Disney’s China Parks Facing Both Growth and Competition

Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Disneyland is going strong in Hong Kong as the theme park posted its first annual profit since its opening seven years ago. Attendance set a record of 6.7 million visitors, up 13% from a year ago. The park, which is 52% owned by the local government and 48% owned by Walt Disney (NYSE: DIS), swung to a profit of $15.05 million (HK$109 million) for the fiscal year ended Sep-2012 from a loss of $30.56 million (HK$237 million) in 2011. This is a significant turnaround considering the difficulty we saw in the Chinese economy in 2012, which saw gaming revenues in Macau slow down. Revenues went up by 18% to $550 million while resort occupancy per 1,000 rooms increased by 1 point to 92%. Not a bad year for a park that has been under serious criticism for the past year--but, just in time given the 2015 projected opening for Shanghai Disneyland.

Disneyland Hong Kong is the company’s smallest theme park. No concrete expansion plans for the long term have been released, but they can be discussed now that six years of losses can be ameliorated somewhat. This investment in Hong Kong will have to take place with the Shanghai park on the horizon. Nearly 67% of its visitors come from outside of Hong Kong, mostly from mainland China (45%). Shanghai Disneyland will be a significant draw down on attendance if it is not maintained. 

Disney’s Shanghai venture is in collaboration with the Shanghai Government, which holds a 57% stake, while Disney owns the rest. The park has been driving most of the foreign investment in the city and comes with a price tag of $4.4 billion. The Shanghai Government planned to invest $1.58 billion to build infrastructure for the park and $695 million to construct a subway that would connect the park with the city center.

However, Disney is not the only one eyeing the pockets of China’s rising and affluent middle-class, particularly those living in Shanghai, which has become a popular tourist destination. Disney’s rival Dreamworks Animation Skg (NASDAQ: DWA) – with its Kung Fu Panda, Shrek and Madagascar franchises – is also planning to open an entertainment district in Shanghai by investing $3.2 billion for a 2016 projected opening day. Dreamworks will also base Oriental Dreamworks, its new $350 million joint venture with Chinese partners, at the park. Unlike Disney, Dreamworks is focusing on the “world's largest IMAX theatre, three Broadway-style theaters, smaller performance halls, restaurants, shops”

Among the most popular theme parks already open in Shanghai is the World of Warcraft inspired ‘Joyland,’ which is just two hours’ drive away from Shanghai. Rovio, the Finnish creator of the iconic game, Angry Birds, has already opened its office in Shanghai and is developing an ‘activity park’ at the Tongji University, Shanghai. 

In essence, while Shanghai Disneyland is more anticipated than any other theme park, it is going to face tough competition from local as well as international rivals. This further pressures Disneyland Hong Kong to continue finding ways to attract visitors after piling up HK$3.8 billion (~$490 million US) in losses since 2008.

Disney’s theme parks seem to have turned the revenue and profitability corner, with the exception of Euroland Disney. In its last quarterly report released earlier in February, Disney reported a 5.2% increase in revenues to $11.34 billion, while its net income dropped by 5.5% to $1.38 billion. During the quarter, the revenues from parks and resorts rose by 7% to $3.4 billion, but operating income also rose by 4.3% to $577 million. The segment is the second biggest contributor to the company’s top and bottom—constituting 30% of total sales. 

Despite the fall in earnings, Disney’s adjusted EPS was $0.79 per share, $0.03 above analysts’ estimates. The company’s stock has risen by 10.3% in the last six months while Dreamworks Animation has not shown any growth in this period. In the meantime, the three leading consumer discretionary ETFs; Vanguard Consumer Discretionary ETF (NYSEMKT: VCR), SPDR Consumer Discretionary ETF (NYSEMKT: XLY) and iShares S&P Global Consumer Discretionary Sector Index ETF (NYSEMKT: RXI), have all outperformed Disney slightly – see chart below – and throw off a comparable dividend. Disney is among the top ten holdings in each of three ETFs.  

That said, however, Disney continues to make smart moves in its content creation business and de-emphasizing its content distribution business. It’s a company with a high cost of capital but also has seriously strong trophy assets, which are economic cycle-proof. As we approach a potential medium term pivot point in the broader equity markets I would wait to take a position to see what the market does.  Disney’s high beta gives me pause at this point in time. But, fundamentally I love the direction the company is headed. 

<table> <tbody> <tr> <td> </td> <td> <p>XLY</p> </td> <td> <p>VCR</p> </td> <td> <p>RXI</p> </td> </tr> <tr> <td> <p>Stock 6M (through 2/22)</p> </td> <td> <p>11.58%</p> </td> <td> <p>11.72%</p> </td> <td> <p>13.19%</p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>16</p> </td> <td> <p>15</p> </td> <td> <p>15</p> </td> </tr> <tr> <td> <p>Expense Ratio</p> </td> <td> <p>0.18%</p> </td> <td> <p>0.14%</p> </td> <td> <p>0.48%</p> </td> </tr> <tr> <td> <p>Disney's %AUM</p> </td> <td> <p>6.13%</p> </td> <td> <p>4.64%</p> </td> <td> <p>3.31%</p> </td> </tr> <tr> <td> <p>Asset Focus</p> </td> <td> <p>US Stocks (99.1%)</p> </td> <td> <p>US Stocks (98.4%)</p> </td> <td> <p>US Stocks (54.83%)</p> </td> </tr> <tr> <td> <p>Yield</p> </td> <td> <p>1.52%</p> </td> <td> <p>1.44%</p> </td> <td> <p>1.35%</p> </td> </tr> </tbody> </table>



PeterPham8 has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation and Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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