Has the Huayi fightback begun?

The 22-year-old media powerhouse has been outmanoeuvred in China’s booming film industry. But some suggest a new appointment might mark a shift in its fortunes

PUBLISHED : Friday, 05 August, 2016, 8:28pm
UPDATED : Sunday, 07 August, 2016, 1:40am

It’s been a bruising past four years for Shenzhen-listed entertainment giant Huayi Brothers.

The 22-year-old media powerhouse was once king of the world’s second-largest film market.

In 2012, it had a dominant 10 per cent share of the industry. But the most recent figures suggest that has now been cut to 2 per cent, pushing it firmly down the rankings, even at a time when total Chinese box office has been growing annually at more than 34 per cent.

With 1.22 billion yuan in box office in 2015, Huayi, headed by chairman and chief executive Wang Zhongjun, ranked eighth among its domestic peers, according to data from consultancy Ent Group.

Not only that, a serious shadow has been cast over its key plan to rescue its fortunes by becoming the country’s leading theme-park operator.

“While Huayi has been busy building theme parks and investing in mobile games, it has gradually taken the shine off its film business,” said Shen Zheyan, a Shenzhen-based analyst with CI Consulting.

Wanda Wuzhou Film Distribution, controlled by China’s richest man Wang Jianlin, now holds a 25 per cent share of the Chinese film market, up from a mere 0.3 per cent in 2012.

Wanda Wuzhou was previously the distribution vehicle of Dalian Wanda’s film offshoot, which also owns Shenzhen-listed Wanda Cinema Line, Asia’s largest movie theatre chain, as well as US theatrical exhibitor AMC Entertainment.

“Although Wanda may not be as experienced as Huayi in filmmaking, its strength lies in distribution as it has a massive theatre chain, and more importantly it seems never to run short of cash,” said Shen.

While Huayi has been busy building theme parks and investing in mobile games, it has gradually taken the shine off its film business
Shen Zheyan, analyst, CI Consulting

Also joining Wanda in the shakeup of China’s movie-market pecking order is e-commerce titan Alibaba, which has vowed – through Hong Kong-listed subsidiary Alibaba Pictures – to transform the domestic industry with big data and online platforms. Alibaba is the owner of the South China Morning Post.

Internet mogul Jack Ma Yun’s film offshoot has also branched out overseas as a key investor in two recent chart-toppers by US film giant Paramount: Mission: Impossible – Rogue Nation and Teenage Mutant Ninja Turtles.

Last year, China’s box-office revenue ballooned by a record 48.7 per cent, data released by Chinese authorities showed, propelled by domestic blockbusters such as Monster Hunt and The Gouls, which Wanda produced.

Meanwhile, as those two newer major players took on Huayi using their massive online and offline distribution channels, a more traditional filmmaker just four years younger than the firm has also been building a leading position.

In 2015, Shenzhen-listed Beijing Enlight Media, which focuses on film and television production and talent agencies, watched its box-office market share climb to 14 per cent from 10.1 per cent in 2012, and it is now only behind Wanda Wuzhou in the rankings, according to data compiled by Ent Group.

Huayi’s shrinking market share, as a result of those three, meant its net profit grew 8.86 per cent last year to 976 million yuan from 2015, a shadow of the 48.04 per cent surge by Wanda Cinema Line and the 22.28 per cent leap by long-time rival Enlight.

Huayi forecast recently it expected a 20 to 50 per cent contraction in net profit for the first six months from a year earlier, only to be told a day later that Enlight was projecting earnings for the same period to soar 277 to 302 per cent to more than 300 million yuan, thanks to “a significant increase in box-office income”.

“There’s no doubt that Enlight’s romantic film The Mermaid, which hit the silver screen during the Lunar New Year, has sent its revenue soaring,” said Huang Guofeng, a Beijing-based senior culture industry analyst with Analysys Consulting.

Directed by Hong Kong’s Stephen Chow Sing-chi, The Mermaid generated 3.4 billion yuan in box office, breaking numerous records in the process, including biggest opening day and week of all time in China.

Huayi said in a statement in July that it anticipated its four films in the pipeline for release over the second half would help it stage a turnaround, but already one of those has failed to deliver the financial returns expected.

Rock Dog, a 334 million yuan Chinese-American 3D animated film, raked in just 30 million yuan in six days, less than a 10th of that pulled in by Enlight’s animated film Big Fish & Begonia.

Both were released on July 8.

“It hasn’t been a good beginning to the second half for Huayi, so questions remain whether its profit growth will swing into the positive territory,” Huang said.

Huayi’s price-earnings ratio of 34.04 is also way below that of its listed peers – Enlight at 52.76, Zhejiang Talent Television and Film at 135.96 and Wanda Cinema Line at 60.84 – illustrating just how much its valuation has shrunk.

Xin Chen, a UBS Securities analyst, downgraded the stock to “neutral” from “buy” in July and now considers the price “fairly valued” as earnings growth is likely to “underperform the industry average over the next three years”.

After peaking in June last year, shares in Huayi have tumbled 36.13 per cent over the past 12 months, against a 28.1 per cent decline by Enlight over the same period.

Huayi said in its 2014 annual report that it would reorganise its business into three segments: film and television, brand merchandising and live entertainment, as well as internet entertainment.

A critical part of the overhaul was to build “film towns”, essentially Universal Studios-like theme parks.

In an interview with the Post last year, Wang said he was “learning from Disneyland”.

“We won’t be the major investor or developer in any of these projects but will mainly be involved in trademark licensing and management,” he said.

Wang said Huayi had signed deals with 13 cities and aimed to roll out 20 such projects across China. For each, the company hopes to net 100 million yuan from a developer for the right to use its trademark and take 10 per cent of the profits.

In its financial data for 2015, however, revenue from Huayi’s brand merchandising and live entertainment business plunged by 76 per cent to 55 million yuan.

Revenues from its two operating theme-park projects – Feng Xiaogang Film Town in Haikou, Hainan province, and Huayi Brothers Movie World in Suzhou, Jiangsu province – shrank 4.02 million yuan and 5.78 million yuan, respectively.

But Huayi is not the only Chinese conglomerate finding it hard to replicate the commercial magic of Disney.

Last Sunday, Wanda said it was to renovate its 3.8 billion yuan flagship movie theme park in Wuhan, just 19 months after it opened, in what appears to be a major setback to billionaire owner Wang Jianlin’s own ambition to surpass Disney as the world’s premier entertainment park operator.

The company said the site was being closed for “renovation and upgrade works to better serve our guests with better-quality content”, while industry insiders reckoned the decision was taken to beef up poor visitor numbers.

A combined 150 billion yuan has been poured into the more than 2,500 theme-park projects in China, but about 70 per cent of them have been losing money, according a report by Beijing-based Qianzhan Industry Research Institute.

“It takes a long time for a project of this sort to bear fruit, and many Chinese theme-park developers need to work out new agendas to lure tourists,” said Zhao Huanyan, chief knowledge officer with hospitality and leisure consultancy Hotelsolutions Consulting.

In his interview with the Post last year, Wang Zhongjun said: “I have no idea if our tourism projects will turn out to be as profitable as we expect. But … you lose the best timing if you insist on having a clear idea of everything [before embarking on it].”

Huang suggests Huayi has turned its lights on theme parks in an attempt to gain the first-mover advantage in what is still a sector in its infancy.

Over time, China’s transition to a domestic consumption-driven economy could deliver handsome profits for theme-park operators as demand rose in line with salaries, he added.

Chen Xiaoyu, deputy general manager, investment, with Ent Group, said Huayi must better use its own good intellectual property to create genuinely popular theme parks.

“For example, many Chinese holidaymakers flock to visit Fantawild Adventure Park in central Anhui province only because their children want to experience its signature Boonie Bears theme,” said Chen.

Others believe Huayi’s long-term prospects come from its star-driven intellectual property, which it has accumulated over two decades as a media behemoth, representing household names such as actress Li Bingbing and Angelababy, dubbed China’s Kim Kardashian.

Everbright Securities analyst Gao Hui is hopeful of Huayi’s changes of success.

“Intellectual property is Huayi’s silver lining ... The chances are its theme parks will become China’s Disneyland one day as it is among the first to make a foray into the sector,” said Gao, adding its investment in the new sector could well mitigate some of the huge uncertainty from its dwindling film production returns.

With Huayi having operated so long in a film industry “which can be very volatile and where blockbusters often depend on luck”, Huang said its heavy investment in theme parks “can also provide relatively steady income”.

Movie fans in China appear to be tightening their belts this year, with total box-office revenue for the first half growing just 21.41 per cent, compared with a 48 per cent rise last year, the latest government statistics showed.

“Back in the time when Huayi decided to play down its film business, its status as No 1 in the industry was very stable. But now everything has changed,” said Shen. “Having said that, it is never too late to rebuild and catch up.”

That fightback may well have started in earnest in March, with the appointment by Huayi of chief executive Jerry Ye Ning to head its film business.

The company even poached Ye from Wanda’s filmmaking and distribution offshoot, which he had headed for more than seven years.

Widely considered the mastermind of Wanda’s rise to the top of China’s film and television world, some market watchers expect Ye to rejuvenate what is one of the country’s oldest private-sector entertainment empires.

“Ye is brilliant,” says Chen, “and all of us hope he will bring tremendous change to Huayi going forward.”

This article was amended to correct the box-office figure for The Mermaid and fix typographical errors