Golden age for Chinese cinemas as national holiday week sees bumper box office takings

Mainland China’s National Day golden week holiday conjures up images of numberless hordes descending on railway stations in the vacationing equivalent of a blockbuster disaster movie. Around 100 million rail journeys were made over this year’s holiday period, but 55 million people opted for something far less daunting – they went to the movies.

Box office receipts for the week totalled 1.9 billion yuan (HK$2.3 billion), 70 per cent more than for the same period last year. “This growth rate is above consensus estimates and should be a positive catalyst for China film-related stocks,” HSBC analysts wrote in a note reviewing the bonanza week.

The mainland’s film industry has been writing its own script for some time. Box office receipts have increased at a compound annual growth rate of 40 per cent since 2009, and they will continue growing at over 20 per cent through 2017 when the mainland will overtake the United States as the world’s most lucrative cinema market, Credit Suisse analysts say.

“China’s box office [is] a newly blossoming sector that is in [a] phase of high growth,” Credit Suisse analysts wrote in a report predicting revenue would hit US$17.2 billion in 2020.

The driver is not ticket prices, which have stayed practically flat at around 35 yuan since 2010, but box office admissions, which grew from 0.1 per capita in 2009 to 0.6 in 2014.

“The 1980s and 1990s born population makes up the mainstream movie audience in China. The increase in disposable income and craving for entertainment for this younger generation will continue to drive movie admissions,” Credit Suisse analysts wrote.

In the US, box office revenue has stagnated amid declining admissions and a shortening theatrical release window, but admissions per capita remain around seven times higher than on the mainland.

That hints at the potential of a growing Chinese middle class, whose appetites should be unaffected by slowing economic growth.

“We think the China film industry will continue to beat expectations regardless of the macroeconomic outlook,” HSBC analysts wrote.

The industry’s fortunes are also influenced by the state. That means constraints on content, but also financial and policy support for the ever-growing number of domestic productions, in line with Beijing’s goal to enhance the culture industry to support internal social cohesion and exert global influence by projecting soft power.

“The Chinese government is increasingly emphasising the rise of China over the past decade, with political leaders coming to understand that economic success alone is not enough,” Credit Suisse analysts observed.

The State Administration of Radio, Film and Television seeks to protect local filmmakers by guaranteeing prime scheduling for domestic films and imposing distribution quotas on foreign films. But consumers are not playing along. In the first half of this year, 33 international films netted 53 per cent of the box office while 117 mainland films took 43 per cent.

(Fast and) Furious 7 dominated first half receipts – before it was overtaken by local production Monster Hunt thanks to the summer blackout on foreign films.

It’s evidence that the industry’s downstream end can thrive whatever the rules.

Cinema chains are omnipresent in tier-one cities and aggressively expanding in smaller cities, and their winning combination of access to the customer and ability to hedge bets across a variety of audience preferences puts them in the box seat among industry players.

“Normally, content is king in the media entertainment industry, and special focus should be given to the top-tier production/distribution companies. However, given the muddy competitive atmosphere and high ‘hit or miss’ risk currently in the space, we believe that movie cinema chains are likely to come out as the biggest winners,” Credit Suisse analysts wrote.

Shenzhen-listed Wanda Cinema Line is the dominant player, with more cinemas than its top three competitors combined, an efficient operation and ambitious global expansion plans. Analysts also pick out Orange Sky Golden Harvest as a highly undervalued H share with solid prospects.

While other parts of the film industry are less reliable, analysts say there is ample scope for them to develop new revenue streams including theme parks, consumer products and spin-offs in other media – with digital television front runner Huace identified as a promising pick by HSBC and Credit Suisse.