) recently signed an agreement with a Shanghai company named Shendi
to build out Disneyland's Shanghai theme park. The company is now
waiting for the final approval from the Chinese government for
incorporation of the related JV companies and conclusion of certain
Disney competes with media companies like Warner Bros. Pictures,
owned by Time Warner (
), 20th Century Fox, owned by News Corp (
), and Paramount Pictures, owned by Viacom (
). We estimate that parks only account for around 10% of Disney's
While it comes as no surprise that Disney should want to have a
theme park in China, the terms of the JV and Disney's ability to
profit from this move are unknown. Hong Kong Disneyland reported
losses in 2009 and was not able to attract as many customers as
Disney intended after opening to much fanfare. While having a park
in the mainland makes it much more accessible to Chinese visitors,
we believe that the cost of setting this up and operating might
exceed initial projections.
As a result of the expected high investment levels and potential
lower gross margins of operating in China, we see some downside
our $37.44 price estimate
which is in line with the market price.
High Investment and Lower Profitability a Risk
We currently forecast
(EBITDA) that Disney's parks and resorts business will gradually
improve and reach close to 26% by end of our forecast period
compared to current estimates of close to 24% for 2010. However, if
Disney continues to suffer losses in its international locations
like Hong Kong and its EBITDA margins drop to around around 20%,
its price estimate drops by about 4%.
With new investments like Shanghai Disneyland and continued
pressure on EBITDA margins, its international
capital expenditures (as % of EBITDA)
could increase more than we forecast. The initial estimates to
build the park are around $3.5 billion. While this is a huge sum on
par with the Shanghai World Expo, this might prove to be
conservative once the final bill is tallied at its expected opening
in 2014. If investment (capital expenditures) to EBITDA
increases to 50% compared to current forecasts of close to 40% in
the coming years, it can add another 2-3% to the downside.
Although Disneyland Shanghai may turn out to be an attractive
investment spot given the wealthy status of its residents, a
growing middle class and high population of about 25+ million in
Shanghai alone as well as access to the rest of China, undertaking
the largest foreign investment in China might prove to be costly in
the medium term.
You can see
the complete $37.44 Trefis price estimate of
Disney's stock here.