Hong Kong Disneyland's Results Hint at Shanghai Disney Resort Potential

Disney is now comfortably profitable in Hong Kong. It might have taken awhile, but that was expected, and this is a sign that Shanghai could be at least twice as successful over the same time-frame.

Feb 25, 2014 at 2:00PM

Magic Kingdom


Every investor makes good and bad decisions throughout their careers. Those who remain patient and possess conviction often end up outperforming other investors. That said, there are some companies out there that allow investors to sit back, relax, and enjoy methodical stock appreciation and dividend payments over the years. Walt Disney (NYSE:DIS) fits into that category.

There are so many reasons to like Disney that it would be impossible to break them all down in one article. Therefore, the company must be looked at in bits and pieces. In this case, we'll look at the other side of the world. 

Hong Kong success 

Hong Kong Disneyland Resort

In fiscal-year 2013, Hong Kong Disneyland Resort saw hotel occupancy reach a record high of 94%. This was part of the reason why Disney announced it will add 750 more hotel rooms by 2017. The cost: $547 million. However, that cost will be partially shouldered by the Hong Kong city government, which owns 52% of the resort.

Other impressive numbers for Hong Kong Disneyland Resort include a fiscal-year 2013 revenue increase of 15% to $629.3 million, a 10% jump to 7.4 million in attendance, and net income of $31.2 million which rose from $14 million in fiscal-year 2012. This is still a small profit for a company like Disney, but the entertainment juggernaut is likely pleased with the recent net income growth considering that the resort wasn't profitable for its first six years in existence.

In 2013, Hong Kong Disneyland opened Mystic Point, which expanded the terrain of the park by approximately 25% and pushed the specific attraction and entertainment offerings north of 100. This might have led to improved traffic and profitability.

Looking ahead to 2016, Disney plans on adding an Iron Man thrill ride in its Tomorrowland section at a cost of $100 million. The cost should pay off given the popularity of the film franchise internationally and in the future it will have the reputation of being the first Marvel-based ride at any Disney park anywhere in the world.

It's clear that Disney is now seeing success as well as increased potential at its Hong Kong theme park. However, the most important number might be the population of Hong Kong: 7 million. Here's why.

764 miles away

Shangahai Disney Resort

If you ever visit Hong Kong, then you should also consider visiting Shanghai, which is only 764 miles away. Why go across the world and not see the largest and most populated city in China? Shanghai has a population of 24 million people.

It took eight years for Hong Kong Disneyland to reach approximately 7.4 million in attendance, which slightly exceeds the city's population of 7.155 million. If a similar trend were to take place in Shanghai, then Shanghai Disney Resort would reach north of 25 million people in attendance within eight years.

That's a big number, and this is a broad statement. However, consider two important points. One, Disney always tries to best itself. While Hong Kong Disneyland has been a hit, it's not likely to compare to Shanghai Disney Resort, which will focus on music, dance, and animals, as well as feature the Gardens of Imagination, offering views of the Enchanted Storybook Castle. Two, Shanghai is the wealthiest city in China with the fastest-growing middle class. This elevated level of disposable income will certainly benefit Disney.

It should also be noted that Disney recently formed its first corporate alliance for the park with Industrial and Commercial Bank of China, or ICBC. The bank will have a large presence at the Garden of the Twelve Friends, which will celebrate each of the 12 Chinese zodiac characters. While it's unlikely that you will invest in a Chinese bank on a foreign exchange, this should increase brand recognition for ICBC.

Expanding a dream
Disney isn't the only entertainment company that has attempted to capitalize on the Shanghai market. DreamWorks Animation (NASDAQ:DWA), in conjunction with Oriental DreamWorks, aims to have its Dream Zone completed by 2016. This will consist of theaters, performance halls, and restaurants across six riverfront city blocks.

DreamWorks plans to make Dream Zone the Chinese version of Broadway. It's going to set the company back by $3.14 billion, close to what Disney is investing in Shanghai Disney Resort: $4 billion. The difference is that Disney is a much larger and fiscally powerful company than DreamWorks Animation, which makes this more of a high-risk, high-reward bet for DreamWorks Animation. Consider the operating cash flows of these companies over the past year: $59.68 million for DreamWorks Animation and $9.52 billion for Disney. However, if DreamWorks Animation's bet pays off, it could pay off in a big way, not just via Dream Zone but via brand and movie-character recognition as well, which could lead to merchandising opportunities. 

The Foolish takeaway
Thanks to a city with wealthy residents and a larger population than any other city in China, Shanghai Disney Resort is likely to see long-term success. Even if the attendance doesn't meet expectations, Disney is further increasing its brand recognition among the Chinese population, which should do wonders for its merchandising as well as its television movie production potential -- keep in mind that China has 1.35 billion people. Please do your own research prior to making any investment decisions. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation and Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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