Huayi Brothers Media Co-Founder to Sell Up to 43% of His Stake

One of the co-founders of struggling Huayi Brothers Media Corp. (300027.SZ) is selling almost half of his shares in the company, which continues to grapple with financial losses that have been exacerbated by the pandemic that forced cinemas to close.

The privately owned Chinese studio announced Tuesday that Wang Zhonglei, the vice chairman and general manager, plans to dump as much as 43% of his stock within the next six months, which accounts for 2% of the firm’s total outstanding shares, according to an exchange filing (link in Chinese).

Based on Tuesday’s closing price, Wang would reap as much as 189 million yuan ($29 million).

Wang said the reason was “personal financial needs,” with the money to be used to pay back the equity pledge financing in order to “reduce risks and maintain business stability,” according to the filing.

An equity pledge is a common practice in the stock market, whereby key shareholders or managers of listed companies can pledge their shares as collateral to borrow money. As of Sept. 22, Wang Zhonglei, along with his brother and other co-founder, Wang Zhongjun, have pledged over 90% of their shares in their Shenzhen-listed studio, making up 23.25% of the company's total.

The Wangs will remain as the firm’s actual controllers, with at least 23.05% of shares in hand after Wang Zhonglei completes his sales this time.

Huayi’s shares dropped 1% to 3.32 yuan Wednesday morning and closed at 3.37 yuan.

The embattled studio has reported three consecutive years of net losses, with its revenue slumping more than 30% to 1.5 billion yuan last year as the country’s box office took a hammering as cinemas closed due to the pandemic.

Meanwhile, the firm’s borrowing almost doubled from 1.7 billion yuan in 2018 to almost 3.1 billion yuan in 2020.

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The studio’s revenue jumped almost 80% in the first half to 579 million yuan, and it posted a net profit of 106 million yuan, but most of that came from one-off items like its disposal of equity in Tencent Music Entertainment Group and Maoyan Entertainment.

Popular film releases did bolster the studio last year, including the comedy “Hi Mom” directed by Jia Ling that became the nation’s highest-earning film during the Lunar New Year holiday period.

As of June, Huayi Brothers held 910 million yuan in cash while its borrowing totaled about 2.4 billion yuan, over half of which is made up of short-term loans.

In a bid to raise money, the firm turned to its investment portfolio and in late September, dumping 15% of shares in Hero Entertainment Co. Ltd., a gaming company. With the sale, the studio cashed out to the tune of 870 million yuan.

A month before that, Huayi also dumped 15% of shares in a Tianjin-based subsidiary involved in multiple real estate projects, cashing out 225 million yuan.

Huayi released another version of its private placement plan (link in Chinese) in late August, after it was halted and reworked thrice last year (link in Chinese). It aims to raise up to 2.07 billion yuan through a private placement of new shares from no more than 35 investors, who have not been named.

Contact reporter Manyun Zou (manyunzou@caixin.com) and editor Flynn Murphy (flynnmurphy@caixin.com)

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