Huayi Bros Jumps On Hollywood Bandwagon

Huayi goes to Hollywood

The list of major Chinese entertainment firms jumping on the Hollywood bandwagon has just gained an important new member with word that Huayi Bros (Shenzhen: 300027) is on the cusp of investing in a major new production house. I’ve been following the China media scene for more than a decade now, and can say that Huayi was one of the nation’s earliest major players to emerge in a space that was extremely difficult for years due to tough restrictions and extreme fragmentation. But Huayi has shown not only an ability to survive, but also to thrive in a market where the movie theater business is suddenly booming and online video has quickly become an important new revenue source.

All that said, it’s just a bit surprising that Huayi took so long to find a Hollywood partner, which comes in the form of a newly established production house set up by Jeff Robinov, the former president of Warner Bros (NYSE: TWX). (English article; Chinese article) A final deal has yet to be signed, but reports say that Huayi has agreed to invest $120-$150 million in Robinov’s newly formed Studio 8.

Robinov recently left Warner to set up his company after a failed bid for the studio’s CEO position. His new studio aims to put out about 5 movies a year initially, with Sony (Tokyo: 6758) handling most of the distribution. But Huayi will handle distribution in China, whose box office has boomed over the last 5 years to become the world’s second largest after only the US. The Chinese box office posted $3.6 billion in revenue last year, up 33 percent over 2012.

Huayi’s new deal comes just a month after word emerged that Robin Li, one of China’s richest men and founder of online search leader Baidu (Nasdaq: BIDU), headed a group of investors that set up a major new animation studio in Hollywood. (previous post) Aquamen Entertainment’s first project will be an animated feature called “Kong”, based on the Monkey King character from the classic Chinese novel “Journey To The West”. It has a fairly sizable budget of $40 million.

Li and now Huayi certainly aren’t the only Chinese investors to cast an envious eye on Hollywood. Others who have flocked to the world’s film capital include real estate giant Wanda Group, which has built up one of China’s largest theater chains and has partnerships with US industry giants Dolby (DLB) and Imax (NYSE: IMAX). The smaller News Corp-backed (Nasdaq: NWSA) Bona (Nasdaq: BONA) also has a Hollywood production deal, and another Chinese investor purchased bankruptcy Hollywood special effects house Digital Domain in 2012.

While film making can certainly be a profitable business for those who know what they’re doing, it is also very costly and potentially disastrous for many who are star-struck by Hollywood but don’t know too much about the actual craft. A good comparison is the casino industry, which looks quite straightforward but has claimed many victims in investors who thought they could simply open an outlet in Las Vegas and would suddenly earn lots of money.

All that said, I do think that Huayi has positioned itself quite well for this new investment. Most importantly, the company has chosen a well-connected industry insider as its main investment partner. Huayi itself is also a shrewd film-maker, backing films including the kung-fu comedy “Journey To The West: Conquering The Demons”, one of last year’s biggest earners. If it plays its cards well, Huayi could provide valuable input for Studio 8 to help it produce films that will appeal to Chinese viewers, creating a supply of new releases with big earnings potential in its home market.

Bottom line: Huayi’s investment in a new US film production studio looks like a smart pairing that could fuel its future growth at the booming China box office.

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