Take Four: Nicefilm Rides Entertainment Rebound To New Listing Attempt

Key Takeaways:

• Nicefilm has applied a fourth time to list in Hong Kong, reporting its 2022 profit jumped by 2.5 times, mainly due to strong IP sales 
• The entertainment company’s profit has been volatile in the past few years due to the hit-and-miss nature of the filmed entertainment business

By Emily Chan

It’s “take four” for Chinese web drama and online movie producer Nicefilm Entertainment Holdings Ltd., which has filed to list in Hong Kong that many times, including its latest application earlier this month following an earlier try in March and two last year. But it’s not easy making a living in showbiz, and Nicefilm’s latest prospectus shows why it could face more challenges winning over investors in the latest bid to put its name in lights on the Hong Kong big board.

Nicefilm was established in 2016 and operates four major businesses. Its main breadwinners are web series and online movie productions, while it also makes theatrical movies and licenses its intellectual property (IP). Since its establishment, the company has made 29 revenue-generating web series and 61 web movies, mostly distributed on China’s five major online video platforms: Youku, iQiyi (IQ.US), Tencent Video, Mango TV and Bilibili (9626.HK).

According to the latest prospectus, the company’s revenue and net profit have been quite volatile over the last three years, which is typical for the hit-and-miss filmed entertainment industry, especially smaller players like Nicefilm.

Its revenue rose 33% from 259 million yuan ($35 million) in 2020 to 346 million yuan in 2021. But then it fell more than 40% to 206 million yuan in 2022, before more than doubling year-on-year to 162 million in the first half of 2023. Its profit has been similarly volatile, falling from 31 million yuan in 2020 to 18.1 million yuan in 2021. The figure jumped to 47.6 million yuan last year, mainly due to profits from 75 million yuan in IP licensing sales during the year.

Hit Reliant

Nicefilm’s prospectus illustrates just how important a single hit can be to the company’s business. It disclosed that its revenue from a single web series varies widely, from as little as 100,000 yuan to as much as 74.1 million yuan. Individual web movies are similar, ranging anywhere from just 5,000 yuan to as much as 39.4 million yuan. That means that having a hit or dud can make all the difference between big and small profits in any given year, and serious cost overruns can also have a big impact.

From a business perspective, Chinese web series mainly fall into three types. Revenue-splitting dramas are those where the customer, often a video platform, pays a license fee to the production company in the form of revenue sharing based on a pre-agreed formula. Customized dramas are usually made specifically for one customer, who determines the product’s content, with the production company acting mostly as producer. The third type, copyrighted dramas, see production houses like Nicefilm collect a fixed license fee from video platforms and other customers. 

Profits and profit margins for each web series and online movie depend on a range of factors, including the revenue model, type of program, investment size and ratio and the overall industry environment.

Generally speaking, gross margins are higher for revenue-splitting and copyrighted dramas. Customized dramas, which have become a favorite for more platforms in recent years, usually have the lowest margins. Gross margins for revenue-splitting dramas ranged from 35.8% to 53.7% over the last three and a half years, while copyrighted dramas ranged from 42.3% to 83.3%. But customized dramas generated much thinner gross margins ranging from as low as 5.6% to 19.9%. 

Nicefilm mainly produced copyrighted dramas in its early stages. But that has shifted to the least profitable customized dramas in recent years as major video platforms shifted to self-produced dramas to differentiate themselves from their peers. As that happened, there has been less demand for copyrighted dramas that were traditionally the most profitable.

As demand has shifted, the revenue contribution from copyrighted dramas took a dive from 45.2% of Nicefilm’s total revenue in 2020 to just 5.5% in 2021, and the figure has essentially been nil since last year. Customized dramas have moved in the other direction, accounting for 47.3% of revenue in the first half of this year, up sharply from just 15.2% in 2020. 

The pandemic, combined with unattractive margins for customized dramas, caused revenue from Nicefilm’s web series business to plunge nearly 70% year-on-year to a meager 79.1 million yuan last year. It only survived through the sale of licensed IP. While the situation has improved this year after China ended its “zero Covid” policy, companies like Nicefilm will continue to get squeezed if video platforms continue to increase their investment in self-produced dramas.

Net Drama Rebound

Things have improved somewhat this year, with Nicefilm’s revenue from net dramas reaching 120 million yuan in the first half of the year. That performance was boosted by the mid-June broadcast of the revenue-splitting romantic comedy “When I Fly Towards You,” which, with sales of more than 60.8 million yuan, was the best revenue-splitting release this year for video platform Youku. That strong showing boosted revenue-splitting dramas from only 4.4% of Nicefilm’s revenue in 2020 to 26.6% in the first half of this year. 

The recent rise of short-video platforms and micro-short dramas will also pose a challenge in the years ahead for traditional filmed entertainment makers like Nicefilm.

Among Nicefilm’s listed peers, Strawbear Entertainment (2125.HK) reported 980 million yuan in revenue last year and 462 million yuan in the first half of 2023, while Linmon Media Ltd. (9857.HK) reported revenues of 951 million yuan and 422 million yuan for the same two periods, respectively, both far higher than Nicefilm. 

But investors are hardly confident in any of these companies due to the market’s volatile nature. Shares of Linmon Media, which listed last August, shot up as high as HK$34.15 after its box office success during this year’s Lunar New Year holiday. But they have crashed since then and now trade around the HK$9 level. Strawbear listed in January 2021 and rose as high as HK$15.30 in April that year. But lately they have sunk to an all-time low of HK$0.55 on Sept. 21, with a price-to-earnings (P/E) ratio of just 4.4 times and a market capitalization of HK$392 million.

Given its peers’ weak performances, Nicefilm looks unlikely to get valued very highly, even though 10.4% of its shares are indirectly owned by Alibaba Pictures Group Ltd. (1060.HK). But first we’ll need to see if the fourth time finally brings some action for the company as it moves ahead with its latest attempt to to see its name in lights.