Disney (NYSE:DIS) unveiled 3D imagery of its Shanghai Disney Resort project during its annual meeting of shareholders in March 2013. The project is expected to complete by 2015, and will allow the company to tap into the lucrative market of mainland China. While Disney expects to draw millions of visitors to the park, the incremental revenues will be offset by high costs and it will take several years for the resort to breakeven. This is typically the case with Disney’s theme parks & resorts which contribute a relatively low value to the company despite their high share of revenues. The Shanghai Disney Resort will include Disneyland, themed hotels, retail and entertainment venue, a lake, and parking & transportation hubs.
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Why Is Shanghai Important?
In 2010, Disney signed an agreement with Shanghai company Shendi to build Shanghai Disney resort. After getting final approval from the Chinese government for incorporation of the related JV companies and conclusion of certain regulatory procedures, the company began construction in 2011. The incentive behind Disney’s investment in the Shanghai resort could be the wealthy status of its residents, a growing middle class and a high population of about 25+ million. In addition to this, Shanghai has good connectivity with the rest of the country.
China’s theme park market is growing and the country’s theme parks & resorts attracted over 100 million visitors in 2011.  The Chinese government has been encouraging domestic consumption which is one of the reasons why Chinese consumers are spending more on leisure including theme parks.  The market potential is evident from the fact that Disney is not the only foreign company making a substantial investment in Shanghai. Dreamworks Animation SKG Inc and its Chinese JV partners are investing more than $3 billion in a theme park that is expected to open by 2016. 
However, adapting to local tastes will be important. According to consulting group AECOM, Chinese consumers have different preferences as compared to the western world.  Disney will benefit more if the entertainment options at its theme park focus less on thrilling rides and more on shows centered around music, dance and animals.  Disney has mentioned that it has paid special attention towards creating a good Chinese experience.
Factors That Can Drive Future Growth For Shanghai Resort
Theme parks are considered a destination for leisure activity and therefore the attendance is somewhat tied to the state of the economy and travel & tourism. Customers are more likely to travel when the economy is in a better state and discretionary spending is more viable. China’s economy has been struggling for the past few quarters with the GDP growth slowing. However, we expect the economy to improve over the next few years, and Shanghai Disney Resort’s long-term growth will be governed by the long-term GDP growth of China.
One of the important trends influencing the growth of the theme parks industry is the concept of “park-within-a-park”, and the company can leverage this idea to drive growth in its park attendance in China. Disney and its competitors have been investing to create multiple themes inside their parks. In addition to this, Disney has also invested in technology upgrades and other services to improve visitor experience. Last year, it expanded and made some changes to its Magic Kingdom theme park in Florida that were aimed at reducing the wait time for customers and increasing overall sales. According to an estimate, Disney might have spent close to $300 million on this makeover.  Such investments are necessary to drive attendance growth.
Value Contribution Will Remain Low
The total cost for the Shanghai Disney Resort project (including hotels and restaurants) is estimated at more than $4 billion.  According to the Theme Parks Index report, Hong Kong Disneyland had a total attendance of 5.9 mllion in 2011, while Tokyo Disneyland saw close to 14 million attendees and Magic Kingdom Florida saw 17 million visitors in the same year.
Given that Shanghai will be in mainland China and have easier access to multiple big cities, we believe that its annual attendance will be much higher than that for Hong Kong Disneyland. Assuming that the park’s annual attendance reaches about 10 million, we estimate its annual revenues could reach $1.4-$1.5 billion. This is based on the fact that Disney’s U.S. theme parks & resorts were able to generate $9.6 billion in revenues in 2011 with 70 million visitors. 
Around $1.5 billion in revenues will imply an EBITDA (earnings before interest, taxes, depreciation and amortization) of close to $380-400 million based on overall EBITDA margins for Disney’s theme parks & resorts business segment. This implies that it will take at least 10 years for the resort to recoup its initial investment. The actual time will be more if we account for maintenance and expansion related capital expenditure that the resort will incur after it opens.
Perhaps Disney is expecting much higher attendance than this to make the investment worthwhile. However, the fact remains that the additional value that Disney’s Shanghai resort will generate will remain relatively low. However, it will give the company an opportunity to connect with Chinese customers in a better way and cross-market other company products. Disney can promote movies, sell consumer goods, promote TV programming as well as online and other games through its theme parks.
Our price estimate for Disney stands at $56.50, implying a discount of 10% to the market price.Notes:
- China’s Theme Park Boom, Knowledge@Wharton, Jan 30 2013 [↩] [↩] [↩] [↩]
- UPDATE 1-DreamWorks China JV to open $3.1 bln Shanghai theme park, Reuters, Aug 6 2012 [↩]
- Disney World’s $300 Million Makeover Means No Waiting for Dumbo, Bloomberg, Dec 6 2012 [↩]
- Shanghai Disney To Open 2015, Forbes, March 8 2013 [↩]
- Disney’s SEC Filings, Theme Parks Index Report [↩]