The state-owned companies’ names were added Jan. 11 to a list of initial public offering 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 yuan ($483 million) 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% of the market for distributing digital movies, for example, which are shown in 80% 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% of annual profits for China Film.
But the imported film distribution market is expected to be liberalized soon, sources said, following a Feb. 18 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 will be allowed to import 14 3D and IMAX films from the United States every year on top of the 20 films already allowed.
Meanwhile, under the agreement Chinese distributors won rights to 25% of box office receipts, up from 13%.
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 Chief Executive 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 [World Trade Organization],” Yu said. “This needs to be gradually improved in accord with domestic conditions.”
But China Film needn’t lose ground in a liberalized market, a company source said.