Everything to play for

With astonishing box-office growth of 43% in 2009, China’s film market is experiencing unprecedented expansion. And the most vibrant area in the film industry is the exhibition sector.

“Nowadays, everyone wants to build cinemas in China,” says Jimmy Wu, chairman of Lumiere Pavilions, which has two cinema sites and 10 more under construction. In 2009, China added 142 new cinemas and 626 screens for a total of 1,687 cinemas and 4,723 screens. Yet the territory, with 1.3 billion people, is still considered under-screened. Cinema managers in Beijing generally estimate that by the end of 2010 there will be a further 800-1,000 screens, bringing the total count to nearly 6,000. With such a growth rate, China will reach 10,000 screens in five years’ time.

The real battle is taking place in cinema investment and development. In 2009 alone, there were more than seven large cinema investment and development companies established in China, eagerly building cinemas throughout the country.

Among them are major real-estate conglomerate Shimao Group, international entertainment firm Golden Harvest, which was renamed Orange Sky Golden Harvest, and major film studio Huayi Brothers Media. Their common goal is to snatch the best-located shopping mall development projects and develop multiplexes.

“It’s no exaggeration to say the competition is cut-throat,” says Johnny Liu, president of Apex International Cinemas, which is currently developing 10 cinemas in China.

Rent has become a critical issue in negotiations with real-estate developers, with revenue-related rents rising fast. “Before, we paid 10% of the box-office revenue to developers as rent,” says Xin Huibin, general manager of China Film Cinema Investment Company, which invests and develops cinemas for state-owned China Film Group. “Now it’s impossible, especially in major cities [Beijing, Shanghai and Guangzhou]. The starting point of the rent is 17% and we’ve heard of 20%.”

The rent hike has become the major talking point among exhibitors. “The current situation is that there are not enough good development projects but too many investors,” says Ye Ning, general manager of Wanda Cinema Line. “Naturally, the price would go up.”

Wanda was China’s highest-grossing cinema circuit in 2009, with its 50 -cinemas bringing in revenue of $122.2m (RMB834.6m). The subsidiary company of commercial property conglomerate Dalian Wanda Group, Wanda Cinema Line, builds cinemas in Wanda’s own commercial property developments.

Shimao Group, another commercial property company, announced in March 2010 that it would expand into the cinema business, aiming to build 40 multiplexes in five years.

Most new cinemas are built in major cities such as Beijing, Shanghai, Shenzhen and Qingdao, while second and third-tier cities are catching up fast. “We still put our priorities in first and second-tier cities,” says Lumiere Pavilions’ Jimmy Wu. “These cities have a large cinema-going population and more importantly these cities are far from saturated.”

However, not many cinemas in China can strictly be called multiplexes. There are on average fewer than five screens in most cinemas while only 10% of existing cinemas have more than 10 screens.

The concept of modern cinemas was introduced to mainland China only eight years ago when the territory began to allow foreign investment in cinema management. Before its withdrawal in 2006, Warner Bros International Cinemas (WBIC) had built and co-owned 30 cinemas, setting up one of the first models for modern multiplexes in China. Wanda Cinema Line and Jinyi Cinema, WBIC’s then partners, were among the first to build multiplexes based on WBIC’s model.

In China, cinema owners take around 50% of the box-office revenue, while distributors and producers take up to 43%. The remainder goes to the cinema circuit, a company attached to each exhibition company that is unique to the Chinese market. Cinema circuits are mostly state-owned by-products of the planned economy system. They handle release dates, ticketing and small parts of film marketing campaigns for films to be released in their cinemas. And they charge 3%-7% of cinemas’ revenue as an obligatory management fee. Cinema circuits do not necessarily own cinemas: China Film Stella Cinema Chain, for example, is formed loosely as an alliance, while private cinema chain Wanda Cinema Line owns and operates all of its cinemas.