Projected losses

China’s cinema slowdown is going to hit some stars in the pocket


Angelababy: learning about the downside risks of investing

Last week Tom Cruise was in China for a week of promotional work for his latest feature Jack Reacher: Never Go Back. The Hollywood superstar was spotted at the Forbidden Palace in Beijing and then he flew to Shanghai and Guangzhou.

Cruise wasn’t alone in hitting the red carpet. Nicholas Tse was also on promotional duty, appearing at three screenings in a single night in Hangzhou to promote Heartfall Arises. The notoriously private singer-actor took selfies with fans and answered questions from tabloids, even when they had little to do with the film itself, says Qianjiang Evening News.

What does this tell us? When China’s box office has lost a little of its lustre – ticket sales over the last six months were down by 10% compared with the same period last year – even the biggest stars have to work up a promotional sweat.

Last year box office receipts increased by nearly half, so the slowdown is dramatic for the industry. Explanations for the downturn are varied. New scrutiny of box office statistics by the government may simply mean that this year’s numbers are more accurate. Others have blamed a weak line-up of films and a shortage of discounts from online ticket sellers. “In 2015, the online platforms burned around Rmb4 billion ($589.6 million) to subsidise the movie market, a bonanza for local films,” Zhang Qiang, the CEO of Alibaba Picture Group, told the Changchun International Movie Festival earlier this month. Now the platforms are putting up prices as they try to get their businesses into profit.

Last year’s stellar performance led many analysts to predict that China would overtake America as the world’s biggest movie market next year.

That now looks less guaranteed and the uncertain outlook has led to some belt-tightening in the movie production industry

Last week, Enlight Media said it would lay off 20% of its staff even though it reported net profit of Rmb560 million in the first nine months of the year. Analysts say the media firm is bracing for what could be a long winter ahead.

Huayi Brothers, too, has reported less inspiring numbers, with net income in the third quarter of this year up 1.3% compared with a year ago, reaching Rmb622 million.

A closer look reveals that the small increase is supported less by the film business and more by a one-off sale of Huayi’s stakes in two internet firms, says Beijing Business Today.

Huayi’s shares have been suspended from trading on the Shenzhen bourse since late September because the company is planning a major restructuring. Their last traded price – Rmb12.38 – is down almost 40% from the beginning of this year.

The fall has hit the pockets of some of the country’s biggest celebrities. Back in January, actress Angelababy – along with actors Li Chen and Zheng Kai – caused a stir by announcing that they had each increased their stakes in the media firm, buying in at a price of Rmb13.9 per share. To show their commitment, they agreed to hold the shares until at least January 2017.

“In just three months, the celebrities can finally offload their shares. But they are not going to be very happy since their shares are now worth a lot less,” says National Business Daily.

A number of stars and filmmakers were offered the chance to become shareholders in China’s top studios in a strategy first adopted by Huayi and then adopted more widely in the entertainment industry. For instance, one of the best-known directors Feng Xiaogang worked exclusively with Huayi after he was given shares in the firm ahead of its initial public offering in 2009, turning him into a billionaire. “By luring actors to become its shareholders, not only is it easier for Huayi Brothers to retain talent, their star power also attracts retail investors, boosting its market value,” comments the industry blog Chief Entertainment Officer. “But this strategy only has a short-term impact. In recent years, many media firms have entered the market, like Enlight, Wanda and Alibaba Pictures, so it has become increasingly common for these celebrities to own shares in more than one studio.”

The slump in share prices has also made a dent in Zhao Wei’s fortune. The billionaire actress, who has a reputation for investment acumen, is said to have offloaded some of her own holdings in the Hong Kong-listed Alibaba Pictures at a loss-making price. “Zhao and her husband have reduced their stake in Alibaba Pictures even though the share price has gone down so much, likely because their cash flow is a bit tight,” an insider speculated to Daily Business, a Hangzhou newspaper. “Alternatively, it could mean that they reckon that with the poor performance in the domestic box office, the prospect of Alibaba Pictures is dim so they would rather take a hit now.”

With so many of China’s movie stars also being studio investors, they have all the more reason for hoping the country’s box office will revert to its previous stellar growth.

© 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.