Alibaba Pictures makes $150m cinema move

Alibaba Pictures makes its first move into China’s growing cinema business by investing $150 million in convertible bonds issued by Guangdong Dadi Cinema Construction.
<em>Mission: Impossible – Rogue Nation </em> was the first Hollywood blockbuster Alibaba Pictures invested in
<em>Mission: Impossible – Rogue Nation </em> was the first Hollywood blockbuster Alibaba Pictures invested in

As it prepares to release a series of self-produced films, Alibaba Pictures has made its first move into China’s growing cinema circuits business by investing Rmb1 billion ($150 million) in convertible bonds issued by Guangdong Dadi Cinema Construction.

If fully converted, the film and entertainment arm of Chinese internet giants Alibaba would hold a 4.76% equity stake in Dadi Cinema, valuing the country’s second-largest cinema investment and management company at Rmb20 billion ($3.07 billion), said Yu Xin, chief executive officer of Dadi Cinema

“We have already been working with them, particularly on online ticketing, since last year. The investment this time isn’t for raising capital but is a commitment which shows both companies want to develop further together,” Yu told FinanceAsia in an interview.

It was, she added, the first time Dadi Cinema had brought in a strategic investor. It did so because of the strategic fit and the “fair valuation” Alibaba Pictures offered. The deal values unlisted Dadi Cinema at Rmb20 billion ($3.07 billion), almost double that of its parent, Hong Kong-listed Chinese investment firm Nan Hai, which has a market value of HK$14 billion ($1.8 billion).

“They are very keen to tap into cinemas [which they lack] as they aim to build an integrated value chain of the film industry, from film production to tickets sales. Their strength is online business while ours is offline resource,” Yu said.

The companies will collaborate in film distribution, movie marketing, joint membership management, e-commerce and big data, she added. “Alibaba cares a lot about the film business because it could draw cinema goers to its e-commerce platform.”

The partnership comes at a time when the Chinese movie market is booming and attracting growing attention from the country’s internet giants. Official data showed ticket sales in China hit a record Rmb44 billion ($6.7 billion) last year, up 49% on 2014.

Wanda Cinemas, the cinema branch of property-to-entertainment conglomerate Dalian Wanda, took the top spot among 265 domestic cinema investment and management firms with 13.5% of the market last year, followed by Dadi Cinema with about 5%, according to Beijing-based film-research company EntGroup.

Dealogic data also shows Chinese tech companies last year invested about $5 billion in domestic film and entertainment-related industry, more than double the volume of such transactions in 2014.

Alibaba alone last October paid $4.7 billion to take over Youku Tudou, the Chinese equivalent of YouTube. The e-commerce giant had prreviously owned an 18.3% stake in the video-hosting company.

Meanwhile, other Chinese internet companies are also keen to establish and expand an offline foothold on top of their online presence in the country’s fast-growing film and entertainment industry.

For instance, in June 2015, Chinese search engine giant Baidu, one of Alibaba’s domestic rivals, reportedly invested $19 million for a 1.59% stake in SMI Holdings, a largest cinema operator in China, to expand its online-to-offline (O2O) entertainment business into domestic cinemas, including ticket services, map search and movie selection.

“The internet companies have been making these minority investments in cinema chains to forge stronger partnership with them in developing the online movie ticket distribution,” Richard Huang, an analyst covering gaming, lodging and leisure research in China for Nomura, told FinanceAsia.

“They wouldn’t want to acquire the entire thing as they are supposed to remain asset light and focus on their core expertise, which is online ticket sales,” he added.

In a further sign of its commitment to the film industry, Alibaba Pictures announced late on Sunday that its online ticketing arm, Taobao Movie, had raised Rmb1.7 billion ($260 million) in its maiden round of fundraising, which valued the leading online ticketing platform in China at Rmb13.7 billion ($2.1 billion).

Chinese asset management firm CDH Investments, Alibaba's financial affiliate Ant Financial and domestic news portal Sina.com led the financing round, along with other investors including Bona Film and Union Pictures.

Established in late 2014, Taobao Movie has grown fast and it now provides online ticketing and seat selection services in more than 5,000 cinemas nationwide, according to Alibaba Pictures. 

Alibaba Pictures' investment in Dadi Cinema also comes at a time when the two-year-old subsidiary is set to release a few of its own productions, including The Ferryman, produced by renowned Hong Kong filmmaker Wong Kar-wai (In the Mood For Love), and Three Lives Three Worlds Ten Miles of Peach Blossoms, this year and next year.

“Teaming up with Dadi Cinema, which is about to open loads of new cinemas in smaller cities, can really help Alibaba Pictures gain good box-office revenues when the latter’s films are on. Because [in the industry chain] after film distribution and marketing, the next is the movie theatre,” said Su Beiqi, general manager of Magic Crop, a Chinese film marketing company.

As of end April, Guangdong-based Dadi Cinema, ran 313 leased cinemas with 1,662 screens in 150 cities across the country, with a focus on cities from tiers two to four – taking in everything from country towns of half a million to emerging megacities, according to the company. It recorded total attendance of 71.58 million movie goers last year, with box office income up 47% year-on-year to Rmb2.2 billion.

China’s smaller, less prosperous cities and towns are likely to underpin the industry’s growth, according to market insiders and analysts.

Dadi Cinema CEO Yu said the company planned to open another 300 cinemas over the next three years. The goal this year is to open up to 80 and acquire a few more from smaller operators.

“Big cinema investment and management companies, such as Wanda and us, have all been acquiring [cinema assets]. Because the scale effect is becoming obvious in the industry...With [about] a 5.1% market share, we already have a big say while negotiating” with outside parties, she said.

Dadi Cinema also plans to go public on the A-share market, where Chinese companies can secure a higher valuation than overseas, but she declined to elaborate further about the timeline and how big the listing might be.

Alibaba Pictures was set up in 2014 on the back of ChinaVision Media, in which Alibaba acquired a 60% controlling stake for about $804 million. The renamed firm has gradually expanded its operations since launch and hit the headlines with a series of acquisitions and investments that underlined its ambitions.

Last year, it bought a large Chinese cinema-ticketing system supplier, Yueke Software Engineering, for Rmb830 million ($127 billion) and paid its parent Alibaba $520 million to purchase Taobao Movie and another of its film-related divisions, Yulebao, a crowdfunding platform for movie and TV drama productions.

Besides its first investment in a Hollywood blockbuster, namely Mission: Impossible – Rogue Nation starring Tom Cruise, it also teamed up with Tencent and other investors to take the Nasdaq-listed Bona Film Group private in December last year.

“Two key strategies for Alibaba in the next decade are developing entertainment and health. I think Alibaba Pictures, as a flagship [entertainment unit of the group], will be very important” for Alibaba, Yang Lei, vice-president of Alibaba Pictures, told FinanceAsia.

Alibaba Pictures posted revenue of Rmb264 million last year, up 108% year on -year, while its net profit stood at Rmb466 million, from a net loss of Rmb417 million one year earlier.

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