In China, where pirated movies can be bought for less than $1, people are flocking to theaters, a sign of how Chinese consumers are willing to spend more on entertainment.

August 1, 2013, 2:34 p.m. ET

Now Playing: China’s Booming Movie Market

People Are Flocking to Theaters

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In China, where pirated movies can be bought for less than $1, people are flocking to theaters, a sign of how Chinese consumers are willing to spend more on entertainment. China, now the world’s second-largest film market after the U.S., is already critical for Hollywood blockbusters such as “Pacific Rim,” a giant monster-versus-robot slamfest that opened in China this week. The movie struggled in the U.S., but its glitzy special effects may be better appreciated in thousands of state-of-the-art movie theatres that have sprung up in China in the past few years. As in other industries, China has taken a “build first, and demand will follow” strategy with movies. And it has worked. The number of screens in China quadrupled from 2009 to 2012, according to entertainment consulting firm EntGroup Inc.The huge supply has helped make movies more affordable. Ticket prices largely have been flat for the past decade, even though urban incomes have almost tripled. Groupon-type websites also helped generate demand by offloading tickets at big discounts.

“Going to a movie used to be a luxury in China, but not anymore,” said Roy Lu, president of Starlive Inc., an entertainment events and talent-management company that is focused on U.S.-China deals. “It is a good family event, and you don’t feel crowded when you are inside the theater.”

Hollywood is a big beneficiary of this trend, but Chinese studios are doing even better. Domestic films’ box-office revenue has doubled in the past year, hitting $1 billion for the first six months of 2013. Chinese films topped foreign offerings for the first time in at least five years.

The difference is Hollywood has relied on special-effects blockbusters, while local directors now focus on low-budget movies about modern Chinese society, which resonate better with viewers. The 2012 comedy “Lost in Thailand,” which cost $5 million to produce, has earned more than $200 million in China, nearly as much as Hollywood’s high-budget “Avatar.”

The red-hot movie industry has led to a gold rush among movie studios, private-equity investors and banks. Alibaba founder Jack Ma, one of the major investors of Shenzhen-listed movie studio Huayi Brothers Media Corp., 300027.SZ -1.26% said recently that he expects to be more involved in the industry.

For investors who want to profit from the new consumption trend, there are a couple of avenues. One is to invest in real-estate developers who build and own the theaters and shopping malls where they tend to be located.

China is expected to add 5,000 screens a year for the next few years, giving it roughly 30,000 screens by 2015. Despite the growth, that still will be 10,000 fewer than in the U.S. The downside is that higher real-estate costs and more competition means it will take longer to earn back the cost of a theater, experts say. Moving to less-affluent places means waiting for the movie craze to reach those cities.

A second option is investing in domestic content. Shenzhen-traded Huayi Brothers, which produced “Journey to the West: Conquering the Demons,” the third-biggest box-office hit ever in China, has been an investors’ darling, rising 180% this year after quadrupling its first-half profit. Beijing Enlight Media Co., 300251.SZ -1.01% maker of the second-biggest box-office hit in China, “Lost in Thailand,” has risen 74% in the past 52 weeks. “Money has been pulled out of properties and coal to invest in films,” said Yang Shuting, a researcher at EntGroup.

But the movie business in China has far more misses than hits, just like in the rest of the world. Among the 745 Chinese movies produced in 2012, only 231 made it to theaters, Ms. Yang said. Those that don’t make the theaters are unlikely to recoup their investments because in China there are few ways to generate income outside box offices. Chinese movies also don’t travel well abroad.

“People who just invest in one movie are going to fail because it is such a hit-driven business,” said Clark Xu, managing director at China Media Capital, which is teaming up with DreamWorks to produce “Kung Fu Panda 3” in China.

Mr. Xu believes the industry needs to modernize to adapt to its size and investor interest.

“Having a lot of theaters is just the first building block,” said Mr. Xu. “As the investment gets bigger, China needs more institutionalized efforts to develop projects, manage risks, and diversify product offerings.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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