Strategic Report for Huayi Bros Media Group

To: Wangzhongjun, CEO of Huayi Bros Media Group

From: Jingjing Huang

Re: SWOT analysis and trends affecting Huayi

Executive Summary

In this report, I propose several strategic moves according to the SWOT analysis to Huayi Brothers Media Group, one of the largest private entertainment groups in China. Those strategic moves would enable this company to adapt to certain emerging trends in China’s film industry, such as coproduction between Hollywood studios and Chinese production companies and seeking joint venture with powerful foreign company.

This report is organaized by  six parts, Introduction to China’s Film Industry, Huayi Bros Media Group Business Overview , Huayi Brothers Media Group Capability Analysis, Trends- affecting Huayi Brothers Media Group, SWOT analysis to Huayi Brothers Media Group and Summary recommendation according to SWOT analysis.

In conclusion, though different from the circumstance in Hollywood, no matter culture, economy or politics, and there are also many obstacles need to be broke through, Huayi Brothers Media group is still facing a booming time of China’s fim industry. For China’s film market, the coproduction issue could be an opportunity or thread, but for Huayi, which has already built its own business model, and enjoyed a great profit from it, the best identification is that being a bystander for a while, waiting for a mature timing of coproduction. Financing is the key point to a company always envolving in big budget productions, just like Huayi. Good financing capacity would ensure the company’s normal operation goes well, decline risks and inprove competitiveness. Insufficient financing channels is a weakness of Huayi, this shortcome has already restricted its development. So seeking joint venture with powerful foreign company to get foreign capital is a good way to solve this problem, through which, Huayi could also get a more international management .

Introduction to China’s Film Industry

China’s film industry is facing on a booming time with both growing domestic market and increasing international business. Everyone seems optimistic with it since it is now the No. 2 B.O. behind U.S. with a yearly up 36% to $2.7 billion in 2012[1].

* Chart resource is Theatrical Market Statistics 2012 by MPAA

However, there is still a long road for  China’s film industry to reach on the so-called “Chinawood”.

 

Different from Hollywood film system, China’s film industry is too complex to describe, it is related to many aspects of China, like economics, politics, history, living standard, mainstream ideology, etc. Following are several most important information helping people getting a better understanding of the big picture of China’s film industry.

It’s not a secret that anyone who wants to make or distribute movies or TV programs in China has to go through SARFT, The State Administration of Radio, Film, and Television. It is a government department, one of whose duty is to issue mandatory guidelines for media content broadcasting in China. Or in other words, it is the regulator and executive of the so-called censorship. For example, Skyfall was re-edited with approximately 40 minutes cut, which was considered to be inappropriate content screen in China. Next familiar definition comes as the quote system, which restricts the number of foreign movies coming into China every year to 20 plus extra14 3D or Imax films since last year. At the same time, foreign distributions also have seen a profit-sharing increase on those films to 25%, up from 13%.[2] There are several reasons result in this current situation of China’s film industry, most medias blame this as a political regulating, however, they are oversimplifying this issue. First of all, there are many other elements involved besides politics, like economics. Chinese government do have the responsibility to protect China’s own film industry from struck by other powerful film industry, like Hollywood. Besides, lack of advantage, though, compared with American film rating system, censorship in China still need to be analyzed in a more neutral perspective instead of simply being blamed on, which does not benefit for its development.

As the world’s fastest growing major film market with a great number of potential audience as well as a total 13118 film screens across the country in 2012 December[3], Chinese film market draws attention from all over the world, every businessman wants to share a piece of this big cake in spite of tough restricts mentioned above.  The highest-grossing film in China last year (RMB 1 billion or $161 million)[4] was “Lost in Thailand,” a locally-produced lowbrow, slapstick comedy distributed only in China. It gave a very solid statement of the potential of this market.  Chinese current President Xi Jinping stopped by Hollywood on a U.S. visit in 2011, during when Dreamworks and Chinese media groups were set to open a joint venture animation studio in Shanghai called Oriental Dreamworks, which is considered as the big sign to cement relations between China and Hollywood. Now we can almost see the bright future of Chinese film market both in domestic and international. However, as mentioned at the beginning, Chinese film market is too complex to analyze, let alone a clear prediction. Having talked about the future of China’s film industry with Ron Meyer, the President & COO of NBCUniversal, I got the answer that what challenges along with the development of China’s film industry, especially on the international cooperation. First, film censorship. The second is piracy. These two definitely have prevented China from developing a film industry value chain based on copyright trade.

Huayi Bros Media Group Business Overview

Founded in Beijing in 1994 by Chairman & CEO Mr. Wang Zhongjun and President Mr. Wang zhonglei , Huayi Brothers Media Group is one of the largest private entertainment groups in China. It underwent a comprehensive expansion into the media industry through investing, and now produces and distributes movies, TV shows, operates talent agencies, music labels, and movie theaters within 8 main subsidiaries, Huayi Brothers Film Investment Co., Ltd., Huayi Brothers TV Service Co., Ltd., Huayi Brothers Arist Agency. Huayi Brothers Music Co., Ltd., Huayi Brothers Advertising Co., Ltd., Huayi Brothers International Distribution Ltd., Huayi Brothers Fashion Group, and Huayi Brothers Giant Information Technology CO. Ltd. [5]In 2009, Huayi Brothers Media Group has successfully being listed on ChiNext, a NASDAQ-type exchange for high-growth, high-tech start-ups opened by the Shenzhen Stock Exchange, one of China’s three stock exchanges.

In film area, Huayi Brothers Media Groups, which has either produced or co-produced, distributed or co-distributed 65 movies since 1998, is different from other Chinese companies, although it continues international development, and is active in the international market, with things like (North American distrib) China Lion, it is more focused on the domestic market with the target that gross $500 million in annual box office[6] (sales revenue amounted to $140 million in 2011)[7]. It has also invested five cinemas located in different cities along with eight new cinemas are currently under construction, and plans to open 50 within the next five years.

In TV business, Huayi Brothers Media Groups has produced more than 2000 episodes TV shows. It has established a mature TV industry chain start from close relationships with some of the most distinguished talents in China’s TV industry. There are 12 workshops under Huayi Brothers TV Service Co., Ltd, which are all talent-driven, and have made one and other big hits in China’s TV screens.

As one of China’s most influential agencies, Huayi Brothers Arist Agency was founded in 2003.The signing amount ranks the first among national artist agencies, and A-list stars occupy half of China’s entertainment industry. For initiate Huayi Fashion Corporation, it extends the business to the field of “Super Model Agency” based on previous artistic agency, struggling to establish first-class fashion brand of China with more and more world super models ranked within 50^th  on the list of models.com.

After six years of steady growth, recently. Huayi Brothers Music extended its business scope into copyright transaction and wireless digital domain transaction besides its original music production business. It has also became a dominant player in China’s highly competitive concert market.

During recent days, Huyi Brothers expands its expertise into real estate field. Leaders are planning a theme park based on Huayi Brothers films. The park will take full advantage of the latest technology and interactive gaming to bring the company’s most beloved films to life. And the company will also use its already exited film sets, like cityscapes and battlefields, in the same way to gain more profits.

Today, Huayi Brothers Media Group is still grounded in future-oriented thinking and constant innovation, aligning with an ambitious goal to reshape how the world sees  China’s entertainment industry.

Huayi Brothers Media Group Capability Analysis

Financial Capability Analysis  

Unit: U.S. Dollar ( $ )

	2012	2011	2010
Gross Revenue	223,613,158	143,932,807	172,857,101
Operating Profit	40,988,768	39,480,907	29,441,172
Total Profit (Income before tax)	51,771,714	44,081,762	30,700,012
	At the end of 2012	At the end of 2011	At the end of 2010
Total Assets	667,410,442	397,380,226	326,100,760
report publish date, March eighth, 2013. Total Liabilities	324,712,020	121,904,764	72,835,366

Statistics are from Huayi Bros Media Groups annual report of 2012, translated and unit conversed by the author, conversion rate is 620.26, according to the rate of the date , when the report was published[8]

 

 

 

 

During the reporting period, the company’s operating profit is increased 55.36% than the previous year, in which film business profit is increased 197.96% and the increase of theater profit is 192.63%, both are compared year-on-year. It is mainly because a very ideal B.O. around 21 hundred million yuan (306.6 million U.S. dollars) and a total thirteen theaters, including seven new opened ones. The company’s agency business is also showing a trend of steady rise. As a whole, the net profit of Huayi Bros Media Groups in 2012 is increased by 0.12% resulting from the rising gross revenue and net assets.

In investment field, besides set up wholly owned subsidiaries, shares investment is the most important method for Huayi Bros Media Groups to form the assets. The company has put its money in fourteen different corporations in return with considerable shareholdings both in domestic and international market. In the area of financing, it still only has limited approaches with high risk, such as private placement, listing and bank loans.

Operation statement

During the report period, the company’s revenue from its core operations has a 55.56% growth compared with 2011, in which the film business with its derivatives market owns a bright year-on-year 197.96% growth resulting from 7 big B.O. hits with a total 34 million dollars in the domestic market. At the same time, the performance of its TV business with the derivatives market is approximately equals to the previous year. But the authorized franchise business model, which includes brand and intellectual property license, has significantly improved the company’s profitability. Considering 6 new self-owned theaters opened this year, the earning from this field increased 192.63%. Meantime, agency business has brought Huayi Bros Group a 10.88% revenue growth this year.[9]

 

 

 

 

 

Trends affecting Huayi Brothers Media Group

Co-production between Hollywood studios and China’s production companies is a developing and promising business model in Chinese film industry. This business model is welcomed by both sides because it can avoid many limitations smartly, such as strict quote system, which makes Hollywood studios very happy since they can gain more profit by importing extra more films to this huge market and get more percentage of the Box Office share. And Chinese partners are also showing a great interest on this model for the reason that they can satisfy the huge audience demand to this kind of movie, of course with more profit. Besides, the quality of Chinese film indeed has been improved during recent years, but when it comes to big budget project, Chinese production companies are still lack of experience and skills, so this kind of business model is really helpful for those companies making progress. From many Chinese audience’s perspective, Hollywood made represents high quality films that great stories with amazing audio-visual effects, it could be recognized as a lovemark in Chinese film market. Many Chinese companies, at first, also would like to take advantage of this point to build their own brands before they have enough competences to earn trademarks in the domestic market.

In order to qualify as a coproduction, a movie must contain “Chinese elements” in the story and be partly shot in China. Scripts must pass China’s censors, whose sensitivities to perceived political or cultural slurs are legion.

While coproduction becoming popular, sensing a gold rush, U.S. studios are piling into China. DreamWorks Animation is building a studio in Shanghai with local partners. News Corp., which owns Twentieth Century Fox, has taken a 20% stake in Beijing-based Bona Film Group, a Nasdaq-listed producer and distributor. The traffic goes both ways: Dalian Wanda Group, a property conglomerate that runs China’s biggest theater chain, agreed in May to pay $2.6 billion for AMC Entertainment. Obviously, the second trend for Chinese entertainment companies is to find joint venture with powerful foreign company, which is in order to strengthen the companies’ competences, like risk taking, financing, production abilities.

The third trend that will affect Huayi Brothers Media Group is social media. This trend would change consumer’s behavior from seeing product to share reviews for product, which gives the answer that why it’s necessary for company to make connection with consumers for a word-of-mouth marketing. It really matters the distributing strategy of Huayi Brothers Media Group.

Those three trends will lead China’s film industry at least in the next five years, but each of them has a different effect on Huayi Brothers Media Group. First, coproduction is not a bad way for Huayi to make big budget films satisfying consumers’ taste, in order to gain more market shares and survive competition. But the fact is that Chinese government will add more detailed policies to qualify a coproduction film, actually, the regulation implemented now is already giving a strict requirement for those coproduction films. Those who wanted to make use of the coproduction benefits entering China’s market with small Chinese investment or few Chinese Stars, such as Cloud Atlas and Looper, already learnt lessons in 2012. The latest news for coproduction policy is that the Chinese investment should not less than one third of the total investment. Under such circumstance, what’s the plan for Huayi Brothers Media? Its President Mr. Wang zhonglei said to Variety journalist that the company will focus on domestic market, though there are big opportunities in the international market. He thought that Chinese audience should be provided various kinds of films, not only those in Hollywood style. Huayi has the ability to produce good films telling appealing stories in a Chinese culture style. And he is confident with this mode. Actually, huayi has produced not a few good movies, which made big hits in the domestic theaters. Last year, Jackie Chan’s work Chinese Zodiac was produced and distributed by Huayi, whose style is very similar with those Jackie Chan’s earlier films produced in Hollywood. It earned excellent reputation, even someone mistook it as a coproduction work. This example suggests that, though coproduction is a very promising business model   in China’s film industry, Huayi can still being a bystander and focus on what it’s always good at, instead of taking the risk of immature regulations.

To the second trend, finding foreign capital is a feasible plan for Huayi, considering that the company’s financing capacity is relatively lower than its competitors, like the Nasdaq-listed producer and distributor Bona Film Group. Besides the foreign capital could be a solution for its narrow financing channel, which makes the assets resources are rare, and is not good for its future big budget film investment.

SWOT analysis to Huayi Brothers Media Group

O4. Big Data helping target consumers more preciously.ThreatT1. Global economic growth keep slowdown along with China’s domestic market competition intensifies.T2. PiracyT3. CensorshipT4. The increasing number of imported Hollywood films has a big impact on China’s domestic film market.

 

Summary recommendations according to SWOT analysis

• SO strategy

1. Improve the industrial chain to enhance specialization in order to increase profits and strengthen the ability to resist risks
2. Further consolidate the synergy effects to gain more resources and strength
3. To get more license
4. Take advantage of brand value through various development methods, such as merging and acquisition, for more future strategic partnerships and a broader industry chain
5. Make Huayi Brothers Media Group a lovemark

• WO strategy

1. Strengthen investing and financing management systematically, and the ability of risk control
2. Invest self-build theaters, meantime, develop cooperation to diverse distribution channels.
3. Attract more professional and influential talents.
4. Learn from and use the experience and technology of other countries for reference to improve product quality.

• ST strategy

1. Summarize market experience, enhance product attraction, improve market share.
2. Seek various strategic partnerships. Maximize interests.
3. Protect intellectual property rights from invasion.
4. Take advantage of policies.
5. Accelerate the integration of  industry superior resources.

• WT strategy

1. Improve financial management and control to build suitable financing system, avoid the problem of overinvestment and underinvestment in order to safeguard the interest of stakeholder, gain corporate growth.
2. Decrease the cost of normal operating activities to optimize the industrial chain.
3. Explore and develop new business, expand the spectrum of value chain.

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