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China Film Group to File $740 Million IPO

State-owned giant aims to raise $740 million, reveals industry insights.

HONG KONG – China Film Group, the state-owned enterprise that dominates the Chinese movie industry, is set to raise up to $740 million from its upcoming share listing.

The company will float, on the Shanghai Stock Exchange, shares of its China Film Corp. unit, a subsidiary formed in 2010.

A draft prospectus was filed this week with the China Securities Regulatory Commission ahead of the upcoming IPO.

The company says it will raise the cash by selling up to 25% of CFC’s shares. CFC is 93% owned by CFG, with seven other state-owned enterprises each having 1% stakes. These include CNTR Media, China Television Group, Gehua, Jiangsu Broadcasting and telephony giant China Unicom.

CFG has been considering a flotation since 2006 but has been stymied by outside economic forces, weak stock market conditions and the most recent series of internal reorganizations.

Though the shares may be bought only by qualified Chinese investors, the massive 503-page document is certain to be pored over by domestic Chinese groups, investors and foreign players.

The long-awaited document gives an unprecedented glimpse into some of the inner workings of China’s biggest and most powerful film company and its diverse and far-reaching relationships.

The prospectus shows CFC as having revenues of4.2 billion yuan ($677 million) in 2013, essentially flat compared with 2012 but a big leap up from $510 million in 2011.

Net profits grew 9% in 2012 to $88.7 million, but slipped to $67.7 million.

At several points, the prospectus pins the blame for the 24% fall in 2013 profits on the implementation of the 2012 agreement between the U.S. and Chinese governments that introduced a new regime for distribution of revenue-sharing imported films.

In a section on its tax liabilities, the company also points to the introduction of a tax regime as denting its profitability. That changed tax system was behind CFG’s prolonged delay in making revenue payments to the Hollywood majors whose films it sub-distributes.

A segment breakdown of CFC’s business shows distribution to account for 58% of 2013 income, compared with 16% each for exhibition and production. The heavy weighting toward distribution underlines the importance of its Hollywood distribution activities and the likelihood that it will continue to seek out the most commercial movies to import and release.

The company – which has 3,400 staff — spans the entire value chain from film and TV production, through post-production to distribution and exhibition, where it has stakes in eight circuits and owns 73 cinema complexes.

Proceeds of the flotation will be deployed primarily to building up its TV activities, digital cinema building and promotions, with smaller amounts going to rights acquisition and repayment of debt owed to CFG.

The document, which reprints a substantial amount of data from the SARFT 2013 annual report, highlights the overall Chinese industry’s 28% compound annual growth since 2006. But it also points to ongoing weaknesses that CFC says include too few big movies, weak skills levels, an over-reliance on theatrical revenues and foundering film exports.

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