Chinese investors lap up cinema IPO sequel

Shanghai Film makes a roaring debut on its local stock exchange, showing that investors like nothing more than a sequel.

Chinese investors have now enjoyed two IPOs from the cinema sector in two weeks, after Shanghai Film Corporation made its debut on Wednesday. They are clearly fond of sequels — the stock has risen almost 60% since it started trading.

The company, the distribution arm of the state-backed Shanghai Film Group, raised Rmb952.765 million ($143.784 million) from its 93.5 million share offer after turning to investors amid rising interest in Chinese cinema companies both at home and abroad.

Shanghai Film priced its shares at Rmb10.19 each, but that price did not hold for long. The new listing jumped by 44% after trading opened, hitting the maximum daily increase allowed by the Shanghai exchange for new listings. It closed at Rmb14.67 on Wednesday, and jumped further to Rmb16.3965 by the end of Thursday.

The company said it would use around Rmb680 million of the money it raised to build new cinemas, but it also plans to upgrade existing cinemas and online services, and acquire other cinema chains in the country. That would continue a recent trend: Shanghai Film acquired 30% of Chongqing-based Cross Cinema in August 2015.

“Our goal is to own more than 100 cinemas [in China] within the next two to three years, and take up 5% market share of national box office,” said Ren Zhonglun, chairman of Shanghai Film Corporation, in a statement.

Double billing

Shanghai Film's debut follows domestic rival China Film's IPO on August 9, a $610 million deal that was the biggest ever listing from China's cinema industry. The two companies were able to appeal to investors by pitching the long-term outlook for the sector, even amid weaker revenues in the first half.

Some analysts think China will overtake the US to become the world’s biggest movie box office market next year. According to HIS Markit and PwC, ticket sales in China are poised to grow 22% to $10.4 billion in 2017. But that will not come without hiccups. During the second quarter of this year, China's box office takings experienced their first drop in around five years.

Box office sales fell 10% in the second quarter compared to the same period last year, Reuters reported on August 11, citing data from box office tracker EntGroup. In July, monthly box office fell 24.1% year on year.

That looks like a scary number for investors. But the shift is likely to be temporary, said Richard Huang, an analyst covering gaming, lodging and leisure research in China for Nomura.

“The box office growth we’ve observed for the past five to ten years has always been volatile,” said Huang, adding that such volatility often came down to nothing more than the quality of movies being released.

China's cinema industry is also being hurt by a fall in the subsidies movie studios and some aggressive e-commerce companies — Baidu, Tencent and Alibaba among them — have been offering to consumers. These subsidies are disappearing, most likely as a result of government sensitivity to criticism over inflated box office numbers in China, said Huang.

“The government is very cautious about the accuracy of different economic data [that’s been] reported,” Huang said. “There is no black-and-white policy that came out…but it’s a common observation.”

The credits

Shanghai Film is one of China’s largest integrated film operators, running distribution channels and cinema chains. Its wholly-owned subsidiary Shanghai United Circuit now has more than 300 theatre affiliates in the country, together contributing more than Rmb3 billion box office income in 2015.

In the first half of this year, the company achieved an operating income of Rmb497.179 million, up 18.15% from Rmb420.816 million of the same period last year.

Shanghai Film’s state-owned parent and biggest shareholder, Shanghai Film Group, sees its stake drop from 95.52% to 69.22% following the IPO, according to a document filed to the Shanghai Stock Exchange.

Beijing-based CICC is the main sponsor and bookrunner of the transaction. The broker declined to comment on the deal.


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