China - Film Industry

Asia Pacific Equity Research
18 January 2011
Initiation
Bona Film Group Ltd.

A 'blockbuster' distributor
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. Chinas 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 EntGroups forecasts, the Chinese film industrys 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 chainfrom production to theatrical. The companys 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 filmrelated advertising, in our view. Strong management team: Bona Films 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 Sales Operating profit EBITDA Pre tax profit Reported net profit Reported EPS (US$) P/E (x) Adjusted EPS (US$) Diluted P/E (x) EV/EBITDA P/B (x) Y/E BPS (US$) FY09 FY10E 38.4 50.3 5.6 9.6 6.5 10.8 5.6 -3.9 4.2 -5.8 0.13 -0.15 49.0 nm 0.16 0.22 37.4 28.5 59.2 35.4 481.8 2.0 0.0 3.0 FY11E FY12E 159.7 209.6 ROE (%) 25.5 33.7 ROIC (%) 27.1 35.7 GAAP dil. EPS (US$) 24.9 32.1 EPS FY09 21.0 25.5 EPS FY10E 0.34 0.41 EPS FY11E 18.0 15.0 0.34 0.41 Absolute perf. (%) 17.8 14.9 Relative perf. (%) 14.1 10.7 Cash (US$MM) 1.8 1.7 Equity (US$MM) 3.3 3.7 FY09 31.1 26.7 1Q 0.00 0.03 0.08 1M -12.3 -17.2 7 20 FY10E -5.6 -3.6 2Q 0.00 -0.01 -0.02 3M -27.8 -40.9 124 184 FY11E 10.9 9.5 3Q 0.05 0.14 0.09 12M -27.8 -46.7 170 205
Overweight
BONA, BONA US Price: $6.14 Price Target: $8.50
China China Internet Dick Wei

AC
(852) 2800-8535 dick.x.wei@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited
Ritesh Gupta
(91-22) 6157 3307 ritesh.z.gupta@jpmorgan.com J.P. Morgan India Private Limited
Imran Khan
(1-212) 622-6693 imran.t.khan@jpmorgan.com J.P. Morgan Securities LLC
Price Performance
11 $ 8 5
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11
BONA share price ($) NASDAQ Composite (rebased)
YTD Abs Rel 6.2% 2.3%
1m -12.3% -17.2%
3m -27.8% -40.9%
12m -27.8% -46.7%
FY12E 11.8 10.3 4Q 0.12 0.05 0.20
52-week range Shares outstg Avg daily volume Avg daily value Index (NASDAQ) Free float Dividend yld Market cap Price target 204 Date of price 231
US$6.14-8.50 58.9MM 0.2Mn 1.1Mn 2,755 30% 0 US$0.4B US$8.5 Jan 14, 2010
Source: Company, Bloomberg, J.P. Morgan estimates. * Note: Adj. EPS excludes share-based compensation expenses.
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.
Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com
Asia Pacific Equity Research 18 January 2011
Company description
P&L sensitivity metrics

FY11E Growth in Revenues Impact of each 1% increase Growth in COGS Impact of each 1% increase Growth in Sales and Marketing expenses Impact of each 1% increase Growth in General and Administrative expenses Impact of each 1% increase
Source: J.P. Morgan estimates.
EBITDA impact (%) 0.7% -1.3% -0.5% -0.6%
EPS impact (%) 0.9% -1.7% -0.6% -0.7%
Bona Film Group Ltd is the largest and most successful distributor of domestic films among all privatelyowned 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.
Price target and valuation analysis
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.
Revenue growth (Rmb MM)
250.0 200.0 150.0 100.0 50.0 0.0 2009 2010E 2011E 38.4 50.3 159.7
209.6
Risk-free rate: Market-risk premium: Beta: WACC: Terminal g:

J.P. Morgan estimates.
4.0% 6.0% 1.3 12.1% 0%
2012E
Source: Company reports, J.P. Morgan estimates.
EPS estimates: J.P. Morgan vs consensus (Rmb)

US$ 4Q10E FY11E FY12E
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.
NA NA NA
J. P. Morgan 0.05 0.34 0.41
Consensus
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
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 companys market share in the distribution business is only behind China Film Group, a government-owned player.
Figure 1: Film distribution marketshare in China, 2009
Others 25% CFG 32%
SFG 5% Huax ia Film Distribution 8% Huay i Brothers 13% Bona 17%
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
50% 40% 30% 20% 10% 0% 2007 2008 2009 44.1% 40.0% 44.1%
% of Box Office Receipts among Top 20 Highest Grossing Domestic Films

Source: EntGroup, 2009.
A key beneficiary of Chinas 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
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, Chinas 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
3,500 3,000 2,500 2,000 1,500 1,000 500 0 3,100 2,200 1,500 600 900
2008
2009
2010E Box office (US$M)
2011E
2012E
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. Bonas strengths in film distribution Some of the features of the companys 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.
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 leadinvested 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 companys 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.
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 capitalat-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 concentrationTop 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.
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.
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 Gates 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 Films 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 Films 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 dont 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 Films 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 Films 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.
9
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.
10
Table 1: Comparative valuation

Ticker Studio Dreamworks Animation DWA US Lions Gate Entertainment LGF US Median Diversified Media Time Warner TWX US Disney DIS US Viacom VIA US Median Cinema Regal Entertainment Group RGC US Cinemark Holdings Inc. CNK US Carmike Cinemas Inc. CKEC US Median Traditional Consumer Discretionary Belle Intl 1880 HK Golden Eagle 3308 HK Parkson 3368 HK Lifestyle 1212 HK New World Departmental Store 825 HK Trinity 891 HK Ports Design 589 HK Median China New Lifestyle Leaders Ctrip CTRP US New Oriental EDU US Home Inn HMIN US Tencent 700 HK Country Style Cooking CCSC US Median China Film Industry Players Huayi Brothers 300027 CH Bona Film BONA US Price (Local) 28.8 6.7 33.1 39.3 47.9 M-cap (US$MM) 2,423 915 36,751 74,399 25,579 EV (US$MM) 2,519 1,445 46,697 74,727 28,044 2010E 1.76 -0.20 0.78 2.34 2.09 2.87 2.22 0.50 1.19 -0.53 0.50 0.47 0.59 0.45 0.73 0.34 0.20 1.04 0.47 1.22 2.28 1.50 5.25 0.47 1.50 0.49 0.22 EPS (LC) 2011E 2012E 2.00 -0.68 0.66 2.63 2.45 3.31 2.54 0.69 1.37 0.38 0.69 0.59 0.77 0.55 0.84 0.41 0.27 1.23 0.59 1.51 2.49 1.56 7.02 0.57 1.56 0.69 0.34 2.37 0.12 1.24 2.97 2.82 3.76 2.89 0.78 1.61 0.62 0.78 0.71 0.99 0.68 0.93 0.47 0.36 1.50 0.71 1.95 3.33 2.19 8.97 0.84 2.19 0.98 0.41 2010E 16.4 -33.8 NA 14.1 18.8 16.7 16.7 25.5 15.0 NM 20.2 29.5 38.2 28.6 27.3 19.8 36.9 20.6 28.6 34.6 47.3 24.9 38.3 49.7 38.3 56.7 27.9 P/E 2011E 14.4 -9.8 2.3 12.6 16.0 14.5 14.5 18.4 13.0 20.4 18.4 23.9 29.2 23.3 23.7 16.4 27.4 17.5 23.7 27.8 43.3 23.9 28.6 40.7 28.6 40.3 18.1 2012E 12.2 57.8 35.0 11.2 14.0 12.7 12.7 16.3 11.1 12.5 12.5 19.7 22.7 19.0 21.5 14.1 21.0 14.3 19.7 21.6 32.4 17.1 22.4 27.6 22.4 28.2 15.0 2010E 10.9 17.3 14.1 7.4 8.5 7.8 7.8 16.8 6.7 7.1 7.1 16.1 18.6 18.2 15.2 9.3 17.8 14.1 16.1 77.1 41.5 22.4 17.6 7.8 22.4 na 24.4 EV/EBITDA 2011E 2012E 9.5 28.1 18.8 6.9 7.5 7.1 7.1 14.8 6.0 6.0 6.0 12.9 14.2 15.0 13.2 7.6 12.9 11.6 12.9 124.8 67.2 36.4 13.4 12.6 36.4 na 9.7 8.6 13.8 11.2 6.5 6.9 6.6 6.6 7.1 10.5 5.8 7.1 10.7 11.1 12.8 11.5 6.3 10.1 9.4 10.7 61.1 32.9 17.8 10.5 6.2 17.8 na 7.4 2010E 13% ROE (%) 2011E 2012E 13% 13% Sales (US$MM) 2010E 2011E 2012E 809 1,589 1,199 26,570 38,342 13,448 26,570 2,858 2,140 506 2,140 3,657 372 656 563 258 260 261 372 432 376 452 2,944 112 432 154 56 854 1,629 1,241 27,885 40,711 14,103 27,885 2,996 2,300 531 2,300 4,421 495 790 630 334 321 307 495 573 512 542 3,918 174 542 207 160 994 1,683 1,338 28,943 43,075 14,671 28,943 3,094 2,419 551 2,419 5,182 637 926 698 401 381 366 637 755 660 656 5,059 255 660 288 210
78% -75% -77% 45.1% -31.5% -31.9% 9% 12% 19% 12% -27% 14% -32% -27% 21% 29% 25% 18% 13% 15% 34% 21% 26% 20% 17% 49% 14% 20% 11% -6% 9% 12% 20% 12% -52% 15% 19% 15% 22% 33% 27% 19% 14% 19% 35% 22% 24% 19% 15% 43% na 21% 13% 11% 8% 13% 23% 13% -148% 15% 34% 15% 23% 35% 28% 18% 15% 21% 36% 23% 24% 21% 17% 38% na 23% 13% 12%
12.7 17.8 7.7
1,964 2,018 99
3,892 3,080 462
14.0 22.6 12.9 20.0 6.6 7.5 21.6
15,160 5,246 4,647 4,318 1,409 1,554 1,559
11,175 3,911 4,822 3,349 1,076 1,074 1,339
42.1 107.7 37.4 201.0 23.1 27.6 6.11
6,223 4,058 1,500 47,557 579 1,333 360
6,419 3,455 1,869 29,033 649 1,208 359
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
3,000 2,000 1,000 0 2005 2006 2007 2008 2009 1,543 5% 1,775 6% 2,027 7% 2,321 8% 2,632 9% 15% 10% 5% 0%
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$18 for Korea. This trend is also due to the low number of screens per million population (eight in China vs. 130 in the US). A low movie penetration per capita presents a long-term sustainable growth opportunity, in our view.
Figure 5: International benchmarking
150 100 50 2 0 China India Japan Korea US 8 12 13 17 27 3 41 18 7 32 21 130
Box office per capita (US$) No. of screens per million of population
No. of mov ie theater per million of pop'n
12
Figure 6: Growth in screens2008-2012E CAGR of 12.3%

7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
Figure 7: Number of movie theatres2008-2012E CAGR of 11.6%

3,000 2,500
4,322
3,967 130 2008
4,023 700 2009
4,112
4,225
2,000 1,500 1,000 500 0
1,545
1,687
1,870
2,100
2,400
1,200 2010E 3D screens Other screens
1,700 2011E
2,200 2012E
2008
2009
2010E Movie theaters
2011E
2012E
Source: EntGroup.
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
3,500 3,000 2,500 2,000 1,500 1,000 500 0 3,100 2,200 1,500 600 900
2008
2009
2010E Box office (US$M)
2011E
2012E
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.
13
Figure 9: Ticket price2008-2012E CAGR of 7.8%

6 5 4 3 2 1 0 2008 2009 2010E Ticket Price (US$) 2011E 2012E 4.5 3.7 5.1 4.8 5.0
Figure 10: Admissions2008-2012E CAGR of 37.6%

700 600 500 400 300 200 100 0 624 454 298 174 201
2008
2009
2010E
2011E
2012E
Source: EntGroup. Source: EntGroup.
Admissions (M)
Table 2: China box office

2005 China box office (Rmb billions) Admission (MM) Per capita admission Average ticket price (Rmb) Number of urban movie theaters
Source: EntGroup.
2006 2.6 89 0.15 21.2* 1,326
2007 3.3 130 0.22 24.4 1,427
2008 4.3 170 0.28 27.6 1,545
2009 6.2 200 0.32 31 1,687
2010E 10.3 258 0.4 31.9 1,870
2011E 14.9 330 0.51 32.8 2,100
2012E 21 430 0.64 33.7 2,400
2.1 73 0.13 30 1,243
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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.
15
Figure 11: Presence across the film value chain
Filmmaking
Film Producers
Talent Agencies
Grey Boxes show PolyBonas presence

Proceeds Films Distribution International Film Distributors Film promotion & distribution Domestic Film Distributors
Pr oc ee ds
Advertising Films Other Professional Parties
Proceeds Control over theaters content access
Li c Film Prints Rig ens ht e s
Theater Circuits
Non-Theatrical Channels
Proceeds
Film Content Film exhibition
Proceeds
Film Prints
Pr oc
Movie Theaters
ee ds
Proceeds Foreign Theatrical Distributors / Cable Television / Others

Source: Company, J.P. Morgan.
Exhibition
Audience
Table 3: Box office split on an average
Domestic films Imported buy-off films Imported box office sharing films
Producers 38-43% * 15-21%
Distributors 4-6% 43% 22-28%
Thater Circuits 5-7% 5% 5-7%
Fi lm
Co
nt
en t
Movie Theatres 50-52% 52% 50-52%
16
Figure 12: Synergetic business lines
17
A leading film distributor in China

Bona Film has emerged as the largest private film distributor in China. The companys market share in the distribution business is only behind China Film Group, a government-owned player.
Figure 13: Film distribution marketshare in China (2009)
Others 25% CFG 32%
SFG 5% Huax ia Film Distribution 8% Huay i Brothers 13%

Bona 17%
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 Market share by gross box office receipts of domestic films distributed China Film Group Corporation (state owned) Bona Film Group Limited Huayi Brothers Huaxia Film Distribution Co., Ltd. (State Owned) Shanghai East Film and TV Distribution Co. (State Owned) Number of domestic films distributed China Film Group Corporation (State Owned) Huaxia Film Distribution Co., Ltd. (State Owned) Bona Film Group Limited Huayi Brothers Shanghai East Film and TV Distribution Co. (State Owned)
Source: Company.
2008
2009
30.8% 16.5% 6.4% 4.4% 1.1% 16 9 14 3 6
28.5% 17.1% 19.4% 0.9% 12.4% 18 11 14 3 6
31.7% 17.3% 13.2% 7.5% 4.5% 19 13 14 4 7
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Figure 14: Number of domestic films distributed by privately-owned distributors

16 12 8 4 0 Poly bona Enlight Pictures Huay i Orange Sky 7 4 2 14
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
21 17 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
50% 40% 30% 20% 10% 0% 2007 2008 2009 44.1% 40.0% 44.1%
% of Box Office Receipts among Top 20 Highest Grossing Domestic Films

Table 5: Top 20 box office films in China

Title 2007 Top 20 Domestic Films The Warlords () Assembly () Lust, Caution () Protege () Secret () Flash Point () Crossed Lines () Invisible Target () Blood Brothers () Brothers () The Iron Triangle () The Secrect of the Magic Gourd () Gongbu () The Sun Also Rises () Invisible Wings () Getting Home () Contract Lover () Call for Love () The Matrimony () Love to be Found in Newhere () Gross Box Office (RMB Title M) 2008 Top 20 Domestic Films 170 Red Cliff I () 144 Painted Skin () 138 If You Are The One () 65 CJ7 (7) 37 The Forbidden Kingdom () 35 Kung Fu Dunk () 34 Forever Enthralled () 34 The Mummy: Tomb of the Dragon Emperor (3) 32 Ip Man () 32 Three Kingdoms: Resurrection of the Dragon () Almost Perfect () 28 22 Connected () 20 An Empress and the Warriors () 17 Fit Lover (2) 16 Desires of the Heart () 15 Storm Rider: Clash of Evils () 15 The Warlords () 13 Missing () 12 All About Women () 11 Super Typhoon () Gross Box Gross Box Office (RMB Title Office (RMB M) M) 2009 Top 20 Domestic Films 322 The Founding of A Republic () 420 232 Red Cliff II () 260 A Simple Noodel Story () 235 216 203 The Message () 225 188 Bodyguards and Assassins () 220 113 City of Life and Death / Nanking Nanking () 172 110 Look For A Star () 113 109 If You Are The One () 110 75 Crazy Racer () 110 72 On His Majesty's Secrect Service () 103 53 Sophie's Revenge () 100 45 Pleasant Goat And Big Big Wolf ( 100 43 Mulan () 90 35 The Treasure Hunter () 63 31 Metallic Attraction: Kungfu Cyborg () 52 30 Gasp () 41 25 Iron Man () 30 22 Examination 1977 (1977) 30 22 Ashes of Time Redux () 27 16 Empire of Silver () 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 films 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 companys 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 films 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 limitsfilm 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 companys movie theatres
Companys movie theaters as of June 30, 2010
Movie Theater Poly Wanhe Red Sparrow International Cineplex City / District Xian, Shaanxi Province Screens 7 Total Seating Capacity 1,605 Location Details Located in second largest shopping mall in Xian near numerous major corporate offices; covers neighborhood with population of approximately 500,000. Located in university district with over 40 colleges and universities; covers areas with population of approximately 500,000. 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. Located in rapidly developing commercial district; local population of over one million residents. Located in large urban area otherwise underserved by theater facilities; total urban population of 2.3 million with over 400,000 neighborhood residents. Located in central northern commercial district with daily pedestrian traffic of over 500,000.
Bona Xintiandi International Cineplex
Xian, Shaanxi Province
1,932
Bona Youtang International Cineplex
Beijing
1,161
Pearl Bona Cineplex
Shanghai
767
Bona Cineplex
Shijiazhuang, Hebei Province
1,133
Maoye Bona Cineplex
Shenzhen, Guangdong Province
1,355
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 DVD, blue-ray, and other home video products Internet TV channel Mobile/Airline Advertising
Partner DVD and blu-ray format through Warner Bailu, Zoke Culture, Guangdong Yingyi, Guang dong Dejin Sohu, Sina, SMG IPTV, LeTV, Tudou, Youku, Qiyi CCTV-6, SMG, Celestial, Star TV, HK Cable TV, MATV, EBC Fone 100TV, China Airline, Dragonair, Cathy Pacific, Southern Airline, Eastern Airline, EVA Airways Filmore Media, Focus Media, AirMedia
Figure 17: China copyright revenue marketsize (US$ MM)

50 40 30 20 10 0 2008
Source: EntGroup. .
2008-2012 CAGR of 36.2%
46 35 25
13
16
2009
2010
2011
2012
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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 companys 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 Xian Film Corporation and Xian Changan 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 Chinas 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 companys 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 Films revenues to grow at a CAGR of 75% from US$38.4 million in 2009 to US$209.6 million in 2012E. We believe this revenue growth will be supported by higher revenue recognition due to the increase in the number of movies, where the company is a leading producer (please see below for accounting differences). The company would also benefit from additional revenues from diversified streams, such as production and cinema theatres.
Figure 18: Expect 2009-2012E revenue CAGR of 75%
250.0 200.0 150.0 100.0 50.0 0.0 2009
Source: Company, J.P. Morgan estimates.
209.6 159.7
38.4
50.3
2010E
2011E
2012E
We expect its non-GAAP net profit to grow at a CAGR of 66.8% during 20092012E.
Figure 19: Expect 2009-2012E Net Profit CAGR of 67%
30.0 25.0 20.0 15.0 10.0 5.0 0.0 2009 2010E 2011E 2012E 5.6 10.5 21.2 25.8
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Table 8: Revenue breakdown (US$ 000)

2007A Distribution revenue Film investment and production external internal (eliminated) Film related revenue (distribution + external production revenues) Cinema revenue Talent agency services revenue Total Revenues 22,398 232 23,396 1,003 38,373 22,398 23,165 37,370 37,176 11,191 1,967 50,334 134,082 25,048 847 159,977 177,226 31,497 847 209,570 21,129 1,269 4,239 2008A 20,275 2,890 6,390 2009A 35,331 2,038 14,064 2010E 35,132 2,044 15,935 2011E 132,838 1,244 54,919 2012E 173,265 3,961 69,530
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 Films 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 Distribution Gross Profit Gross Margin Film investment and production Gross Profit Gross Margin Cinema Gross Profit Gross Margin Talent agency Gross Profit Gross Margin Overall Gross Margins
2008A 7,355 36.3% 3,335 35.9%
2009A 13,406 37.9% 3,512 21.8%
2010E 12,139 34.6% 4,696 26.1% 5,769 51.6%
2011E 38,298 28.8% 7,384 13.1% 12,528 50.0% 847 61.2 38.3%
2012E 57,079 32.9% 6,944 9.4% 15,587 49.5% 847 83.2 39.7%
7,760 36.7% 1,722 31.3%
9.5 42.3%
(0) 10.7 45.7%
322 18.5 48.2%
861 24.3 48.3%
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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 films worldwide revenue, or a fixed percentage of the films 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 FilmIncome statement

US$ in millions, year-end December Total Revenue Distribution Revenues Production Revenues Intersegment Elimination Cinema Revenues Talent Agency Revenues COGS Distribution COGS Film investment and production COGS Intersegment Elimination Cinema Costs Talent Agency Costs Gross Profit Operating Expense SG&A expenses Participation expenses Share-based comps expenses EBIT Adj. EBIT (ex-share-based exp.) EBITDA Net Interest Income Net Other Income Tax (Expense) / Credit Net Profit GAAP (post MI) Adj. Net Profit (ex warrants, derivatives, and preferred share related expenses Diluted EPS (US$) Adj. Diluted EPS (US$, ex-sharebased exp.) Margins (%) Gross Margin Adj. Operating Margin EBITDA Margin Net Margin Adj. Net Margin Sequential growth (%) Revenue Gross Profit EBIT Net Profit EPS 1Q09 3.8 8.8 4.0 -3.5 0.0 0.3 2.7 5.5 2.8 -3.5 0.0 0.2 1.1 -1.4 -1.3 -0.1 0.0 -0.3 -0.3 -0.1 0.0 0.1 0.0 -0.3 -0.2 -0.01 0.00 29.0 -7.1 -2.0 -7.4 -4.2 -34.7 -58.5 -132.8 n.m. n.m. 2Q09 3.0 8.8 4.0 -3.5 0.0 0.3 1.6 5.5 2.8 -3.5 0.0 0.2 1.4 -1.9 -1.7 -0.2 0.0 -0.5 -0.4 -0.2 0.0 -0.1 0.0 -0.4 -0.1 -0.01 0.00 47.3 -13.8 -7.4 -14.5 -2.3 -20.6 29.3 48.4 n.m. n.m. 3Q09 8.6 8.8 4.0 -3.5 0.0 0.3 3.6 5.5 2.8 -3.5 0.0 0.2 5.0 -3.5 -3.2 -0.3 0.0 1.5 1.6 1.8 0.0 0.5 -0.1 1.6 1.6 0.05 0.05 58.6 18.2 20.5 18.1 18.2 184.2 252.0 -439.9 n.m. n.m. 4Q09 22.9 8.8 4.0 -3.5 0.0 0.3 12.0 5.5 2.8 -3.5 0.0 0.2 10.9 -6.1 -5.5 -0.6 0.0 4.8 4.8 5.0 0.0 -0.4 -0.3 3.4 4.2 0.10 0.12 47.5 21.0 21.9 14.8 18.4 166.1 115.9 211.7 118.7 169.0 1Q10 7.8 5.2 1.7 -1.1 1.0 0.5 4.1 2.9 1.2 -1.1 0.5 0.3 3.7 -2.2 -2.0 -0.2 0.0 1.5 1.5 1.7 -0.1 -5.4 -0.1 -4.5 1.4 -0.10 0.03 47.7 19.7 22.1 -58.1 17.9 -65.9 -65.8 -68.6 n.m. -66.9 2Q10 6.7 5.2 1.7 -1.1 1.0 0.5 3.4 2.9 1.2 -1.1 0.5 0.3 3.3 -4.2 -3.8 -0.4 0.0 -1.0 -0.9 -0.8 0.0 -7.3 0.1 -8.7 -0.4 -0.19 -0.01 48.8 -14.0 -11.3 -130.6 -6.3 -14.3 -12.4 -165.2 n.m. n.m. 3Q10 20.5 14.4 8.9 -8.0 4.3 0.8 9.8 9.1 6.3 -8.2 2.1 0.5 10.7 -5.3 -5.2 -0.1 0.0 5.5 5.5 5.7 0.6 -1.1 -0.1 4.4 6.4 0.10 0.14 52.2 26.9 27.9 21.6 31.3 205.9 227.2 -659.6 n.m. n.m. 4Q10E 15.3 10.4 5.7 -5.7 4.8 0.2 8.7 8.2 3.2 -5.2 2.4 0.1 6.6 -2.9 -2.8 -0.1 0.0 3.7 3.8 4.1 -0.3 0.0 -0.3 3.1 3.1 0.05 0.05 48.3 18.2 19.9 14.8 14.9 3.0 -4.7 -30.7 -29.6 -50.9 1Q11E 32.2 24.5 8.1 -7.4 6.7 0.2 20.1 15.0 9.0 -7.4 3.4 0.1 12.1 -6.1 -5.4 -0.7 0.0 5.9 6.0 6.3 -0.1 0.0 -0.9 4.9 5.0 0.08 0.08 34.5 12.6 13.3 10.5 10.6 154.6 81.9 77.7 81.0 80.0 2Q11E 32.6 27.7 8.8 -8.8 4.7 0.2 21.0 19.5 7.7 -8.7 2.3 0.1 11.7 -12.9 -12.1 -0.7 0.0 -1.2 -1.2 -0.8 -0.1 0.0 0.2 -1.1 -1.1 -0.02 -0.02 51.5 6.5 9.2 4.5 4.8 -73.6 -60.6 -86.9 -88.7 -88.1 3Q11E 29.9 22.3 11.6 -11.2 6.8 0.2 16.3 15.8 8.1 -11.1 3.4 0.1 13.6 -7.2 -6.5 -0.7 0.0 6.3 6.4 6.7 -0.2 0.0 -0.9 5.2 5.3 0.08 0.09 46.8 22.0 23.4 18.0 18.2 101.5 82.9 610.0 709.0 667.1 4Q11E 65.1 58.1 27.6 -27.6 6.8 0.2 41.2 44.1 21.0 -27.5 3.4 0.1 23.9 -9.5 -8.8 -0.7 0.0 14.4 14.5 14.9 -0.2 0.0 -2.1 12.0 12.1 0.19 0.20 33.7 17.5 18.1 14.5 14.5 123.8 61.1 78.2 79.2 78.6 FY09 38.4 35.3 16.1 -14.1 0.0 1.0 19.9 21.9 11.3 -14.1 0.0 0.7 18.5 -12.9 -11.7 -1.2 -0.1 5.6 5.7 6.5 0.0 0.1 -0.3 4.2 5.6 0.13 0.16 48.2 14.8 16.9 11.0 14.5 64.0 72.9 49.9 n.m. 118.4 FY10E 50.3 35.1 18.0 -15.9 11.2 2.0 26.0 23.0 11.9 -15.5 5.4 1.2 24.3 -14.7 -13.8 -0.9 -0.2 9.7 9.9 10.8 0.2 -13.8 -0.4 -5.8 10.5 -0.15 0.22 48.3 19.7 21.5 -11.5 20.8 31.2 31.5 75.1 n.m. 88.8 FY11E 159.7 132.6 56.2 -54.9 25.0 0.8 98.5 94.5 45.8 -54.7 12.5 0.3 61.2 -35.7 -32.8 -3.0 -0.2 25.5 25.6 27.1 -0.6 0.0 -3.8 21.0 21.2 0.34 0.34 38.3 16.0 17.0 13.2 13.3 217.4 151.8 161.7 n.m. 102.3 FY12E 209.6 173.3 73.6 -69.6 31.5 0.9 126.4 116.2 62.8 -68.8 15.9 0.4 83.2 -49.5 -45.1 -4.3 -0.2 33.7 34.0 35.7 -1.6 0.0 -6.5 25.5 25.8 0.41 0.41 39.7 16.2 17.0 12.2 12.3 31.2 35.9 32.3 21.2 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
FY08A Revenues Cost of Goods Sold Gross Profit R&D Expenses SG&A Expenses Share-based Expense Operating Profit (EBIT) EBITDA Interest Income, net Investment Income (Exp.) Other Income (Exp.) Earnings before tax Tax Net Income (Reported) Net Income (Adjusted) Reported EPS (US$) Adjusted EPS (US$) 23.4 -12.7 10.7 0.0 7.0 0.0 3.7 4.0 0.0 0.0 -2.0 1.7 1.1 -0.6 2.5 -0.02 0.07 FY09A 38.4 -19.9 18.5 1.2 11.7 0.1 5.6 6.5 0.0 0.0 0.1 5.6 0.3 4.2 5.6 0.13 0.16 FY10E 50.3 -26.0 24.3 0.9 13.8 0.2 9.7 10.8 0.2 0.0 -13.8 -3.9 0.4 -5.8 10.5 -0.15 0.22 FY11E 159.7 -98.5 61.2 3.0 32.8 0.2 25.5 27.1 -0.6 0.0 0.0 24.9 3.8 21.0 21.2 0.34 0.34 FY12E 209.6 -126.4 83.2 4.3 45.1 0.2 33.7 35.7 -1.6 0.0 0.0 32.1 6.5 25.5 25.8 0.41 0.41
Ratio analysis
%, year-end December Gross Margin EBITDA margin Operating Margin Net Margin R&D/sales SG&A/Sales Sales growth Operating Profit Growth Net profit growth FY08A 45.7 17.3 15.9 -2.7 0.0 29.8 686.6 1120.3 nm FY09A 48.2 16.9 14.5 11.0 3.2 30.4 64.0 49.9 nm FY10E 48.3 21.5 19.3 -11.5 1.7 27.4 31.2 75.1 nm FY11E 38.3 17.0 15.9 13.2 1.9 20.5 217.4 161.7 nm FY12E 39.7 17.0 16.1 12.2 2.1 21.5 31.2 32.3 21.2
Net debt to total capital Net debt to equity Asset Turnover Working Capital Turns (X) ROE ROIC
-56.3 -56.3 93.9 23.3 -14.9 7.3
16.3 26.9 57.2 -11.9 31.1 26.7
-45.6 -52.4 19.9 1.2 -5.6 -3.6
-53.2 -63.4 45.5 1.5 10.9 9.5
-54.1 -66.1 52.2 1.6 11.8 10.3
Balance sheet
FY08A Cash and cash equivalents Accounts receivable Inventories Others Current assets LT investments Net fixed assets Other LT assets Total assets Liabilities ST loans Payables Others Total current liabilities Long term debt Other liabilities Total liabilities Bona Film Shareholders' equity Minority interests Total Liabilities and Equity 5 5 0 4 14 1 0 10 25 0 4 7 12 0 4 16 8 1 25 FY09A 7 19 0 7 34 1 0 32 67 13 9 21 42 0 4 47 20 1 67 FY10E 124 10 0 12 146 0 14 93 253 16 10 26 52 11 4 67 184 3 253 FY11E 170 41 0 29 240 0 16 95 351 23 51 47 122 16 5 143 205 3 351 FY12E 204 48 0 35 287 0 19 95 401 30 55 55 140 21 7 168 231 3 401
Cash flow statement

FY08A Net Income Depr. & Amortisation Change in working capital Other Cash flow from operations Capex / Investments Others Cash flow from investing Free cash flow Equity raised/ (repaid) Debt raised/ (repaid) Other Dividends paid Cash flow from financing Net change in cash Beginning cash Ending cash -0.6 -0.3 2.8 -8.6 -6.8 -10.4 -0.6 -11.0 -17.2 7.9 0.0 4.0 0.9 12.7 4.8 0.0 4.8 FY09A 4.2 -0.8 0.4 0.0 3.9 -21.0 0.0 -21.0 -17.1 11.1 12.7 -6.7 1.4 18.5 2.6 4.8 7.4 FY10E -5.8 6.6 10.7 -14.6 -3.1 -81.6 0.3 -81.3 -84.7 160.4 14.6 7.9 1.6 184.5 116.3 7.4 123.7 FY11E 21.0 44.0 14.4 0.3 79.8 -47.7 0.0 -47.7 32.0 0.1 12.0 1.7 0.0 13.8 45.8 123.7 169.5 FY12E 25.5 60.9 -1.8 0.4 85.0 -63.7 0.0 -63.7 21.2 0.0 12.0 1.4 0.0 13.4 34.7 169.5 204.2
Source: Company reports, Bloomberg, J.P. Morgan estimates. *Note: Adjusted earnings exclude share-based compensation expense (non-cash) and one-time items.
32
Film release schedule

Name of films Genre Scheduled domestic release date Top 10 box office pipeline where Bona is lead investor and sole distributor Just call me nobody Martial arts comedy The Grand Master What women want Overheard 2 Legend of Condor Hero The Magician Flying Swords of Dragon Gate Historical martial arts Romantic drama Martial arts comedy Modern action drama Espionage drama Martial arts comedy Drama Drama 3D martial arts 12/1/2010 1/1/2011 2/1/2011 3/1/2011 7/1/2011 7/1/2011 10/1/2011 11/1/2011 12/1/2011 12/12/2011 10/1/2010 12/30/2010 2/14/2011 3/1/2011 4/1/2011 4/1/2011 6/1/2011 8/1/2011 9/1/2010 3/1/2011 11/1/2010 1/1/2011 3/1/2011 1/31/2011 7/1/2011 2012 (TBD) 2012 (TBD) 2012 (TBD) Bonas economic interest 100% 20% 43% 100% 80% 70% 80% 50% 60% 60% 33% 67% 100% 100% 47% 50% 100% 43% 10% 2% 80% 80% 100% Total expected gross BO estimates (US$000) 29,412 36,765 26,471 13,235 22,059 17,647 22,059 22,059 41,176 66,176 4,412 5,147 2,206 11,765 2,206 7,353 8,824 2,941 2,941 2,206 735 5,882 4,412 32,353 58,824 60,150 42,105 33,082
Other film pipeline where Bona is lead investor and sole distributor Romantic drama The Road Less Travelled Snow in Taipei Flying Machine Hello, Mr. Tree A Beautiful Life The Catch Snapper Film pipeline where Bona is only a distributor Pandemic He Lives By Night Chongqing Blues Happy Goat and Big Big Wolf III Film pipeline where Bona is a minor investor Shaoling Temple The Founding of CPC Film pipeline in 2012 so far Sea of Forest and Land of Snow The Third Masters Sword Mulan Source: Company
Source: Company.
Romantic drama Romantic drama 3D family Romantic drama Romantic drama 3D thriller Thriller Thriller Thriller Drama Animation Martial arts Martial arts drama History Drama Historical martial arts Martial arts
33
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 Taxes Net Box Office (post taxes) Share of Movie Theatre @50% of net box office Share of Theatre Circuit @5% of net box office Total distributable Box Office Share of Distributor@6% of net box office Gross Proceeds to Producer Gross Proceeds to Producer (as a % of net box office) Sales and marketing @4% of total net box office Net Proceed to Producer Net Proceed to Producer (as a % net box office)
100.0 8.2 91.8 45.9 4.6 41.3 4.6 36.7 40% 3.7 33.1 36%
34
Figure 20: Bona Films 2010 Box Office Data

Movie Title (English) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Kansen rett My ex-Wife's Wedding Chongqing blues The Road Less Traveled Just Call Me Nobody Pleasant goat and Big Big Wolf II My Iz budushchego Martial spirit Fire of conscience Like a dream Gallants Triple Tap Curse of the Deserted Movie Title (Chinese) 2 2 1.3 6.8 159 Box Office (RMB M) 124.7 NA NA 15.5 NA HK$436 12.35 23.6 NA 0.88 NA
Source: Entgroup.
35
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 analysts 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..
Bona Film Group Ltd. (BONA) Price Chart

14 13 12 11 10 9 8 Price($) 7 6 5 4 3 2 1 0 Dec 10 Dec 10 Dec 10 Jan 11 Jan 11 Jan 11
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 it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
Coverage Universe: Dick Wei: AirMedia (AMCN), Alibaba.com Limited (1688.HK), Ambow Education (AMBO), Baidu.com (BIDU), China Finance Online (JRJC), Focus Media (FMCN), Netease (NTES), Shanda Games (GAME), Shanda Interactive Entertainment Ltd (SNDA), Sina Corp (SINA), Sohu.Com (SOHU), Tencent (0700.HK), The9 Limited (NCTY), VanceInfo Technologies Inc. (VIT), VisionChina (VISN)
36
J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2010 Overweight (buy) 46% 53% 43% 71% Neutral (hold) 42% 50% 49% 63% Underweight (sell) 12% 38% 8% 59%
J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients*
*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative. Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
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Asia Pacific Equity Research

Bona Film Group Ltd.

China China Internet Dick Wei

(852) 2800-8535 dick.x.wei@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited

BONA share price ($) NASDAQ Composite (rebased)

YTD Abs Rel 6.2% 2.3%

12m -27.8% -46.7%

FY12E 11.8 10.3 4Q 0.12 0.05 0.20

Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com

Asia Pacific Equity Research 18 January 2011

P&L sensitivity metrics

EBITDA impact (%) 0.7% -1.3% -0.5% -0.6%

EPS impact (%) 0.9% -1.7% -0.6% -0.7%

Price target and valuation analysis

Risk-free rate: Market-risk premium: Beta: WACC: Terminal g:

4.0% 6.0% 1.3 12.1% 0%

Source: Company reports, J.P. Morgan estimates.

EPS estimates: J.P. Morgan vs consensus (Rmb)

J. P. Morgan 0.05 0.34 0.41

Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com

Asia Pacific Equity Research 18 January 2011

Valuation and share price analysis.........................................9

Investment thesis ...................................................................12

Bona Film Group Ltd.: Summary of financials.....................32

Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com

Asia Pacific Equity Research 18 January 2011

SFG 5% Huax ia Film Distribution 8% Huay i Brothers 13% Bona 17%

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

Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com

Asia Pacific Equity Research 18 January 2011

2010E Box office (US$M)

Source: EntGroup estimates.

Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com

Asia Pacific Equity Research 18 January 2011

Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com

Asia Pacific Equity Research 18 January 2011

Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com

Asia Pacific Equity Research 18 January 2011

Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com

Asia Pacific Equity Research 18 January 2011

Valuation and share price analysis

Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com

Asia Pacific Equity Research 18 January 2011

Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com

Asia Pacific Equity Research 18 January 2011

Table 1: Comparative valuation

12.7 17.8 7.7

3,892 3,080 462

14.0 22.6 12.9 20.0 6.6 7.5 21.6

15,160 5,246 4,647 4,318 1,409 1,554 1,559

11,175 3,911 4,822 3,349 1,076 1,074 1,339

42.1 107.7 37.4 201.0 23.1 27.6 6.11

6,223 4,058 1,500 47,557 579 1,333 360

6,419 3,455 1,869 29,033 649 1,208 359

Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com

Asia Pacific Equity Research 18 January 2011

No. of mov ie theater per million of pop'n

Dick Wei (852) 2800-8535 dick.x.wei@jpmorgan.com

Asia Pacific Equity Research 18 January 2011

Figure 6: Growth in screens2008-2012E CAGR of 12.3%

Figure 7: Number of movie theatres2008-2012E CAGR of 11.6%

3,967 130 2008

4,023 700 2009