Talking Point

Film noir

Chinese movie studios have seen their market values pummelled

Wang-Zhongjun-w

Art of the deal: Huayi Brothers’ boss sold some of his stock to buy this Van Gogh painting

When Chinese film critics talk about “Western influence” in their industry, they don’t actually mean Hollywood. Instead they are referring to movies made in the 1980s by the Xi’an Film Studio, which was later incorporated into the Western Film Group.

At the time there were 11 studios in the country. All were state-owned but Xi’an Film Studio was the worst-run with the biggest losses. “Half the people here didn’t know how to read or write… And eating from one big pot [all the staff were paid the same whether they worked hard or not] made everybody lazy,” studio chief Wu Tianming told the New York Times in 1987.

Wu turned things around by giving younger talent a chance. Resources were limited but with more freedom to experiment the new generation came up with masterpieces such as Zhang Yimou’s Red Sorghum and Chen Kaige’s Yellow Earth. The young directors transformed Xi’an Film Studio into the most profitable Chinese movie maker.

The studio’s renaissance owed much to the willingness of the new breed to work hard in harsh conditions. They were a tough group – Zhang Yimou was said to have raised the funds for his first camera by selling his own blood – and they utilised their resources sparingly. As cinematographer for Yellow Earth, Zhang required just 27,000 feet of film (Hollywood movies at the time might consume 10 times more). The actors would also practice countless times before filming to avoid the need for retakes.

Today’s entertainment industry in China is a lot less frugal, with plenty of capital on offer from the state and the private sector. There’s foreign money too. Movie bosses are making friends and doing deals with Hollywood powerhouses at a time when China has been emerging as a cinema superpower. But industry insiders have been sounding the alarm at the impact of some of the easy money. Are Chinese studios getting lazy and sacrificing creativity for commercial gain? And why are they haemorraging so much market share to US imports?

How are Chinese studios faring?

“Freezing winter” is a Chinese term more often associated with bloated sectors like steel producers and shipyards. But a slew of disappointing financial results in the entertainment sector has seen the media using the term to describe the top movie and TV studios too.

Take Huayi Brothers, which has vowed to become China’s answer to Warner Brothers. Last month the studio reported a 17% drop in its 2016 net profit to Rmb808 million ($117 million). That was Huayi’s first earnings decline since going public on Shenzhen’s stock exchange eight years ago. Worse still, the headline number included a Rmb745 million non-recurrent gain from sales of stakes in tech companies. Take out the one-off items and the studio would barely have been profitable.

Huayi’s dismal run continued into the first quarter of this year: it reported a loss of Rmb68 million versus a net profit of Rmb262 million for the same period a year ago. Over the past 10 years the company has produced highly successful film franchises including If You Are the One and Journey to the West. But more recent offerings haven’t been so popular and core income from movies fell 25% to Rmb42 million for the first quarter.

Enlight Media, another leading studio, had a much better time in 2016, raking in Rmb7 billion at the box office. That made it the top grossing house for the third year in a row. But last week Enlight also reported a poor start to 2017: a 13% decline in first-quarter earnings to Rmb185 million.

“The 2016 earnings stories from listed studios have pointed to declining core income and over-reliance on investment gains. That is a stark contrast from the upbeat mood in 2015 when everyone was reporting good news,” the Economic Observer notes.

Alibaba Pictures, the Hong Kong-listed arm of internet giant Alibaba, was another to report a loss last year – Rmb976 million (mainly because of upfront investment in its online ticketing operation, it said). Its archrival Tencent Pictures is barely a year old and yet to make a major impression. It still needs to convince investors it has the potential to become a larger player, the Economic Observer reckons, despite early successes working with Hollywood on projects like Warcraft and Kong: Skull Island.

Are market values down too?

“If you have faith in a company you should hang onto its shares for the long run. If not, just sell it off,” Wang Changtian, chairman of Enlight, grumbled on his personal weibo as the investor mood started to sour. “The market seems to be unable to distinguish between good and bad movie companies. All company executives have been trashed including Enlight Media. I have investors asking me if there is something wrong with my firm.”

The rant from Wang was posted last month when shareholder patience in Enlight looked to be running short. The company’s stock price has dropped nearly 60% since May 2015. This year alone its value has declined 15%.

Back at the peak of the cycle in mid-2015, Huayi Brothers’ cofounder Wang Zhongjun told investors that Huayi’s market value would soon exceed Rmb100 billion. At the time it was worth around Rmb88 billion. Since then its market cap has plunged, dropping to about Rmb23 billion this week.

The reversal in fortune, Sina Finance believes, can be traced back to 2013 when Wang spent almost Rmb800 million collecting art (including a Van Gogh). Investors weren’t impressed when he helped to finance the spending spree by disposing of some of his Huayi stake.

Lesser known Bona Film Group will be praying for a rebound in sentiment as it heads for an IPO itself. It was the first Chinese studio to go public in the United States in 2010 but it opted to delist last year in a Rmb5.5 billion take-private deal. Bona Film announced that its relisting plan on China’s A-share market is in its final stages this week, with TMT Post reporting that a pre-IPO investment last December had valued the firm at Rmb15 billion, or nearly triple its exit price in New York. Some of that sounds like hype but Bona’s debut could draw investors away from existing media stocks. “Bona Film’s A-share return will pose further challenges for the likes of Huayi, Enlight and LeEco,” TMT Post predicts.

Aren’t China’s cinemas booming?

When the country’s box office climbed 50% to Rmb44 billion in 2015, the forecast was it would hit Rmb66 billion the following year. But that proved far too optimistic: the initially released number for last year was closer to Rmb45 billion, although the government later revised it upwards to Rmb49 billion (or 11% growth). Consequently, the investor mood has turned much more conservative. That’s in spite of bullish indicators like China overtaking the US in terms of total number of cinema screens last year.

China Business Journal says that takings actually fell 1.7% in the first three months of this year (to Rmb14 billion). The latest instalment of The Fast and the Furious franchise helped to revive revenues last month – it brought in Rmb2.6 billion alone and unseated Furious 7 as the top-grossing Hollywood film in China. (The highest grossing movie ever in China is Hong Kong comedian Stephen Chow’s The Mermaid, which was co-produced by Enlight Media and released in early 2016.) But the overall trend is flat at best, with disappointing ticket sales for many of the new releases.

The stronger showing by Hollywood imports also has local critics worried that Western studios are grabbing market share from their Chinese counterparts. “Does our film market have Hollywood-dependency disorder?” asked the Economic Observer, noting that imported movies accounted for 42% of the box office last year, despite their number being capped at 34 releases per year.

The disparity is striking. On average, new Chinese releases gross only Rmb12 million, whereas foreign ones earn about Rmb450 million, the EO says.

More films from Hollywood could be arriving at Chinese cinemas soon. The cap on imports is due to be revised this year, with a Bona Film executive telling the EO that the quota could be doubled. One reason is that an increasing number of American studios are wholly or partly Chinese-owned. For instance, Wanda Group bought Legendary Pictures for $3.5 billion last year. Many of the other imports (including Furious 8) are also the recipients of co-investment by Chinese firms.

Another boom-bust cycle…

Regular WiC readers should be familiar with the tendency for boom-and-bust cycles in China. Typically, interest in a market surges after moves to deregulate it. Capital chases the hot theme, as new entrants play fast and loose with the new rules. Fortunes are made before the market shows signs of overheating. But as the bust approaches, so does a renewed regulatory crackdown.

The film market seems to have followed a similar pattern. The authorities in Beijing had identified ‘the culture industry’ as a pillar sector for economic growth and the policy prompted many of China’s biggest companies – from property majors Wanda Group and China Evergrande to internet giants Alibaba and Tencent – to try their luck in filmmaking. The surge in box office returns before 2015 was fuelled further by reforms that sought to encourage financial innovation in the industry. Deregulation meant filmmakers could raise funds from alternative channels such as peer-to-peer lending platforms and by securitising future ticket sales (see WiC255). To keep up the momentum some of the players forged their income streams by overstating ticket sales – an innovation too far as far as the regulators were concerned. The studios started to be reined in last year (see WiC317).

It has also been a story of quantity trumping quality as the aspiring studios chase financial returns. “There were no fewer than 1,000 movies produced in a single year [in 2016] and they required tens of billions of yuan of investment. But how many of the movies produced by the Chinese studios can cinemagoers actually remember?” CBN asks. The “freezing winter” now chilling the filmmakers is because of a “bubble” created by too much hot money, the newspaper adds.

“The film industry is not like the stock market and property market. We sincerely hope that Chinese filmmakers can summon a craftsman spirit and come up with more quality projects, rather than chasing quick returns in the capital market,” CBN writes.

Have Chinese filmmakers become too rich to care?

“Craftsman spirit” has become a buzzword since Li Keqiang mentioned it in his government work report last year. The Chinese premier was encouraging manufacturers to adopt more of an artisan mindset, pursuing excellence and innovation in their field (see WiC352).

But unlike the cash-strapped days of Xi’an Film Studio, China’s movie world has been awash with cash, transforming directors and performers into the super rich. Zhang Yimou, the 65 year-old director, invested Rmb12 million in a production unit set up by LeEco in 2011. Within five years his stake was said to be worth Rmb1.4 billion (see WiC325) and it has since become the industry norm for studio bosses to tie up their talent with lucrative share options. Many of the biggest celebrities have become serious investors too. For instance, starlet Li Bingbing and her boyfriend Ren Quan established a venture capital firm focused on the ‘culture market’ and billionaire actress Zhao Wei has also been touted for her dazzling dealings in the capital markets.

That said, Zhao’s reputation suffered in February when Chinese lenders refused to finance a Rmb3 billion deal to acquire a stake in a two year-old animation studio (see WiC353). Her takeover target is now under investigation by stock regulators, with CBN suggesting that the authorities are concerned by the impact that she and other movie stars have had on equity markets in the past 18 months.

In other signs of a pull-back from the sector, smartphone maker Xiaomi has announced that it is downsizing its film division and copper processing firm Anhui Xinke New Materials cancelled a deal to buy Voltage Pictures for $345 million.

The studios that remain will need to work harder to make a return, copying their American peers by monetising their movies in selling DVDs, rights to video-streaming platforms and merchandising – and not just relying on ticket sales. But ultimately, the focus needs to turn back to the kind of filmmaking that pulls in millions of Chinese cinemagoers – a move that still promises rich returns for the studios that win over audiences.

“Good movies are not only about money. It is important for the Chinese entertainment industry to return to the fundamentals and focus on producing quality movies and TV shows,” CBN advises.


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