Global Creative Industry Trends- Implications & Investment Opportunities

for China 2009

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EXECUTIVE BRIEFEXECUTIVE BRIEFEXECUTIVE BRIEFEXECUTIVE BRIEF

Version 2.0 22 Jul09 by KCYoon 2

K.C Yoon

Mobile: +86 18675573803 Email : kcyoon.glg@gmail.com

Skype: kcyoon07

Linkedin: http://cn.linkedin.com/in/kcyoon

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WHAT ARE GLOBAL TRENDS AND IMPACT?

WHY MUST CHINA RESPOND?

HOW DOES IT IMPACT CHINA’S CREATIVE INDUSTRY?

WHERE ARE POTENTIAL OPPORTUNITIES?

WHY DOES CHINA HAVE A STRONG FOUNDATION?

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..DIGITAL CONVERGENCE + RISE of INFORMATION ECONOM Y is DRIVING GROWTH OF THE CREATIVE INDUSTRY ..where In tellectual

Property and Ideas have highest economic value-ad d …DATA IS THE NEW OIL

“Future of Media” Gerd Loenhard

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“’” ‘”Virtually every segment of the entertainment and media industry is shifting

..from physical distribution to digital distributio n of content," said Wayne Jackson, global leader of PWC .. "As this shift con tinues, we see more

revenue opportunities for entertainment and media c ompanies.”

Digitization of Traditional Content Increases Availability

“Future of Media” Gerd Loenhard

“Future of Media” Gerd Loenhard

New Media New Media New Media New Media

Players Gaining Players Gaining Players Gaining Players Gaining Market share!Market share!Market share!Market share!

New Media channels capturing consumers + Ad spend

Zenith Optimedia Jul2009

Business Models

change to collaborate consumers,

cross-media, etc

Fundamental Fundamental Fundamental Fundamental

Changes in Media Changes in Media Changes in Media Changes in Media Business ModelsBusiness ModelsBusiness ModelsBusiness Models

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OLD - Production of

content , distribution, accessibility

dominated by few

NEW - Content has power but also

faces competition; consumers

make content

Content Choice

Channel Access Choice

Technology Proliferates

Content Creation

Technology Creates New

Channels

Power to Few !Power to Few !Power to Few !Power to Few !

Power to the Power to the Power to the Power to the

People!” People!” People!” People!” Consumers Consumers Consumers Consumers

“Dictate“Dictate“Dictate“Dictate

Consumers Create Content

Limited Content Limited Channels

UK Creative Industry Report 2008

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World trade in Creative Goods grew at annual rate of 8.7% between 2000-2005, reaching USD

335bn in 2005..China is already the largest exporting nation

Emergence of the Creative & Cultural Industry globa lly will shift economic opportunities and significantly change t he value of

economic output , creating a new global class of DATA CORPORATIONS

1950’s Emergence of Oil & Auto

Global Corporations – Shell, Ford, GM…

Year 2000s- emergence of Global Corporations in

Software , Media –Microsoft, Google, Time-Warner…

UNCTAD Creative Industry Report 2008

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UK: Largest & fastest growing economic

sector

� Fastest growing sector (@ 5%) outperforming traditional sectors; economic output of UK’s creative sector comparable to the financial services sector

� Contributes close to 10% of UK’s GDP (2009)

� Employs 1.8 million people

Case Studies of Creative product

Impact on the economic

� Originally published as a Children book

� Sold 300 books in 63 languages

� Generating over USD 10bn in films and DVD licenses

� Helped drive revenues for entire industry in the US – Warner movies, online games EA and Amazon.com

� Originally conceived as a comedy series- unique due to the “no-speaking” mode

� Widely popular and distributed in over 200 countries worldwide

� Inspired 2 feature films and an animated cartoon series

Emergence of the Creative & Cultural Industry globa lly is part of the industrial evolution as economies migrate from man ufacturing-based to knowledge-based “creative digital age” based in t he 21st Century..

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WHAT ARE GLOBAL TRENDS AND IMPACT?

WHY MUST CHINA RESPOND?

HOW DOES IT IMPACT CHINA’S CREATIVE INDUSTRY?

WHERE ARE POTENTIAL OPPORTUNITIES?

WHY DOES CHINA HAVE A STRONG FOUNDATION?

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Despite censorship implementation, globalization and ability to access foreign media content through online/digital channels cannot be avoided... Need to

counter with availability of domestic content

Growth of Creative Industry as a key economic sector essential to the Chinese Government’s strategy to shift from export-driven to domestic

consumption-based economy.. Benefit of “Clean” growth =minimal energy usage with high-value-added

Large potential market - Chinese consumer’s consumption of media /entertainment increasing as spending power increases plus ability to access

content (largest internet population 330m; mobile users 550m)

Leverage on current global interest in China to spread Chinese history/culture as a “Softpower” foreign –policy tool to create goodwill internationally for the

Chinese nation

Rich Chinese history/culture + Rich human resource provides strong foundation for creative industry and growth of SMEs – generating jobs to fill-

gap for loss in export industry

Aligned with “Clean”” Economic Strategy

Large Domestic

Market

Foundation for Job

Creation

Counter Globalization with Domestic

Content

“Soft power” to Create Goodwill

China already a leader in “’new media’’; but need to “privatize” and expose to “market competitive forces ” SOE-dominated traditional media to ensure that

Chinese media groups can become a globally competitive force

Globally Competitive

Domestic Media

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WHAT ARE GLOBAL TRENDS AND IMPACT?

WHY MUST CHINA RESPOND?

HOW DOES IT IMPACT CHINA’S CREATIVE INDUSTRY?

WHERE ARE POTENTIAL OPPORTUNITIES?

WHY DOES CHINA HAVE A STRONG FOUNDATION?

Convergence

Drives Industry Change Creates

Opportunities

• World’s largest internet population at over 300m and 620m mobile users

• Digital content market already worth USD3bn

• Strong retail growth averaging 15-20% annually

• China to surpass Japan as World’s No.2 consumer economy by 2010

• Consumption growth drives ad spending to USD16bn- 5th largest globally

• Consumer traditional media consumption reached US$22bn

• “Open” media sector to drive growth- contribution to GDP 3.2% vs UK’s 10%

• Remain competitive • Create employment

Currently a USD80bn industry & growing at 14%

CAGR till 2015

Impact of each driver creates convergence & positive reinforcement effect on the industry …as China grows from a low consumption base from a relatively “restricted” industry to a developed nation with open media & entertainment consumption 1

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CONSUMER: China already 3rd largest consumer of luxury goods – will be No.2 by 2015 with market value of USD 12bn

and 29% global market share (Grail Research 2008) ; By 2010 will surpass Japan as 2nd largest consumer economy

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Growth of Chinese Middle-Class

Urbanization and Growth of Cities

Growth and Impact of the Internet

> 200 Cities with >1M residents

By 2015, >300M lower-middle class; 100M luxury consumers

NOW >300M users; >RMB 120B online

consumer sales

Grail Research : 2008

China Retail Sales & Disposable Income Trends

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Chinese Government

deliberate shift to focus on increasing

private consumption as

long-term economic strategy

FT July 2009

China Statistical Abstracts 2008

National Bureau of Statistics “’… consumption accounted for 4.3 percentage points of China's 6.1 percent Q1 2009 GDP growth, compared with 0.2 percentage points for net exports ..2 percentage points for investment…”’

National Bureau of Statistics “’… consumption accounted for 4.3 percentage points of China's 6.1 percent Q1 2009 GDP growth, compared with 0.2 percentage points for net exports ..2 percentage points for investment…”’

Chinese Government strategy to drive shift in econ omy appears to be slowly bearing fruits..e.g. Strong growth in the C hinese auto sector

despite global slump – a major positive consumpti on indicator

USD600 bn stimulus

package to drive Chinese

economy

+ +

China Becomes World’s largest Auto Producer

and Auto Market for 1H2009

overtaking the US

2 Key Issues : (1) Current low GDP share of

private consumption 35% (Half of the US) ;

(2) Rural income levels low compared to urban with 2/3 of China’s population rural

China Passenger Car Assoc.

Retail sales

robust & recovering as

result of stimulus packages

DIGITAL : Currently over 600M Chinese have digital access and by 2015, multiple digital access channels will reach 87% of the

population, with a significant percentage being new consumers in the 3rd tier and smaller cities (over 60% of the population)

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BCG Report 2008

Penetration of digital devices

will extend from current 1 st /2nd

tier cities to reach all the way

to rural China

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BDA China 2008

Emerging digital channels like IPTV already

gaining market share

DE-REGULATION =

TRANSFORMATION OF CHINA’S

CREATIVE & MEDIA INDUSTRY

= NEW GROWTH

OPPORTUNITIES

DE-REGULATION =

TRANSFORMATION OF CHINA’S

CREATIVE & MEDIA INDUSTRY

= NEW GROWTH

OPPORTUNITIES

Coming privatization of Publishing sector in

market valued at USD19bn

Growth of new Mobile Media market , currently valued at USD14.7bn

Coming conversion to Digital/cable TV in market

valued at USD12bn by 2012

NEW DRIVING FORCE

De-regulation brings competition, accelerates chang e from “standardization” to “innovation & differentiation”, tra nsforming the

industry and creating “New Growth” momentum in the in dustry hence “New Investment Opportunities” 17

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+ +

Partnerships between foreign &

domestic media groups

Increased M&A within domestic media

market – between SOEs & new media

companies

Cross-media collaborations +

collaborations across media value-chain

The Chinese Government has targeted Creative & Medi a industry as a key sector for future growth- driving change throug h de-regulation, encouraging digitization across industries, upgradin g of telecoms &

technology infrastructure and the recent roll-out o f 3G..…

Film - 10 th largest global market valued

at USD400+m

Publishing – market valued at USD 19bn

TV - Largest global broadcast market

valued at USD22bn “Bull run” in media consumption and “loosening” with broad participation across all media, including traditional media(TV). China has world largest TV

audience market with over 90% penetration and 1283 channels

“Bull run” in media consumption and “loosening” with broad participation across all media, including traditional media(TV). China has world largest TV

audience market with over 90% penetration and 1283 channels

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Skillnet Report 2008

Employing over 11m people in 2008

Employing over 11m people in 2008

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China’s internet/digital share of media market now at 11% (2008) with digital content market already worth > USD 3 billio n… strongest growth

potential from mobile TV and online games…

BDA Mobile Broadband report China 2008

Breakdown of Media Market Share

PWC Report 2008

Chinese traditional broadcast market i.e. TV is th e largest sector of the Creative industry valued at USD 20bn (2008) with ov er 2000 channels

and access to 400m homes or 1.2 billion consumers

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CCBN 2009 Visit Report

Chinese internet users from 2000-2008, surpassing US in June 08

as the world’s largest

CNICC Survey 2009

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WHAT ARE GLOBAL TRENDS AND IMPACT?

WHY MUST CHINA RESPOND?

HOW DOES IT IMPACT CHINA’S CREATIVE INDUSTRY?

WHERE ARE POTENTIAL OPPORTUNITIES?

WHY DOES CHINA HAVE A STRONG FOUNDATION?

Close to 4000 years of Chinese history

beginning from 2852BC… 25 major dynasties and over 100s of emperors

Over 1000 years of mythology since 12th Century BC..

recorded in literature, poems

and songs

“Chinese Dragon” is one of the key creature in Chinese mythology

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The cultural heritage within China gives a firm fou ndation for content & creation of modern entertainment + development of c ultural services and products eg. Cultural tourism, historical artif acts reproduction,

cultural entertainment & performances…

China has 28 officially recognized written languages, 22 ethnic minority and close to 100 spoken dialects

By end 2008, 38 sites in China

identified as World Heritage by

UNESCO with 27 Cultural sites

The famous Terracotta warriors of Qin

Minority tribes in China with their unique customs and cultures

Recorded history of pottery began

11,000 years ago.. dominating world

ceramic trade from 11th to 19 th century

Other aspects of Chinese culture

have already seen growing demand across the world

SHANDA

(NASDAQ: SNDA) - The world’s largest

online gaming company with

market cap of USD 3.8bn

BLOCKBUSTER

MOVIE “RED CLIFF”

A recent USD 80m movie directed by Director John Woo

“The Battle of RedCliff” in 208 A.D. during the Eastern Han Dynasty between two famous generals is one of most famous battle sin Chinese history

History, myths, folklores & heroes have been succes sfully leveraged to create today’s entertainment and products in movies , TV serials,

animation, online games and merchandise

Already grossed over USD120m in Asia alone part 1 of the 2 part movie.. “..you can’t beat Red Cliff as the most fabulous and classiest movie this summer” The Observer UK 2009

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Using popular Chinese folk lore, heroes as background & storyline for online games

L ITTLE LAMB (HKSE: 0968)

The most famous Chinese hotpot

chain brand globally

SHANGHAI

TANG The first luxury lifestyle fashion brand to emerge

from China

Shanghai Tang is an international clothing chain with over 20 outlets globally, founded in 1994 by a HK businessman and now controlled by Richemont. Shanghai Tang is a Chinese label that set out to rejuvenate Chinese fashion. The fundamental design concept is inspired by traditional Han Chinese clothing combined with the modernity and dynamism of the 21st century.

The opportunity to merge Western management practic es & branding concepts with strong Chinese cultural products/serv ices to create a

global brand has high probability of success 24

Based on the traditional Mongolian love for lamb hotpot, Little Lamb is now a global 350 chain restaurant in China, US, South Korea, Japan and Indonesia

Little Lamb was invested by UK VC 3i and listed on HKSE in June 2008 raising just over USD100M with a USD500M Market capitalisation

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TENCENT (HK:0700)

In C2C : The world’s largest and most profitable online social network

ALIBABA (HK: 1688)

In B2B : world’s largest B2B

company with market cap of USD

12bn

“QQ” is the recognized brand for over 300M consumers

ALIBABA has developed the world’s largest business member base of 40m in over 240 countries. ALIBABA wins by offering offline

and online services plus service to ensure trust/payment ( the key

issues faced with sourcing from SMEs)

ALIBABA has developed the world’s largest business member base of 40m in over 240 countries. ALIBABA wins by offering offline

and online services plus service to ensure trust/payment ( the key

issues faced with sourcing from SMEs)

TENCENT has achieved revenues of over USD 1 bn in

2008 at an operating margin of 44%. TENCENT is ranked Top

10 in Business week’s 2009 Top 100 Global IT- the only Chinese

company to do so

TENCENT has achieved revenues of over USD 1 bn in

2008 at an operating margin of 44%. TENCENT is ranked Top

10 in Business week’s 2009 Top 100 Global IT- the only Chinese

company to do so

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WHAT ARE GLOBAL TRENDS AND IMPACT?

WHY MUST CHINA RESPOND?

HOW DOES IT IMPACT CHINA’S CREATIVE INDUSTRY?

WHERE ARE POTENTIAL OPPORTUNITIES?

WHY DOES CHINA HAVE A STRONG FOUNDATION?

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“Content”+”Consumption”= ‘Hard’” Economics

Traditional + New Media

Cultural & Entertainment/Leisure

Content Creation • TV/Radio/music production/syndication • Film /video production •Licensing (brands, merchandise, content) • Animation/ 3-D • Mobile content • sports broadcast •Online game • Business & financial news/info •Training & Education (Online + Offline)

Distribution • Digital TV channels • TV/radio channels • Online video/IPTV •Outdoor/alternative advertising

Publishing • Magazines- youth, female, sports • Newspaper • School educational text • Digital books/e--book

Services • Media buying agencies • Ad agents •Marketing/ database services • Production services •Outdoor/alternative advertising • Multimedia design

Specialty Retail/Brands

• Lifestyle focused-e.g.tea houses • Wedding service • Healthfood • Handcrafted/Designer accessories • Designer fashionwear

New Media Technology

• X-media content creation apps • X-media accessibility apps

Location-based Entertainment

• Cinema/3-D theatres • Themed restaurants/Regional Cuisines chains • Themed parks • Music Festivals aka Ibiza • Live concerts & performances • Live theatre/ performing arts

Cultural Entertainment

• Cultural tourism • Cultural performances • Sports entertainment

Services

• Wedding services • Traditional beauty spa and wellness • Sports agency • Fashion Design

Products

• X-media consumer gadgets/widget • interactive media devices

While China’s Creative market is not matured..good “Content” and “Service” will have a huge potential market due to gr owing consumer

demand ….the industry extends beyond media, encompas sing cultural, entertainment & leisure

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Sector Market Size in 2009

(USD)

Shifts Investment Opportunity Attractive

IndustryIndustryIndustryIndustry RegulationRegulationRegulationRegulation TechnologyTechnologyTechnologyTechnology

Print & Publishing

(Digital Publishing)

20 bn

(9 bn)

-Fragmented market -top 20 companies have only 20% market share (cpr to US where is 80%). - De-regulation will drive consolidation (>10 large publishing groups have been formed)+ acquisition of other parts of value-chain e.g. Content house, digital media providers (digital publishing valued at RMB53bn in 2008)

Opportunity to consolidate market share, leverage digitization to capture online book & digital news market.

Medium- High

Magazine market has significant opportunity for growth

TV (DT+IPTV)

207 bn -TV has deep and broad penetration across China hence great market potential but currently lacks high-quality content - Consolidation (SARFT made announcements encouraging sector M&A in Aug 2009) and leveraging on cross-media and also strategic partnerships will see overall sector growth continue

-SAFRT has plans to drive user conversion from analogue to digital by 2012 -Partnership with foreign content producers to produce niche channels (education, healthcare, wedding focused )

Medium- High

Radio 430m -Industry slowly recovering in revenues. Smaller stations will be consolidated as part of major cross-media groups

Growing consumption as car population increased

Medium

Film/Cinema 6 bn - Chinese cinema revenue increased >30% in 2008, reaching over RMB4bn and looks to continue strong growth

Gap in content production- opportunity to build creative content

Medium

Interactive Media ----- -Already open market hence highly competitive. -Consolidation in eg. Outdoor media advertisement companies already seeing consolidation

- Leverage on technology like interactive media to improve advertisement effectives

Medium-High

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CCC Analysis

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•Lack of content producers – restrictions on foreign content broadcast

• Consumer switch to “pay-TV” slow

•Lack of content producers – restrictions on foreign content broadcast

• Consumer switch to “pay-TV” slow

•Current market dominated by terrestrial TV; with cable and digital expected to gain market share

• IPTV increasingly gaining market share with current numbers ay 1m viewers

• Video-sharing sites

•Current market dominated by terrestrial TV; with cable and digital expected to gain market share

• IPTV increasingly gaining market share with current numbers ay 1m viewers

• Video-sharing sites

•No clear national leader although recent success of Hunan TV gaining them national market

• Dominance in regions eg. SMG in Shanghai

•No clear national leader although recent success of Hunan TV gaining them national market

• Dominance in regions eg. SMG in Shanghai

•Channel networks are all State or domestic-owned

• Over 1000 production companies

• Current regulations restrict foreign ownership

•Channel networks are all State or domestic-owned

• Over 1000 production companies

• Current regulations restrict foreign ownership

Barriers to entry

Industry Competitiveness

Potential Substitutes

Industry Gaps

•400m Households reaching over 97% population

•163m households on cable +45m homes on digital net

•Over 2000 TV Channels + 320 Broadcast

Key Stats

• Top viewer ratings for factual programming with 13% watching TV for news

• TV Dramas comprised 36% of all TV content and 48% of ratings

• Variety/Entertainment content increasingly poular

Ratings

•2008 •Revenues for broadcast USD21bn • Revenues for cable TV USD5,.09m • Digital pay-TV at USD203m • TV accounted for 76% of USD64 bn total ad spend in China

Revenues

•Foreign investors can take part in china’s digital TV space through investing in a number of listed entities in the space

•Foreign investors can take part in china’s digital TV space through investing in a number of listed entities in the space

Cable & Digital TV/IPTV

•SMG signing a co-production agreement with Mexico’s Televisa to co-produce telenovela’s successful “Dumb Girls’s Don’t go to Heaven

•SMG signing a co-production agreement with Mexico’s Televisa to co-produce telenovela’s successful “Dumb Girls’s Don’t go to Heaven

Co-production

•Format licensing of foreign content- Deal between Hunan TV and Granada’s internationally popular Saturday Night Takeaway format

•Format licensing of foreign content- Deal between Hunan TV and Granada’s internationally popular Saturday Night Takeaway format

Content

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DTV ‘s forecast growth is in line

with SARFT’s target to complete

conversion by 2012

Upon penetration – other value-added services like on games and targeted content, healthcare will create new

revenues

China will have one of the world’s largest DTV and IPTV market; DTV will be focused in urban areas surrounding Beijing , Shanghai and

Guangzhou

Growth of IPTV would see close

to 20m subscribers by

2013

Gross revenues of leading digital Tv Operators

“…by the end of 2010 all book, audio-visual and elect ronic publishing by ministries of the central government shall be separated from Government agencies and transformed into independent market

players..GAPP is encouraging publishers to accept private an d foreign capital, including that raised through public listing …” Apr 2009

Currently all publishers have to be affiliated with an upper-level authority- usually

government agencies, political parties or academic institutions

Foreign ownership of publishing is currently not allowed except through cooperation with Chinese publishers through copyright trading

and public cooperation

Transformation of USD 20bn Publishing Market between

2009 and 2010

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2009 onwards will see formation of large Chinese publishing media

groups, planning for IPO after M&A;

printers are buying content houses & key components of

the value-chain

Top 20 Publishing House only control 20% of the market- fragmented market gives

opportunities

Current-

Directive-

2007 Successful IPO

of 1 st Publication company -

Liaoning Press (Shanghai Stk)

Continued Strong Growth

Incorporated private and entrepreneurial companies into the group under a separate umbrella

This new entity helped to drive new growth and profitability

Company value now at RMB5.7B over 2X on IPO and one of the largest chinese media conglomerates

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Track spin-offs as result if regulatory changes from State-Owned Media seeking business

expansion/foreign partnerships

Watch potential partnerships/ M&A/ extension between online + offline / new +traditional media, brands/services that will increase

overall value

Seek opportunities in combinations where identified consumer demand can increase significantly in collaboration with media

Find opportunities where market leader is created from a combination of the consumer/

industry/ regulatory/ technology shifts

Consumer Industry Regulatory Technology

Other sectors of particular focus are in Education, Healthcare, Beauty Care, Female-focused fashion, Animation content, S ports related

entertainment (some of these could be undervalued l isted equities)