Lights, Camera, Pending IPOs for Filmmakers

The cameras could be rolling soon for long-anticipated stock listings by the nation’s largest movie producer and foreign flick importer China Film Group, as well as a smaller but ambitious rival, Shanghai Film Group.

The state-owned companies’ names were added January 11 to a list of IPO applicants queuing for mandatory reviews by the China Securities Regulatory Commission (CSRC). Each has asked CSRC for permission to trade A shares on the Shanghai Stock Exchange.

China Film plans to raise between 3 billion and 4 billion yuan, according to CSRC documents. Shanghai Film has yet to set financial targets.

China Securities Co. (CSC) and China International Capital Corp. (CICC) are the lead underwriters for each proposed fund-raiser, which could begin later this year. More than 880 companies are waiting for CSRC to rule on IPO applications. Approvals are expected to begin in March, ending a dry spell for A-share listings.

The film companies hope to be in the first batch of IPO approvals, giving the capital market a chance to influence significantly the future of the country’s entertainment industry.

China Film, founded in 1999, has 2.8 billion yuan in assets and reported a profit of 514 million yuan on revenues of 2.1 billion yuan in first half of 2012. Shanghai Film reported 194 million yuan in net profits on 2 billion yuan in operating revenues in 2011.

A source close to the China Film IPO project said funds raised would be used to build film distribution channels, enhance content, boost television drama production capacity, and expand into related upstream and downstream businesses.

China Film has stakes in most corners of the domestic movie industry. The company controls 90 percent of the market for distributing digital movies, for example, which are shown in 80 percent of the nation’s cinemas.

A domestic entertainment research group, Entgroup, said China Film was the nationwide distributor for 158 films last year—handling more movies than the next four distributors combined.

The company also operates the second-most watched TV channel linked to the state broadcast monopoly CCTV, and has nearly exclusive rights to the mainland distribution of films imported from overseas.

Import Challenge

Pending changes for China’s government-controlled market for foreign films could challenge China Film and its potential investors. For years, the foreign film distribution business has contributed up to 40 percent of annual profits for China Film.

But the imported film distribution market is expected to be liberalized soon, sources said, following a February 18, 2012 memorandum of understanding signed by the Chinese and U.S. governments. The document resolved World Trade Organization-related disputes about the film industry.

Under the agreement, the Chinese government will allow more American films to be shown every year in domestic cinemas. Starting in 2012 distributors were allowed to import fourteen 3D and IMAX films from the United States every year on top of the twenty films already allowed. Meanwhile, under the agreement Chinese distributors won rights to 25 percent of box office receipts, up from 13 percent.

The agreement has also opened a door to opportunities for private Chinese distributors of imported films that could challenge China Film’s grip on the market. There is no timetable for wider market access, but one source said China Film would lose some of its advantage—and potential stock investors could pay the price.

Bona Pictures CEO Yu Dong said liberalization was inevitable for the imported movie business. “The government currently gives China Film exclusive import and distribution rights for foreign films, which does not comply with China’s commitments at the time of negotiating with the WTO,” Yu said. “This needs to be gradually improved in accord with domestic conditions.”

But China Film need not lose ground in a liberalized market, a company source said.

“Even if [imported film distribution] is opened to private companies in the future,” the source said, “foreign parties will want to pick a superior distributor. China Film Group will still be in the driver’s seat.”

Indeed, the source said, China Film is already preparing a business plan for a more liberal playing field for distributors.

The only other company that today enjoys imported film distribution rights in China is Huaxia Film Distribution, which is 11 percent owned by China Film. The firm’s second-largest stakeholder is China Broadcast Film Group, which owns 20 percent.

Pushing Forward

Shanghai Film’s slice of the distribution market, meanwhile, is relatively thin, an industry analyst said.

A source said Shanghai Film submitted its application to CSRC without getting permission to seek a listing from the Central Propaganda Department. Shanghai Film officials declined to comment on this.

Meanwhile, Shanghai Film President Ren Zhonglun is moving forward. He says the company plans to raise funds on the stock market in two steps. For step one, its subsidiary Oriental Film Distribution Co. would float stock. Afterward, all company businesses and assets—including production, media, and technology—would be integrated.

A source close to Shanghai Film said much of the company’s revenues come from real estate-related businesses. Last April, Ren said that “in addition to movie-making, we will choose a main sector that concentrates on theater chains, individual theaters, distribution, investment companies and advertising, and fold them into a group that can be listed.”

China Film holds 93 percent of China Film Co., an entity with 1.4 billion yuan in registered capital. Its partners—each with about 1 percent—include China International Television Corp, CNR Media Development, Changchun Film Group, Jiangsu Broadcasting Television Group, China United Network Communications Group, Beijing Gehua CATV Network, and Hunan TV & Broadcast Intermediary. Gehua CATV said it paid 2.1 million yuan for its stake.

China Film also owns the CCTV-6 television movie channel, which has been the second-most popular CCTV channel in terms of average audience and market share for several years.

But a Beijing city government report on China Film’s IPO request released in February 2012 said the company has forty-seven subsidiaries not including the movie channel.

China Film also has a controlling or minority stake in three of the country’s six largest theater chains.

China Film has transferred to China Film Co. a wide array of assets including production and distribution businesses, theater chains, and individual theaters. Other revenue sources include domestic film distribution, film production, investments, and equipment leasing.

Company executives have been locked in intense discussions over whether to add core assets to the listed company. A source who participated in China Film’s restructuring said, however, that it’s been difficult to distinguish between operating and non-operating assets.

Businesses that import and distribute foreign films “are the same as the movie channel,” said one source. “These are all non-market businesses entrusted [to China Film Group] by the state, and they should not be added to listed assets.”

In documents filed for China Film’s first effort to list on a stock market in 2004, its foreign film distributor was among the cited assets. It was, like the movie channel, identified in documents as “a non-operating cultural undertaking.”

The initiative to list on the Hong Kong market was thwarted by Chinese policy restrictions on the use of foreign capital in the domestic film and television industry. The company restarted its march to the stock market in 2007 after a restructuring and a management shuffle.

China Film Chairman Han Sanping says film production, not the distribution monopoly, is the company’s core strength. Indeed, the company has been the country’s largest film producer in recent years, churning out blockbusters such as The Founding of the Republic in 2009 and fourteen films last year.

A source close to China Film said its distribution business handles movies produced by the company as well as other filmmakers. For each film “the producer owns the copyright,” he said.

“China Film has invested in a lot of films” including a popular hit called Aftershock, co-produced with Huayi Brothers, the source said.

China Film has been criticized for weak content, a film industry analyst said. But it’s found ways to benefit from creative talent at partner companies such as Huayi Brothers that “can tell stories because it has famous directors and actors.”

A stock listing would raise China Film to a financial pedestal steps above private filmmakers such as Huayi Brothers and Enlight Media, a source close to China Film said.