Huayu: Starting from joining the mainstream entertainment industry in 96

Chapter 391, page 389: Turbulent Waves

In March 2002, Beijing was still chilly in early spring.

Since the new "Film Management Regulations" officially came into effect on February 1, they have directly triggered multiple major changes.

First, there was the "liberation" and "chaos" of production rights.

Private companies can finally legitimately produce films independently, without having to rely on state-owned companies and share the meager credit rights and profits.

In a short time, countless private film and television companies, full of dreams and hot money, sprang up like mushrooms after rain, eager to replicate the success of Shengying Media.

Meanwhile, the state-owned film studios that lost their production rights were not worried at all, because they relied on the film studio alliance and were backed by China Film Group and Shengyi Film Group to obtain even more powerful terminal screening rights. The continuous profits brought by the cinemas allowed them to retire peacefully.

Of course, some ambitious film studios, such as Shanghai Film Studio, Changchun Film Studio, and Emei Film Studio, are also accelerating their integration with local sister studios into a group, preparing to establish another cinema chain covering the local area and become an unapproachable "father" to the production companies.

Secondly, there is the "reshaping" and "fragmentation" of the distribution and screening system.

The mandatory implementation of the cinema chain system reform has completely shaken the old distribution network of provincial, municipal, and county film companies that relied on multiple layers of distribution.

Cross-provincial cinema chains, represented by "China Film Grand Century," rapidly expanded their reach, while existing distribution and screening units in various regions were either forced to reorganize and join, or were quickly marginalized under the dual pressure of policy and market forces.

This is not only a change in business models, but also a reshuffling of local interest structures.

The "Shanghai United Cinema Circuit," which integrates Shanghai Film Studio and Shanghai Film Distribution and Exhibition Company (including Yongle Cinema Circuit), and the "Guangdong Provincial China Film Southern Cinema Circuit," which is based on local forces in Guangdong Province, are all gearing up to compete with "China Film Prosperity," which is backed by China Film Group and Shengying Capital.

A land grab centered around terminal channels is unfolding across the country.

Furthermore, there are new challenges facing ideological management.

Market liberalization will inevitably lead to the diversification of content.

How to ensure cultural security and correct guidance while encouraging creative prosperity and meeting market demands has become a new challenge that the relevant authorities must consider.

This makes the value of leading companies like Shengying Media, which understand market rules and can "grasp the right measure," even more prominent.

……

Against this backdrop, Wang Sheng and his Shengying Media Group, despite gaining an absolute advantage through forward-looking planning and strong execution, are no longer swimming in a blue ocean, but rather in deep waters where they face fierce competition and dual challenges from policy and the market.

The most urgent task remains going public.

Only by leveraging the power of the capital market can we consolidate our competitive advantage with overwhelming financial and resource advantages and complete our strategic layout in the national and even international markets.

The listing of Shengying Media Group is no longer the most important part of Wang Sheng's personal business ambitions, but has been given the important task of being an industry trendsetter and a touchstone for reform.

Thursday, August 14, 2002.

The main conference room of Shengying Media Group headquarters in Jingxin Building.

The atmosphere was both solemn and enthusiastic.

On one side of the long conference table was the core management team, headed by Wang Sheng.

On the opposite side and at the other end of the conference table were representatives of capital giants who would attract the attention of any domestic company.

These faces themselves are a barometer of the flow of capital in this era.

Hu Zuliu, Managing Director and Head of China Business at Goldman Sachs, is an economist who graduated from Tsinghua University and holds a PhD from Harvard. He is a key figure in Goldman Sachs' business in China, known for his profound insights into the macroeconomy and China's reforms. He is refined in demeanor but sharp in his vision.

Wu Changgen, Managing Director and Head of China Business at Morgan Stanley, is more aggressive than Hu Zuliu, has a deep understanding of international capital operation rules, and is experienced in promoting the overseas listing of Chinese companies.

Mr. Zhu, General Manager of the Investment Banking Department of China International Capital Corporation Limited (CICC), is a representative figure of China's first joint venture investment bank. With a profound background, international vision and local connections, Mr. Zhu is one of the key bridges connecting Chinese enterprises with global capital markets.

His appearance itself represents a certain degree of tacit approval and support from the authorities for Shengying's listing.

In addition, representatives from IDG Capital, SoftBank Asia, and UBS were also present in the conference room, as well as senior executives from leading domestic securities firms such as Southern Securities and Huaxia Securities.

The shadow of unspeakable events still looms over global capital markets, and risk appetite for investment in the United States has decreased, leaving huge amounts of capital urgently seeking safe and high-growth investment opportunities.

With its recent accession to the WTO, a population of over one billion, and sustained high economic growth, China is undoubtedly the brightest star in the eyes of global capital.

Shengying Media, as a benchmark for the market-oriented reform of China's cultural and entertainment industry, has achieved revenues exceeding one billion yuan and annual profits exceeding five hundred million yuan for two consecutive years. Its profitability and growth potential have led overseas capital to envision it as a potential "Chinese Disney".

"Mr. Wang, everyone."

Morgan Stanley's Wu Changgen spoke first, his tone full of confidence: "Based on our model, combined with the Chinese film market's compound annual growth rate of nearly 100%, as well as Shengying Media's market leadership, complete industry chain layout, and excellent management team."

We believe the company's reasonable valuation should be in the range of RMB 150 billion to 200 billion.

This is an optimistic estimate based on earnings forecasts for the next five years, with a price-to-earnings ratio of 35-50. Such value discovery can only be achieved in overseas markets, such as the Hong Kong Stock Exchange.

Hu Zuliu of Goldman Sachs nodded in agreement, his tone relatively mild but his stance firm: "Mr. Wang, the A-share market is certainly important, but its current capacity and investor structure do not support such high valuations."

By the end of 2001, the total market capitalization of A-shares was approximately 4.5 trillion yuan. The companies with the highest market capitalization, such as Baosteel and Sinopec, had market capitalizations ranging from tens of billions to hundreds of billions of yuan, and most of them were in traditional industries.

For the emerging cultural and media sector, there is a lack of comparable companies, leading to conservative valuation systems. High-growth, high-profit companies like Shengying may be severely undervalued in the A-share market. We support Mr. Wu's view that H-shares are a better choice.

Mr. Zhu from CICC immediately retorted, his tone calm but unquestionable: "Mr. Hu, Mr. Wu, I understand the perspective of international capital."

However, please do not overlook a few key points: First, the film industry has distinct cultural attributes and ideological sensitivity, and the relevant authorities prefer to see high-quality companies listed domestically, which is related to cultural confidence and industrial security.

Second, the A-share market is undergoing reforms, and its capacity and activity are now vastly different from what they used to be. More importantly,

He paused for a moment, then dropped a bombshell: "Discussions about the QFII (Qualified Foreign Institutional Investor) system have entered a substantive stage at the China Securities Regulatory Commission (CSRC) level. Although its formal implementation will take some time, the direction is clear."

Once launched, overseas capital will be able to legally invest in A-shares and share in China's growth. At that time, Shengying will also be able to attract international capital in the A-share market.

A representative from Southern Securities added, "Moreover, listing domestically offers advantages such as brand recognition, policy support, and a sense of connection with local audiences that overseas listings cannot match. Shengying's roots are in China."

The two sides engaged in a heated debate over the listing location.

Overseas institutions emphasize valuation and international influence, while domestic institutions emphasize the policy environment and long-term foundation.

Overseas investors even suggested that the "Tsingtao Brewery" model could be adopted: first issue H shares, then return to the A-share market when conditions are right, achieving dual-platform financing and leveraging more funds. Seeing the debate reach a stalemate, Goldman Sachs' Hu Zuliu turned his attention to Wang Sheng, who had been listening silently, and decided to get straight to the point: "Mr. Wang, the debate among investors ultimately serves the company's strategy."

Let's get back to the essential question: How much funding do you plan to raise?

How much real money does Shengying need to achieve its ambitious goal of capturing more than 50% of the mainland market share?

Wang Sheng looked around at everyone and slowly said, "Your data and analysis are all excellent."

But Shengying's vision extends beyond the immediate valuation.

He slowly said, "What we want to build is a complete ecosystem that runs through content creation, distribution channels, terminal screening, derivative development and even technical standards."

This means that we need to continue building high-standard multiplex cinemas across the country, especially in economically developed second-tier cities;
The 'Jackie Chan Happy Park' model needs to be replicated in other core areas; investment in special effects technology needs to be increased to catch up with international advanced levels; and more high-quality IPs and content need to be developed…

He paused, then dropped a number that shocked everyone present: "Based on this, our preliminary calculations show that the first round of financing will require 30 billion RMB."

A brief silence fell over the meeting room.

In 2002, 30 billion was an astronomical figure, enough to acquire several large state-owned enterprises.

Morgan Stanley's Wu Changgen's eyes flashed with a sharp light: "30 billion! If the valuation can reach 180 billion, it can be achieved by diluting about 16.7% of the shares. This is entirely feasible in the H-share market."

Mr. Zhu from CICC frowned slightly: "In the A-share market, raising 30 billion yuan in one go is extremely challenging and may require a special channel, but it is not impossible. The key is whether the valuation can support it."

Wang Sheng raised his hand to stop any possible further debate: "Regarding the listing location, my principle is: A-shares are the primary choice, but I do not rule out the possibility of exploring overseas options when conditions are ripe in the future."

Shengying's roots are in China, and we must first take root in this soil.

As for financing methods…

Wang Sheng raised his hand to signal his assistant to distribute the financing plan.

……

Representatives from various capital groups unveiled their financing proposals.

The plan is as follows:

Listed entity: Shengying Media Group Co., Ltd., listed on the A-share main board in the country.

Equity structure setup:

Wang Sheng held 77% of the shares before the IPO. After the IPO and issuance of new shares, Wang Sheng's shareholding ratio needs to remain above 50% to ensure control.

As a strategic investor, China Film Group's 20% stake can be appropriately diluted after the listing, but it must maintain its status as a major shareholder to provide continuous policy support.

Chen Liang's 3% stake was also diluted.

Financing and control protection:

Assuming a financing of 30 billion, based on a relatively conservative valuation that the A-share market might accept, for example, based on a high price-to-earnings ratio such as 30, corresponding to a market capitalization of approximately 150 billion, it would require issuing about 20% new shares (30 billion / 150 billion ≈ 20%).

The total share capital before listing was set at 100%. Wang Sheng held 77%, China Film Group 20%, and Chen Liang 3%.

After issuing 20% ​​new shares, the total share capital becomes 120%.

Wang Sheng's shareholding ratio becomes 77% / 120% ≈ 64.17%.

China Film Group's shareholding ratio will become approximately 16.67% (20% / 120%).

Chen Liang's shareholding ratio becomes 3% / 120% = 2.5%.

Public shareholders hold 20% of the shares.

Under this plan, Wang Sheng will still retain absolute control.

Addressing future capital needs:
The 3 billion yuan raised in this round is enough to support rapid expansion over the next 2-30 years.

To meet longer-term development needs (such as international expansion and large-scale mergers and acquisitions), the company may consider issuing corporate bonds, convertible bonds, or other instruments after listing, or conduct additional share issuance financing after the A-share market matures and the company's market value increases further.

Employee incentives: A portion of the shares will be reserved as an equity incentive pool, held by me or a designated entity, and used to incentivize core personnel in the future, ensuring team stability and motivation.

……

Observing the expressions of the various capital representatives, Wang Sheng added: "Regarding QFII and overseas capital, QFII, which Mr. Zhu mentioned, is an important direction. Once the system is implemented, Shengying, as a high-quality leading company in the A-share market, will naturally be able to attract overseas funds to invest through the QFII channel, indirectly achieving 'bringing in' capital, without needing to rush to go overseas at this time."

"Everyone,"

Wang Sheng continued, "The Chinese film market is growing at a rate that is almost doubling every year."

I can assure you, this is just the beginning.

With the further development of the economy and the increase in national income after joining the WTO, it will inevitably become a super market that attracts global attention.

What Shengying aims to do is not simply to grab a share of the market, but to grow together with the market and become a leader that defines industry standards.

What we need are visionary, patient capital partners who can fight alongside us, not short-sighted speculators.

With a sharp gaze, he met everyone's eyes and said, "30 billion, 50 billion, or even more, is not for raising money, but to build a moat that will not be easily surpassed for the next ten or twenty years."

Cinemas are the lifeblood of distribution channels; film studios are the testing ground for IP implementation and cultural tourism integration; special effects technology is the cornerstone of future industrialization. All of this requires massive, long-term capital investment.

"My solution is right here."

Wang Sheng concluded with a resolute statement: "We welcome in-depth negotiations with those who can accept this principle and are willing to pay for it. If not, then we regret to inform you."

Inside the conference room, the giants of capital exchanged glances, their hearts filled with turmoil.

(End of this chapter)