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Shirley Yam

Li Ruigang was all over the headlines this week.
He has formed a joint venture with Warner Bros Entertainment to rejuvenate Hong Kong as the Hollywood of the East and he is partnering with Disney to invest in a virtual reality start-up.
Plus with the black T-shirt and blue jeans Steve Jobs-style look he sports occasionally he does live up to the title of "China's Rupert Murdoch".
That's exactly the image IMAX China was projecting for Li, its non-executive director, in its share sale prospectus.
What it did not say is that Li is an influential party cadre. He was promoted to deputy secretary general of the Shanghai Communist Party's Administration Office in 2011. He left after a year but remained the party secretary of the state-owned Shanghai Media Group.
In China's tightly regulated movie industry, his cadre-cum-businessman background is worth billions, literally.
Pre-IPO investors led by him would make HK$2.8 billion, or a 440 per cent return, in less than a year from the listing of IMAX China.
Among them is China Media Group - an investment fund founded by Li with contributions from at least six state-owned corporations, including the State Development Bank, and FountainVest Partners - an equity fund set up by ex-Temasek managers.
They invested US$80 million for a 20 per cent stake in IMAX China in April last year. The return is mouth watering.
First, though 50 per cent of the investment was not paid until February, they got a US$47.5 million special dividend before the listing this month.
Second, they are unloading 44 per cent of their investment in the IPO while IMAX's parent is selling only 15 per cent. More than HK$1.08 billion will go to investors.
That means even if the 11.2 per cent stake they keep turns into worthless wallpaper, they would have already cashed out with a 230 per cent return.
What brought IMAX's parent to accept these terms?
It is not about money. The large screen operator in China has zero borrowing and the investment was hardly used.
It is because of who Li is. "China is a complex country to operate in … Their influence and business acumen was instrumental in the listing of the company," said chairman Richard Gelford. "They deserve it." Gelford did not elaborate.
The fact is that Beijing caps the number of imported movies at 34 each year, it decides when a movie should be released and determines the profit sharing of distributors and other players.
Then, there is the intellectual property issue.
Since 2013, IMAX has said in courts in the US and China that a competing large-screen technology used in China was based on technology stolen from its Canadian offices by a Chinese employee.
It has been ugly. The former employee has moved to Beijing and sued IMAX for defamation. Surprisingly, IMAX said in December a confidential settlement had been reached.
The price of guanxi is therefore never too high in China's movie industry. The question is how long IMAX will continue to enjoy Li's connections.
If the structure of IMAX's offering is telling, not much loyalty can be seen. About 80 per cent of the proceeds will go to the pre-IPO investors and the parent company, leaving only 20 per cent to the company. The former, not the company, will sell more if the deal is hot.
It is a harvest time for Li. The stake of his group and FountainVest in IMAX will drop from 10 per cent to 5.6 per cent. They are free to sell down after six months.
That's a no brainer. Home-grown competition, which is much encouraged by Beijing, is mounting.
Among them is X-land a rival, non-conventional screen system developed by privately owned Wanda Cinema and China Film Giant Screen.
IMAX boasts an 81 per cent market share. Yet, the two domestic rivals did not start until 2012 and they were owned by the two largest cinema chains in the country.
Mind you Wanda is IMAX's largest customer in China, accounting for 44 per cent of its cinema network.
Will Wanda continue to support a competing IMAX? What one can see is that Wanda did not chip in as a cornerstone investor of the IPO. Instead, a hedge fund took up a quarter of the offering with no lock up.
No wonder Li is exiting.
shirley.yam@scmp.com


Chinese media mogul Li Ruigang charges dearly for his connections

IMAX boasts an 81 per cent market share of the big screen experience. Photo: Reuters

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