2012-05-19

In Renminbi We Trust: Chinese market puts new spin on film finance

One of the more notable highlights of Chinese film markets this year in Hong Kong and Shanghai is the increased presence of fund managers from the UK and US pitching various pieces of sophisticated structured financing. "What they were offering was not small. They seemed to be looking for companies in Asia to partner up with on 10 or 20-film production slates,"said one executive who had recently been on the receiving end of a presentation. "Obviously they had all caught on to the expansion of the Chinese market and were pitching China funds. But they didn’t seem to understand that there is lots of money already available for film-making in China. I\'m not sure there is room for them."

If anything, it will soon be the turn of Chinese companies to make expansionary moves abroad, either buying overseas companies or financing Hollywood movies. But the foreign funds have got one thing right. China is increasingly the centre of gravity within the region. The huge growth of the Chinese economy and the even faster growth of the box office are changing the film finance map in Asia. Box office was up by 43% in 2009 to 906 million Dollars and is up by some 650% since a low of 120 million Dollars in 2001. There are semi-official forecasts that gross revenues will hit $1.5 billion in the current year, a further growth of 60%. "Asia recovered better from the recession than any other region. You can now make a 3-5 million Dollars movie and recoup in Asia alone. That\'s a sign of a healthy market," says Fred Milstein of insurance brokering giant Aon. "And you can\'t consider it a \'regional\' market any more. It is a pretty big region and will keep growing."

This trend is allowing some mainland Chinese companies to scale up very rapidly indeed; it is sucking in talent and business partners from elsewhere; and it makes thinking about the Chinese market a necessity for ambitious commercial films in the region.

Having reached a near saturation point in its home market, South Korea\'s CJ Entertainment is now the region\'s most serious multinational player. It has carefully nurtured relations in China and last year invested in the Zhang Ziyi produced Sophie\'s Revenge But it has also recently signed off on a joint venture with Toei subsidiary T-Joy, that will co-finance smaller pictures for the Japanese market and larger ones for the wider Asian region. On Sunday in Shanghai, it signed a strategic partnership deal with China\'s Polybona that will see both companies co-invest, co-produce and share distribution rights. Hong Kong firms have done this for several years, benefitting from the territory’s privileged legal status. But now too Taiwanese film-makers and financiers are getting in on the act, helped by slightly looser regulations concerning talent and following the trend of Greater China celebrity. In many ways film financing in Asia remains quite traditional. It is heavily dependent on equity financing by studio groups which are both end users of film and which have their own financial resources.

That is true of groups like Hong Kong\'s Media Asia and Emperor Motion Pictures, which control large stables of Chinese-speaking talent and are backed by wealthy individual owners.

The money plus talent model is being partially replicated in China, where leading production groups Huayi Brothers and Polybona also double up as major talent managers.

Huayi was the first Chinese film group to launch on the stock market, with an eye-catching doubling of its share price on the first day of trading in October. But there is a queue of others including state-backed enterprises China Film Group and Poly Bona and private companies Enlight Pictures and Beijing Galloping Horse which have declared their interest in following suite. Poly Bona will list its shares in New York this year.

The benefits of such firepower have been amply demonstrated by Huayi, which is currently building eight multiplexes, is growing its TV arm and has a slate of big- budget movies including the world’s first IMAX feature films in non-English-language.

But Chinese film-making also sees a wealth of equity capital from other non-media sources; from textile manufacturers to property magnates. This group has become ever more ambitious, moving from one-off films or small scale art pictures which they did not know how to get distributed upon completion a few years ago, to ambitious slates of commercial pictures today.

Now, there is lots of cash coming from other parts of the new media- entertainment scene, such as online games giant Perfect World or IPTV players Voole and LeTV. Some are hiring producers and signing multi-picture deals directly with talent, while others are providing equity for the pictures produced by the bigger name producers such as Terence Chang or Peter Chan Ho-sun’s Cinema Popular. Red Cliff had some 20 investors, while Chan\'s

Bodyguards and Assassins had nine key stakeholders.

Sophisticated foreign finance techniques such as gap financing, completion bonding and managed equity funds, however, have not taken deep root yet in Asian film, although several larger producers have amassed private equity funds over which they have predominant control.

Bank financing, and in particular gap financing, has been relatively little used by Asian companies and Standard Chartered Bank is the only one to make it a core competence. But other banks are gently nosing their way in. (Enlight claims a 45 million Dollars credit line from Bank of Beijing, for example.) And Milstein predicts that Chinese and Singaporean banks will not sit on the sidelines much longer.

While he is not selling completion bonds at the moment, Milstein is betting that there will be a growing market for other insurance products such as trade credits, death, disability and disgrace policies and protection against regulatory change. "The irony is that many of the people I pitched completion bonds to a few years ago, came up to me this year at FilMart and told me that they had investors who were ready to invest, but needed to be sure that the project would actually get finished."

It is not yet clear whether co-venturing with producers from elsewhere in the region will help bring a better sense of audience perspective or just help Chinese producers offset their risk. Whichever turns out to be the case, the China market is currently a powerful magnet and the Shanghai International Film Festival a key gateway.