China New Culture Business Brief

How to dominate China Next Generation New Culture Business ?

HUGE OPPORTUNITIES IN CHINA KIDS ENTERTAINMENT BUSINESS INDUSTRY.

There is a huge growth in the Chinese kids entertainment and culture industry involving animations, toy, children clothing and online games. A selected handful of companies that understand this industry had been steadily growing China next generation kids companies on the same path as Disney, Nickelodeon, Cartoon Network, Hasbro, Mattel, Bandai and Mega Bloks. In 2009 Guangdong Alpha Animations (*SHE 002292) successfully listed on the Shenzhen GEM board and raised RMB 860 million, Alpha immediately acquire 60% stake in Guangdong JiaJia cartoon channel for RMB 90 million. Following Alpha in 2010 3 more toys companies got IPO on the Shenzhen board – XingHui Auto (*SHE 300043), Goldlok Toys (*SHE 002348) and Guangdong Huawei (*SHE 002502).

There is a huge opportunity in China as well as worldwide for Chinese toys companies to grow. Taomee a kids virtual world and online games company in Shanghai will be making an impressive USD 1 billion IPO on NASDAQ in early 2011. Taomee had proven that the kids online space in China is indeed a very lucrative market space. In next 2 years we shall see more kids companies in China getting IPO and a lot of M&A (mergers and acquisition) will be happening within China and probable also outside of China.

LET’S PEAK INTO CHINA TOYS COMPANIES.

Below are 4 listed toys companies on Shenzhen GEM board.

Company 2009 Revenues Market Cap Remarks

ALPHA
600 million
PE : 61
90% of revenues – China
10% of revenues - International

XINGHUI AUTO
250 million
PE :
RMB 3,000,000,000
90% of revenues – International
10% of revenues - China

GOLDLOK TOYS
300 million
PE : 21
Raised RMB 800 million
90% of revenues – International
10% of revenues - China

GUANGDONG HUAWEI
300 million
Raising RMB 207 million
15% of revenues – China
85% of revenues - International

o Xinghui Auto Model Co.,Ltd. is principally engaged in the research, development, production and sale of model cars. The Company's model cars include static model cars and dynamic model cars. The Company's model car series include BMW X5, Benz GL-CLASS, Nissan 350Z, Lexus, Hummer, Lincoln, Land Rover, Mini Cooper, Lamborghini and Fiat, among others.

o Goldlok Toys Holdings (GuangDong) Co., Ltd. is principally engaged in research, development, manufacture and distribution of electronic and electrical plastic toys. The Company’s major products include electric trains, remote control simulated planes, robot toys, electrical automobile toys, dolls and magnetic word pads for learning, among others. The Company also
involves in trading business. It distributes its products in domestic and overseas markets, such as the United States, Latin America, European Union (EU) and other Asian regions.

From the previous report *CHINA TOYS AND ANIMATIONS INDUSTRY 2010 and from the above sales we can see that China still have much room to grow for the local market. 90% of ALPHA sales are from the local Chinese market and this year ALPHA is expected to pass RMB 800 million in sales. The business model of ALPHA is simply – using animations to create brands and characters then use these mechanics to sell toys. The gross margin in toys range between 40% - 45% makes it an impressive business to be in.

International Toys Companies 2009 Revenues Company 2009 Revenues *USD

MEGA BLOKS
340 million

WALT DISNEY
36.1 billion

MATTEL
5.4 billion

HASBRO
4.07 billion

Chinese company like ALPHA is learning the trick of the industry quick. Building key brands and characters via animations, setting new standards in the Chinese animation quality allows ALPHA to move into new markets internationally. In the next 3 years Chinese animations will be on par with Korea and many western animation studios, if not already !

THE KIDS BUSINESS MODEL.

If the formula of copying the west is right to get huge success in China such as the case of Baidu (*Google), Sina (*Yahoo), Taobao (*EBay) and QQ (*ICQ) then let’s look at Disney, Nickelodeon and Cartoon Network business segments:

*US top cartoon company business segments are almost identical.
Related to the China situation would be the following sectors:

a.) Animations.
b.) Toys.
c.) Kids Portal.
d.) Kids virtual worlds and online games.

If we study closely on the models and key business sectors we will see similarities to the current Chinese animations and culture business development especially for companies that have grasp the know-how and understanding. Notice that in the kids space there is no escaping – animations + licensing + toys + kids online games as key sectors. In fact these are the segments that Disney, Nickelodeon and Cartoon Network specifically own either via acquisition or as key internal division.

CHINA COPY THE WEST KEY STRATEGY FOR TOYS

Hasbro *BEYBLADE toys is supported by BEYBLADE V-FORCE animation series. In China TEENBO and ALPHA had done similar “GYRO” toys and launch its TV animation series as well in 2008. TEENBO ‘Gyro’ toy is a big winner with sales of above RMB 100 million. However we can’t say that China copies the product as ‘GYRO’ is a traditional toy just like ‘YoYo’ and there are many toys companies that produces ‘YoYo’ toys worldwide. MEGA BLOKS have a similar popular ‘GYRO’ toy called – BATTLE STRIKERS too.
The most important element here to learn is the know-how of how to design a ‘Brand’ and ‘Characters’ that kids can relate towards and purchase the toys. China, Japan, Korea and the West had done so via animations specifically designed to sell toys, we call these animations – Product Animation. Japan was
the innovator of this concept, super popular GUNDAM was the best example of “Product Based Animation” where the animation is written and produce specifically to sell and license products. Today Chinese companies like ALPHA, LINGDONG, TEENBO and a few others had mastered this formula for the Chinese market.

CHINESE SUPER HEROES AND ICONS

“Pleasant Goat and Big Big Wolf” is the first of many to come locally produce Chinese animation ICON characters that is not just popular but is widely recognized China-wide among all ages and generation. In the coming next few years China will have its very own home-grown Super Heroes like Spider-Man and it won’t stop here for key Chinese companies are already planning to be the next China Hasbro, Bandai and Disney. When quality of Chinese animation reached the international level plus the current production and development capability of Chinese toys makers and kids online games studio, we will see Chinese companies dominating a niche worldwide in the kids space.

KIDS ONLINE GAMES A MUST HAVE COMPONENT IN KIDS STRATEGY.

Video Games vs. Traditional Toys
Toy sales in the U.S. have been growing at a very low rate for the last few years. In fact, in 2008 toy sales in the U.S. fell 3%. This is mainly because of the shift from traditional toys towards video games. In 2008, sales of video game software units (actual games as opposed to consoles) grew 15% in the United States and 26% in the United Kingdom. Without a major foray into video gaming, toys companies could stand to lose significant market share as youth turn to digital entertainment over traditional toys. We can see this in the strategy by the major players such as Warner Bros, Disney, Nickelodeon, Cartoon Network, Hasbro, Mattel, Lego and now even Dreamworks is investing significantly into kids online games.

China is still a virgin marketplace for – animations, toys and kids online games. But the market will pick up next year at a great speed and there will be new winners and new players emerging. The ultimate winner would belong to the company that manages to master all 3 areas:

a.) Animations
b.) Toys
c.) Kids Online Games

Once the above 3 areas is captured and interlinked then only we will start to see the emerging Chinese Disney or Hasbro which capture the key essence of kid brands creation, development of toys and control of the kids online space. This makes the complete dragon triangle for kids entertainment business in China. Next year we will start to see more Chinese animations + toys moving side by side into the West which will include the US market as well.

Kids MMO will be an area that every toy and animation company can’t ignore and will become a “MUST-HAVE” strategy within their plan for the kids space.

KEY TOYS CATEGORIES

The following are the key toys categories that are being repeated almost every year in different format and brands. It is said that there is a success formula for kids entertainment …

1.) CARS - Model - Remote control
2.) YOYO
3.) HANDHELD GAMES - Digital games
4.) GYRO (tuo lou)
5.) TRANSFORMATION TOYS - Toys like Transformers
6.) CARD GAMES
7.) ACTION FIGURES - Figurines
8.) GUNS AND SWORDS
9.) BLOCK BUILDING - Lego
10.) ACCESSORIES - Accessories toys from animations
11.) PLUSH TOYS
12.) DOLLS

In the West there are slightly more categories than China such as train sets for the European market and planes for US. The above categories did not include Toddlers toys, video games and girl toys in a more specific manner. Boy toys dominates more than 70% of the market in China currently.

CHINA KIDS HANDHELD GAMES DEVICES A MISSING AREA

In the previous report we have touched a lot on animations and toys, in the report we have also highlighted an important missing area in the Chinese toys segment – electronic games and gadgets. While Nintendo DS and Sony PSP held huge market share worldwide in China these handheld games did not become a key trend for kids like in the West. Their market share has recently been pressed by Apple iPod TOUCH and iPAD. This market segment in China is missing and new technology today enable new locally produce handheld devices to prosper if the right mechanics are applied correctly.

THE FINAL WINNER WILL COMBINE ALL 3 KEY ELEMENTS

The company that manages to combine all the 3 key components ( *Animations + Toys + Kids Online Games ) seamlessly integrated together will be the next Disney or Hasbro of China. Like Chinese online games moving worldwide, Chinese animations and toys will follow suit this path only stronger and meaner than the competitions. Watch-out here comes China again !