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China’s Huanxi Media Guarantees Itself a Profitable Future

Huanxi Media, the talent-controlled production and streaming firm, struck a $340 million minimum guarantee deal Wednesday for its upcoming film “Lost in Russia,” directed, co-written and starring Hu Zheng.

Having been picked up by distribution entity Hengdian Film, “Russia” will release in China in time for Chinese New Year in January. Hengdian commits to spending RMB150 million ($20 million) on P&A to support the release and to pay out a minimum of RMB600 million ($85 million) to Huanxi as an advance against a forecast minimum gross in Greater China of RMB2.4 billion ($343 million). Above that figure, Hengdian gets to keep 65%, while paying out 35% of excess earnings to Huanxi.

The deal is typical of the modus operandi of Huanxi, a company that burst onto the scene in China only a couple of years ago, when it corralled talent including Ning Hao (“Crazy Racer,” “No Man’s Land”) and Xu Zheng (director of “Lost in Thailand” and star of “Dying to Survive”) as major shareholders and obtained a listing on the Hong Kong stock market.

While talent provides the sizzle, canny management comes from former investment banker Steven Xiang Shaokun as CEO, and from chairman Dong Ping. As a producer, Dong has credits on “Crouching Tiger Hidden Dragon.” As a businessman, Dong previously headed the company ChinaVision, which was acquired by Alibaba and became Alibaba Pictures.

By selling off the theatrical rights to Hengdian, the MG deal immediately gives Huanxi a profit of nearly $70 million on “Lost in Russia,” Variety has established.

That’s because, in a previous regulatory filing, Huanxi disclosed that Xu would enjoy a massive payday of RMB117 million ($16.8 million) from his multiple roles as writer, producer and director. Other production costs are capped at RMB100 million ($14.3 million) for a total of RMB227 million, or $31.1 million at current rates of exchange.

Huanxi has issued shares to other directors and producers that it seeks to keep close. They include Wong Kar-wai (working on a series called “Paradise Guesthouse”), and Peter Chan Ho-sun. But because Xu owns more than 15% of the company, which currently has a market capitalization of $572 million (HK$4.48 billion), he is deemed to be a connected person and the company is obliged to disclose the details of his deals.

But the model still gives Huanxi vastly more upside.

The real genius of Huanxi’s strategy goes further than simply making a bumper profit on production or of de-risking its theatrical releases. The power that comes from controlling many of China’s hottest directing talents means that Huanxi is able to retain rights in other media — most importantly, Chinese streaming rights.

As in the U.S. and Europe, streaming in China is becoming a huge and disruptive force. Three rival platforms each boast roughly 100 million subscribers. But even after eliminating overlap, the Middle Kingdom now boasts over 200 million paying subscribers to video services, according to media investor Huang (Sum) Haichen, co-founder of XG Entertainment.

Against that background Huanxi has now built its own video-on-demand system, which it has almost invisibly integrated into the streaming platform built by Maoyan, operator of China’s largest film ticketing app. (Maoyan is in turn also seamlessly allied with tech giant Tencent.) Maoyan sees its relationship with Huanxi as so valuable that earlier this year it spent some of the first proceeds of its own IPO on buying a $50 million stake in Huanxi.

The fruits of Huanxi’s foray into streaming could be seen for the first time in August, when it issued a “positive profit alert” and shortly after published its financial results for the six months to June. These showed revenues leaping from HK$85 million ($10.9 million) to HK$1.07 billion ($137 million), and after-tax profits of HK$321 million ($41 million) replacing equivalent period losses of HK$120 million ($15.3 million).

So far, the model has worked almost exactly as planned. Earlier this year, Huanxi collected the full value of another MG deal when Ning Hao’s “Crazy Alien” earned $327 million, but still missed its box office target.

The biggest blot on Huanxi’s playbook to date has come from veteran Zhang Yimou. He was responsible for delivering potent drama “One Second,” that was selected to play in competition at the Berlin festival earlier this year in February. But the film’s Cultural Revolution antics were too much for Chinese political classes and it was abruptly withdrawn after intervention by government regulators. Although this year’s politically sensitive anniversary is now a matter of history, “One Second” remains without a release date.

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