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«China Film Industry Report 2012-2013 (in Brief) China Film Industry Report 2012-2013 (in Brief) China Film Industry Report ...»

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China Film Industry Report 2012-2013 (in Brief)

China Film Industry Report 2012-2013

(in Brief)

www.entgroup.com.cn

China Film Industry Report 2012-2013 (in Brief)

I Research Background

In 2010,the State Council of China issued a series of guidance for film and cultural industries, which gave

significant support to the development of Chinese film industry at the macro policy level. At the end of the same

year, it was announced that the cultural industry would be developed as a pillar industry for the national economy.

China's film industry has achieved rapid growth in this condition.

In 2012, the Chinese film industry showed exponential development. Total film box office revenue exceeded 17 billion Yuan. Film production and financing, and cinema investment and construction all rose to a new level, attracting substantial capital to this field. In essence, the Chinese film market has come to a golden age. Also, accompanied by film technology innovation and rapid growth of its viewer-base, the constitution of moviegoers and their viewing preferences and ways to receive information have all undergone significant changes compared with previous years.

In this environment, series of challenges emerges, such as how to seize investment opportunities in the rapidly growing market, how to improve the competitiveness of domestic films and how to understand the tastes of audiences. To help companies in film industry get a comprehensive understanding about the status and features of the Chinese film industry, EntGroup presents the China Film Industry Report 2012-2013 based on in-depth research, analysis and interviews. The report is the fifth such annual report presented by EntGroup since 2009.

II Research Scope This report will focus on the Chinese film industry in 2012-2013. In this report, the Chinese film industry refers to the mainland China film industry, and does not include the industries in Hong Kong, Macau and Taiwan.

III Methodology This report adopts both quantitative and qualitative methods, and combines revenue figures of the film market to conduct the research on the Chinese film industry. The statistics used in this report are primarily from figures gathered by the Computer Ticketing Network Centre of National Film Special Fund Office, and announced on China Film News, while the market ranking data was obtained from the China Film Exhibition & Distribution Association, and from data provided by major cinema circuits in the country. The above data were cross-referenced by interviewing major cinema circuits and distribution companies. All the figures and statistics used in this report were obtained from more than one source, and they were repeatedly vetted and analyzed to ensure accuracy and authenticity.

1. Overall Analysis of Trends in China’s Film Industry in 2012

1.1 Analysis of China’s Film Industry in 2012 1.1.1 National Policy: Fewer restrictions on foreign films puts pressure on Chinese language films In 2012, a new policy agreement between China and the US allowed for 14 “specialty” films (3D or IMAX) to be imported into China in addition to the 20 revenue-sharing foreign films already allowed. After this new policy agreement, the success of huge blockbusters such as “Titanic” and “The Avengers” brought a great blow to Chinese films at the box office.

In order to withstand this outside pressure, China has implemented policies that support domestic films. In 2012, the Chinese government increased funding to encourage theaters to screen Chinese films. It also implemented a new deal between Taiwan, Hong Kong and the Mainland for the co-production of films, and loosened restrictions on cooperation between Taiwan and Mainland China to further promote cooperation and production. It is hoped that co-productions between Taiwan, Hong Kong and Mainland China will increase interaction between these regions and will encourage the overall integration of Chinese language films.

–  –  –

China Film Industry Report 2012-2013 (in Brief) 1.1.2 Economics: Cross-border M&A to be More Common As China’s economy becomes stronger, mergers and acquisitions are becoming the most effective way for Chinese companies to enter into and compete in the international market. Data show a total of $11.7 billion USD in foreign investment in 2012, which was a 4.5% decrease over the previous year (excluding banks, securities and insurance figures).

–  –  –

As China’s film industry continues to grow, it is inevitable that domestic film and television companies will look to expand overseas. By 2012, it had become a common trend for domestic companies to merge with or acquire large foreign companies.

Analysis by EntGroup shows that mergers and acquisitions of foreign companies have expanded from energy and manufacturing to the cultural sector. Acquiring foreign companies in order to expand internationally is a vital strategy for domestic companies. Through mergers and acquisitions, domestic production companies gain access to advanced technology, which compensates for their disadvantage in post-production, and helps domestic films compete with Hollywood productions.

China Film Industry Report 2012-2013 (in Brief)

1.2 Analysis of the Scale of the Chinese Film Industry 1.2.1 Overview of the Scale of the Chinese Film Industry In 2012, revenue generated by the Chinese film industry totaled $3.3 billion, an increase of 18%. Of this total, box office accounted for $2.7 billion (a 30.18% increase over the previous year) while non-box office related revenue totaled $45 million. Overseas sales continued to fall, generating only $46 million. Projections for 2013 put film industry revenue at $4.58 billion with hopes that box office generated revenue will reach over $3.64 billion.





–  –  –

1.2.4 Revenue from Film Advertising Revenue from preshow ads and embedded ads continued to increase in 2012, with a 22% increase in revenue generated exclusively through preshow ads, while growth for embedded ads was slower at only 3%. Another major avenue used by films to recover investment funding was product placement. Revenue made through this avenue increased by over85%, which was the same level as that for embedded ads.

In 2011, the State Administration of Radio, Film and Television (SARFT) issued guidelines for “promoting coordinated development of film production, distribution and exhibition”, which states that the decision to show ads will be left to the theaters, and production companies will not be involved in embedded ads. These guidelines greatly influenced advertising revenue for 2012.

As business become savvier in terms of entertainment marketing, product placement revenue has risen from 2011 to 2012, approaching the same revenue levels earned from embedded advertisements. There have been a total of 144 examples of product placement in over 30 domestic films. Analysis of data from EBOT EntGroup Box Office Tracker shows that product placements appeared mainly in romantic movies in 2012, and mainly consist of ads for cars, food and beverages, online services, and financial services.

China Film Industry Report 2012-2013 (in Brief) 2 Movie Production in China in 2012

2.1 Overview of Movie Production in China in 2012 2.1.1 Analysis of Production Volume in China in 2012: 745 feature films were produced, 30% made it to theatres In 2012, China produced a total of 893 movies, 745 of which were feature films, and set a new record by doing so.

With a growth rate of 33.5%, this broke the trend of slow growth that had been continuing for the past few years.

Of all the domestic films, 31% were screened in China throughout the year, which is also a considerable rise over the previous year. This shows that domestic film making has finally made the transition from its “hot money-driven” pattern to a more reasonable strategy last year. The clear rise in the number of films in 2012 shows that film market is on its way to recovery.

Image 2 - 1 Total Number of Domestic Feature Films and Numbers of Screened Domestic Films 2005-2012 2.1.2 Analysis of Chinese Movies in 2012 by Genre EntGroup statistics show that of the 315 movies screened in China in 2012, the preference for traditional genres of China Film Industry Report 2012-2013 (in Brief) romance, action and comedy remained strong among audiences. Of these, domestic films were the most exemplary of this trend. Action films did the best at the box office, while comedies and romances took the top two places among domestic films. Worth mentioning is the unexpected rise of thrillers and animations among domestic films. Thrillers such as “Bixian Panic”, “The Zodiac Mystery” and “Nightmare” enjoyed comparatively good reviews and performed fairly well at the box office. This resulted in a 129% increase for domestic thrillers over last year and a gradual increase in the number of people willing to watch domestically produced thrillers.

Image 2 - 2 Production Volume and Box Office Comparison of All Movies and Domestic Movies Screened in China in 2012 2.3.4 Overview of Co-Productions in 2012 Data from the EBOT EntGroup Box Office Tracker show that there were 67 co-productions filmed in 2012, with total box office revenues of $672 million. Currently, co-productions are dominated by partnerships with Hong Kong for 40 of the year's films, taking nine of the places out of the year's top ten best performing films. In addition to Hong Kong, Taiwan's interest in co-productions has also started to pique, with 11 co-production films going into production. The main reason for this is the artistic aspect of Taiwanese films and their ability resonate culturally with Mainland audiences.

3. Film Distribution in China in 2012

3.1 Overview of Film Distribution in China in 2012 3.1.1 Analysis of Market Shares among Chinese Distributors: private companies more active and four companies split market share for each season Data from EBOT EntGroup Box Office Tracker show that in 2012, the ten companies with the largest market shares in distribution accounted for 89.2% of the nationwide market, which was a noticeable increase over the 85.0% concentration in the market in 2011.

Among these companies, Le Vision Pictures, Edko Films and Sil-Metropole were newcomers to the Top 10 list, and their performance was especially noteworthy when compared with other newly emerging private distributors.

4. Analysis of Major Chinese Production and Distribution Companies

4.1 Analysis of State-Owned Companies Over the past 20 years of reform and development, changes have been made in large state-owned film companies in the areas of property rights, operational mechanisms, corporate structure and institutional innovation, and these changes have essentially completed a strategic restructuring of assets, the market and management.

Similar to the structural reforms that have been made within state-owned enterprises, new large-scale state-owned film companies such as the China Film Group, the Shanghai Film Group and especially the Changchun Film Group and Xi'an Movies are also facing policy pressures and systematic shortcomings. In terms of positioning and operational models, they still lag somewhat behind private companies that are growing rapidly.

2002 was a decisive year in the Chinese film industry - the period between 1993 and 2001 was a period of marketization, while the period between 2002 and 2010 was an initial period of development for the Chinese film industry.

China Film Industry Report 2012-2013 (in Brief) The reform of state-owned film companies came just as China was entering the WTO, and the process of marketization that came thereafter drove the development of the film industry. While trade barriers remain in China's film industry, films that are allowed for import every year continue to put pressure on China's domestic film makers. A range of policy guidelines have driven and guided development and changes within state-owned film companies. Meanwhile, the rapid growth of private film companies has also resulted in changes within state-owned film companies.

4.2 Analysis of Listed Private Companies 4.2.1 Huayi Brothers 4.2.1.3 Analysis of Main Business Sectors Huayi Brothers' main business is divided into six different modules. Excluding film/TV production and artist management revenues, revenue brought in only by theaters, gaming and copyright sales accounted for 11.6% of total revenue in 2012. Huayi Brothers' main source of revenue is still from the production of films and television programs, which is supplemented by cultural products. Movies and related business account for nearly half of Huayi Brothers' total business revenue.

According to Huayi Brothers' financial report for 2012, gross profit from gaming was the highest of all the six major business modules (excluding copyright sales), while gross profit from movies and related business was the lowest.

Compared to profit numbers for the same period in 2011, profit from television and theaters both dropped.

Revenue from television series and related business remained at the same levels, but gross profit dropped by six percentage points.

Overall, after Huayi Brothers listed in 2009, there was a drop in operational costs in relation to overall revenue, which meant a rise in annual net profit, but this trend has weakened with each proceeding year. The overall trend for profit shows that Huayi Brothers is gradually transitioning from a developing company into a mature company.

After listing, there was no expansion of key senior management, but the growth rate continued to rise. The limited scope of management may lead to uncertainty in certain areas of business development and a slowing down of growth. The company's financial report also shows that the future of music and online gaming remains unclear.

5. Chinese Film Exhibition Industry in 2012 - A Study of Movie Theater Chains in China

5.2 Overview of Movie Theater Chain Operations in China in 2012 5.2.1 Market Overview  Theater Chain Statistics As of the end of 2012, there were 46 movie theater chains operating in cities throughout China, which was an increase of 7 chains from the same period in 2011. The number of theater chains located in the interior of China has been increasing for the past 4 years, with last year’s growth rate (2012) being the greatest, at 17.9%. This growth is primarily the initial result of the upsurge in theater investment that has brought great amounts of



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