Significance and Growth
Since the reform of the Chinese film industry in 2002, sales of movie tickets have soared rapidly for nine consecutive years. According to China's State Administration of Radio, Film and Television (SARFT), revenues from ticket sales in 2011 was 13.1 billion yuan (about $2.08 billion), a 28.9% increase from the previous year. The warp-speed growth has boosted China to become the second largest film market after the U.S.
Meanwhile, revenues from ticket sales in the U.S. and Canada is on the decline. According to the Motion Picture Association of America, the U.S./Canada box office market finished at $10.2 billion, down 4% compared to last year, but up 6% from 5 years ago. 3D box office was down $400 million in 2011 in comparison to 2010, which is not surprising given that 2010 included Avatar's record-breaking 3D box office performance. 2D box office remained consistent from 2010 to 2011.
Global box office receipts for all films released around the world reached $32.6 billion, an increase of 3% over 2010, due to ongoing growth of box office in international markets. Each international region experienced box office growth in 2011. Chinese box office grew by 35% in 2011 alone, by far the largest growth in major markets.
Cinema ticket sales continue to be fueled by repeated visits by frequent moviegoers - those who go to the movies once a month or more. Frequent moviegoers represent only 10% of the population but purchased half of all tickets sold in 2011.
Globally, cinema screens increased by 3% in 2011. Digital cinema continues its rapid growth so that just over half of the world's screens are now digital. The number of digital screens in the U.S. nearly doubled in 2011, now comprising 65% of all U.S. screens.
Although Chinese people watch far fewer movies than moviegoers in advanced markets, they are expected to go to the movies more frequently with China's economic growth and income rise.
The Chinese government has been strict in opening the country's film industry, imposing rigorous regulations on the import of foreign films and investment from foreign companies. It has also imposed an import quota, limiting the number of films imported to 20 a year, and given the exclusive distribution rights of imported films to two state-owned enterprises, China Film and Huaxua Film Distribution. Although foreign companies can engage in film-making through partnerships or acquiring stakes in Chinese companies, they are not allowed to own over 49% of a Chinese company.
This year, regulations have started to ease, marking a big opportunity for Hollywood. In February Chinese officials announced that they are increasing the quota to 34. China said it will also allow foreign studios to garner a greater share of box office revenue. Foreign companies can now expect to earn 25 percent of their movies' ticket sales in China, up from between 13.5 and 17.5 percent.
China has long kept up a barrier against foreign films - wary of foreign cultural influences while sheltering its own filmmakers.
It's only a matter of time before China's movie-going market is the world's biggest, according to some industry-watchers.
Companies To Watch
American companies are starting to move in.
One of the clearest beneficiaries of the rule change is Imax Corp. (NYSE:IMAX), the big-screen movie company that licenses its technology for a share of ticket sales. Imax is hugely popular with Chinese movie fans. It receives about half of the studios' share of the box office for movies that end up on its screens in China. As more Imax-format movies are let in, more films will contribute to its Chinese revenue going forward.
Greater China continues to be IMAX's biggest and fastest growing market outside of North America. In 2012 the company's footprint is poised to grow by 50% year-over-year, which is on top of 2011's 126% increase. Through the first six months, roughly 30% of new theatres signed were in China, including deals in the second quarter with Bona Film, Aman Ajoy Cinemas and developers Fandal and Wanda, fueling the interest in IMAX from Chinese exhibitors and developers.
Through the first six months of 2012, IMAX theatres in Greater China have delivered box office per screen of more than $830,000 on average. At the end of June there were 97 IMAX theatres opened in Greater China, with a total of 132 in backlog. Of those 97, 78 are commercial theaters and approximately 40% of those JVs.
News Corporation is a diversified global media company, but has not enjoyed much success in China's films and television business so far. The cooperation with Bona Film will expand News Corp's presence in China. In May News Corp. acquired a 19.9% equity stake in Bona directly from the company's founder, Chairman and CEO, Mr. Dong Yu.
Bona Film Group Limited is a leading film distributor in China, with an integrated business model encompassing film production, film distribution, advertising, theatre management, film exhibition and talent representation.
Bona has maintained high growth, with year-on-year sales surging 138.9% to $126 million in 2011.
Bona distributes films to Europe, Greater China, Korea, Southeast Asia and the United States, invests and produces movies in a variety of genres, owns and operates seventeen movie theaters and manages a range of talented and popular Chinese artists.
For News Corp., the cooperation with Bona Film will strengthen their presence and give more exposure to their movies (20th Century Fox) in the Chinese market.
Twentieth Century Fox's Ice Age 4: Continental Drift, which debuted to nearly $21 million in its first three days, easily surpassed prior record-holder Kung Fu Panda 2′s China debut by a wide margin. Ice Age 4's take in its first three days nearly equaled the gross for the entire 2009 run of its predecessor, Ice Age: Dawn of the Dinosaurs.
For Bona Film this is a chance to globalize Chinese films. The first film that just was released in some selected IMAX 3D theatres in the U.S. is The Flying Swords of Dragon Gate.
Two other companies that could benefit from China's opening of the film industry are:
The Walt Disney Company (NYSE:DIS)
Disney's announcement in April that it will make "Iron Man 3" in partnership with a Chinese company is the latest sign that movie studios are warming to China's new openness.
Disney and its new partner, Beijing-based DMG Entertainment, didn't offer many details about their "Iron Man 3" project, although the companies say the movie will incorporate Chinese elements and be partly funded by DMG.
Pixar and Disney could become big and Walt Disney's Asia Pacific revenues could easily double from 2.5 billion to 5 billion in some years.
Dreamworks Animation SKG (NASDAQ:DWA)
DreamWorks Animation SKG, Inc. engages in the development, production, and exploitation of animated films and associated characters worldwide. It offers animated feature films and characters primarily for the theatrical, home entertainment, television, merchandising, and licensing markets. The company also provides television specials and series, live entertainment properties, online virtual worlds, and related consumer products. It has approximately 23 animated feature films, including Shrek, Kung Fu Panda and Madagascar.
One company that is banking on animation's broadening audience reach in China is Oriental Dreamworks, the recently established joint venture between Dreamworks Animation and three Chinese companies. Inspired by the success of the Kung Fu Panda franchise in China, Oriental Dreamworks is said to have seven projects in active development that are based on Chinese folklore and characters, with Kung Fu Panda 3 among them.
Dreamworks CEO Jeffrey Katzenberg has stated, "I think China, as a land of opportunity for great animation, is unlimited. The reception of our work in China has made me very ambitious to figure out how to find the right Chinese partners to be a part of what I think can be a great industry and a great success story in China."
China has a lot of catching up to do before its animation production companies can compete in terms of storytelling, technical quality, and global commercial viability. Because U.S. expertise is highly prized in China, Oriental DreamWorks was created. ODW is a joint venture among China Media Capital, Shanghai Media Group, Shanghai Alliance Investment, Ltd., and DreamWorks Animation SKG Inc., which is positioned as the leading China-focused family entertainment company. The enterprise will initially be capitalized with cash and intellectual property valued at $330 million. Oriental DreamWorks will engage in the development and production of high-quality original Chinese animated and live action content. In addition to content creation, the joint venture will pursue business opportunities in the areas of live entertainment, theme parks, mobile, online, interactive games and consumer products. As one of the largest investment projects of sino-foreign cooperation in China, the goal of Oriental DreamWorks is to become a world-class global entertainment leader and the leading promoter of Chinese culture around the world.
America's major animation companies can anticipate that their futures in China will be very bright indeed.
China is a fast growing big market for American companies. Right now two companies have my direct attention, IMAX Corp. and Bona Film Group, because both are growing at warp speed. Of course there are still many challenges but the opportunities are there, just do your home work.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BONA, IMAX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.