HONG KONG (MarketWatch) — Amid all the talk of a China slowdown in recent weeks, one area that is clearly continuing full steam ahead is its booming cinema business. New data says China’s box office hit 13 billion yuan ($2.1 billion) in 2011, up 30%, meaning it now only trails the U.S. and Japan in size.
These figures from EntGroup, a Beijing-based research firm, come on the heels of a 65% growth in revenues to 10.17 billion yuan in 2010. Analysts predict it is only a matter of time before China overtakes the $10-billion-plus North American box office, as this market of 1.3 billion potential moviegoers awakens.
Unsurprisingly, these numbers are attracting the attention of investors and studios from Hong Kong to Hollywood, but a more tricky question is how to get a slice of this emerging Hollywood of the East?
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Last year, Hollywood films continued to lead China’s box office’s surge, although domestic productions were also increasingly making their mark. In 2011 “Transformers 3” took in 1.1 billion yuan, while “Kung Fu Panda 2” reached 617 billion yuan. Zhang Yimou’s “The Flowers of War,” about the Nanjing massacre and featuring Christian Bale, took in 488 million yuan, and Hong Kong director Tsui Hark’s “The Flying Swords of Dragon Gate,” featuring 3D IMAX visual effects, took in 433 million yuan.
Ever since Fox’s “Avatar” made $210 million in China in 2010, foreign studios have taken the mainland Chinese market more seriously. (Fox is owned by News Corp., the owner of MarketWatch.)
But it is not all good news, as foreign movie releases are limited by quota to 20 a year, and their share of box-office receipts is less than in other markets — often as low as 13%.
One way to get round the import cap is through Sino-foreign joint productions that allow foreign films to distribute in China if they use local production and talent. This is an area that is attracting increasing investment interest.
For many years, returns from China’s film market had been meager, due largely to pervasive piracy and antiquated cinemas. This new growth upswing comes after substantial investment in new cinemas. About 3,000 screens were added last year, taking the total to around 9,000, with many offering high-definition and 3D capability.
This upgrade is significant as it establishes a clear quality gap between the theater movie experience and watching pirated CDs at home.
It also disproves the once widely held belief that mainland Chinese consumers brought up on counterfeit disks and downloads will not pay up for media content. These numbers also suggest a secular growth story, as more towns and cities add new modern screens and attract new audiences.
As with the media business in general in China, foreign participation is subject to strict controls designed to protect domestic filmmakers and Beijing’s sensitivities to Western cultural influences.
But at the same time, authorities are eager to promote a strong domestic film industry, in keeping with a shift in official policy to rebalance growth.
In China’s latest 12th Five-Year Plan, a focus on the culture industry was approved, covering the whole gambit of media publishing, film, animation, television and the performing arts, along with a commitment to “actively develop the international market for cultural products.” Beijing’s aim is to make culture a pillar industry and has stated a target of it contributing at least 5% — more than two trillion yuan — towards GDP by 2015.
Already, various provinces have announced plans to invest in studios, media cities or similar ventures.
One example is Korea’s SK Telecom, which recently released more details on its 12.8 billion yuan project to build a state-of-the-art media city in Chengdu with the provincial authorities. The aim is to provide infrastructure and a cluster of facilities to support film-making and creative industries.
There are also a limited number of listed production houses with exposure to the mainland Chinese market worth looking at.
China film producer Bona Film Group listed on the Nasdaq in December 2010. Notably, it was a major investor in the recent box-office success “Flying Swords of Dragon Gate.”
Another is Huayi Brothers Media, which last year teamed up with Hollywood studio Legendary Pictures to launch Legendary East, focusing on co-productions in China. Huayi Brothers listed on Shenzhen’s GEM market last year and has been attracting further investor interest.
Late last year, Hong Kong construction company Paul Y. Engineering Group announced a $220 million investment in Legendary East to fund a slate of films, although it emerged in the past week that the deal did not go through.
Earlier, Paul Y’s management admitted it knew nothing about the motion-picture business but were seeking an “innovative growth avenue.”
The breakdown of this deal perhaps offers a reminder that, while film-making can appear high-return and glamorous, returns are also notoriously high-risk and volatile.
It is also worth remembering that integrated Hollywood studios traditionally make much of their income through the distribution business of DVDs and Pay TV, two areas which are largely non-existent in the mainland Chinese market.
Still, with the numbers coming out of China’s box office only likely to get bigger, we can expect many more attempts to crack this market.