Cinema chains seek IPOs, markets wary

Jinyi International Cinemas had its application for an IPO rejected recently, throwing a spotlight on the nation's cinema companies. The firms are thirsty for funds, but investors have been warned to pay close attention to their business models and potential profits.

Jinyi International Cinemas has been trying for years to become China's first company from the cinema industry to get listed on a mainland stock exchange, but after its recent rejection by the regulator, there has been vigorous discussion about cinema chains' enthusiasm for IPOs.

The China Securities Regulatory Commission (CSRC) announced on November 28 that it had canceled the scheduled review of Jinyi's IPO application, saying that more clarification was required.

Two days before the scheduled review by the CSRC, Jinyi had been criticized by the State-owned Assets Supervision and Administration Commission of Wuhan City Government (Wuhan SASAC).

The official body rejected Jinyi's claim in its prospectus that the Wuhan SASAC was one of its top five customers having spent a total of 965,000 yuan ($156,330) at Jinyi cinemas in 2011. It said the claiwm was "misleading."

In response to the criticism, Jinyi explained on November 27 that the sum of 965,000 yuan covered all the consumption by the Wuhan SASAC and some other related institutions, and apologized to the Wuhan SASAC for the error in its prospectus.

The event immediately attracted attention from Internet users, who jokingly called the Wuhan SASAC the "SASAC that loves movies most," as the total number of staff members at the Wuhan SASAC is only around 70.

The Wuhan SASAC declared again on its website on November 27 that it was not a corporate customer of Jinyi, and said that Jinyi was "suspected of fabricating facts." It also appealed to the CSRC to investigate the case.

Jinyi declined to comment when reached by the Global Times Wednesday.

Eager for capital

Jinyi has been preparing to get listed on mainland stock exchanges since 2012. However, on the same day that Jinyi's application was canceled, Wanda Cinema Line Co, a movie theater company that is part of the Wanda Group, received approval from the CSRC for a share offering.

The dispute between Jinyi and the Wuhan SASAC indicates that "cinema chains are sparing no efforts to raise capital," Wei Huan, an analyst at EntGroup, a Beijing-based market research group, told the Global Times Wednesday.

Wei noted that the capital market has a cautious attitude toward cinema chain companies because of their high debt-to-asset ratios.

Jinyi also has a high debt-to-asset ratio, restricting its ability to expand its business nationwide, Wei said.

With the fast development of the film and cinema industry and growing demand for more movie theaters in China, various other cinema chains such as China Film Group Corporation are also preparing for IPOs.

"Getting listed is an effective way for cinema chains to reduce their financing costs," Liu Debin, general manager of Poly Film, told the Global Times Wednesday.

Industry consolidation

Liu said industrial consolidation in the cinema chain sector is likely. "Normally, the larger the scale of the cinema chain company, the lower its operating and financing costs are," Liu noted.

Currently in China, there are numerous cinema chains and theaters scattered across the country. In 2013, there were 45 cinema chains in urban areas and 249 cinema chains in rural areas, with a total of 4,583 movie theatres nationwide, compared with a total of 25 cinema chains owning around 4,500 theatres in the US, according to EntGroup.

China will overtake the US as the top movie market globally within three years, Reuters reported on November 28, citing the China Film Producers' Association.

Liu also noted that the development of China's cinema chains has nearly caught up with the level in the US, adding that industrial consolidation would be helpful for further development of the industry.

Global movie theater companies are looking to enter the Chinese mainland market, and are seeking large Chinese partners for potential cooperation.

For instance, theater operator IMAX Corp signed an agreement in July with Shanghai Film Corporation, Shanghai United Circuit Co and Shanghai SFG-EPR Cinema Development & Management Co to build 19 new IMAX theaters throughout China before the end of 2015.

"Since the capital investment required for large-scale projects such as IMAX theaters is huge, finding ways to raise more funding is urgently needed for cinema chain companies," Liu noted.

Liu suggested that smaller cinemas should consider differentiated business models in order to survive.

Caution needed

Wanda Cinema, which is set to become China's first listed cinema chain company, will see further development at a very fast pace, said Wei Huan of EntGroup.

This is partly because it has various advantages, including strong funding and low rental costs for its cinemas, noted Wei, explaining that it can use property offered by Wanda Commercial Properties.

But investors are still curious about the potential of other cinema companies, and are likely to pay close attention to the price-to-earnings (PE) ratio for cinema chains seeking listings.

Liu said a PE ratio between 25 percent and 35 percent would be reasonable, given the relatively low profitability of cinema chains.

Li Daxiao, research director at Shenzhen-based Yingda Securities Co, warned against excessive enthusiasm among investors for cinema chain listings, given the difficulties experienced by other companies in the film industry.

Huayi Brothers Media Corp, one of the first batch of domestic film companies to get listed, saw its shares rise by nearly 150 percent to 63.66 yuan on its debut in October 2009, but it has fallen back since then, and now trades at just over 30 yuan.

"Investors should be cautious and focus on business development of the companies rather than speculating on their shares," Li told the Global Times Thursday.