Alibaba Pictures, the separately listed entertainment arm of Chinese e-commerce giant Alibaba, warned that its losses will be at least $155 million in the year to March recently completed. It blamed the coronavirus outbreak and “complicated difficulties” within the mainland Chinese entertainment industry in 2019.
In a filing to the Hong Kong Stock Exchange issued after trading hours and during a four-day public holiday, the company said that the “significant increase in the loss was primarily due to the complicated difficulties in pursuing profitable operation faced by the entertainment industry in mainland China since 2019, and the significant decrease in the group’s revenue in the fourth quarter of the 2019/2020 financial year as a result of the outbreak of COVID-19.”
In the profit warning it said that net losses would be “between RMB1,100 million ($155 million and RMB1,200 million ($169 million), compared with a similar loss of approximately RMB254 million ($35.6 million) for the financial year ended March 31, 2019.”
The statement describes in some detail the impact of the coronavirus on the film industry in China, where cinemas have been closed since late January. But it makes no explanation of the “complicated difficulties” before the virus outbreak.
Chinese film companies spent much of last year struggling with a new tax regime that was ushered in following the Fan Bingbing tax avoidance scandal of 2018, or trying to repair their finances after making large payments of back taxes. Companies also struggled to come to terms with the impact of a new interventionist industry regulator controlled directly by the Communist Party’s propaganda department.
The regulator pushed the industry to making patriotic and uplifting films, and halted the release of others in Chinese theaters and international festivals. Box office gained 5% in 2019, and Chinese films expanded their market share, but the pace of growth was significantly slower that the rate of new cinema openings.
In October last year, Alibaba Pictures issued another profit warning. At that time it referred to underperforming assets and currency losses.
Alibaba Pictures said that revenues dropped significantly in the January-March quarter, adding to the industry’s preexisting woes. “Most companies in the industry are exposed to the pressure arising from these factors. As a result, many of (Alibaba Pictures’) cooperative partners are facing operating difficulties and risks of disrupted capital chain,” it said. The company established a $113 million (RMB800 million) provision against problematic receivables and investments.
Despite its financial horrors of 2019-20, Alibaba Pictures may emerge as one of the winners in the forthcoming consolidation of the Chinese industry. These days, the company positions itself more as a digital infrastructure, marketing and distribution outfit than as a film producer. It had investment stakes or handled China distribution for films including “Capernaum” and “Green Book”. And parent company, Alibaba made sure during the last year to regain the majority shareholding of Alibaba Pictures, after earlier share issues had diluted its stake below 51%.
With its interests in e-commerce, home delivery services, and video streaming (held within the parent company, not Alibaba Pictures), Alibaba, already China’s largest company, is the nearest thing to a winner from the coronavirus.
The film division “remains optimistic on the operations in each segment (..) for the financial year ending March 31, 2021, through further collaboration with the digital media and entertainment business group of Alibaba Group Holding Limited,” it said.