An increasingly intense focus on domestic pics, sharply rising B.O. receipts in China and state approval means CFG -- the biggest importer and the dominant force in domestic production and exhibition -- is poised to become even stronger.

And yet, and yet. The legislative minefield surrounding foreign investment in the Chinese film biz, combined with a niggling suspicion that foreigners do not get a fair shake of the stick in the booming Chinese market, may lead some investors to hold back when, and if, China Film heads toward the bourse.

CFG topper Han Sanping makes no secret of his ambitions to give the company the extra financial muscle it needs to provide better domestic product and also boost the performance of Chinese movies abroad.

"We want the Chinese film industry to be of the same importance as its Internet and telecommunications industries, which play an important role in the world" is his stated aim.

The Chinese film biz is certainly on a roll. China's B.O. surged 27% last year to $450 million. Two of 2007's top-grossing films, "The Warlords" and "Assembly," were Chinese co-productions, and Chinese films brought in $273 million from overseas sales last year, according to data from the State Administration of Radio, Film and Television (SARFT).

Meanwhile, foreign, mostly U.S., pics constituted 46% of China's B.O. in 2007. Hollywood movies made $158 million in China, up 38% from the 2006 total. Chinese B.O. for "Transformers" was a boffo $38 million, making it the fourth-largest market in the world for "Transformers" after the U.S., South Korea and the U.K.

Han is confident the Chinese market will see annual growth of 30% over the next five to eight years, which indicates a market worth $1.3 billion by the end of 2011 if his predictions hold. A lot is riding on next year's slate, which includes Chen Kaige's "Mei Lanfang," the John Woo blockbuster "Red Cliff" and "Nanking! Nanking!"

The state-owned corporation's tentacles extend into every area of the biz, from production to distribution, importing foreign films and exhibition. It has the money, it owns the facilities, it reps most of the talent, and it has a big say in deciding what movies get made, either as stand-alone pics or as co-productions.

CFG controls the Beijing and China Children's film studios, and it operates seven circuits with 400 theaters, which constitute about half the country's total B.O.

Naturally, it is the country's largest film distributor, has the country's sole film import license and controls national movie channel CCTV-6.

The group itself was established in 1999 after the State Council merged several state-owned film companies, including Beijing Film Studio and China Film Equipment Corp., into one entity.

CFG also benefits from a policy of favoring domestic movies over foreign pics for distribution during blackout periods at various times of the year, such as Chinese New Year and the National Day holiday. The blackout periods mean Chinese films do not have to compete with Hollywood blockbusters.

Han is an avowed nationalist, urging local filmmakers to make more patriotic and "ethically inspiring" movies and does not accept criticism of China, the Communist Party or his group.

When Han revealed in August that the group was planning a public offering, 10 investment banks bid to act as underwriters for the IPO, despite a failed 2005 plan for a partial listing in Hong Kong.

This time around, the stage is set for it to become China's first listed film company. In January, SARFT gave its blessing to the IPO plan, and it is expected to happen before the end of the year, once the go-ahead from the China Securities Regulatory Commission is in place.

The amount CFG will seek to raise is not clear. However, step one was a seven-year secured bond as the basis of a fund worth 500 million yuan ($68 million). That made CFG the first Chinese firm in the biz to issue corporate paper.

This war chest will allow it to complete the construction of a digital movie production base in Huairou, a northern suburb of Beijing. The facility, when completed, will cover 84 acres and cost $127 million. One of the first projects at the Huairou base is Chen's "Mei Lanfang," a biopic of the legendary Peking Opera star.

China has lagged on the exhibition front, and many cinemas are in sore need of refurbishing and updating to new technologies; $98 million will be used for renovation of facilities, an ongoing process that will run until 2010.

Many companies are now busy building multiplexes around the country, including U.S. niche player Imax, which signed a deal Jan. 10 to install 10 Imax screens in China. It expects to have one or two ready by the fall and plans to have 40 screens in China by 2012.

The first three screens will use Imax's lower-cost MPX theater technology, with the remaining seven employing its new digital projection technology, and any screens rolled out after 2009 will use digital tech.

Big cities like Shanghai, Beijing, Chongqing and Guangzhou have already seen the arrival of plush multiplexes, but the second-tier market is still largely untapped.

Warner Bros. dipped its toe in this market but withdrew after legislative changes made it impossible for Warners to operate in China. Those same rule changes benefited local companies, and Han is keen to exploit the possibilities that expanding the exhibition network has to offer.

China Film's digital exhibition unit Digital Cinema Line can already boast 184 screens and plans to increase the number to 1,000 by the end of 2008. The digital movie project will account for $56 million of the funds raised.

The big revenue streams for China Film are advertising and distribution, accounting for one-half and one-quarter of income respectively. The rest comes from equipment sales and developing and printing film, agency services and production.

The group will face restrictions on what parts of its business it can include in the IPO. The Chinese government will not want any broadcasting assets to go into foreign hands, so the TV business, including the CCTV movie channel, is unlikely to be part of the package.

This could provide a challenge for China Film when it does stage the IPO: how to convince foreign investors that they will be able to have more than a symbolic stake in the Chinese film biz.

HONG KONG FILMART
When: March 17-20
Where: HK Convention and Exhibition Center Runs concurrently with Hong Kong-Asia Film Financing Forum (March 17-19)
Web: hkfilmart.com/filmart/ & haf.org.hk/haf/

© Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.

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