China just surpassed Japan to become the second-largest box office market in the world. This has film studios salivating over China’s potential one billion movie viewers. As China rises, so does its demand for quality entertainment. Film studios are rushing to capitalize on this by making movies friendly to China’s censors. Last year China agreed to raise the limit from 20 imported blockbusters per year to 34. The additional 34 films will be in either Imax or 3D formats.
Transforming China
Viacom, Inc. (NASDAQ:VIAB)’s Paramount Pictures Transformers 4 will not only be filmed in China, it will also have a China-based theme. China Movie Channel, which is controlled by the Chinese government, will help select filming sites in China, along with theatrical production and possibly post-production work as well. The movie will also star Chinese actress Li Bingbing and is lookingto cast other big Chinese names.
The biggest development from Viacom, Inc. (NASDAQ:VIAB)’s deal here is that the movie will now qualify as a Chinese and American co-production. This will allow the movie to bypass the Chinese import quota and receive a bigger share of box office receipts. This is great news for Viacom considering that Transformers: Dark of the Moon brought in $177.3 million in ticket sales in China in 2010. When Transformers 4 is released next year, look for the movie to have strong sales in China and boost Viacom, Inc. (NASDAQ:VIAB)’s bottom line.
Tough to keep up with the fox
20th Century Fox has been involved in China with its parent News Corp (NASDAQ:NWSA) since 1992. The Hollywood film studio controlled by billionaire Rupert Murdoch will now become a subsidiary of 21stCentury Fox once News Corp completes its break up later this summer.
20th Century Fox has been instrumental in delivering content in China with its landmark deal with Youku Tudou to stream over 250 films to China’s online viewers in 2010. The film studio was the first studio to do such a deal with China’s version of YouTube.
Last year News Corp (NASDAQ:NWSA) acquired a 19.9% stake in Beijing’s Bona Film Group Ltd (ADR) (NASDAQ:BONA). Bona Film Group is China’s second-largest independent movie production and distribution firm. Bona Film Group is not only looking to go after the Chinese market, but also a global audience. Bona’s tie-up with News Corp is designed to help the company distribute its Chinese-produced films worldwide. What News Corp (NASDAQ:NWSA) liked when it did the deal with Bona is that Bona has a vertically-integrated business model. This is rather rare in the Chinese film community. Again, another smart move by Rupert Murdoch partnering with Bona Film Group.
The Chinese love Kung Fu Panda
Dreamworks Animation Skg Inc (NASDAQ:DWA) owns 45% of Oriental DreamWorks, a Chinese-American film production company. Its Chinese partners are China Media Capital, Shanghai Media Group and Shanghai Alliance Investment. Oriental DreamWorks will produce original Chinese animated and live-action films for distribution in China and worldwide as well. It also plans theme parks, games, and consumer products. The joint venture purchased Chinese animation studio 37 Entertainment which has already worked on productions for DreamWorks television.
The first animated feature film will be Kung Fu Panda 3 and is scheduled to be released in 2015. Starting in 2017, the studio will release one animated feature film per year. The studio is also partnering with China Film Group and National Film Capital to release a live action film based on the popular book series Tibet Code. The film will feature Chinese actors and be filmed in China. The main character of the book is considered China’s Indiana Jones.
Chinese love the House of Mouse
The Walt Disney Company (NYSE:DIS) is well-known and loved in China. The House of Mouse has its Hong Kong Disneyland and is building a second Disneyland in Shanghai. Disney knows the Chinese market and how to navigate it as well as the other studios.
Disney’s Iron Man 3 just set the opening day box office record in China at $21 million. The Chinese version included four additional minutes of footage that featured product placement for a Chinese milk drink and two new characters played by top Chinese actors Wang Xueqi and Fan Bingbing. Disney and its Marvel Studios partnered with Beijing’s DMG Entertainment as a co-distributor in China. The movie’s gross profits in China are estimated to be over $100 million. Not bad, considering all that was required was an extra four minutes of filming.
How they all stack up
| Viacom | News Corp. | Bona Film | DreamWorks | Disney | |
| Market Cap | $31.95 billion | $74.62 billion | $282.61 million | $1.83 billion | $113.60 billion |
| Revenue | $13.05 billion | $35.47 billion | $141.92 million | $748.41 million | $43.76 billion |
| Qtrly Rev Growth | -0.06 | 0.14 | N/A | -0.01 | 0.10 |
| EBITDA | $3.83 billion | $6.98 billion | $3.78 million | $104.20 million | $11.35 billion |
| Gross Margin | 0.50 | 0.38 | N/A | 0.32 | 0.21 |
| Net Income | $2.12 billion | $5.92 billion | ($3.01 million) | ($39.92 million) | $5.97 billion |
| Operating Margin | 0.28 | 0.16 | N/A | 0.13 | 0.21 |
| P/E | 15.91 | 12.91 | N/A | N/A | 19.11 |
Foolish assessment
All five companies are looking to grab a piece of the burgeoning Chinese market. DreamWorks and Bona Film are two of the smaller players in the space and have the most room to grow. The three big players, Viacom, Inc. (NASDAQ:VIAB), News Corp (NASDAQ:NWSA) and Disney, all have giant operations and are able to leverage their geographic scope and financial strength in China. As China grows, look for all five to see increased profits from China.
Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation and Walt Disney. The Motley Fool owns shares of Walt Disney.
The article Film Studios Look to China for Growth originally appeared on Fool.com.
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