Sino companies look to fortify local biz via IPOs amid surging B.O. for Hollywood tentpoles

February marked a high in Hollywood-China relations as incoming President Xi Jinping hiked the quota of foreign films allowed in and applauded a major studio venture with DreamWorks Animation in Shanghai — all from Los Angeles and with great fanfare. But the backslapping has morphed into tension on both sides as China fights to grow its domestic film biz — prepping two major studios for possible IPOs next year — and U.S. players fret that it’s sidestepping the spirit, if not the letter, of the new quota.

Stats released Wednesday underscore China’s struggle. Imported movies saw a whopping 90% surge in box office revenue in the first six months of the year, according to the Xinhua news agency, quoting SARFT — the State Administration of Radio, Film and Television. Overseas pics grew their share to 53% from 35% after China raised the bar to 34 films a year from 20.

“There’s a lot of pressure to keep it at least 50-50 local,” said Piper Jaffray analyst James Marsh, noting that the split had tilted to a lopsided 35% local vs. 65% international during the spring.

To level the field, China imposed a virtual blackout of U.S. pics in August, has offered subsidies to exhibitors if they favor domestic fare and continues to fiddle with release dates, putting Hollywood blockbusters head to head to dull their B.O. potential, industryites say. They cite “The Lorax” and “Ice Age 2,” released in China on July 26 and 27; “The Amazing Spider-Man” and “The Dark Knight Rises,” both released Aug. 26, followed by “Prometheus” on Sept. 2; and “Total Recall” released Oct. 20, a few days before “The Bourne Legacy.” In January, “Skyfall” and “The Hobbit: An Unexpected Journey” may go head to head.

“As they started to change the rules, they started to change the share, and now they’re trying to roll it back. They’re trying to manage it,” Marsh said. “There are lots of things they can do,” he noted, including limiting the length of a pic’s theatrical run.

“What happened was that the new president of China got out ahead of the bureaucrats, and they didn’t like it and have been trying to undercut the deal,” added one industry insider.

Meanwhile, China is pushing to make more and better movies of its own that can cross over to the rest of the world. A key point of the deal with DreamWorks Animation is to produce Chinese films that can travel as well as “Kung Fu Panda” did. As a true partner with three Chinese firms in the new Oriental DreamWorks, the studio can get a much bigger chunk of box office revenue than what’s typical in straight distribution deals. Its first film will be “Kung Fu Panda 3″ in 2016.

While all of the Hollywood studios are involved in China in some way, one Wall Streeter noted that true co-production ventures — or at least bragging rights to them — go mostly to mid-level players, not majors. With some exceptions, “The major studios are too scary and dangerous, and the Chinese are afraid to let them in in a big way,” the Wall Streeter said. They favor “Legendary, Lionsgate, Village Roadshow, guys who are pretty sophisticated film producers, have technology and knowledge but are not as scary and don’t have all the political baggage.”

Last year, just five films got official co-production status, according to regulating body China Film Group. Those included “The Great Magician,” “A Simple Life,” “Tokyo Newcomer,” “Late Autumn,” “Joyful Reunion” and “Silent War” — none of which came from U.S. companies or had much traction outside local markets.

The local film industry needs cash — one reason two big players, China Film and Shanghai Film, recently announced plans to list on the Shanghai Stock Exchange. Wanda Dalian Group, which acquired AMC Entertainment earlier this year, is also considering going public, said a person familiar with the company. Wanda is primarily a big real estate developer and may want to IPO out its growing entertainment business. Wanda is already a giant in exhibition in China and the U.S., and chief Wang Jianlin has made it clear he’d like to expand further, possibly into production and distribution.

Peter Shiao, founder and CEO of Orb Media, said an offering of these two major state-owned enterprises could lead to a new wave of IPOs for entertainment companies in China. “At least 20 companies are preparing to go public behind them,” he said.

Another industry exec called it more of a pronounced “trend of media companies talking about going public in China.”

Neither is sure, however, that giant China Film has the balance sheet needed to pass muster with regulators or public markets.

Shanghai Film, a hybrid controlled in part by the municipality of Shanghai, may be out of the gate first. There’s been talk that the government may give a second license to distribute foreign films in China, possibly to Shanghai Film to encourage the IPO. China Film is currently the sole importer of foreign films.

“The government wants to show that it’s making progress in making these state-owned enterprises public,” Shiao said.

Of Chinese showbiz companies, Bona Film Group is listed on the Nasdaq, and Huayi Brothers Media on the Shenzhen stock exchange.

Observers think IPOs or even IPO talk can help attract top talent and product and create the perception of a modern company. “If they want Ang Lee’s next movie, they can say, ‘We are going public next year. We have a lot of money,'” said one.

It’s also a matter of prestige, said Porter Bibb of Mediatech Capital Partners. “Going public is legitimizing them and taking a step toward making them world class…The government would like Shanghai Film to be equal to Warner Bros., and Shanghai Film wants to make movies for the rest of the world, not just the domestic market.”

Investing in Chinese companies isn’t for the faint of heart, he said, despite, or perhaps because of, a huge boom in the stock market there. “They have 400 million day traders in China, more than the entire U.S. population,” he said. “They drive the stock up when it goes public. (But) There’s not the transparency. It’s hard to value the businesses.”

If IPOs are a sign the government is willing to cede control on any level — even to jump-start its own competing film industry — that’s likely to be welcome news to Hollywood since China is and will remain a market it can’t ignore. SARFT said China’s total box office revenue was $2.3 billion for the first 10 months of 2012. It is expected to surpass U.S. box office in 2020.

For now, one Wall Streeter likened U.S. studios in China to prisoners in a food line. “It can be arbitrary,” he said. “You get your serving. You don’t make a lot of eye contact. You take what you can get.”

(Rachel Abrams in Los Angeles and Clifford Coonan in Beijing contributed to this story.)

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