Walt DisneyX (DIS – Free Report) the latest film in the Avatar franchise is set to release in China along with the rest of the world on December 16th.
Disney and movie theater chain executives have been keeping a close eye on Chinese film censors given the potential box office out of China.
Chinese censors have been quite strict in recent years, barring various Hollywood studios from releasing films in the country, citing sensitive political topics and statements objected to by the authorities.
Strict censorship in China has impacted the worldwide box office performance of the last seven superhero films produced by Marvel Studios, Disney’s highest-grossing film studio. In July, for example, Marvel’s latest film, Thor, underperformed at the international box office due to no release dates being announced in China.
While Disney hasn’t revealed the budget for the Avatar sequel, James Cameron, the film’s director, has stated that it needs to be the third or fourth highest-grossing movie to break even. The permission to open in China could allow the film franchise to live up to past expectations.
The first Avatar movie, released in 2009, grossed almost $2.9 billion worldwide, with $259 million of that going to China, making it the highest-grossing film of all time. It edged out Avengers: Endgame upon re-release in September 2022 as ticket sales for the film increased by $73 million.
The launch of the first Avatar movie triggered a boom in multiplex construction in China, allowing American multiplex businesses such as IMAX (IMAX – Free report) to strengthen your business in China.
In Chinese cinemas, the queue for the film “Avatar” lasted up to six hours. Prior to the film, IMAX had 14 screens in China, and currently has 800, with 200 more on contract.
It will also allow Disney, which currently holds Zacks Rank #3 (Hold), to diversify its revenue stream into high-growth markets and economies that will fund its key growth drivers such as Disney+.
Disney+ is facing significant competition in the streaming market from Netflix (NFLKS – free report) and AppleX (AAPL – Free Report) Apple TV+ and spends a lot of money on the release of original content to fight fierce competition in an extremely saturated market. You can see Full list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Disney Movie Release in China to Fund Disney+ Business
Disney is focusing on its streaming service, which will cost the company capital in terms of content and marketing, to face competition from Netflix and Apple.
Netflix is considered a pioneer in streaming and enjoys the advantage of being a first mover in the industry. Its solid content portfolio is the main growth driver.
Since the launch of Apple TV+, several original Apple TV series and movies have received over 240 awards and 950 nominations, including the acclaimed SAG Awards, Primetime Emmy Awards, and Critics Choice Awards. These accolades grab viewers’ attention and help win market share from Netflix and Disney.
We expect Disney to increase its direct sales spending by 12.5% year on year in order to compete with its competitors. As a result, direct-to-consumer operating losses are expected to be $4.88 billion in FY 2023, up from $4 billion in FY 2022. Rising costs and losses are expected to put pressure on consolidated margins.
In addition, Disney has an extremely highly leveraged balance sheet showing that it is lending more money to grow the business in a highly fragmented market. Total borrowing was $48.37 billion as of October 1, 2022, compared to $46.6 billion as of July 2, 2022. The balance of Disney’s debt is unfavorably balanced against cash, cash equivalents and a current balance of $11.62 billion in marketable investment securities.
All this had a very negative impact on the price of Disney shares. Since the beginning of the year, its shares have fallen 36.2% compared to the Zacks Media Conglomerates industry’s 33.7% drop.
Against this backdrop, the release of the new Avatar movie in China is welcome news for the company. This will create a new source of revenue for the company and help boost its revenue in the coming quarters.