The China Film Group Corporation (CFGC), the country's largest state-owned movie producer and distributor, recently revived a plan to list part of its business on the Shanghai or Shenzhen stock market, with approximately 10 banks vying for underwriters for the group's initial public offering (IPO).

The group failed to win approval for a Hong Kong listing in 2004, although it made great efforts, which included inviting China International Capital Corp. Ltd. as its financial advisor, reshuffling its personnel structure, reforming its financial operation, and investing a large sum of money in the construction of a film production base in Huairou, a northern suburb of Beijing.

In order to promote structural reform and collect development funds, CFGC revived its IPO last August after it failed to make the Hong Kong list.

The new Board Chairman Han Sanping said that the Group needed to expand its development. Last month the Group successfully issued 500 million yuan (about $68.5 million) worth of enterprise bonds -- the first time a culture business in China extended its businesses to the capital market. Although the cash raised was not much, the company enjoyed being in the national limelight.

Showing its confidence in the Group, China Construction Bank has provided guarantee for the bond issue under the condition that CFGC doesn't provide a counter-guarantee. This is also the final guaranteed policy enforced by a bank for an enterprise -- the China Banking Regulatory Commission has thereafter issued rules and regulations, banning any bank from offering guarantees for enterprise bonds, in order to avoid risks.

Money raised from the newly issued bonds will be used to build a digital movie production base in Huairou, produce digital movies for filmgoers, and renew a few old film theatres.

However, the cash raised this time is still far less than the required total investment of 2 billion yuan (about $274 million) for the projects mentioned above. The future IPO is likely to raise over 2 billion yuan, according to a source in the Group.

The Group plans to invest 908 million yuan (about $124.38 million) to build the Huairou film base, which covers a total area of 140,000 square meters, with the first phase involving 34 hectares. The base will be built into a world-class garden-like film production house and a professional, modernized digital film production center. Principal photography on its first film -- Mei Lanfang, a biographical tale of the late grand master of Peking Opera, produced by renowned Chinese director Chen Kaige-- has already begun.

The Group's investment in the digital movie project is projected to reach 400 million yuan ($54.79 million). Digital Cinema Line Co. Ltd. under the Group has built 184 screen cinemas, and plans to increase the number to 1,000 by the end of 2008. The company has set up seven cinema lines, luring more than 400 cinemas -- comprising around 50 percent of the country's total box-office income -- to sign contracts with the Group.

The remaining 700 million ($96 million) is slated to go into the renovation of old cinemas, between 2005 and 2010.

In recent years, film businesses have been voicing their desire to go public. For instance, some private film producers are preparing to list their businesses in bourses.

Culture-related businesses share the characteristic of making net profits on a small scale. By the end of 2006, CFGC had total assets of 2.87 billion yuan ($393 million), comprising 1.7 billion yuan ($232.88 million) of net assets and 56 million yuan ($7.67 million) of net profits. Major revenues of the Group usually come from advertising, film distribution, selling of equipment, as well as developing and printing.

From 2004 to 2006, the company's income from major businesses stood at 1.38 billion yuan ($189 million), 1.37 billion yuan ($187.67 million) and 1.62 billion yuan ($221.91 million) respectively. Advertising income took the lead, accounting for a large and stable proportion of around 50 percent of this income, for three consecutive years. Film distribution, accounting for 25 percent -- 407.5 million yuan ($55.82 million) -- ranked second. Income from equipment selling and agent services stood at 12.59 percent, and that from developing and printing operations at 3.44 percent.

There is much conjecture among people in other fields, regarding the kinds of assets that will be packaged when the Group goes public, given that it had planned to include its high-quality CCTV-6 asset in 2004, on the Hong Kong stock market.

Since that failure, the government issued policies which stipulated that some businesses, including TV and broadcast channels, businesses with film import rights and film co-production companies, were not allowed to go public. As a result, apart from film distribution, CCTV-6 and the China Film Co-Production Corporation cannot be listed.

In terms of the film distribution market, both CFGC and Huaxia Film Distribution Co. Ltd. (established on August 8, 2003) have the right to distribute imported films. Of the 1.62 billion yuan ($221.91 million) of China's total income from the box office in 2006, imported films accounted for 45 percent -- 1.18 billion yuan ($161.64 million) -- and CFGC earned more than 200 million yuan ($27.4 million) from movie returns.

CFGC is thus the new vanguard for the film industry as it marches toward the capital market.

(Source: 21st Century Business Herald and north.com.cn, Tianjin)