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China’s Hengdian Proposes $450 Million Cinema Consolidation Deal

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©Raymond Depardon / Magnum Photo

Hengdian Entertainment, a listed company that straddles film and television production and cinema operation in China, has made an indicative offer of RMB3 billion ($446 million) to buy the Shanghai Xingyi Cinema Managements firm. If the deal goes through, Hengdian Entertainment would become the second largest cinema operator in China.

Hengdian Entertainment made the indicative offer in a regulatory filing to the Shanghai Stock Exchange. Seazen Group, parent of Xingyi Cinema, confirmed the basic deal terms in its own filing to the Hong Kong Stock Exchange. The two companies set Oct. 8, 2022 as a deadline for completing the deal.

Xingyi Cinema was formed in January 2015. By the end of 2021 it operated and managed a total of 128 cinemas, making it China’s seventh largest circuit. Hengdian has 434 venues. Combining the two would create circuit with 662 complexes, overtaking the Dadi group which is currently the second largest behind Wanda Cinema.

The potential deal may be the first major consolidation within the sector since the COVID pandemic. Or indeed for several years.

Chinese cinemas were closed on government order from late January until midsummer 2020 and were able to operate largely without capacity restrictions only from October the same year. Many complained of severe hardship, but most defied predictions that they would close down. Wanda Cinemas, last week said that it plans to continue building more.

However, there was an earlier rash of consolidation between 2015-2017, with Dadi buying 76 complexes belonging to Hong Kong-based Orange Sky Golden Harvest and Poly Films buying 21 from Xingxing Culture. Similarly, tech giant Alibaba bought minority stakes in Wanda, Dadi and Xingji, widely seen at the time as government-orchestrated support moves.

In both 2020 and 2021 China was the world’s largest box office market, albeit with gross revenues below 2019 levels, and the number of cinemas in operation increased. The national government last year also called for further cinema building as part of its five-year plan for the film industry’s development.

The current year has been significantly more difficult. The first few weeks of 2022, until mid-February and the end of the Chinese New Year holiday, were in line with the previous year trend. But from March, when China began to see a spike in COVID cases, largely due to the omicron variant, box office trended sharply lower.

Recent weeks have seen some recovery, but consultancy, Artisan Gateway calculates that nationwide year-to-date box office by July 10, 2022, was more than 35% below the same point in 2021.

Cinemas in Shanghai, which normally contribute about 5-6% of the national total, were only allowed to begin operations from Friday last week. State media reported that 47% of Shanghai cinemas were in operation on Friday, the first day of relaxation. But they are still required to operate below 50% capacity, hold 20-minute disinfection breaks between screenings and require all customers to provide a negative nucleic acid test from the previous 72 hours.

A weak supply of local and international films exacerbated the difficulties in the second quarter of the year. Local media report that some 40 films are lined up for debuts in the July-August period which is often designated as a ‘blackout period’ or ‘national film support’ period and when major Hollywood releases are rare.