Wolf Warrior 2 is definitely the story of the summer, after raking in more than 3.9 billion yuan for 15 days of release. That’s a record for Chinese pictures. The whopping revenue has boosted the performance of a number of film stocks.
The vast growth potential of China’s entertainment industry has lured big investors like Alibaba and Dalian Wanda. However, investors should note that this is a sector with sharp volatility.
The nation’s box office spiked to 45.71 billion yuan last year, up more than 30 times from 1.5 billion yuan in 2004. And the film-related cultural industry has registered whopping growth.
There have been 13 films with box office above 1 billion yuan in recent years.
The Mermaid was China’s biggest grossing domestic movie last year with a box office of 3.39 billion yuan. Wolf Warrior 2 is widely expected to break that record with a box office above 4 billion yuan.
While filmmaking looks like a hugely profitable business, the reality is there is no guarantee of box office success. There is no shortage of bad movies that inflict huge losses on their financial backers.
Following a boom year in 2015, when China’s total box office jumped almost 49 percent, massive capital flowed into the sector.
But 2016 witnessed a slew of poor productions and the box office edged up only 3.7 percent.
Movie-making has no sure-fire formula, and it’s very difficult to predict the results.
Sometimes, a low-budget film might turn out to be a blockbuster, while some big productions may still fail. Therefore, it’s not that easy to profit from movie investment.
The stock market, however, does not seem to recognize this uncertain nature of the movie business.
Beijing Jingxi Culture & Tourism Co. (000802.CN), one of the investors in Wolf Warrior 2 soared more than 70 percent within two weeks.
In fact, a successful movie may not necessarily mean investors will make big profit.
For example, there are up to 21 investors in Wolf Warrior 2. There are several listed companies, including Beijing Jetsen Technology Co. (300182.CN), Beijing Enlight Media Co. (300251.CN), Wanda Film Holding Co. (002739.CN) etc. Profit after deducting production, promotion and cinema fees may not be that much, not to mention that it has to be shared by 21 investors.
It’s estimated that Wolf Warrior 2 may generate a net profit of over 140 million yuan for Beijing Jingxi Culture & Tourism.
The company has a market value of 14.16 billion yuan after the recent rally. A blockbuster may bring short-term stimulus to its share price, but it remains unclear whether the company will be able to maintain profitability in the future to justify the lofty valuation.
Domestic demand for film and other entertainment products should remain robust, but investing in movie-related plays is a completely different issue.
This article appeared in the Hong Kong Economic Journal on Aug. 11
Translation by Julie Zhu
[Chinese version 中文版]
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