China Set To Become IMAX's Biggest Market As Wanda Buys 150 Theatres

Wanda's big screen business just got bigger. IMAX today struck a deal with the entertainment division of Dalian Wanda group to build 150 new theatres in China over the next six years.

The deal with Wanda Cinema Line is the largest pact in Imax's  history and marks its Chinese partner's growing ambition. When the additional screens open, they will bring Imax's  total to 742 in China alone--nearly double the number of U.S. screens.

Controlled by China's richest man, Wang Jianlin, Wanda has been on a shopping spree of late. As the parent company of AMC Theatres, it oversaw AMC’s July bid for U.K. cinema chain Odeon & UCI Cinemas Group; it is also vying for AMC rival Carmike Cinemas. It already owns Hoyts Group of theatres in Australia.

In 2015, 30% of Imax's  $373.8 million revenue came from China. It currently operates 335 theatres in the country, with hundreds more--included the latest Wanda ones--scheduled to be installed by 2021. When all are up and running, Wanda will operate 360 Imax  screens.

"[The deal] not only strengthens our market-leading position in China, the world's fastest-growing film market, but also reinforces our strong working relationship with Wanda Cinema," said Imax  CEO Richard L. Gelfond in a press release.

Both Imax  and Wanda are betting big on China's burgeoning middle class and the growing appetite for movies in the Middle Kingdom. Analysts predicted last year that China's ticketing receipts would outdo the U.S. by 2020, but a slowdown in the second quarter of 2016 had many scale back expectations. Under the terms of the new deal, the two companies will split box office revenue, meaning China's box office fortunes will impact Imax's  bottom line more than ever.

Imax  and Wanda are hoping to snag a significant slice of China's movie market, which has shown a preference for visual effects-driven blockbusters. Foreign films are subject to a quota system, but a 2012 agreement stipulated that an addition 14 IMAX or 3D films can be distributed in China each year. Even better for Imax  and Wanda: Distributors of 3D films can earn a higher cut.

"Our partnership has been instrumental to Wanda's tremendous growth and our track record as China's box-office market leader for seven years running," said John Zeng, President of Wanda Cinema Line.

Revenue share is a marked change in business model for Imax , which used to license its technology to theaters throughout the 90s. The tactic did not work: In 2001, the stock bottomed out at 55 cents a share. "Theater owners would pay us up front to install our projection and sound systems, and we’d receive a very small percentage of box office revenue," recalled Gelfond in 2013, who helped restructure the company so it nabbed a cut of box office receipts on Imax  movie versions. A turning point came with 2009's Avatar, which grossed $250 million globally on Imax  screens; since then, the company has notched year over year revenue growth.

Imax's  local subsidiary, IMAX China, went public in October 2015; IMAX owns just over two thirds of the company.

Following news of the deal, IMAX Corp's stock is up 5% over yesterday's closing price to trade at $32.80 a share. But if Chinese cinema goers drop off in the months to come, IMAX's investors will not be seeing through such rose-tinted glasses.