The trailer for the much-anticipated Zhang Yimou film The Great Wall uses 3D to exaggerate the height of China’s best known structure. That seems appropriate as the film’s producer and distributor China Film Group has been scaling grandiose new heights of its own.
After raising more than Rmb4 billion ($600 million) in its IPO the group’s distribution arm China Film Co made its debut on the Shanghai Stock Exchange on August 9. Its share price has more than tripled in value since then – going from Rmb8.92 on opening day to more than Rmb25 ($3.77) on Thursday this week.
It is the largest public offering in the history of the Chinese entertainment industry and during its one and a half week trading run China Film’s closing price has risen every day. So what is behind its meteoric rise? After all it was only five months ago that one of China Film Group’s subsidiaries was caught exaggerating ticket sales by creating fake screenings (see WiC317).
Indeed, since the government began cracking down on this practice, national box office takings have looked a lot lower – dropping 5% in the second quarter and 18% in July according to data from the Beijing based Ent Group. Before the recent blip Chinese box office takings were expected to surpass those in America by the end of 2017 (see WiC306).
The bulls argue that could still occur: more films are being made, more screens built and the economy is still growing. Nor is China Film the only stock they’ve piled into.
The production arm of the Shanghai municipal media and entertainment group, Shanghai Film Co, also debuted this week and rose by its one-day maximum – adding to the sense that entertainment stocks have become a one way bet. “TV and film has become the hottest commodity in a cool capital market!” screamed Sohu.com’s business page.
But another factor are the rules around new listings. Since the stock market crash last summer the China Securities Regulatory Commission (CSRC) has tightly controlled the type and number of companies going public. It has done so to keep demand high and thus the market up. That’s also made investors keener to chase IPOs – which partly explains why the China Film listing was oversubscribed 2,500 times by institutional investors.
A second reason for its one-way rise is the IPO valuation cap the CSRC has imposed of 23 times historic earnings. As a rough comparison Wanda’s Cinema Line, which is China’s biggest movie-theatre operator, trades at 64 times last year’s earnings. Priced at 23 times its earnings, China Film looked cheap.
The cap means when new listings do occur they often surge. Bloomberg found that newly traded stocks were rising 383% a month in the latter half of last year.
“Returns are guaranteed,” it quoted a portfolio manager as saying. “That’s why everyone is so willing to participate and demand for new shares is so high.” Reuters also takes the view that “post-flotation performance is often divorced from fundamentals”. Its Breaking Views column commented: “The artificially low prices force issuers to leave a lot of money on the table. That in turn guarantees dizzying IPO returns, which then attract even more investors.”
Reuters had some warnings though for those buying into the China Film’s investment story over the medium to long term. It pointed out that ticket prices receive subfrom ticket selling apps – which use low prices to attract and collate data on their customers. If those subsidies disappear, so too might some lower income purchasers, leading to box office declines. It also added: “China Film’s core distribution business is slowing while plans to push into movie-making and cinemas will pit it against powerful rivals like Dalian Wanda and Alibaba.”
But the Hollywood Reporter took another view. It noted that China Film Group has a 58% share of the country’s overall movie distribution market and that it is one of only two companies allowed to handle the import of foreign movies (the other being Huaxia). “There is no relationship more important to the Hollywood studios in the growing Chinese market than its ties with China Film,” the Tinseltown-based industry publication commented.
Some in China’s local media speculated that the IPO would be a force for good because it would bring greater transparency to the sometimes murky world of Chinese film.
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