Huayi Brothers used 'Feng Xiaogang' to pay off debts.
Zebra Consumer Chen Biting
The financial crisis has persisted for several years, and Huayi Brothers has sold everything it can. This time, it's finally Feng Xiaogang's turn.
Yesterday, the company disclosed an announcement stating its intention to transfer its 70% stake in Dongyang Meila to repay a 350 million yuan loan to Alibaba Pictures. The most valuable asset of this subsidiary is Feng Xiaogang's IP.
Selling assets can only provide temporary relief. The fundamental issue for Huayi Brothers is to establish a positive cycle of content production and return to the mainstream of China's film and television industry.
Selling Assets to Repay Debts
Unable to repay a 350 million yuan loan to Beijing Alibaba Pictures Culture Co., Ltd. (hereinafter referred to as "Alibaba Pictures"), Huayi Brothers can only settle the debt through asset transfers.
The asset in question is the 70% stake in Dongyang Meila, which the company acquired at a high price years ago. The most valuable aspect of this company is Feng Xiaogang.
Yesterday, Huayi Brothers (300027.SZ) announced that the proposal had been approved by the board of directors and would be submitted for review at an extraordinary general meeting on August 8.
In 2019, due to financial needs, Huayi Brothers borrowed 700 million yuan from Alibaba Pictures with a five-year term. The loan was secured by the company's 70% stake in Dongyang Meila and partial assets of its subsidiary, Jiali Culture, with personal joint liability guarantees provided by the actual controllers, Wang Zhongjun and Wang Zhonglei, and their spouses, Liu Xiaomei and Wang Xiaorong.
In November 2023, Huayi Brothers' wholly-owned subsidiary, Huayi Entertainment Investment, transferred its 100% stake in Jiali Culture and a 130 million yuan claim to Zhonglian Shengshi Culture (an affiliate of Alibaba Pictures) for 350 million yuan, offsetting the corresponding amount of the loan. After the transaction, Huayi Brothers' outstanding loan principal to Alibaba Pictures remained at 350 million yuan.
Earlier this year, the two parties agreed to extend the loan for six months until July 24, 2024. In early July, they further extended it for three months until October 24, 2024.
Given Huayi Brothers' current financial situation, it is unlikely to raise a large sum of cash to repay the debt in the short term, leaving asset transfer as the only viable solution.
Dongyang Meila was established in September 2015 and is currently owned 70% by Huayi Brothers and 30% by Feng Xiaogang. In 2023, the company reported revenue of 124 million yuan and a net profit of 37.6042 million yuan (consolidated basis). In the first five months of this year, revenue was 675,500 yuan, with a net profit of 1.6273 million yuan (consolidated basis).
As of the end of May this year, Dongyang Meila's total assets were 378 million yuan, with net assets of 260 million yuan.
The same Dongyang Meila stake, which once held considerable assets and the presence of Feng Xiaogang, has seen its value shrink significantly.
The 1 Billion Yuan Acquisition
"Zhonglei and Xiaogang are the closest brothers in my life and work." This is a statement Huayi Brothers' chairman, Wang Zhongjun, has made on multiple occasions.
Wang Zhonglei is his biological brother, and the two have co-founded the company, sticking together through thick and thin. Feng Xiaogang is his business partner, with mutual admiration and shared success.
In 1994, Wang Zhonglei returned to China from the U.S., earning his first pot of gold through advertising. Introduced to Feng Xiaogang, who had just directed "The Dream Factory," the two hit it off and began commercializing Chinese films together.
In 1998, Wang Zhonglei invested in Feng Xiaogang's film "Sorry Baby," which grossed 50 million yuan at the box office, dominating that year's New Year's film season.
Subsequently, their collaborations included films like "Big Shot's Funeral," "Cell Phone," "Assembly," and "If You Are the One," bringing fame and fortune to both Huayi Brothers and Feng Xiaogang.
In 2009, Huayi Brothers went public on the ChiNext board, becoming the "first private film stock." The company's stock price soared, and the Wang brothers' wealth skyrocketed.
Wang Zhongjun did not let his brother down. Before the IPO, Feng Xiaogang was the tenth-largest shareholder of Huayi Brothers, holding a 2.88% stake.
In 2012, after 18 years of preparation and heavy investment, Feng Xiaogang's "Back to 1942" was released. This film, which drained Feng Xiaogang's energy, suffered a box office flop. For several years afterward, Feng Xiaogang was unusually quiet, perhaps as he once tweeted: "My love for film is fading."
A 2015 deal forced Feng Xiaogang to reignite his passion. That year, Huayi Brothers acquired a 70% stake in Feng Xiaogang's Dongyang Meila for 1.05 billion yuan. At the time, the company had been established for only a few months and had almost no assets. Huayi Brothers' exorbitant purchase was essentially buying Feng Xiaogang's future years.
As part of the deal, Feng Xiaogang was tied to a five-year performance commitment (2016-2020), pledging a minimum of 100 million yuan in after-tax net profit for 2016, with a 15% annual increase thereafter, totaling at least 674 million yuan over five years. If the targets were not met, Feng Xiaogang would have to compensate in cash.
Huayi Brothers showed generosity to its brother by paying the acquisition sum in one lump sum.
At the time, both parties were confident because Dongyang Meila had already lined up projects like "Cell Phone 2," "Never Forget," "If You Are the One 3," and "12 Love Letters," along with other film, TV, and variety shows. With sequels to classic IPs and Feng Xiaogang's involvement, meeting the targets seemed achievable.
In 2016 and 2017, "I Am Not Madame Bovary" and "Youth" were released, allowing Dongyang Meila to barely meet its performance commitments for those two years.
However, "Cell Phone 2" encountered unexpected obstacles during production and ultimately was not released. In 2018, Dongyang Meila's actual net profit was 65 million yuan. In 2019, it exceeded the target with 164 million yuan.
In 2020, external adverse conditions made it impossible to turn things around. That year, Dongyang Meila's net profit was only 5.5238 million yuan.
After five years, Feng Xiaogang paid 230 million yuan in compensation to Huayi Brothers, freeing himself from the shackles.
Still Short on Cash
At its peak, Huayi Brothers was half of China's entertainment industry. Back then, top domestic film stars were either signed to the company or eager to appear in its productions. Huayi Brothers rarely missed a major film season, and at its zenith, the company earned nearly 1 billion yuan annually.
Amid this prosperity, Huayi Brothers' ambitions grew wildly, leading to a spree of diversified acquisitions in pursuit of an "Eastern Disney" entertainment empire.
Excessive acquisitions inflated the company's goodwill. Once goodwill impairment exploded, the damage was irreversible. Since 2018, the company has reported massive losses for six consecutive years.
During this period, the foundation of Huayi Brothers' film business weakened, while competitors rose, establishing their own stylistic systems.
In recent years, Huayi Brothers has been mired in a cash crunch. Chairman Wang Zhongjun, once known for his leisurely lifestyle, has resorted to selling mansions, artworks, and seeking help from his wealthy friends to keep the company afloat.
As of the end of March this year, the company's debt-to-asset ratio stood at 79.79%, far above the average of its peers in the Shanghai and Shenzhen markets. Its current ratio and quick ratio were 0.560 and 0.455, respectively, indicating liquidity issues and significant short-term debt pressure.
The actual controllers, Wang Zhongjun and Wang Zhonglei, are temporarily overwhelmed.
As of July 20 this year, the brothers collectively held a 14.16% stake in the listed company, with 98.28% of their shares pledged.
In the next six months, 358 million of their pledged shares (91.15% of their holdings) will mature, corresponding to 480 million yuan in financing.
At an earnings conference in May this year, an investor asked vice chairman and general manager Wang Zhonglei: "I’ve been a steadfast supporter of Huayi Brothers since 2019, but my investment has lost 50%. Is my loyalty worth it?"
Wang Zhonglei did not answer directly.
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