How China's Stock Market Woes Affect Hollywood

AP

Box office has not been hurt, but the stocks of some Chinese partners of Hollywood giants have declined or trading has been halted, with some also predicting that the market slide could affect film funding.

China's battered stock markets rebounded Thursday after falling 30 percent since mid-June, but the devastating slide that has wiped out $3.2 trillion in market value is a reminder to Hollywood investors that the world's second-largest economy and film market is still a work-in-progress.

‎Entertainment companies' exposure to China is mostly in the form of box office, and box-office revenue has so far not been hurt. Jurassic World, for one, earned more than $230 million in China during the period of the market's biggest declines. If anything, box office is set to become more important as investment in the industry continues.

‎"I do not expect any significant impact on the film business due to the stock-market slide. It may affect some productions, but most production money is not from public companies," Jimmy Wu, founder and CEO of the Lumiere Pavilions theater chain, tells The Hollywood Reporter. Chinese box-office revenue is rising by 30 percent a year, and film quotas are set to be lifted in coming years, which experts expect will continue to fuel expansion.

"China is still going to explode in box-office terms to two or three times its current size," said Wu. "Attendance in 2014 was 830 million, meaning individual residents in China only watched half a movie for the year. By lifting the import quota, the number of movies showing in China can easily increase to 600-plus, which means the average individual will watch one movie a year and box office will be over 60 billion yuan ($9.66 billion)."

One burning question regarding Hollywood and China relations is always if, or when, a big Chinese company will buy a Hollywood studio. The most serious contender is widely seen to be U.S. stock market-listed e-commerce giant Alibaba. The company's founder and executive chairman Jack Ma has ambitions to become a major player internationally and has described Alibaba as "the biggest entertainment company in the world." And he visited Hollywood last year.

Alibaba had the largest U.S. IPO in history in September, raising $21.8 billion, but fears of contagion by the Chinese crash have affected investors' sentiment, driving the stock to an all-time low this week. But on Thursday the stock was trading higher.

The group's film unit, Alibaba Pictures, which trades in Hong Kong, closed the day up 37.9 percent Thursday, after a decline of 5.6 percent on Wednesday.

Li Daxiao, chief economist at Yingda, believes that the recent hit to Alibaba's market capitalization means it was less likely to make acquisitions for now, but added that its fundamentals remain strong.

"Alibaba is still a very promising and powerful company," Li said. "I don't think the stock pullback will have any influence on its normal business. In terms of acquisitions, if it is to make a deal with its market value, the stock crash might have some influence."

Li also said: "Like Alibaba, [our market] was going too fast, and now there is a pullback. This is just normal. There is no need to panic."

The market meltdown has, however, affected various Chinese entertainment and digital media players with Hollywood relationships. Authorities have halted IPOs, which affects companies, including in the entertainment sector, that have been planning to go public, and stock prices of sector companies have dropped.

In terms of planned IPOs, state film colossus China Film Group, currently collaborating with Legendary on the Matt Damon-starring Great Wall, is affected. It isn't clear yet when it may seek to revive its plans for a stock market listing.

Imax China is planning a $300 million Hong Kong IPO, but as that is not a mainland listing, it should not be affected by government rules banning IPOs, said observers.

Overall, at least 1,400 Chinese firms listed in the country have halted trading in their stocks to prevent the value of their businesses falling further, including entertainment stocks.

For example, the stock of production company Huayi Brothers, which partnered with Robert Simonds' STX Entertainment for the co-financing, co-production and distribution for 12-15 theatrical releases each year, has been halted since Tuesday when the stock fell 10 percent. Trading has also been halted in Wanda Cinema Line, the stock-market listed business of China's biggest exhibitor.

Some observers also say that the recent market woes, if they persist, could have longer-term effects on film companies looking to raise funding for projects.

"There are go-betweens who solicit rich people to invest in movies," said one Hollywood producer who does business in China and requested anonymity. "That money is going to dry up" if the crisis continues.

While the producer said Huayi Brothers could be affected by the slide in that way, he also thought Fosun, which last year invested $200 million in Jeff Robinov's Studio 8, would not be much affected for the time being. Fosun has seen its stock rise in recent days amid a sharp drop in many smaller stocks, with some observers calling it a possible safe haven.

The Beijing government's armory of measures to give liquidity a boost and ease investor worries finally seemed to pay off on Thursday, with the Shanghai Composite rising 5.8 percent and the Shenzhen market gaining 4.3 percent.

While this will have soothed anxieties in Hollywood a little, it remains to be seen if the Thursday rebound will mark a real turning point, with the bull run resuming, or if it will be merely a brief pause during an ongoing decline.

With box office seeing 30 percent growth rates every year and with China set to become the world's biggest movie market at some stage in the next three years, not even a big market crash will keep investors away, some say though.

IAC/InterActiveCorp chairman Barry Diller told reporters in Sun Valley, Idaho that he wasn't concerned about the recent sell-off in Chinese stocks.

The recent market meltdown in China comes after a strong run of stocks in the country. After the bursting of the real estate bubble in China, thousands of small investors ploughed their savings into the market, driving up valuations. Many now say that the market has run up too much too quickly, and some have drawn comparisons from a Chinese stock market bubble in 2007.

In a research note, Daniel Tenengauzer, head of emerging markets and global foreign exchange strategy at RBC Capital Markets, pointed out how the Shanghai Composite Index rose 54 percent in the fourth quarter of last year, another 14 percent in the first quarter of this year and 35 percent in the second quarter.

"It is down 30 percent so far this quarter," he said. "What melts up, usually also melts down," he said.

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