Talking Point

Box office bombshell

Alleged scam rocks China’s film industry as financing model is questioned

Ip Man w

Ticketing controversy: Donnie Yen, star of the Ip Man franchise, with other cast members

For years Mike Tyson has wanted to be taken more seriously as an actor. The former boxer has had cameo roles in films like The Hangover and starred in his own one-man Broadway show.

But for his most recent outing Tyson has turned to the Chinese market, playing the villain in the martial arts movie Ip Man 3. His performance as a corrupt property developer has even won him a Best New Actor award from Macau’s Studio City (admittedly the honour was more of a PR move for the Hollywood-themed casino resort than a genuine industry accolade).

But no matter: Tyson’s appearance has helped to boost the film at the Chinese box office, where it raked in Rmb100 million ($15.4 million) in ticket sales in its opening 16 hours this month. To date, it has grossed about Rmb700 million and is on track to surpass Rmb1 billion by the end of its run.

Ip Man 3’s performance is less of a surprise because the previous instalments of the franchise did well in China too. But last week it became headline news for the wrong reasons, when regulators announced an investigation into whether the distributor had been faking ticket sales.

So what happened?

After the film’s strong debut on March 4, fans started to pick up on strange activity among some of the online ticketing platforms. China Daily then published a screen grab from a mobile ticketing service showing weekend screenings for Ip Man 3 running from 5:40pm to 11:25pm and charging Rmb38 a ticket (a common discounted online rate), followed by additional screenings at 12:50am and 12:56am charging as much as Rmb203 per seat.

Some of the late screenings – such as those after midnight – were also indicating full-house status, prompting the coinage of a new buzz word to explain the weird phenomenon: ghost tickets.

“Who has been buying those ghost tickets?” one internet user asked.

Xinhua news agency noted other irregularities, with many front row and aisle seats – that is, the least desirable seats in the house – sold out, while seats in the middle were left empty. Cinema chains in smaller regional markets were also reporting much larger grosses for the film than for other recent blockbusters.

The suspicion is that cinema operators have been colluding with distributors to push up box office figures.

In Shanghai alone, Sina reports that as many as 200 cinemas have signed “private use” agreements with the distributor, Shanghai Kuailu Investment Group. The theatre management arm of China Film Group, the largest state-backed movie distributor, also admitted in a separate statement that one of its cinemas in Wuhan had launched overlapping “invalid” screenings of Ip Man 3 last week and promised to punish the cinema operator for its wayward behaviour.

Why would Kuailu want to boost box office receipts?

In the past Hollywood studios have been more likely to complain about losing out on income, as theatres under-report ticket sales to avoid tax or reduce payouts to content owners.

But the buying of ghost tickets is a very different phenomenon. “The first week of a film’s release is highly critical because it directly effects how many screenings the cinema operators will schedule. So bulk-buying tickets is part of the film’s promotion and marketing campaign,” an industry insider told CBN, a newspaper. “For the cinemas that work with the distributors, it means they will receive extra profits.”

Another insider told the Wall Street Journal that it has long been “an under-the-radar practice” for companies to buy tickets in bulk during the opening period to manufacture buzz around a film. Edko Films admitted to purchasing 40 million tickets for last summer’s blockbuster Monster Hunt, for instance, with the film eventually unseating Furious 7 to become China’s top-grossing film ever.

As WiC has reported previously, box office fraud has become enough of a problem for the industry regulator, the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT), to promise ‘iron fist’ measures to crack down on fraudulent practices (see WiC311).

The only reason that the latest incident has become high profile is because Kuailu was “more blatant than usual,” says the China Daily. After Ip Man 3 pulled in more than Rmb500 million during the first four days after its March debut (traditionally a quieter period for cinemas after the peak season over the Lunar New Year) SAPPRFT then summoned the movie’s producers and distributors for an explanation. An investigation is still underway. “We have received many complaints about box office fraud,” the regulator acknowledged. “We will nullify box office returns as necessary and punish the cinemas, distributors and film companies involved, depending on the seriousness of the offence.”

Kuailu denies the accusations, insisting that Ip Man 3 was a “great film” and that there was no need to inflate its box office receipts artificially.

“Some competitors and criminals are fabricating facts to blackmail Shanghai Kuailu group and other companies,” it said in a statement, adding that the “widespread rumours and defamation have greatly harmed us, a healthy private company”.

A later statement took on a more patriotic stance, saying that commercial returns were not its primary goal and that Kuailu wanted to “express our emotions toward the country”.

“Kuailu is not only investing in a film, but also in sending a message across. Once China is strong, Chinese films will be strong.”

The role of movie finance…

The alleged box office fraud would not be quite so serious were it not for the innovative way Kuailu (and other producers) now finance their movies: using structured financial products linked to ticketing sales. CBN has suggested the emergence of this funding source is another motivation for distributors to dress up a film’s gross income.

The simplest form of a movie-backed investment product is a box office guarantee between investors and the distributors of a film. For instance, Beijing Daily has reported that distributors for The Mermaid have already paid out Rmb2 billion to the film’s investors, including Hong Kong comedian Stephen Chow (see WiC313). The distributors get to keep all of the receipts above this figure. The Mermaid has grossed more than Rmb3 billion (and is still showing).

Teaming up with conventional movie producers, Chinese internet giants like Baidu and Alibaba have also been offering schemes for retail investors to put money into movies and have their returns linked to its box office performance (see WiC255).

According to CBN, the practice has resulted in more complex – and more opaque – securitisations, including movie-backed investment schemes packaged as wealth management products and sold on peer-to-peer lending platforms.

“A bubble is forming in the movie industry,” the newspaper warns. “A movie which is expected to gross more than Rmb1 billion could easily pull in more than Rmb10 billion of capital. But if the movie in question doesn’t meet the box office target [Rmb1 billion], there could be liquidity concerns or even defaults along the industry chain.”

What exactly is Kuailu’s role?

Ip Man 3 is now providing a case study for an inside look at how some of these financing arrangements work. Allegations of box office fudges aren’t the only reason that Kuailu is in media focus. As it turns out, the company also hatched plans to make money from Ip Man 3 via the capital markets.

In late February, Kuailu’s boss Shi Jianxiang, 52, became the single largest shareholder of the Hong Kong-listed media firm, Shifang, which then spent Rmb110 million to acquire 55% of the action movie’s ticket income in China. On top of this investment, Shifang said it would acquire a 15% stake in an affiliate of Kuailu, with plans to turn “some of its financial products into a form of consumer product for film distribution by incorporating the function of film ticketing redemption with investment”.

Shifang provided few further details on the proposals. But that didn’t stop its shares from surging almost 60% in the month prior to Ip Man 3’s debut.

One Kuailu employee told Times Weekly: “The ultimate goal for Kuailu is to increase the box office figure in exchange for an increase in the share price of the listed company. The higher the box office, the higher the share price.”

Funding for Ip Man 3’s reported $30 million budget also came in part from peer-to-peer (P2P) lending firms run by Shi. They entice investors by promising at least 8% annual returns, and as much as 18% if films surpass Rmb1 billion at the box office.

To complicate matters further, Kuailu serves as the guarantor of these securitised products.

“I believe that some of the crowdfunding platforms are innocent. However, some of those peer-to-peer lenders are actually the producers themselves, so that is illegal fundraising,” an industry source tells Time Weekly.

A financial columnist writing on Baidu’s commentary portal has even compared Kuailu’s case with Ezubao, a failed P2P finance platform which has been cited by the state media as ‘China’s biggest ponzi scheme’ (see WiC313). “Kuailu and its affiliates needs to disclose their financial transparency to the public as soon as possible, or else questions on Ip Man 3 will never go away,” he writes.

So essentially, Kuailu’s presence is an all-encompassing one: it produces the film, distributes it and securitises the future earnings through various subsidiaries. Of course, it is also alleged to have purchased tickets for the film to inflate the box office figures.

“Capital has been tight for Kuailu for some time. It is using the operations in the film business to raise capital in the secondary market [to stay afloat],” an unnamed company insider told CBN.

The Shanghai-based firm was founded in the 1990s when four state-run firms, including a wire and cable manufacture, were privatised.

In recent years it started dabbling in film financing and distribution. In addition to being one of the producers of Ip Man 3, it is also financing The Bombing, a film featuring Adrian Brody and Bruce Willis, which will dramatise Japanese air raids on the city of Chongqing during the Second World War. The project has a budget of about $56 million, according to company information, and Kuailu has put financing proposals for The Bombing into the P2P lending market.

But what’s the big deal?

Betting on how well a movie will do is notoriously risky. Even the best directors and the most star-strewn casts can make bad films, while smaller productions can reap huge gains, says Changjiang Evening News.­­ What it means for investors is that there is little guarantee that they will get their money back: “If the film reaches the expected box office result, everyone gets paid and the securitisation serves its purpose. But if the film flops, the capital chain is going to be broken and investors will lose all their money,” says Securities Times.

Ticket sales at Chinese cinemas surpassed American ones in February, Xinhua reports. The Rmb6.87 billion in revenue was a 50% increase over the same period last year, when China beat the US in monthly gross box office income for the first time. Boosted by the boom, share prices in the sector have surged too.

The stock price of the largest cinema chain, Wanda Cinema Line, has risen nearly eightfold since its initial public offering in Shenzhen in January last year. Shares in IMAX China (which has plans to open 100 new theatres in China this year) have also risen 54% after making their debut in Hong Kong in October.

But the fact that the film industry is one of the brighter spots in an economy with a slowing growth rate likewise means that it is attracting speculators – very few of whom are interested in filmmaking itself.

One financial analyst told CBN: “A lot of listed companies that previously had nothing to do with the film industry are now pouring into the industry, hoping to diversify from their main business.” Moreover, the controversy over ghost ticketing also begs the question: how big is China’s box office really?

While China looks well positioned to surpass the US as the biggest grossing film market next year, many are questioning the accuracy of some of the numbers. And with the proliferation of shadow financing schemes, it seems to be only a matter of time before some investors get burned.


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