Case Huayi Brothers: Strategic transformation

CASE 12
12 By Professors Jie Li and Jean-Louis Schaan

I n March 2015, Huayi Brothers Media

Corporation (Huayi) was China’s most influential
entertainment company with 2014 revenues of close
or not? If yes, what was the best strategy to move
forward with the impending partnership and grow
internationally outside of China?
to ¥2.4 billion.1 Founded in 1994 by brothers Dennis,
(chairman and chief executive officer (CEO)) and
James (president) Wang, the company’s historic roots The film and entertainment
were in movie production as the owner, producer and
distributor of some of China’s most popular film and
industry in China
television (TV) productions, including “Cell Phone,” The Chinese film and entertainment industry had
“Assembly” and “Aftershock.” In recent years, in an come a long way since 2004 from a full state
effort to leverage its movie content and copyrights, monopoly to a small number of large, highly visible
Huayi had also expanded into developing and private media conglomerates with the size, strength
distributing mobile games and building entertainment and commercial success to rival Hollywood. It
theme parks in Asia. primarily consisted of producers and distributors of
Huayi considered forging a partnership with a range of entertainment formats, such as movies
Hollywood’s STX Entertainment to jointly invest and music. The industry had experienced sustainable
in and co-produce 18 films and distribute them growth over the 2004 to 2014 period and continued
worldwide by December 31, 2017. Huayi would to show strong upside potential in the medium term.
share in the global revenue from the cooperatively In 2014, the industry posted revenues of $4,878.3
produced films and have distribution rights for million, representing a compound annual growth
Greater China (mainland China, Hong Kong, rate (CAGR) of 30.3 per cent between 2010 and
Macau, Taiwan and Singapore). The impending 2014. This number was forecast to decelerate to 18.6
move would represent a significant step in its per cent over 2014 to 2019, to a value of $11,449.7
growth towards internationalization and leveraging million by the end of 2019.2
its proprietary content globally across all areas of The media industry in China as a whole, which
the entertainment sector—visual entertainment, the included advertising, broadcasting and cable TV,
Internet and gaming. However, some in the industry publishing, movies and entertainment, grew by
were skeptical that Huayi could succeed after three 7.3 per cent with $90.4 billion in revenues and was
previous failed attempts with other US companies. expected to reach $162.1 billion by the end of 2019,
The past failures were attributed to Chairman Dennis or an anticipated CAGR of 18.6 per cent over 2014
Wang’s overly cautious nature and desire to have to 2019. 3 The film, Internet and mobile gaming
controlling interest. segments represented the most lucrative segments of
The Huayi chairman wondered how to best grow the Chinese entertainment industry. The film sector
his film and entertainment company internationally. alone accounted for 94.6 per cent of the market’s
Should the company enter into partnership with STX overall value. China’s box office was roughly

Professors Jie Li (Antai College of Economics & Management, Shanghai Jiao Tong University) and Jean-Louis Schaan wrote this case solely to
provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The
authors may have disguised certain names and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of
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Distributed by The Case Centre www.thecasecentre.org All rights reserved
Copyright © 2015, Antai College of Economics and Management and Ivey Business School Foundation Version: 2018-03-06

815
816 SECTION V CASES

10 per cent of global box office revenues. 4 The value commercialization in the industry, film production
of China’s box office was expected to surpass that of in China was widely construed as a component of
the United States by 2019.5 the overall commercial production chain rather than
a creative endeavour in its own right. In most cases,
Key growth drivers box office receipts only accounted for a moderate
fraction of total income, with the remainder coming
The ex plosive gr owt h in Chi na’s fil m a nd from commercial spinoffs such as advertising and
entertainment market was driven by three key merchandising. The drive towards maximizing
factors: growing disposable income per capita, the reach and impact through novel and profitable
which reached ¥28,844 in 20146 from ¥11,759.5 in distribution channels pushed large industry players
2006;7 broad-based government support in the form towards vertical and horizontal integration. The
of training and financial subsidies; and the expanded industry began merging film production and
wireless broadband access, which facilitated new distribution and intensifying its access to various
media adoption. The immense size and diversity of commercial channels including TV production, TV
the Chinese market also created substantial room channel management, audio/video (especially DVD)
for differentiation in terms of genre and content. production, talent management and advertising.
Entertainment companies had been more inclined to There was significant competition in the pre-
focus on more mature markets in China’s high tier production phase for financial capital and talent
coastal cities due to their higher rates of technology (particularly for renowned film directors and movie
adoption and stronger receptiveness to foreign actors, important sources of differentiation).
culture. However, many were seeking new ways to The concentration of profits to just the few
reach lower tier cities in the more inland regions largest players was attributed to the high capital
where entertainment spending was growing most requirements of commercial big budget films, which
rapidly. Despite the Chinese government’s quotas, still remained the most profitable type of film project.
imported foreign films, with box office revenues Only the largest players with deep experience in the
exceeding ¥13.2 billion in 2014, up by 51.9 industry were able to amass the requisite level of
per cent from 2013, accounted for a significant capital, use their brand reputation to attract top-notch
fraction of overall demand. In order to alleviate talent and adapt to the rapid pace of technological
domestic competitive pressures, Chinese companies change. In contrast, small to medium-sized firms,
sought to diversify their customer base by exporting which composed the majority of industry players,
movies (2.7 per cent of total industry revenue in lacked the advantages of scale and were limited to
2014, or $156.9 million).8 producing one to two budget films a year. Despite the
promises of technological advancements and mobile
Industry characteristics platforms, which would encourage new entrants into
the industry, the industry concentration was expected
The Chinese film and entertainment industry
to intensify as major companies continued to gain in
was fraught with high risks and uncertainty, with
scale to feed larger production budgets and produce
competing yet complementary relationships between
higher quality movies to cater to an international
a small number of state and privately run media
audience.
conglomerates. There was intense rivalry between
private players, particularly large companies. In
2015, China Film Group Corporation (government- Major industry trends
owned), Bona Film Group, Huayi and Beijing Intra- and international growth The Chinese
Enlight Group accounted for 47.7 per cent of total entertainment industry was positioned to trend in
industry revenue. 9 They operated under similar two directions. On the one hand, the presence of
business models while competing across broad companies in Hong Kong, Taiwan and (South) Korea
swaths of the media sector including movies, music, that were already in the co-production business
the Internet and TV. with China were expected to continue to support a
Companies competed aggressively in the booming regional film market. On the other hand, the
distribution of creative content and constantly sought industry was becoming a major recipient and source
to strengthen their commercial horsepower to reach of foreign direct investment. This was evidenced
a wider set of audiences. Due to the importance of by the fact that several notable US companies such
 CASE 12 HUAYI BROTHERS: STRATEGIC TRANSFORMATION 817

as Warner Bros. Entertainment and DreamWorks Two main factors drove the continual rise of
Animation had recently forged joint ventures (JVs) mobility in the entertainment industry. First was
with major Chinese media companies to distribute the sizable number of young, affluent and well-
and produce content in China.10 Foreign filmmakers educated consumers as a share of all Chinese media
benefited from co-producing as opposed to importing consumers. In 2014, 87 per cent of China’s film
films as it allowed them to retain a much larger share audiences were between the ages of 19 and 40, and
of box office profits. 50 per cent were aged from 19 to 30.19 The lower
The deals were also increasingly going in the costs of distribution through online platforms also
other direction. The formation of co-production encouraged the entry of new content creators. This
agreements with US companies had been popular with was particularly true of producers of independent
the Chinese as it facilitated the transmission of film niche films, an increasingly popular film genre among
production expertise and market know-how from their young moviegoers. Another important catalyst of
more experienced US counterparts and supported the this trend was the improvement of China’s network
broader objective of raising China’s cultural profile infrastructure towards a wider reach, expanded
internationally. In 2012, Wanda Group bought AMC capabilities and faster speed. The government’s plan
(a US theatre chain); 11 in 2014, Tencent entered to modernize its infrastructure entailed the merger of
an exclusive partnership with HBO 12 for China telecom, broadcast and Internet on a single platform
distribution and Hony Capital invested in STX; 13 to deliver voice, data and video content. According
and in 2015, Hunan TV partnered with Lions Gate to one estimate, this was slated to create $250
Entertainment,14 DMG Entertainment partnered with billion in demand for entertainment content such
Valiant Comics15 and Fosun partnered with Studio 8.16 as TV Internet subscription, video on demand and
interactive services.20
Rise of mobility The convergence of mobile
Public private partnerships While the Chinese
and media in China was rapidly accelerating. The
entertainment industry looked vastly different than
Chinese market had grown immensely in both
scale and technological sophistication. Despite low what it had been under state monopoly just a few
Internet penetration by developed country standards, decades earlier, the government continued to wield
the Chinese were avid digital consumers and led the control through several policy levers. Consequently,
world in many areas of technology adoption, mobile private companies still found it beneficial to retain
device usage and percentage of homes with smart political and social capital in the government,
particularly when navigating stringent Chinese
TVs.17 On-demand streaming video was a proven and
censorship laws. Recognizing their common interest
robust distribution model in the country—according
in leveraging media to maximize China’s global
to China Internet Network Information Center, more
influence, the state and private sector had reshaped
than 461 million people in China streamed videos
their interaction from one that had been top-down
online.18
in structure to mutually beneficial partnerships. For
Many entertainment companies were entering
instance, the state had committed to improve access
the mobile space as it not only provided a lucrative
to financing through its state-run banks, created
distribution channel for content, but also enabled
private equity funds dedicated to the cultural sector
the delivery of a wider range of entertainment
formats, such as online gaming, social networks and even loosened restrictions on foreign capital
and learning. As the shift of media consumption inflows into the entertainment industry.21
to online accelerated, TV and film companies that Wanda Dalian, the world’s largest owner of
lacked a digital distribution platform could run theatre chains, recently partnered with a municipal
a substantial risk of being edged out by mobile government to construct a production facility that
aspired to be the “Hollywood of China.”22
substitutes. Many large Internet companies such as
Alibaba, Baidu and Tencent had taken advantage of
shifting trends towards online media consumption Huayi’s strategic evolution and
by establishing film and production departments and
making strategic acquisitions. These companies had
diversification
relied on advertising as their main source of revenue Huayi was created by brothers Wang Zhongjun
but were pursuing new monetization models to offer (Dennis Wang) and Wang Zhonglei (James Wang)
differentiated value. in 1994 when they founded the Huayi Advertising
818 SECTION V CASES

Company in Beijing. Within four years, the brothers marketing company together with mobile app
had developed a successful advertising business developers. Put these two teams together so they
and were intrigued by the prospects offered by the can do more film distribution on the Internet. For
emerging Chinese film industry. The firm was one us, it is not innovation, it is not high technology.
of the early entrants in the industry when in 1998 it We are trying to bring together people who used
produced a TV series that it sold through an innovative to be separated, couldn’t understand each other,
mechanism. Because China’s TV stations were state- and encourage them to create working platform
owned enterprises, they were not allowed to negotiate across products and channels.
cash payment for the series. Payment was made in the
Generations born in the 1990s, now in their 20s,
form of advertising that Huayi sold to its clients, the
who had grown up on mobile devices, were not big
proceeds of which helped finance its next productions.
consumers of newspapers, magazines or even TV.
Building on successful box office productions,
The convergence between movies, games and talent
in 2000 Huayi formed a 50–50 JV with Taihe Film
on the Internet—and how to best capture revenue
Investment Co. (Taihe). Over time, this arrangement
from the interaction between these products—was
showed strains in decision making, so Huayi bought
the company’s biggest challenge. Huayi started
enough of Taihe’s shares to take a majority stake
exploring and developing different celebrity
in the JV. With greater control, Huayi was able to
promotional products to build a social networking
engage in film co-production with Columbia Pictures
presence over the next five to 10 years. An online
Corp. Through this collaboration and the ensuing
ticketing company was also started to capture revenue
opportunity for brand marketing, Huayi became a
from consumer transactions. However, pinpointing
bona fide film production company in China. But
which new venture deserved the company’s greatest
by 2004, disagreements among the partners about
attention was unclear. Said Dennis Wang:
distribution of benefits ended the collaboration.
Huayi continued on its successful trajectory with There are lots of uncertainties in China’s
hits such as “A World of Thieves” and continued entertainment industry. You can think five years
to attract investors. TOM Group helped the Wang ahead, but it would be hard to predict [what the
brothers buy back the 45 per cent of the equity future will look like in] 10 years as there may
still owned by Taihe, bringing the Huayi brothers’ be transformative changes in this industry. In
ownership to 70 per cent. In 2005, Dennis Wang the past five years, we’ve focused on our core
sold 15 per cent of Huayi to Jack Ma, chairman of business—Visual Entertainment. However, I
Alibaba, and bought back 20 per cent of TOM’s would like Huayi to go international in the future.
shares.
Huayi became China’s first official “movie stock”
The year 2005 was a defining one for the company,
when it went public on October 30, 2009 on the
as it did not release any movies. One of the reasons
Growth Enterprise Market of the Shenzhen Stock
was that Huayi’s star director, Feng Xiaogang, was
Exchange. The company made world news when its
shooting “The Banquet,” a blockbuster that required
stock closing price of ¥70.81 more than doubled its
more than a year to complete. Confronted with the
initial public offering (IPO) opening price. Huayi
financial risk inherent to the industry, management
raised ¥1.2 billion. Dennis Wang’s 26 per cent
decided to expand its Visual Entertainment division
share in the company put him on Forbes China’s
into TV drama production and talent management.
“Rich List”—he was ranked at 142 in 2013, with an
Huayi also diversified further by moving in two new
estimated wealth of $1.1 billion.23
directions—one was the tourist and entertainment
With a stronger financial position and facing
property business, the other was exploring the Internet
increasing competition and risks, Dennis Wang and
for distribution and games. Huayi was no longer
his team explored a number of potential business
satisfied to be just a creative studio. It was the first
models including Warner Brothers and Disney. Profit-
time the company thought about developing a future
hungry investors had recently begun to swarm film and
growth strategy to look for crossover opportunities.
TV production, where large Internet companies such
Said Chief Financial Officer (CFO) Brenda Hu:
as Baidu, Alibaba and Tencent had set up film and
We wanted to bring together different fields production departments. In 2005, about 100 movie
which used to be separated and try to integrate investors were in operation, whereas in 2015 there
them. For example, we are trying to bring a film were more than 1500.24 With increasing competition
 CASE 12 HUAYI BROTHERS: STRATEGIC TRANSFORMATION 819

on the content side of the entertainment business in first 10 years, it grew to second in terms of national
China, Huayi looked for an opportunity to expand market share, generating revenues of ¥518 million in
on the channel side in order to monetize its content. 2013. Its TV shows totaled 700 episodes, amounting
By 2015, the company was invested in three major to 600 hours of on-air programming each year, with
businesses: Visual Entertainment, which represented such titles as “My Son is Wonderful,” “Husband and
50 per cent of revenues; Live Entertainment, Wife” and “Without Thieves.” By the end of 2011, the
20 per cent; and Internet Entertainment, 30 per cent company had developed a sophisticated production
The three businesses contributed almost equally to studio network of 12 studios. The company also built
profits. Each is further summarized below. and operated 15 cinemas in major urban centres such
as Beijing, Shanghai and Shenzhen.
Visual Entertainment
This business included films, TV shows, talent Live Entertainment
management, Music, cinemas and entertainment
The second business included film towns, cultural
marketing. Huayi was the owner, producer and
parks and movie theme parks. In 2011, Huayi
distributor of some of China’s most popular film
announced plans to develop nearly 20 small live
and TV productions. It had established its brand for
entertainment film towns (themed real estate)
high-quality commercial entertainment. Many of its nationwide by the end of the decade. Modeled
films were recognized at prestigious events such as after Disney, the towns were designed to “bring
the Hong Kong Film Awards, the Golden Horseshoe memories and the silver screen to life” through
Awards, the Huabiao Awards, the Golden Rooster and recreating familiar scenes from the company’s most
Hundred Flowers Awards. The company’s primary popular movies as a backdrop for commercial shops,
focus on content generation differentiated it as China’s
restaurants and hotels. The company’s location-based
most original TV and film industry brand, with
entertainment (LBE) business model was to work
the nation’s largest and most varied entertainment
with developers who bore the financial responsibility
portfolio. Its business vision was to become Asia’s
for planning and constructing the properties. Huayi
largest integrated entertainment group and generate
then shared in the profits by collecting licensing
greater global respect for China through film.
fees. Said Dennis Wang: “Right now, all big cities
Visual Entertainment, including film, TV drama,
in China look very much alike. But if we can build
music, cinemas, a talent agency brokerage and other
a movie commune near Beijing, or recreate a small
related businesses, had been the company’s major
town of 100 years ago, young people will love it.”
source of operations revenue and profit since its launch The first of three, which opened in 2013, was the
in 1998. In 2012, box office receipts exceeded ¥100 “Huayi Brothers Culture City,” a ¥$1 billion ($152
million and had combined revenue of approximately million) fully functional indoor studio complex in
¥2.1 billion, setting a record that year for privately Shanghai, incorporating studio tours and rides. It was
owned film production. By 2013, box office revenues followed by “Huayi Brothers Movie World,” a major
were in excess of ¥$3 billion and by 2015 accounted theme park initiative focusing exclusively on Huayi
for 15 per cent of the domestic market share and 25
film content. The third “Huayi Brothers Film Studio”
to 30 per cent of the market share for Chinese-made
opened in the Shanghai suburb of Suzhou in June
films. At the beginning of 2015, Huayi had produced
2014. It featured backdrops from the movies “Back
75 films with total box office receipts of ¥9.2 billion.
to 1942,” “Aftershock” and “If You Are the One” and
Plans for 2014/15 were to produce 32 films, with a
received more than 10,000 visitors on its first day. The
box office target of ¥10 billion.
fourth, “Feng Xiaogang’s Movie Commune,” named
Huayi’s move towards diversification began in
after Huayi’s famous director, opened in spring 2015 in
2000. The company launched an entertainment talent
Haikou, the capital city of Hainan Province. Said Hu:
brokerage and quickly grew to represent 300 artists,
100 of whom were considered “A list” emerging It works out very well. Tourists and consumers
stars in movies, TV and music, making it China’s like sound stages because it makes them
leading talent agency. A music division followed in feel very close to the movie industry and to
2004, covering artist packaging, album production, celebrities. We can attract both tourists and
music videos, concerts and live performance events. also retailers. And also, the construction is
In 2005, Huayi started its TV division. Within the very quick. It’s not the same kind of theme park
820 SECTION V CASES

as Disneyland or Universal Studios, but I think company’s first-quarter revenue and was also the
it will work out better here in China. We can fastest growing. Revenue from Internet Entertainment
expand very quickly. in the first half of 2015 was expected to be close to
that of Visual Entertainment.

Internet Entertainment Internationalization

The third business included games, new media, fan During the first three quarters of 2014, the rapid
economy and online distribution. In an effort to growth of Huayi’s Internet Entertainment revenues
break down the boundaries between film and other helped cushion a steep drop in the company’s Visual
potential media revenue streams, Huayi became Entertainment revenues by 75 per cent. During that
the first company in the industry to venture into year, Huayi released only six films and did not have a
the mobile games business. Many Chinese people major blockbuster. It was the first time the company’s
accessed entertainment content via their cell phones core revenue stream had declined considerably in
or tablets, and the company recognized the need to almost 10 years. Such was not the case, however,
expand its presence in mobile. Visual Entertainment with the health of China’s overall film industry.
was still the company’s main source of content and While film revenues inched up globally by only 1
revenue, but games were similar to films in terms of per cent in 2014, in China they increased 34 per cent,
content creation and generating integration potential. to $4.8 billion, a global box office record, according
The vision was to turn mobile games into films, and to the Motion Picture Association of America. In
vice versa. 2013 alone, China added more movie screens than
In 2010, the company invested ¥149 million to the total for France.25
purchase 22 per cent of the shares of mobile game There was indeed promising box office potential
company Ourpalm, becoming its second largest at home, but it still relied heavily on acquiring
shareholder. In May 2012, Ourpalm went public as much needed and missing talent—not just movie
the first listed company in mobile gaming, and stock stars, but experienced directors, producers and
held by Huayi reached the value of ¥1.5 billion. In distributors. After many years of state ownership,
the same year, in order to expand its presence in China’s independent film industry was still relatively
the gaming sector, Huayi invested ¥70 million to in its infancy, only 10 to 15 years old. Huayi needed
purchase 51 per cent of the stock of Giant Interactive to look further afield and leverage the much more
Group and set up Huayi Giant Company to step into experienced, mature US talent pool in Hollywood to
client-end gaming. However, the acquisition turned make its movie magic.
out to be unsuccessful as the new company failed to Dennis Wang began to search for international
meet its profit goal. investment opportunities, particularly in Hollywood
In 2013, Huayi spent ¥670 million on the purchase but also Europe, to collaborate on the financing,
of 50.88 per cent of the stock of Yinhan Technology production and distribution of movies on a global
(Yinhan), becoming its controlling shareholder. The scale. The aim was primarily to find solid US
two companies’ corporate cultures were a good partners with strong production capabilities who
match, and they worked together to coordinate on were looking to establish a foothold to distribute
celebrity endorsements, movie marketing and other films in the growing Chinese market. Huayi would
businesses. Yinhan’s “Space Hunter” was the first invest and participate in co-producing US films and
domestic mobile game with monthly turnover of handle marketing and distribution in China. Said
over ¥100 million, while another game, “Shenmo,” Dennis Wang: “I think the basic philosophy we had
launched in November 2013, reached a monthly in going to Hollywood and Europe is that we wanted
turnover of ¥50 million. Within just the first half of to [access] their product, their technology or their
2014, Yinhan games had achieved a turnover of ¥800 know-how and pull it in to China. We’re not trying to
million. These numbers surpassed Chairman Wang’s sell in those foreign markets, because we feel it’s not
most optimistic expectations. realistic. That takes time.”
In the first quarter of 2015, Huayi’s Internet Huayi started its Hollywood journey by co-
Entertainment generated more than ¥410 million, financing movies. However, the move towards greater
accounting for 66.65 per cent of total revenue. The internationalization was not without its challenges
division accounted for the biggest portion of the and false starts. A first attempt at partnering with
 CASE 12 HUAYI BROTHERS: STRATEGIC TRANSFORMATION 821

Legendary Entertainment fell through in 2013. In STX had avoided the traditional distribution
2014, the company pulled out of talks with Lions process and signed direct long-term distribution
Gate Entertainment when it announced that it had agreements with the four largest theatre chains
agreed to invest as much as $150 million in Studio 8, in the United States, i.e., Regal Cinemas, AMC,
the production company launched by former Warner Cinemark and Carmike. In January 2015, the
Brothers executive Jeff Robinov. But the partnership company also signed an exclusive agreement with
never materialized because Dennis Wang decided Showtime Networks, under which it was allowed
at the eleventh hour to terminate negotiations. In to exclusively exhibit all films distributed in
all three cases, termination was motivated by a theatre chains on channels including Showtime,
cautious approach to investment. The Shanghai-based Flix and The Movie Channel. The company was
conglomerate Fosun International later signed a deal also rapidly expanding into digital production,
to invest in Robinov’s company, while Lions Gate distribution and the mobile game business and
entered into a partnership with Hunan TV.26 was the first mainstream film and TV company in
In 2014, the company changed its approach and Hollywood to have such a broad presence in nearly
invested $130 million to establish a wholly owned 20 years.
US subsidiary to produce and distribute movies and If Huayi and STX proceeded with the proposed
TV shows. Said Dennis Wang: “I think in the future, partnership, both parties would jointly invest in,
if we find the right target . . . we would like to have shoot and distribute no fewer than 18 cooperative
a controlling stake. We would control the operation, films internationally over the next three years. This
and we would prefer to have the management team was the first time that a Chinese company would
have a minority interest in the business.” That same participate in all activities in the value chain from
year he found a new possibility: Hollywood’s recent production to marketing and distribution. Although
upstart, STX Entertainment (STX). the specific financial terms of the deal were not made
public, the new arrangement would enable STX to
spend approximately $1 billion each year producing
and distributing its films through 2017 and give the
The STX deal company a foothold in China’s rapidly growing film
Founded in spring 2014, Burbank-based STX was a market.
fully integrated film and TV company specializing In return, the deal would help Huayi promote
in producing, marketing and distributing film, TV its brand globally, obtain access to the Hollywood
and digital content. The company was financially film industry and participate in all segments from
backed by private investment firm TPG Capital, film financing to production and distribution. Huayi
which managed $65 billion in assets and produced would partner on nearly every title STX studios
films with low- to mid-level budgets of $20 million produced and be granted first rights to distribute STX
to $60 million. Other investors included Chinese films in China where the Wang brothers’ reach and
private equity company Hony Capital, hedge fund connectivity was far greater than the US studio’s.
SeerCapital, Gigi Pritzker, JPMorgan Chase and Not all films were expected to be appropriate for
Bank of America, Merrill Lynch. 27 Recent movie the Chinese market, but they would qualify as
credits included such well-known titles as “The co-productions and therefore have easier access to
Wedding Singer” and “Happy Gilmore.” Its output the market through the government quotas than 100
was limited to eight to 10 films per year. Led by Bob per cent foreign films. The impending partnership
Simonds, STX rapidly attracted a wealth of elite talent would leverage each company’s strengths to expand
from Disney, Warner Brothers, Sony, Universal, Fox, their combined global reach.
Metro-Goldwyn-Mayer, DreamWorks, Paramount The idea for the STX partnership came from
and DreamWorks Animation. It was dedicated to Donald Tang who had close and long-standing
creating high-quality mainstream commercial films relationships in the entertainment business in both
(low and medium budget) for global audiences. The China and the United States, in particular with
goal of the company was to become a major studio Simonds and the Wang brothers whom he had known
and compete with Sony and Universal. Simonds was for over 20 years. He also was a personal friend of
convinced that if he wanted to succeed in this regard Dominic Ng, CEO of East West Bank, which was
he needed to have a China strategy. lined up to finance the transaction.
822 SECTION V CASES

Huayi could not expand into the US entertainment organically while Huayi continued looking for the
market without bringing the right people to the right US targets to invest in or acquire. In the United
table and tapping into their expertise. Said Hu: “(In States, there were two other types of businesses
China), we know those people . . . who is good and besides movie production that looked attractive for
who is not. When we enter into a new market, a new acquisition: talent agencies and social networking
world, we have no connections. We don’t know how start-ups that the company could leverage to support
to judge people; it’s very confusing.” Whether or not the convergence between its core divisions’ products.
those individuals could be recruited and developed
within Huayi or needed to be acquired through
mergers and acquisitions was uncertain.
Financial performance and
The company’s new wholly owned US subsidiary growth
was a starting point to retain its own creative people In April 2015, Huayi was worth an estimated ¥30
and develop Hollywood productions. Huayi had billion ($7.9 billion). The Wang brothers personally
already signed a co-production agreement with QED held a 30 per cent stake in the company. Other major
International to work together on the World War II shareholders included Tencent (4.86 per cent), Jack
film “Fury” starring Brad Pitt and Shia Leboeuf, Ma (Alibaba, 4.03 per cent), Yu Feng (1.76 per cent)
which it would distribute in China. This agreement and Lu Weiding (1.42 per cent). For further details
would provide challenging, creative work in the short about the balance sheets and income statement see
term to help retain the company’s top talent and grow Exhibits 1 and 2.

EXHIBIT 1 BALANCE SHEET IN ¥ MILLION

2014 2013 2012 2011 2010

Current assets
Cash and cash equivalents 1829 1137 642 531 847
Notes receivable 6 – – – –
Accounts receivable 1612 1147 1001 410 458
Payment in advance 921 462 386 399 106
Interest receivable – – – 0 1
Other receivable 50 67 53 7 20
Inventory 816 575 701 543 226
Non-current assets within one year 4 – – – –
Other current assets 11 4 12 12 4
Subtotal – current assets 5250 3393 2794 1902 1662
Non-current assets
Available for sale 1695 2189 588 – –
Long-term receivables 67 41 32 14 10
Long-term investment 784 878 386 319 184
Fixed assets 354 317 273 117 69
Intangible assets 74 2 – 20 –
Goodwill 1486 354 33 77 77
Long-term deferred expenses 20 4 4 4 7
Deferred tax assets 89 35 28 10 15
Subtotal – non-current assets 4569 3819 1344 561 360
Total assets 9819 7212 4138 2464 2022
Current liabilities
Short-term loans 785 668 593 – –
Accounts payable 311 501 496 195 254
Receipt in advance 305 77 88 138 82
Accrued payroll 24 5 4 3 3
Tax payable 425 256 93 70 41
 CASE 12 HUAYI BROTHERS: STRATEGIC TRANSFORMATION 823

2014 2013 2012 2011 2010

Interest payable 18 27 23 3 –
Other payable 303 110 23 48 72
Non-current liabilities within one year 142 – – – –
Other current liabilities 600 600 300 300 –
Subtotal – current liabilities 2913 2243 1621 756 452
Non-current liabilities
Long-term loan 849 502 300 – –
Long-term payable 0 – – – –
Deferred tax liabilities 364 506 93 – –
Other non-current liabilities – 2 – – –
Subtotal – non-current liabilities 1225 1011 393 – –
Total liabilities 4139 3254 2013 756 452
Shareholders’ equity
Share capital 1242 1210 605 605 336
Capital surplus 830 1632 989 710 979
Surplus reserve 247 137 68 40 32
Accumulated profits 1836 964 458 333 205
Shareholders’ equity attributable to 5037 3942 2120 1687 1552
parent company
Non-controlling interests 643 16 5 21 18
Total shareholders’ equity 5680 3958 2125 1708 1570
Total liabilities and shareholders’ equity 9819 7212 4138 2464 2022
Source: Company documents.

EXHIBIT 2 INCOME STATEMENT IN ¥ MILLION

2014 2013 2012 2011 2010

Total operating revenue 2389 2014 1386 892 1072

Operating revenue 2389 2014 1386 892 1072
Total operating cost 1636 1565 1188 654 890
Operating cost 934 910 685 377 566
Business tax and surcharges 14 20 40 41 34
Selling expense 330 383 281 154 232
G&A expense 230 95 79 78 58
Financial expenses 99 73 61 −8 −12
Asset impairment loss 30 84 43 12 13
Investment income 426 374 56 6 1
Operating profits 1179 823 254 245 183
Non-operating income 103 82 68 33 15
Non-operating losses 3 7 1 4 7
Non-current assets disposal loss 0 2 0 0 0
Gross profit 1279 898 321 273 190
Income taxes 245 225 80 68 40
Net profit 1034 673 241 205 150
824 SECTION V CASES

2014 2013 2012 2011 2010

Net profit attributable to parent company 897 665 244 203 149
Non-controlling interests 138 8 −4 3 1
EPS
Basic EPS 0.73 0.55 0.40 0.34 0.44
Diluted EPS 0.73 0.55 0.40 0.34 0.44
Other comprehensive income −413 1242 – – –
Comprehensive income 621 1915 241 205 150
Comprehensive income attributable to 483 1907 244 203 149
parent company
Comprehensive income attributable to 138 8 −4 3 1
non-controlling shareholders

Notes: G&A expenses: general and administrative expenses; EPS: earnings per share.
Source: Company documents.

In September 2014, the reported operating income small and was led by board chair and CEO Dennis
and net profit for Huayi was ¥958 million and ¥455 Wang, President James Wang and CFO Brenda Hu.
million, respectively. The company registered a 10.4 Dennis Wang was responsible for the company’s
per cent rise in net earnings in the first nine months of overall strategic planning and financial management
the year. This followed a period of substantial growth and oversaw the company’s Live Entertainment
during the previous year when income from the divi si on. Jam es Wang wa s re spon sib le fo r
company’s main business recorded a year-over-year the company’s overall operations and Visual
increase of 43.7 per cent, of which ¥1.08 billion was Entertainment division. Hu, who joined Huayi
from films and spin-offs. TV shows and associated in 2005 and led the company’s IPO in 2009, was
business income totaled ¥517 million, a year-over- CFO and in charge of the company’s Internet
year increase of 36.13 per cent. Entertainment division.
The company’s growth was also evidenced in Huayi’s financial forecasting and strategic planning
recent mergers and acquisitions, as in 2013 it merged was very short term due to the constantly changing
with Yinhan and purchased TV producer Zhejiang nature of the entertainment business in China. With
Changsheng and Internet entertainment company movies, in particular, it was still largely impossible
Maizuo.com. Said Dennis Wang: to predict the right formula for box office success.
Newly emerging Internet companies appearing on
Financial performance for us is very easy to
the scene were also trying to expand into producing
measure. Other indicators we use are box office
movies and crowding the marketplace. While the
revenues and the new directors we have signed
management team looked ahead as far as three to five
up. If, for example, we sign up two or three new
years trying to determine how to best diversify and
directors each year, we would think it is a success.
grow, its focus was on executing a one-year strategy
Of course we use accounting metrics, like
and adjusting quarter by quarter. Said Hu:
profit. But also, we have other key performance
indicators such as number of visitors for Internet We have some principles of how we do business,
entertainment sectors, and in live entertainment but it’s really difficult to do even a three-year
it is how many sites are under construction. business plan. We focus on a one-year period.
We have our plan—but we don’t have a budget.
Organization and culture It is very short, two to three pages high level,
with some targets. Not a formal document. It
In 2015, Huayi employed 1500 staff across its three just changes so, so fast. We have to move very
divisions, including its recent US subsidiary based in fast, as a management team, sitting around the
Hollywood. The senior management team was very table to discuss that document, or what goes in
 CASE 12 HUAYI BROTHERS: STRATEGIC TRANSFORMATION 825

that document or not? We do it once a year, with Next steps

all the management team. But we have daily
communication. Looking ahead, Dennis Wang wondered from where his
company’s future growth would come and what action
From a business standpoint, Dennis Wang focused would be needed. Huayi needed to establish a brand
on personally managing mergers and acquisitions, presence in North America if it were going to attract
relying heavily on the company’s professional future investment on a global scale. He wanted to have
managers to run the day-to-day operations. His controlling interest in whatever lay ahead—something
educational background was a major in mass media he had not been able to achieve after one year of difficult
and art studies from New York State University, negotiations with Robinov in the failed Studio 8 deal.
so self-admittedly finance was not his strong suit. This time, he was also looking for a more “roll up the
He was a passionate art collector, with his own sleeves,” hands-on partner—someone who wanted to
personal gallery. His strength was to be hands-on in be more actively engaged in the entire process from
the recruitment of movie directors and devoting his film conception to release. In China, JVs were more
energy to “future visioning.” In spite of his title, he collaborative. Producers and directors took an active
had no fixed role or responsibility and only visited role acquiring actors and developing the project early
his office a half dozen times a year at most, preferring in the process. Dennis Wang discovered by comparison
instead to spend his time with film artists to get ideas that Hollywood was not as eager to work together until
and inspiration. He said: all of the financial and legal negotiations had been
I bring romance and joy to the table, visioning finalized. And even then, in the movie business there
the future of the company. I love my team; Huayi were no guarantees the personal chemistry that was so
is more like a happy family. . . . My leadership important to him would be right. He said:
style is more random, like painting. I don’t plan I think finding a business partner depends to
my day. For example, I spent this morning with some extent on luck and fate. Huayi wasn’t able
director Xiaogang Feng, chatting about his to become a controlling shareholder of Studio 8
future and his new movies. I had a good time but as I had hoped. The ideal partner for me would
also figured out where Huayi is moving towards. be someone who does both movie production
Although it was over 20 years old, Huayi’s corporate and distribution. I sensed a stronger chemistry
culture resembled that of a young start-up enterprise: with STX . . . [but] I haven’t stopped looking at
very small, efficient and active. Its management other American film companies; I think China
hierarchy was flat, with very few formal roles and has a great chance to enter the US market.
functions. The company used stick incentives to STX was different than other US film companies in
stimulate innovation and attract top talent. For the sense that it was founded by a number of new
example, when the equity structure of the Internet entrepreneurs. And it was, in fact, doing both movie
Entertainment division was revisited, 50 per cent of production and distribution—only a few of the large
the stock went to the team. A key concern among US companies did both. Dennis Wang wondered if
the top management team was to retain talent, this would bode well for a successful JV. Why had
so deliberate steps were taken to nurture internal no foreign film company ever been successful in
“intrapreneurs” and encourage them to start their Hollywood? Could Huayi break this pattern?
own companies within the Huayi umbrella.
The company prided itself on its track record
for innovation in the industry, proclaiming in Endnotes
its promotional materials to be “taking the road 1
¥ = yuan renminbi. All currency in US dollars unless specified
others didn’t dare to tread.” It claimed ownership otherwise. US$1 = ¥6.26, March 15, 2015, www.xe.com/
of a number of industry firsts, including first to currencytables/?from=CNY&date=2015-03-15, accessed March
participate in all film development stages from 15, 2015.
investment to shooting to distribution. Huayi was 2
“Movies & Entertainment in China,” Marketline, April
also the first privately owned TV company to attract 2015, www.reportlinker.com/p02906359-summary/Movies-
Entertainment-in-China.html, accessed December 8, 2015.
external capital, finance films through banks and go 3
“Media in China,” Marketline, October 2015, http://advantage.
public with its IPO. marketline.com/Product?pid=MLIP1741-0005, accessed
December 8, 2015.