Digital Domain's new Hong Kong owner, Wanda's Imax affair

A couple of news bits are highlighting China's rapidly blossoming love affair with Hollywood, and also hinting at the turbulence we're likely to see in the next couple of years as Chinese firms invest too much as they become smitten with show business. One of those deals has US digital effects house Digital Domain being taken over by a new Chinese owner less than a year after it was purchased out of bankruptcy by a Beijing-based film producer. The other has leading theatre chain owner Wanda Group significantly boosting its ties with Canada's Imax (Toronto: IMX), as it invests heavily in Imax's big-screen technology.

Both of these deals shine a spotlight on the building bubble in China's film and related theatre businesses, which are seeing massive new investment as China and Hollywood rapidly expand their ties. Much of that new love affair is understandable, since China's box office is growing rapidly and is now the world's second largest behind only the US. But as with many things in China, this sudden rush of companies into a hot new industry is likely to result in a bubble due to excessive new investment.

All that said, let's have a look at these two new deals starting with word that Hong Kong-listed real estate company Sun Innovation (0547.HK) has become the official new owner of Digital Domain. Industry watchers will recall that Digital Domain is the Hollywood special effects house co-founded by blockbuster movie director James Cameron.

Digital Domain was a former high flyer that fell onto hard times and ultimately declared bankruptcy. Its primary assets were purchased out of bankruptcy last year by a Chinese film production company called Galloping Horse Film, which paired with India's Reliance Group for the purchase. Galloping Horse got 70 per cent of Digital Domain in the deal, while Reliance purchased the remaining 30 per cent.

Under the latest twist in this story, the parent of Galloping Horse has been swallowed by Sun Innovation for $50 million (HK$388 million). I've had a quick look at Sun Innovation's background, and the company is a real estate company with little or no experience in the film business. But that hasn't stopped it from this new acquisition, which includes the installation of a Sun executive as CEO of Digital Domain. I see nothing but trouble ahead for this new partnership, and wouldn't be surprised to see Sun either sell off Digital Domain yet again in the next two years or perhaps even get dragged into bankruptcy itself by the troublesome asset.

From Digital Domain, let's take a look at the latest announcement from Wanda, a leading Chinese real estate group that is quickly developing its own taste for Hollywood. Wanda made headlines last year with its purchase of AMC Entertainment, the second largest US theatre chain operator. As part of that deal, Wanda, which is also one of China's top theatre operators, announced it would make major investment to upgrade both its China and US theatre operations.

Now Wanda is following up that announcement with word that it will build up to 120 new Imax big-screen theatres in China. The deal makes Wanda Imax's largest international partner, and represents a major expansion of a tie-up that dates back to 2007. I've said before that Wanda is a great shopping mall developer, but it's far from clear that it can replicate that success in the competitive movie theatre business.

I do expect that Wanda will ultimately emerge as one of China's more successful theatre operators, largely due to the lack of many major competitors. But I do also think that Wanda's rapid build-up, combined with similar expansion by other major operators, is likely to produce a glut of new theatres in China in the next five years, which will be followed by some painful retrenchment for everyone.

Bottom line: Digital Domain is headed for turbulence with its takeover by a new Chinese parent, while Wanda may be moving too fast with a major expansion of its Imax tie-up.

To read more commentaries from Doug Young, visit youngchinabiz.com