CHINA ANIMATIONS AND TOYS MARKET OPPORTUNITY REPORT

2010

BY CALVIN NG
APPLE TOON.com

China Animations and Toys Market Opportunity Report
China animations industry is growing steadily …

Animation Market is an emerging sector in China and is expected to grow steadily. Favorable policies framed by the Government and allocation of funds by the provinces are benefiting the players today. The market trends reveals that players in the market are forming joint ventures, mergers and acquisitions are taking place while private equity and venture capital firms are investing in the business of the animation companies.

The Chinese-made animated movie industry is also booming, “The Pleasant Goat and Big Big Wolf” an animated movie base on the same IP TV series launched at the beginning of 2009 and hit a box office of above RMB 80 million with a production cost of just RMB 6 million. In addition to children, many white-collar workers liked the film. "How to marry a husband like the Big Big Wolf" became a hot topic on the Internet.

China's cartoon industry has been expanded to more than 170,000 minutes of animation last year and half of this year had already shot pass this figure. The continuous efforts of the government, which set up supporting policies to boost domestic animation industry, will spur continuous growth. During the first five months of this year, 221 Chinese-made cartoons (more than 270,000 minutes) were produced for domestic television channels, according to the State Administration of Radio, Film and Television (SARFT).

In 2000, the State Administration of Radio, Film and Television (SARFT) required local TV stations to get approval from the administration and set quotas for imported cartoons to air on TV. In 2004, it issued another regulation, stipulating that at least 60 percent of cartoon programs aired in any given quarter had to be domestic. In September 2006, the SARFT banned all foreign cartoons from 5 p.m. to 8 p.m. Last February it extended the ban to 9 p.m. Additionally, the Chinese government has made an annual investment of 200 million yuan in the animation industry since 2006. Last year July, the Ministry of Finance and the State Administration of Taxation jointly issued a favorable taxation policy to support the development of comic and animation industry.

China currently has above 6,000 companies making cartoons and comics. According to a report from the Ministry of Culture (MOC) and the industry now employs more than 400,000 workers. However, besides the lucky "The Pleasant Goat and Big Big Wolf" whom hit it big time on the silver screen others such as the Hong Kong co-production “McDull”, Kung Fu Kindergarten, other animated films, including The Magic Aster, Happy Running, and the 3D Prequel of the Monkey King didn't do so well at box office.

China’s growing ambitions coincide with an ominous industry-wide slump in Japan.
After peaking in 2006, the number of anime minutes made for television fell 20 percent to 108,342 in 2009, according to the Association of Japanese Animations. Overseas anime revenue fell 21 percent between 2006 and 2009. The world’s hunger for anime accelerated around 2000, with Hollywood incorporating anime scenes into films and children clamoring for Pokemon.

Since 2006, however, a trend toward adult-oriented (and often sexually explicit) niche titles has turned off the general audience. Moreover, the industry is losing young talent due to persistently low pay and poor working conditions, forcing Japanese animation companies to outsource much of their work.

“The Japanese anime industry basically gave China, Korea and all these countries the keys to the candyshop, by outsourcing so much work to them, they trained this work force of people who are now far more ambitious and far more hungry than a lot of Japanese animators are.”

Japanese anime industry is beginning to realize that it cannot ignore China — as an emerging rival or a potentially lucrative new market. For both countries, cooperating appears to be the best option for now.

One of the most successful joint projects so far is the “Romance of Three Kingdoms,” a historical animated series currently airing across China. The program, produced by Japan’s Takara Tomy and a subsidiary of China Central Television ( CCTV ).

China toys market

In 2009 due to the financial crisis global toys sales hit US$80 billion, an increase of 3.6% compared with 2007 US$ 77 billion in 2008. As the global economy recovers gradually in 2010, the toys market is forecasted to increase by 5.4% hitting above US$ 85 billion. The USA, Japan and China rank top 3 of toys sales worldwide respectively hitting – US$ 21.5 billion, US$ 5.8 billion and US$ 4.9 billion, while UK, France, Germany, Brazil, India, Australia and Canada take the 4th to 10th position. These top 10 countries occupy 66% of global toys sales.

China is the world’s largest toy manufacturer and exporter, and over 2/3 of global toys are made in China; the export value of Chinese toys in 2009 reached US$7.8 billion. Guangdong, Jiangsu, Zhejiang, Shanghai, and Shandong are the foremost production and export bases of toys in China, accounting for
more than 90% of the annual sales of Chinese toys, of which, Guangdong gives priority to electric toys and plastic toys; Jiangsu and Shanghai are mainly engaged in plush toys; Zhejiang gives first place to wooden toys.

From the perspective of annual average consumption of toys by children worldwide, China sees only US$20, while Australia and the USA reach respective US$401 and US$280. At present, the population of Chinese juvenile and children has hit above 300 million, so, there is huge potentiality of toy consumption in domestic market especially so since China have its one child policy creating even stronger bond to the child. On the other hand, as we entering 2010, the Echo Boomers born in 1980s will become the main force of toy consumption. It is predicted that the demand of domestic toy industry will increase dramatically in the following several years.
Facing the rising market demand, major toy enterprises in China have worked out ambitious development plans.

Guangdong Alpha Animation and Culture Co., Ltd. raised RMB860 million from the IPO in 2009, which enables it to carry out integrated operation of animation industry chain through merging and acquiring excellent domestic enterprises. In March 2010, it invested RMB90 million to acquire a 60% stake in Guangdong Jiajia Cartoon Film Co., Ltd. in an effort to obtain rare media channel resources and promote the release of animated films and the selling of cartoon toys.

Based on the current 21 brands and 190 models of model cars, Xinghui Auto Model Co., Ltd. plans to get the model car authorization of foreign brands including Porsche, and domestic brands including Hongqi, Chery and BYD in the coming three years, striving for the authorization of 26 brands and over 300 models. Restricted by output capacity, the products of Xinghui Auto Model Co., Ltd. are mainly sold to foreign countries and first-tier domestic cities like Beijing and Shanghai; the company will further expand its market in second and third-tier domestic cities after the improvement of its output capacity in the future.

China existing key toys players :

 Guangdong Alpha Animation and Culture Co., Ltd [] SHE 002292 *2009 IPO
 Xinghui Auto Model Co., Ltd [] SHE 300043 *2010 IPO
 Goldlok Toys Holdings (Guangdong) Co., Ltd [] SHE 002348 *2010 IPO
 Lung Cheong International Holdings Limited [] HKG 0348
 Jiangsu Goodbaby Group
 Guangdong Huawei Toys Craft Co., Ltd [] SHE 002502 *2010 IPO
 Guangzhou Teenbo
 Guangzhou Starjet Toys Co., Ltd
 Guangzhou M&D
 Guangzhou Wangtong
 Guangzhou Kaleeto
 Guangzhou Toys & Wonder Ltd
 Shanghai Toonmax Media Co., Ltd [] Pending IPO 2011
 Beijing Kaku Cartoon Culture Co., Ltd [] Pending IPO 2011
 Camino Trading (Huizhou) Company Limited

International toys players in China :

 Mattel
 Hasbro
 Takara Tomy
 Lego
 Bandai Namco

Local toys dominate the market today …
China's toy market has huge potentials for development. Since 2006 the tide of toys sales have changed in China, local toys IP and brands dominates the market today. Back in 2005 and 2006 overseas toy brands in China dominate the markets and toy stores, various sized Mickey Mice and Donald Ducks have occupied the most eye-striking positions. Blond Barbies are sold in special counters. Transformer, Spiderman, Robot Cat, Ultraman are almost all imports, and there are few toy products with a Chinese brand. In the great consumption market with a scale of tens of billions of RMB, domestically produced toys only seize 16 percent of shares.
This is not true today, thanks to animations and the smart use and development of local IP, characters, stories and brands via animation being continuously screen on hundreds of TV stations in China had help companies like Guangdong Alpha IPO with a PE of above 50x.

A good example would be the overseas “POWER RANGERS” versus “ARMOR HERO” ( by Alpha ), kids in China chooses Armor Hero over Power Rangers toys. This is the key trend today and with effective use of the power of animations as a key media promoter to push brands, IP’s (intellectual property rights) and cartoon characters across to Chinese kids and teens, China very own toys companies is dominating the new toys market. With proper implementation of brand strategy and marketing techniques plus a deeper understand of the Chinese culture China’s toy enterprises can win the upper hand in the market. “The Pleasant Goat and Big Big Wolf” is a good example of an animation whom brings in the local culture into play, the animation rights is rumor to be acquired by DISNEY for above US$ 100 million.
The future will lies within brand and IP building as well as innovating development of electronic and dynamic toys based on China home grown animation stories and characters to have the added values raised.

The Digital handheld game trend

Once dominated by Nintendo and Sony PSP a new player had emerged … Nintendo still dominates with kids in the portable space, however Apple is becoming a significant player. 44% of tween girls (8-11) and 58% of teen girls (12-15) use an Apple device to play games. iPod Touch has sold 130 million units, near the same sales as Nintendo Co.’s DS handheld game system. Additionally, while the DS has sold more than 700 million games, Apple has sold 1.5 billion games for its iOS platform.

The fastest growing model is the iPod Touch, which represents 40 percent of the "iPhone platform". BusinessWeek quoted, "Apple could be on the cusp of claiming the crown as the world's leading in pocket gaming,", referring to the use of an iPod Touch as a portable games device. To emphasize the company's point further, it touted that the PlayStation Portable has 607 games available, the Nintendo DS has 3,680 games available, and the prices of the games for both platforms are easily higher than games sold at App Store. 2009 Stats
Technically, there are more than 30,000 games are now available from the App Store. iPod Touch is fast becoming an MP3 player and a high-end pocket games device in the US.

Many industry professionals do argue ( *especially Sony and Nintendo ) that the games on APPLE App Store are too basic and simple as compared with what’s available on the Nintendo DS and PSP. This same argument can take a note from the “Social Games” versus “Casual Games” arena whom social games is winning the market by miles ahead of the latter and creating an entire new games segment.

However at RMB 1,500 to 2,500 the iPod Touch is still too expensive to Chinese kids. Another key winning point for handheld gaming device is the games available for that particular platform, as in Nintendo DS, it is the “Super Mario” franchise that’s matters most to kids buying the device.

These points’ gives an opportunity for a local specific Chinese handheld game device designed specifically for the Chinese market embedded with key Chinese games IP such as those from famous animations. From 2008 to 2009 Bandai sold more than 150 000 units of “Tomogotchi” handheld games in China with a retail price of between RMB 129 to 259 each.

How the business works ?

Huge market opportunity still exist in China
The Pleasant Goat and Big Big Wolf - has come out and created a miracle for the Chinese local animation films with a box office of up to RMB 90 million since it was screened around the Spring Festival of 2009 and above RMB 100 million in 2010 box office. The animation film with more than 500 episodes has also successfully expanded its audience from children aged below 6 to all the age groups.

US, Japan and South Korea are three major countries with a relatively large animation industry in the world. US, the originator of the animation industry with an output of more than US$200B, the animation industry is the second largest industry by export, just next to the computer industry. Japan has become the world's largest producer by combining animations, cartoon books and electronic games, representing 65% of the world market and 80% of the European market. The animation industry has grown into the third largest industry in Japan, accounting for 10% of GDP. Even South Korea, a late-comer in the industry, takes 30% of the global animation output, just after America and Japan, and 30 times that of China.

All these above-mentioned data are enough to spur the optimism of the Chinese animation insiders although investment and M&A in the Chinese animation sector is still relatively small it is growing today as investors begin to understand why a handful of entrepreneurs are the one that is making the big bucks. Guangdong ALPHA IPO and the huge success of “The Pleasant Goat and Big Big Wolf” provided an eye opener to many whom had neglected this industry in the past and also highlighted the secrets towards making money from the animation creative and culture industry.
The animations and toys industry chain
The industrial chain of animation industry seems simple and is composed of the following links including creation, production and distribution of animation works and development, production and sales of derivative products. Every link is far-reaching. Compared with the established complete industrial chain and profit mode in the United States and Japan, domestic enterprises are still exploring a suitable road and attempt different "portfolios" in this aspect.

Some attempt to create and distribute animation works at first, and then launch derivative products according to market reaction; some attempt to pay equal attention to both animation works and derivative products and pave the way for derivative products early in creation link to make and launch derivative products in synchronism with animation works. In comparison of the said two attempts, the former needs relatively small investment in early stage and faces low risks in late stage.
The reason is that derivative products are developed on the basis of feedback of target group to ensure minimum risks at the cost of a prolonged investment pay-back period. By contrast, the latter needs relative large investment in early stage and faces high risks in late stage accordingly. However, the investment pay-back period is short. Furthermore, launching derivative products in synchronism with animation works reduces the risks of losing initiative opportunities for copyright piracy.
Presently, Chinese animation industry lacks harmony among links and fails to establish sound win-win mode among them. The decisions of links in this business may defer from companies to companies each with its own agenda. Therefore, a mature industrial chain must be built, the exchanges and cooperation among the enterprises of each links shall be unified and promoted where each efforts are done to perfect the industrial chain in order to develop animation industry.

Three Drawbacks of China's Animation Industry

The followings are the three current drawbacks of the Chinese animation industry which directly reflects the towards the toys industry as well.

1. Creative industry needs to upgrade its creativity
The domestic animation works lack innovative design concept. Instead, many have kept to the beaten track of producing low budget production simply to get government funds. Most of the images are borrowed from foreign works. The movements of the cartoon figures are also very similar, and lack fresh innovations. Kung Fu Panda, a Disney animation has achieved a great success in China market. The animation easily hit a box office of more than RMB100M during a ten-day show. Chinese animation companies are good at producing teaching-oriented animations, such as 3,000 Questions of Blue Cat and Naughty and Mars Baby Learns Chinese Characters. These animations always lack the space for expansion, and do not generate a high profit, despite a high audience rating.

2. Poor marketing ability
Many animation producers lack the market awareness and know-how needed. Durniok, a little merchant who bought the 20-year copyright of Nezha Conquers the Dragon King from China ten years ago, has built the envious Durniok Mansion by distributing the modified version in Europe, and become a major producer and publisher in Europe. When Nezha Conquers the Dragon King was played in Japan tens of years ago, a Japanese garment company worked overtime to produce a lot of T-shirts printed with the Nezha image. When the audience walked into the theater in the T-shirts, the boss of the garment company was also overjoyed. In China, both films and TV series lack sound marketing and promotion strategies - As a result, they cannot attract the attention of the audience in the early stage, catch the eyeballs of the audience in the middle stage, or find derivatives favored by the audience. Therefore many fail in this industry.

3. Incomplete industrial chain
Japan has developed a mature animation industrial chain, a complete cycle from animation publishing, animation production, broadcasting, copyright licensing, derivative production and sales to export licensing of some animation products, deep development of successful animation products and development of new animations. This mode is relatively sound, as every link is very professional and has formed a scale, and different links are well connected. The matrix of responsibilities along the industrial chain is very clear. In comparison, the industrial chain in China is far from mature, and relevant links are short of collaboration. Consequently, many animation companies have become part of the industrial chain of others, and earned the fame of OEM for the Chinese animation industry.

In reality, the Pleasant Goat and Big Big Wolf is not a heavy-investment production. Usually, the unit investment of local animations ranges from RMB3,000-5,000 per minute and even RMB10,000, if the 3D technology is used. With an even lower cost of RMB2,000 per minute, the Pleasant Goat and Big Big Wolf has triggered such a large market response, which has definitely given us a good lesson. In content, the animation has abandoned the teaching-oriented route, but introduced some very popular elements at present to deliver a vivid and lively style. In addition, the broadcasting fees paid by TV stations are far from enough to cover the production cost, which is also a headache of many local animation companies. Now, the derivatives of Pleasant Goat and Big Big Wolf can be seen everywhere, which have entirely benefited from the company's forward-leading practice of reserving the space for future derivatives before the project started. At the same time, the Pleasant Goat and Big Big Wolf has also broken the mode that the animation images are applied to toys, stationery and food, and expanded the image licensing to more extensive industries.

The success of the Pleasant Goat and Big Big Wolf has set a very good example for local animation enterprises. How far this outstanding animation will go still depends on the overall strategy and new creation of the producer.
The special few companies that understand these drawbacks …

These drawbacks actually created opportunities for a special handful of companies whom fully understands the market and its mechanics towards managing the limitations today and creates success from it. The animations coming from ALPHA are world-class quality with equipments and story-board written from Japan. LingDong hires Japanese and Hong Kong designers to design its characters for its toys and animations.
The other hidden secrets unknown to many are:

1. The ability to create “Toys Animations” that’s purely designed to sell products.
2. The ability to design toys for the local market as well as international market.
3. The ability to understand the local market needs and culture.
4. The ability to network and distribute to a mass audience base in China.
5. The ability to connect all the industry chain and links together.
6. The ability to get the animations on to top TV stations at prime time and across as many provincial TV stations as possible.
7. The ability to grasps, creates, develop and manage brands and IP’s.

The Chinese animations industry is set for a big change in the coming next 3 to 5 years as these companies expand their market share in China and abroad to Asia and eventually worldwide. We will also be seeing more IPO, mergers and acquisition happening in 2011 and 2012 as key leaders expand their grasp on the market. The new growth area in 2011 will be the kids online games and portal sector, where we will see the world first kids online games company goes IPO on NASDAQ *Taomee USD 1 billion IPO will spur the industry to grow further.

Expect China very own Hasbro, Mattel, Disney and Cartoon Network in a years time!