Imagi Lifting off?

Here's an interesting editorial targeted towards investors out of Hong Kong that focuses on the financial aspect of Imagi and the Astro Boy movie. There were some money problems mid-way through production of the film, and naturally it's still up in the air how well Astro will perform at the US box office this weekend, but judging from this, the current outlook on the company is rather positive. Do keep in mind that there are some factual errors to be found (Imagi created the TMNT movie, not the TV series).

We'll have to wait and see what the Astro Boy film will mean for the future of Imagi, but until then you can read "Lift-off?" on the Standard or by clicking the link below for an archive version.

Lift-off?

Timothy Kwai

Monday, October 19, 2009

Imagi International (0585) will be looking for much more than Anime magic when its US$65 million (HK$507 million) animation, Astro Boy premiers in the United States and China on Friday.

Based on a popular Japanese manga character originally created by Tesuka Osamu in 1965, the film, Imagi hopes the movie puts it on a much stronger financial footing.

It opened in Hong Kong theatres on Saturday. But some investors are not waiting for box office returns.

They have already regained their faith in the company and the stock has been one of the most volatile counters on the local bourse, which some analysts have said is already quite topsy-turvey.

Imagi specializes in the development and production of animated feature films using computer generated imagery (CGI) technology. In 2007 it produced the very successful television series Teenage Mutant Ninja Turtles.

Astro Boy was completed in June. Many fans of animation around the world are eagerly waiting to see the film -- a proof that Imagi US$40 million outlay to promote the movie has not been in vain.

But some observers are wary of the company itself as it has had to climb stiff hurdles to be where it is today. In January, it conducted intense negotiations to secure a bridge loan facility of up to US$16.6 million.

In May, the firm said that it had reached an agreement with one of its shareholder -- Winnington Capital Limited -- to restructure the terms of its HK$132 million convertible note dated January 30, 20
08 issued by the Company pursuant to a subscription agreement dated December 4, 2007 between the Imagi and Winnington.

The initial conversion price of the Winnington shares is HK$0.30 subject to certain adjustments.

Also, there has been an earthquake in the boardroom. The founder, Francis Kao, has been appointed to handle design and financial matters while Phoon Chiong-kit, an experienced film executive, -has been elected as the deputy chairman.

A large-scale animation like Astro Boy and it has taken around 3 years to develop this project. During this time most of Imagi's human and financial resources were devoted to this animation.

However, sources in the industry point out that the profit-sharing deal between Imagi and Warner Brothers -- the distributor of Astro Boy -- does not favor the Hong Kong company.

This is important as a big slice of the income from such films is derived from the sales of toys and related items.

The film no doubt is expected to fare well in Hong Kong and the mainland. But that is unlikely to be matched by the reception of the much more lucrative American market.

With his prior connections in the industry, Phoon Chiong-kit has been able to ensure the screening of Astro Boy in 1,200 mainland theaters.

This is no small feat as Western movies rarely get such a wide exposure at the same time in China.

Foreign films distributors usually need to bypass a number of bureaucratic obstacles before being screened. Although Astro-boy is a foreign-made film, Imagi has got the license allowing direct talks on profit-sharing deals with individual theater owners.

There are around 4,000 theatres in China. So, being screened in 1,200 theatres is a breakthrough.

But investors should be aware of the fact that Imagi is pulling all resources on Astro Boy.

This is fraught with risks. If anything goes wrong with the film's reception, the stock price, currently trading at 38 Hong Kong cents, will be under great pressure.

I have the impression that Imagi is under such pressure to produce a successful animation or the management has to sell the company to someone else.

Investors are advised to keep track of the returns from the American box office at the end of this month. Surely, such returns is likely to correlate with the stock price.

Timothy Kwai is an investment strategist at Quam Securities