Disney’s Shanghai Project Will Drive International Resort And Theme Park Operations In Coming Years

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DIS: Walt Disney logo
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Walt Disney

Disney’s (NYSE:DIS) international resorts and theme park operations have seen slower growth in the past few years. Disney’s international parks and resorts are located in Paris, Hong Kong, Shanghai and Japan. Looking at the hotel side, the performance of a property primarily depends on two factors, occupancy rate and average per room spending. Disney has seen steady growth in room spending over the past few years led by a recovery in Europe and strength in Asian economies. However, the occupancy rates have declined since the recessionary period. While we expect occupancy levels to marginally improve from the current levels, room spending will continue to grow at a steady pace in the coming years. Looking at the international theme parks, revenues have grown at an average annual rate of 5% in the past few years. However, we expect strong growth on this front as the company opens its Shanghai resort in 2016. On that note, we discuss below the trends in Disney’s international theme parks and hotel operations and what will drive its growth in the coming years.

We estimate revenues of around $52.65 billion for Disney in 2015 and EPS of $4.90, which is in line with the market consensus of $4.46-$5.08, compiled by Thomson Reuters. We currently have a $105 price estimate for Disney’s shares, which is more than 5% below the current market price of $114.

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Trends In Disney’s International Resorts And Theme Park Operations And Our Forecasts

Disney offers around 2.50 million room nights in its international properties. The occupancy levels at these properties have declined from 87% to 79% between 2010 and 2014. Looking at the guest spend, it has been on an uptrend and grew from $272 to $322 during the same period. [1] However, declining occupancy levels weighed over the hotel revenues, which grew at an average annual rate of around 2% from $0.58 billion in 2010 to $0.62 billion in 2014. Going forward, we expect the occupancy rates to improve marginally from the current levels and average guest spend to grow to around $400 levels by the end of our forecast period. This will translate into hotel revenues of a little under $1 billion.

Looking at the theme parks, the performance has been better as compared to the hotel operations. The international theme parks revenues have grown at an average annual rate of 5% from $1.80 billion in 2010 to $2.15 billion in 2014. We expect strong growth in this segment and estimate the theme parks revenues to be north of $3.30 billion by the end of our five- to seven-year forecast period. This will translate into overall revenues of $4.25 billion for Disney’s international theme parks and resort operations. An estimated EBITDA margin of 34% for Disney’s hotel and parks will translate into EBITDA of $1.45 billion, representing around 5% of the company-wide EBITDA. The contribution will be much higher if we include Disney’s U.S. theme parks and hotel operations, which we label as a separate segment in our model.

What Will Drive This Growth?

We believe that the Shanghai resort will drive much of the growth for Disney’s international resorts and theme park operations. The $5.5 billion resort project will be spread across 963 acres in Pudong, Shanghai. It will offer 2 hotel properties and various dining and entertainment options along with the theme park. Disney will own 43% of the resort while the remaining 57% will be owned by the Shanghai Shendi Group. [1]

Disney has been aggressively expanding in China, betting on its buoying middle class. There has been massive demand for Hollywood movies and characters in China, and it is also one of the biggest markets for various studios. The company also opened its largest retail store in Shanghai recently and received a stellar response to the store opening with customers queued up to a mile outside the store. This reflects the popularity of Disney in China and a theme park will only strengthen the brand in the region. The theme parks business is of immense importance to Disney as it generates stable cash flows for the company and also provides a platform to sell and cross-market its other products and services, including movies, retail merchandise and television. The new theme park will thus aid the company’s other ventures such as gaming, movies and merchandise in China.

China has become an important market for various U.S. based retailers, media companies and all consumption related players, given its size and sustained growth in income levels. The country has been able to sustain growth as a result of rising income levels and increasing urbanization. This can be primarily attributed to the increase in disposable income driven by a substantial rise in labor costs. The disposable income per capita has more than doubled since 2008. The chart below, complied by Trading Economics, shows the growth in China’s personal disposable income since 2006. The Chinese government itself has been focusing on streamlining the economy towards consumption. These factors have resulted in rapid growth in China’s retail industry as well as demand for entertainment and travel. Accordingly, we believe Disney’s resort and theme park operations will benefit from this growth and drive the segment revenues in the coming years.

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Notes:
  1. Disney’s SEC Filings [] []