The capital market has turned to investing in movies in recent years in light of their high investment returns. The immense influx of capital has been a boon to the film production industry, allowing for bigger budgets and better special effects. But it has also caused its share of problems, industry experts said, such as box office fraud. Meanwhile, experts warn that a bubble might be forming in the movie industry, which could quench capital markets' appetite for further investment.
The group of girls and young women spared not even a glance for what was playing when they walked into the Wanda Cinema in downtown Beijing on Saturday night.
The young students, most of whom were in their teens and tweens, made a beeline right for the box office to buy tickets to see The Lost Tomb, which opened on Friday.
The film, based on a well-known Chinese novel, stars Lu Han and Jing Boran, two of the most popular heartthrobs currently gracing the Chinese cinema. In Chinese, this type of young star is referred to as "fresh meat."
"I am here to support Lu Han," a student surnamed Chen cheered. "Any movie with Lu makes itself a good one."
Another teenager seconded that opinion. "I just saw the movie yesterday, and as long as Lu is in it, any movie is worth seeing a second time."
Fueled by female fan frenzy, The Lost Tomb has lit up the dreary summer box office, grossing 400 million yuan ($60 million) in its first three days.
And yet, the movie might not live up to the promises that its distributor, a subsidiary of the listed company Lugang Technology Co, made to investors.
To fund the movie's reported 200 million yuan budget, Lugang Technology signed a "minimum box office guarantee" with four investors.
Under such an agreement, the film's distributor is entitled to the lion's share of the profits if the film grosses more than 1 billion yuan at the box office, according to news portal sina.com. If ticket sales come under 1 billion, the distributor has to give up a greater share of the profits to its investors.
The agreement serves as insurance for the film's investors. And it has been growing in popularity recently in China's film industry, according to Chen Changye, a veteran entertainment industry insider.
Distributors and investors have signed guarantees for movies such as Stephen Chow's blockbuster The Mermaid and the Jackie Chan's comedy Skiptrace.
The business model that employs this kind of agreement is a product of an immense influx of capital into the film industry over the last decade.
According to the Beijing-based research institution Zero2IPO Group, the number of film-focused private equity funds grew to 166 in 2015, up from five in 2005.
The movie industry has been making greater use of private capital since 2013, a period in which the film industry was booming, while growth in traditional assets such as real estate was slowing.
"At that time, investors started to look for alternatives to expand their investment portfolios," said Jay Wei, the president of the listed capital company Gold Finance Group. The company has funded many hit movies, including the The Mermaid and Journey to the West: Conquering the Demons.
Due to the high investment returns and the halo effect that accompanies celebrities, private capital poured into the film industry, Wei said.
Capital effects
The influx of capital has benefited some investors, but it has also increased the cost of producing movies without necessarily raising their quality, according to some people in the industry.
The added funding has pushed forward technological innovation and the introduction of high-quality production teams in the domestic film industry, said Peng Jiao, the vice president of the Beijing-based film production company CHS media.
"Currently, it costs 20 million to 30 million yuan or so to produce a movie. And the cost will keep going up for animated special-effects scenes," said Huang Guofeng, an industry analyst with Enfodesk.
The question, however, is whether bigger budgets and more special effects actually make movies better. "The capital market doesn't pay much attention to a film's quality," Huang said.
"They only care about the box office and making a quick buck."
The Lost Tomb might have had a stellar opening weekend, but the reviews have been less than glowing. On Douban, one of China's most authoritative user review websites, viewers gave the movie an average rating of 4.9 out of 10, making it one of the worst reviewed films of 2016.
Viewers criticized the acting of the two leading men, but also took shots at the quality of the movie, which reportedly had to be shot, produced and released within one year.
"It is obvious why the distributors chose two young idols [to star in the movie]," Huang said.
Fraud is another problem, Wei said.
It turns out that when movie distributors stand to get a windfall for meeting a box office target, it gives them an incentive to goose ticket sales.
In March, the main distributor of IP Man 3, Beijing Max Screen, admitted that it had bought tickets in bulk to inflate the movie's box office returns, in part to drive up the stock price of a listed subsidiary that had a stake in the movie.
As punishment, regulators suspended the company's distribution license for one month and subtracted 32 million yuan from the movie's box office total.
Bubble forming
China has become the world's fast-growing and second-largest movie market, but its growth began to slow in the first half of 2016.
The deceleration suggests there might be an oversupply in movie releases, which indicates a bubble might be forming, experts noted.
"Currently, the risk of investing in movie industry is skyrocketing," Huang said, noting that this year only 10 percent to 20 percent of the investing enterprises are making a profit, while about 50 percent are posting losses.
Huang's opinion was echoed by Chen who said that with the exception of The Mermaid, almost all the movie distributors that have signed "minimum box office guarantee" contracts have failed to meet ticket sales targets.
Gold Finance Group will be more cautious in selecting movies and scripts to invest in, Wei said.
"After all, the development of movie industry is evolving just any other sector," Huang said.
"At first, investors swarm to take a share of the booming market, then murky practices appear and harm the industry. As the industry gradually adjusts, the market becomes standardized and stable."
