Across The Border

Why China’s box-office growth plunged in 2016, after a three-fold expansion since 2010

Wanda’s chairman and CEO Wang Jianlin says the apparent boom of China’s movie market in recent years created a ‘false impression’ of its true performance

PUBLISHED : Thursday, 05 January, 2017, 12:55pm
UPDATED : Friday, 06 January, 2017, 10:40am

China’s ambitions of overtaking the United States to become the world’s largest movie market last year have been well and truly dashed, with box office numbers coming in well under expectation, according to the latest numbers from Beijing-based consultancy firm EntGroup.

Institutional analysts blamed a combination of weak film launches, which effectively cooled down what was already considered an inflated film market.

Last year EntGroup calculates China’s box-office income hit 45.5 billion yuan, up 4 per cent year on year. But that compared with a mighty 48 per cent rise in 2015.

The numbers also fell far behind the US, which stood at US$11.4 billion according to box office tracker comScore.

“The slowdown in growth was mainly due to a cutback in [growth-boosting] ticket subsidies, and also a weak crop of films,” said Richard Huang, an analyst with Nomura.

Liao Xufa, an analyst with Beijing based Gaohua Securities, explains in more detail in a report issued in late September.

“Decreasing ticket subsidies from online ticket buying platforms, the official crack down on fraudulent box office figures, in addition to the decline in movie quality caused the slowdown in ticket sales growth rate,” he said.

A boom in movie-related investment and cut-throat competition between emerging online ticket sales platforms also made for a frothy market.

The slowdown is even more dramatic when you consider China’s film market expanded more than threefold between 2010 and 2015.

Ticket subsidies by online sales platforms and movie makers declined 10 per cent last year as the industry consolidated, said Huang, but he notes that’s “not the sole factor contributing to the dramatic slowdown in fortunes”.

In late March, China’s film regulators, for instance, suspended the license of a film distributor for inflating its ticket sales for the movie Ip Man 3, as part of a crackdown on widespread box-office fraud.

Local media reported that the distributor, Shanghai based Kuailu Investment Group, had bought up large numbers of tickets from theatres after it purchased the distribution rights from the movie maker by placing a minimum ticket sales guarantee.

Kuailu’s major income source is from financing on its peer-to-peer lending platform and the wealth management products it issues.

Panic investors then rushed to cash in their investment, causing the company’s payment system to collapse – a administrative mess the firm is still trying to sort out.

From April to June, China’s box office slumped by 4.6 per cent compared with last year to 10.1 billion yuan, marking the first quarterly drop in ticket revenue in five years.

Wang Jianlin, chairman and CEO of China’s Wanda Group, which owns the country’s biggest film theatre operation Wanda Cinema, said recently that the 2016 box office falls actually painted a more realistic picture of China’s film market, and that the subsidy-fuelled earlier years had created a “false impression”.

“The film market has slumped a lot this year, but this reflects reality,” said Wang.

“I said last year there was a bubble in this sector which would burst once we squeezed out fake ticket sales.

“China’s box office has grown 40 per cent annually for three years. Do you think that’s likely to be sustained when the macro economy is growing around 6 per cent?” he told a forum in Beijing in early December, noting a growth pace of between 10 and 20 per cent seems more realistic.

Huang and his colleagues at Nomura are more optimistic, predicting 25 per cent year-on-year box office growth in 2017.

However, they were bearish on some key industry players, including Wanda Cinemas, which it recently downgraded, with a lower target price 39.3 yuan.

On the other hand, they rated IMAX China their top pick, with forecast box office growth of 42 per cent in 2017.

“The reason for preferring IMAX over Wanda is because first, IMAX is trading at more attractive valuations and second, it is more focused on core operations, which is in contrast to Wanda’s acquisition-led growth model, which exposes shareholders to additional risk,” analyst Richard Huang said.

It warns too that Wanda’s obsession with acquisition is also likely to result in significant margin deterioration. The company has spent around 10 billion yuan over the past 18 months, acquiring assets including overseas cinemas chains such as Hoyts, domestic chains including Shimao, and movie advertising companies such as Movie Media.

The report concluded the one common market factor, is the meagre profits they are generating.

“If they are not loss-making, our forecasted net profit margin decline is from 14.8 per cent in 2015 to 11.5-12.2 per cent in 2016-18 financial year”.