Can Disney Compete In China?
In less than a month, the world will have a new Disney theme park. This time, it’s in China. Shanghai, to be exact.
The park has already been “open” for trial guests, and the company is pretty excited about the feedback it’s been getting. But Disney’s really hanging a lot on this park. The company expects to earn $300 million from the park in the third quarter of this year.
#-ad_banner-#To put that in perspective, Disney (NYSE: DIS) brought in revenues of $12.97 billion in the second quarter of this year. But while you might think that Shanghai Disney’s projected haul is chump change in comparison, consider this: Disney’s net income in the second quarter was only $2.1 billion.
That means a $300 million paycheck isn’t so small.
Disney has spent $5 billion to bring this park to life, so it would take nearly 17 quarters, or more than 4 years worth of $300 million proceeds in order to make back its initial investment, not to mention upkeep and operational costs.
So here’s the thing… Is a $5 billion theme park in China a good bet?
Well, if you’re a Chinese billionaire member of the Communist Party, you might not think so.
Via NPR:
“We will make Disney unprofitable in China within the next decade or two,” Wang [Jianlin, owner of Wanda, a real estate development company] predicted in an interview on Chinese state television on Sunday. Wang says he’s betting the Chinese cultural themes at his parks will outdraw Mickey Mouse and Snow White, that Shanghai’s weather is too rainy in summer and cold in winter for Disney’s outdoor attractions and that Disney’s building costs will result in tickets that are too pricey for local customers.
According to Disney, regular peak-price tickets will be $76 per person, and $56 per person during off-peak days. There will also be special pricing for children and senior citizens.
But that’s still a steep price for many Chinese people.
Even though Shanghai sees the highest pay of any Chinese city, the average salaries for job openings was only $942 a month in early 2015. If a family of four decided to go to Disney’s park — and to be generous, we’ll assume that the kids get in free, and that the family goes on an off-peak day — the ticket costs alone account for almost 12% of an earner’s monthly income.
And that doesn’t include costs of eating, souvenirs or getting to the park!
It’s not hard to see why some people might be skeptical of Shanghai Disney’s potential.
But I’d like to take a look at some hard numbers, without the red tinge of “party line” getting in the way.
The company’s second-quarter earning’s report marked the 11th quarter of double-digit growth in adjusted EPS. And operating income from its parks and resorts segments jumped 10% quarter-over-quarter.
Six-month figures show an even bigger jump of 17%.
Impressively, the company’s movies division revenues jumped 22% in the quarter.
From the company’s Chairman and CEO, Robert Iger:
“Our Studio’s unprecedented winning streak at the box office underscores the incredible appeal of our branded content, which we continue to leverage across the entire company to drive significant value. Looking forward, we are thrilled with the Studio’s slate and tremendously excited about the June 16th grand opening of the spectacular Shanghai Disney Resort.”
As a result, share prices have been impressive as well.
Over the past five years Disney’s share price has climbed 153.5%. And more could be in store for the future.
Analysts predict earnings growth of more than 10.5% a year for the next five years, with earnings estimated at $5.82 per share for 2016 and $6.21 per share for 2017.
What this means to me is that the Shanghai China is just a piece in the puzzle for Disney, no matter how much some China billionaires want to send the company running with its tail tucked.
(Wang told NPR, “Disney really shouldn’t have come to China. Our strategy is based on the saying, one tiger is no match for a pack of wolves.”)
Risks To Consider: A $5 billion price tag is nothing to sneeze at, and these costs have already bitten into China’s international parks revenue. But with the opening of Shanghai Disney, this risk is falling by the wayside.
There are other risks, though. Wang could be right… that Disney’s priced its tickets too high for Chinese consumers.
Only time will tell for that one.
In the meantime, we have more than decent earnings and income growth pushing shares higher.
Action To Take: Analysts are forecasting a median target price of $112, roughly 11.7% higher than current prices. Ambitious analysts are targeting a share price of $130, or 29.6% higher than current prices.
That would put Disney shares in uncharted territory with an all-time high.
Very ambitious indeed! But not out of the realm of the possible.
P.S. This stock has turned every $1,000 invested back in 1972 into a stunning $2,669,645 today. But thanks to the actions of 40 members of Congress… it’s flashing “buy” right now. Click here to see why it could soar triple- digits over the next 12 months.