January 10, 2019
A key theme to watch in China Media industry in 2019 is industry consolidation. The stage is set for media titans to further strengthen their positions, as changes in the industry landscape may make it increasingly difficult for smaller players to succeed.
As a result, leading companies – from movie theatre chains to advertising firms – are poised to increase their market shares and possibly acquire their smaller competitors.
Furthermore, the push toward higher-quality content and possible policy fine-tuning from the government are also key themes to watch, and they may further pave the way for industry leaders to pull ahead.
We take a look at each sub-sector in turn.
Valuations of media companies at a glance:
Movie theatre chains
Leading movie theatre chains enjoy economies of scale and better funding, which offer protection at a time when weaker players are grappling with rising rents and operational difficulties.
Coupled with a slowdown in the construction of movie theatres, which saw the number of new theatres fall 10.2% YoY to 264 in 3Q18, market leaders are in a position to strengthen their hand. In addition, movie theatre chains with film production arms that can produce quality entertainment – the main draw for moviegoers who have become more discerning over the years – are especially ready to benefit from a consolidation.
There’s room for consolidation as market shares of China’s top 3 movie theatre chains still lag their US counterparts:
Over the longer term, we believe the leaders will secure rapid growth through M&A.
TV and web series production
The TV and web series production industry entered into a downturn as regulations on content and tax were tightened. Many TV and web series did not proceed as expected in 2H18, which led to a sharp decline in filming.
We expect additional policy fine-tuning and for the National Radio and Television Administration (SAPPRFT) to further tighten its control of TV and web programs.
Decline in production and approvals for distribution:
Small and medium TV producers may continue to be squeezed out of the market on the back of industry headwinds, and major producers are ready to solidify their positions.
As for web programs, we anticipate greater cooperation between content producers and online video platforms to better control costs and share the operational risks as well as cash flow pressure. Top producers are primed to further cement their leadership by leveraging their experience and access to high-quality resources.
The Ministry of Culture’s suspension of approvals for mobile games in June 2018 contributed to a slowdown in the industry. While the suspension was lifted at the end of 2018, the existing policies restrict the total number of game launches, which should encourage the development of innovative and high-quality games.
This trend towards quality should make it more difficult for small and medium-sized game developers as they have weaker finances, lower ability to produce high-quality games, and limited distribution channels.
Industry leaders Tencent and NetEase have increased their market shares over the years
China’s online publishing platforms have created a large and vibrant market for online reading, which can be distinct from physical books as the stories can often be “works in progress” and updated chapter by chapter when ready.
While some of the newer platforms have seen rapid user growth, we believe users can only be retained with high-quality content, which is where the industry leaders have an edge. Well-established platforms have had years to build their libraries and have sound incentive schemes for the writers. Furthermore, leading players are better positioned to turn online works into films and TV series, which can be a new growth driver despite the mixed reviews for some of the adaptations.
TV and web adaptations can be a source of growth:
The traditional publishing industry stands to benefit from a growing student population and scrapping of the one-child policy. Compared to other businesses, publishing textbooks and study guides offers relatively stable revenue and generates gross margins of 20–40%. This segment is a major business at state-owned publishing companieswhich are the main players in the traditional publishing business.
Publishing textbooks and study guides is big business:
China started to promote the integration of telecommunications networks, cable TV networks and the internet in 2010 but consolidation of cable networks has been slow due to the complicated profit distribution.
However, the government appears determined to spur the process, with the National Radio and Television Administration (SAPPRFT) issuing a guidance in November 2018 on the issue, which should benefit cable TV network operators.
While the number of cable TV subscribers has dropped for three straight years, the number of subscribers to value-added services has grown rapidly:
As the advertising industry is strongly correlated with economic growth and consumption, we expect the growth of China’s advertising industry to slow in the coming couple of years
While this puts pressure on advertising agencies, we believe the competitive landscape for them will remain stable. However, there could be an acceleration in small and medium-sized agencies getting squeezed out of the market.
Overall industry growth faces pressure:
Owing to a confluence of factors, from margin pressure to tighter regulations, market leaders across the media landscape are poised to pull further ahead. Apart from consolidation, we could also see more examples of integration, such as movie theatre chains with film production arms or cooperation between content producers and online video platforms. The pressure to produce higher-quality content can be seen across the sub-sectors, and further regulatory fine-tuning will also likely strengthen the leaders.For more information, please refer to our reports 2019 advertising outlook: industry growth to slow; focus on core media. 2019 entertainment outlook: Watch for quality content & leading distributors. 2019 outlook for online literature: upbeat on long-term growth. 2019 outlook for publishing and cable TV: opportunities arise from the bottom. 2019 outlook: Watch for opportunities from three trends (overview) published in January 2019.