Curtain Rising on Theater Investment

Peter Dazeley | Photographer's Choice | Getty Images

A government-backed investment fund is one of several waiting in the wings for a chance to support – and profit from – China's fast-growing performing arts and film companies.

The Chinese Cultural Industry Investment Fund (CCIIF) plans to invest 20 billion yuan in businesses that together at the box office took in almost 30 billion yuan nationwide in 2012.

Moviegoers spent around 16 billion yuan last year, according to the fund's director, Chen Hang, while combined ticket sales for live theater performances, concerts and various tourist shows reached 13 billion yuan.

(Read More: Hollywood Tops Chinese Film Market in 2012)

Private investors in recent years have financed the entertainment industry to the tune of several hundred thousand to tens of millions of yuan per target, said drama director Wang Xiaoxin. Some tourist productions have been backed by investments in the hundreds of millions of yuan.

But the two-year-old CCIIF is aiming higher, especially in light of discussions emphasizing entertainment business and cultural development growth held during economic planning sessions at the Communist Party's 18th National Congress last fall.

The fund's backers include the Ministry of Finance, Bank of China International, a China Central Television (CCTV) subsidiary called China International Television Corp., and the Shenzhen International Cultural Industries Fair.

CCIIF has finalized investment in news portal, China Publishing and Media Co., and several other media companies. Last May, CCIIF signed a preliminary agreement to invest an undisclosed amount in Mahua FunAge Production Co., one of China's most successful theater producers, said Chen. He said monetary levels and equity stakes have yet to be worked out.

In addition, Chen said, the fund is looking at giving financial support to theater companies that specialize in musicals, stage show and a financial news provider.

Caixin learned that one musical producer eyed by the fund is United Asia Live Entertainment, which staged Chinese-language versions of Cats and Mama Mia. United Asia was formed in 2010 with backing from Shanghai Media Group, China Arts and Entertainment Group, and South Korea's CJ E&M.

Mahua, founded in 2003, is a private production company that introduced what are now popular comedies staged annually around Chinese New Year. Since its launch, the company has staged more than 1,500 performances of 19 plays in Beijing and other big cities.

"We were the leader in theater shows nationwide in 2011," said Mahua FunAge President Liu Hongtao. "We put on a total 337 plays for more than 300,000 people.

"We were also No. 1 in box office revenues," said Liu, whose shows command average ticket prices of about 250 yuan. "Revenue growth has exceeded 50 percent for the last three years."

Mahua's shows accounted for about 10 percent of what the Daolue Center for Culture Industry Research said was 630 million yuan in nationwide ticket revenue for theater performances in 2011.

Venture capital firms first contacted Mahua about buying a piece of the action in early 2011, said Liu. "But we were unfamiliar with capital operations," he said, "and we're cautious."

About a year later, CCIIF stepped on stage and successfully wooed Mahua executives as "the only central government-backed" entertainment business investment fund, Liu said. Ultimately, he said, Mahua is aiming for a public listing on the stock market.

Cautious Potential

If the fund-raiser succeeds, Liu said, most of the money would go toward production of stage shows. But Mahua also plans to branch out by making "television dramas and low-cost movies" including comedy films, which are rare in China, he said.

A budget movie can be less expensive to produce than a play, Liu said, which can cost millions of yuan to start.

Chen sees huge profit potential for China's entertainment industry. But another investor said companies like Mahua with stable profits, rapid growth and good cash flow are few and far between.

Indeed, another investor said the market may be "overheated."

More From Caixin Online:

"Big cities have markets, but there are very few good plays," the investor said. "As with the film industry, if there isn't a famous director, a good script and good actors, box office sales for Chinese-language plays are difficult."

Li Weidong, head of research for investment firm ChinaVenture, said that theater is not the first choice among entertainment consumers in major cities.

Yet, there is rising demand for live performances that experts expect to continue. "A rebound for the performing arts is a major trend and definitely not a flash in the pan," Zhao Yue, chief culture industry analyst for Rising Securities, said.

A beneficiary of the strong demand in the nation's capital is the state-run Beijing People's Art Theater (BPAT), which drew big audiences for performances of a play called The Grief of Comedy, starring several famous actors. Tickets for the show's second performance in November sold out within two hours.

(Read More: China's Art Bubble May Be Popping)

That day, BPAT says it sold nearly 10,000 tickets for performances of the show at 12 theaters, taking in about 5.4 million yuan and setting a new record in China for single-day box office sales.

Also in recent months, revenues from 26 BPAT theaters that staged a show called The Jiazi Garden were about 8 million yuan.

BPAT Director Zhang Heping said the company's nationwide box office receipts totaled 33 million yuan in 2011 and more than 50 million yuan between January and mid-November last year.

Neither BPAT nor another state-run show producer called National Theater plan to change their business structures or raise money through the stock market, executives at the institutions said. BPAT President Cui Ning said financial decisions for his company are fully controlled by the Beijing city government which "has given no instructions in this regard."

A National Theater executive, however, said the company in 2009 changed its management philosophy by giving more operational freedom to each show's producer and production team. Teams are the basic unit in charge of reaching for profit goals set by the theater president.

The team approach was put into practice for the National Theater's performances of To Live, produced by famous director Meng Jinghui, and The Yellow Storm, a Tian Qinxin production.

Industry sources said National Theater lets Meng and Tian operate independent studios and contracts for their productions under a quota system requires certain number of shows to be produced for the theater within a year. Audiences are attracted to shows with popular directors such as Meng, Tian and Lin Zhaohua.

Some investors have shown interest in studios run by well-known directors, but their links to state-owned institutions present obstacles. "Before we invest, we would certainly need to clean up" an entertainment company tied to theaters, for example, said one investor.

Popular directors must "work fully for their studios and make that their main effort," the investor said. "Otherwise this would constitute same-business competition with other theater, which the China Securities Regulatory Commission does not allow."

Another obstacle, said Liu, is that "profitability is low in this industry ... The biggest problem lies in the fact that costs constantly increase while there is a ceiling for box office revenues."

(Read More: The Risks, Rewards and Realities of Investing in Theater)

One investor said although optimistic about the performing arts sector, he would rather invest in private than state-owned theater companies. State-owned theaters have large markets, he said, but they cannot satisfy the capital market's growth demands.

Yet state-run firms are not blind to the importance of box office receipts and the impetus for a stronger entertainment industry, driven by government policy and consumer demand.

BPAT, for example, is preparing to stage the play Our Assassin Jing Ke, written by Mo Yan, who recently won the Nobel Prize for Literature. The show could trigger another surge for box office receipts.