Poly Theater in Beijing. Poly Film Investment Co Ltd has established strategic cooperative partnerships with leading property developers including Greentown and Shanghai-based Greenland, which means it has priority in negotiating with them for cinema construction. [Photo /  China Daily]

Commercial property firms demand bigger share of profits from cinemas

BEIJING - Although the Chinese film industry celebrated a milestone last year with box office receipts reaching a record 10.17 billion yuan ($1.54 billion), commercial property developers were raining on its parade by seeking a bigger slice of the profits.

The two industries have been cooperating since 2002, when the China Film Group Corporation struck a deal with Citic Shenzhen (Group) Co to invest in the construction of New South Movie City Inc.

The mutual benefits were obvious. Cineplexes are believed to be a catalyst for the prosperity of surrounding commercial facilities, such as shopping malls, because they attract lots of people.

However, the rampant expansion of cinemas driven by the burgeoning Chinese film market in recent years has left commercial property developers doing better than cinema investors.

Box office receipts increased from 6.21 billion yuan in 2009 to 10.17 billion yuan last year on the Chinese mainland, registering a year-on-year growth of 63.9 percent, according to the State Administration of Radio, Film and Television.

In 2010, the number of cinemas increased by 313 and the number of screens exceeded 6,200 compared with 4,723 in 2009, official figures showed.

"There used to be three to four investors bidding for a cinema project several years ago, but the other day I went to Changsha and they told me more than 30 different groups were battling over just one proposal," said Qin Hong, chairman of Stellar Group, one of the leading private film companies, speaking in early November.

Many of these competitors offered bids that were totally unrealistic and unlikely to recover the investment, let alone make a profit, because there exist many uncertainties in the market, Qin added.

Liu Debin, general manager of Poly Film Investment Co Ltd, said: "We once offered a quotation price of 1.5 million yuan as a year's rental in a bid for a cinema project of 4,000 square meters in Mentougou district in the city, but ultimately we failed because others offered more.

"Investors without any industry background and professional knowledge are increasingly streaming into the cinema sector, creating crazy competition within the industry."

Property owners inevitably choose the investor offering the highest price even though he or she doesn't have any experience in the market, Liu added.

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This blind enthusiasm for cinema construction has led to a sharp rise in rentals. Some property developers even ask for more than 20 percent of a cinema's box office receipts in some central business districts, when the figure was between 5 and 7 percent about four years ago, insiders said.

"We are reluctant to involve ourselves in the vicious competition, because what we attach great importance to is sustainable development instead of a short-term and sudden success," said Liu.

Poly Film Investment Co Ltd has established strategic cooperative partnerships with leading property developers including Greentown and Shanghai-based Greenland, which means it has priority in negotiating with them for cinema construction, the Poly Film executive added.

Currently, property developers ask for 8 to 10 percent of box office receipts from Poly cinemas and the situation is stable, Liu said.

"We are also looking forward to take advantage of the Poly Real Estate Group Co Ltd in the coming cinema expansion moves," he added.

Huang Wei, general manager of Bona International Cineplex Investment and Management Co Ltd, a subsidiary of Bona Film Group Ltd, the first Nasdaq-listed Chinese private movie studio, said: "Newly opened cinemas are most vulnerable to rising rentals because property developers offer rentals based on the standard for a mature cinema."

It usually takes three years for a cinema to become mature so this will be a hard time for them because of the pressure from high rents, Huang added.

If property developers require more than 15 percent of the net box office revenues, which excludes sales tax and the national film developing fund, a cinema will hardly make any profit in one year's operation, said Liu from Poly.

Liu based his conclusion on calculations involving costs of operation, wages and depreciation.

Many outsiders believe that Chinese movie theaters are making lots of money every day when they see the long lines standing in front of ticket windows. However, the fact is that the off-season period is much longer than that of the boom in a year, Huang said.