Can Shanghai Boost Disney’s Theme Park Revenues?

Walt Disney‘s (NYSE:DIS)  theme park debut in China is off to an encouraging start as tickets for the opening day (June 16) were sold out within a few hours of being available on its official website. Disney resort hotels for the new Park are fully booked in the first two weeks of opening, indicating strong interest by customers in Shanghai. While the Shanghai theme park is three times the size of Hong Kong Disneyland, its tickets are priced 20% lower than the latter. The company management believes that China  is a huge growth opportunity for Disney.  Based on the initial response, it appears that the Shanghai opening  could provide asubstantial boost to the Disney’s Theme Park segment’s revenues in coming years

Largest Disney Park With A Potential To Lure More Than 300 Million People

As China transitions from a manufacturing economy to a consumption-based economy, entertainment spending in the region will see a significant increase, lifted as well by increases in consumer spending and as disposable income. In the last five years,  the entertainment industry in the country grew at an  CAGR of 17%.  According to a McKinsey report, the percentage of affluent and mainstream Chinese population (households with disposable income of $16,000 per annum or more) will be 57% by 2020, a significant increase compared to the 8% number in 2010. To put things in perspective the average annual household income in the U.S. is $35,000. This shift will positively impact the family entertainment business in the region and growth in this segment is likely to be very strong in the next five years.  The Shanghai theme park is strategically located with nearly 300 million people living within a 3.5 hour ride to the park via car or train. According to the company management, Shanghai would be the biggest park Disney has opened in any location on opening day.

According to our estimates, Theme Parks and Resorts is the most important segment for Disney, accounting for nearly 30% of its valuation, of which international parks and resorts account for 5%. We estimate Disney’s international theme park revenues will grow from around $2 billion in 2016 to nearly $4 billion by the end of our modelling period.  The expansion into other regions including Shanghai  will contribute towards this growth. If these revenues grow significantly and reach around $7 billion by the end of our forecast period, there can be a 5% upside in our price estimate.

The initial response to Disney’s theme park in Shanghai is very encouraging. The strategic location of the park, and move of the Chinese economy toward a consumption based economy, ensure that this park will present a huge growth opportunity to the company.  From the launch in June into the next fiscal years, revenue growth should be strong.  And the fiscal 2017 full years results  should show the full benefit of this new venture.

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