Investors have been generally punishing Chinese film production companies for promoting quantity over quality, amid an overall slowing of China’s economic growth and continued trade disputes with the U.S.

Shares of several media companies in China have recently taken a nosedive, including Wanda Film Holding (SHE:002739), Beijing Enlight Media (SHE:300251) and Yinji Entertainment and Media (SHE:002143), as the nascent industry, which has been propelled by a surge in consumption, appears to have reversed course.

The Chinese economy has been facing a gradual, steady slowdown since its last quarterly rate of double-digit growth of 10.2% more than seven years ago. The nation’s most recent reading of 6.5% disappointed market expectations and marked the slowest pace of growth since the first quarter of 2009.

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The latest GDP data also spurred uncertainties over the potential harm China’s trade feuds with the U.S. may be inflicting on the country’s economic well-being, casting a shadow of bearish sentiment among many market participants about the nation’s financial health.

Meanwhile, the People's Bank of China has made frequent cuts to banks' reserve requirements in 2018 – likely to boost liquidity and promote growth.

Chinese central bank governor Yi Gang said at the International Monetary and Financial Committee meeting in mid-October that downside risks to global growth “warrant close attention, with trade protectionism and rising trade tensions being major risks facing the global economy.”

Gang noted that “rising trade protectionism, friction and policy uncertainties have begun to dampen global business confidence and resulted in increased financial market volatility. Investment and trade as well as economic growth have also been dragged.”

In the first half of 2018, consumption contributed 78.5% to China’s GDP growth, an increase of 14.2% over the same year-ago period.

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More bang for the yuan

Against this backdrop, China’s domestic box offices have been suffering, as consumers have generally become more sensitive to entertainment value and appear to have grown increasingly cautious about their movie ticket purchases.

Intake for the top ten highest-grossing films in China fell by roughly US$381m (-4.8%) year-to-date in 2018 from the prior year, amid a decline of almost 4.5% since February in the level of consumer confidence.

According to Gary Guo, HSBC’s head of media and internet research for China, after 2012’s hit film Lost in Thailand, sales of Chinese local productions more than doubled, with the number of screens (around 440,000) and audiences having soared tenfold since 2009.

However, Guo said that while more Chinese films were produced, “the quality declined, and a glut of movies fought to get screened. In 2016, audiences for domestic films fell for the first time in a decade, while foreign pictures gained.”

Indeed, Hollywood productions appear to remain a threat to China’s domestic offerings.

Guo observed that in 2017, local films raked in only 52% of their share of box office receipts, largely due to strong imports, including The Fate of the Furious – one of six blockbusters with ticket sales exceeding ¥1bn.

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Given the increasingly competitive environment, Chinese film-makers have ratcheted-up the level of production technique and value, pouring more funds into technology and special effects.

Guo added that budgets for local fantasy and war blockbusters are approaching U.S. levels. 

Wolf Warriors 2 – China’s top-grossing film of 2017 – cost ¥200m, while Operation Red Sea –to date, the number one film of 2018 – cost ¥500m. These two movies have earned total ticket sales of around US$854m and US$576m, respectively, according to Box Office Mojo.

By comparison, top U.S. box office films Black Panther (2018 year-to-date) and Star Wars: The Last Jedi (2017) reaped domestic revenues of more than US$700m, and US$620m in 2017, respectively. Production budgets for the movies ran US$200m and US$317m, respectively, according to The Numbers.

Total U.S. movie ticket sales have amounted to over US$10.1bn in 2018, a 10.7% surge over the same prior year period.

Shaky business

Meanwhile, many investors in Chinese equities have grown more averse to several of the country’s media sector stocks.

While some market players may have considered certain companies relatively undervalued, a blanket of bearishness appears to remain firmly in place.

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Wanda Film Holding, a subsidiary of the massive Dalian Wanda Group conglomerate and owner of Legendary Entertainment, for example, saw its share price plummet by Shenzhen’s 10% daily limit in early November. The company’s stock had resumed trading after having been halted since July 2017 due to company restructuring.

The firm’s stock plunged a little more than 36.7% from its five-year high of US$42.93 set in early December 2016 and was last quoted at US$23.70 Thursday, according to the IBKR Trader Workstation.

Wanda has been grappling for a strategy for its film division as it aims to reduce its debt burden, having reportedly revised some terms related to its planned purchase of its Wanda Pictures affiliate, as well as having shed about a third of its stake in U.S.-based mammoth movie exhibitor AMC Entertainment (NYSE: AMC), amid federal foreign ownership policy.

Among other corporate actions, Wanda earlier in 2018 had also offloaded an almost 7.7% stake in Wanda Film Holding to Alibaba Group, as well as 5.1% to the government-backed Beijing Cultural Investment Holdings for a total of about US$1.2bn.

Wanda is not the only Chinese media company to see a precipitous fall in its shares.

Yinji Entertainment’s stock lost more than 88.6% of its value from late March 2017 through mid-October 2018. While there has been a recent uptick in the company’s interest, its shares remained down around 2.85% intraday Thursday to US$3.75 – a far cry from their five year high of US$24.25. Also, Beijing Enlight Media’s shares have sunk by around 41.3% since mid-March 2018, after recouping about 13% of its losses since mid-October.

In the meantime, trade concerns between the U.S. and China have instilled some fears about any further escalation, which may harm the Hollywood industry.

Uncertainties over whether China will decide to cease on-going negotiations to increase the number of revenue-sharing foreign film imports has generally made Hollywood executives somewhat nervous. The Chinese government could also decide to place a ban on the exhibition of U.S. films in China in retaliation against any further U.S.-imposed tariffs.