The hangover for STX will be dealing with the U. S.-China cultural divide.
Here’s one Hollywood production that looks destined to be a hit with a Chinese audience. STX Entertainment has filed for a Hong Kong initial public offering, seeking to become the first studio to list outside the U. S. in a deal that could raise $500 million.
It makes sense for the Burbank, California-based filmmaker and distributor to raise funds in Asia, given its slate of Chinese owners and the mainland market’s box-office potential. Backers include Tencent Holdings Ltd., Hony Capital and Hong Kong billionaire Richard Li’s PCCW Ltd. TPG is among other key STX investors.
The studio behind “Bad Moms” competes in the mid-budget movie space, where productions cost roughly $20 million to $80 million, alongside rivals such as Lions Gate Entertainment Corp., maker of the “Hunger Games” franchise. STX is among the biggest independent U. S. studios outside of the six majors that include Walt Disney Co. and Sony Pictures Entertainment Inc.
Its timing couldn’t have been better. China’s box office is on a tear after a slump last year, while Hong Kong’s IPO market is heating up amid a series of keenly anticipated technology offerings. STX will be the first American firm in years to list in the city.
STX is counting on making movies that appeal both to Chinese and American audiences, which combined make up almost half of global box-office takings. China is poised to become the largest market by 2021: Ticket sales there are growing at a 17.1 percent compound annual rate, versus 3.5 percent in the U. S., according to research firm Frost & Sullivan.
By co-producing films with Chinese studios, STX hopes to capture more of that growth. Joint productions aren’t subject to a quota of 34 films a year that the government imposes on Hollywood movies screened in China. STX is currently producing movies with Tencent and another Chinese internet giant, Alibaba Group Holding Ltd.
Considering the market potential, STX’s money-losing status shouldn’t worry investors in Hong Kong, where unprofitable tech firms are having no problems generating interest in their IPOs. STX posted a gross loss of $28.1 million in the three months through December and said it expects to remain in the red for its fiscal year ending Sept. 30.
To some extent, the losses reflect the nature of the movie business: Studios tend to be unprofitable in the early days, booking the bulk of their expenses when films are released and revenue is only starting to come in. The bigger challenge for STX is to make movies that win over the Chinese market while keeping the still-crucial U. S. audience happy. Bridging that cultural divide may be easier said than done.
A China theme, big-name actors and a lavish production budget are no guarantee of success – as the makers of „The Great Wall“ found. The film, starring Matt Damon, was produced by Legendary Entertainment, a division of billionaire Wang Jianlin’s Dalian Wanda Group Co. It made $171 million in China and a mere $46 million in North America, barely covering the costs of a production billed as one of the mainland’s most expensive ever.
STX’s “The Foreigner,” starring Jackie Chan, took in $145 million globally, but its $81 million of China revenue dwarfed the $34 million in box-office receipts in North America.
Censorship doesn’t help. Chinese authorities prohibit a wide range of subject matters, including those that portray „superstition, defamation, promotion of obscenity, gambling or violence and damage to social order, stability, social morality or cultural traditions,“ according to STX’s prospectus.
The company clearly knows how to appeal to moviegoers, to judge by its biggest hit. “Bad Moms,” a comedy and sequel about three over-stressed mothers who go on a wild drinking binge, grossed $300 million worldwide.
The formula wasn’t much help in China, though: “Bad Moms” wasn’t shown there.
To contact the author of this story: Nisha Gopalan at ngopalan3@bloomberg.net
To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net
