Chinese cinema deals under the spotlight, as regulators scrutinise blockbuster valuations

Wanda Cinema and Leshiare questioned by Shenzhen Stock Exchange over proposed movie unit acquisitions, with the focus on aggressive valuations

PUBLISHED : Thursday, 26 May, 2016, 10:47pm
UPDATED : Thursday, 26 May, 2016, 10:47pm

China’s securities regulator is reining in aggressive valuations in merger and acquisition deals, particularly those related to the cinema and film business.

Wanda Cinema Line, the ­movie theatre arm of conglo­merate Dalian Wanda Group, has received an inquiry from the Shenzhen Stock Exchange (SSE) asking for further information in a recent acquisition deal, the Shenzhen-listed company said in a ­filing on Tuesday night.

The company announced a plan on May 13 to acquire a 100 per cent interest in Wanda Media, a film production and distribution unit under Wanda Group. The ­latter is valued at 37.2 billion yuan (HK$44.04 billion).

It is the second time in a week that the SSE has asked for deeper information disclosure regarding a listed company’s restructuring of its film business. Last Friday, the bourse made a similar request to Leshi Internet Information & Technology Corp’s plan to ­acquire its film production and distribution unit Le Vision ­Pictures for 9.8 billion yuan.

“The film units under Wanda and Leshi are of top level in the sector. They are very likely to pass the inquiry and accomplish the deals,” Ray Zhao, a media analyst with Guotai Junan Securities, said. “But the authority is making a gesture to warn other less competitive companies, that raising funding from the capital market is under more strict supervision.”

The SSE has asked for a “sufficient explanation” from Wanda for the valuation and pricing of Wanda Media’s assets, according to “comparable companies and deals”. The SSE also requires an explanation for the profit outlook.

The acquisition proposal assumes the annual net profit of Wanda Media would be above 5.1 billion yuan from 2016 to 2018, whereas the number looks like a big jump from recorded performance, SSE said in the inquiry.

Net profit attributed to parent company shareholders remained negative in 2014 and 2015 for Wanda Media, equal to losses of 2.69 billion yuan in 2015, and 3.97 billion yuan in 2014.

More than 20 per cent of ­A-share listed companies missed their profit growth promises made in M&A proposals in 2015, Lin Xiaochi, an analyst with Citic Securities, said in a research note.

Also, the identities of investors participating in the deal and the operating conditions of Legendary Entertainment, a US movie studio acquired by Wanda in January for US$3.5 billion and part of Wanda Media, are included in the exchange’s questions.

The box office on the mainland last year surged 51.2 per cent to reach US$6.78 billion, and some analysts expect the market to surpass the US in 2017, currently the world’s top film market. On Saturday, China’s 2016 annual box office total hit 20 billion yuan, achieving that milestone 37 days quicker than last year. However, the number dipped in April by 24 per cent year on year, after a blistering first quarter .

The central government authorities are trying to rein in bubbles in the capital markets, led by investment to the “new economy” sector, which includes companies engaged in internet technology and entertainment.

The China Securities Regulatory Commission, the nation’s top securities watchdog, is considering tightening up, or even blocking, companies from private placement deals to fund investments in these business, industry sources said.