In Stephen Chow’s action-comedy Journey to the West: Conquering the Demons, the character Tang Sanzang struggles to defeat fish and pig demons, as well as the wicked Monkey King. In real life, there’s a parallel drama unfolding between the film’s distributor, Huayi Brothers, and its four investors, led by Chow’s Bingo Group. Each side is claiming entitlement to 70% of the movie’s bumper profits.
For the past week, Bingo Group, which is listed on the Hong Kong stock exchange, and ChiNext-listed Huayi Brothers have been issuing separate notices contesting how the profits are to be divided. The main sticking point is whether Huayi is an investor in the production or merely the Chinese distributor of the film. If the latter, the studio’s take will be considerably less.
There’s a lot at stake financially. Journey has taken Rmb1.24 billion ($200 million) in ticket sales. If the trend continues, it could displace Lost in Thailand – which took Rmb1.26 billion – as China’s top-grossing domestic production.
So what happened? The debacle began in early February, when Huayi’s chief executive Wang Zhonglei wrote on his personal weibo that his company was contracted to receive the largest share of Journey’s net profits because Huayi had invested in the film, as well as serving as its China distributor. Wang claimed that Huayi had put Rmb88 million into the production, by far the largest investor into a film that cost Rmb106 million to make.
The weibo post caught everyone by surprise, contrasting sharply with Bingo’s announcement last November, which didn’t even name Huayi among the project’s four financing parties. At the time, Chow said Village Roadshow, Chinavision Media and Edko Films were co-producers and investors of the film, with Bingo owning the majority share.
After Wang’s announcement, Bingo then issued a statement saying that Huayi will receive only 12% of the film’s net profits as distributors plus an additional share of box-office dividends. The other investors – excluding Huayi Brothers – “actually obtain approximately 70% of the net income calculated from distribution of the film in mainland China”.
Shanghai Securities Times reckons the dispute stems from Huayi’s definition of the Rmb88 million “investment”. For Bingo and the other studios, the cash was never considered as production money. Instead, they see it as Huayi’s guaranteed return on ticket sales in China. But Hu Ming, Huayi’s company secretary, told Sina Entertainment that the money was referred to as an “investment” in the terms of agreement with Bingo. Huayi’s title – on paper – was also as a co-producer.
After the initial war of words both parties have gone very quiet on the matter. Speaking to Hong Kong’s Apple Daily last week, Chow declined to comment, saying only that his company is already dealing with the matter.
Still, the row is revealing for several reasons, and not just because such public brawls are unusual. Film accounting can be notoriously difficult to pin down (not just in China; Seth MacFarlane joked about it at this year’s Oscars, although in this case it was about how Hollywood tries to reduce its tax bill). But this is the first time that two publicly traded Chinese film studios have found themselves in such open disagreement. And as China’s box office take grows, more disputes may arise, especially if the initial legal agreements leave room for different interpretation by rival parties.
Huayi Brothers and Bingo aren’t the only studios in the headlines for investors. Another studio, Enlight, has also shocked the market when the studio behind Lost in Thailand reported earnings that fell far short of forecasts. Its share price fell rapidly as a result.
Even though the company – which is listed in Shenzhen –recorded net profit of Rmb310.2 million for 2012, a healthy increase of 76.5% from a year ago, investors were expecting much more.
Lost in Thailand, which is said to have cost just Rmb30 million to make, reported box office earnings of Rmb1.2 billion by the end of last year (see WiC177). That should have translated to a post-tax profit of at least Rmb270 million for Enlight in the fourth quarter, says 21CN Business Herald. In the first three quarters Enlight also recorded gross profit of Rmb136 million. With the additional income expected from Lost in Thailand, investors were hopeful of much better full-year results.
What was the reason for Enlight coming up short? One explanation is that the studio had committed itself to dividing more of the proceeds among the actors, director and other participants. Others say the film must have cost far more than Rmb30 million to make. But there is no way of confirming this because Enlight refuses to reveal the costs for individual projects. “It is not clear how much it took to make Lost in Thailand,” an industry insider told 21CN. “In the end, only Enlight knows the final figure. In the film business, falsifying figures is common practice.”
All of these industry tussles have only come to light because the parties involved are listed companies. Nonetheless, a little more transparency would be useful. Enlight’s share price has since recovered much of its lost ground. But as China’s box office becomes too big to ignore – it surpassed Japan as the world’s second largest box office last year – a greater level of transparency in studio accounting is desperately required.
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