Disneyland Shanghai Finally Set to Break Ground

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Bob Iger

Bob Iger is said to be China-bound for the April 8 ceremony, which kicks off the $3.7 billion initial phase of construction following 10 years of negotiations with the government.

BEIJING -- The Walt Disney Co. will break ground on its Shanghai theme park this week with CEO Bob Iger there to celebrate a milestone reached after 10 years of negotiations with China's one-party government, sources familiar with the situation said Tuesday.

The $3.7 billion initial phase of construction expected to begin Friday will cover 1.5 square miles, with construction on a theme park and two hotels, and will reserve an additional 1.1. square miles for further development, China's Xinhua news agency said late Monday.

If Shanghai Mayor Han Zheng's estimated cost of the park, which also will include a lake, is correct, it will be one of the largest foreign investments ever made in China.

Disneyland Shanghai, set to open in 2016 in the Pudong district made famous by the World Expo in 2010, will be Burbank-based Disney's sixth theme park around the world, third in Asia after Tokyo and Hong Kong and first on China's mainland. It will be about 1/26 the size of Walt Disney World in Orlando.

The three-phase Shanghai project, approved by the Chinese government in November, was presented at the Disney investor's conference in February this year as "the most exciting initiative since Walt bought land in Florida in 1964 and a cornerstone of Disney's China expansion."

In an equity research note issued Monday, Alan Gould, an analyst with New York-based Evercore Partners, said: "Compared with Disney's land acquisition in Florida, the Shanghai park provides Disney with a powerful business partner (the Chinese government) and a blueprint for business expansion to fully exploit the surging domestic consumption in the fastest-growing economy in the world."

Disney and the Shanghai government sent an invitation to a "special event" in Shanghai on Friday, April 8, to The Hollywood Reporter. A company official in Hong Kong did not respond to requests for details about the invitation but promised to send further "press materials" on Friday.

Disneyland Shanghai is one part of a multipronged push into China, where Mandarin language film co-productions such as "Trail of the Panda" and ongoing negotiations for a cable television presence are part of a strategy to tap China's booming box office (up 64 percent to $1.5 billion in 2010), and get the company into distribution of its branded content here.

Because China lost a case brought by the U.S. at the World Trade Organization in December 2009, Beijing right now is supposed to be opening the distribution of movies, books and films to greater foreign participation where overseas companies currently are allowed only limited participation.

Gould of Evercore estimates that Disneyland Shanghai will generate management fees of $65-70 million in its first fiscal year of operations, 2016, and grow to more than $200 million in 10 years "assuming the park reaches 15 million in attendance."

The ownership of the park in Shanghai -- a city of roughly 20 million people about halfway between Hong Kong to the South and the capital Beijing to the north -- is reported by Chinese media to be 57 percent by Shanghai Shendi Group and 43 percent by Disney, exactly the same as Hong Kong Disneyland.

Since it opened in 2005, Hong Kong Disneyland has experienced lower-than-expected attendance with 42 percent of its guests last year coming from the mainland, according to the park's statistics.

Disneyland Shanghai is expected to draw 7.3 million visitors its first year, according to a note from Greg Brown, an analyst with Memphis, Tenn.-based equity research firm Wunderlich Securities.

"The park has ambitions to be both authentically Chinese and authentically Disney, and exemplifies the global power of the Disney brand portfolio," Brown said.

Gould of Evercore said Disney "has the strongest China strategy of any of the studios" and that "near term value could be created if Disney can negotiate a 24-hour cable network in China or wider distribution of its films."

China annually limits to 20 the number of imported films allowed to share in a percentage of the box office receipts they generate and foreign television companies are not allowed direct majority participation in the market.

"The Chinese government will be the majority owner of the park and arguably will benefit from the expansion of the Disney brand, the awareness of Disney content and the protection of Disney's intellectual property in China," Gould said.

China for years has limited the influx of overseas entertainment content as the government initiates greater support for homegrown animation, films and television in hopes of competing with Hollywood both at home and around the world.

Disney shares closed in New York on Monday at $42.63 each, near the upper end of their 52-week range of $30.72-$44.34.