The Chinese box office hit $1.5bn in 2010 — yet the territory remains vastly under-screened. Sen-lun Yu explores the fierce competition in China’s exhibition sector, and the potential for foreign investment
Driven by the twin engines of rapid cinema expansion and a surging admissions rate, the Chinese box office continued its meteoric rise in 2010 to hit $1.5bn — a year-on-year increase of 61.3%. Today, the exhibition sector remains the fastest-growing part of the Chinese film industry and in the view of Chinese exhibitors, this growth is going to continue over the next five years.
More than 313 new cinemas were built in 2010, with 1,533 new screens, taking China’s total screen count to 6,200 according to statistics from government film agency SARFT. An average of 4.2 new screens opened every day in China in 2010, 90% of which were digital and more than 40% of which were based in second-tier cities or the less-developed west of the country.
But despite this rapid expansion, China’s film market is still vastly under-screened. With a population of 1.3 billion, there is still only one screen for every 209,000 people, and even in the cities there is just one screen for every 120,000 inhabitants.
“In the next three years, there will be a total of 20,000 screens and in five years the screen number will reach 40,000,” says Zhang Baoquan, president of Time Antaeus, an exhibitor and distributor which recently made moves into production. Time Antaeus currently owns or manages 380 screens and Zhang is very optimistic about the future of China’s cinema business, pointing out that 85% of the territory’s total area still has little or no cinema presence at all, especially in the west of the country. “These areas are the diamond mines of future cinema development,” he says.
Even Beijing, China’s most cinema-populated city, is not yet saturated according to Jimmy Wu, chairman of Lumiere Pavilions, which owns five cinemas and has 10 more in construction across the country including one in Beijing.
China’s box-office growth has attracted a swarm of new investors and developers to the business, particularly in the past two years. Wu says it is “the warring-states period” for the cinema business.
Among the top exhibitors, Wanda Cinema Line was the highest-grossing circuit in 2009 and 2010, owning 72 cinemas and 584 screens. China Film Stellar Theater Chain was second with 156 cinemas and 718 screens, followed by Shanghai United Circuit with 145 cinemas and 600 screens.
Unlike many other territories, where exhibitors own and manage their own circuits, the business landscape for operators in China is unique. Individual cinemas must join a cinema circuit and submit 7% of their box-office revenue as a management fee.
Cinema circuits such as China Film Stellar Theater Chain handle release dates, ticketing and small aspects of film marketing, but do not necessarily own cinemas, which are often state-owned, a by-product of the planned economy of the 1980s. However, newly established and privately owned cinema circuits such as Wanda Cinema Line and Dadi Digital Cinema own and operate all of their cinemas.
‘In three years, there will be 20,000 screens in China and in five the number will reach 40,000’
Zhang Baoquan, Time Antaeus
Wanda’s parent company is the commercial property conglomerate Dalian Wanda Group, a set-up that Ye Ning, general manager of Wanda Cinema Line, says has real benefits for the exhibition business. “This means our property business will provide quality cinema projects non-stop to the cinema business. From 2010, Wanda’s own cinema development projects will steadily increase by 17 projects every year. That is, we will have 200 new screens each year,” Ye told local press in early 2010.
Wanda may be in a good position but other circuits which hire their cinema space are suffering from rising rents. In major cities such as Beijing and Shanghai, rents have increased from 7% three years ago to 20% in 2010 because of fierce competition from developers.
As a result, the time it takes for a cinema project to recoup its investment has grown from around five years to eight years or more. “If a project takes eight years to recoup, it will be very difficult for a manager to run the cinema,” says Time Antaeus’ Zhang. Cheating on box office and taking more than the cinema’s share of earnings has become a serious problem, as SARFT’s Film Bureau director Tong Gang pointed out in a statement in early January. Many industry players say high rents are the main reason some cinema owners decide to cheat, in the hope of offsetting a bad rent deal.
“If not handled well, this can be a vicious circle for many cinemas,” says Lumiere Pavilions’ Wu.
China’s foreign policy
Under Chinese regulations, foreign exhibitors require a local partner to establish cinemas in the country, and can only hold a stake of up to 49% in a cinema business. Between 2003 and 2005, China allowed foreign companies to hold stakes of up to 75% in seven major cities on a trial basis. Warner Brothers International Cinemas (WBIC) once owned 30 multiplexes across China but withdrew from the market in 2006 after China restricted the stake to 49%.
Hong Kong companies, however, are allowed to own a cinema business wholly under the CEPA trade agreement.
Foreign investors began to enter China’s cinema business as early as 2000. Hong Kong brands such as Broadway Cinemas, UA Cinemas and UME, and Korean brands such as CJ’s CGV and Megabox are among the leading foreign cinema operators in China. Korea’s Lotte also opened its first theatre in Shenyang in China in late 2010.
As for US operators, since WBIC’s withdrawal in 2006, New York-listed Entertainment Properties Trust (EPR) established a strategic alliance in 2008 with Hong Kong based-APEX International Cinemas Investment, aiming to build 10 cinemas in China. In 2009, EPR set up a joint venture with Shanghai Film Group, titled SFG-EPR Cinema Development and Management. The first cinema was set up in May 2010 in Ningbo in eastern China.
Japanese conglomerate Kadokawa Group, meanwhile, partnered with Hong Kong’s Sun Wah Media and set up three cinemas in China.
“The production sector of the Chinese film industry is still considered risky for many international banks,” says Wang Ran, CEO of Beijing-based private investment bank China eCapital. “On the other hand, because of its relatively low volatility and potential business scale, the exhibition sector is more likely to attract international capital. Companies such as Wanda Cinema Line are very much favoured.”
Digitisation is another major trend in China’s cinema business. Around 90% of the new screens in China in 2010 were digital, taking the total number of digital screens in the country to 3,150, the second-highest in the world.
According to Zhang, whose Time Antaeus Group develops digital cinema projection systems, digital screens contributed more than 65% of the box-office takings of major blockbusters such as Avatar and Aftershock.
Zhang predicts the number of digital screens will account for 70% of China’s total by the end of this year, contributing 90% of box-office takings, and that by the end of 2012 the country’s cinemas will be entirely digitised.
The release of mega hits such as Avatar and Inception has also encouraged the speedy growth of Imax and 3D screens. In 2010, Imax set up at least four deals with Chinese cinema operators securing the development of 25 new Imax screens. China now has the most Imax screens in the world, with 35. By 2014, 67 are scheduled to be operating in China.
In 2010, 650 new 3D screens were built in China, pushing the total to 1,350, the second-highest in the world.
Top 10 films in China, 2010
|3||Let The Bullets Fly||$81.57m (rmb540m)|
|5||If You Are The One 2||$54.38m (rmb360m)|
|6||Detective Dee And The Mystery Of The Phantom Flame||$44.56m (rmb295m)|
|7||Alice In Wonderland||$33.81m (rmb223.8m)|
|8||Harry Potter And The Deathly Hallows: Part 1||$33.4m (rmb221.1m)|
|9||Ip Man 2||$33.17m (rmb219.6m)|
|10||The Expendables||$32.17m (rmb213m)|
Up until Dec 31, 2010. Source: SARFT, Screen International
Top multiplex operators in China, 2010
|Wanda Cinema Line||72||584||$211.88m|
|China Film stellar Theater Chain||156||718||$183.27m|
|Shanghai United Circuit||145||600||$161.82m|
|China Film South Cinema Circuit||110||500||$143.61m|
|New Film Association||100||531||$120.65m|
Sources: SARFT, Screen International, Entgroup Inc
Number of cinemas and screens in China, 2006-10