Cartoons and Lingerie Were Behind Hong Kong's Top Performing IPOs in 2015by
Best 2015 debut China Animation soared 125% as box office grew
Younger Chinese to drive spending on leisurely pursuits
As a boy in China in the 1970s, Jason Zhuang Xiangsong was captivated by comics based on the legendary Monkey King and dreamed of creating a Chinese version of Astro Boy -- a renowned Japanese animated character who flies through the air on rocket-propelled feet.
Now Zhuang, chief executive officer of China Animation Characters Co., has managed to soar high himself. His company had the best-performing initial public offering in Hong Kong last year, returning more than 125 percent to investors between its March debut and the end of the year.
"We are very confident in our business model," Zhuang, 46, a native of Chaozhou in Guangdong province who in 2013 started his company making toys based on cartoons licensed from Japan and has been diversifying into animation-focused amusement centers in malls, film-making and virtual reality games.
Along with China Animation, the next two top-performing consumer-focused companies that went public in Hong Kong last year, lingerie-maker Regina Miracle International Holdings Ltd. and cinema operator Imax China Holding Inc. highlight a shift in Chinese buying habits. They returned 102% and 76% respectively on the index of Hong Kong IPOs with at least $50 million in market value tracked by Bloomberg. As Beijing’s three-year austerity and anti-graft campaigns curb displays of wealth, rising average wages over three decades have spawned a working and middle-class with more discretionary cash.
“Anti-corruption campaigns hurt high-end luxury consumption, but mid-end luxury is more affordable for the middle class, and it will gain traction in China,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “Investors won’t neglect the big trend of moving towards a more service- and consumption-driven economy.”
China Animation fell 1.8 percent by the close of Hong Kong trading Monday, trimming the stock’s gain since its debut to 108 percent amid a broader sell-off in Chinese markets. Regina Miracle slipped 0.9 percent, while Imax China declined 4.1 percent. The Hang Seng Index retreated 1 percent.
There’s room for growth. Recreation currently accounts for 9 percent of personal consumption spending in China, compared with 16 to 18 percent in the U.S., Japan and Korea, Goldman Sachs Group Inc. analysts wrote in a September report.
Millennials -- typically born after 1980 -- grew up in a more stable China than their parents and are exposed to Western culture, which “will make them the prime consumer group to drive spending on leisure,” the report said, citing sports, travel, media and online gaming as key areas to monetize.
Box office takings in the country are expected to grow 20 percent a year over the next five years to reach $18.8 billion in 2020, overtaking the U.S. market in 2017, according to Credit Suisse Group AG. That’s benefiting large-screen cinema operator Imax Corp.’s China unit.
“We’re very bullish on how the Chinese movie industry is going to evolve,” Richard Gelfond, CEO of the Ontario, Canada-based parent company, said in an interview. “I think there are less entertainment options in China than in the U.S., for example, meaning sports leagues, concerts and other things like that.”
Imax currently has 268 screens in China, plans to open more than 200 more, and expects to invest as much as $20 million in two Chinese movies a year, according to data provided by the company. Imax has "lots of capital" looking for more opportunities, Gelfond said.
“Star Wars: The Force Awakens,” which opens in China including on Imax screens Saturday, could gross as much as 1.5 billion yuan ($230 million) in the country, according to Nomura Holdings Co.
China Animation’s growth plan focuses on developing animated characters, both for screen and amusement parks. It currently derives more than 90 percent of sales making toys for Japanese animators, and about 9 percent from an amusement park it opened a year ago in a Shanghai shopping mall.
Revenue rose 21 percent to HK$259 million ($33 million) in the six months ended Sept. 30, the latest period reported. The company is targeting its sales contribution from the theme parks and virtual reality businesses to rise to 50 percent by the end of this year, Zhuang said.
Licensed from Tokyo-based video game-maker Sega Sammy Holdings Inc., its Joypolis indoor theme park touts a digital aquarium and is scheduled to add a roller coaster featuring animation characters and virtual reality machines.
“We saw that the traffic and Chinese people’s consumption power in the theme park was far higher than we had expected,” said Zhuang, who’s preparing two more shopping mall-based Joypolis parks in China. “In the past, we only read small-sized comic books, and we had very limited animation films, such as Astro Boy, showing in cinemas. Now it’s more diversified.”
Zhuang’s creation to rival Astro Boy is a purple-haired, singing and dancing virtual pop singer named Violet who has released singles and held performances, including a concert in Shenzhen that sold 4 million yuan worth of tickets last year, he said. China Animation is currently producing a movie based on the doe-eyed, three-dimensional cartoon girl, scheduled to hit cinemas this year, he said.
For revenues to grow, characters need to resonate with audiences, said Tom Doctoroff, Asia Pacific CEO at advertising agency J Walter Thompson Co.
“The question is if it’s going to be a franchise that deepens over time, and that’s where I am skeptical,” said Doctoroff, who has worked in China since 1998 and written books on selling to Chinese consumers. “As long as you have that loyalty or the consistent level of quality, I think then investors are going to be satisfied.”
Consumer sectors including gambling, high-end liquors and luxury gifts have suffered from President Xi Jinping’s crackdown on graft, according to a Morgan Stanley report in December.
Among the large consumer IPOs in Hong Kong, Chow Tai Fook Jewellery Group is languishing at one-third of its offer price, while luxury goods-maker Prada Spa and casino operator MGM China Holdings Ltd. have both plunged more than 35 percent below their 2011 Hong Kong debuts.
While demand in the luxury sector has been negatively affected by anti-graft activities, “it is still unclear whether we have seen the bottom yet,” Morgan Stanley analysts including Louise Singlehurst wrote in a Dec. 15 report.
Yet high-end lingerie could be regarded as safe from scrutiny as it’s not used as a gift in return for official favors, and even gem-encrusted bras are generally not worn to be shown in public. More Chinese consumers prefer branded intimate wear now, due to rising living standards and income levels, according to consultancy Frost & Sullivan’s president of Greater China, Neil Wong.
The lingerie market in China has been growing in the double digits since 2010 and exceeded $20 billion as of 2014, the consultancy said.
That’s a boon for Hong Kong-based Regina Miracle, whose factory in Shenzhen produces lingerie for premium brands such as Victoria’s Secret, Calvin Klein and Under Armour. Its October public offering made Chairman Hung Yau Lit a billionaire.
"By definition it’s not for ostentation, it’s not to show off," said John Hooks, director of high-end Italian lingerie-maker La Perla, which has eight China boutiques and plans to open as many as four more by the end of 2017. "We’re not really affected by a lot of the more public clampdowns on conspicuous consumption."