Film Content (Overweight/Maintain) BIFF, the rise of China, and 2016 movie lineup This year’s BIFF puts spotlight on Chinese and Indian films; Asian Film Market launches world’s first entertainment intellectual property market Sector Update 2016 lineup: CJ E&M unveils wide range of genres and a number of US/Asia co- October 6, 2015 productions; Showbox focuses on dramas, action films, and disaster films; NEW bets on fantasy and disaster films Maintain Buy and TP of W110,000 for CJ E&M; Maintain Buy and TP of W11,000 for Daewoo Securities CCo.,o., Ltd. Showbox; Maintain Trading Buy and TP of W17,000 for NEW [Telecom Service / Media] Jee-hyun Moon BIFF and Asian films of today +822-768-3615 [email protected] 1) BIFF puts spotlight on Chinese and Indian films At the 2015 Busan International Film Festival (BIFF), which celebrates its 20th anniversary this year, films from two of the biggest emerging markets, China and India, have taken center stage. The festival officially opened on October 1st with the Indian film Zubaan (directed by Mozez Singh) and is set to close on the 10th with the China-US co-production Mountain Cry (directed by Larry Yang). Monster Hunt, which has become China’s highest grossing film of all time, was also screened at the festival on October 4th. This year’s Window on Asian Cinema section featured a number of international co- productions, including the China-Korea film Bad Guys Always Die (starring Son Ye-jin) and the Korea-Indonesia film A Copy of My Mind. The Korean Cinema Today-Panorama section showcased several domestic blockbusters that have sold more than 10 million tickets, such as Ode to My Father, Assassination, and Veteran, but also smaller indie films like Stop (directed by Kim Ki-duk) and Right Now, Wrong Then (directed by Hong Sang-soo). 2) Asian Film Market launched E-IP market The Asian Film Market, an event that started in 2006 and runs annually during the BIFF, brings together industry experts to discuss all stages of filmmaking, from pre-production to sales. This year, the event also includes the world’s first entertainment intellectual property (E-IP) market, which is a trading zone for rights to a variety of films and original works, including story-format web dramas and games on new media platforms (web, mobile, etc.). Notably, one of the forums scheduled for this year’s Asian Film Market—titled “Producing Blockbusters in China,” and set to be held on October 6th—will bring together top Chinese film producers to discuss key factors for success, the current status of co-productions, and the future of China’s film market. One of the participants is Jacky Y. H. Liu, CEO of Huace Union Pictures, which made the China-US co-productions Wedding Invitation and Miss Granny. The Chinese performance of Miss Granny will be reflected in CJ E&M’s 3Q earnings. Figure 111.1. 202020 ththth Busan International Film Festival poster and authorauthor’’’’ss entrance badge Source: Busan International Film Festival, KDB Daewoo Securities Research Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including tthehe U.S. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. October 6, 2015 Film Content Perspectives of distributors, producers, and investors 1) Film investors/distributors: Looking to improve domestic profitability while expanding overseas Major listed film distributors, including CJ E&M (130960 KQ), Showbox (086980 KQ) and Next Entertainment World (NEW; 160550 KQ), are looking to improve profitability in the domestic market while expanding their presence overseas (especially in China). Companies that have theater operators within their corporate groups, such as CJ E&M and Lotte Entertainment (a division of Lotte Shopping), each have around 20 films lined up for 2016. Companies without theater operating affiliates, such as Showbox and NEW, have relatively fewer movies—about 10 each—in their pipeline. On one hand, the number of Korean films breaking the 10mn admissions mark is increasing, but on the other, there are fewer “semi-hit” films selling around 4-6mn tickets. As such, we believe it will become increasingly important for domestic film distributors to break even on each individual project, not just on tentpole films, in order to maintain stable earnings. On the overseas front, domestic firms are focusing their efforts on China. In 2016, CJ E&M plans to co-produce five films with China, one with the US, and four with Southeast Asia (Vietnam and Indonesia). Showbox has a co-production deal with China’s Huayi Brothers to make six Chinese movies over a three-year period, with the first film possibly hitting theaters next summer. Meanwhile, NEW has unveiled plans to produce three films in China through its joint venture with Chinese firm Huace Media, its second-largest shareholder. The local box-office performance of co-productions will likely serve as important share catalysts for these stocks. 2) Producers: Planning is the most important step in film production We had the opportunity to hear from Realies Pictures, which produced Masquerade and is currently producing With God (based on a NAVER webtoon). The firm emphasized that, from the perspective of film producers, planning is the most important step in film production. This includes budgeting, choosing a director, and casting; such choices are critical to a project’s reception by investors (who make investment decisions largely based on the lineup of actors, who, in turn, choose projects based largely on who the director is) and ultimately by consumers. Planning is all the more crucial to producers, as receiving their share of box-office revenue is contingent on sales exceeding the break-even point. Korean producers are keenly interested in the Chinese market. Currently, Chinese producers who are interested in hiring Korean directors and actors for their projects often contact them individually. However, to ensure equal and sustainable partnerships between Korean and Chinese producers, Realies Pictures thinks it would be better if efforts at cooperation involved comprehensive packages (story, director, production staff, and actors). In this sense, it is positive that distributors are seeking Korea-China co-productions. 3) Film investors: Investors have a greater role in China than in Korea Union Investment Partners, a venture capital firm that mainly invests in cultural content, offered useful insights into the structure of the Chinese film industry and co-productions. Most notably, the revenue and profit sharing ratios among stakeholders differ between the Korean and Chinese film industries. In Korea, box office revenue is shared equally by theaters and distributors, whereas in China, theaters take about 60%. Moreover, while investors and filmmakers share profits at around a 6:4 ratio in Korea, investors in China take a much bigger share, at around 80%. As Korean distributors have difficulty directly distributing films in the Chinese market, they often switch to investing to recognize profits. Indeed, Shanghai Yiheya Media Co. (CJ E&M’s wholly owned subsidiary in China) is an investment entity, and Showbox’s Chinese operations are also in the form of project investments. Korean film investors are now well aware of the need to improve their project packaging capabilities (story, staff, actors/actresses, investments, etc.) to advance deeper into the Chinese market. As part of such efforts, Union Investment Partners has invested in Bounty Hunters (a co-production involving a Korean director and Korean and Chinese actors) via its Global Content Fund no. 1. KDB Daewoo Securities Research 2 October 6, 2015 Film Content Policy makers’ perspective 1) Understanding the Chinese film industry The Korean Film Council shared insights from its effort to better understand the Chinese film industry, both quantitatively (market size and growth potential) and qualitatively (regulations and consumer preferences). China is the world’s only movie market that is showing explosive growth. It expanded 32% YoY last year, with total movie attendance of 830mn people (four times higher than Korea’s). Chinese films grossed RMB16.2bn (market share of 55%), and foreign films RMB13.5bn (45%). In terms of distributorship, state-run enterprises dominated the market, with China Film Group and Huaxia holding market shares of 33% and 23%, respectively. Given the tight regulations, the strong performances of foreign films are particularly impressive. China has an annual quota system restricting foreign movie imports to 34 titles a year on a revenue-sharing basis, and 30 titles that are purchased with a lump-sum payment without a revenue-sharing condition. Imported movies are mostly Hollywood films, and China is increasingly making investments in such movies, including Transformers: Age of Extinction (2014), Furious 7 (2015), and Mission: Impossible - Rogue Nation (2015). Of note, Monster Hunt , released in July, has become the highest-grossing film ever in China. Based on Strange Stories from a Chinese Studio, a collection of tales written in classical Chinese, Monster Hunt is a fantasy about a baby monster with a human father. The movie’s success stemmed in part from Chinese regulators’ designation of August as a “protective month” for domestic films, when foreign films typically are not shown. Fantasy and comedy films are popular with Chinese audiences, with Hollywood films dominating the fantasy segment and Chinese films driving the comedy segment. There have been few cases of other genres finding commercial success, largely because of the constraints on film producers in China. The absence of a movie rating system means that all movies must be eligible for all ages, and in addition, strict screening makes it difficult for producers to seek creativity and diversity. Furthermore, even highly anticipated films often fail to make a splash in China.