China’s Monster Summer


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By Robert Cain for China Film Biz

August 22, 2013

The disturbing drought that plagued Hollywood’s movies in China through the first half of 2013 has been quenched, at least temporarily, by a string of box office successes that began in July. Chief among these has been Pacific Rim, a monsters-meet-robots spectacle that couldn’t have been more perfectly aimed at Chinese moviegoers. In its first three weeks of PRC release (as of Thursday August 22nd) the film has devoured $109 million in receipts, good enough for 2nd place this year among all Hollywood imports, and better by far than the $98.7 million the film has earned in North America.

While some might attribute Pacific Rim’s PRC success to its giant CG robots—the Transformers franchise is after all the highest grossing movie series in China’s history—I’d like to make the case that the film’s massive monsters are at least as responsible for scaring up Chinese ticket sales. Chinese audiences love a good monster movie as much as anyone, but the country’s strict censorship policies have restricted the homegrown monster movie quotient to practically zero. It’s a quirk of the Chinese film administration’s policies that monsters can invade China—or its theaters, anyway—from overseas, but they’re generally prohibited from breeding, hatching, or emerging from slimy lagoons onshore in the Middle Kingdom.

Further proof of my theory can be found in this week’s monster opening of Jurassic Park 3D, Universal’s reissue of the 20-year old Steven Spielberg dinosaurs-gone-wild classic. With almost $17 million in Chinese revenue in its first three days, the film ranks as the fourth biggest foreign opener of 2013 and is is well on its way to becoming the biggest grossing re-release of the past 12 months. Although the grosses for reissues tend to quickly fall off, the pattern so far suggests a final gross in the $30 million to $40 million range, which would make it China’s second highest grossing 3D re-release ever—albeit a far distant second—to 2012’s Titanic 3D.Top-grossing HW rel

The next ‘monster’ movie up is of a more kid-friendly variety, Pixar’s Monsters University, which is scheduled to open on Friday, August 23rd. China’s monster mania may help the film to break the Pixar curse, which has seen most of that animation studio’s films open poorly in the PRC and quickly fade away. With little family-fare competition I expect Monsters U to take at least $25 million in China, which would put it well above Toy Story 3’s $16.7 million gross in 2010, Cars 2’s $11.9 million in 2011, and Brave‘s dismal $4.7 million in 2012.

Last week’s box office saw Pacific Rim win its third week in a row, the first time that’s happened for a Hollywood film in 2013 (the China/Hong Kong co-pro Journey to the West won 5 straight weeks in February and March). Tiny Times 2, the sequel to July’s teen girl-oriented hit Tiny Times, ran up its total to $44 million with a $17 million second place finish. And Fan Bingbing’s romantic comedy One Night Surprise from writer-director Jin Yimeng (Sophie’s Revenge) took third with $15 million, proving the rom-com genre’s continuing strength with Chinese audiences.Box office for week ending Aug 18, 2013

Bona’s boxing flick Unbeatable took fourth place with $9 million on generally positive reviews. Rounding out the top 5 was Wanda Media’s disappointing release  The Palace, which managed just $7.4 million in its first 7 days despite the huge opening screen count allocated by its sister company, theatrical exhibitor Wanda Cinema Line. This marks Wanda’s second flop in a row after Man of Tai Chi. Wanda is new at the feature production game, and with its deep pockets the company presumably has the staying power to get enough at bats to eventually generate some homeruns.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and at www.pacificbridgepics.com.

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Wanda’s Real Reasons For Acquiring AMC Theatres


 

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by Robert Cain for China Film Biz

May 23, 2012

Dalian Wanda, the $16 billion private Chinese conglomerate that operates in the commercial real estate, culture & entertainment, and retail industries, announced on Sunday that it has signed an agreement to purchase AMC Entertainment and its 5,048 screen North American theater chain for the sum of $2.6 billion. Wanda has indicated that it will also spend an additional $500 million on theater renovations and technology upgrades.

Last week I laid out a detailed argument that the acquisition doesn’t appear to make much sense for Wanda. Now that a deal has been announced I still don’t see any compelling business reasons for it. The rationales offered by Wanda’s billionaire chairman Wang Jianlin have so far been unconvincing, the following being representative of his statements:

  • “We want to be a big company, not just in China but in the world.”
  • “This transaction will help make Wanda a truly global cinema owner”

If there were competitive advantages to becoming a very big global player in the cinema business, someone would have done it before. Size alone, and global reach, offer no discernible strategic advantages in a business whose customers’ movie-going choices are purely local ones. There may be some scale economies such as increased bargaining leverage in dealing with suppliers of films, equipment, and popcorn, but these hardly justify paying a peak market price for an aging cinema chain with limited growth prospects and low profitability.

The opportunity costs for Wanda are huge. The $3.1 billion they’re spending on AMC could instead have acquired or built thousands of Chinese and Asian cinemas. Wanda could have chosen to amass a huge market share in a very fast-growing, profitable territory. But they didn’t.

So what, then, are Wanda’s true motivations for buying AMC? How does Wang Jianlin benefit? Herewith, a few theories.

Currency exchange

The AMC purchase might simply be a vehicle for Wanda to move a large sum of money from “soft” Chinese currency into hard American greenbacks. Theaters are a cash business, and Wanda could eventually take AMC public, which would be a nifty way for the company to shift a chunk of its asset base and grow it in the relatively safe haven of the U.S.

Window dressing
Wanda Group is widely expected to go public with its own IPO in China later this year. The AMC acquisition gives Wanda a bit of international sex appeal by instantly making it a global ‘Hollywood’ company, and provides fodder for its road show pitch to prospective IPO investors.

Location, location, location

Dalian Wanda, the parent company of Wanda Cinema Line, is mainly in the business of commercial real estate in China. And commercial real estate in China hasn’t been a very appealing business lately, with government regulation, tight debt policies, and a slowing economy all contributing to a downturn in the sector. So Wanda may see the U.S. as a better bet than China for its real estate development business, with AMC serving as a beachhead to help it launch new hotels, offices, and entertainment properties. We’ve already seen one hobbled Chinese real estate company, Paul Y Engineering, attempt, unsuccessfully, to invest in a U.S. media company as a way of shifting its business and geographic focus. But unlike Paul Y, Wanda already has a presence in the movie business.

Political troubles at home

At least part of Wang Jianlin’s business rise can be attributed to his close dealings with disgraced politician Bo Xilai, who was once the party chief of Dalian, where Wanda is based. Although Wang denies he is being investigated, he must be thinking about the possibility of future political fallout from the Bo scandal. AMC will give him a nice business escape hatch if he needs it.

Vertical integration

AMC could serve as the first element of a vertical integration strategy under which Wanda would get into financing, production and distribution of Hollywood style films for the global market. Wanda has already begun to develop and produce films in China, and an understanding of how both the U.S. and Chinese markets work will become increasingly valuable, as the two film markets combined will likely account for about 40 to 45 percent of total world box office receipts by 2020. 

Soft power

I may be going out on a limb here, but the fact that Wanda will now have a major beachhead in the world’s most important media market could greatly enhance Wang Jianlin’s standing with the Communist Party. The party leadership has repeatedly emphasized the critical importance of soft power initiatives, especially in the west, and with AMC Wang will now have China’s largest mouthpiece in the U.S. It’s unlikely that AMC theaters will be running the Chinese national anthem before screenings of Communist Revolution-set propaganda dramas any time soon, but Wanda can now credibly proclaim that it’s leading the charge in spreading Chinese values to the west.

Of course, Wang’s motives might be much simpler than all of this. As James Marsh, an entertainment industry analyst at Piper Jaffray & Co. put it, “I think this is more of a vanity purchase than anything else.” And he may be right.

Wang has granted an interview to at least one major U.S. newspaper this week, so we may learn more about his thinking in the coming days. 

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and at www.pacificbridgepics.com.

If you’re looking to build your business in China, Pacific Bridge can help. We have more than 50 years of combined experience in developing, financing, and producing films in China and Hollywood, and a uniquely valuable set of relationships and skills to help entertainment and media companies formulate their strategies and achieve their goals in China.

Does Chinese Exhibitor Wanda’s Acquisition of AMC Theaters Make Sense?


by Robert Cain for China Film Biz
May 13, 2012

Another major announcement from China got Hollywood talking last week when Dalian–based Wanda Cinema Line revealed that it has initiated discussions to acquire the 5,048 screen U.S. cinema circuit AMC Entertainment.

The notion of a Chinese company controlling America’s second largest theater chain took many by surprise, and raised lots of questions. But before we speculate too much about what changes a Chinese operator would bring to U.S. movie theaters, a more immediate question comes to mind: does this deal even make sense? Would Wanda truly benefit from owning AMC, or is this merely another example of Chinese chest-thumping that will ultimately amount to nothing?

Let’s look at the following facts:

1. AMC will be costly. U.S. cinema stocks have been on the rise this year, with all three of the publicly listed national theater chains trading at or near their 52 week highs.

It has been widely suggested that AMC’s valuation is $1.5 billion, but that figure would put the company at a value of less than $300,000 per screen, far below the level of the two other large, publicly traded national chains, Cinemark ($711,000 per screen) and Regal ($595,000). Even though AMC was unprofitable last year, losing $83 million on revenue of $1.93 billion in the 39 weeks ending December 29, 2011, its profits have likely bounced back with the strengthening of the U.S. box office in 2012. Given recent market trends, Wanda would likely have to pay top dollar for AMC.

2. Acquiring AMC would be dilutive. Wanda is a market leader in one of the fastest growing, and for the foreseeable future, one of the most profitable cinema markets in the world. China has been growing at an average rate of 35 percent annually, and with 200 million more people forecast to join its upper-middle and affluent classes in the next five years, it will continue to grow rapidly. Ticket prices in China are high, labor and operating costs are low. Government regulations protect exhibitor margins, and keep foreign players out.

The U.S., on the other hand is a completely saturated, highly competitive, slow- to no-growth market, with average profit margins in the low single digits. The future upside for AMC is marginal, with few organic growth prospects and only a few interesting acquisition opportunities available. Given the ability to easily expand and perhaps dominate in a sizzling hot territory like China, why would Wanda invest at least $1.5 billion in the stagnant U.S. market?

3. AMC would not be strategic. One of Wanda’s stated justifications for the AMC acquisition is that it would guarantee the company U.S. exhibition for the movies that it produces.

This is just plain silly. First of all, while Wanda does have a film production division, it has yet to produce a single film. Secondly, unless they also plan on buying Lionsgate or Paramount, there is no way they’re going to be able to consistently make movies that anyone in America will pay to see. To pay $1.5 billion or more to have a U.S. outlet for a fledgling Chinese movie division makes about as much sense as it would to buy an entire parking lot just to be sure you’d have a place to park your horse and buggy.

Another presumptive rationale for the deal would be the potential gain in negotiating leverage Wanda would accrue from owning so many theaters. But the terms for acquisition, import and distribution of foreign films are already set by the Chinese government and they are highly favorable for domestic companies. Wanda wouldn’t gain anything here. It might gain a bit of leverage vis a vis equipment vendors, but as China’s largest player in a market that foreigners are eager to serve, Wanda already has a substantial negotiating position. Again, this looks like a specious justification for acquiring AMC.

4. The deal would be complicated. AMC is privately held, with four large private equity players—Apollo, Bain Capital, Carlyle Group and JPMorgan—among its largest shareholders. Getting these diverse investors to work in concert and agree on terms will likely be a long and complicated process, unless Wanda consents to significantly overpay for the acquisition.

5. The deal could get political. With Wanda’s billionaire Chairman Wang Jianlin already in the media spotlight due to his close dealings with disgraced politician and Politburo member Bo Xilai, a major investment in America’s cultural industry could bring Wang additional unwanted press scrutiny, and possibly attention from the Securities and Exchange Commission as well. Although there are no legal prohibitions against foreign ownership of a theater chain, American lawmakers and moviegoers might not be happy to see a Chinese company establish a dominant position in such a symbolically important business as the movie industry.

With no apparent strategic upside and so much potential financial and political downside, it’s hard to see why Wanda would want to pursue this acquisition. The deal would make infinitely more sense if it were going the other way, with AMC buying Wanda. But given AMC’s already heavy debt load and an imposing set of Chinese regulatory hurdles, that’s not likely to happen any time soon.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and at www.pacificbridgepics.com.