Lions Gate Entertainment Corp. (NYSE:LGF)-Long€œA side benefit of our genre focus, whether in...

M c I n t i r e I n v e s t m e n t I n s t i t u t e 1

MCINTIRE INVESTMENT INSTITUTE AT THE UNIVERSITY OF VIRGINIA

Jessica Jie Gao| Sep.26th, 2013

Lions Gate Entertainment Corp.

(NYSE:LGF)-Long

M c I n t i r e I n v e s t m e n t I n s t i t u t e

AGENDA

•  Company Overview •  Main Thesis Points

Ø  Movie theatres help to boost earnings Ø  Television provides the company’s steady growth Ø  Rapid expansion of distribution Ø  Effective management and financial control

•  Risks

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•  DCF Model 4

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COMPANY OVERVIEW

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•  Founded in 1997, the youngest among top 10 Hollywood film production firms.

•  The largest independent film production firm •  An international company with a presence in motion

picture production, TV programming, home entertainment and channel platforms.

•  The producer of Twilight: Saga and The Hunger Games.


COMPANY OVERVIEW

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STOCK OVERVIEW

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Price: 36.04 52 week low-high: 14.56 – 37.81 Vol/Avg: 3.98M/1.27M Mkt Cap: 4.64B P/E: 16.97

Inst.Own: 97% Revenue: 2.7B Beta: 0.74 EPS (ttm): 1.99


Motion Pictures

85%

Television Production

15% Theatrica

l 23%

Home Entertain

ment 39%

Television

12%

International 16%

Lionsgate UK 6%

Mandate Pictures

3%

Other 1%

Segment Sales

COMPANY OVERVIEW


#1: FILM INDUSTRY

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Movie theatres help to boost earnings

Low production cost

Thriving of film industry

Good contents: bona fide blockbusters

Easy Targeted Market


OVERVIEW OF FILM DIVISION

•  Over $400M at North America box office in the 1Q FY 2013, increased by 39.6%.

•  7% North America theatrical market share, and 8.4% theatrical market share in foreign countries, including Latin America, Russia, the UK, an China.

•  Ranking the 7th in domestic movie market.

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THRIVING INDUSTRY

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“Domestic box office revenues grew 25% from 2006 to 2010 from $25.5B to $31.8B, and that. Worldwide entertainment industry grew from $449B to $745B.” --CCIA(Computer and Communications Industry Association) Best-of-industry Position: Box office revenues of Lionsgate have grown by 327.1% from 2006 to 2012, much higher industry average.


LOW PRODUCTION COST

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Average historical production budget: Lionsgate: <$35M Major studio: >$70.8M (Major studios includes: Warner Bros., Universal, Walt Disney, 20th Century Fox, Sony Pictures, Paramount Pictures.)


BONA FIDE BLOCKBUSTERS

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•  Lionsgate has some of the best content in the industry, from movies to TV series.

•  2 out of 7 most anticipated films in 2013 are from Lionsgate. (NY Times) •  Bona fide blockbusters can be foreseen:

Divergent Jul, 2014

Upcoming young adult franchises.

Step Up 5:

Sep, 2014 The last

installment of Step Up series.

Ender’s Game Nov, 2013

Potential to be turned into trilogies or

more.

The Hunger Games:

Catching Fire Nov, 2013

2nd part of the series. Two other parts will be released in 2014

and 2015.



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Hunger Game: Catching Fire Box office revenue of Hunger Games 1: •  Domestic: $408M (NO.13) •  Oversea: $283.2M (NO.58)

•  Analysts may currently be underestimating the potential of this movie, as the international box office is set to be much higher.

•  “Catching fire will gross approximately $950M worldwide when it opens in mid-November…”

-- Alan Gould, managing director of Evercore Partners

Divergent: Divergent book series is approaching the 300 million copies sold mark. At the current phrase Divergent is actually on the same track and same amount of sales as Hunger Games at this point in its release.



NO. Movie Name Trailer Views Book sales Production Company

1 The Hunger Game: Catching Fire

28,950,110 67,000,000 Lionsgate

2 Thor: the dark world 9,657,341 120,000 Walt Disney

3 The Ender’s Game 5,963,200 11,000,ooo Lionsgate

4 Gravity 7,125,020 - Warner Bro

5 Godzilla 186,611 4,300,000 Warner Bro

6 Wolf of Wall Street 114,929 1,700,000 Red Granite Pictures

7 The Wolverine 4,348,587 670000 20th Century Fox

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•  Correlation between box office revenue and trailer views: 0.241 •  Correlation between book sales and box office revenue: 0.619 •  Correlation between comics sales and box office revenue: 0.334

Most Anticipated films this fall:


BONA FIDE BLOCKBUSTERS VAR: ONLINE SURVEY

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The questionnaire is designed to understand how young adults truly think of The Hunger Games and their preferences over film genre. *29 Reponses have been collected; due to the small sample size, the conclusion maybe biased.


EASY TARGETED MARKET

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•  Lionsgate targets young adults’ market which is easy to approach. •  Lionsgate focuses on making adventure, action and horror movies.

Company Target Market Favorite Genre Genres Market Share

Lions Gate Young adults Adventure, Action, Horror 41.6%

Dreamworks Teenagers Adventure, Science Fiction 21.38%

Disney Kids of 4~12 Animation 17.6%

Paramount Mix Romantic, Family, Comedy 52.37%

“A side benefit of our genre focus, whether in adventure or horror is we appeal to younger, digitally avid market.”

-- Steve Beeks, Lionsgate’s CO-COO “Typically, the most dependable filmgoer have been the young adults who “goes to the movies” to get away from home. Young adults offer another feature that filmmakers love—they are an easy sell because they are lacking in discrimination and sophistication.

--Dr. Anney Kodas, Professor in Media Studies, Rice University


EASY TARGETED MARKET

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Data from www.numbers.com

Data from my online survey


VAR: GENRE TREND AT US BOX OFFICE

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“A limited range of special effects-based films from the action/adventure and fantasy/science fiction genres have come to dominate the US box office at the Expense character- and narrative-driven films (crime/thriller and drama films) that were previously identified as the most popular.” -- “Genre trends at US box office, 1991~2010” by Nick Redfern


#2: TELEVISION INDUSTRY

Television provides the company’s steady growth

Misperception: Television is dying

Cooperation with Netflix

Popular contents

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TELEVISION DIVISION OVERVIEW

•  Diversified television business is continuing its 13-year trajectory of profitable growth: compound annual growth rate has been nearly 25% since 2000.

•  Presence in nonfiction programming with more than 10 different series now ordered or airing in prime time.

•  Just acquires television rights to the #1 New York Times Bestselling series Crossfire.

•  Orange is The New Black is the most popular TV series on Netflix. •  Weeds is the most popular TV series on Showtime.

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MISPERCEPTION #1

•  Misperception: Televisions are dying.

“Television as a delivery method has no trend to die; rather, the platform evolves with time and technology… Nowadays people prefer to watch television on websites such as Netflix, Gulu, and Amazon….”

-- Fan Mai (PhD at Media Study Department, University of Virginia)

•  Steady growth higher than industry average

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VAR #3 CASE STUDY: THE FUTURE OF TELEVISION

•  “TV revolution” is coming due to the rise of on-demand viewing, particularly over Internet, such as Netflix, Gulu, and Prime Instant Video.

•  How does on-demand viewing on Internet affect Lionsgate? Pros: --Created new revenue stream for old films and old seasons of TV shows. --More platform are available for distributions. Cons: --these internet video services are competing for viewers’ time, which hurts TV ratings. --Undermines advertising revenues.

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COOPERATION WITH NETFLIX

Why Netflix wins? •  Big Data:

–  1/3 of downloads on the Internet during peak periods on any given day are devoted to Netflix.

–  2012, 54.7% watched TV series streamed online than on physical television.

–  Netflix looks at 30 million “plays” a day so that it has mind-blogging access to consumer sentiment in real time.

•  Conclusion: having a very molecular understanding of user data is going to have a big impact on how things happen in television.

•  On demand distributors share a great deal of data with the studios from which they’ve purchased films.

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COOPERATION WITH NEW DIGITAL BUYERS

How Lions Gate survives and benefits from “TV revolution”? •  Leadership in producing and delivering content for new digital

buyers. In 2013, –  Partnership with FX results in orders for 2 additional high-

profile comedies. –  Initial foray into creating content for digital platform: produced

“Orange is the New Black” for Netflix which has been renewed for a second season.

–  A series order from Hulu. –  A deal for a pilot script for Amazon.

•  A new multi-year licensing agreement that will make Netflix the exclusive subscription streaming in UK and Ireland for first-run feature films from the studio.

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#3: RAPID EXPANSION OF DISTRIBUTION

Expansion of distribution

Channels & Home Entertainment

International Cooperation

Marketing Strategies

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#3:WIDE SPREAD DISTRIBUTION

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DVD & Blu-ray Blockbuster

Netflix

Rentrak

Wal-Mart

Other mass merchandisers

Electronic distribution

iTunes

Amazon

Microsoft

Netflix

Hulu

YouTube

Sony

Pay & free TV

Showtime

FX

Disney Channel

USA Network


HOME ENTERTAINMENT

•  Home entertainment business is among top 5 major studios with 9.5% market share.

•  High operating margins achieved through new distribution and replication agreement with Fox and Cinram.

•  Partnership with Samsung to expand 3D content in home entertainment market. (ahead of market.)

•  Partnership with Internet Explorer to publicize. •  Other digital platforms expand sales opportunity.

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INTERNATIONAL SALES

•  International growth has been robust: –  International box office gross for FY 2012 was $1.25 Billion, increased

by 46% –  Output deals cover more than 80% of the world’s movie-going

population. –  The number of episodes distributed internationally has grown from 430

in FY2012 to more than 1000 in FY 2014. –  Established new output deals with leading distribution partners in

France, Germany, Russia, Spain etc. •  Celestial Tiger Entertainment operates 6 branded channels. This

year, it has achieved 27 carriage deals and launched 10 new on demand and over the top services across 16 platforms in 11 Asian territories.

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INTERNATIONAL SALES

•  Winner in Cannes Film Festival: –  Sold international rights to 9 movies –  Generates more than $250M –  Sales topping last year’s company record by more than 50%.

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Main international market

New international Market

Baltic UK Poland Czech Republic Hungary

China Japan Israel Middle East Turkey Hong Kong Italy

Switzerland Middle East Romania Taiwan India

“Our strong performance at Cannes this year is attributable in part to the international framework we’ve set in place combining output deals around the world with self-distribution in key territories such as UK and Latin America. This infrastructure gives us enormous flexibility an is already delivering remarkable results.”

--Patrik Wachberger, Lionsgate Motion Picture Group Co-Chair


CHINESE MARKET

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“China’s moviegoing market is still relatively small — total ticket sales were just over $2 billion last year, compared with the $10 billion spent in the United States — but it is growing fast, by 40 percent every year.”

--Sarft( State Administration of Radio, Film and Television )

•  May, 2013. Dalian Wanda Group bought AMC Entertainment, the 2nd largest U.S. theater chain for $2.6 Billion to become the world’s biggest cinema owner. It was also the biggest purchase of a U.S.

•  China, which recently surpassed Japan as the 2nd largest media market outside the U.S., has taken steps to ease restrictions on the number of foreign films it allows into the country each year under a revenue-sharing agreement.

•  Lionsgate Signed agreement with Youku through Celestial Tiger

Entertainment. The agreement grants Youku the rights to make more than 200 Lionsgate titles, which is the largest international contract Youku ever made.


MARKETING STRATEGY

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Disciplined Strategy to create the leading studio


#4: MANAGEMENT

Effective Management and Financial Control

Quick expanding by acquisitions

Comparative advantage in financials

Misperception: the price is over-valued

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CEO

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Jon Feltheimer CEO

During Mr. Feltheimer’s 9-year tenure as CEO, Lionsgate has •  Increased its revenue from $180M to

a projected $2B this year •  Grown its market capitalization •  Built a strong balance sheet

supported by significant available cash and a $340M JPMorgan credit facility

•  Created a unique and successful business model


FAST EXPANSION BY ACQUISITIONS

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Acquisitions 1998: Termile Art Productions Sterling Home Entertainmen Cinepic Film Properties 1999: Mandalay Pictures International Movie Group

2001: Trimark Holdings, Inc 2003: Artisan Entertainment 2005; Modern Entertainment 2006: Dermar-Mercury 2007: Roadside Attractions 2008: TV Guide Network TV Guide.com 2009: Epix (Co-owner) 2012: Summit Entertainment

Summit Entertainment let Lionsgates successfully break into the production of high-grossing Hollywood pictures that had previously been dominated by Walt Disney, Time Warner, Sony…

CBS joined Lionsgate in a 50/50 partnership in TVGN and TVGuide.com as the channel continues its transformation to a full screen entertainment channel. It has increased its full screen penetration from 32% to 83% today.

The EPIX channel has emerged as an innovative technology leader in the pay TV space with 10M subscribers in 40M homes.


EFFICIENT FINANCIAL CONTROL

•  LGF Beats market expectations continuously.

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COMPARATIVE OUTPERFORMANCE

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•  Lionsgate outperforms its competitors in profitability and financial strength. CNK: Cinemark Holdings Inc. RGC: Regal Entertainment Group DWA: dreamWorks Animation Inc.


COMPARISON CHART

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COMPARATIVE OUTPERFORMANCE

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•  LGF has a very clean balance sheet. There are minimal “bad assets” such as goodwill assets, deferred long term assets and intangible assets.

•  The company has grown its free cash flow by an average of more than 20% annually over the past 5 years. New acquisitions could be made next year.

•  Income statement will stay strong.


SUMMARY

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Resurgence of television

Rapid Expansion of distribution

Forerunning in film production

Financial control

Efficient Management

Strong Long


RISKS

•  The movie business is inherently volatile with big hits and misses. •  Any disappointment over the box offices will hurt the stock hard. •  LGF earns 85% of its revenue from the production and distribution

of motion pictures, making the firm’s business particularly vulnerable to the unpredictability of box office performance.

•  The costs of producing and marketing feature films is high and may

increase in the future.

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APPENDIX: DCF MODEL

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SUGGESTION

•  Initiate long position at 3%.

•  Time is critical: –  Buy it after the recent adjustment of stock price. –  Consider to sell it 2 weeks after the release of “The Hunger

Games: Catching Fire” –  Repurchase next year.

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QUESTIONS

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Lions Gate Entertainment Corp. (NYSE:LGF)-Long€œA side benefit of our genre focus, whether in...

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