China's box office recently beat the US, and is now on the cusp of a 'new growth cycle'

  • China's box office revenues beat the U.S. in the first quarter.
  • After a brief slowdown, growth in China's film industry is back on track, HSBC Qianhai Securities said in a report on the sector.
  • HSBC Qianhai Securities initiated coverage on Huayi Brothers, Enlight Media and China Film.
A view of a cinema operated by Wanda Film Holding in Yancheng, Jiangsu Province, China.
Zhang Peng | LightRocket | Getty Images

China's box office takings surpassed the U.S. in the beginning of the year and that's setting the Chinese film industry up for a "Hollywood moment," HSBC said in a May report.

Box office revenues in China beat numbers out of North America in the first three months of this year, totaling 20.2 billion yuan (around $3.17 billion), according to numbers from Variety. Revenues collected in North American cinemas, referring to both the U.S. and Canada, came in at $2.85 billion during the same time frame, Variety said, citing data from ComScore.

Numbers from Maoyan, a Chinese online ticketing platform, matched the figures from Variety — a record for the highest box office takings by a single market in one quarter.

Analysts had previously forecast Chinese box office revenue to overtake the U.S. in 2017, but that was put on hold after growth in 2016 slowed. The slump in growth was blamed on the release of fewer quality movies, among other reasons.

Growth back on track 

But following that blip, "the growth story is now on track," said Gary Guo, head of A share media and internet research at HSBC Qianhai Securities.

He pointed to "Operation Red Sea" — a local war movie based loosely on events in Yemen in 2015 — beating Disney's "Black Panther" to the number one spot in March as a sign that China's film industry was "at the start of a new growth cycle."

Among the factors Guo sees contributing to that growth are the release of domestic films of better quality and higher spending power among urban residents, with third- and fourth-tier cities expected to contribute significantly to growth in the industry.

The increase in total cinema screens in the country, which had been the main reason boosting the number of cinema visits per person in past years, is expected to have less of an impact going forward.

Success in the box office was also a result of more compelling content being produced by local studios and the better selection of foreign films broadcast on the mainland, Benjamin Cavender, a principal at China Market Research Group, told CNBC.

Ent Group, a market research firm, has forecast that China's box office will surpass the 90 billion yuan ($14.1 billion) mark while revenues from sectors linked to the movie industry were expected to exceed 200 billion yuan ($31.3 billion) by 2022.

People walk by a movie poster for Chinese action flick "Wolf Warrior 2" in Beijing, China.
Greg Baker | AFP | Getty Images
People walk by a movie poster for Chinese action flick "Wolf Warrior 2" in Beijing, China.

As more people head to the cinemas, one additional factor likely to contribute to growth is the development of more channels of revenue that rely on intellectual property rights from movies, Guo said.

"The expanding number of of sequels is one of the key factors behind the enduring success of Hollywood. Marvel, Transformers and Mission Impossible have all become strong IPs ... The same pattern is emerging in China," he said, citing local film franchises like "Monster Hunt," "Wolf Warror" and "Detective Chinatown."

Against that backdrop, HSBC Qianhai Securities initiated coverage on three companies operating in the mainland film and television industry: Huayi Brothers and entertainment company Enlight Media, which it has buy calls on, and a hold rating on China Film.

Huayi Brothers, a film and television production house, is behind blockbuster releases such as "The Ex-File 3: The Return of the Exes," which outshone "Star Wars: The Last Jedi" during its opening weekend in China, and the Feng Xiaogang-directed "Youth."

Beijing-based entertainment company Enlight Media, which backs online ticketing platform Maoyan, is responsible for "Lost in Thailand" and "The Mermaid," once the top-grossing film in China. Meanwhile, China Film is involved in multiple areas in the film business, including production, distribution and screening.