Bottom line: Huayi Bros could be moving towards an eventual goal of becoming China’s first major Hollywood-style studio through its massive new 30 billion yuan partnership with Ping An Bank.
It’s become quite common in China these days to see non-entertainment companies pour millions of dollars into entertainment-related ventures, most notably film-production deals. Everyone’s goal is to repeat the success of recent box office hits like “Monster Hunt”, which are earning big money by drawing on a fast-growing Chinese box office that could pass the US to become the world’s largest in the next decade.
But even I was surprised to see the size of the latest mega tie-up, which will see Ping An Bank pair with the highly successful independent movie producer Huayi Bros (Shenzhen: 300027) in a massive partnership with 30 billion yuan ($4.7 billion) in investment. That’s quite a large sum of money for the entertainment space, and is roughly comparable to how much e-commerce leader Alibaba (NYSE: BABA) said it would pay last week for 20 percent of retailing giant Suning (Shenzhen: 002024).
Such massive sums of money aren’t a huge surprise anymore these days, since many of China’s most aggressive Internet and private financial companies are flush with cash right now and looking for places to spend it. But in an industry where an average film costs perhaps $10-$20 million, this latest $4.7 billion partnership seems a bit excessive.
The two sides didn’t give too much detail about their tie-up, though one media report notes that Ping An Bank will be able to draw on the financial resources of its many affiliated companies, including Ping An Insurance (HKEx: 2318; Shanghai: 601318) to fund its part of the commitment. (Chinese article) That same report also notes that China’s entire box office for all 2014 was worth just 29.6 billion yuan, or less than the total amount of this new investment.
Most of China’s most aggressive private companies have announced plans to invest in the movie business over the last 2 years. Among those, online search leader Baidu (Nasdaq: BIDU), online video leader LeTV (Shenzhen: 300104) and private equity giant Fosun (HKEx: 656) have all announced such deals, though all have been in the tens or hundreds of millions of dollars. None has exceeded $1 billion.
Building a Chinese Disney
According to one of the latest reports, this new tie-up could be far more comprehensive than the earlier deals, involving a wide range of entertainment-related products and services. Those could include not only traditional film production, but also online video products and services, as well as brand management services.
At the end of the day, the deal looks like a major capital injection aimed at helping Huayi transform from a simple production house to a more comprehensive studio similar to big Hollywood names like Disney (NYSE: DIS) and Twenty-First Century Fox (Nasdaq: FOX). In terms of market value, Huayi is still just a fraction of the size of the big western studios, worth $8.6 billion versus $60 billion for Fox and $180 billion for Disney.
At this point in time, China really doesn’t have any major studios to rival the big Hollywood names. Big state-owned TV broadcasters like CCTV and Shanghai Media Group (SMG) have lots of resources to make moves, but are still relatively limited in their scope. Among private companies, names like Huayi and Bona Film (Nasdaq: BONA) have emerged as important independent film-makers, though none is very large.
The driving force pushing these companies is China’s box office, and also the rapidly growing online video market. China box office sales jumped nearly 50 percent in the first half of the year to $3.3 billion, and July’s box office posted an all-time monthly record of nearly 5.3 billion yuan on the strength of several blockbuster home-grown movies. With so much money to be made it’s not surprising that everyone wants to become China’s next Disney, and perhaps this new partnership with Ping An will bring Huayi closer to that goal.
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