Deal focus: CDIB finds media consumption proxy

China's film industry endured a difficult 2018. The mysterious four-month disappearance and reappearance of Bingbing Fan, once the country's highest-paid movie star, overshadowed new releases. Fan was accused of tax evasion and had to pay back $100 million. Several other tycoons were subsequently hit with back tax bills amounting to $1.7 billion. Meanwhile, the government has tightened its grip on the industry, imposing a cap on actors' salaries and urging people to engage in "self-examination and correction".

But the crackdown has not deterred all investors. CDIB Capital International, the private equity arm of China Development Financial, is among those that remain bullish. The firm recently bought a significant minority stake in VHQ China, a post-production and visual-effects provider for domestic movies and TV series. VHQ, which has 400 staff, was established in 2013 under Taiwan-listed VHQ Media Holdings, Asia's largest post-production house with a 30-year track record across movies, TV, and commercials.

"We need to distinguish between content generation companies and service providers like VHQ. The 2018 enforcement activities mainly targeted studios and individual principals on the ‘content' side. Like many other areas, we believe China welcomes the use of more technology to improve its overall competitiveness in the special effects space, and we believe this situation actually has increased opportunities for VHQ in China," says Hamilton Tang, a managing director at CDIB Capital. " 

At present, actors' salaries account for around half of the average Chinese movie production budget, compared to 20% in the US. The hope is that Beijing's attempts to rein in compensation could see more dollars flow into visual effects and post-production. As one of the largest and most profitable post-production houses in a fragmented market, VHQ China stands to benefit, Tang explains. 

In addition, the company differentiates itself from the competition by focusing on Chinese productions. While some of its rivals are happy to take outsourced production work – a lot of it from Hollywood studios – VHQ sources projects directly from Chinese directors. These individuals have the power to recommend or even decide which post-production house is used.

"The profit margins for outsourced works are quite low. In contrast, VHQ China does projects almost entirely on its own and thus controls the quality and resources deployed, helping it to enjoy solid margins. In general, the company delivers works that are on par with its Hollywood peers but with a price that is appropriate for China market," says Tang.

Future growth will come from rising viewer numbers for internet TV dramas, which will drive demand for content. Consumer spending on movies is also set to increase, in part due to special effects-heavy local productions. VHQ China wants to consolidate its market position ahead of a Hong Kong IPO in the next few years.   

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Expansion
• Media
• China
• CDIB Capital
• Growth capital