The Hong Kong-based CEO of Legendary East talks about the new joint venture between Inception producer Legendary Entertainment and Chinese partners.

Kelvin Wu has recently raised $220.5m for Legendary East – which aims to produce one or two event movies a year for global distribution – through Hong Kong-listed construction group Paul Y Engineering (PYE).

Thomas Tull’s Legendary Entertainment and Legendary East management now own a 40.1% stake in the venture, while PYE holds 50% and Beijing-based production and distribution partner Huayi Brothers owns 9.9%. The first production from Legendary East will be action adventure The Great Wall, directed by Ed Zwick, which Huayi Brothers will distribute in China and Warner Bros in the rest of the world. 

Wu has an investment background – he also manages a fund, AID Partners Capital, which is investing $35m in PYE, and was previously president of Investec Asia. From 2009-2011, he was CEO of Orange Sky Golden Harvest (OSGH), which last year bought a 3.3% share in Legendary for $25m, but recently sold back the stake.

How will the projects that Legendary East produces be generated and developed?

We want to repeat what Legendary has achieved in the West and deliver the same kind of movies in terms of budgets and revenues. In order to ensure we have bit hits from the beginning, we are going to rely heavily on the Legendary East team in Burbank. However our strategy is to become a member of the film community here in Greater China, so we want to develop our own expertise here also.

So the goal in the long-term is to have our own team, with a mixed culture of East meets West, and create a long-running business for the company.

What kind of genres and subject matter will the films have?

We don’t know how to do love stories or comedies. We want to produce something that a 20-year-old – not necessarily that age, but psychologically that age! – would want to watch on a Friday night, whether they’re in Tokyo, Beijing, Johannesburg or Los Angeles. These movies will also have strong cultural ties to China.

Are the Chinese cultural ties necessary in order to qualify the films as official co-productions (and therefore bypass China’s import quotas)?

Yes, but it also works the other way round, as we will be exporting Chinese stories to the rest of the world. According to our financial model – the Chinese market will be maybe less than 10% of the global revenues – although we expect and hope that our films will also break into the Top Ten of Chinese box office each year, in the way that Inception did. All the films will be set up as co-productions and our co-production partner, Huayi Brothers, will be taking the lead role in that.

Many attempts by the US studios and other Hollywood players to make movies in China have fallen short of expectations. How do you avoid making the same mistakes?

They came too early – this is just the right time to come to China. The box office has increased by six or seven times and the cultural industry has lagged behind other industries – so it’s time to catch up.

The government does encourage the development of this industry, and many other industries have been growing so rapidly that a lot of excess capital has come to join the party. There are not too many avenues of investment in China so some of the property developers or mining entrepreneurs, when they’re slowed down by other regulations, have to find a new industry to invest in. Perhaps they also like this industry because they think it’s cool.

The film industry also has more responsibility in terms of – it’s not exploiting natural resources – and it’s not just the film industry; music and the arts are also attracting a lot of capital.

How did the deal with PYE come about? And how will this new area of investment fit within their existing construction and engineering business?

We’ve been working with advisors – there were couple of choices and we chose Paul Y. I think firstly Paul Y also wanted to diversify their business – the growth in construction seemed flat in the last two or three years. I also imagine that we may be able to do something in the future through Paul Y’s relationship with Charles Chan, and his relationship with TVB, although nothing has been discussed yet. [Chan, a well-known Hong Kong entrepreneur, is an investor in local broadcaster TVB and chairman of PYE parent ITC]

However, Paul Y has separate teams to run the two businesses – it’s easier to run them separately than try to find synergies that are not really there. I would describe Paul Y as a platform for investors – a very transparent, professional platform with the strong backing of existing shareholders. It’s not like another [Hong Kong] family-owned company.

You’ve raised equity of $220m which should cover the first couple of films – will you also use debt financing when you get deeper into the slate?

The first couple of films will be financed by equity raised through PYE, and when we release the first few films, we create a library, and can use the residual revenue of that to approach commercial banks and raise financing for further films. We’ll talk to banks in the US but not necessarily US banks. Cost-wise it’s more beneficial to get financing in the US as the interest is lower and they’re more used to this kind of asset-backed, library-based financing.

Why didn’t the deal between Legendary and OSGH work out?

Orange Sky has a very different strategy, even though they’re in the same industry, they want to build a theatrical distribution business by building a lot of cinemas first and then move further up the value chain. That’s very capital intensive and doing my duty as CEO I raised a lot of money for them – probably about HK$600m equity – but the first couple of years could be tough on cash flow and Orange Sky need a lot of cash on hand to grow out their business. There was a friendly reversal of the transaction and Orange Sky got quite a nice return as well.

What role with Huayi Brothers play in Legendary East, in addition to distributing the films you produce in China? Will they also invest in the films?

Not apart from the co-production investment – in order to qualify as a co-production, a percentage of the investment should be from a Chinese entity. They will distribute in China, so will keep their distribution fees, then the rest [of the mainland China box office] goes to Legendary East and Huayi Brothers gets their share in terms of their co-production investment.

How about Warner Bros – will they be investing or simply distributing on a commission basis?

They’re also a distributor – they don’t have equity in the films, but they’ll also put up the p&a costs, which will be substantial, so they’ll recover the p&a and take a fee. But no, they’re not investing.

So with distribution all sewn up, there’s no room for anyone else to buy a piece of these films?

Not at the distribution level – but they can all come in at Paul Y’s level! My fund, AID Partners, is also coming in at Paul Y’s level.