theatres, delayed key movie launches and regulatory changes.

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Table 1: Comparative valuation Ticker Price M-cap EV EPS (LC) P/E EV/EBITDA ROE (%) Sales (US$MM)

(Local) (US$MM) (US$MM) 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E Studio Dreamworks Animation DWA US 28.8 2,423 2,519 1.76 2.00 2.37 16.4 14.4 12.2 10.9 9.5 8.6 13% 13% 13% 809 854 994 Lions Gate Entertainment LGF US 6.7 915 1,445 -0.20 -0.68 0.12 -33.8 -9.8 57.8 17.3 28.1 13.8 78% -75% -77% 1,589 1,629 1,683 Median 0.78 0.66 1.24 NA 2.3 35.0 14.1 18.8 11.2 45.1% -31.5% -31.9% 1,199 1,241 1,338 Diversified Media Time Warner TWX US 33.1 36,751 46,697 2.34 2.63 2.97 14.1 12.6 11.2 7.4 6.9 6.5 9% 9% 8% 26,570 27,885 28,943 Disney DIS US 39.3 74,399 74,727 2.09 2.45 2.82 18.8 16.0 14.0 8.5 7.5 6.9 12% 12% 13% 38,342 40,711 43,075 Viacom VIA US 47.9 25,579 28,044 2.87 3.31 3.76 16.7 14.5 12.7 7.8 7.1 6.6 19% 20% 23% 13,448 14,103 14,671 Median 2.22 2.54 2.89 16.7 14.5 12.7 7.8 7.1 6.6 12% 12% 13% 26,570 27,885 28,943 Cinema Regal Entertainment Group RGC US 12.7 1,964 3,892 0.50 0.69 0.78 25.5 18.4 16.3 16.8 14.8 7.1 -27% -52% -148% 2,858 2,996 3,094 Cinemark Holdings Inc. CNK US 17.8 2,018 3,080 1.19 1.37 1.61 15.0 13.0 11.1 6.7 6.0 10.5 14% 15% 15% 2,140 2,300 2,419 Carmike Cinemas Inc. CKEC US 7.7 99 462 -0.53 0.38 0.62 NM 20.4 12.5 7.1 6.0 5.8 -32% 19% 34% 506 531 551 Median 0.50 0.69 0.78 20.2 18.4 12.5 7.1 6.0 7.1 -27% 15% 15% 2,140 2,300 2,419 Traditional Consumer Discretionary Belle Intl 1880 HK 14.0 15,160 11,175 0.47 0.59 0.71 29.5 23.9 19.7 16.1 12.9 10.7 21% 22% 23% 3,657 4,421 5,182 Golden Eagle 3308 HK 22.6 5,246 3,911 0.59 0.77 0.99 38.2 29.2 22.7 18.6 14.2 11.1 29% 33% 35% 372 495 637 Parkson 3368 HK 12.9 4,647 4,822 0.45 0.55 0.68 28.6 23.3 19.0 18.2 15.0 12.8 25% 27% 28% 656 790 926 Lifestyle 1212 HK 20.0 4,318 3,349 0.73 0.84 0.93 27.3 23.7 21.5 15.2 13.2 11.5 18% 19% 18% 563 630 698 New World Departmental Store 825 HK 6.6 1,409 1,076 0.34 0.41 0.47 19.8 16.4 14.1 9.3 7.6 6.3 13% 14% 15% 258 334 401 Trinity 891 HK 7.5 1,554 1,074 0.20 0.27 0.36 36.9 27.4 21.0 17.8 12.9 10.1 15% 19% 21% 260 321 381 Ports Design 589 HK 21.6 1,559 1,339 1.04 1.23 1.50 20.6 17.5 14.3 14.1 11.6 9.4 34% 35% 36% 261 307 366 Median 0.47 0.59 0.71 28.6 23.7 19.7 16.1 12.9 10.7 21% 22% 23% 372 495 637 China New Lifestyle Leaders Ctrip CTRP US 42.1 6,223 6,419 1.22 1.51 1.95 34.6 27.8 21.6 77.1 124.8 61.1 26% 24% 24% 432 573 755 New Oriental EDU US 107.7 4,058 3,455 2.28 2.49 3.33 47.3 43.3 32.4 41.5 67.2 32.9 20% 19% 21% 376 512 660 Home Inn HMIN US 37.4 1,500 1,869 1.50 1.56 2.19 24.9 23.9 17.1 22.4 36.4 17.8 17% 15% 17% 452 542 656 Tencent 700 HK 201.0 47,557 29,033 5.25 7.02 8.97 38.3 28.6 22.4 17.6 13.4 10.5 49% 43% 38% 2,944 3,918 5,059 Country Style Cooking CCSC US 23.1 579 649 0.47 0.57 0.84 49.7 40.7 27.6 7.8 12.6 6.2 14% na na 112 174 255 Median 1.50 1.56 2.19 38.3 28.6 22.4 22.4 36.4 17.8 20% 21% 23% 432 542 660 China Film Industry Players Huayi Brothers 300027 CH 27.6 1,333 1,208 0.49 0.69 0.98 56.7 40.3 28.2 na na na 11% 13% 13% 154 207 288 Bona Film BONA US 6.11 360 359 0.22 0.34 0.41 27.9 18.1 15.0 24.4 9.7 7.4 -6% 11% 12% 56 160 210

Source: Bloomberg estimates (for NR/non-China companies), J.P. Morgan estimates (for rated China names). *Note: Prices and valuations are as of January 14, 2011.

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Investment thesis China entertainment consumption to rise Rising disposable income growth in China is bound to expand entertainment spending in China. As more and more people become affluent and the disposable income rises beyond a minimum sustenance level, their income allocation to discretionary spending such as travel, going to movies, luxury goods, and gaming would increase. As per EntGroup data, the annual disposable income per capita has grown at a CAGR of 32.2% from 2005-2009. The percentage spending on entertainment has also risen from 5% of total disposable income to 9% of total disposable income.

Figure 4: The annual disposable income has grown at a CAGR of 32.2% for 2005-2009

1,543 1,775 2,0272,321 2,632

5% 6%8% 9%

7%

0

1,000

2,000

3,000

2005 2006 2007 2008 2009

0%

5%

10%

15%

Annual disposable income per capita (US$), LHS

% of disposable income spent on entertainment, RHS

Source: EntGroup (2009).

Movie penetration per capita still low Currently, China lags other developed countries such as Japan, Korea, and Japan. Box office per capita in China is just US$2 vs. US$32 for the US and US$18 for Korea.

This trend is also due to the low number of screens per million population (eight in China vs. 130 in the US). A low movie penetration per capita presents a long-term sustainable growth opportunity, in our view.

Figure 5: International benchmarking

2 217 18

323 12 3 7

218 1327

41

130

0

50

100

150

China India Japan Korea US

Box office per capita (US$) No. of mov ie theater per million of pop'n

No. of screens per million of population


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Figure 6: Growth in screens—2008-2012E CAGR of 12.3%

130 700 1,200 1,700 2,2003,967

4,0234,112

4,2254,322

01,0002,0003,0004,0005,0006,0007,000

2008 2009 2010E 2011E 2012E

3D screens Other screens

Source: EntGroup.

Figure 7: Number of movie theatres—2008-2012E CAGR of 11.6%

1,545 1,687 1,8702,100

2,400

0500

1,0001,5002,0002,5003,000

2008 2009 2010E 2011E 2012E

Movie theaters

Source: EntGroup.

Booming box office Increasing entertainment spending coupled with rising number of screens and number of domestic movies produced should drive strong growth for China box office. As per EntGroup forecasts, China box office will grow at 2008-2012 CAGR of 48.4%. The strong growth will be supported by increasing quality as well as quantity of Chinese movies, increasing number of theatres, and a lower penetration of movies, according to EntGroup.

Figure 8: Box office in China to grow at a CAGR of 48.4% for 2008-2012E

600900

1,500

2,200

3,100

0500

1,0001,5002,0002,5003,0003,500

2008 2009 2010E 2011E 2012E

Box office (US$M)

Source: EntGroup.

Ticket price to remain stable We believe a major driver for the movie market is tickets sold when the average selling price for tickets is stable. While there are upside drivers for ticket prices such as 3D movies, and frequent sold-outs at large movies, we believe fast movie theatre expansion to lower tier cities will make ticket prices stable.

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Figure 9: Ticket price—2008-2012E CAGR of 7.8%

3.74.5

5.1 4.8 5.0

01

234

56

2008 2009 2010E 2011E 2012E

Ticket Price (US$)

Source: EntGroup.

Figure 10: Admissions—2008-2012E CAGR of 37.6%

174 201298

454

624

0100200300400500600700

2008 2009 2010E 2011E 2012E

Admissions (M)

Source: EntGroup.

Table 2: China box office

2005 2006 2007 2008 2009 2010E 2011E 2012E China box office (Rmb billions) 2.1 2.6 3.3 4.3 6.2 10.3 14.9 21 Admission (MM) 73 89 130 170 200 258 330 430 Per capita admission 0.13 0.15 0.22 0.28 0.32 0.4 0.51 0.64 Average ticket price (Rmb) 30 21.2* 24.4 27.6 31 31.9 32.8 33.7 Number of urban movie theaters 1,243 1,326 1,427 1,545 1,687 1,870 2,100 2,400 Source: EntGroup.

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A vertically integrated business model The company has gained experience and know-how and expanded its business both upstream, in film production, and downstream, in film exhibition, as well as into complementary areas such as talent agency services that have enhanced its core film distribution business.

Its expertise and participation throughout the film industry value chain provides it a competitive advantage in identifying and gaining access to promising films while enabling it to attract desirable projects through its reputation and established industry presence.

By extending the film distribution business into film production upstream and film exhibition downstream, we believe the company has a stronger capability to provide a premium movie-going experience for the Chinese audience and increase the desire for Chinese-oriented content.

In addition, the company uses its films and movie theater operations to attract advertising customers.

Production and investment Through its experience in the movie industry, the company seeks movie projects that can generate best returns. It can secure distribution rights in high potential movies through investing or participating in film production.

Distribution The company uses its distribution experience to decide the best time schedule to produce films, ensuring quality films are released in every peak season.

Additionally, distribution experience also enables the company to discern Chinese audiences’ taste and selectively invest in film production, thus reducing investment risk.

Film exhibition The film exhibition business strengthens the distribution business by giving it significant bargaining power with theatre circuits. Theatre circuits form an important part of the film value chain between film distribution and film exhibition.

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Figure 11: Presence across the film value chain

Film Producers

Domestic FilmDistributors

Theater Circuits

Movie Theaters

Audience

Talent Agencies

Advertising

Other Professional Parties

Non-TheatricalChannels

International FilmDistributors

Foreign TheatricalDistributors / Cable Television / Others

Filmmaking

Film promotion & distribution

Films Distribution

Control over theater’s content access

Film exhibition

Proceeds Film Content

Proceeds

Proceeds

Proceeds

Proceeds

Films

Film Prints

Film Prints

Exhibition

ProceedsLicense

Rights

Proce

eds

Film C

onten

t

Grey Boxes show PolyBona’s presence

Film Producers

Domestic FilmDistributors

Theater Circuits

Movie Theaters

Audience

Talent Agencies

Advertising

Other Professional Parties

Non-TheatricalChannels

International FilmDistributors

Foreign TheatricalDistributors / Cable Television / Others

Filmmaking

Film promotion & distribution

Films Distribution

Control over theater’s content access

Film exhibition

Proceeds Film Content

Proceeds

Proceeds

Proceeds

Proceeds

Films

Film Prints

Film Prints

Exhibition

ProceedsLicense

Rights

Proce

eds

Film C

onten

t

Grey Boxes show PolyBona’s presence

Source: Company, J.P. Morgan.

Table 3: Box office split on an average Producers Distributors Thater Circuits Movie Theatres

Domestic films 38-43% 4-6% 5-7% 50-52%Imported buy-off films * 43% 5% 52%Imported box office sharing films 15-21% 22-28% 5-7% 50-52%


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Figure 12: Synergetic business lines


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A leading film distributor in China Bona Film has emerged as the largest private film distributor in China. The company’s market share in the distribution business is only behind China Film Group, a government-owned player.

Figure 13: Film distribution marketshare in China (2009)

CFG32%

Bona17%Huay i Brothers

13%

Others25%

SFG5%

Huax ia Film Distribution

8%


The company maintains a healthy relationship with most of the theatre circuits in China. The company distributed 19, 16 and 14 domestic films (including Hong Kong films) in 2007, 2008 and 2009, respectively.

Bona Film also has been a pioneer in the distribution of films internationally. It distributes domestic movies primarily in regions with large Chinese-speaking populations, such as Hong Kong, Singapore, Macau, and Taiwan as well as in other Asian countries such as Korea and Japan. The company has experience in distributing 25 Chinese films (and four foreign films) internationally since 2008.

Bona Film is also the largest private distributor in China in terms of number of movies as well as revenue market share. The company distributed 14 domestic movies in 2009 vs. seven for its nearest competitors.

Table 4: Market share of major distributors and number of domestic films distributed per year 2007 2008 2009

Market share by gross box office receipts of domestic films distributed

China Film Group Corporation (state owned) 30.8% 28.5% 31.7% Bona Film Group Limited 16.5% 17.1% 17.3% Huayi Brothers 6.4% 19.4% 13.2% Huaxia Film Distribution Co., Ltd. (State Owned) 4.4% 0.9% 7.5% Shanghai East Film and TV Distribution Co. (State Owned) 1.1% 12.4% 4.5% Number of domestic films distributed

China Film Group Corporation (State Owned) 16 18 19 Huaxia Film Distribution Co., Ltd. (State Owned) 9 11 13 Bona Film Group Limited 14 14 14 Huayi Brothers 3 3 4 Shanghai East Film and TV Distribution Co. (State Owned) 6 6 7 Source: Company.

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Figure 14: Number of domestic films distributed by privately-owned distributors

14

7

42

0

4

8

12

16

Poly bona Enlight Pictures Huay i Orange Sky

Source: EntGroup, 2009. Note: State-owned enterprises China Film Group and Huaxia distributed 19 and 13 films, respectively.

The company had a steady track record of distribution by distributing 16 or more movies over the past three years. We believe it will be able to maintain its strength in distribution given its relationship and ability to secure distribution rights.

Figure 15: Steady distribution track record

17

21

12

20

16 16

2004 2005 2006 2007 2008 2009

# of Bona's dis tributed film s

Source: Company. Data include both domestic and international movies distributed.

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Strengths in distribution capabilities Bona Film has successfully maintained a steady share of above 40% in top 20 films box office receipts in China for the past three years (FY07-FY09).

Figure 16: Consistent share of top 20 films box office receipts 44.1%

40.0%44.1%

0%

10%

20%

30%

40%

50%

2007 2008 2009

% of Box Office Receipts among Top 20 Highest Grossing Domestic Films


Table 5: Top 20 box office films in China

TitleGross Box Office (RMB M)



2007 Top 20 Domestic Films 2008 Top 20 Domestic Films 2009 Top 20 Domestic FilmsThe Warlords (投名状) 170 Red Cliff I (赤壁（上）) 322 The Founding of A Republic (建国大业) 420Assembly (集结号) 144 Painted Skin (画皮) 232 Red Cliff II (赤壁（下）) 260Lust, Caution (色戒) 138 If You Are The One (非诚勿扰) 216 A Simple Noodel Story (三枪拍案惊奇) 235Protege (门徒) 65 CJ7 (长江7号) 203 The Message (风声) 225Secret (不能说的秘密) 37 The Forbidden Kingdom (功夫之王) 188 Bodyguards and Assassins (十月围城) 220Flash Point (导火线) 35 Kung Fu Dunk (大灌篮) 113 City of Life and Death / Nanking Nanking (南京！南京！) 172Crossed Lines (命运呼叫转移) 34 Forever Enthralled (梅兰芳) 110 Look For A Star (游龙戏风) 113Invisible Target (男儿本色) 34 The Mummy: Tomb of the Dragon Emperor (木乃伊3) 109 If You Are The One (非诚勿扰) 110Blood Brothers (天堂) 32 Ip Man (叶问) 75 Crazy Racer (疯狂的赛车) 110Brothers (兄弟联盟) 32 Three Kingdoms: Resurrection of the Dragon (见龙卸甲) 72 On His Majesty's Secrect Service (大内密探灵灵狗) 103The Iron Triangle (铁三角) 28 Almost Perfect (十全十美) 53 Sophie's Revenge (非常完美) 100The Secrect of the Magic Gourd (宝葫芦的秘密) 22 Connected (保持通话) 45 Pleasant Goat And Big Big Wolf (喜羊羊与灰太狼之牛气 100Gongbu (公仆) 20 An Empress and the Warriors (江山美人) 43 Mulan (花木兰) 90The Sun Also Rises (太阳照常升起) 17 Fit Lover (爱情呼叫转移2：爱情左右) 35 The Treasure Hunter (刺陵) 63Invisible Wings (隐形翅膀) 16 Desires of the Heart (桃花运) 31 Metallic Attraction: Kungfu Cyborg (机器侠) 52Getting Home (落叶归根) 15 Storm Rider: Clash of Evils (风云决) 30 Gasp (气喘吁吁) 41Contract Lover (合约情人) 15 The Warlords (投名状) 25 Iron Man (铁人) 30Call for Love (爱情呼叫转移) 13 Missing (迷失) 22 Examination 1977 (高考1977) 30The Matrimony (心中有鬼) 12 All About Women (女人不坏) 22 Ashes of Time Redux (东邪西毒：终极版) 27Love to be Found in Newhere (苹果) 11 Super Typhoon (超级台风) 16 Empire of Silver (白银帝国) 23 Source: EntGroup, J.P. Morgan.

The decision to acquire the distribution rights was made collectively by its senior management, supported by the analysis on a variety of factors that typically include a film’s expected critical reception, marketability, and potential for box office success, as well as the cost to acquire a film, the estimated distribution and marketing expenses required to bring a film to its widest possible target audience and ancillary market potential post theatrical release.

Some of the features of the company’s distribution model are:

Influential film sourcing As the number of movies distributed is restricted by the number of weekends, Bona Film focuses on distributing highly promising movies to ensure success. The company focuses on obtaining distribution rights for high quality names through

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management relationships and contacts, involvement in film production, and strengths in distribution capabilities. Its vertically integrated business model further enhances bargaining power with producers as well as theatre circuits.

Low-risk revenue model Given the inherent risks in the film distribution model, the company executes most of the distribution contracts after a film’s post-production. This helps the company better evaluate the market potential of a film beforehand. Additionally, this also reduces the risk related to delays in the completion of a film. The company also optimizes the distribution arrangements in terms of revenue split and co-distribution with other distributors to distribute the risk among various stakeholders.

Being a leading player with strong distribution networks helps the company to better negotiate distribution contracts to effectively manage its risks. The company enters into distribution contracts before film pre-production only in the case of big-budget movies or movies in which high profile artists are involved.

The company gets into distribution agreements with theatre circuits on a film-by-film basis that specify the exhibition period and percentage of box office receipts to theatre circuits. The company also coordinates efforts amongst distributors to avoid clash of big titles.

An effective distribution channel Domestic distribution It selectively enters into a range of joint distribution arrangements that increase its access to additional high quality films and enhance distribution opportunities. It collaborates with China Film Group Corporation, the largest state-owned film enterprise in China.

International distribution Its management team comprises pioneers in the international distribution of films produced in China. It has leveraged this advantage in international distribution to cultivate strategic alliances with distributors for foreign markets, including the CJ Group for Korea and Japan and Celestial Movies Asia for Southeast Asia.

Non-theatrical distribution channels The company takes advantage of a range of other distribution channels in China and internationally, e.g. DVD, home video products, internet and television. This allows the company to enhance monetization opportunities for its films, broaden its reach and maximize the commercial life of its film distribution rights and copyrights.

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Production business synergetic to distribution business Due to the long experience of the company in the core distribution business, the company expanded into new complementary business areas such as film production, film exhibition such as theatres, and talent agency services. The company has invested in a total of 26 films from 2007 to September 30, 2010, which provide it distribution rights for high quality film projects.

We believe production business helps the company to:

(1) use the solid knowledge about the best film schedule to produce films, thus ensuring quality films to be released in every peak season.

(2) leverage the distribution experience to discern Chinese audiences’ taste and selectively invest in film production, thus reducing investment risk.

(3) build up a film library to obtain sustainable revenue from the exploitation of copyright value.

(4) rely on the fast growing China market to exploit the opportunity of international co-investment and co-production, becoming the bridge to connect Chinese films with Hollywood.

(5) manage risk by imposing limits—film invested in an appropriate percentage of films distributed, limiting the percentage of investment to not more than 50% of total estimated production budget.

Film participation Bona Film has a “portfolio” approach to film production, which means diversifying film investment across genres and reducing risks through “film participation”. The company diversifies its capital-at-risk in film investment by syndicating film investment to other investors while trying to keep its stake to not more than 50% of the total investment amount.

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Film theatre and talent agency business The company also expanded to the film theatre and talent agency business to leverage its reputation both as a producer and distributor.

The theatre business provides its distribution business strong negotiating power with theatre circuits. It assists companies in securing preferred scheduling rights, a more favorable revenue split, and prompt and accurate payments by theater circuits.

Table 6: List of company’s movie theatres

Located in central northern commercial district with daily pedestrian traffic of over 500,000.

1,3559Shenzhen, Guangdong Province

Maoye Bona Cineplex

Located in large urban area otherwise underserved by theater facilities; total urban population of 2.3 million with over 400,000 neighborhood residents.

1,1337Shijiazhuang, HebeiProvince

Bona Cineplex

Located in rapidly developing commercial district; local population of over one million residents.

7675ShanghaiPearl Bona Cineplex

Located in central Chaoyang commercial district nearby numerous major international and domestic businesses and major office buildings; one of the major meeting places for businesspeople and professionals.

1,1617BeijingBona Youtang International Cineplex

Located in university district with over 40 colleges and universities; covers areas with population of approximately 500,000.

1,9329Xi’an, ShaanxiProvince

Bona Xintiandi International Cineplex

Located in second largest shopping mall in Xi’an near numerous major corporate offices; covers neighborhood with population of approximately 500,000.


Poly Wanhe Red Sparrow International Cineplex

Location DetailsTotal Seating Capacity

ScreensCity / DistrictMovie Theater

Company’s movie theaters as of June 30, 2010

Located in central northern commercial district with daily pedestrian traffic of over 500,000.

1,3559Shenzhen, Guangdong Province

Maoye Bona Cineplex

Located in large urban area otherwise underserved by theater facilities; total urban population of 2.3 million with over 400,000 neighborhood residents.

1,1337Shijiazhuang, HebeiProvince

Bona Cineplex

Located in rapidly developing commercial district; local population of over one million residents.

7675ShanghaiPearl Bona Cineplex

Located in central Chaoyang commercial district nearby numerous major international and domestic businesses and major office buildings; one of the major meeting places for businesspeople and professionals.

1,1617BeijingBona Youtang International Cineplex

Located in university district with over 40 colleges and universities; covers areas with population of approximately 500,000.


Bona Xintiandi International Cineplex

Located in second largest shopping mall in Xi’an near numerous major corporate offices; covers neighborhood with population of approximately 500,000.


Poly Wanhe Red Sparrow International Cineplex

Location DetailsTotal Seating Capacity

ScreensCity / DistrictMovie Theater

Company’s movie theaters as of June 30, 2010


The company intends to acquire more movie theatres to capture additional revenue in the film value chain and further strengthen its relationship with movie theater circuits.

Talent agency Talent agency business helps it secure key talent for its production movies. Additionally, it helps in obtaining desirable films for distribution, additional insights into film projects and other source/contacts for promising film opportunities. The company represented 22 artists at the end of 3Q10.

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Opportunities in non-theatrical distribution Bona Film has also expanded into non-theatrical distribution channels, including home video products, digital distribution and television. While till now such intellectual properties (IP) have been badly affected by rampant piracy in China. However, with government taking strict actions to protect IP, we expect the situation to improve. We expect the company to increase the number of cinemas owned steadily to high single digits over the next three-five years through acquisitions.

The company has developed relationships with many leading players in the distribution business to maximize the value of its intellectual properties.

Table 7: Key tie-ups with leading players in other non-theatrical businesses

Non theatrical format Partner DVD, blue-ray, and other home video products DVD and blu-ray format through Warner Bailu, Zoke Culture, Guangdong Yingyi, Guang dong Dejin Internet Sohu, Sina, SMG IPTV, LeTV, Tudou, Youku, Qiyi TV channel CCTV-6, SMG, Celestial, Star TV, HK Cable TV, MATV, EBC Mobile/Airline Fone 100TV hina Airline, Dragonair, Cathy Pacific, Southern Airline, Eastern Airline, EVA Airways Advertising Filmore Med , Focus Media, AirMedia Source: Company, J.P. Morgan.

Figure 17

0

10

20

30

40

50

Source: EntG

.

, Cia

: China copyright revenue marketsize (US$ MM)

1316

25

35

46

2008 2009 2010 2011 2012

roup.

2008-2012 CAGR of 36.2% 2008-2012 CAGR of 36.2%

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Quality and influential management We believe the Bona Film management is well placed to source distribution rights and other film investment projects. The company’s strong management team includes leaders of modern Chinese film industry, including Mr. Dong Yu, Mr. Jeffrey Chan and Ms. Nansun Shi .

The company founder Dong Yu has over 15 years of experience in film distribution. He was rated as “The Most Influential Asian Film Producer” by Hollywood Reporter in November 2006 and ‘‘Outstanding Figure of the Year in Chinese Creative Enterprises’’ by Chinese Creative Enterprises in 2008. Mr. Yu is also on the managing committee of various film associations in China.

Nansun Shi, a director of the company, is a Hong Kong film producer, presenter and a former senior advisor for Media Asia Group with over 30 years of experience in the film industry. She has extensive knowledge and insights into key players in the international film industry.

Mr. Jeffrey Chan, director and chief operating officer of the company, has over 20 years of experience in the film distribution and entertainment industry. He has also been actively involved in the development of Hollywood adaptations of Chinese movies such as The Departed and Confession of Pain.

Mr. Hao Zhang, the general manager of domestic distribution business, has over 20 years of experience in film distribution and movie theater operations, primarily at the Xi’an Film Corporation and Xi’an Chang’an Cinema Chain. Mr. Liang Xu, CFO of the company, previously served as chief financial officer of China Digital TV Holding Co., Ltd., a leading vendor in China’s digital television market, as well as having held various management roles in private equity investment, financial analysis and marketing. He has a bachelor degree from Tsinghua University and an MBA degree from Harvard Business School.

In addition, it has assembled professional teams with expertise at each point along the film industry value chain, from talent sourcing to production to distribution and exhibition.

The strength of the company’s management team and potential of its business model are further evidenced by the international private equity investments it has attracted, with major investors including SIG China Investment One, Ltd., the Sequoia Funds and Matrix Partners China Funds.

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Financial statement analysis Solid growth ahead 2009-2012E revenue CAGR of 75% We expect Bona Film’s revenues to grow at a CAGR of 75% from US$38.4 million in 2009 to US$209.6 million in 2012E. We believe this revenue growth will be supported by higher revenue recognition due to the increase in the number of movies, where the company is a leading producer (please see below for accounting differences). The company would also benefit from additional revenues from diversified streams, such as production and cinema theatres.

Figure 18: Expect 2009-2012E revenue CAGR of 75%

38.4 50.3

159.7

209.6

0.0

50.0

100.0

150.0

200.0

250.0

2009 2010E 2011E 2012E

Source: Company, J.P. Morgan estimates.

We expect its non-GAAP net profit to grow at a CAGR of 66.8% during 2009-2012E.

Figure 19: Expect 2009-2012E Net Profit CAGR of 67%

5.6

10.5

21.2

25.8

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2009 2010E 2011E 2012E

Source: Company, J.P. Morgan estimates.

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Table 8: Revenue breakdown (US$ ‘000)

2007A 2008A 2009A 2010E 2011E 2012E Distribution revenue 21,129 20,275 35,331 35,132 132,838 173,265 Film investment and production

external 1,269 2,890 2,038 2,044 1,244 3,961 internal (eliminated) 4,239 6,390 14,064 15,935 54,919 69,530

Film related revenue (distribution + external production revenues) 22,398 23,165 37,370 37,176 134,082 177,226 Cinema revenue 11,191 25,048 31,497 Talent agency services revenue - 232 1,003 1,967 847 847 Total Revenues 22,398 23,396 38,373 50,334 159,977 209,570 Source: Company, J.P. Morgan estimates. Internal Film investment and production revenues are eliminated from the total film related revenues due to double accounting in both distribution and production revenues.

Segment revenues Film distribution Bona Film’s film distribution segment generates revenues from external customers. Its revenues comprise its share of the box-office receipts for its distribution services and, to the extent it has distribution rights outside the PRC, the revenues it derives from those arrangements and advertising revenues.

Film investment and production Its film investment and production segment generates revenues both from external customers and, through inter-segment transactions, from its own distribution entities.

The segment generates revenues from external customers, where it has invested in a film but does not act as the principal distributor, and also through inter-segment transactions, where it has invested in a film and does act as the principal distributor.

Talent agency The talent agency segment generates revenues only from external customers for its talent agency services.

Cinema The cinema segment generates revenues both from external customers and, through inter-segment transactions, from the exhibition of films distributed by its own distribution entities. The segment generates revenues mainly from external customers for the film exhibition services and also through inter-segment transactions from the exhibition of films distributed by its own distribution entities.

Segment cost of revenue Film distribution The cost of revenues for its film distribution segment include:

• amortization of the cost of acquiring distribution rights and participation rights, where the company cooperates with other distributors to distribute films as a participating distributor but is not the primary obligor

• the amount the company remits to participating distributors when it is the principal but not sole distributor

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• the amount that the company remits to film producers when they are entitled to share the box-office sales with the company based on the distribution arrangement where it produces the film. This amount includes any amount paid by its film distribution operations to its film investment and production operations

• costs incurred in providing film-related advertising services.

Film investment and production The cost of revenues for its film investment and production segment includes the amortization of production costs for films.

Talent agency The cost of revenues for its talent agency segment primarily consists of compensation paid to artists.

Cinema The cost of revenues for its cinema segment primarily consists of government tax and surcharge, box-office sharing with theater chains and film distributors.

Table 9: Segment gross profit and gross margin trend (US$ ‘000)

2007A 2008A 2009A 2010E 2011E 2012E Distribution Gross Profit 7,760 7,355 13,406 12,139 38,298 57,079 Gross Margin 36.7% 36.3% 37.9% 34.6% 28.8% 32.9% Film investment and production Gross Profit 1,722 3,335 3,512 4,696 7,384 6,944 Gross Margin 31.3% 35.9% 21.8% 26.1% 13.1% 9.4% Cinema Gross Profit 5,769 12,528 15,587 Gross Margin 51.6% 50.0% 49.5% Talent agency Gross Profit - (0) 322 861 847 847 Gross Margin 9.5 10.7 18.5 24.3 61.2 83.2 Overall Gross Margins 42.3% 45.7% 48.2% 48.3% 38.3% 39.7% Source: Company, J.P. Morgan estimates.

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Balance sheet Cash balance Bona Film had cash of US$12.1million before IPO (end-3Q10). The company raised ~US$100 million from the IPO and reached US$124 million in cash at the end of 4Q10.

The company plans to use more than half of its IPO cash to purchase cinema theatres in China. We believe it will significantly expand the number of theatres over next three years.

Some part of the cash would also be utilized for film investment and production business. For financing of feature film production projects, the company intends to use its own cash for half of the requirement, and the rest from debt and film financing in equal amounts (so a film investment of US$100 would mean US$50 of cash from the company, US$25 from film participation by third party, and US$25$ from debt).

Debt The company had a total debt of US$24.3 million before the IPO, and most of the debt was taken to finance film production.

Film participation liabilities Apart from bank debt, the company invites third-party investors to invest in the film produced by itself and in return offers a fixed percentage of the film’s worldwide revenue, or a fixed percentage of the film’s worldwide revenue with a guarantee of minimum rate of return on the principal; the cash received from these investors is accounted for as film participation liabilities.

The company had film participation liabilities of US$10.7 million at the end of 3Q10.

Working capital Changes in working capital from 2010 to 2012 are due to the big jump in revenues. We expect payables to increase at a faster rate than receivables, generating some cashflow from working capital for 2010 and 2011, as the company expands its film investment and production business (as per company guidance). In 2012, we expect limited expansion in payables, and hence the working capital would generate a negative cashflow due to higher receivables.

Cash flow Film investments We believe that with better financial resources post-IPO, the company would increase its film investments. We expect total film investments by Bona Film to be US$47 million in 2011. The company usually invests half of the project value by itself. The rest is financed through debt and film participation by third-party investors in equal amounts. We categorize this as capital expenditure in our model.

Depreciation and amortization We expect amortization expenses related to production costs (the company books total investments for films-under-progress as production costs) would increase in

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2011 to US$44 million vs. US$7 million in 2010. This is largely due to increased investments in film production.

Operating cash flow We expect the company to report a positive operating cash flow of US$80 million in 2011, likely helped by stronger cash revenues.

Free cash flows Better operating cashflow and controlled investments in films should help the company to turn free cash flow positive. We expect a free cash flow of US$32 million for 2011.

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Table 10: Bona Film—Income statement US$ in millions, year-end December

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10E 1Q11E 2Q11E 3Q11E 4Q11E FY09 FY10E FY11E FY12E Total Revenue 3.8 3.0 8.6 22.9 7.8 6.7 20.5 15.3 32.2 32.6 29.9 65.1 38.4 50.3 159.7 209.6 Distribution Revenues 8.8 8.8 8.8 8.8 5.2 5.2 14.4 10.4 24.5 27.7 22.3 58.1 35.3 35.1 132.6 173.3 Production Revenues 4.0 4.0 4.0 4.0 1.7 1.7 8.9 5.7 8.1 8.8 11.6 27.6 16.1 18.0 56.2 73.6 Intersegment Elimination -3.5 -3.5 -3.5 -3.5 -1.1 -1.1 -8.0 -5.7 -7.4 -8.8 -11.2 -27.6 -14.1 -15.9 -54.9 -69.6 Cinema Revenues 0.0 0.0 0.0 0.0 1.0 1.0 4.3 4.8 6.7 4.7 6.8 6.8 0.0 11.2 25.0 31.5 Talent Agency Revenues 0.3 0.3 0.3 0.3 0.5 0.5 0.8 0.2 0.2 0.2 0.2 0.2 1.0 2.0 0.8 0.9 COGS 2.7 1.6 3.6 12.0 4.1 3.4 9.8 8.7 20.1 21.0 16.3 41.2 19.9 26.0 98.5 126.4 Distribution COGS 5.5 5.5 5.5 5.5 2.9 2.9 9.1 8.2 15.0 19.5 15.8 44.1 21.9 23.0 94.5 116.2 Film investment and production COGS 2.8 2.8 2.8 2.8 1.2 1.2 6.3 3.2 9.0 7.7 8.1 21.0 11.3 11.9 45.8 62.8 Intersegment Elimination -3.5 -3.5 -3.5 -3.5 -1.1 -1.1 -8.2 -5.2 -7.4 -8.7 -11.1 -27.5 -14.1 -15.5 -54.7 -68.8 Cinema Costs 0.0 0.0 0.0 0.0 0.5 0.5 2.1 2.4 3.4 2.3 3.4 3.4 0.0 5.4 12.5 15.9 Talent Agency Costs 0.2 0.2 0.2 0.2 0.3 0.3 0.5 0.1 0.1 0.1 0.1 0.1 0.7 1.2 0.3 0.4 Gross Profit 1.1 1.4 5.0 10.9 3.7 3.3 10.7 6.6 12.1 11.7 13.6 23.9 18.5 24.3 61.2 83.2 Operating Expense -1.4 -1.9 -3.5 -6.1 -2.2 -4.2 -5.3 -2.9 -6.1 -12.9 -7.2 -9.5 -12.9 -14.7 -35.7 -49.5 SG&A expenses -1.3 -1.7 -3.2 -5.5 -2.0 -3.8 -5.2 -2.8 -5.4 -12.1 -6.5 -8.8 -11.7 -13.8 -32.8 -45.1

Participation expenses -0.1 -0.2 -0.3 -0.6 -0.2 -0.4 -0.1 -0.1 -0.7 -0.7 -0.7 -0.7 -1.2 -0.9 -3.0 -4.3 Share-based comps expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -0.2 -0.2 -0.2 EBIT -0.3 -0.5 1.5 4.8 1.5 -1.0 5.5 3.7 5.9 -1.2 6.3 14.4 5.6 9.7 25.5 33.7 Adj. EBIT (ex-share-based exp.) -0.3 -0.4 1.6 4.8 1.5 -0.9 5.5 3.8 6.0 -1.2 6.4 14.5 5.7 9.9 25.6 34.0 EBITDA -0.1 -0.2 1.8 5.0 1.7 -0.8 5.7 4.1 6.3 -0.8 6.7 14.9 6.5 10.8 27.1 35.7 Net Interest Income 0.0 0.0 0.0 0.0 -0.1 0.0 0.6 -0.3 -0.1 -0.1 -0.2 -0.2 0.0 0.2 -0.6 -1.6 Net Other Income 0.1 -0.1 0.5 -0.4 -5.4 -7.3 -1.1 0.0 0.0 0.0 0.0 0.0 0.1 -13.8 0.0 0.0 Tax (Expense) / Credit 0.0 0.0 -0.1 -0.3 -0.1 0.1 -0.1 -0.3 -0.9 0.2 -0.9 -2.1 -0.3 -0.4 -3.8 -6.5 Net Profit GAAP (post MI) -0.3 -0.4 1.6 3.4 -4.5 -8.7 4.4 3.1 4.9 -1.1 5.2 12.0 4.2 -5.8 21.0 25.5 Adj. Net Profit (ex warrants, derivatives, and preferred share related expenses -0.2 -0.1 1.6 4.2 1.4 -0.4 6.4 3.1 5.0 -1.1 5.3 12.1 5.6 10.5 21.2 25.8 Diluted EPS (US$) -0.01 -0.01 0.05 0.10 -0.10 -0.19 0.10 0.05 0.08 -0.02 0.08 0.19 0.13 -0.15 0.34 0.41 Adj. Diluted EPS (US$, ex-share-based exp.) 0.00 0.00 0.05 0.12 0.03 -0.01 0.14 0.05 0.08 -0.02 0.09 0.20 0.16 0.22 0.34 0.41 Margins (%) Gross Margin 29.0 47.3 58.6 47.5 47.7 48.8 52.2 48.3 34.5 51.5 46.8 33.7 48.2 48.3 38.3 39.7 Adj. Operating Margin -7.1 -13.8 18.2 21.0 19.7 -14.0 26.9 18.2 12.6 6.5 22.0 17.5 14.8 19.7 16.0 16.2 EBITDA Margin -2.0 -7.4 20.5 21.9 22.1 -11.3 27.9 19.9 13.3 9.2 23.4 18.1 16.9 21.5 17.0 17.0 Net Margin -7.4 -14.5 18.1 14.8 -58.1 -130.6 21.6 14.8 10.5 4.5 18.0 14.5 11.0 -11.5 13.2 12.2 Adj. Net Margin -4.2 -2.3 18.2 18.4 17.9 -6.3 31.3 14.9 10.6 4.8 18.2 14.5 14.5 20.8 13.3 12.3 Sequential growth (%) Revenue -34.7 -20.6 184.2 166.1 -65.9 -14.3 205.9 3.0 154.6 -73.6 101.5 123.8 64.0 31.2 217.4 31.2 Gross Profit -58.5 29.3 252.0 115.9 -65.8 -12.4 227.2 -4.7 81.9 -60.6 82.9 61.1 72.9 31.5 151.8 35.9 EBIT -132.8 48.4 -439.9 211.7 -68.6 -165.2 -659.6 -30.7 77.7 -86.9 610.0 78.2 49.9 75.1 161.7 32.3 Net Profit n.m. n.m. n.m. 118.7 n.m. n.m. n.m. -29.6 81.0 -88.7 709.0 79.2 n.m. n.m. n.m. 21.2 EPS n.m. n.m. n.m. 169.0 -66.9 n.m. n.m. -50.9 80.0 -88.1 667.1 78.6 118.4 88.8 102.3 21.5 Source: Company and J.P. Morgan estimates. *Note: Adjusted earnings exclude share-based compensation expense (non-cash) and one-time items. . No adjustments for amortization expenses.

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Bona Film Group Ltd.: Summary of financials US$ in millions, year-end December Income statement Ratio analysis FY08A FY09A FY10E FY11E FY12E %, year-end December FY08A FY09A FY10E FY11E FY12E Revenues 23.4 38.4 50.3 159.7 209.6 Gross Margin 45.7 48.2 48.3 38.3 39.7 Cost of Goods Sold -12.7 -19.9 -26.0 -98.5 -126.4 EBITDA margin 17.3 16.9 21.5 17.0 17.0 Gross Profit 10.7 18.5 24.3 61.2 83.2 Operating Margin 15.9 14.5 19.3 15.9 16.1 R&D Expenses 0.0 1.2 0.9 3.0 4.3 Net Margin -2.7 11.0 -11.5 13.2 12.2 SG&A Expenses 7.0 11.7 13.8 32.8 45.1 R&D/sales 0.0 3.2 1.7 1.9 2.1 Share-based Expense 0.0 0.1 0.2 0.2 0.2 SG&A/Sales 29.8 30.4 27.4 20.5 21.5 Operating Profit (EBIT) 3.7 5.6 9.7 25.5 33.7 Sales growth 686.6 64.0 31.2 217.4 31.2 EBITDA 4.0 6.5 10.8 27.1 35.7 Operating Profit Growth 1120.3 49.9 75.1 161.7 32.3 Interest Income, net 0.0 0.0 0.2 -0.6 -1.6 Net profit growth nm nm nm nm 21.2 Investment Income (Exp.) 0.0 0.0 0.0 0.0 0.0 Other Income (Exp.) -2.0 0.1 -13.8 0.0 0.0 Net debt to total capital -56.3 16.3 -45.6 -53.2 -54.1 Earnings before tax 1.7 5.6 -3.9 24.9 32.1 Net debt to equity -56.3 26.9 -52.4 -63.4 -66.1 Tax 1.1 0.3 0.4 3.8 6.5 Asset Turnover 93.9 57.2 19.9 45.5 52.2 Net Income (Reported) -0.6 4.2 -5.8 21.0 25.5 Working Capital Turns (X) 23.3 -11.9 1.2 1.5 1.6 Net Income (Adjusted) 2.5 5.6 10.5 21.2 25.8 ROE -14.9 31.1 -5.6 10.9 11.8 Reported EPS (US$) -0.02 0.13 -0.15 0.34 0.41 ROIC 7.3 26.7 -3.6 9.5 10.3 Adjusted EPS (US$) 0.07 0.16 0.22 0.34 0.41 Balance sheet Cash flow statement FY08A FY09A FY10E FY11E FY12E FY08A FY09A FY10E FY11E FY12E Cash and cash equivalents 5 7 124 170 204 Net Income -0.6 4.2 -5.8 21.0 25.5 Accounts receivable 5 19 10 41 48 Depr. & Amortisation -0.3 -0.8 6.6 44.0 60.9 Inventories 0 0 0 0 0 Change in working capital 2.8 0.4 10.7 14.4 -1.8 Others 4 7 12 29 35 Other -8.6 0.0 -14.6 0.3 0.4 Current assets 14 34 146 240 287 Cash flow from operations -6.8 3.9 -3.1 79.8 85.0 LT investments 1 1 0 0 0 Capex / Investments -10.4 -21.0 -81.6 -47.7 -63.7 Net fixed assets 0 0 14 16 19 Others -0.6 0.0 0.3 0.0 0.0 Other LT assets 10 32 93 95 95 Cash flow from investing -11.0 -21.0 -81.3 -47.7 -63.7 Total assets 25 67 253 351 401 Free cash flow -17.2 -17.1 -84.7 32.0 21.2 Liabilities Equity raised/ (repaid) 7.9 11.1 160.4 0.1 0.0 ST loans 0 13 16 23 30 Debt raised/ (repaid) 0.0 12.7 14.6 12.0 12.0 Payables 4 9 10 51 55 Other 4.0 -6.7 7.9 1.7 1.4 Others 7 21 26 47 55 Dividends paid 0.9 1.4 1.6 0.0 0.0 Total current liabilities 12 42 52 122 140 Cash flow from financing 12.7 18.5 184.5 13.8 13.4 Long term debt 0 0 11 16 21 Other liabilities 4 4 4 5 7 Net change in cash 4.8 2.6 116.3 45.8 34.7 Total liabilities 16 47 67 143 168 Beginning cash 0.0 4.8 7.4 123.7 169.5 Bona Film Shareholders' equity 8 20 184 205 231 Ending cash 4.8 7.4 123.7 169.5 204.2 Minority interests 1 1 3 3 3 Total Liabilities and Equity 25 67 253 351 401 Source: Company reports, Bloomberg, J.P. Morgan estimates. *Note: Adjusted earnings exclude share-based compensation expense (non-cash) and one-time items.

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Film release schedule Name of films Genre Scheduled domestic

release date Bona’s economic

interest Total expected gross BO

estimates (US$’000) Top 10 box office pipeline where Bona is lead investor and sole distributor Just call me nobody Martial arts comedy 12/1/2010 100% 29,412 The Grand Master Historical martial arts 1/1/2011 20% 36,765 What women want Romantic drama 2/1/2011 43% 26,471 财神客栈 Martial arts comedy 3/1/2011 100% 13,235 Overheard 2 Modern action drama 7/1/2011 80% 22,059 潜伏 Espionage drama 7/1/2011 70% 17,647 Legend of Condor Hero Martial arts comedy 10/1/2011 80% 22,059 大上海 Drama 11/1/2011 50% 22,059 The Magician Drama 12/1/2011 60% 41,176 Flying Swords of Dragon Gate 3D martial arts 12/12/2011 60% 66,176 Other film pipeline where Bona is lead investor and sole distributor 恋爱吧 Romantic drama 10/1/2010 33% 4,412 The Road Less Travelled Romantic drama 12/30/2010 67% 5,147 Snow in Taipei Romantic drama 2/14/2011 100% 2,206 Flying Machine 3D family 3/1/2011 100% 11,765 Hello, Mr. Tree Romantic drama 4/1/2011 47% 2,206 A Beautiful Life Romantic drama 4/1/2011 50% 7,353 The Catch 3D thriller 6/1/2011 100% 8,824 Snapper Thriller 8/1/2011 43% 2,941 Film pipeline where Bona is only a distributor Pandemic Thriller 9/1/2010 - 2,941 He Lives By Night Thriller 3/1/2011 - 2,206 Chongqing Blues Drama 11/1/2010 - 735 Happy Goat and Big Big Wolf III Animation 1/1/2011 - 5,882 夺宝飞龙 Martial arts 3/1/2011 - 4,412 Film pipeline where Bona is a minor investor Shaoling Temple Martial arts drama 1/31/2011 10% 32,353 The Founding of CPC History 7/1/2011 2% 58,824 Film pipeline in 2012 so far Sea of Forest and Land of Snow Drama 2012 (TBD) 80% 60,150 The Third Master’s Sword Historical martial arts 2012 (TBD) 80% 42,105 Mulan Martial arts 2012 (TBD) 100% 33,082 Source: Company Source: Company.

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Key accounting policies Distribution revenues: As a principle distributor

• Recognize the distributable amount as distribution revenue on a gross basis

• The distributable amount, after deduction of the distribution fees and print and marketing expenses, is paid or payable to producer and other distributors (if any) as a cost of distribution revenue.

As a participating distributor

• Recognize the distribution fees remitted from the principal distributor as distribution revenue.

Film production participation revenue As a principle distributor

• Revenue is recognized as a part of distribution revenue.

As a participating distributor or a pure production participant

• Recognize the share of the net profit of the film as film production participation revenue.

Box office revenue distribution (For 100$ of Box Office Collection)

Total Movie Box Office 100.0Taxes 8.2Net Box Office (post taxes) 91.8Share of Movie Theatre @50% of net box office 45.9Share of Theatre Circuit @5% of net box office 4.6Total distributable Box Office 41.3

Share of Distributor@6% of net box office 4.6Gross Proceeds to Producer 36.7Gross Proceeds to Producer (as a % of net box office) 40%

Sales and marketing @4% of total net box office 3.7Net Proceed to Producer 33.1Net Proceed to Producer (as a % net box office) 36%


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Figure 20: Bona Films 2010 Box Office Data Movie Title (English) Movie Title (Chinese) Box Office (RMB M)

1 Pleasant goat and Big Big Wolf II 喜羊羊与灰太狼 2 124.7 2 My Iz budushchego 我们来自未来 2 NA 3 Martial spirit 武动青春 NA 4 Fire of conscience 火龙对决 15.5 5 Like a dream 如梦 NA 6 Gallants 打擂台 HK$436 7 Triple Tap 枪王之王 12.35 8 Curse of the Deserted 荒村公寓 23.6 9 夜惊魂 NA 10 Kansen rettô 感染列岛 0.88 11 My ex-Wife's Wedding 恋爱吧（跟我的前妻谈恋

爱） NA

12 Chongqing blues 日照重庆 1.3 13 The Road Less Traveled 一路有你 6.8 14 Just Call Me Nobody 大笑江湖 159 Source: Entgroup.

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Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

• Market Maker: JPMS makes a market in the stock of Bona Film Group Ltd.. • Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Bona Film

Group Ltd. within the past 12 months. • Client of the Firm: Bona Film Group Ltd. is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided

to the company investment banking services. • Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking services

from Bona Film Group Ltd.. • Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking

services in the next three months from Bona Film Group Ltd..

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Price($)

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Bona Film Group Ltd. (BONA) Price Chart

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered itover the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

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J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2010

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China - Film Industry

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