Shanghai Disney Resort: What Wall Street Is Saying
It won't be "a significant financial catalyst on a stand-alone basis,” says one analyst. “The real benefit to Disney will likely be the opportunities that this park brings over time" in movies, consumer products and the like.
Walt Disney will formally open its $5.5 billion Shanghai Disney resort on Thursday and already is starting to plan an expansion.
While there has been much media coverage, Wall Street observers also have been visiting the theme park and running their models on it to gauge what it means for the entertainment conglomerate and its financials.
"At the end of the day, we don't view Shanghai Disneyland as a significant financial catalyst on a stand-alone basis,” Wells Fargo analyst Marci Ryvicker concluded. “The real benefit to Disney will likely be the opportunities that this park brings over time; i.e. movies, consumer products, etc. Unfortunately, we don't know when this will be or how to quantify the upside, which means the driving force of this stock's performance will continue to be ESPN for the foreseeable future."
The only concrete number she noted after conversations with Disney executives was the park's capacity of 45,000 visitors per day, which could be boosted to 60,000 before any further expansion. Based on that, Ryvicker forecasts an attendance range of 7 million-17 million per year, "which equates to $800 million-$3.1 billion in annual revenue and an operating result somewhere between a $200 million loss and a $600 million profit. "The financial impact of the park is small versus total company fiscal year 2015 revenue/operating income of $52.5 billion/$14 billion," the analyst concluded. "It's really all about the long-term opportunities."
Ryvicker predicts a breakeven in year 3 after initial losses. “There is some nice upside potential at some point,” she added. “We're thinking further builds (the property can eventually be upsized by 80 percent), as well as incremental opportunities now that Disney is "anchored" in China (movies, toys, consumer products etc.). We just don't know how much upside or when.”
Several analysts said crowd management will be one of the key challenges for the new park. ”The biggest risk we see is overcrowding, which should be nullified by 'relatively high prices,' according to some trade press,” said Ryvicker.
Management expects lower than average off-peak visitors compared with other parks and higher-than-average peak visitors, “partly as parents will not want to take children out of school to come to Disney,” said Macquarie Capital analyst Tim Nollen. “Pricing reflects this: Off-peak tickets are on sale for about $55, which is at the low end of all Disney parks, and peak pricing at about $76 is at the high end of Disney's Asia parks.”
Jefferies analyst John Janedis said in a report that "the view on the ground is that there is pent-up demand” and that “early sales suggest price hasn't been an issue.”
Janedis expects fewer than 250,000 guests in year 1 from outside of China. "In total, we continue to expect about 10 million guests to the park in year 1, though do not expect a full year of profitability until year 3," he said.
With the Shanghai park not using the MagicBand bracelets known from other Disney theme parks due to the proliferation of mobile devices and technology, analysts also wondered about that decision’s impact. "That shift should come with some cost savings," said Janedis.
The analyst also suggested there could be upside from extended stays. "Management had initially expected that Shanghai would be a one-day experience, but it now appears as though it could be more," he wrote. "Additionally, there is the potential for a third gate to be added if the demand warrants it."
Other highlights spotlighted by analysts:
• “The park is definitely very Chinese-themed,” wrote Nollen. “For example, we attended performances of Tarzan and Pirates of the Caribbean that were completely spoken in Mandarin. There were numerous Chinese visitors in attendance at these performances, and the reception was enthusiastic, particularly to the spectacular special effects — lighting, video, cannons, trapeze artistry etc.” He also said that management mentioned that 15,000 people per day, in 10 daily shows, have attended sing-along performances of Frozen.
“This is in a city where nominal GDP per head is $16,500,” said Janedis. “This may explain why many visitors sneak their own food and drinks into the park, where entrance checks appear to be lax. Shanghai Disney is not without risk or competition — for example, Wanda Group is opening 15-20 parks in China, and is deliberately targeting visitors at a lower price point.”
• “Shanghai Disneyland has two hotels on the property — the Toy Story Hotel (the larger “value” hotel, with rooms starting at $130 per night) and the Shanghai Disneyland Hotel (a higher-end hotel, with rooms starting at $250 per night),” said Ryvicker.
• The food available in the park is 70 percent Chinese, 20 percent other Asian and 10 percent U.S. "But evidently corn dogs and turkey legs are hugely popular here already and Disney had had to source more turkey parts beyond its Polish supplier, now adding from South America," said Nollen. "Food service is primarily high-end, quick-service restaurants, which management feels justifies the high price."
• Merchandise available at the theme park includes a Pirates of the Caribbean ship play set for 339 yuan (about $52) and a Spider-Man baseball cap for 259 yuan (about $39), while a bucket of popcorn goes for 65 yuan ($10) and a can of Pepsi for 20 yuan ($3), according to Nollen.
“This will likely lead to sticker-shock, but may not dampen popularity of the park,” he said. “The quality and the uniqueness of the experience here is likely to satisfy local visitors, assuming Disney executes well, which many may decide is worth the price.”
• Shanghai Disney will employ 10,000 "castmembers,” 1,000 of which are performers drawn from six Chinese performing arts colleges. “Around a third of the employee count is housed in specially built dorms and provided with benefits, which Disney hopes will help with retention,” said Nollen.