Media & Gaming

Galloping ahead

Li Ming is cashing-in on China’s cinema boom

Galloping ahead

Here’s a stat likely to resonate with Hollywood studio execs: China is adding new cinemas at the pace of three screens a day, faster than any other market. Three years ago it had just 1,500 screens but 20,000 are expected to be operating by 2015, and 40,000 by 2040, taking the country to parity with the US.

Growth at that pace means no shortage of investors trying to get a piece of the action. Film studio Huayi Brothers raised Rmb1.2 billion ($175 million) through an initial public offering in 2009 on Shenzhen’s ChiNext exchange, and Bona Film Group, a distributor, also pulled in $100 million through an initial public offering on Nasdaq late last year.

Now some are betting that Beijing Galloping Horse will be the next big thing. Back in March, the Beijing-based film studio raised more than Rmb750 million from over 40 investors on a valuation of Rmb3 billion. The placement was so popular that virtually all the bigger domestic private equity and venture capital firms expressed interest in buying a stake, says Global Entrepreneur.

That’s understandable considering Galloping Horse’s track record. The company’s successes include the ongoing TV hit series Three Kingdoms and last year’s feature film Kung-fu Cyborg: Metallic Attraction. It also has a reputation for making movies inexpensively and generating strong returns. This year it produced Just Another Pandora’s Box, a film that cost Rmb30 million to make but took in more than Rmb130 million at the box office. Similarly, Zhang Yibai’s Cherish Our Love Forever cost just Rmb13 million but raked in Rmb200 million in ticket sales.

The studio currently generates the majority of revenues from film and TV production. While it is common practice in other countries for the studio to take a majority share of box office receipts, in China cinemas claim much more of the take (up to 60% of it, in fact). Studios also struggle to cash in on DVD sales and merchandising like their American peers, because of piracy. Both drawbacks put pressure on production houses to keep budgets low if shareholders are going to earn a decent return.

Li Ming, the founder of Galloping Horse, says that TV production can also look more attractive than filmmaking, as it is generally easier to predict success.

“As producers, you just need to be able to secure the right actor and director who are experienced in this area,” Li told China Enterprise News. “Making films, on the other hand, is risky and unpredictable. I liken it to gambling – one film may make it, but the next one may fail.”

Given the risks, Galloping Horse is now thinking of moving upstream into cinema operations. The company recently announced it’s spending Rmb500 million building 15 theatres of its own by the end of this year. Each cinema will have between eight and twelve screens, for a total of 100 screens by the end of 2011, Ivy Zhong, general manager of the company’s production division, told The Hollywood Reporter.

Because of rapid growth in cinema numbers in China, other production companies are also looking at moving into the field as a way to increase profits. Huayi Brothers, too, has started investing in its own chain of cinemas. “If a company does not have the ability to distribute its own films and has to rely on someone else to do it, then they are in trouble,” says Li.

The problem with that strategy, says Century Weekly, is that the up-front costs are steep: the industry estimate is that it takes from three to seven years to recoup a cinema-related investment. But that hasn’t dampened investor enthusiasm. Jiang Tao, a director at film regulator SARFT, told Century Weekly that some individual investors have also started putting money into smaller cinemas in the provinces. In part that’s an attempt to boost their public profiles locally. But if it turns out to be a profitable exercise too, they will be doubly pleased.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.