Disney (NYSE:DIS) is partnering with the animation arm of China’s Ministry of Culture and Tencent Holdings Ltd. to push animation in China.  The success of the movie Kung Fu Panda (parts 1 & 2) has helped China realize that it has a significant opportunity to leverage its culture and create successful animated movies. Disney plans to be part of this initiative and benefit from China’s huge population and consequently large untapped market potential for animated films and TV shows. The company can leverage this partnership to also launch its dedicated channels in China where it has struggled in the past. Disney competes with other media companies such as Viacom (NASDAQ:VIA), Time Warner (NYSE:TWX) and News Corp (NASDAQ:NWS).
Importance of animation to Disney
Animation is a significant business for Disney. After ESPN, the Disney Channel is the biggest value contributor for the company among all of its cable networks at an estimated 5%. This might look small but Disney’s animated characters extend far beyond Disney Channel and play a major role in its box office sales, DVD sales, content licensing business as well as theme parks business. The company also leverages its animated characters to sell a variety of merchandise. Overall, animation is a big part of Disney, and it makes sense for the company to push further into China.
China’s growing box office market
Just as China has overtaken the U.S. and become the world’s biggest PC market, it overtook Japan recently as the world’s second largest box office market with total sales amounting to $2.08 billion in 2011.  This is still far off from $10+ billion box office market for the U.S. and Canada combined.  Nevertheless, the growth rate difference is notable. While China’s market grew by 33%, the U.S. and Canada market declined by 4% in 2011 compared to 2010.
The clear success of the recent animated movies in the U.S. and Canada demonstrates that it’s prudent for animation giant Disney to further its animation business in the growing Chinese box office market.
Our price estimate for Disney stands at $52.15, implying a premium of about 20% to the current market price.Notes: